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spk02: Good day, ladies and gentlemen, and welcome to the Brinker International Q3 F20 trainings conference. 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, VP of Finance and Investor Relations. Ma'am, the floor is yours.
spk00: Thank you, Paul, and good morning, everyone. With me on today's call are Wyman Roberts, 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. 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, it's my job 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 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 filing 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.
spk03: All right. Thank you, Micah, and thank you all for joining us this morning. Last time we talked with you, at the beginning of February, we were just emerging from the Omicron wave, which, while thankfully with a short-lived strain, had a whipsaw effect on January's staffing and sales. We got back on track quickly and generated positive progression in February and March. Brinker ended the third quarter in a good position with an adjusted EPS of 92 cents, which is up significantly from last year's 78 cents. Considering all the noise in the results and comparisons, we believe average weekly sales may be a clearer guide to the growth of the business. Chili's average weekly sales accelerated throughout the quarter, with February and March reaching four-year highs. Now, as consumers navigate the economic challenges that are starting to play out, we're cautious but optimistic about where our top line sits. At Chili's, we're encouraged by the shift we're seeing back into the dining rooms, which is driving higher check averages. Off-premise remains at more than 200% over pre-pandemic levels as we continue to grow the delivery business. And the same is true for Maggiano's. We feel really good about the changes we've made to the business model, specifically the restructured value proposition for both dine-in and off-premise. The brand's off-premise business is up 180% versus pre-pandemic, and data shows the brand's delivery business is attracting a highly incremental guest. So as banquets come back, Maggiano's is poised for some really good growth. On the cost side, we're seeing labor pressure start to stabilize now that we've addressed our most critical staffing needs. We don't foresee as much inflationary pressure on wages going forward like we experienced in the last year. And now we're focused on managing that piece of the business as effectively as we can as we work through training our new team members to run our operational systems and deliver a great guest experience. It will come as no surprise that looking ahead, our biggest challenge is commodity inflation. We do believe the elevated costs we're dealing with today won't stay at these levels permanently. So we'll continue to leverage a pricing strategy that isn't passive but isn't reckless either. We've taken six pricing actions already this year to ensure consumer acceptance and protect our long-term traffic growth. We've put a stake in the ground as an industry leader in value, which has been key to driving our AAVs and our guest frequency. And as we move into a slower economic cycle, this becomes an increasingly important competitive advantage for us. So to further mitigate the inflationary pressure, we're also actively pursuing ways to run a more efficient operation. In a few weeks, we'll roll out a new menu that reduces operational complexity, restructures our value proposition for better margins, as well as future pricing flexibility, and takes additional price, which will get us close to 6%. We're also achieving efficiency gains with our now fully implemented service model that leverages both handheld and food runners. With this model, we're already seeing front-of-the-house labor hours at near-record lows, and servers are making more money than they've ever made. which we know reduces turnover and the associated pressures on the P&L. And those tenured team members deliver a better, more consistent guest experience. As we continue to manage these near-term headwinds, we're also playing offense on a lot of fronts. I'm really excited about how we're investing in the business and accelerating our timelines to aggressively grow the business longer term. We're investing in our restaurant pipeline. All the hard work we've done to build the pipeline has come to fruition And now we start opening new Chili's on a consistent basis. And the response to the brand has been tremendous. For example, our most recent opening just outside San Antonio did more than $100,000 in sales during the first week, beating expectations as all our most recent new locations have. Our operators are doing a great job creating loyal guests in these communities by delivering great experiences from the very first visit. As we move into next fiscal year, we have plans to open two to three new restaurants on average every month. We're investing in our virtual brand business on two fronts. First, we're expanding our delivery business in existing markets with additional third-party partners, which drives business across the whole portfolio. And second, as I mentioned last quarter, we're taking our brands to previously untapped markets and expanding points of distribution around the country through ghost kitchens and smaller footprint locations. We've seen our global partners embrace this as well, so we're optimistic about the potential, both domestically and internationally. Now that we've fully implemented our new technology-based front-of-the-house service model and takeout systems, we're pivoting our innovation efforts to upgrade our kitchens for the first time in close to 10 years. We're testing some exciting new equipment that makes our heart-of-the-house team members' jobs easier, delivers a better product, is more efficient, and more effectively supports high volumes. We're moving quickly down that path, so more on that to come. And finally, we're taking the robotics technology we've been experimenting with at the host stand for nearly three years now and incorporating it into our new service model. Our robot, Rita, has been promoted to food runner. She does a fantastic job and our guests love her. We've expanded to an additional 50 restaurants, which is yet another example of how we're bringing our technology expertise to scale and bear. It's been nearly 40 years since Norman Brinker founded this company, and it remains today a strong, innovative organization with exciting growth potential and competitive advantages. From our leading edge technology stack and the systems that enable us to run higher volume restaurants to the exceptional quality of this team, our operators are doing a great job managing through headwinds, and our leadership team continues to navigate the most challenging business cycles many of us have ever seen. We have a clear grasp on what will grow this business in the near and longer term, and I couldn't be prouder of the work this team is doing. Now I'll turn the call over to Joe to give you details on the quarter and update guidance for the year. Joe?
spk05: Thank you, Wyman, and good morning, everyone. The results reported this morning represented another quarter of top line progress for Brinker, but also one that is representative of the challenges still facing our industry. For the third quarter of fiscal 2022, Brinker reported total revenues of $980 million with consolidated one-year comp sales of positive 13.5%. Our adjusted diluted EPS for the quarter was 92 cents. As mentioned during our last analyst call, January was a particularly difficult month due to the Omicron spike in meaningful weather events. Both brands experienced a short-term pullback in guest demand during the spike, as well as staffing challenges during the month. We estimate our consolidated EPS for the quarter was negatively impacted from these January issues by approximately 35 cents. Guest traffic and labor availability bounced back nicely with a positive progression in our performance as we moved through the rest of the quarter. For the quarter, Chili's recorded positive one-year comp sales of 10.3%, which included 2.1% of positive traffic. Maggiana's one-year comp sales were positive 50.5%, with 28.9% positive traffic. As we move through the two-year lap of the beginning of the pandemic, average weekly sales is a useful lens to the growth of the business. Average weekly sales per restaurant at the consolidated brinker level were $63,000 for the third quarter. Both brands' average weekly sales accelerated throughout the quarter, with Chili's averaging $63,000 in March. Maggiana's also gained strength throughout the quarter as dining rooms further recovered and off-premise sales remained strong. The brand reached average weekly sales of $157,000 for March. For the third quarter, Brinker recorded a year-over-year price increase of 4.3%. Both brands took pricing actions during the quarter, with Chili's exiting the quarter carrying 4.6% of increased menu price, while Maggiano's exited with 5.1% of additional menu price. We anticipate further pricing actions in the fourth quarter, with Chili's approaching 6% year-over-year pricing in June. Our price actions continue to be determined in the context of maintaining our sector leadership and guest value perception and our traffic focus strategy. Now turning to margins. Third quarter consolidated restaurant operating margin was 12.2%, and adjusted operating margin was 5.7%. Inflationary pressures throughout the P&L continued in the third quarter, with incremental impact beyond our original expectations in numerous areas. In the quarter, food and beverage costs were 180 basis points higher year over year, driven by commodity inflation of 11%, partially offset by menu price. As you have heard throughout this earnings season, commodity markets are being incrementally impacted by world events, a situation that will maintain inflationary pressures longer than originally expected. We continue to believe that commodity markets will eventually moderate as the environment changes, likely as we move into calendar 23. Labor expense, again, is a percent of company sales with unfavorable 100 basis points compared to prior year. primarily driven by wage rate increases of 10% and the laughing of one-time favorability in the prior year due to closed dining rooms in high wage rate states. We also incurred elevated training and overtime costs of 60 to 70 basis points, which we expect to work out of the model as turnover normalizes. Restaurant expenses were favorable year over year by 110 basis points as we continue to leverage our fixed cost with an improved top line. That being said, this area was also impacted by inflationary pressures, in particular areas such as utilities and maintenance, reducing year-over-year favorability by approximately 90 basis points. Our cash flow for the third quarter remains strong. Brinker has generated year-to-date operating cash flow of $212 million and year-to-date EBITDA of $255 million. As Wyman mentioned, we continue to invest in the growth of our brands at an increasing level, Capital expenditures year-to-date totaled $109 million, driven by investments in new restaurant development, technology, and re-images. We expect our pace of investment to increase as we move more fully into the construction phase of our expanding development pipeline. From a balance sheet perspective, our quarter-ending total funded debt leverage was 2.41 times, and our lease adjusted leverage was 3.48 times. In addition, we repurchased $26 million worth of shares during the quarter. This morning's press release also updated certain aspects of our fiscal year guidance. We do expect both Chili's and Maggiana's to continue their solid top-line performance, assuming no further COVID spikes or softening of consumer demand due to macroeconomic pressure. Some specific updates. We continue to expect annual total revenues to be in our previously guided range of 3.75%, to $3.85 billion. Due to the Omicron spike and continued elevated inflationary pressures, our annual adjusted EPS is now expected to be in the range of $3.05 to $3.30. Fiscal 22 CapEx should be in the $160 to $165 million range. We welcome the appearance that most of the U.S. is moving beyond the last two years of pandemic-driven environment. This next phase of recovery still has inflationary-driven challenges to work through in the short run. However, we remain confident that our strength with our guests, their perception of good value from our brands, and our ability to invest actively in improving operations will bring us through in a strong form. And with our prepared comments complete, let's open the call for questions until just about the top of the hour. Paul, I'm going to turn it back over to you to moderate.
spk02: Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one 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. Once again, please press star one if you have a question at this time. And please hold while we poll for questions. And we did have a few questions come in. The first question is coming from Alex Slagle. Alex, your line is live. Please announce your affiliation and pose your question.
spk09: Thank you. Good morning, Jeffrey. I just wanted to start on cost of goods. Obviously, lots of inflation. I want to be smart on pricing. I'm curious if you could discuss the opportunity to drive the dine-in volumes back towards the 19 levels and what impact that has on cost of goods just with the improved profitability dynamics and additional beverages and food attach. kind of wondering how material that is. And then, I guess, if you could expand on the other opportunities with the menu that you brought up in the prepared remarks.
spk03: Yeah, I'll talk a little bit about the opportunity, Alex, and then Joe can fill in on some of the details on commodities. I think, well, first off, the margin differential between the various channels, both dine-in and take-out, from a margin perspective, are pretty similar. So we don't see You know, we've made sure that in pricing, like takeout and delivery, that we maintain solid margins. You're absolutely right, though, when we get guests in the dining room and they're, you know, things like alcoholic check average really helps build a stronger check. And we're seeing that business come back. It'll come back organically as I think more and more people feel more and more comfortable that, you know, the COVID situation is really behind us. We continue to see that. We see opportunities. from our perspective through some efficiency plays that we mentioned to help the throughput, to create more opportunities to bring people in faster, more efficiently, both through our new service model as well as from some of the things we're excited about testing here on the kitchen side of the equation. So we're gonna see both just the natural move back into the dining room and then we're gonna continue to incent and change the business to encourage people to come in at a greater rate. And that's an important part of the model. But we're comfortable with kind of how it's moving right now. Joe, you got anything to add to that?
spk05: Yeah, and Alex, I'd just say right now we're getting our dining rooms back into that mid-80% area. Obviously, they've moved down meaningfully in January. So for the quarter, really, again, that front-end impact of January can't be – overstated. And I think there's, we're definitely continuing to see upside is, again, just generally speaking, I see the country moving, you know, farther and farther past kind of that significant pandemic environment. There's about an eight, a little over $8 difference in your incremental guest in the dining room as opposed to the to-go side of the equation. So the leverageability of that guest is pretty important because it's not just about you know, the cost of goods. And there's, you know, there can be a little variance between the channels and what that mix looks like. But the ability to leverage off that incremental check, and as you said, build that check from add-ons, alcohol sales, and things of that nature that I think everybody's pretty familiar with.
spk09: Yeah, on the average weekly sales metrics that you provide, how much are those impacted by the recent franchise acquisitions? I'm not sure if that does make much of a difference.
spk05: Well, it makes a little difference, Alex. That's a good question. Just basically the nature of the restaurants in some of the markets that were in things of that nature, they come in at a slightly lower average volume. So I think roughly probably $1,000 impact between those restaurants and the current fleet. And again, I think that we view that from a rationale of the acquisition as a great opportunity because I think the closer we can bring those those restaurants to average is kind of incremental to the performance. The margins too, I guess. Yes, without a doubt.
spk09: Got it. Thank you. Thanks, Ev.
spk02: Thank you. And the next question is coming from Jared Garber. Jared, your line is live. Please announce your affiliation and pose your question.
spk10: Hi. Thanks for the question, Goldman Sachs. Joe, if I could just dig into the sort of the full-year guide and what's implied for the fourth quarter. Obviously, the top line seems like it remains, you know, pretty healthy, and that's kind of in line with what we've heard from others, but obviously the margin's being pressured by some cost increases. Can you just frame maybe how you're thinking about that 6% price? Is that the guide for the fourth quarter here? And then how are we thinking about sort of the inflation metrics? I think Last time we spoke, maybe it was a high single-digit number in the second half, but the third quarter actualized above that. Are you thinking or seeing that commodity inflation will be greater than that high single-digit in the fourth quarter? Just trying to figure out kind of the puts and takes on the EPS line.
spk05: Yeah, if you think about the construct of the re-guidance, obviously you have the impact of January embedded in that, and then And then, frankly, the rest of the deltas related to the inflationary pressures we're seeing, because you're right, the top line is really performing pretty much at the levels we anticipated they would perform. So we do expect inflation, and I think you were referencing the COGS inflation in particular, but we do expect that to continue at that low, that 11% range that we kind of gave you, I think is very operative. for the foreseeable future. So that is definitely factoring into the equation.
spk10: Great. Thanks. That's helpful. And then just one follow-up on the pricing, the 6% that you noted. Yeah.
spk05: That's the exit pricing. So again, that move, as Wyman indicated, takes place in a couple weeks. So it'll have some impact in the, but it's really the back end of the current quarter. So it's really going to be more indicative of the price they will be carried heading into next fiscal year.
spk10: Okay, great. That's really helpful. Thanks so much. Thanks, Jared.
spk02: Thank you. And the next question is coming from Joshua Long. Joshua, your line is live. Please announce your affiliation and pose your question.
spk06: Great. Thank you. Piper Sandler. Wanted to follow up on the venue price piece as well. As you mentioned, taking six windows, thus far, six incremental pricing actions thus far. Just curious what you've learned in terms of the gaps and where they're at. I mean, the narrative we're hearing is that, you know, maybe in line with what you're seeing too, you know, more frequent but smaller price increases and there doesn't seem to be too much pushback. But just curious what you've experienced and, you know, how you think about reworking that value proposition, as you mentioned in some of your prepared comments. Obviously, you want to keep things balanced and you want to provide some optionality for the guests. But just curious what you can share there that doesn't tip your hand too much before those new menu items come out.
spk03: Sure. Well, Josh, like we said, we understand the challenges with the inflationary pressure we're seeing, but we also understand the importance of getting your pricing strategy right. And so we have chosen to be probably more thoughtful in terms of timing-wise through this year about our pricing action. We've tested them all before we've taken them across the system to make sure that we were understanding the guest's reaction. And we've taken them across different channels, whether they be, you know, base business, virtual brands, delivery, to make sure that the impact to the demand side of the equation wasn't owners that we weren't chasing away too many guests with with these price increases and and as you've said and as most people have said so far the consumer has been fairly receptive to these pricing actions we do see in the broader industry data you know some concerns about consumers value ratings and how they're kind of reacting so we want to be cautious to that and always be looking at kind of their expectations and their perceptions of value and As we think about our value propositions, we are restructuring those as we talked about. That menu will come out here shortly. It's been in test. We feel good about the way we've restructured our platforms to deliver better margins, but also to deliver us more pricing flexibility across geographies and across various menu items, especially as we're starting to see Commodity prices significantly different in various categories, right? And that's been one of the benefits of Chili's is we've got a varied menu. We've been able to, in the past, kind of move around some of the cost issues that have affected product because they've been more unique to whether it's beef or chicken or meat. Now, it's a little harder to move around when everything's moving up, but we anticipate we'll see more of that going forward, more of the typical, hey, this is the product that's going to be the most challenged, and how do we move the mix around that and get our guests to maybe shop a little bit differently in our restaurants at a more favorable cost area of the menu. That's where we're at. We're excited about it, but again, we're very cautious about how we move forward with price to make sure that our long-term value proposition, especially at Chili's, is intact. Especially as we look at a little bit of an uncertain future with regard to where the inflationary pressures are going to take the consumer, we want to make sure we have that real strong value proposition for them to lean into.
spk06: That's very helpful. Thank you. When we think about trends by day part or geography, anything worth calling out there? I know you mentioned that as dining rooms have come back in, the off-premises have been holding in there as well. But just curious if we kind of expand that conversation out to either day of the week, day part, regionality, anything that's worth calling out or that you found interesting.
spk03: Well, there's a lot of things going on that are very interesting, Josh. Without giving too much away, I will say there are some geographical – not everyone's reacting the same. As we kind of come out of a post-COVID environment, you know, you are still seeing more regional variability than we typically had seen prior, right? I mean, where in the past, a two to three point difference in sales trends was probably what you get. You're still seeing some high single load teen numbers with regard to various geographical areas and their response to this now kind of what we'll call maybe a little bit of a post-COVID world. So, We anticipate those things kind of settling out, and we see upside to that because we're in some of those areas in fairly large numbers. So that's where we see some upside as those areas get a little more on their feet, if you will, post-COVID, so taking some of those a little bit longer. Beyond that, I think we like the portfolio for that reason. We're everywhere. And for the most part, we balance off and balance out some of these kind of more challenged areas with the ones that are doing better.
spk05: Yeah, Josh, from a day part standpoint, still staying pretty typical to what we've seen. It's a two-third, one-third dinner to lunch. I would note that you're probably seeing a little increased favorability on your weekend lunch side of the equation, which, again, I think is reflective of more normal activities at a higher rate than we've seen, a little bit lower early day which probably is indicative of reopening to a great extent. So really kind of opting back to what we had typically seen in a pre-COVID structure.
spk06: Very helpful. And if I could squeeze one more in on the COGS visibility that you have running about 11% for the basket now. Just curious to your commentary, Wyman, I mean, is that everything – going up higher? I mean, largely protein-driven, any sort of commentary you can provide there? And then what type of visibility do you have? Are we still in that environment where locking in pieces of the basket doesn't necessarily make sense for the premiums you have to pay?
spk03: Yeah, I mean, Josh, again, the big drivers of our basket are really the proteins, right? So chicken, beef, and you're seeing more broad kind of movements in the whole chicken complex as well, right? So what has historically been kind of a wings environment with volatility has now kind of moved more into other more traditionally stable chicken products like breast meat. And so that's just kind of out there right now. Again, when we look at the commodities environment and you just do kind of some of the math on the costs that are going into the input side of this, It doesn't really add up to these prices. So there's got to be inefficiencies, as we all know, in the distribution and the supply chain side that are being taken into consideration. They're taking these prices higher than they would normally go up. And then there's, frankly, just some opportunistic pricing going on. And both of those things we think will settle themselves out and bring us back to a more reasonable level in the not too distant future, although nobody knows exactly what that looks like. So it is a little broader. across those proteins and that's why it's a little bit harder to kind of move people around and we're a little more cautious about just pricing right for it because we do believe it'll come back to a more reasonable level here in the not too distant future. Great. Thank you. All right.
spk02: Thank you. And the next question is coming from John Ivanko. John, your line is live. Please announce your affiliation and pose your question.
spk06: Hey, John.
spk08: John, you there?
spk02: John, your line is live.
spk08: Please go ahead. Sorry about that, guys. The question is on CapEx new store development, I guess overall capital return. Obviously, or maybe not obviously, I mean, I asked this in the context of the stock price and the stock price declined today. I mean, I guess how much does senior management and does the board you know, kind of think about, you know, previous periods where, you know, Brinker has added a lot of value to shareholders. And, you know, and I go back and I think about, you know, maybe it was kind of, you know, 2008 and 2009 timeframe, you know, where there was a significant reduction in CapEx, where CapEx was less than DNA. You know, we saw this enormous free cash flow yield, you know, capital return to shareholders, and you basically focused all of your attention on improving returns at existing units and basically not you know, really growing new units at all. So, you know, it's a philosophical question, but, you know, you guys know how I think and, you know, and I know how you kind of responded in the past. I mean, you know, how do we kind of consider this current environment? And again, you know, if the stock is kind of an indication of, hey, listen, you know, here are the type of returns that you can get in buying back your own equity, you know, why doesn't significantly slowing down that CapEx and new unit, you know, make more sense in the strategy in what is obviously still a not great consumer environment and a very bad cost environment. And thank you for allowing me to ask that long question.
spk03: Sure, sure, John. I think it probably has more to do with your timelines, John. You know, I think if we were talking about, you know, what would you do today, you know, investing back in our stock at these prices, we think it's a great investment because we absolutely believe that these prices are too low. kind of understand what the market's reacting to in terms of this inflationary environment. But when you think back, you know, you referenced back to 2008, we were opening 125 restaurants a year in that timeframe. So, you know, when we talk about growing the portfolio from a traditional standpoint to 20 to 30, it's significantly lower capital spend than what was going on prior to the time you referenced. And we're doing both, frankly. And when we talk about The opportunity we had back in 2010 through 2012 when we really got much better at the operating level and strengthened the business model, we see those opportunities now with the new handhelds and bringing technology to bear with our new service model up front and what we're excited about doing with our kitchens again, which is what we did 10 years ago that you're referencing, investing those dollars into being more efficient in the heart of the house, helping our margin situation as well there and helping us build sales. And so I would just say, you know, as we think about how to help our investors realize gains, we believe it's a balanced approach. But organic growth is key to that story. And you've got to have an organic growth model. And that's what we're focused on is how do we balance that organic growth model. We generate a lot of cash. but we want to have an organic growth story as well. And so when we think about virtual brands and different distribution points to grow the business organically as well as all the things we just talked about, that's why we're trying to find that sweet spot there to bring great cash returns, deliver back to the shareholder that way, but also find a good organic growth story.
spk05: Yeah, the one piece I'd add to that too, John, is... the period of time you referenced before, we did it at a more leveraged basis too. So again, the balance is going to be important as we think about this going forward, but we want to do it at, and we want to be able to invest in the business, grow organically and also return capital shareholders, but at a lower leverage position. So part of this is the transition. COVID obviously got in the way and slowed that down for a period of time, but again, you know, once we've rebalanced the debt levels back to our targets, you know, that's really the trade-off. That, you know, then you can start, you know, directing more of those dollars back towards the return to shareholder standpoint while still growing at a decent clip and investing in the business.
spk08: Yeah, and certainly, and I guess maybe the question was whether, you know, whether to debt holders or to equity holders, but at least, you know, I'm not... not a new unit construction. So let me ask this question just as a, you know, a memory or maybe it's changed. How much is the fiscal 23, you know, CapEx guided? How much of that CapEx is, you know, would you consider to be fully non-discretionary or necessary, if you will, you know, to basically maintain or grow the cash flow in the business? How much flexibility do you have, you know, if that conversation were to happen in the future?
spk05: Yeah, you do maintain a lot of good flexibility there, John, because when I think about maintenance expense and ongoing IT investment, you're really going to be in that $70 million to $80 million range, and there's probably even a little variability in those numbers. But that's kind of what I consider to be that keep the engines running and moving forward kind of capital spend.
spk08: That's great. Thanks for the patience, guys.
spk05: Good talking to you, John.
spk03: Ivan Koch.
spk02: Thank you, and the next question is coming from David Palmer. David, your line is live. Please announce your affiliation and pose your question.
spk04: Thanks, Evercore ISI. I would imagine it might be too early to talk about fiscal 23 restaurant margins in total, but you're going to be making some changes here in the near term in terms of the menu simplification, the price increases, and I would imagine also you have pretty good visibility on your costs through the rest of this calendar year. So I'm wondering if you could talk about how you're thinking about restaurant margins sort of exiting fiscal 22 into the first half of 23. I guess I'm specifically thinking you might be on path to doing 12% plus restaurant margins in the first half, which might set the table for something closer to 13 for that next year. But I don't want to put numbers in your mouth here. How are you thinking about margins?
spk05: Yeah, and David, I don't want to get into a 23 discussion or forecast at that point. We'll have a very robust discussion about that on the next call. But I think, again, as you heard us comment on some of the drivers impacting current margins, I think there's opportunity there. We do believe commodity prices will moderate. That can have a meaningful impact to margins. And I think we gave you kind of, we see that moderation, you know, starting, you know, in calendar 23, which again would be the back half of our next fiscal year. So, but we also, you know, again, as we continue to improve turnover and improve training, there are dollars that are impacting in those areas. That's that $60 to $70 The basis points of transitory costs I talked about, we think we can start to wean that out of the system. So again, there's opportunities to continue to improve margins, and I think we will do that over time. I'm not going to put any specific number on the table today, but I think the progression of top-line growth, too, is going to help, too. I would expect you will see a discussion of continued top-line growth for the brand as we move into next year, and With that comes leverageability opportunities. Again, optimistic on the direction, David.
spk04: Yeah, no, I hear that. I guess I'm curious also about the two things that service, the customer experience today and service levels. You talked about labor hours in the front of house being near all-time lows, but we've all heard stories about not just Chili's, but everybody in this industry as well. kind of had some bad service scores from the consumer for obvious reasons. But I wonder how you're thinking about that and where you are versus pre-COVID and getting that customer experience up. And then I'm also curious if that 13.7 to 14.2 margin that you talked about as an intermediate target, is that still a pretty good working intermediate target for margins? And I'll pass it on.
spk03: Yeah, so two questions. So let me just give you the service take, David, as we see it. So two components, right? So first, as we mentioned, you know, it was getting staffed back up. And so a lot of new team members in the system and in the industry, right? I mean, we just had a big turnover. The good news is we have more team members in our restaurants today than we had pre-pandemic. So we've got the team members we need to run the restaurants. but they're newer and they're not trained as well. And we've changed our system, our service model. And so what we know is when that model is running well and running as it's kind of programmed to run, service scores are outstanding. Team members make a lot of money, more money than they were making pre. And the experience is better. It's faster. It's more personable. So we're focused on getting to that state with all of our restaurants as quick as possible. And we're just in that curve of training everybody up, getting all of the leadership to understand the model right now and get comfortable with it, because it's a new service model for most of the system, and then moving it throughout every team member that runs it. So that's that. Additionally, as we talked about, we see opportunities with the kitchen to get the kitchen side of it much more efficient. And that'll speed service up. That'll get one of the biggest challenges that you have in the restaurant industry, right, is, hey, where's my food? And so as we can speed up the process in the kitchen while delivering a better, more consistent product, we see another real win for the guests there as well, as well as helping us push more people through the dining room get them in and out of the restaurants in the timely fashion that they're looking for. So we see a real nice, bright future for both our team members and our guests with regard to the systems and the technology we've got in play to kind of move us forward. First, we've got to train, and then we've got to roll out some kitchen stuff to even take it to the next level.
spk05: Hey, David, in the second half of your question, without getting into any specifics, obviously a lot is since we talked about those numbers originally, but again, I remain optimistic in our ability to improve margins over time. Again, these initiatives have a line of sight to how that can happen. I think, again, we'll continue to leverage our top line as we go forward. So I know you used the term intermediate. Anybody can have a perspective on what that means, but I do envision as we kind of move out of this inflationary cycle on the COG side of the equation, whenever that happens, that you will see margin improvement out of the business.
spk06: Thank you.
spk05: Thanks, Deb.
spk02: Thank you. Once again, ladies and gentlemen, you can still enter the Q&A queue by pressing star 1 on your phone at any time. The next question is coming from Brett Levy. Brett, your line is live. Please announce your affiliation and pose your question.
spk07: Thank you. Brett Levy, MKM Partners. Just building a little bit more off of that question on the labor side, as you think about your labor expectations, I know you said you don't expect much pressure on wages, and you did talk about the 50 to 75 basis points of transitory. Can you parse out a little bit more, given everything that's going on in competition for labor, how we should think about it from a cost perspective? You said you have a solid headcount but how should we think about where you need to supplement that? And just from a broader brushstroke, what do you think you can do specifically to drive those gains? And then just secondarily, you talked about a $0.35 hit from January in your estimates. Was that already implied in the guidance from last quarter, or is that new to this morning's guidance? Thanks.
spk05: I'll comment first. The $0.35 was not implied. We didn't make any... guidance commentary really on the last call. And obviously we had not even closed January at that time. So 35 is implied in this guidance level.
spk03: So we didn't count on it. But without getting too into the model, just what we're seeing out in the marketplace is that obviously with all of the movement in the industry negatively last summer, you know, spring and summer, there was a lot of pressure on restaffing. And with that, you know, increase in demand, a little bit of a challenge in supply, you saw people having to raise rates, wage rates to recruit. And we were in that situation as well, as well as having to spend quite a bit of money just recruiting. So, you know, advertising expense for recruitment is up significantly just getting these folks into the restaurants. And the good news is, especially over the last three months, I mean, you've seen the employment numbers, the ones that just came out today that I saw, showed almost 500,000 jobs added in March, and I think almost 100,000 of those came into the hospitality area. So we're continuing as an industry to be staffed up, and that takes the demand, or the supply and demand equation It balances that out a little more, so we're not seeing as much pressure to have to raise rates to just get folks in. There's always going to be legislative pressure, right? So minimum wage increases are going to happen on their calendar, but it looks like everything we can see that the demand supply pressures are easing, and we're not going to see as much of that. in the coming months as we have seen in the last 12. So that's really kind of how we see that marketplace going forward. Thank you. All right. Thanks, Brett.
spk02: Thank you. And the next question is coming from Dennis Geiger. Dennis, your line is live. Please announce your affiliation and pose your question.
spk01: Thank you. It's UBS. Just wondering if you could speak at all a little bit more to what you're seeing very recently from a sales perspective, maybe in the quarter-to-date period at a high level, just given the relatively dynamic environment that we're in right now. And then I guess more importantly, you gave some helpful comments on the consumer broadly, how you're thinking about the consumer relative to pricing, et cetera. But I'm just curious if you could comment on on anything that you've seen to date from your customers, any changes in how they're using the menu, you know, that weakness from the lower income consumer, you know, specific to your brand, anything on virtual brands where behaviors are changing, just anything along those lines that you've observed to date. Thank you.
spk03: Hey Dennis, without getting too granular into the quarter, I mean, I'd say in general, we're seeing stability in the sales um, experience, uh, through from the third quarter, you know, the, the back end of, you know, February, March, we already talked about what happened in January Omnicon driven, but since we've kind of been post COVID major impacts, uh, the trends have been holding, um, and that's encouraging, you know, it's a solid, um, sales levels above pre pandemic, um, at, at, uh, at, at both brands now and the, uh, The virtual brands are now, you know, comping positive. So we feel good about kind of that top line situation, especially, you know, given we've taken a lot more price than we've taken in the last, you know, 20 years in a period of time as short as this. So we're watching it closely. The trends seem to be holding. It's more about, okay, where's the consumer going to go as the economy times up? And maybe with all of the strength on the balance sheets that consumers have and the continued great labor market, they'll work through this. And there will be more opportunity to price if we have to price, but also as we see commodities kind of mitigate and move themselves down to more moderate levels, you know, we'll be where we need to be without having to price a whole lot more. But we're very cautious about watching that. I'd say anything on the menu side that we've seen with regard to shifts in behaviors have been more driven by us than by consumers. You know, we've pushed people in and out of the menu or moved them, shifted them more from a marketing perspective than they've kind of gone on their own, and we do that consistently. We do that quite often just to make sure that we've got them where we think is the best place for them to sit relative to the variety of our menu and the cost that we're dealing with.
spk01: I appreciate that. And one quick follow-up on that, if I may. Just as far as the look ahead, you know, if the consumer becomes particularly pressured, again, I think you've spoken to this some. But just thinking about how you're positioned from a value perspective, you haven't taken much price in recent years. You've got some really compelling promotional offers as a staple to the menu, of course. Just anything more there on how resilient the brand will be and on a relative basis maybe where you take share from the category if the consumer comes under incremental pressure, if all that's fair and if you have anything else to add to that.
spk03: Well, Dan, I'm Listen, I'm glad you asked the question. I don't think it gets brought up enough in terms of market share of traffic. So our firm belief is that that's probably the most critical measure of brand strength and success. And we've taken market share of traffic in casual dining and continue to take, even in this environment, for the last four years. And so when we think about the position of the brand, especially Chili's, it's a beloved brand. It's a ubiquitous brand. And it just needs to be available for folks. And obviously the business model has to work. But the business model works so much better when there's more bodies in the restaurant. And so we do trade off in the short term maybe some potential sales that would come from pricing to ensure that we have the traffic that we know is critical to the success of running a busy restaurant. You know, it's just very difficult to run a restaurant successfully if you don't have a lot of bodies in it. And so that's our positioning. It holds up well against our value propositions and against the balance of both price and other elements that come into building our value proposition. We think we're well positioned in a tougher economic environment for the consumer to embrace us. And so we're making sure that that doesn't get damaged as we kind of work our way into what could be a more difficult consumer environment. Thanks, Wyman. Thanks.
spk02: Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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