Q2 2020 Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Brinker International Q2 fiscal 2020 earnings call. At this time all participants have been placed on listen only mode. We'll open the floor for your questions and comments. After the presentation. It is now my pleasure to turn the federal put your host Microware maam the floor is yours.
Thank you Paul and good morning, everyone welcome to the earnings call for Brinker International second quarter fiscal year 2020.
With me today on the call or 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 Dotcom Wyman and Joe will well first make prepared comments related to our operating performance and stuff.
TG initiatives, then we will open the call for your questions before beginning our comment I must remind everyone of our safe Harbor regarding forward looking statement 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.
Private Securities Litigation Reform Act of 1995.
All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated such risks and uncertainties include factors more completely described in this mornings press release and the company's filing with the FCC and of course on the call. We may refer to certain non-GAAP financial measures that manner.
It uses in its review of the business and believes will provide insight into the companys ongoing operations and with that said I will turn the call over to Wyman. Thanks, Mike Good morning, everyone and thank you for joining us.
Q2, with a great quarter for Brinker, we delivered a dollar in one segment adjusted earnings a 13% improvement over prior year, which was driven primarily through strong core execution and our restaurants. This level of organic growth demonstrates the effectiveness of our strategy and the ability of our operators to deliver for our shareholders as well.
Outlined in this mornings press release, the ongoing momentum in our business has enabled us to raise guidance for the year, which Joe will detail for you in just a few minutes.
Our success starts with our positive comp sales trends Brinker came in up 1.5% for the quarter until he was up 2% our seventh consecutive quarter a positive comp sales.
Hi, John has had a softer quarter, but finished strong with one of our best holiday season at 37 of our 52 locations set new holiday sales record.
Off premise was once again the primary sales driver at Chili's would take out third party delivery and now delivery options on our App and website all contributing.
In Q2 was the eight quarter in a row chili's outperformed the category in traffic, we're really pleased with this trend as it demonstrates our ability to meet the consumers' increasing needs for convenience value and consistency at a level matched by few other brands.
And once again, our operator said, new all time highs and our guest satisfaction metrics proving we can drive the business, while delivering a better guest experience.
We believe this strategy will continued to perform well into the future and we will uphold our commitment to our operators to provide best in class systems and the keep our operations model simple. So they can stay focused on strong core execution.
Well operators remain focused on running great shifts our support teams are hard at work on exciting innovation to ensure our long term success.
We're testing new initiatives that allow us to enhance our value proposition improve our operating systems Inc. and increase efficiencies toll heuristically strengthened the brinker business model and further separate us from those competitors that can't keep up with those are the best performing at these higher levels.
For example, this quarter, we began replacing our original tabletop system with new more advanced system.
We're in the first we were the first major chained to put technology on the table and it's made significant improvements to our guest experience and efficiencies of our model.
With the new upgraded system will continue to leverage the operational advantages like customer payment in real time feedback as well as the marketed advantages like direct logging for activation and engagement in our loyalty program.
And just like any new technology. This system is more reliable and offers more advanced features like near field communication, which allows us to create an even more personal marketing relationship and further enhance our ability to leverage our powerful consumer database.
Investments back into the business like this are an important component in continuing our share gains and financial growth.
Our Midwest investment is also playing out well for US. These 116 restaurants are transitioning smoothly.
They are in the process of converting over to the breaker systems, which should be completed by the end of this fiscal year.
And we anticipate seeing a more significant bottom line impact the brinker piano during the higher volume back half of our fiscal year.
Our remodel and new restaurant development programs continue to perform well through January we've opened six new restaurants, each well above hurdle with as many as seven more new and relocated restaurants to open this fiscal year.
This is an area. We think we can accelerate as we have fertile trade area is now available for development that were previously held by franchisees.
All in all it was a great second quarter for Brinker, we believe in our brands and then owning great restaurants at a scale that enables us to continue to take share and win in this category.
We're excited about our line of sight into the balance of the year and longer term.
And while we typically don't share inter period results, we're off to a strong start in Q3 with sales at Chili's up over 4% in January .
And now I'll turn the call over to Joe to walk you through the numbers, Joe Hi, Thanks, and good morning, everyone.
Before jumping into my overview related to the second quarter, let me pick up on Wymans last comment regarding our current quarter performance. During the five week January period, which ends today, both brands built on their momentum coming out of the holiday recording positive comp sales performance compared to prior year.
Of particular note chili's net comp sales quarter to date is above 4%.
This quarter as we implemented our plan move back to messaging around value and layered on new news with stake in our powertrain Margarita our guests have responded.
I would note this performance lapse, a 4.5% comp sales recorded in January of last fiscal year and sets up the quarter nicely for very solid topline organic growth.
Moving back to the second quarter as demonstrated by the results reported. This morning. The strategy has and we believe we'll continue to produce solid organic topline growth improved restaurant level margins and adjusted EPS growth squarely in our target range of 10% to 15% annually.
At the top of the PML total revenues in the second quarter were $869 million, a 9.9% increase versus prior year.
This is driven by comp sales growth at Brinker of 1.5% and a full quarter of capacity approximately $71 million from the mid west restaurants acquired in early September .
Off premise sales in the core quarter grew in excess of 31% year over year.
From a sales both to go and delivery now represent approximately 17% of total sales.
At the brand level until his continued its topline momentum reporting quarterly net comp sales of 2% nicely lapping a positive 2.9% from the prior year. This results in a two year stack of 4.9% for each of the last two quarters.
Traffic was positive for the quarter and also positive to the industry by approximately 300 basis points.
Our Maggianos brand posted net comps of minus 1.4% for the quarter.
We are disappointed in these topline results for the quarter that being said performance did improve throughout the quarter end. The brand ended December with a very solid holiday season.
Magenis team has now worked through the transition to toward asked exclusivity, which was a drag early in the quarter as they gave up other established third party delivery business.
Despite a weaker topline than expected the brand managed its PNM effectively and contributed well to the overall success, but the brinker bottom line for the quarter.
Capacity growth and effective utilization by our restaurant teams of our operating tools and systems combined to increase bankers restaurant operating margin by 30 basis points as compared to the second quarter last year.
Taking more detailed look into margins cost of sales was favorable 10 basis points to last year as pricing of 1.4% offset a low level of mix shift and slight commodity inflation, primarily driven by beef and dairy.
Our top quality supply chain team continues to manage our sourcing effectively avoiding inflationary impacts to our specific basket.
As Weve previously stated we have established higher levels of commodity contracting to protect ourselves against volatility for key products. We're now 93% contracted through the ended the fiscal year and more than 50% contracted to the first half of next fiscal year.
Labor was 20 basis points unfavorable versus prior year for the quarter hourly wage rates were up again in the mid 3% range our operators focus on our labor tools and sales leverage helped to mitigate the inflationary pressures in this area.
As expected the positive impact of the topline capacity growth is meaningfully evident in our restaurant expense line favorable 40 basis points compared to prior year.
As previously discussed growing cash flow was an important part of our strategy and our operating performance. So far this year has set us on a path to achieving our growth targets for the year.
After first half capital expenditures of approximately $51 million, our free cash flow for the first half of the fiscal year totaled $90 million, an increase of nearly $46 million for the six month period.
We are using our strong cash generation to differentiate our performance by investing across the breadth of our business, while moving forward with repayment of incremental debt associated with our recent acquisition.
As it relates to guidance our year to date results and expected performance in the second half of the fiscal year enabled us to increase several pieces of our guidance specifically.
Earnings per share excluding special items. This now estimated to be in the range of $4.25 to $4.45.
Restaurant operating margin is expected to be flat compared to fiscal 2019.
And the expected range for free cash flow is increased to $175 million to $190 million.
We also reaffirm the other aspects of our fiscal 2020 financial guidance as previously communicated on our August 13, 2019 earnings call.
As many of you are also starting to focus on modeling for our next fiscal year fiscal year 2021. Please be aware. It will include a 50 threerd week without additional week landing in the fourth quarter.
In summary, our strategy to focus on core execution value and convenience is delivering on both the top and bottom line and further differentiating chili's as one of the top performing brands and casual dining.
We continue to demonstrate our ability to consistently win by driving improved guest experience and incremental traffic.
With our comments now complete Paul let's open the call for questions.
Certainly 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.
Police Q. Please press star too we ask that while closing your question you. Please pick up your handset listening on speaker phone to provide optimum sound quality. Please hold while we pull for questions.
On your first question is coming from Jeff Farmer, Jeff. Your line is light. Please announce your affiliation and pose your question.
Thanks, Gordon Haskett, you share January same store sales trends.
What does that solid performance a function of stronger segment trends were has chili's seen its relative performance improved versus the peer group and then look to January .
Hey, Jeff.
A little both so I think we're excited about them the absolute movement that we've seen in our business and it really comes from.
A focus back into a restaurant message so really for the first half we.
Primarily focused on.
Communicating and building our.
Delivery and takeout messaging didnt bring any new news or innovation to the marketplace or or into the operations as we let them focus on the increase.
Shifting in that channel.
And then at the start of January we got back on the year and back into.
On the or with with stake on three for 10 and that that.
At a significant impact and changing the trends and we're that's our plan as we move through the rest of the years to continue to find.
A balance between.
Communicating innovation and new news and excitement about the in restaurant as well as.
Outside the restaurant the opportunities.
Thank you and just a quick follow up on delivery are you able to provide an update on any of those metrics that you for shared at your Investor day across.
Delivery orders per day average check Incrementality anything you guys are able to share would love to hear.
Ed Jeff that really consistent with what we talked about at the at the August meaning you're seeing that that check above 25.
Bucks on average a slightly higher check as we move to the.
White label, they the orders per day, or holding and right, where we expect to them moved up a tick with a seasonality you start to see really as you kind of move through the winter seasonal build in delivery to and so were we are experiencing that.
And Incrementality the way, we're looking incremental it's holding in right, where we expected to particularly move through the first year of this delivery operation.
Thank you.
Thank you.
The next question is coming from David Palmer, David Your line is Lyons. Please announce your affiliation and pose your question.
Hi, Evercore ISI I.
I guess follow up there on on the marketing.
As you went through that December quarter, probably also for the entire first half. It looked like you were really channeling one thing that was delivery and.
Here, we dipped our toe into supporting another channel into People's brings here with the three for 10 and adding stake to that.
Just wondering is you audit what has happened and perhaps Saudi incrementality and how that played out.
In that fiscal second quarter.
And whats happened today, how how are you going to basically navigate going forward and are you going to think about new menu news because it looks like you just did value news here.
But the new menu part has not really been a part of that it's been sort of it the same old favorites being put on to value.
Just a menu and menu strategy and then the separate thing to is it feels like there's these flare ups of discounting out there and even.
Been Darden was talking about how that's causing some volatility.
Could you talk about the discounting that's happened in are you seeing tremors in your own results and swings based upon one desperate competitor here, they're doing some stuff that may not be sustainable. Thanks.
Hey, David Yeah, I mean first on the.
On the strategy itself.
I think and Incrementality of delivery I think everything is pretty much falling in line with.
As we expected it would.
I think one of the things that I'm.
Just surprised a little bit about as how independent delivery can can can work.
Once you get out in that environment. It doesn't probably require as much of our support to keep that business moving as we may have thought and that you know it has its own kind of organic marketing world that that it can play into and so we will now as we had always plan.
And but I think very comfortably move back into a a balanced marketing approach. It has as much if not more energy focused on in restaurant opportunities.
As well as you know continuing to remind people about our convenience options.
With regard to the kind of flare up as you said with with the various competitors and what's going on in this space I think there's nothing really new I mean, I think you find people that.
Maybe a little bit out of desperation to try and turn to trend around throw something out there that's really not sustainable.
For the most part we havent felt the that impact us in a dramatic way and we continue to not chase, we continue to want to run our race.
Put the value and the innovation.
And the consistency and quality.
Components together for our for our restaurants, and our operators to deliver to our guests on a day in day up basis, So thats kind of how we we deal with that.
And David I would add too on the stakes side and equation as as Youve seen or heard us talk about the the three for 10 with stake on it but it's a but it's a broader stake play too when you come back into being able to talk about that protein because we have.
Feature cars and the restaurants, what's the with a couple very nice stake offerings that are also doing well. So you get the value play and you get kind of a premium approach and lift the entire segment US Stakes as you kind of move through that.
That window.
Thank you guys.
Right.
Thank you. Your next question is coming from Chris So call. It Chris Your line is life. Please naturalization pose your question.
Thank Stifel, one and I know part of the improvement in comps of also come just from some improvements you've made to the food quality or to the specs of certain items do you have plans to make any additional improvements to the menu this year.
Then I had a follow up.
Yeah, Chris I mean, I guess in general.
Just our overall strategy is to consistently.
Upgrade the quality of the experience that that whether its atmosphere service or food and we're constantly looking for ways to do that in a way that the consumer gives us credit for it and and significantly changes kind of their approach we absolutely are.
Not looking at any.
Opportunities to save costs and reduce the quality of the product. So to answer your question. Yeah. We're we've continued to have a work being done.
In the commentary center to bring us ideas on how we can upgrade the quality of the products I think our chicken sandwich that we talked about last time is another good example that pounded.
Hand breaded.
Chicken product relative to kind of the alternatives that we were looking at before it is just significantly better product now does it turned the business around overnight or may have a huge impact.
Immediately no but over the long haul, we're seeing that impact and it's all showing up in better guest satisfaction metrics right. So our food scores that are guess give us or at all time highs.
And we continue to see that happened because of the changes in the menu as well as our operators executing more consistently the standards.
Great and then.
Joe does the updated restaurant margin guidance reflect upside to your internal expectations for the second quarter or is it more of it just an improved view on the outlook in the back half of the year and then also if you could just give us an update on the commodity basket in particular, what you may have locked already for fiscal 2001.
Okay.
It's a combination both on as it relates to margins again I think.
Seeing the level of execution in the improvement at the restaurant level from an operational stamp on because it's not any one thing both in the second quarter or my expectations going forward is performing at cross that restaurant level PNM al.
That is starting to make a difference on that flow through which we're very appreciative of their offer the operators in their performance there threats the commodities.
One of the largest locks we have put in place.
The guys pretty much.
Through most of.
The 21 is chicken, which is one of our largest obviously protein buys and we have extended our contracts.
Out well into the second half of the fiscal 2001 in that regard.
A lot of our bacon product ramps things of that we've locked in through the end of the calendar year and are actually.
Looking at taking advantage of some of the improvements you've seen in some of those pork related.
Markets in December two probably extend that coverage.
A little bit farther into the year. So we're trying to be very opportunistic.
Our supply chain is extremely experienced in this regard Dave they've been they're done that they've seen the cycles and understand how to work around those cycles and work within the cycles and.
Our making all the appropriate moves to reduce that volatility.
Great. Thanks, guys.
Alright. Thanks.
Thank you and the next question is coming from Nicole Miller Nicole Your line is nice please announce your situation I'm pose your question.
Thank you Piper Sam or good morning, I understand a little bit more about truly specifically and then if this is this question is true maybe for all of casual dining, but I'm inclined to believe that with your progress in same store sales.
It's good to have a rifle shot approach in terms that they're very focused that you'd like it just feels like maybe you had bradner horizons. Good now come back full circle to read you said you get to Margarita has it been focused as of right.
Why is that and then how does it makes it look today when customers come ahead versus maybe what it looked at in prior periods, where comps weren't as strong as they are today. Thank you.
Hi, nickel I think.
Our our belief in our strategy is really been laid out now probably into our third year of focused menu execution. So to your point from a consumer standpoint, if you ask the consumer they'll always want more you know I mean listen give me you know give me a menu with everything that I could possibly ever want on it.
The challenge with that obviously is executing those items at a high level of consistency with the with the expertise you need to deliver a great in restaurant experience and so we've found that you know to stay focused on those core.
Menu items is really critical for us, but to also bring innovation and new news to them to kind of keep him fresh but to not get caught up in a kind of an arms race for new items, and new and new initiatives around the menu, especially to getting to a kitchen to execute under high volume Fridays and sat.
Today nights your menu consistently is not an easy thing and so we've committed to our operators to only bring them changes to the menu when it really makes a difference when consumers are really excited about it and not just because it may chase some short term trend or provide.
As a category or an item that that a small group of people are maybe a little bit excited about for short period time. So.
We are totally onboard with focus doesn't make a difference and we're seeing that again as I mentioned in all of our results.
It also allows you to be a little more efficient because people have that muscle memory.
So it sounds like disciplined matters. Thank you Ed and I do recur in the past from Maggianos, you've had some good <unk> RAC interactions and you've talked about varies from catering and how that could maybe extending pick delivery across Chile. So is there any update on best practices and how how you're the brand how casual dining.
Brent can go direct to the customer, yes, so utilizing third party marketplace, but capture that data capture their relationship directly with the consumer in terms of delivery specifically.
Well with Maggianos, we obviously do have our own catering teams in every restaurant with with vehicles and so we do and we know we do delivery ourselves as well as use third parties with regard to Chili's, we don't anticipate delivering ourselves.
We just think that the model doesn't work as well in that case I think the key there as you know working with our printer and we're very excited and happy to have jordache as a partner and making sure that we're helping each other.
Leverage the marketing opportunities for in restaurant out of restaurant experiences and so again it has a lot to do with how do we partner on on databases on on.
Building each other's businesses, if you will through the strength of the scale that we both bring into the into the into the partnership.
Thank you.
Thanks.
Thank you. The next question is coming from Brian Vaccaro, Brian . Your line is line. Please announce your affiliation and pose your question.
Thank you Raymond James I'm, just wanted I appreciate the January comments, but could you also speak to the cadence you saw in fiscal Q2. It. It seems like your relative got to the industry may have narrowed it is that right and if so what would you attribute that to the value environment, maybe daypart specific or anything else you can shed some light.
Yeah, Brian It's really easy if you look at our Q1 performance our price mix was at 2.9% Oh I'm sorry. It was I'm sorry, Yeah, two partners to 2.9, and so we told I think we communicated to the field to the street at that time that to nine was a high end for us.
You know, we've always been pretty clear that our price strategy is one of the happy too and that you know given timing of when you take a price increase a quarter may be a little high one maybe a little low they don't always line up exactly and then we may have some mix shifts but in general you know that one of the aptitude range is what we kind of plan for.
Okay, and so we were a little bit on the high end in Q1, and if you do we came in right and what we what we expected at 1.9 with a with things kind of more leveling out to our expectation so I think the.
We were pretty much.
Onboard with exactly the way the results came in if anything we were a little bit more aggressive just based on timing of some menu pricing. In Q1, then we would have normally expect I thought we communicated that but sometimes that gets lost in the mix.
Overall, we continue to focus on a traffic driving strategy and you know this is our eight quarter in a row of beating traffic trends for the industry and not by small numbers were not you know we're consistently beating by a two and three points now and we want to continue that approach keeping.
The restaurants busy through you know.
Traffic is the key to success, we think and leveraging the business and that gap to the industry actually increased second quarter to first quarter two.
Okay and.
The pricing in in January I guess or the traffic performance in January .
Could you speak to either those have have you taken pricing relative to where you were in the fiscal second quarter here in January and also how should we think about second half pricing Joe.
Just setting expectations for average check growth.
Yeah. It in second half again, we you know what we've guided all along is that we will bring.
Pricing. It is now back down into that range of 1.5% to 2% or will maintain it in that range to be kind of move through the second half of the of the year.
And we didn't do any pricing in January yet so.
Those results are really just a function of what we talked about you know.
Getting more focused on driving traffic back into the restaurant through a messaging that that really is only available in the restaurant three for 10 as you know is not available in.
The delivery channel so when we talk about stake on three for 10.
If you want to take advantage of that opportunity of that offer you got to come into the restaurant.
Yes from a dollar standpoint to it I think Brian you would expect to see us with a menu pricing.
Towards the upper end of that range, but it'll definitely in the range, but I want you to.
Air towards the top end not the bottom end.
Upper end of the pricing range rest of this year.
Correct.
Okay. That's helpful very helpful color and just to shift gears, a one quick follow up and sorry, if I missed it I think it'll be in the 10-Q, but what was delivery sales mix at chili's in the quarter and you can you help us frame how much is coming from third party versus the direct channels. The app in the website. Thank you.
[noise] [noise], Yeah third party.
Third party.
The marketplaces, we call it continues to be the the lions share of that effort, it's generating of the delivery piece of the equation. It's it's in the mid eighties from a percentage standpoint of how much is coming out of.
The marketplace again.
Still early on in the in the the White label side of the equation, having started that in October so.
We'll watch that closely but you know marketplace has a a wide broad presence in a great incrementality that comes from that so the thing that's encouraging Brian is you know were and are moving to the third year of kind of emphasis on our takeout business and take out a is continuing to grow.
And so this quarter, we continued to see growth and take out after some really nice growth prior year. So it's not all about third party. We're we're continuing to see growth in our takeout business as well, which.
Again encourages us that.
As we kind of lapping and move through this business, we will continue to be able to grow it all the channels.
Okay, and I think the delivery was 3.1% memory serves in Q1 level can you share what that was in Q2.
Yes, the at the breaker level, it's a little above 4% now and it's a higher level at chilis is pushing towards a 5% of there to have their total.
And again as I said total off premise is.
Pushing at 17% now of total sales as you continue to to also see a little bit of growth coming out of the to go side that equation too so.
That's great. Thank you.
Okay. Thank you and the next question is coming from Stephen Anderson Stephen Your line is life. Please announce your affiliation and pose your question, yes from Maxim Group.
It's too I turn to Maggianos as is a major competitor in that upscale times space I. Just also announced another batch of a closer news lately just wanted to ask if you are C.
Signs or any kind of a pickup of market share or maybe some for some of the competitors that have a closed in that space.
You know I think.
It's probably a little early for that to kind of all flow through Stephen but will.
I mean maggianos is doing a great job focusing on you know continuing to deliver great guest experience working on.
Making the brand.
Kind of.
As relevant.
As it needs to be in today's world. Its continues to be one of the one of the premier brands in the industry.
No matter, what the guest or consumer survey you look at Maggianos always ranks right at the top so we've got a really powerful brand that does a great job and now we're focused on just kind of enhancing that experience, we probably need to put a little bit of investment back into the branded and to kind of update some of the relevancy of element.
But.
We havent seen anything specific to what you're asking about but we haven't really been looking either we're just kind of more focused on ourselves and how to grow that business and we're excited about what that teams pulling together I think it.
Yes.
Thank you and the next question is coming from John .
John Your line is Lyons. Please announce your affiliation and pose your question Hi. Thank you, let's start with JP Morgan I you know I was just curious about so some of the monthly sales trends that chilis is seeing it. It does seem like September and October a little bit better odd November and December maybe slowed down a little bit only to reaccelerate in that in the January .
Why don't you, obviously have a lot of experience with the Chili's brand, specifically, but obviously the industry overall it does that.
Yeah monthly volatility for the lack of a better word or even just kind of some monthly unevenness and year over year sales performance surprised you I guess at this point in the cycle.
Do you think especially for the sake of that the operators and overall staffing levels that you can you kind of achieve.
More predictable and stable kind of month to month year over year sales performance given the company your current economic and competitive environment.
Yeah, John you know I think theres some.
Some factors that are.
Contributing to it looking maybe a little more volatile than it is and you know the way the holiday played out, especially with a lot of our calendars you know through.
Might have thrown Thanksgiving.
Out of one month into the next and that that had a pretty dramatic impact.
Obviously, the holiday shopping period this year versus the last you went from the longer period to the shortest kind of consolidated or compressed time period. So those kind of things kind of played into it but overall when you kind of sift through some of that it's not that dramatic its.
It's moving you know a point here or there and at the restaurant level. That's manageable the good news for us and I think for the industry is moving into right direction.
And that's that's encouraging and I think thats a sign of a lot of things happening.
Both you know.
You know primarily at what we're doing it here at Chili's, but also in the category maybe to become more competitive.
Okay. It was my impression and correct me if I'm wrong that comment that the run rate in September and October was stronger than what you actually reported for the quarter button that you know maybe I could have misinterpreted some of that conference call comments that you made three months ago, but we can I follow up that without online. If you don't want to now on <unk> and if if I.
Maybe just in terms of a slightly different question why don't you did mention in your prepared remarks, maybe looking at some.
More new unit development, specifically Chili's and acquired franchise markets I know at the analyst day, we talked about beginning to look at some packages for remodels of Maggianos in some of those bigger units haven't been touched.
As you begin to kind of think about the 21 plan as Joe as you rightly pointed out we certainly are focused on the 21 and 22 in our models what does that say in terms of future Capex and where does that where did those numbers like he has shifted if at all.
Just two reasons [laughter].
Again, I think we would expect to see a fairly consistent level of Capex. As you think about those next couple of years right I mean, again, well, we'll update that more.
Officially as we get to get to the guidance either equation, but.
I think the the pace than we're seeing the acceleration of cash flows as we look at our capital models and needs and move between the different buckets I would expect to see a is that similar range for the next couple of years, we have a couple more years of Reimaging work on the Chile side equation and then we'll start.
Two.
Also sequence in what we think a.
Where the opportunities lie as it relates to maggianos in that timeframe also.
Thank you.
Alright, Thanks John .
Thank you on the next question is coming from Catherines Socrates Catherine Your line is life. Please announce your affiliation and pose your question.
Great. Thank you and its Goldman Sachs and I have a a few questions here on this the first on it I mean, it's touched on it a little bit, but you know for the broader industry and only I detect say, we're getting our that trend improved in January .
You know from the consumer standpoint kind of boots on the ground do you think that that's more than next Oh, I'm better consumer spending to you a actually it kind of it to whether you know anything outside of the overall strength that you're seeing entry for tenant and delivery that what kind of help explain in more constructive back shot and then you know easy you referenced that then you table.
So you're putting in I know, it's still kind of early days on that they could you kind of help us understand whether it's the engagement and loyalty side or get ticket orthopedist service anything that we can understand how that that rollout is helping tail and accelerate your business. Thank you.
Yeah, Katy so I mean again from an industry standpoint, I'm not going to.
Kind of spend a lot of time speculating on what could be a driving some of that performance I do think there has been.
As mentioned on a previous question, maybe a little more aggressive shorter term marketing initiatives by certain players there maybe a little bit of weather in there there, although all the components kind of come in but at the end of the day I think that thing. That's interesting is I think we're going to start to see strength.
In the casual dining SEC segment relative to the other segments and that's that's a that's a nice trend to see and I think that it really gets back to specifically what we're doing.
Making ourselves a better competitor, whether it's in our restaurants or whether it's through delivery channels to other options out there whether they'd be fast food or fast casual and and again with delivery you opened yourself up two occasions that people may not have considered as for before that the you know they only consider other.
Categories. So those are the kind of things that are exciting to us in that we're leaning into better understanding a as we continue to expect.
And are excited about our opportunity can do to grow sales and traffic with regard to tabletop and the new tabletop device in a we opened up that whole category for a for the industry and casual dining for sure over six years ago, and so the equipment needed to be replaced it you know you.
Can't run a computer with the kind of stress, we put those computers under under our volumes forever. So we knew we needed to replace we've gone to a system that does a couple of things better for us or what are the wins for us.
It's a it's a more dependable system less moving parts. So that's that's a good thing for operators in our team members because you know if they can count on the equipment to work every time, then they will get our guests to use it no lean into it and that does a couple of things that it gets people too.
To handle the payment on their own and so our pay at the table as we call. The metric is high and that that's important because that gives servers frees up server time to do other things rather than run checks back and forth. It also has implications to credit card and bad debt because if there there are those.
Those new machines, all have a chip readers that eliminate some of that expense and it is really most powerful for us from the standpoint of engaging our guests in our loyalty programs. So it becomes very easy for them to to log in and participate in loyalty.
We also have now that capability, we haven't turned it on yet to to ask them. If they want to start to communicate more kind of more automatically they can walk in they've set their phone up we can just start talking to them without even having them log in and those are kind of thing we're going to continue to push for as we aggressively grow.
Our database.
So we are right now pushing and growing the database a nice clip, we will continue to grow that and see that as a as a really competitive advantage to us in the future as we are getting smarter and smarter about how to use that database to market to individual consumers.
In unique ways that drive Incrementality.
Hey, I just also have a follow up on certainly on a day, three Santana and kind of pushing stake more I'm is there anything from a margin perspective that we need to consider or is that pretty comparable to the margins on the other offerings and take for attack.
It's in the ballpark, it's a little premium on it's not again, it's not going to be there forever. It's a it'll it'll be on three for 10 platform for a period of time and then it will go away and in that time period as Joe mentioned, we're pushing a so we may give up a little margin on the three for 10 platform mistake, but we're also pushing our whole stake.
Portfolio, if you will and we've we've added some new items to that portfolio and they're doing well and those items actually have better than average margins and so the tradeoff is a definitely manageable.
Thank you and the next question is coming from Jeffrey Bernstein. Jeffrey Your line is nice please announce your affiliation and pose your question.
Okay, great. Thank you from Barclays.
Two questions just one.
Kind of looking back at the the January improvement in the fact that it uptick as much as it did and the comparison family was a lot more difficult.
I was hoping to contextualize your understanding is at this point that the greatest driver of that was the switch back in advertising to the three for 10 with stake, but it seems like your acknowledging that the industry got better as well so I'm just trying to understand.
And what you believe the primary driver was if it was the state condition and then maybe contextualize, how chili's performed versus the industry, maybe versus PPIF months, just to kind of going to feel for how much of it is just the rising tide lifting.
Both and if that number is sustainable which it sounds like you guys feel good about the momentum how you think about the fiscal 20 guide because it would seem like your your comp guidance would therefore would be quite conservative.
Hey, Jeff.
So let me just talk to what's going on within Chili's. So again, we talked about getting back on here in January with a more compelling message that drives traffic into the restaurants and we've seen a you know the way we measure success usually on on something like that as you know how many people came in and eight the hate the item were to.
Going about and we've seen really good pickup on stake on three for 10 as you'd expect and that was consistent with the trend change for us from an absolute perspective. Additionally, we were you know our Margarita the month program is unbelievably powerful again. This is a program that will start our third year of next month.
And every every year has gotten stronger and continues to to get a better with regard to driving incrementality in that in that aspect of our business and we had our most successful margarita them on a in ever in January with the Petro Margarita that just blew it out of the park so again.
When it lines up with our strategy to deliver quality products at a great value, but not be the lowest possible price point out there not to necessarily go to the very.
Bottom of the well, if you will but to but to really put compelling value out there linked with quality products Thats whats a that strategically what we're doing and that's what's winning and thats kind of what we thought we saw trend change our trends with regard to the rest of the industry, it's a little bit a in I'm.
I'm not an expert on exactly what's going on with the rest of the industry. There has been some some some other weather changes there have been some people that have been pushing a little more aggressively and so again, it's just nice to see the whole category move a little bit in a positive direction. After what's been relatively soft first half for our fiscal year for the category.
But that said, we're absolutely I'm encouraged and optimistic about what we're doing a both relative and absolute.
Jeff as it relates to the comp guidance, we're very comfortable with.
The comp guidance, we provided and the range that you have right now and that's in the context of the first half the Eurs Wyman said, where we've had a industry underperformance versus what we baked into our expectations.
So and improving industry is only going to bolster confidence even more as we kind of move into the the second half of the year, but.
Yes, I think were.
We're solidly in that guidance range, and I'm, very comfortable with where where we expected to come out.
By the end of the year yeah.
Got it unlike my follow up from the value messaging and I know you talked about you know occasionally competitors get more aggressive and whatnot in terms of value offerings, but I think in your prepared remarks, you talked about even specific the chili's, there's some new initiatives to enhance the value proposition.
I'm wondering what that might entail.
When you think about your value proposition, where you guys are currently sitting has a mix the percentage of the menu as it's still kind of in that 25 plus percent range as a percentage of sales or how do you think about that mix.
Yes, again it depends on what you would consider our value platforms.
When you think about three for 10, which is absolutely value platform. You know we're in the high teens and that's the driver.
And those that's the primary platform we've been leveraging you know for for a little while now and we will continue to and we see opportunities to bring new news into that platform. It's a compelling platform. It's a mark you know it's built into our margin structure now and as you can see or margins look good. So we have room to.
We continue to lean into that the fact that were not offering that in the delivery channel kind of gives us another kind of buffer if you will in between those pieces of the business and we like that and so between.
Innovation that we can bring to that platform as an example, and then what we're doing with our database. We're excited about the opportunity we have to continue to drive traffic.
Traffic inside and outside the restaurant.
Great color. Thank you.
Alright, thank you.
Thank you on the next question is coming from John Glass. John Your line is life. Please announce your affiliation and pose your question.
Thank you its Morgan Stanley if I could just go back to the dynamics in the second quarter on the comp and particularly delivery versus the rest of the business. If you looked at trafficking in mix there, they're relatively stable versus first quarter to second quarter. So is it the right way to look at it is that delivery performed well we'd be outperform what you did.
The rest of the business underperformed because you Didnt have news so that delivery is still can trimming what you thought and does that raised the challenge. If you go into a period like Youre now where you're focusing on it died in offer that you can't get in delivery does that hurt delivery sales is there a balance you need to figure out how to strikes you could drive both delivery as well as to dine in business.
Hi, John that it's a great observation right. So I think first off you know.
Were six months into delivery. So we're learning exactly how this business.
Plays on a scale right I mean, obviously, we did delivery, but it didn't you know is a relatively small.
And.
Piece of the business and now as it becomes a bigger piece of the business, we're getting smarter about okay. How does how do you how much do you have to market to it how much how much of that gets carried by your third party partner.
And how much do you have to.
You know how do you optimize it with regard to you know the promotional aspect of it and we've been very hesitant to promote I mean were that we haven't done a lot of you know discounting with in that space not as much as advisors. So that's always an opportunity for us we probably put more external emphasis on it with.
Regard to our marketing messaging than in hindsight, we probably need it looks like a lot of that gets carried you know more third party and that's great news because that's not an incremental costs, we have to deal with as much and so we don't have to make those trade offs and that's what we're going to lean into now as we are comfortable now that the delivery aspect of the businesses kind of working on its own and it doesn't.
Require a whole lot of our support a from a from a marketing messaging and we will we will put our focus more on kind of the in restaurant opportunities.
Thanks for that and then Joe and on a year Jay how much did that contribute to this quarter from an earnings perspective. In his is is is part of your increased guidance, you've got better visibility on better accretion than you initially thought from that acquisition.
It contributed really at the level, we expected to but our expectation on along as we built the annual model was for greater contribute.
Contribution from the acquisition in the last two quarters as you see us just normally make more money in the last two quarters as those are the higher volume businesses. So.
You know we performed as expected we're on the path that we will continue to see that performance play out and so it will contribute at a higher level.
Both of the last two quarters and in line or with within expectations of how we built that model. So again, not making any great changes too.
Specific accretion from it but.
We're very pleased and what we have seen in the direction of where that piece of the business is going I would know to that one of the things it's interesting about.
The current performance that we talked about earlier in this.
In this first part of the of the quarter is remember Midwest is not in those numbers because they are non comp restaurants are the first year and.
We're pretty excited about the performance, we've seen coming out of those restaurants.
Two as they also right some of the benefits of we're bringing to the equation. This.
This quarter.
Okay. Thank you.
Thank you and the next question is coming from Sara Senatore, Sir Your line is life. Please announce your affiliation and pose your question.
Bernstein. Thank you.
I just a follow up on margins you know the messaging back to value I was wondering if that is implications from your margins are our mix.
[laughter] clean the context of guidance, where he took up bps in cash flow, but they're not comp even now of course the January trend. It is quite strong and you already kind of running at the high end of your comp guide. So just trying to understand if there any implications of that sort of margin topline trade off or how you think about that playing out to the rest of here.
Notwithstanding the January top line and unrelated question.
Could you just talk a little bit more about them.
Margin implication.
Kick out I think we said at the same are higher than in store delivery as maybe a little bit lower though as you pointed out I'm kind of what what's offered on the delivery channel may may dictate a little bit what happens, but just remind me kind of how those different channels like from a margin perspective. Thanks.
Hi, There let me let me just talking about the first question you know with regard to the impact of a cost to sales and margins relative to these offers it's not significant and it's obviously, what we planned for the bigger opportunity is you know the leverage we get from higher sales and.
No that more than offsets any kind of downside margin and that's what you're seeing right. As we continue to show positive comp sales our ability to flow that through our operators around really great restaurants, and or are very much aligned with you know how to maintain a cost structure and so those those dollars flow through.
Pretty predictable and a high level, so, but Joe talked it yet and again as I think as it relates to.
Particularly cuts sales achievement, you mentioned I mean, our supply chain is working hand in hand, with the marketing teams and they operate under says there's great line of sight is where we're going from from a marketing standpoint is built into how they approach the markets. The contracting we do so there's not you know again when you think about.
The positions we've taken in and the protections we put in place that is with total line aside as to what we're expecting to do.
On the on the marketing side of equation so.
Don't expect any surprises coming out as out of that piece the equation as it relates to margins in the different channels. They do have different.
Margin characteristics, but not radically different so I think is why do I mentioned earlier on the delivery side equation. When you don't have the three for 10 opportunity within marketplace. That's one of the ways that you manage the that overall manage that that margin perspective for that channel. So.
Yes, clearly the in dining which is the dominant part of our business clearly above 80% of the business has slightly larger margins.
Across those channels, followed by delivery and to go based on some of those that dynamics.
And were and against their we're getting smarter about this new kind of delivery business and how to how to optimize it and find efficiencies in it and will you know were pretty good at that we have a great team. That's constantly looking at hey, where can we where can we find some efficiencies that don't impact the guest experience.
Thank you and the next question is coming from Andrew Strelzik. Andrew Your line is light. Please announce your affiliation and pose your question.
Oh. Thank you. My question is on the loyalty program, which is an initiative that is that fits and starts overtime, but I'm just curious for an update there.
In terms of you know where are you continuing to see the membership grow I know you've been kind of optimistic about the ability to lean and with the personalized offers there have you really started to lean in or is that an opportunity that's still on front.
Hey, Andrew I'm first we are growing the database and were looking to even grow it more aggressively so our which just kind of lead.
Kind of falls into the the camp that we are totally bought into this approach towards marketing for the future that.
Direct to consumer marketing.
Getting leverage your database leveraging our scale to use technology in a way that maybe others can't to get really smart about how we market to a two our to our guests and our potential guess is a away we're going to win.
So yeah, we're absolutely growing it and we're committed to it and we're excited about it and we are using.
Customization to a certain degree, but we see opportunities to take that up.
To the next level as we continue to bring some of the new technology into the restaurant like we just talked about with tabletop that opens up some avenues for us and as we just get smarter with the database over time.
That's helpful and my other question is.
From a turnover person, though the labor efficiencies been impressive certainly last couple of quarters, you've talked about some of the drivers, but I'm curious.
Turned over I mean, how much has improvement there with the performance and kind of some easing of the operations and the training and all of those things how much is that contributed to somebody efficiencies on the labor side. Thank you.
No not a lot right now our hourly turnover number you know again continues to be much better than the industry, but.
Still an opportunity for us in our operators and everyone in the organization is focused on.
Understanding how we can stabilize some of that even more because we do believe that's an important metric for us.
The management level, we have seen some stability or some lower turnover numbers and we think thats. A you know again something we look to continue as we move forward.
Forward with with the better systems for our managers and better metrics to help them understand kind of how how they're performing so.
It's not been a big component of it but we do see opportunity as we move down the road to leverage turnover.
Great. Thank you.
Thanks.
Thank you and the next question is coming from John Tower. John Your line is life. Please announce your affiliation and pose your question.
Great. Thanks Wells Fargo, just just a quick longer term question.
On the business operating margins have been contracting really since fiscal excuse me fiscal 16, and there's been some accounting pressures on that so it's not truly an operating.
Function, but I am curious if you could kind of outlined how you think about this business.
Going forward over the next three to five years, how we should think about EPS growth of the components of EPS growth. Specifically, you know restaurant level margins should those stay flattish or do you expect goes to expand in future periods, and then leveraging or or kind of keeping gionee growth flattish and therefore, the components of the impact on.
Operating income overtime.
Yeah, I think it's a combination John of all those and the key is really the topline growth side of equation Youre seeing great evidence this last quarter.
Quarter or the capacity growth both from comp sales and from the acquisition, that's obviously a dynamic that.
Well continue.
Predicted that get that capacity addition from the acquisition over the course of I've really the next three quarters and you get a strengthening of of that capacity growth.
In the second half of the of this fiscal year.
So that that topline again, we go back to the long term outline the we talked about at the Investor day that our ability to.
You know drive towards a.
2% competition comp.
Area.
I should have the opportunity you know for margin management in that in that regard and and you can get there.
Obviously with that wanted to have to 2% price.
Got to maintain a consistent traffic perspective, and and flex net mix.
When you have those opportunities to do that and flow through that.
That price rise equation, but I think our our belief.
And again, we've always been effective management on the cost side equation, all the way down the PML and inclusion in Jna sided equation. So.
Again growing that top line.
You know adding capacity.
On a new restaurant development side, and maintaining that you know that twoish percent comp range does give us that opportunity to to manage our margins.
Okay. Thank you.
Thank you.
Thank you and final question is coming from Gregory Francfort Gregory Your line is life. Please announce your affiliation and pose your question.
Hey, Thanks for the question I I had to the first is for Joe just in terms of the contracting on the commodity side.
How does that work is our those fixed price contracts for the volume contracts or some blend of the too.
And then my other question was for Wyman.
As you look at the economics of the third party delivery.
To you and then also your third party I mean is that how you are thinking about it and.
As we try to gauge what seems like it's changing dynamics in the aggregator VC world.
You know as you look at Chili's delivered order is it higher profitability than than other delivered orders and that's why you believe VC will shift towards casual dining chili's or how do you think about that dynamic. Thank you.
I think Greg they did the short answer to your first part your questions, Yes, yes, and yes, it depends on the product.
Now that you're talking about it depends on.
How that product equates to what we're doing in the restaurant from a marketing standpoint.
So it can be a combination of all of the.
All of what you mentioned.
Yeah, I mean again I think that basket is fairly will lock, though and so that gives us absolute coverage.
With regard to the third party delivery I'm not exactly sure Greg the question, but you know the economics.
Within you know.
ER pinned to the Incrementality right and so we feel good about incrementality in based on that the cost structure and the and the Incrementality combined it makes delivery a really nice piece of business for us and when we think we can continue to grow and grow profitably and so when we.
Look at a at delivery, we look at it from a.
Totality of the business and you know so the increment how it is important we feel good about that and with that Incrementality. How are the absolute margins and there are solid so are they as good as if somebody were to walk right in our front door, probably not because you're paying for that delivery component, but it is a it is a good piece of business in one well, we're going after and one.
On the consumer is going to demand I mean again, we think convenience is.
Or something that consumers are demanding so rather than fight that we're going to looking into it and do it in a way that we feel good about delivering a quality product.
And a business model that works for us.
So that's how we're looking at third party deliver.
Thanks, that's helpful.
Yep.
Okay. So that that concludes our call for today. So we appreciate everyone joining us on the call and look forward to updating you on our third quarter resort.
In April that would have a wonderful day.
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.