Q4 2022 Brinker International Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the Brinker International Q4 F. 'twenty two earnings conference call.
At this time, all participants have been placed on 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 Michael Ware, VP of finance and Investor Relations at Brinker, Ma'am the floor is yours.
Thank you Paul and good morning, everyone and thank you for participating on today's call with me are Kevin Hoffman, Our Chief Executive Officer, and President and Joe Taylor, Our Chief Financial Officer results for the quarter were released earlier. This morning and are available on our website at Brinker Dot com as is our per ads.
As our practice, Kevin and Joe will first make prepared comments related to our operating performance and strategic initiatives. Then we will open the call for your questions before beginning our comments I would like to remind everyone of our safe Harbor regarding forward looking statements. During our call management may discuss certain items, which are not based entirely on historical <unk>.
<unk>.
Any such items should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC and of course on the call. We may refer to certain non-GAAP financial measures that management uses in its review of the business.
And believes will provide insight into the company's ongoing operations.
With that said I will now turn the call over to Kevin Thanks, Mike and good morning, everyone.
With this being our first call since women's retirement I wanted to take a moment to recognize him as the leader of our great company for the past nine years.
Thank him for our many strategic accomplishments in addition to being a coach and a friend as so many brinker heads wyman lead growth of our brands significant technology improvements and developed an industry, leading off premise business I know he's listening and cheering us on so on behalf of our 62000 team members. Thank you Wyman for entrusting your legacy to us.
Pairing us for the future.
This organization has a solid foundation well known brands that have stood the test of time and ownership model that allows us to move quickly a strong leadership team and the most dedicated operators in the industry. During my first two months on the job I've spent a lot of time in the field with our restaurant teams and our above restaurant leaders to better understand their challenges.
And to exchange ideas on how we can accelerate the business together.
I'm happy to share they are hungry for growth and they have great ideas on how we can make running restaurants easier more profitable and a better experience for both our team members and for our guests and while I'm, forming our longer term growth strategy with our senior executive team in order to deliver better results over time, we must deliver meeting.
Improvements to the four wall economics of owning a chili's in owning <unk>.
So we're working quickly to identify the things we can do to grow the business sustainably improve the guest experience reduce cost and complexity and implement more strategic pricing, which will in turn expand restaurant margins and grow profits. Our evolve pricing strategy will include providing focused everyday value for guests who needed, but we will.
Move away from frequent and deep discounting we.
We will also right size of the mix of everyday menu items offered on deal, but we'll make sure. There is something available for the cash drop customer who needs a superior value to enjoy casual dining.
We will also do a better job of recovering expenses for inflated commodities as well as the added cost for delivering chili's <unk> and our virtual brands.
I have chartered to teens as senior executives to make quick interventions that will build momentum in our business. One team has dedicated a near term ideas to drive sustainable and profitable sales layers. There have been charged with identifying customer insight driven sales opportunities as well as bringing exciting new initiatives to our dining rooms.
To help accelerate traffic recovery.
Other team is charged with simplifying operations. So we can improve our guest experience, we will take unnecessary cost and complexity out of the business, which will free up labor to reinvest in the things that will help us win with the guest.
The team is looking at all aspects of operations from focusing the menu to streamlining back of house prep to eliminating time consuming process that doesn't add value to our guest experience. We shared some of those early ideas with our operators at our annual Chili's General manager Conference last week and I have to say the team is very excited to get after it.
I've also asked our chili's executive team to refocus the portfolio of projects. We are working on to prioritize the most important and stopped the ones that won't have a meaningful impact on our core business I'm very pleased with the progress we are making on our prioritization front.
As for our longer term strategy. Our biggest opportunity is also to focus on the core Chili's business, we must identify how our brand can uniquely add value for guests and a modern relevant way strengthen our positioning within casual dining leveraged technology to remove friction for guests and team members and continued to reduce unnecessary.
<unk>, all of which should lead to a better guest experience higher sales and stronger for all economics.
I'm also very pleased to share that we brought on Georgia Felix is our new Chili's, Chief Marketing Officer, George is known for taking well known brands and reminding customers what makes the brand special and a contemporary relevant way. He is currently working to define our north star positioning in the market, which will help us make strategic choices on marketing as well as help guide us on where to focus operations.
And improve our guest experience.
Excited that George is already making an impact with several of our sales driving and simplification initiatives.
As for Marciano, it's on a good trajectory the improvements we've made to both off premise business and removing cost from the middle of the P&L. During Covid has allowed the brand to emerge much stronger marciano menu travelers off premise exceptionally well and now that dining rooms are coming back we have lots of runway for growth I couldnt be prouder of the work that Steve Provost.
And his team have led to get <unk> through the pandemic, which I would expect we'll continue to be a source of growth for our business.
We find ourselves in interesting times with the inflationary environment, a dimmer economic outlook and a wary consumer I am confident that the interventions were putting in place today to simplify operations to win with the guest to implement more strategic pricing.
A lot of sales driving initiatives and to take cost out of the business will help us fight through our near term challenges. They will also build the momentum we need to put the business in a stronger position for longer term sustainable growth now I will hand, the call over to Joe to walk you through the numbers go ahead, Joe Hey, Thank you, Kevin and welcome to the quarterly earnings calls and good morning, everyone.
As detailed in this morning's press release Brinker reported total revenues of $1.022 billion for the fourth quarter of fiscal year 'twenty two.
Consolidated comp sales for the quarter rose three 1% as pricing and mix increases offset negative traffic.
Fourth quarter adjusted EPS was reported at $1 15.
And let me unpack several of the pieces from the topline through the bottom line results.
As a reminder, we had a 50 <unk> week in the fourth quarter of fiscal 'twenty, one which impacts the year over year comparison of revenues margins and EPS for the recently completed quarter and fiscal year our.
Our restaurant comp sales are stated as 52 week comparisons.
At the brand level Chili's comp sales on a year over year basis were positive <unk>, 3% lapping fourth quarter comp sales of 59, 8% in the prior year.
Looking at sales performance relative to the pre Covid environment fourth quarter average weekly sales of $59 5000 were up four 5% when compared to the fourth quarter of fiscal 19.
Traffic was negative at chili's for the quarter and decelerated throughout as some guests appeared to react to the challenging inflationary environment, particularly during the weeks of very elevated gas prices.
We also experienced approximately a 1% negative sales impact to the quarter. Some restaurants, we're not able to fully open dining rooms, particularly at peak times or had to throttle back online orders, giving limited staff availability.
I would note that chili's traffic trends since the end of the quarter saw a sequential improvement into August although they remain in the mid single digit negative territory.
We did see positive sales and traffic in Chile's dining rooms for the quarter as guests returned to more normal diet and routines at the same time, they're off premise channels remains strong constituting approximately 34% of sales during the quarter.
Marciano has continued a solid recovery posting positive restaurant comp sales of 30% for the quarter driven by positive price favorable mix and strong traffic from the return of their dining room guests.
When compared to pre Covid fourth quarter of fiscal 19 average weekly sales increased seven 3%.
Fortunately the post COVID-19 level of the off of the brand's off premise business remains intact at above 20% of sales, providing a meaningful avenue to improve guest frequency as the brand moves forward.
Drinkers franchise and other revenue increased year over year due to incremental gift card breakage and increased banquet revenue related to <unk>.
Moving further down the P&L, our fourth quarter restaurant operating margin was 10, 3% down from prior year due to the magnitude of inflation, we experienced throughout the major category at the restaurant margin.
Restaurant margin was also negatively impacted by approximately 80 basis points from lapping the 50 <unk> week of the prior year.
Food and beverage costs as a percent of company sales were unfavorable 310 basis points compared to prior year.
As you might expect this was driven by higher commodity costs with inflation hitting close to 15% for the quarter a high for the fiscal year.
Every major commodity category was negatively impacted with poultry being our largest year over year increase chicken mix is high across our menus with approximately 52% of our overall protein mix exposed to the high cost dynamics of the poultry market <unk>.
Fortunately, we are now starting to see steady cost reductions for chicken working their way into our supply chain.
Trend that has the potential to create favorable cost comparisons as we move further into the fiscal year.
Labor for the quarter was unfavorable 70 basis points, primarily driven by wage rate increases and the 6% to 7% range additional hours utilized in the restaurants as we incrementally staffed our dining rooms and continued elevated levels of training expense for new team members as a result of higher turnover rates than we traditionally.
Experience.
Restaurant expense was unfavorable 280 basis points as higher energy prices inflated, our utility expense and we experienced higher rent and increased repair and maintenance costs.
Also lapped a onetime advertising related credit of approximately $6 million taken in the fourth quarter over the prior fiscal year.
Operating cash flow for the fourth quarter and fiscal year remained strong with $41 million and $252 million recorded for those timeframes respectively.
Adjusted EBITDA for the quarter totaled $100 million bring.
Bringing the fiscal year, adjusted EBITDA to $355 million.
Now turning to our outlook for fiscal year 2003.
This mornings press release included several target ranges for our current fiscal year.
Our cautious view of economic conditions, particularly for our value oriented guests reflects negative traffic expectations in the low single digits for chili's.
We believe the significant headwinds from commodity inflation will lessen as we move through the year.
And that could continue for a period beyond the current fiscal year.
Our year over year increase in food and beverage costs are forecasted to be at their highest point almost 400 basis points in the current first quarter before narrowing midyear and turning favorable year over year by fourth quarter.
For the year food and beverage costs are expected to be up in the neighborhood of 100 basis points.
For the full year, we have the following expectations revenues in the three 9% to $4 billion range.
Capex in the $155 million to $165 million range way.
Weighted average shares in the $44 million to $45 million range and annual adjusted EPS in the range of $2 45 to $2 85 for the fiscal year 'twenty three.
As it relates to pricing we are planning near term pricing actions at both brands Chili's is expected to exit the first quarter at close to 8% price a level the brand will maintain throughout the fiscal year.
Marciano is will exit the first quarter in the mid 5% range and is anticipated to average closer to 7% for the year.
Regarding restaurant development schedule for our current fiscal year has slowed somewhat as several anticipating openings have pushed into fiscal 2024.
We now anticipate opening 19, new locations during the fiscal 'twenty three year.
Let me provide some insights on quarter one.
Our current first quarter is likely to be the low point of our operating results for the fiscal year as we work through the cresting of inflationary pressures for our brands.
With that in mind, let me provide some specific insights for the quarter that also help define the expected meaningful positive progression of operating performance as we move into and through the remaining quarters of the year.
As is typical we expect the first quarter to be our lowest revenue quarter generating between $920 million and $930 million of company sales for the period.
The year over year impact of inflationary increases for the first quarter will increase costs in all the major categories of restaurant margin.
Food and beverage expenses alone are expected to be up more than $50 million for the quarter.
When combined with the lower revenue of this quarter, we expect restaurant operating margin to be between four 5% and five 5% for the first quarter.
This restaurant margin will result in an overall operating loss for the quarter with a negative operating margin expected in the mid 3% range and first quarter adjusted EPS estimated in a range of negative 70 to negative 60.
While we anticipate a disappointing start to the fiscal year, we maintained clear line of sight to meaningfully improved operating performance throughout the year as the incremental pricing lower food and beverage costs and sales driving initiatives all kick in during subsequent quarters.
On behalf of the Brinker leadership team, we're pleased to have Kevin on board.
He has quickly focused the team on simplifying operations, improving four wall economics, and driving growth in the core business.
I am confident this will not only move us through the current more difficult operating environment in better form, but we will provide the foundation for sustainable long term growth and better profitability for brinker and its brands.
And with my comments now complete let's turn it back over to Paul to moderate your questions.
Thank you ladies and gentlemen, the floor is now opened for questions.
Any questions or comments. Please press star one on your phone at this time, we ask that while posing your question. Please pickup your handset of listing on speaker phone to provide optimum sound quality. Please hold while we pull for questions.
On the first question is coming from David Palmer from Evercore ISI, David Your line is live.
Thanks, Good morning.
Just a question on strategy.
You talked about some opportunities to improve the economics of the four walls with perhaps pricing being a part of that but.
Wondering more about the investment areas that you see as an opportunity is that is that labor is that marketing.
How are you thinking about ways that you can improve that guest experience that you were talking about and drive sales in your highest margin business.
Yes. Thanks for the question David So so we're thinking about in two ways. One is there is some short term interventions that we have to make that we just can't.
We cannot wait to make those interventions based on where the business environment is now and so what I've had the team working on is the short term wins and then we'll talk a second about what we're doing from a longer term basis. So.
I haven't I have charged the team with how do we improve restaurant margins quickly and.
And obviously the number one thing is grow comp store sales. So we've got a growth team that we spun up that is looking at what are different areas that we can quickly grow the business.
Kind of mutes some of the headwinds of traffic that we've seen.
Obviously, a strategic pricing, which we talked about in our prepared comments.
There is a significant reduction in discounting that we're working on that's in a couple of areas. One is we give away a lot of free food and our my Chili's rewards there is probably a better way to do that.
And still maintain the traffic that that drives without constantly giving away free food every week.
As well as redoing some of the value sections of our menu. So that we don't have so much of our menu mix on deal, but still have very attractive exciting offers on whole meals for that guest that's cashed up that otherwise couldn't enjoy casual dining.
Then we're also working on some cost reductions that will also help with also labor with simplified simplification in the restaurants, so specifically.
Yes.
Eliminating low mixing or redundant menu items, eliminating redundant pantry skus that are in the back of the restaurants.
Removing unneeded dishware, which will help with both labor as well as some cost of small players.
Eliminating unneeded process.
That happened that don't really helped the guests, but end up being.
Literally years of labor hours annually that we are spending money on and then reducing administrative work in the back of the restaurants, it's not helping the guest.
Also we're working on some new item innovation to drive traffic, which I am excited that youll see in the next couple of weeks start to rollout.
It will also help drive some traffic and our bar.
And then the last thing that we're doing is updating our strategic loyalty program.
To drive more traffic.
Reducing some of those discounts I was telling you that's kind of the short term interventions that we're making are meeting with my leadership team off site in the next couple of weeks that we're going to talk about what are the big things that we need to do over the next few years to unleash.
Both restaurant margins and accelerated growth for our business and I think those are the big discussions on labor and equipment and all the things that we need to make long term improvements in the guest experience I hope.
We're ready to surface with those interventions are that we'll be able to share them with all of you.
Thanks, I'll pass it on.
Thank you and the next question is coming from Nicole Miller from Piper Sandler Nicole Your line is life.
Thank you so much one for you Joe first and then I have one for you Kevin as well if I can sneak it in but Jim.
You said something about dining rooms, 34% can you just can you walk us through please.
The fourth quarter or even for the year frankly, it doesn't matter the construct.
The revenues for the dining room off premise and I guess kind of the.
Everything else bucket, but it would be nice to get it to its just swings.
Yes, Nicole.
I think the commentary referring to it was 34% in the fourth quarter at Chili's sales mix was off premise, which is relatively cat with Ofcom.
That was off Graham we did see.
Slight traffic improvement and positive comp in the dining rooms for the quarter Youre starting to see I think a little bit more of a <unk>.
A normalization of that dine in experience.
The relative mix dine into off premise has remained relatively consistent in that kind of two thirds, one third mixing area over the course of the year.
Perfect just trying to match that up with.
What margins might be in those channels and then.
Kevin can you talk about.
You know the customer base you have today and as you think through the strategy options and totally understand youre thinking through them is it changing that mix is it changing the frequency.
Both like how are you thinking about that.
Well, we have to start with just who our customer basis today, it's pretty it's pretty broadly spread out so its not like were overrepresented with low income guests are high income guess, it's pretty.
Much representative of the casual dining population and so we.
We have to play a barbell on this number one we have to make sure that that low income guests that.
It is extremely extremely cash strapped, how do we make sure that we have offerings.
Everyday menu that they know they can get an affordable meal at chili's and be excited about that and continue to come in on the flip side, we've got to mitigate how much trade down that we get from our guests that can afford more as well as start to innovate. So that we can drive both check and traffic with that guest. So we think there are a lot of opportunities both in terms of food innovation.
As well as in drink innovation to drive a higher check guest check as well as drive more traffic with those guests.
Thank you.
Yeah.
Thank you.
Question is coming from Chris <unk> from Stifel. Chris Your line is live.
Thank you good morning, guys.
Good morning, a question for <unk>.
I had a question for Joe and Kevin.
Kevin I'm interested in hearing your assessment of the virtual brands and maybe how important you believe those brands will be to the company's future growth.
Yes. So so let me just start with virtual brands will continue to play a meaningful role in our business. I mean, there are currently about 6% of mix. So.
They are a part of our business now.
That said, we do need to rightsize, the time and attention and investment.
A sales layer that 6% of the business. So specifically we have to make sure that were right sizing the amount of incremental pantry SKU ingredients that we need to service. These brands for example on the <unk> virtual Brent. It's currently 26 unique skus to service about 2% of the business.
That is just too much right. So we've got to make sure that we cut that number probably about more than half. We think it can retain most of the sales mix on that business, but make it a whole lot easier for our team members to run that that part of the business as well as mitigate a lot of the food waste.
Shows up in cost in our business of the opportunity on its just wings.
It's a lot less in terms of simplification because it was designed I think exceptionally well.
Mary within our kitchen, Theres really two things, we're working on and that brand. One is we have a smoked wing on that lineup that is extremely low mixing it provides a lot of food waste.
We think that most of that volume will migrate back into its just wing. So we think that we can improve the P&L.
It's just winked by eliminating that item. The other thing that we're working on and it's just wings is because a lot of those orders come in a very tight window and typically it's during that kind of busy dinner service, we get kind of stopped up sometimes on zone, one which is our <unk> zone and so we've got to make sure that we figure out ways to build capacity in that area because I think.
It's just wings as well as in the Chili's business that zone, one will be a source of growth going forward. So we're working very closely with our operations team and understanding how we can free up some capacity in zone. One the other things that we're doing to grow the business, we're going to take pricing on virtual brands as the vast majority of business goes out to delivery customers, who are much more focused on <unk>.
<unk> are willing to pay for that convenience I know that from my Pizza days and then we are going to be taking some of the virtual brand investment and putting it back on core chili's.
If you just look at the numbers even in just off premise core chilis does roughly five to six times the business and our virtual brands and so we think there's also opportunity not just in the virtual brands, but growing off premise on the core Chili's business. We also have some growth ideas for virtual brands. So one of the big ideas that I'm really bullish about that we're going to be rolling out next.
Weak is taking all of the it's just wings wing flavors, and curly fries and putting them on core chilis and if you think about that core chilis does about two four times the sales of its just wing. So why not take these amazing flavors in these amazing curly fries put them into the chili's business as a premium at the bar, we are very bullish on what.
That could mean to the business and likewise, we have an amazing we call. It the chicken crisper to chicken tender of why not take that product on chili's put it into its just wings to create a meaningful business and that business chicken tenders in the chicken segment is a lot bigger than chicken wings. So we think we will probably never sell more chicken tenders and chicken wings on it's just wings, but we think.
It could be a meaningful source of growth without any new incremental skus or incremental training or incremental process for the back of the house. So we're very bullish on being able to leverage some of the great items on its just wings on core chili's as well as doing it vice versa to growth both businesses.
That's helpful. Thank you.
I just had another quick one for you Joe It looks like the company expects earnings to increase about 18, 19% for the last three quarters of the year, assuming the midpoint of your guidance for the first quarter and the full year.
That about right and are there any unique things thats going to drive that growth.
Yes, it definitely is a forecast that that obviously it starts off in a negative position of ramps up quickly as we move through the last three quarters, a number of things obviously the pricing initiatives. We've talked about the elimination of discounting has an incremental impact as we move through the fiscal year the commodity.
The inflation cycle cycle in total, but specifically the commodity cycle, we see materially improving as we get through the <unk>.
Year, and actually turn to two a year over year favorable dynamic as we move into that fourth quarter. So yes that hockey stick is in place and we have a pretty good line of sight to it too and I think you are kind of hitting the dynamics based on the points of.
Guidance that youre.
Referencing so yes.
Great. Thanks, guys.
Thank you. The next question is coming from Jeffrey Bernstein from Barclays.
Jeffrey your line is less.
Great. Thank you very much to.
Two questions.
Kevin.
Obviously, that's coming from the industry.
Leading the team.
Wondering if you could maybe talk about the differences you see.
Between running a <unk> versus a casual brand and see.
Our franchise system. This is primarily a company operated systems could you talk about maybe the.
The lateral implications of the potential synergies that you see.
What youre greatest strengths are as you make that transition from one type of the business to the other.
Well.
It's a great question I'd start with some of the real positives that I see the fact that we own most of our one of our restaurants has allowed us to move a whole lot faster I think than.
We would be able to do in our franchise system and we need to make some quick interventions and so.
The teams have really responded well and it's allowed us to move very fast I think as we get further down the road in terms of the technology improvements and one of the things that I'm talking about with our leadership team is what can we use technology to do to make it both a better experience for the guest as well as <unk>.
Some of the work out of the team members hands in.
Where we own most of our own restaurants that gets a whole lot easier to test and roll out a whole lot faster it and technology as you know and everybody that covers the industry is.
Where everything is going right. So.
I think thats going to be huge advantages for us I think there are some things that can bring from kind of my <unk> days.
I think can help the business I think more strategic pricing I think <unk> does an exceptional job of understanding how do we make sure that the great values that we offer advertising drive traffic and so we need to make sure that we have industry leading value.
With our <unk> program that starts at 10, 99, and yet my experience because we haven't spent a whole lot of <unk>.
Dollars on it.
Lot of customers don't know about it right. So one of the lessons <unk>.
If you're going to have a great value going to make sure that you talk about it and quite frankly been a little bit of invisible and our business.
Last few years, and we need to get back on air once we're ready to do that so that's one example, another thing I think that we can bring is how do we manage.
The merchandising of value and the merchandising of items at the restaurant level to make sure that we're driving as much check and trade up as we can as well as minimizing trade down and I think these are very obvious opportunities that I've seen early on and that we're working on and I think youre going to see improvements in our restaurant margins because of some of those learnings I'm, bringing from <unk>.
Understood.
Just because of the fact that you come from a portfolio of brands.
I was wondering whether you could offer some thoughts on how you see brinker best positioned.
You look back a decade, or so and brinker had eight or nine brands now running two along with a couple of virtual brand, but I'm. Just wondering how you think about our portfolio versus single brand approach, whether you have any views on that as you look forward.
Yes, I don't have I don't have a perspective on that now I know, that's probably not the answer that you want to hear I'm really focused on improving the four wall economics, both chili's and <unk> and that's really what I have kept the team focused on right. Now obviously, if we can do that successfully that opens up a whole lot more opportunities in the future for whatever we want to do in terms of the long term.
<unk>, but it starts with making sure that we have very strong restaurant margins in four wall economics, because we own all of these chili's and <unk> and that's what I'm committed to doing with the team.
Okay.
Understood. Thank you best of luck.
Thank you and the next question is coming from Andrew <unk> from.
From BMO, Andrew Your line is live.
Hey, good morning, Thanks for taking the question I just had.
Two from me first is a follow up do you have a sense based on obviously the cost environment pricing that youre talking about some channel shifts that have occurred over the last couple of years do you have a sense for what restaurant margin this business should be able to achieve.
As you are a goal in mind as you kind of work towards implementing the strategies that you've talked about and then my other question is just on capital allocation priorities.
Obviously, no buyback in the guidance, which is not unusual lower capex. It sounds like some delays on the unit growth. So I'm just curious should we expect any changes there kind of over time and is accelerating unit growth, which I know has been in the plan because that it makes sense now.
Yes, So let me let me take the restaurant margin question, and then I'll kick it over to Joe.
On the Newbuild question so.
So we're in the we're kind of in the low double digits right now I think between 10 and 11% restaurant margins.
We think that we can probably get to the mid teens now I don't I don't know I don't have a specific timetable exactly on when so.
But when we look at.
I think we can get we can get a couple of points when we think about strategic pricing and reducing discounting and then we think about operational <unk> and leverage if we can get the business growing I think mid teens is achievable and <unk>.
And that's where I'm going to have the team focused on I think if we can get to those numbers certainly it's going to unlock a lot of value for our business and that's what I have the team is laser focused on.
And I think that that.
<unk>.
It goes right into the capital allocation nicely, because obviously that that will feed future capital allocation discussions as we go Andrew Youre right. This year capital allocation is pretty straightforward. We're focused on the capex dynamics that $1 55 to $1 65, which is that the same buckets, we've typically seen.
And they're from development to re image to obviously, a big chunk of that is.
Return maintenance expenses within the current fleet and so it's a fairly straight forward and typical construct on the.
The capex side of equation.
Newbuild construction has slowed somewhat the markets.
A little bit longer.
Timelines on some of the construction you have seen some.
Increased costs, which has caused us to pull back in different places.
Make sure that we are if we're constructing we're constructing within a dynamic that we think we can get a good return and we've been pleased with the restaurant development. We've done the last couple of years and the operational performance of that cohort. So yes, I'm comfortable as we kind of move forward continuing the restaurant development. We think it is a great opportunity.
To provide.
Some incremental growth into the equation as we go forward, obviously, improving the four wall economics is one of the best things. We can do to continue to bolster the performance return of.
Not only the existing fleet, but.
These new new builds as we move them forward. So so we will continue our new mail piece of the equation.
The other pieces of capital allocation down the road.
Obviously, we will.
We will look at those opportunities based on the performance.
The overall company and the cash flow generation so.
That's kind of where the near term is with the opportunity down that down the road.
Great. Thank you very much.
Thank you and the next question is coming from Brian Mullan from Deutsche Bank.
Brian Your line of life.
Okay. Thank you just a little bit of a follow up on on development. The 19 that you are going to open. This year are these the ones that are simply under some form of construction now in Europe .
Pausing a bit for the rest of the time all the operations get tightened up or is that not the case.
A little clarity there and then Kevin will be great to hear your longer term thoughts on Chili's development opportunity, how you're thinking about over the long term and do you need to see those mid teens restaurant level margins restored before you'd really want to lean in there aggressively just any thoughts on how youre thinking about it.
Brian , Yes, I think thats not a bad way to think about it it's not universal.
As to.
Where we've gone from the higher <unk> that we talked about down to 19, but we have pushed back some have pushed back just on the.
The timelines that it's taking to develop and open a new restaurant, but we've also pushed back starting times for development and things of that nature. All of those 19 are.
In the process, so youre talking about.
Committed leases and in most cases some level of construction starting with that so it's most of those openings will take place in the first half of the fiscal year couple of as you kind of move into the early part of the of the second half and will continue to then develop what that pipeline looks as we move more into the.
<unk> 24 time frame and we can communicate that as we kind of go through the.
The rest of this fiscal year.
Yes.
To answer your question, how I think about development I think it's kind of twofold one is.
As we as we complete our Northstar work about.
What is worse chili's positioning in the marketplace I think that will help us think about what is the nextgen <unk>.
Chili's looked like so obviously, it's maybe it's not as big a dining room space and it's optimized for off premise.
We certainly can optimize the kitchen, if we understand the northstar better that will create obviously lower build costs and then concurrently we can improve restaurant margins.
That will obviously accelerate paybacks right. So.
In order to answer your specific question of like are we waiting to get to mid <unk>.
Mid double digit margins to start to start accelerating builds again, it's hard to answer that question until we get into the details of how much cost can we take out of the building based on a next gen chili's as well as how fast we accelerate margin improvement but.
I do think the fact that we can get to better margins. The faster we can return to building again.
Thank you.
Thank you.
The next question is coming from John Glass from Morgan Stanley John Your line is live.
Thanks, Good morning, Congratulations Kevin Great to hear your voice.
First Kevin I, just wanted to maybe sort of put together the pieces as you drive.
We're endeavoring to restore traffic, we're talking about strategic pricing, you're talking about reducing the amount of discounting those generally don't coincide with better traffic.
Our analysis, the discounting and the promotions that my Chili's rewards just did not drive traffic. So we're moving them is not an impediment to restoring traffic. How did you how do you make that decision and why do you think there is at risk of further degradation in traffic if you win some of those promotions.
Yes, well as you know John Theres lots of different ways to drive traffic right and one of the things I think we need to evolve overtime is driving the right. The right traffic that is sustainable growth versus traffic for traffic sake. So.
So let me give you a couple of thoughts of how I'm thinking about driving traffic, which I think is kind of at the part of your question.
We have seen that low income customer start to visit less often which is why we've seen those traffic trends turned negative.
We are implementing several initiatives to claw back as much of that traffic back. So the first thing is on that low income customer that I think youre kind of referring to when you're talking about the ability for those discounts to drive traffic and we simply need to do a better job of talking about the unbeatable value that we have on our three for me menu and so specifically you can get.
Chips and salsa, a burger fries unlimited soft drink refills and it's just 10 99, and we have a few other entrees that start at that price point too and I would tell you we had a.
It was like a famous broadcaster Jetblue is on his radio show we didn't pay for this or you just kind of went to a chili's in encino and just raved about how much food he got from.
At $11 price point from Chili's and Theres two observations from.
And then he talked about it for the next couple of days and brought another celebrity in with them.
First one is we have an unbeatable value at a time that customers needed the most.
And that was clear just hearing him rave about the amount of value that he got from that three for me deal, but the second thing that tells me is we have to do a much better job of talking about it. So our guests are aware of that value right. So we have a great value in the in the restaurant today, we don't plan on getting rid of it anytime soon and so what are the things that we can do with our limited marketing dollars to make sure that we're driving awareness of the.
Right now we're spending our limited embarking dollars primarily either on talking about three things that are available.
My Chili's rewards.
We're focused on digital off premise and the virtual brand. So I think there is opportunity right there.
Second thing that we're doing is we're launching.
And what we're calling the raise the bar initiative to reignite traffic at the bar, which we think will spill over into the dining room too so.
So the raise the bar initiative includes a completely new drink lineup of new bar food lineup.
<unk> that's available every day.
The launch of NFL Sunday ticket into our restaurants, which will drive traffic via sports viewership beyond NFL Sunday ticket. We're looking at other things that we can use outside of football season to help driving traffic. Obviously those are more full revenue guests that we can get in to enjoy food and drink and then we're going to reboot. The my Chili's rewards program.
Probably we'll still give some things away, but it will be focused more on compressing the time between visits for our loyal guests and we think we can make that loyalty program more traffic driving but less costly with a better strategy and execution based on key customer insight. So I do think that my Chili's rewards will still play a big role in driving traffic, but I think there's probably a better way.
We can utilize it going forward.
Super helpful. Thank you and Joe or Kevin the most recent trends you called out the traffic declines how much of that is the industry. In other words, you talked about your share gains in the past is this idiosyncratic or more severe at chili's than the industry or what you're experiencing your views just the industry slowdown in general.
I think I think that the.
The bulk of it is similar to what you've seen in the industry and heard other folks talk about.
When you look at the fourth quarter for instance, you saw that traffic deceleration with June being the worst traffic positioning.
For the quarter, which again coincides coincided with a lot of the <unk>.
Very excessive inflationary factors like $5 gas average gas prices things of that nature, I will say that.
We have have not performed as well relative to the industry as I'd like to see us.
Do so I think there is work for us to do in our house to that is.
Beyond the macro environment and Thats when when when we focus on retaining team members Thats a big piece of the equation, we need to bring turnover down to make sure. We can get dining rooms fully open, particularly on peak times and.
On the weekends, and we will not have throttling of.
Off premise.
Online ordering system, so that which is really their dining room. So we don't want to constrain that piece of the equation too so simplification.
Is geared at helping to move the needle.
In that space, but we're very focused on the retention side to try and get back into that.
Better than industry positioning on traffic. So some work to do there, but I think most of it was similar trends to what you saw.
From the industry side of the equation.
Thank you.
Thank you. The next question is coming from John Vivanco from J P. Morgan John Your line of sight, Yes, hi, Thank you.
Listening to the call when we're talking about things like changes in loyalty reduction of discounting pricing all front.
Seem to be very data driven decision. So I guess the question is did that data it just before but whether it was feel her experience is different decisions were made in the past.
Do you have new data, suggesting that some of these changes I guess can be made in a positive manner or is this still kind of a seal and experiencing type of decision, where we're making maybe some of these decisions without necessarily to supportive data today and I have a follow up.
Well to answer your question a lot of them to support it with data <unk> testing.
Some of it is moving faster than I think we would normally do just given the circumstances.
And then some of it is just based on my experience.
With pricing and discounts.
Two other brands.
We're in a similar place of.
Having a huge percentage of their mix on discount so in our example on Chili's 30.
37% of our checks are moving with some type of discount it just simply too high.
For our brand and we just need that we need to figure out ways to get that lower so it's not a question of like if we should do it its how we should do it.
And we're probably moving a little faster than we normally would but we're going to we're going to course correct of the things that we think we go too hard on.
But we do think that there we do have some pricing power in different areas in the business.
Between.
Being a little bit slower than the industry last year on taking everyday pricing, making sure that we have really sharp pricing for that guest that's cash strapped that's available in the restaurant every day, which we're going to maintain and then the reduction of discounts over time that we think will help us earn better pricing on the business. So to answer your question. It's a combination of both.
And but the most important thing is that over time, we get to a more sustainable business with with.
Better four wall economics, and better restaurant margins.
That's very helpful. Thank you and secondly, the KFC brand in the U S really became a much stronger brand after it actually significantly shrank its footprint in the U S.
Decided.
Wanted to be with what type of customer where they felt that the operations could be solid.
Are there other opportunities specifically to chili's for you to really rethink their portfolio and maybe can you kind of get better and stronger by being at least in the short term smaller how do you kind of see I mean, if there's a way to compare and contrast, the turn.
Turnover opportunity at Chili's relative to what was successfully achieved at KFC in the U S. If that's appropriate.
Hey, John .
I think we're always going to be taking a hard look at the.
Performance dynamics of the fleet.
And frankly may take an even harder look at it.
That spectrum of restaurants that you are always going to have some that are at the lower end of the spectrum you might.
Could we be a touch more aggressive on closing and relocating.
I think as we kind of go forward, possibly.
It's something we will look a little little deeper at and maybe not carry as many along I think we've talked in the past about our ability to carry restaurants again since we own all of our restaurants, and we can kind of bring the fleet along.
Mass.
We don't have to be.
Bringing some of that level along as we have in the past I don't see that as a radical change, though I don't want to take you down a path that theres going to be a significant initiative anytime in the near term.
Near term mean.
<unk> meaningful closures, but.
But we won't be afraid to it.
Close a restaurant or not renew a lease and a lot of cases in some of these get to X Ray if we don't see a ability to approve improve the operation and performance of an individual restaurants.
It'd be a tick more than you've seen in the past, but nothing nothing planned dramatically in the near term.
Thank you.
Thank you and the next question is coming from Jared Garber from Goldman Sachs charge your line of life.
Great. Thank you for the question.
Over the last maybe year or so we've heard a lot about technology initiatives in the restaurants to help them operations and I think Kevin you talked a lot about simplification initiative.
Moving forward. So I just wanted to get a sense of.
Maybe what some of the initiatives that were in place in terms of AI and robotics that we're <unk>.
Being tested.
And some other initiatives.
Back of house in front of House, and how you think about those things going forward.
Yeah, So we have a lot of opportunity and technology.
One of the things that the leadership team did when I first got here because we literally laid out all of the projects that we're working on kind of a two by two one was its ability to impact.
Sales and profits in the next few years and then the other axis is like the probability of success last how much investment and time, we need to put into this.
And we made some strategic decisions.
To accelerate some projects and to stop other projects. So.
The robotics project I think you're probably referring to we're going to we're pausing right now.
But we are going to try to accelerate what we call kitchen of the future three.
Which is equipment that will make it a lot easier faster and more consistent.
And dramatically reduce Cook times on majority of the items on our menu, we believe that getting speed of service up through that equipment will lead to turning tables faster and higher sales. So.
So we are aggressively looking at technology.
As a way to improve restaurant margins and productivity.
A couple of other areas that.
That we are looking at will be talking about in terms of our long term strategy, there's clearly opportunity to remove friction for both our team members and guests with these with better use of technology.
For team members there is clear opportunity in our heart of house of our back of house with our kitchen display systems, improving the order flow and the to go area, which is now 35% of our business.
There is also several tests that we think that guests.
What to do for themselves with the right technology, if we can deploy it properly in the restaurants like seating ordering and payment.
This would make it easier for the guest and reduced how much time, our team members have to do those tests for our guests today.
And then we also have we think a pretty big opportunity in our mobile site interface. The vast majority of our off premise guests are using that mobile site to order and we think we can make that easier and faster to help build stickier online customers. So.
The directly answer your question is we're going to stop some of those projects that we just didn't have a line of sight to a return on the business, but we're going to double down and accelerate the ones that we think will have a more meaningful impact on restaurant margins and a quicker impact on our business.
Thanks, That's really helpful color and then Joe if I could just follow up on a question around pricing I think you said the expectation is to run about 8% price for the full year at Chili's. So does that suggest that youll be taking incremental price increases throughout the year to maintain that 8% level because presumably you'll have.
Some price actions from from 2022 fiscal year 'twenty two.
Rolling off at various points around the year. So just wanted to make sure I understood that that commentary.
Properly.
Yes, you are understanding it correctly will take.
A series of different price increases not necessarily just menu price increase is obviously looking at a lot of different dynamics, if where you can.
Take actionable price.
Youll, probably actually see on a quarterly sequencing chili's tick up a little bit above that average level as you kind of move through the middle of the fiscal year.
Then depending on any.
Incremental decisions, we may make down the road, we've left ourselves the optionality on how we think about price in the second half of the fiscal year.
Then gravitate back into that kind of 8%.
Range so.
That's kind of the flow of pricing for them.
Okay, great. Thanks, so much.
Yeah.
Thank you and the next question is coming from Dennis Geiger from UBS.
Your line is live.
Great. Thank you just first wanted to ask another one on the pricing levels and really anything that you've seen with respect to pushback or resistance from the customer to date.
Kevin I know you spoke to having pricing power and pricing below peers in past years just curious.
What you've seen most recently from a from a feedback standpoint from customers.
Well, we continue to see.
Mixed be fine. So we haven't seen really any trade down what we have seen is the traffic with that low income guest.
Tell us a bit and so.
One of the things that we need to do is the superior we have two really superior values in our restaurants today, we have $9 lunch combo, which if you look at the <unk>.
Fast food index of combos beneath the head, so and Thats casual dining right and then we have.
Three for me program, which is essentially an appetizer and entree and unlimited drinks starting at $10 99. These are both unbeatable values.
In the market and so we have to do a better job of taking the limited marketing dollars that we have and making sure that we're <unk>.
Chatting those things for the guests so that the.
The low income guests that literally wouldn't be able to choose casual dining unless they had those price points available to them are aware of them right. So that's why we're pivoting some of the dollars that we're spending on comps for my Chili's rewards and trying to figure out how do we reinvest that back into advertising the everyday value that we have today that we think is unbeatable in the market.
The other things that we're doing in terms of pricing when we think about like reducing the number of items that are offered on on that three for me menu to just make sure. We have a couple of things that are really good for that guests, but not discount large swaths of the menu, we think that will have.
A positive impact on pricing.
<unk> the number of free offers which we've talked about on my Chili's rewards.
And then the other thing I don't think we have talked about is just <unk>.
Accelerating pricing in recovering the costs.
Delivering our food both on Marciano chili's into virtual brands historically, we just haven't recovered all those costs.
We know that guest is very price inelastic and.
There's really value and convenience over menu price so.
It may not be in the context of like how you think about pricing power, but there clearly is opportunity and upside on.
<unk> been pushing a little harder on those things in a smart way, while protecting those opening price points for that guest that just desperately need that price point.
Very helpful. And then just one more if I could just on the food and beverage inflation side of things are the expectations there.
What are the biggest drivers maybe for the fiscal <unk> target as far as.
Poultry.
How much of a pressure is that based on the latest contract in.
And maybe just kind of what youre seeing for the for the full year. How contracted you are for the full fiscal 'twenty three Joe if you could kind of speak to that a little bit. Thank you.
Hi, Dennis this is Mike.
So actually poultry and oils are probably the two biggest drivers of our Q1 inflation and for the first quarter. We are actually we're probably 99% contracted where more contracted as well into the second quarter opened in the back half of the year. We do think the market is going to come down, but that's where we stand today.
Very helpful. Thanks, Michael.
Thanks Dennis.
Thank you and the next question is coming from Chris <unk> from RBC capital markets. Chris Your line is nice.
Thanks, Good morning, and thanks for the question here.
So can you talk about the staffing environment today, maybe focusing on turnover relative to pre COVID-19 levels. Joe I think you had alluded to elevated turnover in the <unk> versus historical levels and and then I guess at a high level. How are you thinking about balancing all of the strategic initiatives that youre anticipating with what youre seeing.
And staffing today.
Now let me let me jump in on the first part and <unk>.
Kevin if you want to jump in on the back half of where we can see that heading.
We are running.
Within the hourly population we're running.
Much higher turnover rates than we did pre COVID-19.
Retention is the area that we're really focusing on there we're not having a difficulty from a hiring standpoint, the number of people staffed in the restaurants is fairly similar to pre COVID-19, but it's the turnover rate that is generating higher than normal training expenses utilization of overtime and some of those dynamics to keep.
That overall labor cost more elevated than than we'd like to be so we're really focusing a lot of attention on how to approve the retention rates and that starts with making sure. We have the right dynamics of hiring practices in place the right training programs, our initiative around virtual training and Onboarding.
I think it is going to be effective as we just start to deploy that.
The restaurants, but that is clearly a hyper focus for how we.
Improve the labor situation and we need to bring those levels, particularly for the hourly.
<unk> turnover is very stable, where it needs to be improvements in the overall manager and then a lot of attention on the.
On the hourly side of the equation.
And I think this is going to be a work in progress. We do continue to have higher level of turnover versus pre pandemic at the team member restaurant level that Joe referred to.
During my listening tour in restaurants.
What I've learned is we don't have a problem in attracting enough folks to work in our restaurants, we have.
<unk> and retaining them.
And talking with the operators.
What I heard is it's more difficult to work in a chili's and it's not as fun to work in a chili's than it was pre pandemic I think we're competitive on.
In terms of wage rates, it's more about the actual work and so there is two big things that we're working on one is the simplification initiative, where we've got this team of senior executives working on things that are going to make it easier.
To work in a chili's and then we're going to we're also having spinning up some ideas on how to make it fun again to working at Chili's. So the simplification one is kind of more obvious and near in.
Theres just a lot of tests that we do in the back of the restaurant that don't necessarily help the guest experience.
And can be frustrating for team members I'll give you. One example, if you have an idea of the stuff we're working on so.
We have this thing called portion of that we do for a lot of our proteins, which is.
Before service will literally like count the number of shrimp rural measure the amount of brisket, and we'll put that into a into a plastic bag and then we'll we'll stage that.
Calling area and in my restaurant tours I saw pretty much every morning of just saw people, just counting shrimp or measuring brisket and.
And just to give you a sense of like how much time that could be and how much money that could be for our business. Just one hour per day per restaurant is roughly 46 years of labor that we're paying for annually. When you add that all up right and when the team member said well I don't know why we count shrimp counting shrimp and put them in a bag and said well how would you do it.
When the customer orders of shrimp dish I would count eight shrimp.
And not do it before service right and that seems pretty logical and something that we could immediately doing probably there was a time that when we put that in that proteins.
We were really worried about the waste on them and labor rates weren't where they were and so it might've been good decisions. When we made those decisions 15 years ago, but today in a world where wage rates are where they are in.
Turnover rates are where they are and thats not.
Fund task to do like why don't we get rid of that and save millions of dollars in terms of labor that can either be redeployed back into the restaurant or potentially to the bottom line. If we can change the amount of hours that we deployed to the business. So.
So many examples in our business that we can remove some of the cost and complexity out of our business, but don't really meaningfully impact the guest experience and then from a fund standpoint, there are plenty of ideas that we've heard from the restaurant teams that we think actually could not just make the business more fun to work in but actually drive some traffic. So one of the things that we're bringing back that we had pre pandemic.
That I heard from the restaurant teams that we announced at our conference last week is give back night. So that's literally any of your guests and your local chili's, Ken asked for to use the restaurant for a night.
They will attract the guests and 10% of the proceeds that might go to that guess nonprofit charity.
And they will do the recruiting to bring guests into the restaurant because it's for.
Cause that they all care about obviously the team members love it because it's something that can get back to their communities. It's a form of driving traffic and it's a whole lot of fun for everybody. So there's so many different ideas that we can do both to simplify the restaurant and make it fun to work in a chili's again and I think we do those things I think you'll see those turnover rates for team members start to start to go down.
Alright.
Thanks, Kevin.
Alright, Thank you Kevin and thank you Joe and thank you everyone for joining us on the call today that concludes our call and we look forward to updating you on our first quarter results in November everyone have a wonderful day. Thank you everybody.
Yes.
Goodbye, ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.
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