DOCUMENTS INCORPORATED BY REFERENCE
We have incorporated portions of our Annual Report to Shareholders for the fiscal year ended June 28, 2006 into Part II hereof, to the extent indicated herein. We have also incorporated by reference portions of our Proxy Statement for our annual meeting of shareholders on November 2, 2006, to be dated on or about September 8, 2006, into Part III hereof, to the extent indicated herein.
PART I
Item 1. BUSINESS.
General
References to “Brinker,” “the Company,” “we,” “us,” and “our” in this Form 10-K are references to Brinker International, Inc. and its subsidiaries and any predecessor companies of Brinker International, Inc.
We own, develop, operate and franchise the Chili’s Grill & Bar (“Chili’s”), Romano’s Macaroni Grill (“Macaroni Grill”), Maggiano’s Little Italy (“Maggiano’s”), and On The Border Mexican Grill & Cantina (“On The Border”) restaurant brands. The Company was organized under the laws of the State of Delaware in September 1983 to succeed to the business operated by Chili’s, Inc., a Texas corporation, which was organized in August 1977. We completed the acquisitions of Macaroni Grill in November 1989, On The Border in May 1994, and Maggiano’s in August 1995.
Restaurant Brands
Chili’s Grill & Bar
Chili’s is a full-service restaurant, featuring a casual atmosphere and a varied menu of chicken, beef, pork and seafood entrees, steaks, fajitas, sandwiches, salads, appetizers, desserts, and our legendary Big Mouth Burgers and Baby Back Ribs. All of our menu items are prepared fresh daily according to special Chili’s recipes. At most of our Chili’s restaurants we have a full-service Margarita Bar serving alcohol, with a variety of specialty margaritas, including our signature drink, the Presidente Margarita. We place emphasis on serving substantial portions of fresh, flavorful, and high quality food at modest prices. Chili’s also offers the convenience of a To-Go menu and To-Go entrance in most locations.
Our Chili’s restaurants feature quick, efficient and friendly table service. Our service is designed to minimize customer waiting time and aid in table turnover. The average turnover time per table is approximately 45 minutes. Our Chili’s team members are dressed casually in jeans, knit shirts or t-shirts, and aprons to reinforce the casual, informal environment. The décor of a Chili’s restaurant consists of booth seating, tile-top tables, hanging plants and wood and brick walls covered with interesting memorabilia.
During the year ending June 28, 2006, entrée selections ranged in menu price from $5.99 to $15.49, with the average revenue per meal, including alcoholic beverages, approximating $12.18 per person. During this same year, food and non-alcoholic beverage sales constituted approximately 86.3% of Chili’s total restaurant revenues, with alcoholic beverage sales accounting for the remaining 13.7%. Our average annual sales volume per Chili’s restaurant was $3.2 million for this same year.
Romano’s Macaroni Grill
Macaroni Grill is an exciting, national casual Italian restaurant that ignites the senses. Guests enjoy our culinary masterpieces inspired by the Italian passion and culinary heritage of Macaroni Grill. Menu selections include signature pastas, grilled steak, seafood, salads and delicious desserts—all prepared by talented chefs in open kitchens. Our Macaroni Grill restaurants feature brick ovens, festive string lights, fresh gladiolus, and a broad selection of house and premium wines. We meet our guests with a sincere welcome at the door and they enjoy warm, knowledgeable service. Additionally, our guests enjoy the convenience of Macaroni Grill’s Curbside To Go service. We deliver delicious, chef-prepared meals right to their cars for our guests to enjoy at home. Macaroni Grill also offers catering service from drop-off delivery to full service event planning in selected locations.
During the year ending June 28, 2006, entrée selections ranged in menu price from $8.99 to $19.99, with chef features priced separately. The average revenue per meal, including alcoholic beverages, was approximately $14.96 per person. During this same year, food and non-alcoholic beverage sales constituted approximately 87.7% of Macaroni Grill’s total restaurant revenues, with alcoholic beverage sales accounting for the remaining 12.3%. Our average annual sales volume per Macaroni Grill restaurant was $3.3 million for this year.
Maggiano’s Little Italy
Maggiano’s is a classic Italian-American restaurant in the style of New York’s Little Italy in the 1940s. Our Maggiano’s restaurants are casual, full-service restaurants featuring family-style menus and extensive banquet facilities that host events up to 300 people. We have a full lunch and dinner menu offering chef-prepared, classic Italian-American fare in the form of appetizers, bountiful portions of pasta, chicken, seafood, veal and prime steaks. Our Maggiano’s restaurants also offer a full range of alcoholic beverages.
During the year ending June 28, 2006, entrée selections range in menu price from $8.95 to $37.95, with the average revenue per meal, including alcoholic beverages, approximating $25.58 per person. During this same year, food and non-alcoholic beverage sales constituted approximately 80.1% of Maggiano’s total restaurant revenues, with alcoholic beverage sales accounting for the remaining 19.9%. Sales from our banquet facilities made up 20.1% of our total restaurant revenues for the year. Our average annual sales volume per Maggiano’s restaurant was $9.4 million for this year.
On The Border Mexican Grill & Cantina
On The Border is a full-service, national, casual-dining Mexican restaurant chain. On The Border’s menu offers a wide variety of Mexican favorites and is best known for its fajitas and margaritas. Our On The Border restaurants also offer a variety of innovative menu items from Guacamole Live! to Brisket Tacos and Enchiladas Suizas. Our new Margarita Selects are made with 100% blue agave tequila. As a full service restaurant, On The Border offers full bar service, in-restaurant dining and patio dining in all locations. On The Border also offers the convenience of a To-Go menu and To-Go entrance to speed take-out service in most locations. In addition to To-Go, On The Border offers catering service from simple drop-off delivery to full-service event planning.
During the year ending June 28, 2006, entrée selections range in menu price from $6.49 to $14.29, with the average revenue per meal, including alcoholic beverages, approximating $13.34 per person. During this same year, food and non-alcoholic beverage sales constituted approximately 81.2% of the brand’s total restaurant revenues, with alcoholic beverage sales accounting for the remaining 18.8%. Our average annual sales volume per On The Border restaurant was $3.1 million for this year.
Business Development
Our long-term vision is to be a dominant, global casual-dining restaurant portfolio company. To achieve our vision, we focus our strategy on growing shareholder value through:
- expanding profitable restaurants globally while increasing the percentage of franchised restaurants in our brands;
- growing our base business through brand building and operational performance; and
- leveraging our customers and our infrastructure across our portfolio of brands.
In fulfilling our long-term vision, we continue to expand our restaurant brands by opening Company-and franchise-operated restaurants in strategically desirable markets. We concentrate on the development of certain identified markets to achieve the necessary levels to improve our competitive position, marketing potential, profitability and return on invested capital. Our domestic expansion efforts focus not only on major metropolitan areas in the United States but also on smaller market areas and non-traditional locations (such as airports and food courts) which can adequately support any of our restaurant brands. We continue to pursue development in countries outside of the United States through Company- and franchise-operated restaurants.
The restaurant site selection process is critical to our long-term success and we devote significant effort to the investigation of new locations utilizing a variety of sophisticated analytical techniques. The site selection process evaluates a variety of factors, including: trade area demographics, such as target population density and household income levels; physical site characteristics, such as visibility, accessibility and traffic volume; relative proximity to activity centers, such as shopping centers, hotel and entertainment complexes and office buildings; supply and demand trends, such as proposed infrastructure improvements, new developments, and existing and potential competition. Members of each restaurant brand’s executive team inspect, review and approve each restaurant site prior to its acquisition for that restaurant brand.
We periodically reevaluate restaurant sites to ensure that site selection attributes have not deteriorated below our minimum standards. In the event site deterioration occurs, each brand makes a concerted effort to improve the restaurant’s performance by providing physical, operating and marketing enhancements unique to each restaurant’s situation. If efforts to restore the restaurant’s performance to acceptable minimum standards are unsuccessful, the brand considers relocation to a proximate, more desirable site, or evaluates closing the restaurant if the brand’s measurement criteria, such as return on investment and area demographic trends, do not support relocation. Since inception, relating to our restaurant brands, we have closed 111 restaurants, including 12 in fiscal 2006. These closed restaurants were performing below our standards primarily due to declining or shifting trade area demographics or near or at the expiration of their lease term. Our strategic plan is targeted to support our long-term growth objectives, with a focus on continued development of those restaurant brands that have the greatest return potential for the Company and our shareholders.
The following table illustrates the system-wide restaurants opened in fiscal 2006 and the planned openings in fiscal 2007:
| Fiscal 2006 Openings(1) |
Fiscal 2007 Projected Openings |
||||||
|---|---|---|---|---|---|---|---|
| Chili’s: Company-operated |
103 | 125-130 | |||||
| Franchise | 20 | 10-15 | |||||
| Macaroni Grill: Company-operated |
7 | 4-5 | |||||
| Franchise | 1 | 3-4 | |||||
| Maggiano’s | 4 | 4-5 | |||||
| On The Border: Company-operated |
9 | 12-14 | |||||
| Franchise | 1 | 4-6 | |||||
| International: Company-operated |
— | — | |||||
| Franchise | 14 | 38-41 | |||||
| Total | 159 | 200-220 | |||||
| (1) | The numbers in this column are the total of new restaurant openings and openings of relocated restaurants during the fiscal year. |
We anticipate that some of the fiscal 2007 projected restaurant openings may be constructed pursuant to “build-to-suit” agreements. Under these agreements, the lessor contributes some or substantially all, of the building construction costs. In other cases, we may either lease or own the land (paying for any owned land from our own funds) and either lease or own the building, furniture, fixtures and equipment (paying for any owned items from our own funds).
The following table illustrates the approximate average capital investment for a typical unit in our restaurant brands based on restaurants opened in fiscal 2006:
| Chili’s | Macaroni Grill |
Maggiano’s | On The Border | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Land(1) | $ | 817,000 | $ | 1,472,000 | $ | 3,445,000 | $ | 1,112,000 | |||||||
| Building | 1,465,000 | 1,568,000 | 4,488,000 | 1,577,000 | |||||||||||
| Furniture & Equipment | 465,000 | 543,000 | 1,375,000 | 509,000 | |||||||||||
| Other | 42,000 | 40,000 | 64,000 | 40,000 | |||||||||||
| Total | $ | 2,789,000 | $ | 3,623,000 | $ | 9,372,000 | $ | 3,238,000 | |||||||
| (1) | This amount represents the average cost for land acquisition, capital lease values, or an equivalent amount for operating lease costs based on estimated lease payments and other costs that will be incurred through the term of the lease. |
The specific rate at which we are able to open new restaurants is determined, in part, by our success in locating satisfactory sites, negotiating acceptable lease or purchase terms, securing appropriate local governmental permits and approvals, and by our capacity to supervise construction and recruit and train management personnel.