Q2 2021 Brinker International Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Brinker International Q2 F. 'twenty one earnings call. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments. After the presentation. It is now my pleasure to turn the floor over to your host.
Oh, where ma'am the floor is yours.
Thank you Kate and good morning, everyone welcome to the earnings call for Brinker International second quarter of fiscal 'twenty 'twenty. One with me on today's call are Wyman Roberts, Chief Executive Officer, and President and Joe Taylor, Our Chief Financial Officer.
Our results for the quarter were released earlier this morning and are available on our website at Brinker Dot com as usual 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 every one of our <unk>.
They've harbor regarding forward looking statements during our call management may discuss certain items, which are not based entirely on historical facts any such items should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, all such statements are subject to risks and uncertainties, which could cause.
Cause actual results to differ from those anticipated such risks and uncertainties include factors more completely described in this morning's press release and company's filings with the SEC and of course on the call. We may refer to certain non-GAAP financial measures that management uses and its review of the business and believes will provide insight into the company's ongoing.
And with that said I will turn the call over to Wyman.
Thanks, Mike and thanks to everyone for joining us this morning Q.
Q2 of the dynamic quarter and Joe is going to walk you through the details.
Think about all of the craziness 2020 broad across our industry and our world. We're also appreciative of the invaluable lessons we gained.
We learned we of the right team and the field and here at the restaurant support center. Our operators are working tirelessly everyday to deliver great experiences for our guests and team members as we aggressively pursue opportunities to grow our business organically.
And we learned that we can drive our business and increase market share. Despite the hurdles brought on by a global pandemic and widespread civil and political unrest and the second quarter Chili's increased its two year trend of taking share and leading the category with an 18% beat and sales and at 25% beat and traffic According to Knapp track.
And we learned at our strategies work the ways, we leverage our scale and our ownership model and the investments, we continue to make and technology and improving our operational systems, they're working well for us prior to the pandemic and continue to work even more effectively throughout the year.
Leveraging those competitive advantages opened up opportunities for us to grow our business and unique and innovative ways like.
Elevating our digital guest experience at both brands and leaning into virtual brands those things are hard to execute and even harder to replicate so we're taking those lessons into 'twenty 'twenty, one as we prepare to accelerate organic growth and of post vaccine environment.
We believe like most others that of widespread vaccine will indeed, released pent up dining room demand and our operators are excited to return to full capacity and deliver more great guest experiences and person.
But we don't expect a return to the old normal.
2020 fundamentally changed us as consumers, we were forced to use technology to enjoy our favorite restaurants, and new ways like third party delivery curbside takeout QR code menus and mobile payments.
And now that we've experienced greater convenience and control over our experience, we're not likely to give it all back.
The Brinker team knew that convenience was a big opportunity even before the pandemic.
2020, just accelerated our commitment to embrace consumers gravitation towards digital interaction and meet them where they are.
We believe digital sales and traffic will continue to be of strategic driver of our results and both the near and long term.
So and preparation for fiscal 'twenty, two we're dedicating even more time effort and capital to accelerate and our competitive advantage as a digital leader and the category and aggressively pursuing opportunities to drive our top and bottom line.
At Chili's, we're testing a fully integrated digital experience that gives our guests control over the pace of their experience and level of interaction with our team whether they are dining in or off premise at.
Still early but the team is making tremendous progress and the guests and our test restaurants of responding really well we.
We anticipate of rollout beginning fourth quarter.
We've also spent a great deal of time and effort Systematizing what goes out for <unk> at both our brands.
We got really good at takeout and delivery during the height of quarantine.
So while our dining rooms are still limited.
At limited capacity, we're ensuring we have strong systems in place to support our operators and execute our robust off premise business, even as our dining rooms returned to full capacity.
Delivering a best in class off premise experience also supports virtual brands, which is a key component of our growth strategy.
Our scale and our ownership model, coupled with our ability to mine data and develop systems is moving very effective in this new world of virtual brands.
It's just wings is on track and performing well, we believe there's significant upside and so we're focused on building it into a strong sustainable brand some of the biggest brands and the world right now our virtual so we know the model resonates with consumers as long as you deliver a great product.
Right now we have of one channel solution, we're working to optimize that channel for incremental marketing opportunities and expanded consumer touch points.
We're also going to grow the brand through additional channels like takeout.
We're ensuring we have the right systems in place that will sort of best support our operator's ability to execute at a high level, especially as dining rooms reopen.
And once we know we're consistently deliver and a great guest experience.
And our operators at from our operating at full volumes will move strategically to launch another virtual brand and.
<unk> at by the end of this fiscal year, we'll have a clearer line of sight and be able to share more details with you.
And.
It was in 2020 was of crazy year, but through it we confirmed that our strategies are working and that we have an outstanding team in the field and at the restaurant support Center every day to day demonstrate their ability to adapt for severe and wind as vaccines rollout and our country begins to leave their homes. Once again I firmly believe we will continue to win and with that I'll turn the call over to Joe.
Hey, Thanks, Wyman and good morning, everyone. Let me finish our prepared comments by providing some detail and context to our second quarter results as well as offer a few insights for our January of periods and sales performance and the <unk>.
Second quarter of fiscal 2021, Brinker delivered adjusted diluted EPS of <unk> 35.
Brinker as total revenues were $761 million and consolidated reported net comp sales were negative 12, 1% at.
A couple of items to note for the quarter.
First let me highlight impacts to the consolidated quarter, resulting from ASEAN is performance, which was highly constrained by COVID-19 restrictions and appropriate consumer reactions to the pandemic.
As a reminder for second quarter is traditionally their highest performing quarters. However, this year of Covid eliminated most of their typically robust banquet and corporate catering channels, both of which tend to over deliver to results for the second quarter.
The brands of operating profit was $22 million below last year constituting virtually all of the reduction and consolidated operating profit for Brinker.
The impact on consolidated comp sales and restaurant operating margin. We're also outsized with the brand reporting net comp sales of negative, 47% and our restaurant operating margin of five 5% down more than 11% from prior year.
With the second quarter now behind US we expect the impact from March on as to the consolidated performance of Brinker to be more muted as we head into the rest of the fiscal year, particularly as the brand recovers from both an improved operating environment and the implementation of performance driving initiatives.
Now moving on to Chili's.
The brand continued its relative strong performance, although also impacted by Covid restrictions during the latter half of the quarter.
Operating income for the brand was relatively close to last year, not only $1 6 million.
Chili's reported net comp sales for the second quarter of negative six 3%. This.
This result does contain a holiday flip which benefited the brand by approximately 100 basis points as Christmas moved out of Q2 and into Q3.
The brand continues to meaningfully outperformed the casual dining sector with our GAAP strengthening in both sales and traffic through the second quarter.
Traffic apps and the Nap index exceeded 20% throughout the quarter performance relative to the competition was strong throughout the country with double digit sales gaps recorded and regions from east to West Coast.
Included in the consolidated adjusted net income for the quarter with a tax benefit of approximately $2 4 million Pri.
Primarily driven by employment tax credits.
Of this benefit is of $1 $8 million catch up related to Q1, which was over accrued relative to our current expectations for our annual tax liability.
The consolidated restaurant operating margin for the second quarter was 10, 7%.
Most of the variance to prior year is the result of the lower than normal contribution for Mastriano, which impacted the consolidated margin by 130 basis points.
The leverage due to topline softening in November and December was the secondary influence.
And food and beverage expenses unfavorable year over year by 40 basis points, primarily as a result of menu mix and some higher costs from items, such as cheese and produce.
Labor costs were favorable 10 basis points with savings and hourly expenses.
Net by deleverage included and this performance is a consistent level of manager bonus compared to last year's second quarter.
We remain committed to retaining our restaurant leadership teams as they are critical to our success and both in the short term and at the operating environment returns to more normal conditions.
Restaurant expense was unfavorable year over year by 170 basis points, driven by top line deleverage increased delivery and packaging, partially offset by lower advertising and restaurant and maintenance expenses.
Even with the volatile operating environment at Brinker has delivered solid cash flow generating $130 million of operating cash flow year to date at.
For capital expenditures of $37 million or free cash flow for the first six months totaled nearly $93 million.
As I mentioned last quarter, we first use of our cash to invest and the business.
And at expansion is progressing with six new or relocated restaurants opened year to date.
We also continue to invest and restaurant re images technology and equipment to further enhance our guest experience and allow for better execution as our sales volumes, both on and off premise growth.
Our second priority is to pay down debt. So far during this fiscal year, we have retired over $66 million of revolving credit borrowings and plan for further meaningful reductions as we progress through the second half of the year.
As I indicated during prior earnings calls, we are strengthening our balance sheet by deleveraging to below three five times of lease adjusted debt, which we anticipate achieving next fiscal year.
From a total liquidity perspective, we ended the quarter with $64 million of cash and total liquidity of just under $658 million.
While we're not providing specific guidance for the third quarter due to the ongoing operational environment I do want to offer some perspective on January.
While the first week of January was negatively impacted by the holiday flip of Christmas moving to our third quarter top line results for Chili's strengthened as we move through the remaining four weeks of the period.
Underlying this performance is improvement and the net comp sales to a range of negative five to negative 6% for the last four weeks combined.
These results obviously include the impact of ongoing COVID-19 related restrictions, particularly dining room closures and are number three and four markets of California, and Illinois and <unk>.
During out these two markets the rest of the brand during the last four weeks of the January period showed record net comp sales of approximately positive 2%.
And again, clearly, indicating the brand's ability to perform and a strong positive sales manager manner with dining rooms open.
And also supporting the January results is the performance of its just wings.
As you might expect the brand does well in conjunction with sports and our ability to market on the delivery platform around major events.
<unk> highly incremental sales and set a number of sales records during the period.
Overall, we are hopeful for and improved operating environment as we move through the quarter with the opportunity to return to recovery level performance, we delivered and the early fall.
In March we start to lap of the initial pandemic outbreak, which we anticipate will create meaningful year over year positive net comp sales comparisons.
Looking beyond the short term volatility caused by the waves of Covid restrictions to the solid long term strategy being executed by our operators I'm confident as to what this company can deliver for our shareholders our focus and execution will enable our continued performance as a leader for the casual dining sector.
<unk> for the rest of this fiscal year and and the years ahead.
And now with our prepared comments complete let's move to your questions.
I'll turn it back over to you at a moderate.
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 do ask that while posing your question you. Please pick up your handset if listening on speakerphone and to provide optimum sound quality. Please hold a moment, while we poll for questions.
Our first question today is coming from David Palmer. Please announce your affiliation and then pose your question.
Thanks Evercore ISI.
Just a question on marketing to start.
How do you think youll end up spending money gross spending broadly at can be advertising, whether that's digital or TV or your email promotions.
How do you think that will settle out for you both as a percent of sales, but also the breakup between east and then I have a quick follow up.
Hey, David It's Wyman I don't know if I can give you the percent of sales number right now and again.
And with higher sales than we anticipated.
Those numbers are going to move around but I will tell you just as we think about marketing.
We were just thinking about of differently and not and the traditional sense as much and.
And so when you think about the <unk>.
Significant.
And reduction we've had and traditional media spending.
But we've offset that with.
Significant increases and digital direct and the support of our takeout and virtual brands through third party partnerships and promotions as well as fees. So we kind of look at that whole bucket.
And in some cases.
And if we're going to leverage our database more.
A lot of that shows up as comp expense, which doesn't really it and thats out of sales. So you wouldn't even see it and the P&L.
And we're looking at net sales so, but we are committed to of too much more of.
What we think is a forward looking approach to to marketing much more direct and much more digital.
Thanks and I.
And have another sort of forward looking one that hopefully you can give us some texture on that surrounds your third party brands.
For your virtual brands.
You you were testing a few.
There was a thought that perhaps one of those tests stopped happening I think goes on Flyers and pies.
But.
Perhaps you can talk about the pipeline of your virtual brand and what the stages are and how you think your world and if that sounds like you're now kind of maybe be unmasking.
It's just wings by having a co go out of the Chili's itself.
And so growth thing, but im wonder also those other brands in terms of the delivery side. Thanks.
Well first of all of it let's just talk about the unmasking comment because we've never been.
We've never thought it was important and this is through the whole testing process to keep these brands.
Secretive if you will that we want to be upfront with consumers about whereas you know who these brands or are sponsored by who actually is producing this product because we think that transparency is important and so.
So the process that we're going through is as we introduced the virtual brand.
And test first understand how viable at its how much.
From two primary aspects right, how big is the potential from a sales and a consumer's perspective, and then how operationally.
Executable is at in our restaurants.
So when we stop of test it doesn't necessarily mean that test was unsuccessful and it just means we're done testing.
And we could very well be have everything we and then no need to know to go.
But what we're doing is we're taking.
It's just wings and we're going to develop it further you know again, we've got it and the one channel. We're learning every day really how to maximize that channel and channel Joe mentioned.
And our first.
Sports season, really and and obviously that brand resonates well during sports. So we're we're pushing the marketing in and outside of the channel and then we're pushing to take out and.
And that takes and infrastructure build that requires.
Technology and support and then of marketing effort behind that but we want to build that brand out and then at the same time get our operations lined up for full restaurant capabilities as well as full takeout, both chili's and virtual brands and that's all happening now and as soon as we get that brand kind of further built out we will.
And look at the next brand and determined.
And when to bring that into the into the mix and that's the process we're going through.
Great. Thank you.
Yes, Thanks, David and good talking to you.
Thank you. Our next question today is coming from James Rutherford. Please announce your affiliation and pose your question.
Yes at Stephens, Inc, and thanks for taking the question I wanted to follow up on a comment that was made about the fully digital experience and test I think it was at Chili's can you talk a bit more about how that would look in the restaurant.
And whether this is a direct response of the potential pressures on minimum wage and.
And finally on that topic, the potential impact to margins at this rolls out to the system at the store level. Thank you.
Okay.
And so.
Well just to address the first question or the second question for US it's not a direct response to minimum wage at its a direct response to what we talked about.
Consumers have been looking for and we've been embracing and that's convenience and control over there.
Experience more and so what we've done is we've taken a lot of the technology that we already had and places like our tabletop technology and we've incorporated some of the new technology of the technology.
And kind of built through the Covid experience, which has a lot more to do with how you talk to consumers in that third at.
At their home and and other places and we've kind of linked debt more together. So basically you are able to if you're a family and you know you've got you know if you have small Joe and I know if you have small children are at James but you know Theres a window right you don't have an hour and a half you have a limited time and sometimes when you go to a casual dining restaurant, it's that front end that can take a look.
Longer than you'd necessarily like well if you've got your order ready on your tablet or on your phone and you walk into a restaurant when you sit at the table, we will our tabletop device will allow you to interact with it before the Servier and gets there soon as your SaaS and you ordered and immediately goes into the kitchen and your server sees at brings out the food starts the experience and and you're off and running.
Significantly faster you can close out at the same time on that device and you eliminate some of the kind of stretch points. If you will.
And that can come into and on occasion, if youre in a hurry if youre not we've got servers. There they will take your order and and bring your experience to you at whatever pace you want but it allows you to control that more so.
We're very excited about the opportunity to offer this to guests. We think it will pick up we think the table turns will be there. It will allow service to be a little more efficient all of those things are side benefits.
But they actually have implications for the restaurant on especially on a busy Friday Saturday night and yes. James is one of the things I would add just to the second part of that while that of all the specific digital connectivity. We're talking here is and designed from a labor model standpoint, while we have shot what we've found is we deal and a lot of higher labor stages technology does matter and technology.
<unk> will be helpful. So.
And this and the other investments we've made in and technology, probably will have a role to play as you kind of work your way through.
Higher wage.
The environment, So I think we're well positioned and and understand of that can be a piece of the of the equation.
And I'll, just say that technology.
And one thing to map it out it's another thing to make sure it's stable and running well and that everything is working because of again on a busy Friday Saturday night and of restaurant, if you're relying on that technology to be the backbone of your operations at can't go down you can't because you don't have a backup and and so that's why some of these things that sound.
Fairly simple or easy.
At the end of the day, you've got to make sure your technology and your infrastructure is solid because youre going to youre going to bank on it and the guest experience is really determined by how good you are delivering and that's what we're excited about kind of locking that down.
Sounds very interesting thanks for the help.
Thanks James.
Thank you. Our next question today is coming from Brett Levy. Please announce your affiliation and pose your question.
Great. Thank you and K and partners.
I appreciate the call.
We're going at a time, where obviously sales are going to be volatile and there is quite a shift and what's going on with the input costs. How are you thinking about not just the traditional but also the newer market of the newer prototypical units.
What kind of margin potential there is either.
You can see savings on the labor front, where the incremental costs.
And can get pushed aside or theyre, just going to become overbearing and.
Sure.
Do you think your new.
And experienced type units have the potential to actually expand margins and how greatly thank you.
Yes, Brad let me just let me make a few comments and then we'll take it from there again.
Everything we're seeing today despite the volatility.
Not changing our view of how we can grow margin and that's sort of topline.
Our new restaurants are well received as we open them, we're really pleased.
About the outperformance we've seen from the group that has come in so far this year. So again, it's of prototypes that plays well and a variety of markets I think it is going to work well for us to two to increase <unk>.
<unk>, it's all about really how do you take that average.
The upfront and that $3 million ish range into the mid threes, and we target and think about $3 5 million.
And <unk>.
AUC that that's where at the big opportunity lies to be of more efficient operation at the restaurant level as we as we get towards that so.
As we grow the base business as we connect digitally as we layer and virtual brands.
Those are all going to be key pieces of the equation and yes.
There are places that we will be more efficient and how we use technology to offset headwinds how do we make sure that our supply chain is effectively dealing with those markets all of the comes and to bear, but it is a growth strategy to manage margins as opposed to how do I cut to the bare bones and one of the things.
We saw on the second quarter as we went into a little bit more volatile environment.
It was obviously of deleveraging impact, but we also don't want to overreact, we wanted to maintain.
And our levels of spend that we thought were appropriate for what we thought was going to be a relatively short peer.
Period of volatility and we're not through the woods, yet, but we are back end recovery, but I think the comments I made about manager bonus of probably indicative of that and how we how we worked on and making sure we were still.
While being judicious.
Ride levels of.
R&M spend and and other spend that you could've quickly needs of our factory very dramatically just to gain a couple of tenths of margin. So we're trying to take a longer view.
Yes, the only thing I'd add Brett is it really is about systems, right and and what we're doing and what we've taken the opportunity to do and.
And a lot of restaurants, where at the capacity is down is put in systems that will allow us well and all of our restaurants, but in places where we're down it's a little easier to put in these systems, especially around takeout and delivery that will allow the restaurants, when we're back up and running and growing the volumes of Joe talked about to execute at a high level and thats.
How are we and that's how we're going to grow the business and with that will come leverage and better margins.
Thanks, Brett.
Thank you our next question today and it was coming.
Is coming from Chris O'connell. Please announce your affiliation and then pose your question.
Stifel, Yes, good morning, guys.
I had.
Just a follow up question on the margin.
Response, you just gave I am trying to understand how chili's segment restaurant margin moved quarter over quarter and it was and I think it was up 50 basis points for the prior year and the first quarter, but fell 80 basis points to the prior year on higher sales this quarter and so I was hoping you could just explain what drove that sequential change and performance and how we should be.
Thinking about.
Recovery and especially the labor dynamics.
And as sales start to recover.
Yes, yes.
Chris.
And talk to you.
And again, we're real comfortable with the way at Chili's is going to be managing margins going forward Chili's has actually continued early on and the quarter. So when I look at.
And the October time frame was expanding its margins I think the delta that took place and it was simply the COVID-19 restrictions and the volatility of of of.
Of those top line sales of came into play as you saw that.
And those reductions and that deleverage I think you've seen the.
The weekly as we gave you back in December and kind of moving for.
Pretty much a flat to.
Slightly positive comp into a down and the teens and it was just the quickness of the deleverage and our choice.
Again to maintain some of the casket and.
Cost dynamics, and we thought were important to the business for at coming out of recovery and again manager bonus Yeah, I think Chris if you just think of I'll, let's just take California.
The magnitude of the hit there has been significant as everybody is well documented right and so.
And we're paying those managers.
Really solid bonuses, even though their performance level and a typical environment wouldn't wouldn't that wouldn't happen right. I mean, if we were doing this off our typical hey sales and profit drive your margin your bonus payment they probably wouldn't be getting any bonus, but we're recognizing the need to keep these operators motivated to keep them in.
In the shop with us because we know this is going to turnaround its already starting to turn around and we need them there and so there's a little bit of that in the mix. So again, we're confident about where margins are going to play out and we've seen at as the business gets stronger I think if you just look at chili's in the quarter.
Even with all of that volatility of the margins are relatively flat.
So it's not it's not something we're overly concerned with at all.
We're actually very excited about the growth potential and how margins will then react.
Excellent. Thank you and then just one follow up how should we be thinking about.
The flow through I mean, the flow through is obviously very high with these virtual brands, how should we be thinking about changes to the potential flow through with these initiatives like takeout and some other things that youre introducing for its just wings.
And again, one of the things, we like about the virtual brands as the flow through and the ability to leverage the existing.
Structures and operations and management teams, we have in place.
Learning how to invest into those brands. So that's going to be a big piece of the equation, but as we make those decisions as to.
Right level of brand building spend and again these are younger brands and they will need nurturing and investment and and we want to expand and build those brands and a number of different platforms and and consumer access channels.
We're going to start from a pretty high level of flow through so we can so we're very comfortable with the ability to invest.
Back into those brands and I, just look at the base level of flow through that.
And that they develop.
Yes.
A little a little heavier on the front end and especially with to go very profitable on the on the back end as the brand gets established and we build that and we're just in that process of understanding okay. What's it going to take to get a little bit more.
Brand awareness out there.
Direct and and I think that's of Great point as we move.
From one channel right now and just some other channels there's opportunities there because you don't have some of the delivery fees associated with it to go and that's why that's why we're very excited not only about the growth potential of the.
It's just wings to go but the flow through of potential tier.
Great. Thanks, guys good talking to you Chris.
Thank you. Our next question today is coming from Andrew <unk>. Please announce your affiliation and then pose your question.
Hi, BMO. Thank you I actually wanted to follow up on some comments you just made can you share with us where the awareness is right now for its just wings and how that's been trending and.
And then when you think about brand building in virtual brands I mean, just kind of holistically, you've talked a little bit about marketing and.
Some of the channels that you might move into but just holistically. How do you think about building those virtual brands into brands with recognition of sustainability.
And the context of a category that obviously is getting more competitive and I'll ask competitive overtime and so.
And just how you think about standing out.
In that context.
All of the data we have again, we're primarily of one channel brand right now rights of our door Dash brand and so everything that's been.
Primarily I mean, there are some some PR and some other things that have been out there, but most of it's either word of mouth of your learning from it on door dash and and the growth and all of the acceptance and the repeat numbers are all of a positive and we're excited about how the brand is building. It's a limited channel at the Big channel and and one aspect of it but it's just one channel so as.
As we look to grow this brand more broadly we'll use the traditional marketing.
<unk> that you used to build any brands. So it'll it'll obviously as we've talked about at would be of more digital and more social approach.
But we will start to move people directly to and it's just wings website and get overall awareness and how we get them there will be.
Typical marketing activity that we already have a lot of history with in terms of of how to do that effectively.
You have to have the infrastructure in place first though so you have to of the technology and all of the ability to for people to map and get to that location and understand what it is just wings is and how to get there and that's that's all kind of being built and has been built now and so now we can start to push that debt that channel and we'll see how quickly we can build of Brandon and.
And where it goes.
And just on the.
Some of the investments that you're talking about more capital being put behind kind of other systems and some of those things on the digital side.
Or are you assuming.
Can do that and the way that's not going to impact the margin progression or where should we expect a little bit more choppiness of kind of taking aside the sales volatility.
Well from a capital standpoint, these investments are very small.
Relative to building restaurants, and staffing them and Youre talking about very small investments and technology and sometimes its end and materials like shelving and and so it's important but it's not expensive relative.
And so.
Again on the on the flip side of the expense necessary to build the brand as Joe talked about we're just going to have to see how that works.
And how quickly and how effectively we can do that we're confident that we have a lot of history and a lot of experience and some great marketers that can help grow this brand quickly and effectively.
But we will we will we will have more on that probably next quarter.
Great. Thank you very much.
Thanks, Andrew.
Thank you. Our next question today is coming from Greg Frankfurt. Please announce your affiliation then pose your question.
Hey at the Bank of America.
Wyman and Joe.
Question is on the news recently around minimum wages and tip tip credits for minimum wages and you guys are and a lot of states where wages are already at 12 to $13. Now are headed to 15 can you talk maybe that some of the experiences that you've had operating in those markets.
They're around price elasticity or.
Kind of what you've done around labor controls or new equipment that may be an indication of how you would handle.
And sort of a broader national minimum wage going up thanks.
Yeah, Greg I think it's a combination of all of those things right. So we are definitely leveraging technology and we put it in states that were.
And that we're experiencing higher labor costs that allow us to be more efficient also allow our servers and our team members to make more money because again the tip of the tip pool and that amount is and spread over fewer team members. So they make a lot of money and that's great.
We also then.
We're looking at ways to be more efficient and effective of round to pooling, sometimes and that opens up sometimes as you get into some of these higher cost situations that allow us to mitigate some of the costs that we may have to pay.
By helping lead and the tip of who will help.
At the heart of the house.
Wage rate if you will.
And then from a pricing standpoint.
We do see that competitively.
Especially.
Folks at can't do the things I've, just talked about they basically deal with this at from a pricing perspective. So competitively you have a little bit more room to price.
Interestingly enough, though and California, we have three for 10 out there and.
And it works fine and we've just built a model at that efficient and that effective and it drives that much traffic that the leverage helps us become.
And competitive now how long, we can afford that price point and that market I don't know, but its out there and it's been out there for a couple of years, even at the price and the wage rates have gone up so I think our scale really helps us in this environment and at the end of the day.
These things that that across the industry are going to be much more difficult for restaurant operators and again and our case that's half of the category that don't have scale.
The way you deal with this most effectively is through technology and through our systems and we have the ability to do that and have been doing that and we will we're excited about rolling some of this technology.
And to other markets fairly soon.
That's great perspective, and then I had one other question just on your.
Your thoughts on Chili's is potentially be at Chili's really hasn't been a very strong unit growth chain for a little bit of time are you seeing the pandemic as an opportunity to accelerate that and are you seeing the real estate market free up to kind of make that happen and.
And thats it thank you.
Yes, Greg I think again, we do think we are reaching a point and.
And the brand's evolution that we can.
Increase our our unit development and you got to remember we have also done a couple of acquisitions of franchise that have brought units back into the corporate ownership side. So.
And so we have grown the base.
Again, I think we've indicated we want to get up into that 1% to 2% net.
Growth on an annual basis I'd like it to be over time towards the higher end of that there is a pipeline and a process and we got great.
Folks and our.
And our development team is already working that yes, we are seeing some.
Some changes and the real estate market I think we are seeing.
Conversion opportunities at a much higher level, which are interesting because.
I'm seeing our ability to access and certain markets now that you probably wanted of had.
The same level of access to pre.
Pre pandemic, so I'm excited about that opportunity.
We're positioning the company so we can grow at that level for them.
And for both capital perspective and.
And at.
A team perspective development again, keeping and developing our leadership is.
A critical part of of.
Of that equation. So, yes, I think as we as we move really into 'twenty, three and 'twenty for.
And youll start to see that higher level of new restaurant develop.
Work its way into the system and that's one of the benefits of these acquisitions and we brought back territories that haven't been.
Built out as well or as effectively as as <unk>.
Texas.
And so we and we're now opening restaurants in these markets and having really great reception. So we're confident the.
That there is probably more green space out there then.
And then we had before for that reason as well and the strategy is also play today and again the ability to open.
Three and a half of $4 million of restaurant.
Gives you a lot more access to markets you want to be and that's it.
It's just a better model to have then if youre trying to open something at a significantly lower.
<unk>.
Thank you.
Thanks, Greg.
Thank you. Our next question today is coming from Robert Derrington. Please announce your affiliation and then pose your question.
Thank you Telsey advisory.
Joe and Wyman I'm trying to think about it as just wings and kind of a transition from being just a a brand that's on available through the door Dash app.
To being possibly available and other ways.
One thing that that certainly is a benefit of chili's in many ways has been the leverage that you have on the information that's received if I place and order through the my Chili's App.
The control that you can use that.
Within your rewards and your loyalty program is there some thought of as you move you add to go with.
It's just wings does that give you more leveraged at does it get you better access to information by which you can communicate with your consumer.
Yeah.
Absolutely Bob I mean again it fits of the model we have as you just spelled out and we have these infrastructures in place to do direct marketing very well, we will we will dips.
Deploy that against its just wings brand and create that the beauty of the brand. So far is that there is.
It's a fairly incremental guests to us in terms of it doesn't just overlay with the chili's guests. So it's a different occasion, it's a different user base and so it helps us broaden our base of users and again leverage all of the infrastructure and capital that we've already put in place, so and including leveraging on.
Our marketing capabilities and with with regard to direct so.
It's absolutely.
Key to the strategy going forward.
Is there a potential quick follow up sorry is there and the potential that you could add.
Possibly of loyalty or rewards program, it's just wings and.
And what areas do you have now of that consumer data that I guess goes through door at Ashford.
Okay.
And door Dash is a great partner they share a lot of information in broad terms.
Sure individual.
Guests.
Contact information.
We are working with them to be more of.
<unk> and to partner at a higher level with regard to trading and loyalty data or at least.
Giving guests the opportunity to become chili's loyalty guests through the door dash App and so we're working that.
That opportunity, but right now it's really it's more just general market information and so how do I know that debt the door at ash at just wings guests isn't the same as the Chili's guest book is door to actually helps us understand the broader on the broader characteristics of those two segments.
Terrific. Thanks, so much.
Thanks, Bob.
Thank you. Our next question today is coming from Jeff Farmer. Please announce your affiliation and then pose your question. Thank you Gordon Haskett you touched on a couple of questions I wanted to dive into but I didn't want to approach it from a little bit of a different angle if I could so what's the potential minimum wage increase.
Clearly and industrial focus I am curious what.
And as the hourly labor expense for.
For for let's say at Chili's, or just brinker and its entirety as a percent of total labor expense and then as a follow up to that.
And what is the average hourly wage when including the front of house workers that are potentially receiving.
Chip minimum wage and the states that allow them to do so.
They're looking Jeff to see if I can give you a number on the first question.
On the second question.
Average.
Tip server.
And is.
And in the $20 range again, it varies and California, it's significantly higher because there is no tip credit and they're at 15 Bucks. So you can imagine and California, there closer to 30.
Maybe a little bit lower than that and.
And the 213 states, but not not too far below 20, and we average.
Well into that.
Low to mid twenties.
Okay.
Please go ahead I'm sorry, when you look at Jeff when you look at labor expense.
Roughly two thirds of it is going to be on the hourly.
Side of the equation.
Okay. So.
Again in terms of this is almost sort of your editorial and thinking about this so.
Conversations with peers have been.
$15 looks like a long shot somewhat increasingly looked like in looking at like a.
Potential that it could happen, but that the tipped minimum wage was always sort of a bridge too far to the extent debt.
And the casual dining sector in particular is under a lot of pressure right now and then that's probably.
And that is unlikely to happen.
That's my that's my comment, but how are you guys thinking about it.
Yeah again.
Jeff.
This will be of debate I think it's going to be front and center for an extended period of time.
And this year than of all.
All of it and a couple of of minimum wage debates over the years and.
And they do tend to.
And be intense discussions there is passion and on both sides of the equation they tend to.
Extend over periods of time, and I'm not going to get into the various and sausage making of yeah.
Budget reconciliation versus regular order versus things of that and how that and Congress works its magic, but.
I think there is probably a decent.
Down the road possibility of.
Of a wage increase I think we have to be realistic and.
And our thinking to that I don't see that happening in the short run and we're going to focus our time and attention on.
On the specifics underlying that because again, it's a there is of complexity of the way of minimum wage works at the federal level and we're going to focus very heavily from our sector perspective on the chip side of the equation.
And then and effective.
Methodology on how that that legislation has worked and the past and we're going to continue to advocate strongly that that methodologies and be maintained and in some form or fashion. As we go forward that being said, we operate and a number of high.
The higher wage rates states that have their own on approach of things I think there's 20 or so that at.
After that side, including our number two three and four markets. So we're used to at large numbers of restaurants and higher wage states.
But it will be of debate and I think we cant we cant just assume things are not going to change and and we will engage and we'll be prepared as we kind of move for that but I don't see it.
Impacting this fiscal year, and frankly, and maybe not even in the first part of next fiscal year.
Okay. That's very helpful and just a separate follow up on California. So.
Obviously, the the mitigation efforts and that state has been one of the the.
The headwinds you face from a consolidated same store sales standpoint for for the Chili's concept, but what I'm looking for sort of and understanding or better understanding of of the case study, So obviously, California and.
And July.
Went ahead and reinstituted indoor.
On dining suspensions and then.
Remove those I think late August September depending on what part of the state. It was my question is how quickly things of that California consumer respond.
To the reopening of indoor dining very quickly.
Yeah, it's an immediate response.
And again at California's of a.
And when and when Covid is over and and you do the case studies of.
You know why.
State that closed restaurants still has some of the worst result, its just interesting right. So and it comes back it doesn't look like if you're running restaurants at the right way, it's not the it's not the it's not the driver of Covid and and in California and felt that that's some editorial from my perspective, but that said.
When we open up parking lots and.
And put tense and them and people at.
Lineup I mean, they're just dying to come to our restaurant and and eat and so and.
And get out of their house and so you can do that safely and California, they've I think overreacted.
And they've got of Covid problems, so I'm not I'm not dismissing that I just think there solution, which is really heavy on the restaurant business has been a non.
And not as effective obviously, because it hasn't really dealt with the Covid crisis.
They needed to so when they are they will start to see we've already started to see at the.
And as soon as they start to lighten up and open up even outdoor dining which is I think is usually the first step and then they'll go to some indoor.
See the immediate response, but California has been the biggest negative drag throughout the whole pandemic, because it's never consistently up and down the state and had a policy that has had dining rooms open at the same time throughout the state at any capacity level.
I appreciate that thank you.
And we're excited when they do because I agree with you there is some pent up demand and California.
Thank you. Our next question today is coming from Brian Vaccaro. Please announce your affiliation and then pose your question.
Thanks, Raymond James Good morning, Great to hear from you guys and hope everyone's doing well.
Wanted to circle back on it's just wings and in prior calls you, obviously mentioned the sales of around $3 million of weak or an annual run rate of over 150 email and could you provide a tighter update on the brands more recent sales performance either dollars or contribution to chili's comps and then what's the timeline on when you expect to take out <unk>.
And also be roads for the brand.
And Brian Let me talk to the first part of that.
The 150 annualized sales of our extremely comfortable with and and confident of that Theres been no deviation from the way. The brand has been performing that gives us any and.
And any doubt there and Thats, just and that's a number of talking to the corporate side of the equation. The franchisees of now embraced it and are starting to.
To perform nicely also and their own regard as it relates to wings and as I mentioned and Mike and my commentary, what we're seeing as we as we learn how to promote particularly around sporting events.
Nice interim mentality off of that.
And again.
There is a number of ways. We are now learning how to grow the brand of <unk>.
Market at how you tie at a different sporting events and now how we take it to other channels.
I think from a timing standpoint on well I mean, if you're in door at Ash today, you can and in some markets. It's already turned on and you can you can have that option now most people that go to the door Dash App, obviously youre looking for delivery, but we have we are.
Experiencing we have some guests today, who are in the door at ash world that choose to pick it up.
And so we're already out there.
With our system really testing the system, both external and internal that allows us to deal with pick up it's just wings guests.
We're in test markets and significant test markets with the infrastructure in place to allow the website of direct people to the right restaurant to pick it up and then.
At test is now <unk>.
Technologically.
And in place and now we will start the marketing aspect of it and I would think by the end of this year. We'll have this thing rolled out and moving is our goal.
Alright, thats helpful color and.
And one quick follow up sorry, if I missed it but what was chili's off premise sales mix in fiscal Q2, and the split between delivery and takeout.
Okay.
The split between delivery and takeout has remained relatively consistent kind of at a two thirds. One third split it's been interesting is this does.
There's the whole off premise channel of grew throughout the pandemic and between the ups and downs that is state of <unk>.
Relatively consistent and I want to say the overall mix continues to be and that.
And the high for nature of that 45 to 47 ish percent bouncing around.
Okay, and I would expect as you get some of these larger markets opening you'll probably start to see that.
Again and start to come back down again like we saw during the last laugh.
The last way of kind of accelerated.
Alright, that's all for me and I'll pass it along thanks again.
Thank you. Our next question today is coming from John <unk>. Please announce your affiliation and pose your question.
Hi, Thank you I'm with J P Morgan on.
A couple of questions. If I may 1st can we talk about the.
2% comp, excluding California, and Illinois, how widely.
Widely distributed.
Is that number and in other words, yes can we talk about comp performance and kind of some of the key southern markets like Florida for example, maybe Texas and and as you know some of these markets of that at 100% of seating capacity more or less and you back for customer usage and customers. In fact are in many cases using that capacity.
How are trends and those kind of markets and as you've reopened the dine in as for Dine and has have been open the longest of markets like that of what has been the overall trend and sales dollars of your off premise business and that's of follow ups too.
Hey, John.
First there are very few I mean to my knowledge.
States.
Of any.
And our geographical areas at our 100% dining room capacity.
And there maybe some folks who are pushing that but we're not we're continuing to abide by the restrictions and the guidelines and so.
So first of all of these numbers are still for the most part and a large part we're probably at closer to 50% capacity and.
And the breadth of that.
<unk>.
Result is broad it is it is across our.
Our regions both.
Southern and Midwest, New England on New England. So yeah, it's not a it's not like Florida is up 20, and everyone else is down five and now it's a fairly consistent pattern.
And with the typical geographical.
And the variances, but nothing dramatic it's of.
And which has got us feeling pretty comfortable about as Joe said, our ability to deliver positive comp sales.
And if we're doing that with 50% dining room capacities and and what we also see John just at a little more color is it why do we feel comfortable we're getting.
Sure.
We're definitely stretched on the weekends.
Weekends of where we struggle the most from a sales perspective, because we just don't have the capacity.
And so our comp numbers on the weekends or are more challenged.
Early week, where your capacity isn't as big of an issue.
Very strong.
Okay David.
And sorry go ahead, Jonathan because that's an interesting and it's been interesting to see and and a number of these other markets that have gone to constraints and restrictions and then come off of them how quickly the bounce back has happened again.
You see when you look at some of the mountain regions that have moved in and then back at it again, you get a return to what we were experiencing kind.
Kind of in that September October and relatively short order.
Okay. Thank you on.
And then secondly, one of the obviously the overall.
Driving themes of positive things and I think you've kind of touched on it and.
Sort of conversion opportunities that are of rising for you.
It's kind of consolidation of supply.
And certainly one of the hardest things for US is not just to look at it at a national or state level, but you know and individual trade areas like your own and you. Obviously you guys are over.
For whatever the last 40 years whatever it is now 50, I guess 40.
And I have done a great job of selecting real estate in other words and you know I think.
And generally chosen to locate chili's and trade areas that had gone up and value and not gone down.
How much effective supply and you know I can use.
And I guess at a specific term do you think has come out and the marketplaces, and which you compete I guess on of trade area by trade area of basis, I know I think listen I thought I'm asking for a number but it's a qualitative comment I mean, how big of a contraction do you think has actually happened at this point of where you say hey, let's not just number of restaurants, but the effect of supply and other.
Words sales dollars of core customer occasions whenever that may be.
Actually come out of the market that you might be able to capture some long term share from.
Yes, I think.
And again, it's difficult to pinpoint and you have to look at particularly when Youre thinking about conversion is the why is that available.
Is it just a bad location.
Eventually went away or.
Is it a of franchisee for instant or something that debt.
At the larger entity went away and there and had some good opportunities.
Embedded within it and so we've got a look very carefully at that.
And again, we tend to have higher <unk>, we tend to penetrate into a market a little more effectively than some of the competition. So I think there's some upside there, but again, we want to be we're probably more judicious about.
Looking at conversions to make sure that we're understanding what the real opportunity is there from a capacity standpoint, and I think that question is still open.
You see.
For instance of National Restaurant Association is right now they are there look at the world and they and they look pretty extensively through their state of restaurant Association of network down into the the breadth of the market and they you know they are talking about 1% and six restaurants.
Being closed and now how much of the stay permanently closed will say and I've seen.
And distribution numbers and.
A little bit below that.
They tend to look more.
Extensively into the the higher end.
Independent operator, which probably is a little bit more survivability two at so I think there'll be there.
And then again, it's at is site by site by site and so.
Other you got to be careful of that kind of the broad brush national look at individual at real estate markets and its non out if I ask the question and very helpful and I go ahead, sorry Wyman go ahead.
John I, just just to put some color.
Non out of six closures, we know obviously independents have been hurt.
More significantly and and they tend to not run as a group at higher volume and so I wouldn't so I wouldn't translate necessarily that same percentage into sales opportunities, but it's definitely going to be of different landscape.
Post COVID-19.
Thank you guys.
Yeah. Thanks, John can talk to you.
Thank you. Our next question today is coming from Jeffrey Bernstein. Please announce your affiliation and then pose your question.
Great. Thank you from Barclays.
Couple of question and just from a sales trend perspective.
And I'm just wondering what you think drove the sequential uptick in January I think you said down 5% to 6% well and.
Versus what we think it was like down 12% in December.
And I'm wondering whether you think the broader industry participated and that directional trend and.
And whether you think of stimulus or less political noise or how sustainable might that be just any thoughts on that and then and I had one for John.
Jeff.
And it's like clear, it's Covid I mean is this COVID-19 I.
I mean as restrictions come in.
We closed dining room, so sales go down.
We've been up the hill and down the Hill and now we're kind of going back.
And back up and up to a positive sales, yet and so and it's.
I'd say, 90% just restrictions and the reaction to the communities to the pandemic appropriately for.
And most part I would say.
Theres, probably some stimulus and this month, obviously theres those checks had been out and.
That's probably that Couldnt hurt it can't hurt when the government throws.
Significant dollars into the economy, so theres some of that and the mix but.
And we're seeing at pretty consistent trends. So we don't think it's the major driver and <unk>.
And I'm thinking about that I do think theres some stimulus there but.
Again, one of the things COVID-19 constrained at pretty much across the sector.
Gift card sales right. So you probably don't have quite as much of a gift card.
The impact that you would normally see in January so is there kind of some kind of offsetting factors there sitting outside of the whole COVID-19 impact.
Understood and then as you think about the kind of casual dining segment from a promotional environment perspective. It seems like there's less discounting like you said them and everyone is limited capacity of satisfy the customer. So why would you deep discount and so I'm just wondering how you think that's going to play out.
As we move through and beyond Covid. It seems like it's safe to say, it's more peers because I know you guys have talked about easing up on your LTE OS and the recent quarters and years, but just wondering.
And kind of impact.
And we've kind of got out of it.
Yes for us. It's we just kind of got out of that game are really under our third year now Jeff of what.
Chasing promotions at of casual dining level.
And our belief is it's kind of a lot more wasted energy and and it's not very efficient.
Pops, you out youre going to hit something every once in a while but all of the energy and effort and the brand.
And what I'll call.
Degradation going through those cycles can isn't worth the effort is kind of where we're at and so.
It's always it's always a competitive category, it's always going to be.
We just talked about you know the landscape will look different.
Post Covid and so we'll see how that plays into the mix but.
We're going to go after with the strategy, we've always we've been employing and especially the last few years, which is a strong base value propositions talking to consumers more directly and incentive of them that way versus some.
Broad thrown out and message.
It doesn't necessarily work very well.
Understood and lastly, Joe.
You mentioned, how you didn't want to necessarily give fiscal third quarter guidance.
And they will end during the second quarter, you were more comfortable to do so I'm just wondering directionally.
And whether you could look for any color on margin of our earnings if the comps were to stay at this down mid single digit level or it's just not worth even attempting.
Yes, it's not at Jeff I'm, not going to end to go there again as I indicated in my script, we do have some beliefs around recovery as we kind of move.
Through.
And as we demonstrated in the fall with some of the numbers you saw and we've talked about.
At that level of recovery has those positive directional impacts on things like margin. So.
And I'm looking looking forward to kind of.
And some of the near time.
Ability to talk about that at that kind of activity.
Looking forward to that thank you.
Thank you.
Our final question today is coming from Jon Tower. Please announce your affiliation and then pose your question.
Awesome, great. Thanks for taking the call at Wells Fargo. Just a couple of questions first on the it's just wings and moving to a potential of physical presence.
Is this a push for coal, meaning our consumers asking for this today or you essentially getting ahead of any potential demand in the pickup channel and.
Especially with the knowledge that the economics of more favorable to you versus say at traditional delivery transaction and then my follow up question is just I know there are a lot of moving pieces and the business right now, but I was hoping maybe you could help frame the long term margin and profit opportunity for brinker as a whole.
Perhaps even rep.
Referencing the margins relative to fiscal 19 levels like where do you think this business can move from where it's been in the past. Thank you.
Let me, let me take the back end of that first again from a margin perspective again, we're we're still very firmly of the belief as we've talked about this on the past that that we can grow margins and growth from that 19 level and over the course of the next.
Couple of years, that's the opportunity of getting taking of 3 million to $3 5 million ABB and that dynamic those will grow and that will grow margins.
And not pinpointing down at a specific.
Level, but it's definitely at at a higher mid teens kind of thought process is what we've talked about at and again as we move further down this path and get better insights we will.
We will start to give you that down the road, but it's definitely.
Nice upside opportunity.
At those level of.
And that Leverages the system very nicely and that is.
As far as yes, I think the push full it's interesting we're in a channel that doesn't really.
I mean consumers don't expect.
When they are and when they are and the delivery channel to pick up. So there is not a that's all of that's really that's the only segment that knows of its just wings per se. So.
But we know based on the strength of the product and the and the acceptance in that channel that there is broader.
Possibilities and greater consumer acceptance of the product so.
And I can't tell you that the people that are on door at ash today are saying, Oh, why can't I pick it up because they don't want to pick it up there on door debt because they want someone to deliver at primarily but we know that the brand itself and we know based on our history. I mean, if you look at the mix within Chili's World takeout to delivery Takeouts two to one so right so at the.
Takeout guests as a broader category and the delivery guests and our and our broader world. So we know that that is a there is a segment out there that have no problem.
<unk>.
And I just wanted to clear too John because you made of you made a comment in there of that as you move to physical location. So I just want to make sure Theres no misrepresentation of work, we're talking about pickup at at Chili's, but not not putting a.
And a separate physical location and out there.
Got it thank you and just a follow up on that the magnitude of the difference between of delivery transaction and the to go transaction is there any way you could help frame it and I think today the incremental.
Margins on and it's just wings transaction is somewhere in the mid <unk> and in the 40 day.
Flip to a physical pick.
Pick up transaction, how much better and that fee.
Well again I. Thank you.
Do you benefit from.
And if I break it into specific channels that you are talking about there you're going to benefit from not having to pay.
And the delivery costs and those.
And consequential there.
There are obviously, what we think are very well negotiated rates, but.
But those don't exist now and how you market into that channel and the cost of you put to make sure that there's awareness and understanding.
And at a website marketing through Google of doing things of that nature is another cost so.
All in and at its definitely going to be at more favorable flow through for that particular channel.
And it's and it's a it's a lower cost of the consumer as well right because they're not paying for those fees. So.
Those things are all kind of they're they're all positive.
Our price total price for the consumer and margin for us and magnitude will kind of TBD.
Got it thank you and good luck.
Alright, Thanks John.
Alright, well. Thank you everyone. We appreciate you joining us on the call today, and we look forward to updating you on our third quarter results in April have a wonderful day.
Bye bye.
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.
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