Brinker International, Inc. (NYSE:EAT) Q2 2023 Earnings Call Transcript

Brinker International, Inc. (NYSE:EAT) Q2 2023 Earnings Call Transcript February 1, 2023

Operator: Good day, and welcome to the Brinker International Q2 F2023 Earnings Call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware, Vice President of Finance and Investor Relations. Ma’am, the floor is yours.

Mika Ware: Thank you, Holly, and good morning, everyone, and thank you for participating on today’s call. Joining me today are Kevin Hochman, our Chief Executive Officer and President; and Joe Taylor, our Chief Financial Officer. Results for the quarter were released earlier this morning, and are available on our website at brinker.com. As we always do, Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our Safe Harbor regarding forward-looking statements. During our call, management may discuss certain items, which are not based entirely on historical facts.

Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning’s press release and the company’s filings with the SEC. And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company’s ongoing operations. And with that said, I will turn the call over to Kevin.

Kevin Hochman: Thanks, Mika, and good morning, everyone, and thank you for joining us as we share insights on the momentum we’re seeing in the business, progress against our strategy, and plans to maintain that momentum. I’ll start with Maggiano’s, which delivered a very strong second quarter sales and margin growth as some of the business model changes have had accelerated recovery. We expected Maggiano’s performance to exceed pre-COVID levels during the quarter and the team delivered. Comp sales were up 21% year-over-year and margins improved significantly. One of the big drivers of growth during the quarter was the off-premise business, which delivered an 82% increase versus pre-pandemic levels. Maggiano’s off-premise sales are highly incremental.

Customer insights are telling us that off-premise sales, which are meals consumed at home are at different occasion than the dining get-togethers and celebrations that Maggiano’s is known for. And Maggiano’s guests who visit us for everyday home that replace it visit more often than the dining guest. So off-premise for Maggiano’s drives two things that we really like incrementality and frequency. The solid recovery of the core business plus the incrementality of the fast growing off-premise channel coupled with an improved business model, makes us very excited about the future of Maggiano’s. Now for Chili’s. At Chili’s, we’ve made solid progress strengthening the core business and generating momentum in our results. Second quarter same-store sales were up 8%.

We’ve returned to profitability and were steadily improving the guest and team member experience. As you recall during our last call, last quarter, I shared we were starting to implement our longer-term strategy to sustainably grow the core business by focusing on the key areas that will differentiate and best position Chili’s in the marketplace. While there’s still a lot of work ahead of us, I am encouraged by the progress our team has made across four pillars of our strategy. The first pillar is team members with the goal of making their jobs easier, more fun, and more rewarding, which we believe will lower turnover, increase engagement, and ultimately lead to better team member and guest experience at Chili’s. We continue to make meaningful progress simplifying both our menu and operational procedures in our heart-of-house.

As I mentioned last quarter, simplification is not a one-time event, but an ongoing commitment to our team. Our leadership team and I continue to host listening tours all around the country. And as managers and team members see changes happening, they are feeling heard and understand that we have — they have a direct say in the future of their operation. These changing beliefs are now resulting in both significantly improved employee engagement scores and lower turnover, especially at the manager level, which is now below pre-pandemic levels. We still have work to do on the hourly front as we claw back from staffing challenges, but the hourly turnover numbers are now also trending in the right direction. Hospitality is our second pillar. We’re in the process of evolving our service model to provide better service for both dine-in and off-premise guests.

Servers now have more support as we staff key positions to make sure shifts are more manageable and guests feel welcome and cared for. As a result of these changes, our restaurant teams are telling us they feel more supported than ever. In fact, a few weeks ago I was in our Florida market and all of the managers told me this is the first holiday seasoning years that the restaurant felt completely manageable with a lot less stress on their teams. These first two pillars are working together to improve team member engagement and turnover, as well as driving significant improvements to our guest satisfaction metrics. When you see team member engagement turnover and guest satisfaction all trending in the right direction, it’s typically a good sign for the business.

And I’m excited to see this happening because it’s a confirmation that we’re making inroads in the things that really matter. The third pillar is atmosphere. We’re ensuring our buildings and our equipment are well maintained and we’re bringing more energy and vibrancy back to our restaurants. It’s a big focus for us this year to ensure that all of our equipment is in working order and that the restaurants look great. In addition to the labor changes should improve both the team member and the guest experience. We’re encouraged by the progress here too, but given the levels of deferred maintenance during COVID; we still have work ahead of us. And our final pillar is food and drink. And we’re committed to winning on the four core equities that sell Chili’s apart: burgers, crispers, fajitas, and margaritas.

Our Raise the Bar program, the Happy Hour offering, and new bar menu we launched in the first quarter, delivered impressive increases to alcohol sales, PPA and mix during the second quarter. And now we’re building on the success with an updated bar menu that features more premium drink offerings to delight our guests and grow the business. This menu highlights our breadth of classic Margaritas along with some new products including the Sangria-Rita and the Henrietta. The Sangria-Rita is taking a very popular southwestern favorite, a frozen margarita swirled with Sangria and bringing it to our customers nationwide. And the Henrietta is a re-imagined Chili’s favorite. The last time we launched a margarita made with Hennessy, it was wildly popular as we promoted as the margarita of the month.

Now we’ve re-imagined this as a higher quality premium margarita that will price reflect this premium positioning. This is just the first wave of robust bar innovation pipeline the team has developed. We’ll launch these updated bar offerings later this month in time for the NCAA basketball tournaments, the final month of the NBA regular season, and the start of our internal Margarita Madness program, which is a fun check driving contest we know is a huge engagement driver for our team members and translates to a more vibrant atmosphere increased sales. We’ll have significantly more margarita innovation coming to the permanent menu later this year, as well as an all new CRISPRs platform that’s running through our new innovation stage-gate process and is currently in test market that we’re very encouraged by.

We look forward to sharing more details on both platform upgrades during the June Investor Day meeting. Now let’s talk about traffic at Chili’s. During the first half of the fiscal year, we reset pricing strategy and reduced the amount of checks on deal as well as the frequency and depth of couponing in order to work some less profitable traffic out of our system. Now with a stronger foundation driving our improved performance, we’re able to manage our investments more effectively to build incremental traffic into the business. This quarter we’ll start reinvesting some of our dollars we saved from less discounting to get back on TV with a Three for Me value platform. We’re excited about being on air, which will be the first time in over three years that we’ll be on TV.

At a time when consumers are seeing record restaurant prices in smaller portions, we’re coming in with industry-leading abundant and complete meal at a sharp price point. The Three for Me platform also includes more variety than many other bundles in the marketplace. And for just $10.99 the guests gets a full size entree with unlimited chips, unlimited salsa, and a bottomless soft drink. For the business, the platform encourages trade up to more premium and margin decretive offerings at $13.99 and $15.99, which will merchandise in the restaurant. In fact, the majority of Three for Me volume moves at the $13.99 and the $15.99 price point. And now with the addition of out-of-restaurant advertising, Three for Me will play the role of traffic driver in our business.

Photo by saskia fairfull on Unsplash

We believe promoting this platform through national media as well as the opportunity to reboot our loyalty offers will help us drive incremental traffic and win market share regardless of the macroeconomic condition. Lastly, I want to spend a little time talking about additions to our Chili’s executive team that will strengthen the leadership of our organization. I’m excited to share that Jesse Johnson, a senior leader at the world class advertising agency, Wieden and Kennedy has joined our marketing team as VP of Marketing, working for our Chief Marketing Officer, George Felix. Jesse is an accomplished marketing and advertising leader who has worked on some of the world’s most iconic brands, creating news and excitement to everything he touches.

And most importantly, he brings an energy and a passion for our Chili’s brand. Jesse has already embraced — has already been embraced by the team as they work to develop a robust strategy to drive traffic in the near-term and strengthen the brand over time. I’m also excited to welcome James Butler as our new Senior Vice President of Supply Chain. James is a well-respected highly strategic supply chain leader who recently served as SVP leading supply chain co-op of a very large multi-unit restaurant concept. Having worked with James in the past, I know he will bring a high-level of fresh thinking and leadership to our business that will not only help make progress in our supply chain, but will help accelerate the advancement of our strategy.

We believe with a world-class leadership team, stronger Maggiano’s business and executing on Chili’s four strategic pillars, we’re making the right choices for our business, improving the experience for our guests and team members, and driving our four wall economics will help our business regardless of the macro environment. With this focus on the core business, Maggiano’s will unlock its growth potential and Chili’s will be a stronger more competitive brand. And that’s why I’m encouraged about our future at Brinker. Now I’m going to hand over the call to you, Joe, to walk you through the numbers.

Joe Taylor: Hey, thanks, Kevin, and good morning, everyone. The fiscal second quarter operating results reported this morning represent a nice move forward for the business. Sales benefited from continued consumer demand, our ability to price more appropriately and strong mixed results. Our in restaurant economics started to recover and improving commodity environment became more evident, and importantly, guest feedback improved in response to our initiatives. For the second quarter of fiscal year 2023, Brinker reported total revenues of $1.019 billion, a restaurant operating margin of 11.6%, and adjusted earnings of $0.76 per share, an increase of $0.05 from prior year. At the brand level, Chili’s comp store sales increased 8%.

We executed incremental pricing actions in the quarter both on the menu and in third-party delivery channels resulting in year-over-year pricing of 10%. Even with this more elevated price structure, we feel comfortable with our overall price and value positioning relative to the competition. As we mentioned last quarter, an important part of our sales strategy is our concerted effort to move away from higher unnecessary levels of discounting. This, coupled with our October menu restructure of the Three for Me platform, resulted in positive quarterly mix of 5.6% for the brand. Negative traffic at Chili’s of 7.6% was in line with our expectations and was clearly more than offset with the ability to incrementally price and drive mix. Maggiano’s had an outstanding quarter fueled by a great holiday season.

The brand reported positive comp sales of 21.2%, driven by traffic of 8.4%, price of 7.7% and favorable mix. Digging deeper, Maggiano’s realized improved traffic in all revenue channels, dine-in, banquet, and off-premise, with their overall business now exceeding pre-pandemic levels. Our restaurant operating margin for the second quarter was 11.6%, representing a decent beginning to establishing stronger double-digit margins on a consolidated basis. Let me make some specific comments as to the components of our ROM. Food and beverage costs were unfavorable 110 basis points year-over-year with commodity inflation coming in around 19%, down from 24% in the first quarter. Cost increases for the quarter were largely driven by inflation in poultry and beef and recent spikes in produce related to weather and yields.

While we anticipate inflationary pressure for the balance of this fiscal year, we expect these pressures to moderate each quarter, moving below 10% in Q3 and further down to the mid-single-digit range by Q4. Labor costs were 130 basis points favorable versus prior year, benefiting from sales leverage, partially offset by increased hourly wage rates, and a higher quarterly manager bonus payout due to the improved performance. Wage rate inflation for the quarter was approximately 5%. As Kevin mentioned, we are in the process of updating our labor model to improve the work environment for our team members and the dining experience for our guests. The changes to the model started late in the second quarter, and were more broadly worked their way into the system over the course of the fiscal year.

We are working to fine tune the number of labor hours needed to deliver the improved experiences for our team members and guests. Early results have driven positive guest metrics and better sales flow through during peak hours, as well as contributing to improving turnover rates at both the hourly and managerial levels. Importantly, we now believe we can generate the desired improvements, while investing a bit less in the model than originally anticipated. Restaurant expense for the quarter was elevated 70 basis points versus prior year due to overall inflationary costs in several expense areas and an increase in investment for repair and maintenance. The R&M expense increase reflects our work to improve the overall condition and cleanliness of our restaurants and to catch-up on deferred maintenance as supply chain issues and labor normalize.

Additional momentum for Chili’s is evidenced in the performance of the brand’s new restaurant development. Through Q2, four new restaurants were added to the fleet, and three more came online in January. All are opening at very strong levels, some above a $100,000 a week, as communities such as San Juan, Texas, Inverness, Florida, and Owensboro, Kentucky embrace the brand. We have seven more openings planned for the back half of this fiscal year and look forward to sharing those incremental results on future calls. At the halfway point in our fiscal year, we are taking the opportunity to update our annual guidance. This update incorporates various investments we are making into operations and assumes the continuation of the current economic environment with no material downturn.

We are raising our fiscal 2023 full-year guidance to include the following. Revenue is now anticipated in the range of $4.05 billion to $4.15 billion. EPS is anticipated in the range of $2.60 to $2.90, and CapEx is expected to be between $170 million and $180 million for the fiscal year. In closing, we believe our strategic initiatives, operational investments, and heightened team member focus is moving our business in the right direction. We’re excited to now reengage key traffic driving opportunities to build further momentum in our performance while understanding the short-term potential impacts from macroeconomic conditions. The heightened engagement of our restaurant teams around the direction we are taking is exciting to see, and we are highly appreciative of their efforts every day to bring the Chili’s and Maggiano’s experience to life for our guests.

It is through them, we will see our success. Now with our comments complete, let’s open the call for questions. And Holly, I’ll turn it back over to you to moderate the Q&A.

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Q&A Session

Operator: At this time, we will be conducting a question-and-answer session. . Your first question for today is coming from Andrew Strelzik at BMO.

Andrew Strelzik: Hi, thanks for taking the question. My first one, I was just curious on the traffic cadence to the quarter, if you could speak to that. I know last quarter you said you had some early softness with the menu change, so I’m just curious how that evolved since that time and obviously the industry data in January’s been quite strong. So anything you can say about whether or not that’s continued or any color would be great.

Joe Taylor: Yes, Andrew, good morning. The traffic cadence throughout the quarter was actually relatively consistent. Not a huge variation as we moved through the second quarter. And actually we were strengthening as you kind of headed through December. December was a good month until you got to right at the end where you had an impact of weather. They really hit the kind of tail end of December. I think you probably saw that in some of the industry numbers you looked at. And we were not immune. But very consistent to the quarter results that that you saw. And I think the dynamics of traffic are definitely carrying forward into January. As you might expect with the COVID lap, we have seen a acceleration on the comp side of the equation very similar to what you’re seeing from the industry trends.

But I think the underlying dynamics that have been driving the business are still in place as we move into the first part of the calendar year. January’s going to be unique with its COVID lap. Also you’re seeing as I said looking at my window at the frozen tundra of Dallas, you’re seeing some weather moves as you kind of work throughout January. So I look forward to thawing out and keep moving forward.

Andrew Strelzik: Got it. Okay. That’s helpful. And then I just wanted to ask you about the investments that you made you referenced late in the quarter on the labor model. What exactly have you done so far? You referenced some improvements in metrics. If you could speak to those a little bit and how are you thinking about maybe the next round of labor investments and the timing of that. Thanks.

Kevin Hochman: Yes. Just so this is Kevin, just so you understand how we designed the program. So Mika Ware has been leading a team both field leadership as well as folks in our restaurant support center at our home office to best understand if we were going to put labor investments back into the business, where would it make the biggest impact. And so the first round of those changes from that team we rolled out towards the tail end of December, it’s not an on/off switch, so it takes some time to get the hours and the bodies back into the building. But the focus areas were one, on giving servers more time to focus on fewer tables so that they could better serve those tables; two, adding additional runner/buster position to try to keep tables cleaner during service more frequently in restaurants with high bar traffic we added or had the option to add a second bartender to manage that traffic, not just at the bar, but obviously the tables that was in the bar area.