Brinker International, Inc.

Good morning, ladies and gentlemen, and welcome to the Brinker International Q4 2020 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Micah Ware. Ma'am, the floor is yours.

Thank you, Paul, and good morning, everyone. With me on today's call are Wyman Roberts, Chief Executive Officer and President of and Joe Taylor, Chief Financial Officer. Results for the fourth quarter were released earlier this morning and are available on our website at brinker.com. Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives. Then we will open the call for your questions. Before beginning our comments, I must 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 Security Litigation Reform Act of 1995. All such statements are subject to risk and uncertainties which could cause actual results to differ from those anticipated. Such risk 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 Wyman.

Thanks, Micah. And thanks, everyone, for joining us this morning. Joe and I will share highlights of our fourth quarter performance and what we're seeing quarter to date. And by now you've heard most others in our space, and despite the volatility we're all facing, it's good to see the category and the industry moving in the right direction. You'll hear some of the same themes from us, like progressive improvements throughout the quarter as dining rooms reopened, growth in off-premise, and digital expansion. The biggest difference you'll hear is in our level of performance. By staying true to our strategy and making aggressive moves to grow the business, our team has navigated this pandemic very well. Chili's generated significant top-line progress throughout the quarter, and with our operators' disciplined margin management, we delivered positive cash flow for the quarter, which we used to pay down debt. Our debt load is now below our pre-pandemic level. We continued this momentum into July, ending the month with Chili's down just 10.9%. And in the 84% of our company-owned restaurants with open dining rooms, we're down just 3.8%. And 36% of our company-owned Chili's restaurants ran positive comp sales for the month. It wasn't our quick reaction to the crisis that enabled us to deliver these results. It was our choice to stay true to the strategy we've been working for more than two years. We had already made significant progress in the areas required to thrive in this environment, off-premise, digital, value, and scale. We didn't have to scramble when the pandemic hit. We walked into it with seven solid quarters of performance. All we had to do was stay focused and push the accelerator a little harder. As a result, we set the bar in casual dining, landing the top spot in sales and traffic for three straight months, according to NAPTRAC. and we're poised for continued future success. You've heard how many restaurant companies are leaning into digital to manage through this crisis. And while Chili's is no exception, we were leading the way in the digital space long before the pandemic. Over the past decade, we've made significant investments to build our digital infrastructure, foster connections with guests, and enabling us to quickly respond to their evolving dining needs. Increasing convenience is a big component of how we leverage our digital capability. We can lean into our 8 million member loyalty database, gain check-level purchasing insight from our tabletop devices, and continue to improve our five-star app with features like one-tap reorder of our guests' most frequent ordered items. And last year, we integrated DoorDash into our POS system and our e-commerce experience, making it possible to shift our marketing focus from national TV spots to our digital platform. where we continuously test and learn to increase e-commerce conversions. And as a result, our digital sales of off-premise meals have grown from low teens to more than 50% in the fourth quarter, with only a slight dip as dining rooms reopen. We've also driven frequency, increased frequency through our takeout and delivery channels at a fraction of the marketing expense. That's the beauty of a digital strategy that makes dining easier and more convenient for guests. Because we can meet them where they are, Guests used us more. Finally, here's something you haven't heard from anyone else in our space. During the last week of fiscal 2020, we accomplished something no other restaurant company has ever done. In a single day, we launched It's Just Wings, our first virtual brand, in 1,050 Chili's and Maggiano's across the country. Sales continue to build every week, and we clearly see the potential to exceed $150 million in the brand's first year, which would secure It's Just Wings a spot in the top 200 restaurant brands. Over the years, casual dining has been dinged for being overbuilt. We believe this is our opportunity to prove that maybe it isn't overbuilt, it's just underutilized. It's Just Wings leverages existing buildings, equipment, and labor. Even after aggressive pricing and marketing, buying quality ingredients and packaging, and paying our last mile logistics partner, we're generating strong flow through. The brand's guests are highly incremental to Brinker Concepts and their feedback is extremely positive. Satisfaction ratings are among the top restaurant brands on DoorDash and rear intent is high. And we're just getting started. We created this business in six months and launched it overnight with minimal investment in a consumer channel where demand is growing by more than 100% annually. Taking into account our scale, the capacity of our kitchens, our exclusive partnership with DoorDash, we believe our ability to win in this space is unmatched. So we're testing additional virtual concepts and learning how to drive visibility among the millions of DoorDash guests looking for food delivery options and how to continually improve our operations to meet consumer demand for speed, food quality, and value. We are pleased to have not one, but two brands that rank among the most popular on the DoorDash platform, and we're excited about the potential that lies ahead. Obviously, things aren't back to normal for any of us yet, but we see a bright future for all the Brinker brands. We promised you last quarter that no matter what came our way, we would do two things. Put the safety of our guests and team members first, and continue to perform and take share. I couldn't be more proud of how our operators and our support teams have delivered on both of those promises and how we're creatively and boldly building our future together. No matter what lies ahead, with the talent on our team, the power of our brands, and the scale at our disposal, we start from a position of strength. And with that, I'll turn the call over to Joe.

Hey, thanks Wyman, and good morning everyone. Regardless of the descriptor you put on the operating environment in the most recent quarter, and a number of less complimentary ones come to mind, our operators quickly adjusted course to the realities of the pandemic and rose to the challenge to exceed expectations with the results delivered. For the fourth quarter of fiscal year 20, Brinker reported consolidated net comp sales of negative 36.7%, although comp sales recorded material improvement as the quarter progressed, with the June period consolidated results down 19%. Both brands generated a positive progression of performance through the quarter, with Chili's leading the casual dining sector from a comp sales perspective. While the reported quarterly net comp sales for the brand was a negative 32.2%, performance progressed from down 51% in April at the height of the dining room closures to down only 13% for the June period. Chili's outpaced the competition throughout the quarter, with comp sales positive to the casual dining sector by approximately 13% and traffic positive to the sector by approximately 18%. More than 25 percent of our corporate Chili's restaurants reported positive comp sales for the June period. A percentage, as Wyman earlier stated, that increased to 36 percent in July. Our P&L highlights for the quarter were total revenues of $563 million, a restaurant operating margin of 6.4 percent, and an adjusted loss per diluted share of 88 cents. Included in the 88-cent loss is a burden of approximately 18 cents due to the timing of recording expenses related to annual and long-term incentive compensation plans beyond what would typically be recorded in the fourth quarter in our G&A expense. Throughout this crisis, our team has done an exceptional job of taking care of our guests and team members and has proven an equal ability to effectively manage expenses in the face of meaningful sales decreases. Our managers have been efficient in utilizing our scheduling tools to optimize the labor hours to fit the current business environment. Hourly labor and payroll tax have a good degree of variability and were favorable year over year, although total labor, including restaurant management, was unfavorable in the quarter by 260 basis points driven by sales to leverage. Restaurant expense margin for the quarter increased by 6.2%, again, primarily due to sales to leverage, despite our operators reducing year-over-year spend in this area by more than $29 million. We recorded meaningful savings in advertising spend, repair and maintenance, and supplies related to on-premise dining, a portion of which we believe will be ongoing. As to cost of sales, we were positive 30 basis points versus prior year, primarily due to favorable menu mix. As I earlier commented, our restaurant operating margin from the quarter was 6.4%. However, in conjunction with the progress we made top line, our operating margin improved through the quarter, increasing to 12.2% for the June period. Assuming an improving operating environment, We believe we are set up for additional margin improvement as we carry forward identified efficiencies, further open dining room capacity, and leverage sales from our virtual brand, It's Just Wings. Strengthening the balance sheet is an important part of our financial strategy moving forward, and we are currently focusing free cash flow towards debt reduction and liquidity enhancement. To further enhance our liquidity position, we executed an equity offering in the quarter raising approximately $139 million, which was used to pay down revolving credit debt. Our overall total debt balance at fiscal year end was approximately $1.2 billion, a reduction of just over $220 million from the end of the third quarter, as revolving credit borrowings decreased from $700 million to less than $473 million. Our liquidity, which we considered to be cash balances and revolving credit availability now exceeds $575 million. In addition, we recently completed a 15-month extension of our revolving credit facility, now maturing in December 2022. As sales and cash flows improved, we resumed new restaurant development activity that had been temporarily halted early in the quarter. We plan to open or relocate four new Chili's restaurants during this current quarter. Now as to operating guidance, while in past years we would typically provide annual guidance for Brinker during this earnings call, the potential volatility and unknowns of the current operating environment makes that exercise difficult. Instead, we are providing some limited guidance as to our consolidated performance for the current first quarter and anticipate providing quarterly insights as we move through the year. For Brinker in the first quarter, we expect consolidated comp store sales to be down in the low to mid-teens range. Adjusted earnings per diluted share are currently estimated to be a loss in the range of 25 cents to 40 cents. We anticipate positive operating cash flow, and weighted average shares is estimated to be 45 to 46 million shares. I would also like to remind everyone that fiscal year 2021 includes the 53rd week, which takes place during the fourth quarter. Despite the difficulties experienced from this pandemic, our team has risen to the challenge. Our strategy of focusing on value, convenience, and safety has proven to be well received by our guests, has given us the ability to outperform our competition, and leaves us very well positioned to continue to take market share as we move through the fiscal year. I greatly appreciate the hard work and commitment from our team members, especially those on the front lines serving our guests each and every day. I have every confidence we will continue to demonstrate our ability to sustain our progress and return to growth on the top and bottom line for the long term. And with that, Paul, let's open the call up for questions.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. And your first question is coming from Brian Vaccaro. Brian, your line is live. Please announce your affiliation and pose your question.

Thanks, and good morning. I just wanted to circle back to the It's Just Wings concept. I think you said you believe it can generate around $150 million this year in sales. Just curious, I know it's still early days, but Can you just give us a sense of how that's contributed to the quarter-to-date comps and how you've seen that build even through the first four or five weeks? And could you also provide some more color on the brand's margin dynamics?

Hey, Brian. You know, we'll give you a little bit of insight. We're not going to give you everything you're asking for, but obviously you can kind of do the math. If it's a $150 million brand and, you know, roughly $3 million-plus sales, week in sales that's what it's it's pretty much incremental to our business so it adds that much to to the sales levels so it's you know it's low single digits mid single digits kind of in that range and we we've seen really great response to the brand and the product as we've rolled it out now we're in week seven so it's been very well received sales have grown nicely and it's it's met or exceeded our expectation pretty much on every turn. And as I mentioned, the margins and the leverage we have with this virtual brand is significant. You know, there's no capital per se. We had to buy a couple of small refrigerators in a couple of restaurants, but for the sales volume that it generates, it's really capital-free. And we get to leverage all of the expertise we have in our restaurants in terms of culinary ability. We get to leverage the equipment that we already have and things like our combi, which is a great piece of equipment that allows us to smoke our ribs, now also allows us to smoke wings and offer a differentiated product from a lot of people in the category. So we're very excited about the virtual brand. We're pleased with its results, and we just see a potential future, potential down the road to grow it.

All right, and then I also wanted to just ask about initiatives that you've been working through to optimize capacity within your restaurants. Where are you on installing plastic partitions or working to expand outdoor seating? And can you remind me, what percent of the seats in a typical Chili's are booths?

Yeah, I don't have the number of booths. What do you think, Michael? Yeah, it's about 45% of our seating is booths. Outdoor capacity has not been area of focus for us through the pandemic. As we've gotten a little bit more into this summer and now looking into fall, and it looks like we may be out there a little longer in some states, we are starting to put out some additional outdoor spaces. But the results you're seeing us deliver, which, again, are top in the category, are without us having to do a whole lot of external or extraneous and having to build, you know, patios or tents in any major way. We're doing that off of the capacity we have in our dining rooms today, which for the most part is about 50%. So we have a lot of upside as we get, you know, more and more comfortable with being able to seat people in maybe closer proximities.

And clearly, again, as we mentioned in July, getting 36%. of your restaurants back into positive comp territory without having to do those incremental activities.

Thanks, Brian. Thanks, Brian.

Thank you. Thank you. And the next question is coming from John Ivanko. John, your line is live. Please announce your affiliation and pose your question.

Hi, great. Thank you, JP Morgan. First, a clarification on the 36%. Was it concentrated? In a couple of states, maybe some parts of Florida, Georgia, Texas, if you can just kind of make a comment, or were you able to have it more spread out than the southeast? And secondly, if I can, and I'm going to see if I can ask this question correctly, is there a level of sales, maybe percentage of previous average unit volumes where you expect to get back to previous store-level margins either in percent or even in dollar margins? you know, that you care to talk about today. Obviously, you know, I mean, a lot of businesses, you know, are running themselves much more efficiently than they were in the past. And, you know, you're actually able to achieve previous percent margins or dollar margins with a lower level of sales. And if you don't mind, I'd have a, I'd like to have a third question as well, if I'm not being too gritty. Thanks.

John Ivanco going for it. You're going for the triple. Yeah. So, uh, I can't even remember your first question now, John. So the first question was, uh, The first question, the beauty of what we're seeing is it's broad-based. So we're, of those 36%, spread out across the country, market by market, some in Texas and Florida as well as other parts of the country. The mountains states are doing very well. Obviously, California being closed in restaurant dining has been a little bit of a pullback from what we saw in the fourth quarter. So we walked into July and we had to kind of deal with California closing dining rooms, which was probably the biggest setback we've had. And so we're very confident that as we get restaurants reopened everywhere, we'll see these positive sales trends grow even more. And with regard to your question, around at what level do we attain the profitability, our historic profitability levels. As Joe mentioned, we're finding, like you're hearing from so many other folks, when you zero base a concept and you take out so much cost and then you get to rebuild it, you find opportunities. And we're finding those opportunities. So we do think there probably is a more efficient, well, we believe there is a more efficient model going forward And so the level of which the sales that we've had historically would deliver better profitability. So I don't have a specific percentage for you. I don't know if we want to give you that, but I'll let Joe talk to that.

And then obviously you add just wings into the equation. Again, highly leverageable sales coming on that side. So clearly the biggest opportunity over the course of the rest of the fiscal year is getting capacity back online. Dining rooms reopened back up into those 90% levels. but what we can really control, again, is the efficiency that the operators are finding and how to run the restaurants and then adding the virtual brand into the equation. So I think there's definitely strong beliefs around our ability to increase margins.

Thank you so much for that. And then secondly, obviously, G&A is kind of, there's so many different stories of G&A and fiscal 20. The question is on fiscal 21, you know, just kind of thinking about I don't know if you would fully accrue bonuses on the current level of comp that you have in the first quarter. Obviously, it's so much better than the fourth. But can you kind of help us hone in on what you think could kind of be a reported G&A number in 21? Obviously, whether it's on IC or whether it's in headcount or different projects that you're doing, it's probably a number that I need the most help with at this point.

Yeah, and again, I think that will evolve as the year evolves, too, based on where we see the business trajectory. I think it will be reasonable to see us get, you know, the number from a percentage basis should start with a four and how far we can drive that down or, you know, it's going to depend on some of the dynamics we just talked about and some efficiencies we see on the G&A side. We will definitely spend fewer dollars in G&A in this fiscal year than we have in the past typical years, and we'll continue to, but we're going to continue to also invest appropriately. Included in G&A is IT spend, and that's an extremely important piece of business, and we will invest along those lines. Obviously, incentive compensation programs have variable dynamics to them depending on where the business goes. You would expect in lower than traditional business environments to see lower spend in that regard, and And I think that's the way some of those programs will work as we move through this year. And as we continue to build the business, you know, hopefully we'll build some of those results also. So, again, I don't think at the end of the day from a percentage basis it's going to be a radically different environment. But, again, that's one of the unknowns and one of the reasons we're kind of keeping our thought processes in these conversations to a quarterly basis.

Thanks so much, guys. Thanks, John. Thanks. Good talking to you.

Thank you. And the next question is coming from David Palmer. David, your line is live. Please announce your affiliation and pose your question.

Thanks. Evercore ISI. Good morning. What is your to-go sales mix lately in the partly open dining room locations? I think you mentioned it dropped maybe below 50%. And what is your seating capacity today? in your dining rooms or the partially open dining rooms as a percent of normal? And I have a quick follow-up.

Hey, David, that's an easy question because it's got the same basic answer. 50%. So we're, you know, again, as more dining rooms open and people get a little more comfortable, we see it drop a little bit below that 50%. But we're basically 50% in the restaurant and 50% out, right, at this point. And for the most part, where our dining rooms are open, we're running 50% capacity. And we've been very conservative. Again, our first promise was to keep our team members and our employees safe. And we've had masks on everyone from the very beginning of this pandemic. And we social distance. And we really did social distance in our restaurants. And so... We're going to continue to do that, but we're looking at ways to maybe get some additional capacity in now that we have a better sense for, you know, what we have to do to stay safe and continue to provide that environment.

And then I know this is a bit of a million-dollar question type question, but how much higher could AUVs be in the out year, you know, versus pre-COVID, and obviously we're thinking about the to-go sales. If you're annualizing 1.4 million in to-go sales, it does make you wonder if you've discovered some of that is going to be sticky after this is all over, but there's so many other factors that you must be thinking about as well. How do you think about that versus other factors that maybe you want to tell us about? Thanks.

Well, I mean, David, I don't think anyone would say this is a robust environment for casual dining. And the fact that we've got 36% of our restaurants running positive comp sales tells me that we're doing some good things and that there is upside potential. And that's with still 15, 16% of our restaurants that don't have dining rooms open. So I think it kind of we're optimistic that there is quite a bit of topside room for our brands to grow and to leverage the capacity that we have with some virtual brands as well as just getting the core business stronger. And in this post-pandemic environment, we think the things that we've been doing, the value proposition, leveraging scale, leaning to digital technology is going to allow us to be even more successful. So, I don't have a number for you, but we look to grow per restaurant sales, and we see some significant upside potential.

Thank you very much.

Thanks, David. Thanks, David.

Thank you. And the next question is coming from Nicole Miller. Nicole, your line is live. Please announce your affiliation and pose your question.

Thank you. Good morning, Piper Sandler. Two quick ones. The first is, There's a lot of excitement about It's Just Wings, but I'll tell you, I've been asked about, you know, what kind of human capital time investments do you have to make? Could you just walk us through both? You know, the store level sounds pretty easy, but from an executive level, just assure us that there's no disruption on your end as you kick off this opportunity and others.

Hey, Nicole, that's a great question. I think... So this is where another strategy of our scale comes into play, right? So we have the luxury at Brinker to be able to put some really talented people in position to manage businesses. And Steve Provo was heading up innovation last year. And in that process, we looked at a lot of things beyond virtual brands, including ghost kitchens and mobile kitchens and a litany of things. And to have somebody of that quality and caliber of leadership taking us through that journey and finding the best place for us to land is a luxury that a lot of people don't have. And so we had the ability to take a leader and a team and keep them somewhat isolated and work on a lot of innovation ideas. And then when it became time to roll it into the system, we did it overnight. And now it sits within our brands fairly seamlessly. We have some talented leaders now kind of responsible for growing and building that business, and Steve stepped into the Magianos world to help us kind of navigate Magianos through this current time period and into the future. So I feel very good that the leadership we have isn't being distracted from the core, if that's kind of the key issue you're trying to get to. But I also feel really great that the quality of the people working on this business, and it is a significant incremental piece of business, are also talented and motivated to move it forward.

That's very important and appreciated. Thank you. Last question. You basically short up the balance sheet. You're obviously positive same-source sales are in line of sight and happening for a good chunk of the base. What's just the holistic view of capital deployment now in terms of the traditional methods around dividend share repurchase, development, etc.? ?

Yeah, Nicole, I think as I mentioned in the comments, you know, right now we're continuing to shore up that balance sheet. We will be reducing our leverage position on the go-forward position. And as we continue through that process, we'll give you more updates as it relates to what that looks like and what those levels will be. But they will be significantly reduced as we kind of go forward. As we build the business back up, you know, we're going to also continue to capitalize do capital allocation that invests back in the business. As I indicated, we started back very quickly within the development side of the equation. We will bring capacity online over the course of the next several years. And we're going to also invest back into the fleet similar to the re-image programs that we were working on pre-pandemic. So I really look at that initial pandemic period of time as just really a pause in the activities that we were doing pre-pandemic as it relates specific to the share repurchase activity and dividend activity, more to say down the road as we kind of move through these next couple phases. But, you know, clearly returning excess cash flow to shareholders still is very much a long-term focus for us.

Thank you.

Thank you, Nicole.

Thank you. And the next question is coming from Chris O'Call. Chris, your line is live. Please announce your affiliation and pose your question.

Thanks, Steve. Well, good morning, guys. Wyman, do you think Brinker has advantages to launching virtual concepts that other restaurant chains do not have, or do you expect other chains to start launching virtual concepts for delivery?

Hey, Chris. Absolutely. I mean, I think, again, back to the strategies of scale and company ownership, there's a First, with regard to speed, I don't know anyone that could do over 1,000 restaurants with a virtual brand overnight. The relationship we have with DoorDash is also instrumental and strategic in this whole virtual brand and delivery strategy of ours. We've chosen a little bit of a different path and some others, and we think that that is an advantage for us. And we're going to continue to lean into that and build off that. And we're in the first innings of this game. So will there be other people that work on virtual branding and try and do a similar kind of stuff? I have no doubt it's a good idea. But do they have the capability to do what we've done and to leverage it the way we leverage it? I don't think so. I think our operators are really the kind of un- somewhat an unrecognized source of power for us. We just got such a great operations team. We have the quality of systems in our restaurants that allow us to do some of this additional complication. So in a time when people were cutting menus and simplifying the world and trying to simplify it down, our operators were stepping up. We didn't reduce our menu at all. We actually rolled out a virtual brand to the restaurants in the middle of this crisis and they embrace it and deliver really a home run for us just kind of goes to kind of the quality of the people we have running our restaurants every day.

That's helpful. And then, Joe, could you give us a sense for how much of Maggiano's fiscal 2Q revenue is typically attributable to banquets or large party occasions? I'm just trying to get a sense of what comps could look like if people are still avoiding group events. by the holiday season when I think AUVs expand meaningfully?

Yeah, I think, again, it is a significant, that's the quarter where banquets do play an oversized run. I don't have the specific number right here, but it's a meaningful piece of what they do within the second quarter, and they have a lot of work ongoing right now to try and shore up that space. That is, you know, when you think about the Maggiana's business model, That is probably the weakest piece of the equation. They've done a number of other great things on how to broaden their business. They've seen a trajectory that is also improving. You saw this negative 66 going down into the mid-40s. We're continuing to see improvement as they move forward from that level. But as we move to the second quarter, looking at that banquet space could be a bit of a hurdle to get over. It's about 3% in the second quarter of their their model drives off of, the comp sales drive off of that banquet space. And again, they have a lot of energy devoted. They know the issue in the second quarter, but working it aggressively.

Great. Thanks, guys. Thanks, Chris.

Thank you. And the next question is coming from Alex Slagle. Alex, your line is live. Please announce your affiliation and pose your question.

Thanks, Jeffries. Good morning. I appreciate the details on the restaurants already driving positive comps. I was wondering if you could kind of talk about the characteristics of those restaurants and the biggest differentiating factors.

Hey, Alex. No, there really isn't anything unique about them. They're just, you know, they're spread out throughout the country. Obviously, with the rollout of It's Just Wings, some of them are higher-performing. Wings restaurants. So those sales are helping them get over prior year levels. But it really isn't any one characteristic. And that's why we're kind of encouraged about what we're seeing across the country.

And do you have any thoughts on narrowing down the menu sums to eliminate unnecessary complexity and improve speed? Or is that at this point, does that not seem like it's holding you back?

No, and I know, I think you're relatively new to us, right? Welcome, Alex. Yeah, so welcome. Two years ago, we did a major menu simplification effort where we took 40% of our menu items at Chili's and reduced the scope of the menu. So again, when I talk about strategies that we've had in play for a while, menu simplification is something we did in a significant way two years ago, a little over two years ago now. And so we feel very comfortable. I mean, comfortable enough with the complexity of our kitchen that we were able to bring Itch Just Wings into the kitchen and not see any kind of a negative guest impact to the guests in the dining room, dining in Chili's with regard to the food or the delivery of the food or the service. So We keep a very close watch on our guest metrics, now both those that are taking it out or getting it delivered, but especially those in the dining room, and we don't see any need to have to deal with the complexity at this point. We keep a close eye on it there to make sure it doesn't creep.

Yeah, and Alex, I think as you heard me mention, we had that positive menu mix in the second quarter. To a certain extent, the guest is simplified for us. narrowing back to some of the tried and true favorites when you think about crispers and burgers and things of that nature. So we've kind of seen a little bit of narrowing of where their choice is, which does provide a little bit of simplification if you think about it in that regard where we don't have to take things off the menu, but that does focus our operators in those areas. So we have the ability to follow the consumer where they want to go.

That's great. Thank you. Great.

Thank you. And the next question is coming from Gregory Frankfurt. Gregory, your line is live. Please announce your affiliation and pose your question.

Hey, Bank of America. I had two questions. The first is, I think it was in response to, I don't know if it was Glass's or Ivanko's question, on just margins and some of the areas you guys have been able to find efficiencies through this process. Can you maybe talk about what some of those areas are? Is it labor? Is it food waste? I guess any sort of broad scopes, and that would be helpful. And then my second question is on pricing power and coming out of this. And I'm sort of curious, when I've talked to some of the casual dining companies, I'm getting very sort of mixed feelings on whether or not pricing can be pushed a little bit harder, or if you guys want to be a little bit more restrained. And I'm sort of curious where Chili shakes out on that front.

Thanks. Greg, we'll probably tag team the cost side of it. I'll just say in general, Again, back to operators, at the outset, outside of the pandemic, in March, when we really had to address the dramatic shift in business and closing of dining rooms, the cost structure leverage came from our managers. They really just managed labor extremely well. They did a lot of the work to get us through some of those early tough days, which allowed us to kind of reduce our variable labor costs significantly with the reduction in sales. And then as we started to build back into the dining room and build the business back up, you have this very unique opportunity to say, hey, I mean, I got rid of all these costs because I didn't have my dining room open. So I'm going to build the cost back in. Let's evaluate each of these investments again to make sure that what we've been doing for years really does make sense or that maybe somebody that was doing it slightly different in one part of the country we now have better visibility into it. And while some of these things seem small, when you've got over 1,000 restaurants, they add up quickly. And so Joe can give you some color on what some of those examples are, but we've found some very good opportunities that we think will stick with us.

Yeah, Greg, when I look at the main components, again, I think there will be opportunities in labor, and those probably drive off of running our labor systems effectively. So, again, as you bring the business back online, we're always looking at some efficiency opportunities and how you use technology, and we may do some of that as we go forward. But I think it's really, you know, using the systems closely and effectively as we kind of build the business back up. I think when I look at the progression of margins that I talked about over the quarter and into the improvements we're seeing, you know, into this quarter, the restaurant expense areas where you see a lot of very identifiable ones – Strategically, we've made some decisions around advertising that are going to play out very nicely from a margin standpoint. That's the digital power of the company that can shift to a more digital and more efficient strategy there. And then you look underneath that, and this is where there's line item after line item after line item. It can be as knife sharpening, linens, R&M expense. You just kind of go down a laundry list of costs that kind of perpetuate themselves in the business model until you have to look at them in this environment and take them down and then rebuild them. And frankly, we're identifying millions of dollars of opportunities as we wind things back up again. So I think there will be some nice opportunity within the restaurant expense area as we kind of build forward. And we're seeing it already as we move through that first period.

And then just quickly with pricing, I think right now we don't have any, there's no dramatic headwinds that are forcing us to consider aggressive pricing strategies. And we're, as we have been again for the last few years, focused on driving traffic into our restaurants, whether it's now in the dining room or even through takeout and delivery. And so we're really focused about how do we get more more bodies into the restaurants and a little less about, you know, taking the checkup. So we'll continue to keep our margins strong, but really our focus is on traffic. And so our pricing strategies will probably be a little more conservative as we make sure, especially as the consumer starts to deal with, you know, the economic realities of the pandemic here in the near future. So that's just our overall approach.

Yeah, what's I think most exciting about those gaps to the industry is that traffic side of the equation. And so we're very focused on very wide, wide gaps, 18% in the quarter. And frankly, I think we have some abilities to strengthen those gaps as we move forward.

Thank you both.

Thank you. And the next question is coming from James Rutherford. James, your line is live. Please announce your affiliation and pose your question.

Thanks. I'm with Stevens Inc. I just wanted to start off sort of based on that last comment around sort of the consumer, we know that stimulus checks provide a bit of boost to the whole space for the portion of last quarter. So I'm just curious if you've seen anything already in terms of the week-to-week comp progression here quarter to date that would give any indication that as those unemployment benefits sort of roll off, that consumer gets a little bit more squeezed, whether it would roll through to kind of your results and what you've seen so far this quarter.

Yeah, James, really great question. Top of mind for all of us, right, as those $600 checks kind of disappeared. We were nervous and curious as to how it was going to impact the business. You saw our July results. I'll just say we're almost two weeks now into our August, and the results have gotten better. Our trends have strengthened, and so now we're several weeks past those unemployment rates. checks rolling off and we haven't seen any indication that it's having an impact on our business. That doesn't mean it won't. That doesn't mean we're not, you know, we're not saying that we're just saying, you know, line of sight now and how we're managing our business, frankly, is, you know, week to week, quarter to quarter to some degree, just because of the nature of what's going on with the pandemic. But so far, so good on that front. We don't kid ourselves, though, that there is some tough economic times ahead for for some people and some parts of the country. And that's where having a great value proposition and having convenience and, you know, I don't know if you've looked at the It's Just Wings product, but the value proposition in that concept is really outrageous. I mean, it's what we like to say, as the tagline says, stupid pricing. So I think we're in good position to deal with some of the to give the consumer what they need as things tighten up a little bit without having to resort to some limited time off for stuff or slashing prices. We have just a great value proposition embedded in our concepts, and WINGS just builds on that.

And I think, James, the commentary around the consumer, and particularly as we think through how we wanted to build our thought process for this quarter, I wanted to be a little circumspect around the guidance we gave you based on that issue in itself. So we need to see how that plays out over the course of the next several weeks. And we're also heading into what would traditionally be that back to school period of time. And obviously this is going to be probably the most unique back to school, you know, in parentheses that I think we've ever seen. So how that factors into what would typically be some of our lower volume periods of time will be interesting over the course of the rest of this quarter. But kind of those two issues are kind of ones that kind of give a little bit of cloudiness to where we think this business can go in the short run.

Yeah, I mean, I'll just add on to that, and I know it's not part of your question, James, but the biggest concern we have, and as the country has, is, you know, where does the virus go? And obviously we've seen... things spike and then get back under control, and that's going to be the big determinant of our results, I think, in the short term. If the country can continue to wear masks and stay socially distanced and do what we do in our restaurants, which is, you know, somewhat frustrating, so now I'll just give you a little frustration, but I think we're going to be in good shape. If we start to see things spike, then we're going to see consumers react and pull back a little bit. And those are the variations of the business that we just don't control. But without that, we feel pretty good.

Well, that's encouraging, and it's a helpful perspective. I just wanted to follow up with one other question. I think you all sort of teased that the virtual wings concept may be the first of several And just to help us frame that, do you see an opportunity for multiple virtual learning concepts with a similar potential to this It's Just Wings concept? And whether those, should we think about those as being potentially in 2021, or are these something much more, you know, much further down the road than that?

Yeah, I mean, obviously we think there's more potential. We're going to be very smart about first making sure It's Just Wings is is a strong brand that's executed well and that we're growing it through multiple channels. It wasn't our first brand that we tested, by the way. We were in test with another brand before we decided on Wings. So we continue to test and innovate and look for ways to grow our business. and the virtual brand story isn't played out. I won't go any deeper than that. Stay tuned. We'll see. We rolled this one out fairly quickly, and that's probably how we'll roll the next one out. Hopefully it won't have a lot of fanfare, but when it hits, it hits big. Great. Best of luck. Thank you. Thanks. Thanks.

Thank you. And the next question is coming from Jeff Farmer. Jeff, your line is live. Please announce your affiliation and pose your question.

Gordon Haskett, I actually have a follow-up on an earlier question and then one more question after that. So in terms of the follow-up, for these restaurants that posted positive same-shore sales operating at really that very limited capacity, 50% seating capacity, did you guys make any aggressive efforts to shift demand to non-peak day parts or week parts? How did you do that knowing that you have some bottlenecks on the weekends and some evenings? How did you accomplish that? positive comp number?

Well, Jeff, I mean, the biggest way you accomplish it is you're doing a lot of takeout and delivery. And then you throw Itch This Wings, which is another delivery concept, on top of that. So a lot of the volume is now happening outside of the restaurant. We still, as a company, with restaurants that are open, are seeing positive company-wide average sales growth early week. It's the weekend where the capacity issues come in that we start to give it back a little bit, and that's just understandable when you've got 50% of your dining room tables closed off. So, yeah, it wasn't anything specific to, again, those restaurants didn't do anything different. They just are either in areas where there's a little bit more support for the brand or maybe they're a little bit stronger. It's just wings pick up. and maybe just in general stronger delivery market. So all of those things kind of go into the mix, but it really is how are we doing this? We're doing it earlier week more than late week, and we're doing it through delivery and takeout more than dining room, and that's enough to offset to get us back to positive comp sales.

All right, that's helpful. And then just probably the third or fourth question on it's just wings. When you were testing that, what did you see in particular that got you excited, and how did you promote that product or offering in those test markets? How did you actually get your customers to know that there was an option to go and get wings delivered from Chili's Box?

So it's an interesting story. Like I mentioned, we'd already been in markets with an alternative virtual brand into the the early winter, and we were getting ready to take this WINGS concept and put it into a national kind of test, and then COVID hit. And we didn't, you know, normally when we do something like that, we put our culinary people out in the field and, you know, travel stopped. So we said, listen, let's just take it to Dallas. So we tested this thing in seven restaurants in Dallas for about two months. And we were encouraged enough about consumer acceptance, about operational ability to deliver, that we rolled it nationally to 1,050 restaurants with that basis. And it's proven out to be exactly what we thought it would do and then some. And so I'm not saying that's an ideal way to test nationally rolled out concepts, but I would say in the middle of a pandemic that our people were excited about stepping up and not holding back and that we weren't just looking to cut costs and hunker down that we were looking to grow the business and, again, prove to ourselves that, yeah, that the success for casual dining and bar and grill is to get more capacity into the buildings and kitchens that we already have and not build more of those. We're, I mean, I don't know. We're just excited about that idea.

Yeah, and specifically then when you look at some things that are very encouraging and you know, we're already seeing a 30% plus reorder in the first six to seven weeks, which is significantly high. We're seeing above expectations in the add-ons. So in the add-ons, it's the add-on and extra fry, add-on those incredible fried Oreos, add-on extra sauces, which helps drive that check and actually, you know, gives you that powerful incremental flow through. You know, the ratings we're seeing from the consumer are, are right near the stronger ends of what we wanted to see.

And the only surprise was just we've got a handful of restaurants that are doing volumes we never anticipated. There are the top, you know, 3%, 4% of our restaurants are doing numbers that are really phenomenal. I mean, amazing.

Okay. And that's without putting a lot of firepower behind it from a marketing standpoint.

Yeah, from a marketing standpoint, we just use DoorDash. I mean, DoorDash is our partner. We just get on their carousel. We've done free delivery as a way. We put free delivery or try free in there to get you in and get some awareness levels, and we just continue to use that.

Appreciate it, guys. Thank you. Let's keep going.

Thank you. The next question is coming from Jeffrey Bernstein. Jeffrey, your line is live. Please announce your affiliation and pose your question.

Thank you. Barclays. Two questions. First one, just on the to-go business. It seems like whether the dining room is open or not, you've got to-go sitting at 50% mix. I'm just wondering how you think about retaining that to-go customer. Maybe you're doing more one-to-one marketing, any kind of color there, and whether you think those customers or are the same as your customers or maybe incremental? Just trying to figure out where the mix of to-go could level off a year or so from now based on your kind of read of those customers.

Yeah, it's going to be interesting, Jeff, to see where it levels off. Obviously, a lot of the increase in to-go came from the dining room guests that couldn't get in dining rooms or didn't want to come into dining rooms as they opened. And so we know there is some of that trade-off. As we've opened dining rooms, though, we haven't seen as much of a drop as we would have thought, potentially, and so that's why we're continuing to see strength. This is where the beauty of our digital and our loyalty database come in to play. We have 8 million growing guests that talk to us on a kind of weekly basis, and we know which ones of those are coming in through the dining room and have shifted over to takeout, and so we can... we can get a pretty good sense for how the guest is kind of shifting their behavior based on COVID, and we'll keep track of that. And then depending on what makes sense, we'll make sure we're giving them kind of the incentive they need to dine with us. Either way, we don't, you know, we're not, we're agnostic. We'll take either one of those channels with regard to whether or not, you know, as long as they come in.

and then just a follow up on an earlier question in terms of doing more with less I mean I guess just the month of June using that as a proxy I think you said your comps were down 13% and your restaurant margins were a positive 12% which a 12% margin is better than some of the margins you reported when your comps were down a whole lot less than 13 so just you know maybe asking a prior question a different way where can the margins settle if sales ever return to historic levels or maybe what's the biggest line item that would achieve that? Or maybe there's some reason why these margins wouldn't ramp up as the sales improved from here? Thank you.

Yeah, I mean, I think, Jeff, we don't have a specific number. We don't have the model laid out exactly as I know people would like. We just know there's a lot of room. Joe kind of walked through some of the restaurant operating expense opportunities that we're seeing. Marketing is another area that we're definitely evaluating with regard to what's the right spend there as we invest more into digital and some of these other avenues. I will say the sales that we've achieved right now and our relative position in the category, which is number one, came with very little marketing spend. That doesn't mean we're not going to spend marketing in the future. It just says, hey, that's an opportunity for us to continue to evaluate how we spend and how we drive traffic and what the levers are. So what we are very optimistic about is that the future model will be more efficient. I can't give you a percentage.

Yeah, I think, Jeff, a lot is going to obviously depend on that top-line capacity growth as the restaurants come back. What I can tell you, and again, let's be a little careful about any one given period. Remembering July is a five-week period for us, so you get some leverageability into those numbers. But what I can tell you is July's flow-through really isn't radically far from what we saw the last July. I mean, you're talking within tens of basis points of what we did last July. So achieving that on those capacity levels, again, what I talked about is reopening restaurants and adding It just swings into the mix. We'll have a positive. So there is decent upside coming from a margin standpoint as we kind of move forward.

Thank you. Thanks, Jeff.

Thank you. And the next question is coming from Brett Levy. Brett, your line is live. Please announce your affiliation and pose your question.

Great. Thank you. MKM Partners. Now that we're hearing you talk a lot more about forward-looking initiatives rather than simply your circling the wagon approach that we've seen across the industry, how should we think about your strategic and your capital priorities, not just the buckets of investments, but what you're thinking and how you're thinking about things like structural changes to the box, what more you need to do on the technology front, and obviously how much time and dollars you can allocate to the newer initiatives, the off-premise, the virtual brands and other areas like that. Thanks.

Again, from a capital allocation standpoint, you know, we're going to focus on pretty much the same areas we focused on. The interesting thing, I'm going to reverse what you just said. The virtual brands don't necessarily require a lot of capital investment. Very, again, frankly, there was really no true capital investment that went into the to launching a top 200 brand in this case. That's the uniqueness and the power of using the capacity we've already established from a capital investment perspective. I think as we move forward, technology is always going to be front and center from an investment standpoint. We will typically, through capital and GNA, be in that $40 million to $50 million range of investment, and I would see that as kind of an ongoing piece of the equation. I think there will be opportunity on the new restaurant development side. And, again, you know, we're committed to making sure that our current existing fleet is kept current. And so we'll, you know, I envision as we move into the latter half of this fiscal year and next fiscal year be re-imaging again at a decent pace. You know, from a capital dollar standpoint, I think this year will definitely be well below last year's spend. It is, frankly, a bit of a moving target for us as we see where the business goes as it comes back online and grows. We will have the opportunity to increase some of that capital investment, but you can expect probably a year-over-year final capital payment meaningfully below last year. But on a trajectory of getting kind of back towards the level of capital investment you've seen, the last couple years, pre-pandemic.

Thanks, Brett.

I think we have time for about two more sets of questions.

Hey, Bob. Okay. The next question is coming from Bob Darrington. Bob, your line is live.

Yeah, thank you. Not to belabor a point, but certainly we're pretty excited, I think, as most are, about the virtual brands. I'm just wondering, you know, is... we've seen one of the major fast casual brands within the industry use free delivery as a carrot to really kind of drive, you know, customer interest. You know, Wyman, is that one of the things that, you know, you can use, I guess, in ebb and flow depending on the demand and how you want to ultimately, you know, improve it, spike it, hold it back? You know, is that a carrot you eat?

Yeah, yeah. Sure, Bob. I think, again... The primary marketing tool is DoorDash and, you know, getting awareness levels of a brand that, you know, is really coming from nowhere. You've got to get some visibility, and a real powerful way to do that is through getting it on the right carousel, and whether it's the free delivery or try-free, try, you know, first-time offer. Those are reasonable investments to make, especially given... the cost structure of this brand and how it fits into our portfolio. And, again, as we've said a couple times, because there's not a lot of incremental costs associated with this, you can afford to do some of that. Similar to the fast food concept I think I know who you're talking about and has had fairly good success doing that extensively. So, yeah, that's how we look at it, and I think that's a key tool in the marketing space the tool chest, if you will, toolbox to kind of build awareness and drive it.

The value that you offer doesn't mean everybody gets it that way.

It doesn't mean everybody gets it that way. It's not free for everybody. Free delivery doesn't go to every offer, but it's a powerful marketing tool.

And one of the great things you see in the early stages of this brand is the trial coming from DoorDash users that have not utilized Chili's. So, you know, north of 60% of the trial, um, for it's just wings are we're, we're tapping into a new DoorDash, uh, user. So, uh, broadening that, that base and that appeal.

You know, a quick follow up, if I may, the, the check average opportunity, certainly it's just wings, you know, offers a, in my view, a very compelling value to consumers. Is that the niche that you kind of focus on Wyman as you look out towards other opportunities? And could you do something, as we know the public is enamored with spicy chicken sandwiches, could you do something within spicy chicken sandwiches to create a virtual brand?

I love to innovate on the call, Bob. It's a very good thing. Now, again, we're looking at a lot of different concepts, ideas. The first priority is to get It's Just Wings established. and growing and strong, and it's off to a great start, but we think it's got a lot of upside, so we're not going to get distracted too early with what's next, but it's not necessarily the only way to go in at a virtual brand. It's Just Wings is It's Just Wings. Its statement is around a value proposition and how we go after it, but we're looking at other concepts, and again, we've tested some concepts that don't necessarily walk into or present themselves to the consumer on just kind of that, on a value proposition based on the same value proposition that It's Just Wings does. And they also have shown some very encouraging opportunities with regards to sales potential. So to answer your question, I think, we don't see the whole world of virtual brands being positioned exactly like It's Just Wings. Great. Thank you. Thanks, Bob.

Thank you. And the final question coming from Sarah Senator. Sarah, your line is live. Please announce your affiliation and pose your question.

Thanks. This is actually Leo for Sarah from Bernstein. So I have a question on Chili's. Same-store sales for restaurants that have off-premise only. The same-store sales trend in July for these restaurants is very similar to the trend that we saw in the end of April, right before you started to reopen dining rooms. So is that because the restaurant's still don't have any dining room capacity or the hardest heat states where the recovery has been slowest, any call on that would be great. Thank you.

Yeah, I think the question, and I'm not totally sure if I got this right, but yeah, our restaurants that are not open, so that's 15%, 16% that don't have dining room open, are experiencing similar trends to what we saw earlier when we were in that situation, you know, that down 40-ish percentage. And I think you may, because we don't build big patios and haven't built big patios or outdoor spaces with the typical Chili's, there have been the difference between what some concepts have seen in April and what they've seen in June and July is that In April, it was shut down everything. And in June and July, if you've got big patio spaces, you can leverage those a little more. And so they're seeing maybe a little bit of a pickup there. Kind of in California, that's where you've seen it the most. I think the first closure in California was everything. And the second closure is indoor dining. And so if you had bigger patios, you may have gotten some better results. But because we don't leverage patios as much as some others, we've seen a little less of that. But it's all about, again, 85% of the restaurants are open for dining. We think these others will open sooner than later as the virus and people wear masks and we get this thing under control and they realize that, hey, you can do that and still have social distancing in restaurants. And then we're going to be back to, again, these low single digits and a lot of restaurants positive comp sales. Thank you. All right. Thank you.

All right. Thank you, everyone. We appreciate everyone joining us on the call today, and we look forward to updating you on our first quarter results in October.

Thanks, everybody.

Have a wonderful day. Thank you.

All right. Be safe. Thank you, everyone.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.