Brinker International, Inc. (NYSE:EAT) Q4 2023 Earnings Call Transcript August 16, 2023

Brinker International, Inc. beats earnings expectations. Reported EPS is $1.39, expectations were $1.3.

Operator: Good day, and welcome to the Q4 F ’23 Earnings Call. At this time all participants have been placed on a listen-only mode. The floor will be opened 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 on the call 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 usual, 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 recap the progress made during fiscal ’23, and highlight our plans to build on this momentum and drive traffic in fiscal ’24. During fiscal ’23, we made significant shifts to our strategy to drive our core dine-in channel business and help us drive margin improvement over time. We pulled back on deep discounting, we reduced our focus on investment of virtual brands, and started to pricing to recover inflation while still maintaining best-in-class value. We acted on our restaurant teams ideas to simplify operations, we invested in our labor model to improve our food grade scores and service, and we returned to national advertising for the first time in more than three years.

And we saw very good progress in our results, we are now significantly outpacing industry sales growth, since the middle of February, which is being driven by improved food scores, improved service scores, and have returned to traffic driving advertising. Our traffic gap versus the industry is also beginning to narrow, even though we continue to strategically shed the unprofitable Maggiano’s virtual brands sales, and some Chili’s sales that were driven by deep discounting, as we continue to reduce our reliance on coupons. From a retention standpoint we significantly improved managerial turnover and we are now better than pre-pandemic levels. A year ago we challenged our Vice Presidents of Operations to get after one obsession metric, they chose manager turnover, and the results have been exceptional.

We are now beating the industry. This year, they’ve chosen the obsession goal of hourly team member turnover, and I’m confident the team will deliver improvements there too. All in all, good progress in one year that has set the business up for a longer run of sustainable profitable growth. Before we shift our focus to fiscal ’24. I’d like to share an update on the relaunch of our Chicken Crispers, the first of our Core Four improvements, as an example of how our strategy is creating value. Our goal is to make it easier for operators to execute higher volumes, improve their recipes on chicken and fries, bring in new Mac and Cheese and new dipping sauces, and lastly merchandise Crispers in a more relevant way that would drive bigger piece counts.

We launched this platform at the end of May, and we’ve already seen some very positive results, including over 40% more Crisper volume. The best part is, these results came before we turned on advertising next month, in conjunction with the start of football season. We’ll also be featuring this improved platform more prominently on our new bar menu rolling out in September, and we will also introduce a new an incredibly delicious flavor that uses the existing operational procedures and adds no new complexity to the kitchen. Guest feedback on the new Crispers, Fries and Mac and Cheese has been phenomenal and has confirmed moving to one type of breading, to both improve the recipe and allow teams to produce much higher quantities consistently, has been the right choice.

The end results, a much bigger and margin accretive Crisper business driven by both higher pricing, higher piece counts and better taste, with less complexity because we eliminated the low mixing original Crisper. And our restaurant teams loved the changes. More sales with less complexity is a big win. In fiscal 2024, our goal is to accelerate this momentum by focusing on two key areas. Number one, we’ll continue to improve the team member and the guest experience, through service levels and atmosphere while driving the Core Four, through improved operations and innovation. The Core Four now represents 43% of our sales. We took many of you through those plans on improving guest and team member experiences when you attended the Investor Day, here in Dallas last quarter.

Number two, we’re laying several strategic initiatives to drive incremental traffic and accelerate our sales even more versus the industry, and I will detail them here. So let’s dive a little deeper into those initiatives starting with our advertising strategy. Last quarter, I shared the encouraging results for – of our 3 for Me TV campaign. This was our first national advertising window in more than three years, which helped narrow our traffic gap and accelerate Chili’s market share growth. This year will follow that same strategy, but increased from four weeks on TV to 21 weeks, that advertising will focus on value and Core Four menu items. We will use offers and innovation to bring guests in, and then use menu merchandising to drive check.

We’ll supplement these ad windows with a social media and digital strategy, to drive awareness and continue to increase the brand’s relevance. The marketing team is doing a great job getting Chili’s back in the cultural conversation and engaging with customers through these channels. For example, over the past six months, we’ve been a top trending topic on the platform, formerly known as Twitter, four times. Finally, we’re building a more sophisticated CRM program to drive frequency. I’m excited to announce our partnership with GALE, the award winning digital and CRM agency who is known as best-in-class in the restaurant industry. We’ll continue reducing CRM discounts and redeploy those dollars to more effective and sustainable communication that delivers relevant targeted messaging to reduce time between visits.

I’m so pleased to have the caliber of the GALE team working on our business and look forward to bringing you more updates on this program throughout the year. The other area of the business we’re leaning to drive incremental traffic is the bar. With last year’s Raise the Bar initiative, we are now selling more premium margaritas and our bars are more profitable. Building on that success, we’re launching an updated bar menu later this month, in conjunction with football, that includes compelling happy hour specials, premium drinks like our Casamigos Rita and our new Teremana tropical Rita, as well as a completely new food lineup with an emphasis on Crispers and Wings. In addition to featuring our premium burgers and Chicken Crispers on that new bar menu, I’m pleased to share we’ll be graduating the virtual brand It’s Just Wings to the real world, where they will now have the marketing power and distribution of Chili’s Grill and Bar.

It’s Just Wings is one of the largest, if not the largest virtual brand in the world, and it’s likely to get a lot bigger in the for-real restaurant world. We see an opportunity to leverage It’s Just Wings brand as a trip driver for bar visits and providing credibility to Chili’s as a wing player. We’ll start with football season and drive the Wings business throughout the year, leveraging relevant sports viewing occasions to drive traffic. It’s Just Wings will also appear on the everyday dining room menu, and we expect it to drive add-ons and trade up in the appetizer section. In summary, we expect these multiple traffic driving initiatives to improve traffic trends. We also expect a negative traffic impact of our CRM deep discounts reduction and Maggiano’s virtual brand removal, to have less of a drag on traffic, as we move through this fiscal year and we cycle those impacts out.

We’re excited about our plans to continue growing the Chili’s business in fiscal ’24, and we expect to continue to significantly outpace the industry on sales. And we expect our traffic driving initiatives to improve traffic trends versus the industry, which will continue to accelerate market share growth throughout fiscal ’24. Now let’s move on to Maggiano’s. The Maggiano’s team has delivered impressive results during fiscal ’23, as the recovery from the pandemic is now complete, finishing the year with an impressive $9.5 million AUV. I’m encouraged by the progress the Maggiano’s leadership team is making in clarifying their brand positioning. The team is currently working plans based on this positioning to modernize this iconic brand, and accelerate growth on top of this past year of impressive results.

I did want to take a moment to recognize Maggiano’s President, Steve Provost, who is retiring at the end of this month. Steve has made many contributions to our business during his 14 years at Brinker. He started at Maggiano’s brand and served as the President for many years, when the company needed him to jump into Chili’s, he did so, acting as the Chief Marketing and Innovation Officer, and in that role Steve created and launched It’s Just Wings brand during the pandemic, which is a big help to the business during a very tough time. And now, Steve has finished his career leading Maggiano’s for the second time. And Steve has done a great job leading the brand through the pandemic, thoughtfully supporting managers and teammates, and ultimately creating a stronger Maggiano’s, post pandemic.

We’re grateful for the many hats Steve has worn here at Brinker, and we’ll miss his infectious energy and passion for the business and the people. Chief Concept Officer, Larry Konecny and I are co-leading the brand, as we search for the right leader to grow the business in the long term. I wanted to close with a brief update on what we experienced at our Annual Manager Conference here last week in Chili’s – in Dallas. Our Chief People Officer, Aaron White and Chief Operating Officer, Doug Comings, hosted all of our Chili’s restaurant general managers at our Annual Conference. There we shared our fiscal ’24 plans. It was incredibly encouraging to hear the managers alignment and see their energy about the Chili’s – new Chili’s direction. The job continues to get easier, the job continues to be more fun and more rewarding for them and their teams.

They feel like they’re being heard and a big part of shaping the future of Chili’s. And they love winning again and growing faster than the industry. So the teams’ are really fired up and they’re ready to deliver another year with accelerated growth and profitability. Net, we have confidence in the plans, we have the enthusiasm of our field restaurant teams and we have the alignment to what’s important across our entire organization, that will allow us to deliver strong results this fiscal year. Now, I’ll hand it over to Joe and he’ll walk you through the numbers and share guidance for fiscal ’24. Go ahead. Joe.

Joe Taylor: Well, thank you, Kevin and good morning everyone. The results reported in this morning’s press release represent the completion of a successful fiscal year, in which we turned the overall direction of our brands, created a stronger foundation for growth and build operational momentum heading into the current fiscal year. For fiscal ’23, Brinker’s annual revenue was $4,133 million and our adjusted EPS was $2.83. Let me start my comments with several financial highlights for the fiscal year, followed by an overview of the fourth quarter performance, before ending with comments and specific guidance for fiscal ’24. During the recently completed fiscal year, we initiated investments into the Chili’s brand through greater labor and maintenance spend, that are bearing fruit by supporting an improved guest experience.

While incorporating these necessary costs into the Chili’s business model, we still realized improved restaurant level economics as we move through the year. Operational simplification, more aggressive and appropriate use of price mix and cost of sales improvement were the primary contributors to the change. Maggiano’s moved fully out of its post pandemic recovery mode and delivered record pre-tax profits for the brand. With particular success in solidifying their off-premise channel. Brinker delivered top and bottom line results that strengthened through the year and finished well within the guidance range as updated at midyear. Overall, we are proud of the work our team members delivered and the progress made through the year, particularly around initiatives to improve team member and guest experiences, efforts that will lead to greater guest engagement as we move into a more robust traffic driving phase of our strategy.

Now moving to a overview of fourth quarter financial highlights. For the fourth quarter of fiscal 2023, Brinker reported total revenues of $1,075 million, with consolidated comp sales of positive 6.6%. Our adjusted diluted EPS for the quarter was $1.39, an increase of 21% from fourth quarter last fiscal year. Both brands reported meaningful top line sales growth with Chili’s coming in at a positive 6.3% for the quarter, driven by price of 9.4% and positive mix of 4.6%, partially offset by negative traffic of 7.7%. Comp sales and traffic improved as we moved through the quarter, and the brands positive gap to the industry widened. Importantly, dining room traffic for the quarter was positive when compared to the fourth quarter of fiscal ’22.

I would note Chili’s is maintaining strong sales momentum in the beginning of this fiscal year, as well as further widening their comp sales gap to this sector. Maggiano’s also recorded a solid fourth quarter, with comp sales up 9.1% driven by positive price of 9.5%, partially offset by slightly negative mix in traffic. As mentioned earlier, we improved our restaurant operating margin with a fourth quarter consolidated ROM of 13.4%, up 90 basis points from the comparable quarter of the prior fiscal year. The improvement was primarily driven by sales leverage from greater price mix in the quarter, and year-over-year improvement in cost of sales. Commodity markets moved in the right direction with inflation just over 4% for the quarter. Our investment into incremental labor hours to improve operational performance and wage rate inflation firmly in the 5% range, were the primary drivers of increased labor expense for the quarter.

The third component of ROM, restaurant expense, was impacted year-over-year by our strategy to increase both advertising and repair and maintenance spend, both of which we believe will positively impact our brand awareness and guest engagement. In addition, we recorded a year-end adjustment to increase our reserve for workers’ comp and GL insurance liabilities that reduced adjusted EPS by approximately $0.05. Our adjusted EBITDA for the fourth quarter and fiscal year, was $114 million and $345 million, respectively. This level of performance allowed us to reinvest in our restaurants, while also paying down $87 million of debt over the course of the year. At year-end, our funded debt leverage ratio declined to 2.6 times and our lease adjusted leverage declined to 3.8 times.

We will continue to utilize free cash flow to reduce outstanding debt with a target of reducing our funded debt leverage ratio to two times, a target we believe achievable before the end of calendar ’24. During the quarter, we opened seven new Chili’s restaurants, bringing our fiscal year openings to 14. Our recent openings continue to be a source of strength for Chili’s, with three of the openings this quarter setting back to back to back, opening sales records, showing the continued relevancy of the Chili’s brand. Now to fiscal 2024. Company sales for the current fiscal year will continue to benefit from favorable price mix dynamics, although at a reduced level from the low teens combination of fiscal ’23. For the current fiscal year, we expect consolidated comp sales growth in the mid-single digit range.

As it relates to labor costs, we expect wage rate inflation remaining sticky in the mid-single digit range. The first half of the year will also be impacted by the incremental labor hours we built into our model during the middle of last fiscal year. As indicated at our recent Investor Day, we expect this to be approximately $20 million of incremental spend during the first half of the fiscal year. One of the more meaningful changes when compared to fiscal ’23, should be food and beverage inflation. In the category of what a difference a year makes, we expect commodity inflation for the fiscal year ’24 to be approximately 1%. When compared to the respective quarters of last year, we expect commodity price to be deflationary for the first two quarters, with a low single-digit inflation, the last two quarters.

Enhanced marketing will be a key driver for Chili’s in this fiscal year. We expect to spend approximately $55 million to $60 million more in marketing expense during fiscal ’24, when compared to fiscal ’23. And finally, restaurant development has 12 new openings scheduled in the fiscal year. In this morning’s press release, we included some specific guidance for certain reportable items. This incorporates our existing view of the macro casual dining industry, our strategy to drive positive performance at both brands and our capital allocation priorities. For the fiscal year, we are currently forecasting total revenues between $4.27 billion and $4.35 billion. Adjusted earnings per share in a range of $3.15 to $3.55, capital expenditures between $175 million and $195 million and weighted average shares, in the a range of 45 million to 46 million shares.

In close, we are proud of the progress we’ve made and are continuing to make in building a solid foundation for future growth. We owe many thanks to our team members, both in the field and at our restaurant support center who are hard at work improving the business on a day-to-day basis. Their efforts have created strong momentum that we are confident will drive the business forward as we move through the fiscal year. And with my comments now complete. I’m going to turn the call back over to Holly to moderate questions.

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Q&A Session

Operator: [Operator Instructions] Your first question for today is coming from Dennis Geiger at UBS.

Dennis Geiger: Great, thank you and thanks for all the color on the market share. Maybe we could start there as it relates to market share through the quarter, any comments on how that traffic market share trended through the quarter? And then, Joe, I wasn’t sure if you made a comment on starting the new fiscal year or not, but any comments on how that has looked into the beginning of the year?

Joe Taylor: Yes, sure, Dennis, and good morning. Yes. Traffic dynamics – comps and traffic dynamics improved as we move throughout the quarter being the quarter and I think you heard some of the similar commentary from others in the sector, was a little bit below expectations in kind of that April, early May kind of timeframe, but definitely improves of both traffic, getting better, gap getting better and overall comps getting better as we move. So some nice momentum coming out of the quarter, which we have definitely maintained. Very excited about what we’re seeing in the first, really seven weeks of the current fiscal year, maintaining that momentum both on comp sales, traffic and continuing to widen our gap to the industry.

Dennis Geiger: That’s great Joe, thank you. And then just one more, a lot of initiatives clearly in progress and resonating. Just curious on customer behavior that you’re able to kind of parse out? Any changes, behavior-wise, purchase intent-wise, that you’re seeing within different customer cohorts are or anything notable from that perspective, as you move through the quarter? Thank you, guys.

Kevin Hochman: Yes. From a macro standpoint, our internal metrics continued to improve. So when I say internal metric, talk about server attentive, intent to return, food grade scores, they are all headed in the right direction. From a cohort standpoint, the low-end customer is hanging in there, we haven’t seen any change in frequency, quarter to quarter, the high-end customers, or the higher income customers is actually coming more often and then that middle ground, we’ve seen a little bit of fall off. But all three of those cohorts are actually spending more than they were a year ago. So the net of it is, it’s a little bit mixed, right? You’ve got a higher income customer that actually is coming more often, the lowest income customer is about the same and that middle ground, we’ve seen a little bit of drop-off, but yet all three cohorts are spending more.

Dennis Geiger: Great, thank you guys. I appreciate it.

Operator: Your next question is coming from David Palmer at Evercore ISI.

David Palmer: Thanks, good morning. I’m just wondering how you’re thinking about – I think I know the answer to this, but the thing is about how you’re sort of targeting key metrics, your guidance implies a 100 to 150-ish restaurant margin basis point expansion in ’24. I mean you can correct me if I’m wrong on that rough math, but that’s both good and it’s a fairly tight window. In other words, you get a lot of leverage on your business model. Are you targeting price according to really target the right margin? And I wonder what – when and how you think about, when you start targeting traffic as a key metric? And I guess maybe related to all this is – should we assume that you’re not going to be taking more price than the carry-over four points of price going into fiscal ’24? Thanks.

Joe Taylor: David, this is Joe, let me deal with the price piece of the equation, then we to segue into traffic. We’re going to be targeting both, the year on the pricing in particular, the year is going to benefit obviously from pricing actions we took throughout this year. I think there – we’re very comfortable with where we stand relative to the industry from a pricing standpoint. I do think that there is some more price available to us. We’re actually also in the early stages of working with a third-party consultant on even becoming more sophisticated in our ability to apply price throughout our various markets. But I think we’ll take a little bit of incremental price, probably mid-single digits here in the first half of the year later on in this quarter, and then move into a low level of pricing impact in the back half of the year.