Q1 2023 Brinker International Inc Earnings Call

November 2, 2022

Okay.

[music], Thank you for holding.

Clearly I appreciate your patience.

Good day, ladies and gentlemen, and welcome to the Brinker International Q1 fiscal 2023 earnings Conference call.

At this time, all participants have been placed on listen only mode. The floor will be opened for questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host Michael Ware, 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 practice, Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. 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 his.

Oracle facts any such items should be considered forward looking statements with the meaning of the private Securities Litigation Reform Act of 1095.

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 believe.

We will provide insight into the company's ongoing operations.

And with that said I will turn the call over to Kevin Thanks, Mike and good morning, everyone.

Now five months into this role and I am encouraged by our quick progress to grow top line sales and to simplify operations. While we still have work to do and there is some uncertainty in the macro environment to navigate the business is moving in the right direction and we're putting the initiatives in place that we expect will grow the business and improve our four wall economics.

Over time this morning, I'd like to share the results of the changes we've talked about in August to create near term momentum and the progress that we've made in defining chili's northstar in the longer term strategy.

The last time, we talked I had charter two teams one focused on driving sustainable and profitable sales layers and the other one taking unnecessary cost and complexity out of the business to reinvest in more impactful areas.

Our team in charge of growth implemented initiative, we called raise the bar comprised of new drink offerings delicious, new food like loaded quarterly fries, and the Chili's Philly robust happy hour platform and marketing that positions, Chile as the bar destination during football season.

Our field restaurant teams are excited by the new offerings, and we're seeing more energy at the bar as well as improvements to sales and mix, we plan to build upon that momentum to drive profitable traffic through additional sports driven group viewing occasions like March madness, and the NBA playoffs, which will also include new food and drink offerings.

Our simplification team led efforts to streamline operations and finding ways to quickly reduce complexity and focus on growing the core chili's business. They made good progress collaborating with operators to take things out of the system that didn't add to the guest experience and to make our team's jobs easier. So we can spend more time and more energy on the things that will really improve.

The business, we quickly learned that simplification has to be an ongoing priority for us. So we will regularly partner with operators to implement more ways to make it easier to run restaurants.

We expect over time. These efforts will show up on the P&L through lower waste improved labor productivity better margins and increase retention.

We also implemented a new pricing strategy to help expand restaurant margins and grow profits by providing a value price point for cash strapped guests, who need it moving away from frequent deep discounting reducing the amount of mix on deal and increasing trade up opportunities to drive check last week, we launched a new menu with 407.

The basis points of price, including a reconfigured value platform.

We protected 10 99 is the entry price point for our three for me value menu, but we right size the number of offerings to reduce the overall mix and the value platform. We also introduced more premium price points at 13, 99, and $15 99 for those value focused guests, who want a little something more like steak or shrimp as a result of these three for me then.

New changes, we are seeing more trade up off the value menu and we're selling more full revenue entrees off the Ala Carte menu.

We're also well underway to right sizing our investments in my Chili's rewards promotional offers that change in addition to decreasing our value menu mix has reduced our percentage of checks on deal from the high <unk> to the low thirties.

As expected, we did see traffic slipped a little bit with the initial reduction of discounts, which we're closely monitoring and we're also seeing favorable favorable mix and profitable growth as a result of these changes.

We expect these growth simplification and pricing initiatives will allow us to invest back into restarting our marketing voice sometime in Q3.

In the new calendar year, we know that cash drop customers will be seeking great deals without sacrificing quality and were making plans to create broader awareness of our unbeatable chili's value.

Now I will talk a little bit about our long term strategy.

Since our last call we completed the work on the Chili's Northstar and longer term strategy.

We are now in process of aggressively putting plans in place that we believe will strengthen chili's position in casual dining.

Liver value to our guests and deliver value to our shareholders over time.

We started by defining the four strategic pillars that we believe are fundamental to growing market share now and sustainably over time, each pillar will have a senior executive owner action plans and Kpis that we will measure and track performance against.

Our first pillar as team members, which is all about making the job easier more fun and more rewarding for our operators and our <unk> the.

Three areas, we prioritize here are stabilizing turnover, ensuring that we're fully staffed and reducing complexity to make it easier to run our restaurants.

While we have seen both manager and hourly turnover start to improve we still have more work to do to return to pre pandemic levels.

To accelerate our progress we restructured to bring critical people functions closer to our operations and I'm pleased to share that Aaron White, who was most recently our co COO has taken on the role of Chief people officer. During her 21 year Chili's career, Aaron has held leadership roles in human resources and operations and I'm confident.

She will add huge value in this role and help us tackle our turnover challenge.

Second pillar is food and drink, which defines the core categories that we want to win on we will double down on four segments that we're already known for which also happened to be huge opportunity in growing segments of what Americans eat burgers Fajitas chicken, Chris Bruce Margaritas.

We believe that making sure that we have the best possible offerings in each of these categories, we will improve the guest experience and increase traffic in our pricing power over time.

To enable our restaurant teams to focus on those core segments will continue to remove skus in operational complexity from the categories were over invested in like salads and sandwiches and of course, we'll protect our other famous recipes, which are customer favorites like baby back ribs skill of queso in our southwest egg Rolls. An example of how this plays out to grow the biz.

We're working on Relaunching, our chicken crisper platform in the back half of the year Boneless fried chicken is a huge segment and we see tremendous upside.

Our insights tell us customers want a variety of dipping sauces, the best possible fries.

And the ability to get larger piece counts of chicken tenders, and we already have a terrific chicken tender product and by expanding the flavor profiles using its just wings sauces that are already in the restaurants upgrading our fries reengineering the merchandising to provide trade up opportunities. We think we can explore that segment of the business. This is what we mean.

<unk> by more focus on large strategic growing segments of our menu.

Our next pillar is hospitality. This is all about making sure we deliver a great experience for both our dining guests and our off premise guests on the dining side, which represents two thirds of our business working to redefine the labor model that make service jobs easier. So they can spend more time connecting with our guests have told us that serving the <unk>.

<unk> is why they chose to work in the hospitality business and we need to allow them more time and more focus on making our guests feel special we're serious about improving hospitality and we will make some needed investments in this critical part of the business.

From an off premise standpoint, it is now over $1 billion of business for us today, which tells US our guests see chili's as a whole meal replacement.

So we've structured our organization to be more deliberate about improving the off premise experience end to end removing friction for both guests and team members in optimizing food quality for takeout and delivery.

We believe this focus will accelerate the growth of this important part of our business.

The fourth and final pillar is atmosphere, there's two legs to this pillar. The first is providing a better atmosphere for our heart of house kitchen team members by ensuring our restaurant facilities and equipment are well maintained and fully operational.

Many others, we deferred some maintenance items during COVID-19, which we know is impacting the experience for team members and guests. So we're working to accelerate getting restaurant maintenance and equipment back on track to pre pandemic levels.

The second leg of atmosphere as the guest facing experience in our dining rooms, and bars, we're committed to making the chili's atmosphere more fun environment for our guests as they returned back to our restaurant dining rooms.

Last week, we finished cast getting the Northstar strategic pillars throughout <unk>.

Operations and across the restaurant support center refining it based on their input and their response has been incredibly positive our operators are already feeling the impact of short term changes we've made to make it easier to run their restaurants and grow the overall business. We just completed our annual employee feedback survey both at the restaurant support center here in out in the field engaged.

I intend to say saw very significant lifts driven by implementing team members recommendations to simplify operations and also giving them more of a voice in our business outcomes.

This is a multiyear strategy for the Chili's brand with investments designed to improve four wall economics over time. We also have plans in place to improve the guest experience to mitigate the negative traffic headwinds in this fiscal year, we're focused on strengthening our voices in the marketplace building incremental sales platforms around core equities and improving the team member.

Which we believe will strengthen our ability to move through a tough macro environment.

We're planning an Investor day later this fiscal year, so our senior leadership and I can share more details around our longer term strategy. We look forward to seeing you all and we will announce the dates soon.

Now I'll hand, the call over to Joe to walk you through the numbers go ahead, Joe Hey, Thanks, Kevin and good morning to everyone on the call for the first quarter of fiscal year 'twenty three Brinker International's reported total revenues of $955 million, a restaurant operating margin of 6% and an adjusted loss of 57 per share.

Sure.

These results lived up to the expectations, we discussed in our previous to analyst call topline company sales performed well supported by positive comp sales for the quarter and the addition of restaurants acquired and opened since the first quarter of last year.

Quite a tough inflationary environment, our operators delivered restaurant margins slightly better than we planned.

At the brand level Chili's posted a comp store sales increase of three 8% driven by price of seven 4% and mix gains of 3%.

An important part of the comp make up this quarter with our concerted effort to move away from higher levels of discounting, particularly through our loyalty program and bar offerings. This did contribute to the brand's negative traffic of six 6% for the quarter, but also supported positive mix and lower comp expenses related to the offers.

In addition, we believe some guests are reacting to the tougher economic environment with fewer restaurant visits.

While our year over year price is higher than we have typically carried we continue to feel good about our ability to price at this level as we move through the next couple of quarters inclusive of our recent menu introduction that Kevin referenced our second quarter price will be close to 10% and we anticipate full year menu pricing of approximately eight to nine <unk>.

<unk>, which enables us to narrow the pricing gap relative to the industry.

Chili's continues to offer good value opportunities for those guests, who might otherwise shy away and even with our more aggressive pricing, we remain favorably positioned to our sector.

Marciano has reported a very strong quarter with positive sales of 18, 2% driven by favorable traffic of nine 3% and increased price of five 8% along with improved mix.

Brand recorded positive traffic in all major revenue channels, including dine in banquet and off premise overall.

Overall their first quarter business performance exceeded pre pandemic results their dining rooms have recovered and they're strong off premise performance has remained in place.

Last piece of the recovery as banquets, which will play out over the course of the next two months.

Events held this past quarter exceeded expectations and the banquet pipeline for the upcoming holiday season looks promising.

Moving on to restaurant margins.

First as indicated in this morning's press release, we are reclassifying certain revenues intercompany sales from the franchise and other revenue category.

Life more directly to restaurant level performance. We believe this more accurately reflects our restaurant level performance and provides a more relevant comparison to our peer group. The first quarter restaurant operating margin benefited about 70 basis points due to this reclassification.

As expected for the quarter, we experienced commodity inflation of approximately 24% with significant year over year cost increases from chicken and beef driving the inflation.

The three 5% increase in food and beverage cost was the primary impact to the overall loss for the quarter.

However, we are now seeing most of our main commodity markets, particularly chicken move to lower cost levels supporting our expectations of a much improved cost environment as we move further into the fiscal year.

On the labor front wage rate increases have moderated although they remain in the mid single digits for the first quarter. Our hourly staffing levels continue to improve and we are starting to make necessary progress in lowering overtime and training costs.

In addition, our operations leadership is starting to make progress with turnover, which should result in better team member and guest experiences over time.

While restaurant expense did benefit from top line growth when compared to last year's first quarter, a significant year over year inflation led to one 7% year over year increase.

Primarily driven by increases in delivery fees utility costs, and higher restaurant repair and maintenance.

Looking ahead, we anticipate growing company sales and expanding restaurant margins as we progress through the rest of the year.

In terms of development, we are moving into a period, where we will consistently open new restaurants with five scheduled for the second quarter and 18, including one relocation for the fiscal year.

We just opened our newest location location in Athens, Texas.

Mid sized community east of Dallas, where we clearly received a warm welcome. The opening was very successful generating nearly $100000 in sales during its first week. This.

This demonstrates the power of the Chili's brand and the potential to develop locations and a variety of markets.

At the same time, we continue to evaluate our fleet at the lower end of the performance spectrum, mostly due to aging locations and we anticipate closing eight to 12 restaurants this fiscal year.

Now with the tough first quarter behind Us we're moving forward through the rest of the fiscal year with a good line of sight to an improving operating performance.

With this in mind, we are reiterating our full year guidance provided on our last earnings call.

As Kevin detailed in his comments, we are quickly moving forward to improve the chili's brand and a focused and sustainable manner.

<unk> is now back in full force and primed for a celebratory holiday season, and importantly, the worst of the inflationary headwinds. We believe are now behind us.

<unk> there are likely some uncertain economic times to maneuver, but as we strengthen the capabilities of our operations and create a more relevant.

Year to operate and distinctive experience for our guests, we will create the opportunity to be successful and whatever conditions prevail we.

We entered the rest of our fiscal year optimistic for the growth and improvement ahead.

With our comments now complete let me turn the call back to Paul and moderate questions about the top of the hour.

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 asked about posing your question you. Please pickup your handset and for listening on speaker phone to provide optimal sound quality.

Hold while we poll for questions.

And the first question is coming from Jeff Farmer from Gordon Haskett, Jeff. Your line is live great. Good morning, I think you guys said commodity inflation was 24% in the quarter could you share your expectation for commodity inflation for the balance of the year or for the full year rather.

Yes, Jeff It's Joe Good morning, Let me give you a little insight there we think one it's going to be coming down I would expect to see something in kind of in the mid teen range as you think about the current <unk>.

Order and then mitigating further into the back half down into the mid to upper mid single digits. I think we will we will be in those ranges you would expect to see okay. And then just one unrelated question. So it sounds like you were able to decrease.

The number of orders or checks on discount from I think it was 37% last quarter to a low 30% level this quarter.

Where would you guys like to see that number get to meaning percentage of orders on discount and if you were to get to that level what type of check benefit would that provide for you guys.

Yes, I can't give you specifics on that I can tell you it's less than where we are today. So we like where we're excited that we got it from the high <unk> to the low thirties, and we think it should be sub 30, but we don't have an exact number and of course as if traffic trends were to continue to weigh our we feel we feel good about where we're headed obviously.

If the economy.

It gets tougher we might have to be a little bit more aggressive maybe pull back a little bit odd continuing to do this but right now based on everything that we're seeing we're going to continue to manage that number down and hopefully we'll get below <unk>.

The next time, we talk but we just got to make sure that we monitor the economic environment make sure. We don't get ahead of our skis on anything that we need that we think the customer needs.

Yeah, and I think.

Jeff I think another piece of that is as we start to evaluate how we think about offers theres opportunity there to where in the past.

Most offers were going out as a free something or I can fill in the blank after that theres probably opt.

Opportunities to restructure that program, where there's in essence, its an offer but maybe it's.

As the price point attached with the two so rather than a freebie.

For a dollar to dollar or something of that nature.

So it can still be an offer from a number of check but it can be a more profitable offer relative to where we were.

Alright, thank you.

Thank you. Thank you. The next question is coming from Alex Slagle from Jefferies. Alex Your line of sight.

Great. Thanks.

Good morning, cumulative sales momentum both at Chili's in Marciano seemed to accelerate a bit quicker than expected and just curious to the degree that surprised you and how much of this momentum is sustainable just maybe thinking about how you layer. These near term drivers with some of the longer term.

Drivers down the road.

Alex we are pleased with with that directional acceleration we saw accelerate.

As we moved through the quarter October is maintaining.

That pace coming out of the.

Out of the quarter. So we're pleased with that and we're seeing it.

Being driven by some of the initiatives we spoke.

Spoke about the bar, which is obviously not just an impact within the bar it impacts the entire entire restaurant.

We're seeing receptivity to the pricing.

Changes, we have made and some nice mix ramifications of the way we've kind of started to reconfigure the menu and focus on some of those core equity. So I think it I think it is sustainable.

And it's something.

But we would expect to continue as we move further into the fiscal year.

Okay.

On the other restaurant expense line, the utilities and repair and maintenance, which I guess you called out maybe it's our focus going forward.

Delivery fees, how much of this elevated costs out of your control are in control and just trying to figure out how much continues through to Q2 and into the back half.

Yes, I think it's a great question I think there is a little bit of both when you think of delivery fees. Some of that a lot of that was driven by actions, we took to expand those delivery aggregators and.

And grow the.

Some of the virtual brand offerings.

When im looking at that year over year comparison.

You're also getting some again similar to what you saw on food and beverage some larger year over year comparisons that I don't think we will continue at the same.

Year over year comparisons as we move so I think particularly when I think about the utilities and some of those.

Bigger expenses within restaurant expenses, I think youll start to see gravitation more to the to the level year over year on.

On a comparative basis, but I don't think it will have quite the same level of drag on a percentage basis as we go farther into the fiscal year.

Okay got that thank you.

Thank you and the next question is coming from John <unk>.

<unk> from J P. Morgan John your line of life high.

Hi, Thank you Kevin I was curious the more time that you've spent with the brand obviously at very heavy.

Company operated structure and even some of the menu changes that you're talking about seem to be national in scale.

I was wondering if if youre kind of seeing an opportunity to maybe start to localize your business a little bit more regionalize your business a little bit more I mean, we just have so much such a disparity of kind of consumers and behaviors.

Competition, what have you that.

On a local market I was wondering if there's any pockets or opportunities that you see that.

To actually optimize and get scale from this business might actually not be taking a completely national approach, but maybe expressing it more locally or regionally.

Yes.

I have experienced in national chains are shared kind of.

Kind of two things I think in your question.

You are probably speaking more about the menu.

Which we'll get to in a second I think the first place I think that we have to be really sharp about understanding regional differences in pricing tiers. So.

Whether you're in a high cost market or depend.

Depending on the level of casual dining activity I think we have to be really sharp about understanding where can.

Can we take price and where do we have to be as competitive as we possibly need to be in order to.

Operate in those markets. So from a pricing standpoint, we tend to look at things more regionally and be more customized on how to go to market, whether it's with bar specials or food specials, or where the everyday menu pricing isn't hearing.

As far as like in terms of food or regional differences.

It is a discussion that we're having internally here I would tell you.

I think there might be room for a little bit.

<unk>, but for the most part what I've seen in my time in working on National brands as we need to be focused on big things that will impact.

We will make big impacts to the business and typically those are things that can be expanded in all 1000, plus restaurants and have the scale of our buying power behind it as well as as we get back on.

At a restaurant advertising.

It makes more sense to be national from a cost standpoint, both in terms of producing the advertising as well as getting the best possible right. So.

Anticipate seeing very much region reality in terms of our menu there might be a little bit of customization that we do like on regional craft brews and some things that we hear from the operators, but I don't anticipate that being a major part of any kind of strategy that we do going forward. Okay. Thank you for that and there was it soft illusion and I will be.

More specific in this case.

Terms of the ownership.

I'm sure you probably know many very talented franchisees from your previous organization that probably would actually do very well franchising chili's, if that opportunity came to them.

Especially as obviously there is a disparity of performance across markets.

Probably have some stores that can be run run by a franchisee.

And would be dilutive or maybe excuse me not dilutive or perhaps even accretive to operating income dollars. So there could be maybe a portfolio management.

Type of.

And exercise to go through.

Less company store ownership increased franchise ownership and that would allow the franchisee to be very connected to the local markets. As I was alluding to earlier does that is that entering into your thought process. I mean could we see a very different company to franchise type of ownership composition over the next three years or five years. I mean, do you think that makes sense based on.

What your previous experience has been in terms of the success at that drove across the organization.

Yes, well I.

Appreciate the question honestly, we haven't given much thought to that since we've been working on our long term strategy. What we've been focusing on is what are the long term things that we need to address in order to have sustainable profitable growth over time. So the four pillars that I talked about on the prepared remarks food hospitality atmosphere and team member experience, that's really what we're focused on.

Right now, we really just have not even remotely talked about ownership and franchise models. Because we're really focused on things that are going to win with the guest and help us grow faster and do it more sustainably, yes, John I would also echo in the.

Corporate ownership and community connectivity are not mutually exclusive.

Ideas in fact, when we talked on the last call I think we highlighted a lot of focus we're giving to making sure that our.

Our restaurants in a community and they are very much part of the local communities increased connectivity give back nights and things of that nature. So.

Engagement and connectivity to the local communities that our restaurants are in is in part an important piece of the dialogue as we kind of move forward.

I got that thank you.

Thank you. The next question is coming from Brian Vaccaro from Raymond James Brian Your line is less.

Good morning, and thanks for taking my questions and sorry, I joined a few minutes late.

You've commented on this I forgive me for that but I wanted to ask about the performance of the three for me platform. Since you made some changes to the program can you can you just give us a sense of how that's mixing in terms of sales or transactions and to what degree the profitability of the platform has improved versus prior versions.

Yes, so I'll walk you through Brian .

The changes that we made and then Joe wants to chime in with any more specifics. He is welcome to so.

So we dropped a new menu on $10 25.

Had kind of a restructured three for me platform.

We reduced the mix.

The menu mix.

Of the of that platform. So we reduced from 12 offers to nine.

And we also went from four price tiers to three price tiers and the intent of that was to drive more trade up within three for me as well as higher guest check both for three for me.

Customers as well as customers that then would trade out of three for me and go back to the Ala Carte menu and as I said on my prepared remarks.

We're in the high <unk> in terms of discounted.

Tickets, we're now in the low 30, so we've seen a meaningful impact.

We've seen significant PPE.

PPA or average check increases.

For those that by three for me.

We've also seen a reduction of mixing three for me as some have moved back to the Ala Carte defined the items that have removed from the three for me for me.

The other changes that we made even on the tiers above $10 99.

Several of those items were priced as a bundled offer below the Ala carte price, which obviously would.

Pushed the customer to buy the bundled price because it's less we've corrected that with this menu update so.

All of those items that are on the bundled three for me menu are now higher priced still incredible discount for the customer, but higher priced than the Ala carte items.

And then we added some options to the higher tiers of three for me to drive trade up so at our 15 99 tier debt now has Cajun chip pasta and two steak offerings six ounce sirloin and our carnet asada. So not all value customers just want the basic they want to be able to trade up.

We've seen some success behind that too.

And then the last thing is we took some of our classic favorites out of three for me. So the Cajun chicken pasta, the chicken fajitas and the Margarita grilled chicken those are destination of items for chili's.

<unk>.

Reposition him back on the La Carte menu.

It has also helped us get out of some of those discounted check so.

So we are losing quite a few changes to those one in terms of the overall number of three for me. The overall mix of the three for me.

The PPA that we're getting out of three for me customers and then obviously that mix that goes to Ala Carte is helping with PPA for the overall box too.

With increased profitability too.

The structure of the program also reduces the.

The cost dynamics of the platform itself too so not only youre getting.

As a favorable lift and the favorable PPA, it's coming against a lower cost.

<unk> on the platform too so yeah, we're one week into it.

Obviously.

Pretty excited about what we're seeing.

Come out of it and we will watch it develop it as we kind of go through.

The rest of the quarter, but.

It's performing across all of that all of the metrics, including the mixed back into the Ala Carte side of the equation.

At or.

Above where we would have expected it to perform.

Okay. Thank you that's helpful and Joe on the annual revenue guidance can.

Can you remind us what you've embedded in that guide in terms of chili's traffic and sort of average check expectations I know you talked about pricing.

I think high single digits, but maybe you can sharpen our step on that and then also just on mix specifically would you expect mix to continue to be a more meaningful contributor in this ballpark like we saw in the first quarter than we've seen historically.

Brian .

Sharpen that to the extent of reminding what I said on the last call as we've reiterated the guidance and you hit on the on the traffic and we do expect chili's to run at a negative traffic.

Mid single digit range as we kind of move through the fiscal year pricing will be at those levels that we've told you about mix is is kind of the delta.

Encouraged by the mix and the sustainability of what we're seeing on the mix side of the equation didn't really give you.

Specific range.

I guess I'll sharpen it by saying.

Through the first quarter and what we're seeing.

Sustainable level of mix for the near near term I'm.

Very encouraged by that.

Okay, and then last one from me just on the Labor line, it's pretty solid performance this quarter and I think you mentioned seeing some normalization finally, seeing some normalization in training and hiring costs and that's been very outsized in the last 12 to 18 months is there a way you could ballpark sort of how.

How much progress you've made maybe as a percent of sales or however, you'd characterize it and how much opportunity still remains on that front.

Yeah as it relates to those items I don't think I said normalization, we're seeing wage rates start to stabilize kind of in that that.

Mid single digit range, which is down from last year.

A couple of percentage points.

Seeing improvement and the overtime and the beginnings of improvement on the training side of the equation I view both of those as still having opportunities as we kind of move.

Forward through the rest of the fiscal year.

Training.

The managerial side of the equation has.

Stabilized pretty much getting back into the pre pandemic I'd like to see a little little more opportunity for improvement there.

And will it continue to move the needle forward on the hourly side of the equation, which drives a lot of that training expense. So.

It's getting better but I still think there's good opportunity within those two specific areas as we kind of move forward obviously the benefits we're seeing.

From sustaining our price dynamics in.

Our mix lifts will help.

In that category as you kind of move forward.

Thank you I'll pass it along.

Okay.

Thank you. The next question is coming from Jon Tower from Citi.

John Your line is live.

Thank you for taking the questions.

First go into the marketing conversation I believe Kevin earlier.

On the call you had mentioned the idea of marketing coming back online later this year.

And I know I believe you've been on TV for a little while now so I'm curious how we should think about.

This rolling through.

In terms of the message to the consumer is it going to be more product versus say brand is it going to be focused on value versus premium and how youre thinking about the level of spend now versus history.

The channels are going and whether it's traditional media versus more digital et cetera.

Yes, So last call. We did talk about wanting to start building back those investments into the business, but we needed to have clarity on where the brand was going to be positioned well.

It's a new news to bring guests back in.

And then obviously, we've got to find incremental funding sources, either through cost reduction or sales growth from contributions. So I think we've got we've got line of sight to getting those things solved if some of those things are solved with some of those things we're working on and we will be adding some advertising dollars in the back half of this fiscal.

Our goal to increase that spend both this fiscal and then some more for next fiscal we only spent about 1% today pre pandemic. We were at 4% I don't think we're going to get to all the way to bright there.

But we are going to incrementally start adding back marketing dollars and then really monitor the return that we're getting on those and if it's good we'll continue to build in it and if it's not we'll have to retool right.

We've done some pretty good things on the business that we think we could advertise so we've got like these margarita of the month that are incredibly attractive. We've obviously got this unbeatable value in the industry at three for me.

The menu, but we've not invested dollars to make customers aware of those amazing offers and so.

Any of the incremental spend that we put into the business next.

In the back half will be funded from.

We're moving some of this deep discounting and removing the menu mix that we talked about at three for me and we will be putting dollars into really focusing on the value the value components of our business just because we think thats going to be things that resonates with the cash gap customer coming out of the holidays looking for not just low prices, but high quality and.

Abundant value and we think that we are very well positioned.

Blitzer casual dining in the restaurant industry to deliver on that so you likely will see more food focused advertising that focuses on the offers versus brand spots that you might see from somebody else but.

But most importantly, we can do as we get back on air is making sure that we're getting the return on investment that we want from our marketing dollars because that gets the whole flywheel going so.

And then as far as the last question I think you had was the elements that we would invest in.

We don't have those details flushed out yet certainly we've been primarily focused on digital with our limited spend in the past. So I would hope that we'd be able to get back on to on the TV, but im going to let the marketers figure out what the best with the best recommended spend is based on the levels of spend and what we're trying to accomplish so.

More to come on that but very exciting about what the team is working on it now I think that we have a clear north star and the things that we want to focus on how we want to position ourselves within casual dining I get excited about putting money back into marketing and starting to tell our story again.

Got it. Thank you I appreciate all the color there Im curious just pivoting a little bit too.

<unk> retention.

I believe it's still elevated versus history, it's improving sequentially, but probably not exactly where you want it to be so im just curious.

What you've heard from your employees is too.

I guess now ex employees.

Why they're leaving where theyre going and frankly, what you guys are doing to address this.

Yes, I mean, there's a couple of challenges and I think when we talked about the kind of a long term north star and the four pillars. Many of those even though theres just one pillar thats those team members. Many of the other pillars will help with team member retention.

So one thing that we heard from servers was theyre covering too many tables and they got into the business because they want to serve guests and provide hospitality and that's why you choose restaurant versus some other type of work and we've got to make it easier. So they can focus on fewer tables and focus more on the guest another one that we heard was they have to.

Any task to do and so one of the things that we're testing right now is busters, bringing back busters and all of our restaurants. So that the buses can focus on keeping the restaurants clean and maintained and we feel that the service focused on what they want to do which is greeting and delighting in making guest feel special so.

That's one big piece, we heard the other big piece, we heard was hey, how can you make this easier and more fun again to work in a chilly so like when we're at our best servers and back of the house, we're working together, having fun, even if it was a busy service.

They got through that service and they felt like they really accomplished something big and so we've got to get back to that that atmosphere. Both in the back of the house of the restaurants as well as the front of the house and so the simplification that we talked about on the first call and I alluded it to it in my prepared comments, that's going to be an ongoing thing and I will tell you like when we looked at the employee engaged.

<unk> surveys over the last few weeks, we do the once a year we saw record increases in terms of engagement and intend to stay and we think that is a direct reflection on two things one that they now have a voice on what are the changes that we're going to make in our restaurants to make it easier to operate and to the fact that the changes are happening and they are continually to happen right and so.

Every month or two they are seeing the changes happen, it's making an impact on making their lives easier and so they know that we're all in this together to make it more fun and more easy to work in a chili's I think if we focus on those two things I think we're going to see significant improvements over time, and that's going to help both the labor line as well as probably more importantly, the customer service levels.

Alright. Thank you I appreciate the time.

Thank you. The next question is coming from Katherine Griffin from Bank of America, Catherine Your line of sight.

Hi, Thanks for taking my question. So I wanted to kind of appreciate like all of that I'll just add some color, but just specifically on fiscal 2023 guidance I think it would be helpful. Again, just sort of narrow down some of the puts and takes that would get you to either the low end or the high end of the guidance.

<unk>.

For EPS.

Well obviously.

And again the guidance is out there and we've had a lot of commentary around it I think from a puts and takes standpoint, obviously you look at the cost structures.

First and foremost so.

The ability to continue to see the movement and improvement year over year on particularly food and beverage is going to be a big piece of the equation.

As we make.

From a topline perspective, I think our ability to make.

Further traction in improving the guest experience.

It's going to be a big piece of that equation, but obviously the mixed dynamics that.

We see coming out of some of the changes we make will have.

If I think about the incremental impact that that creates.

Upside that that would be a Q1 from the top line.

But I think the reality is that should come from both sides of the equation, but the topline growth has opportunities.

As it relates to our initiatives and.

Particularly the mix side and then the cost structure.

Further improvements that exceed our initial expectations.

Obviously will flow.

Towards the bottom line, we may choose.

Kind of move through this fiscal year on how we think about the.

The reinvestment that we've talked about on both of these two calls so there are opportunities to reinvest in the business, which will have.

The long term benefit of structure of trading a stronger foundation that can do.

Driving the subsequent fiscal years. So we will obviously take the time and be thoughtful about how we if we do see incremental savings in different places how do we.

Either reinvest that back into the business to drive further top line or improved guest experience and what flows to the bottom line.

Hopefully that gives a little more insight, yes, no absolutely. Thank you.

But I guess, if I could just follow up I mean, when we talk about.

Sort of ambition to narrow the price gap versus the industry does that mean that youre expecting to lose some of the lower profitability of transactions I think it would be helpful to just share again sort of what the expectation is going forward on traffic like specifically within the context of share gains because I.

Some of the traffic that's been gained from lower relative pricing is that risk. So just any thoughts on how we should assess that risk would be it would be helpful.

Yes, I think the reality is in the moves we're making as we will probably see some traffic losses as it relates to the.

The discounting side of the equation, but again, we're trying to.

Create a stronger profitable model from on an ongoing basis, we think thats worth.

Tradeoff right now we're seeing.

A nice net positive benefit as we kind of move through.

First the <unk>.

First four months really continuing on through October thing, where the interesting things as we go through.

Some of the moves we've made on the discounting side of the equation why typically we will see an initial traffic reaction we saw that gap narrow as we move farther through in particular in October when I look at traffic gap to the industry.

One where we've moved to exceeding the industry from a comp perspective, as we move through the month of October and the traffic piece of that equation has narrowed to the industry as we kind of have gone through that so.

Right now it's a trade we're willing to make because it's definitely reaching bottom line benefits as we go forward.

Great. Thanks appreciate it.

Thank you. The next question is coming from Fred Wightman from Wolfe Research your line of size.

Hey, guys, Joe I, just wanted to follow up on that October comment I think earlier in the call you made a comment that the October momentum was maintaining the pace coming out of the quarter was that a comment on sort of the sequential rate of change and improvement that you were seeing or is the actual total operating performance sort of steady in the rate of change has slowed.

I put it more in the closer to the steady as we kind of move through it now October .

Is probably the first full month of a lot of the changes we've made as it relates to the.

Removals and some of the discounting changes and of course.

You saw the menu drop coming at the very end of the month, so not a lot of impact.

Outside of this last week.

Period ends today.

That's not going to impact the October numbers this month, but it's exciting to see what that potential impact could be as we kind of move forward. So.

I'd put it in the steady, but it was a nice sequential improvement up to two this steady performance and again, our price and mix is materially exceeding.

Any of the traffic losses, we've experienced during that period of time.

Makes sense and then on pricing I think last quarter, you said around 8% it looks like that ticked up a bit this quarter to 8% to 9% is the sequencing of that as far as a bigger contribution in the middle of the fiscal year and then eventually getting to where pricing is a net positive <unk> <unk> unchanged like is that still sort of the cadence to think about.

And Thats still the cadence. We currently have obviously, we reserve the right to.

To make.

Subsequent changes, but what we what we did is really took my planned mid year kind of January price increase and pulled it forward to this October menu since we had the menu.

Already in the works to go so we were able to embed some incremental pricing opportunities there.

If we maintain it.

Obviously see the the <unk>.

Impact year over year in November and December at that higher level. So we spoke about and then unless we take further actions if any nature you will start to see kind of a steady pull back as we lap prior year pricing actions. So.

You would see that start to come back down more into the upper mid single digits since you moved towards.

At the end of the fiscal year, but we will continue to evaluate the pricing dynamics and opportunities as we kind of move forward.

Makes sense. Thank you.

Yes.

Thank you and the next question is coming from David Palmer from Evercore ISI.

David Your line is live.

Thanks, Good morning.

Wanted to come back to the guidance I wonder.

How you view that guidance versus the changes you want to make to set the brand up for the long term and during this call you've said evaluating the business a bunch of times and it sounds like you want to improve the guest experience and make a pivot in marketing.

And then I think you've also noted that youre going to have an analyst day coming in the second half of the year. So just thinking about how.

This guidance really contemplate some margin wins from rethinking some things like the virtual brand strategy and the delivery menu pricing.

But also perhaps some margin sacrifices.

The assessing of team service model.

The advertising spend that the company may have sacrificed in recent years that you want to get back to support some of the things you want to do so could you perhaps talk about that and how you would view those things, perhaps being a net impact to your to your earnings in the near term to fund long term.

Repositioning.

<unk>.

Yes, David.

Appreciate the question I am going to decouple, it a little bit.

For you from a from how to think about what I'm very encouraged by the direction of the business.

Obviously the guidance was provided not too long ago. This is the first quarter will continue to evaluate guidance and we have further opportunities to talk to you about that as we kind of move through the rest of the fiscal year, but again, we're removing through this but we anticipate it to be a very tough quarter and it was.

And feeling good about the direction of the business and the upside we have based on the on how we are moving forward now that being said the other piece of the equation is how do we think about.

Investing back into the business and that's a constant conversation, we're having as a leadership team as we kind of go forward.

And frankly, I don't want to put a lot of it in the context of the guidance, we're going to make.

What we think are smart decisions for the long term benefit.

Of the brand.

As we look at that where that comes from and how it is funded.

Isn't necessarily going to have to be.

Sacrificing margin in the short run too because again as we think about how we reallocate costs and where we are seeing.

Benefits on our cost structure relative to what we originally thought for the year.

Those give you really near term opportunities to think through.

What what needs to foundation, we go back into the business and what opportunities do we have to flow to the bottom line. So.

It helps color the discussion, but I think philosophically.

<unk>, Kevin you can add anything you want to I think we need to be thinking about how to build a.

An improved foundation of the both of our brands businesses for the long term and we'll make the right decisions.

<unk>, which fiscal year, we're thinking about.

Going forward, but again very very encouraged by the increased ability to do that based on the current operations of the company.

Yes, I mean, just the one thing I'd add is I'm sure, we'll be able to share a little bit more detail at the Investor day.

In the back half.

The way, we're thinking about the investments David is really on.

Labor R&M marketing and then some new equipment to help automate some of the back of the house, but we call. It <unk> three our kitchen of the future three so.

The good news is we have line of sight to what those things are and we have some pretty good ideas on how we finance them now.

Now, it's just about kind of the pacing and sequencing of what Joe was talking about.

Where does it hit when do we make the investments et cetera, so, but we'll have more details on that.

As you think about the Investor day next in the back half so.

And does this.

This guidance contemplate us sort of a step up in and those investments.

Vestments run rating into the perhaps the next fiscal year, but included in this year, but for the second half of the year. When those investments will be made does that does this guidance include those investments.

It does in the short run.

And again, the pacing and sequencing of that week.

We can change as we kind of go forward based on need and opportunity kind of as I said.

Talk through but there are levels of investments back into those areas that are specifically contemplated in the guidance and then we'll update those as we kind of move through the rest of the fiscal year and are definitely flows into next fiscal year.

Thank you.

Thank you and the next question is coming from Nicole Miller from Piper Sandler.

Nicole your line of Flash.

Thank you so much good morning.

On price.

Was the price actions still 400 basis points in August and then to get closer to the 10% is at about 150 basis points in October that Youre talking about.

And I want to make sure that isolating just price that that's not including mix at 10%.

Okay.

And I call.

It wasn't 400 basis. So again, if you look at the pricing actions taken there was the July pricing action.

The way I think we've talked about it.

On the last call there was probably in the $1 30 range.

Okay under one 1% impacting.

August with.

And a little over 60 basis points coming on in September . Some of these actions are taken off menu too.

So it's it's.

It's how you impact some of your off menu.

Third party channel delivery things of that nature. So.

The $4 70 is the price action that we took related to the menu last week.

So obviously it impacts one week of October , but will impact at that level going going forward. So.

So there were some specific you had a kind of early in the first quarter menu you had some subsequent.

Off menu pricing actions and then this big one this.

This last week.

Okay for semi and then when you look at the next sitting with around 3% in the first quarter is all of that or the vast majority with less discounting.

I'm wondering how does like the improvement in <unk>.

<unk> of the bar plan, which probably doesn't count as an entre traffic count.

But it's but it's dollar spent is that does that show up in mix is it meaningful and is there anything else meaningful and mix.

I think the two big discounting is clearly driving most of that.

Upside in mix I do think some of the bar initiatives as it related to.

Some of the the restructuring of price points and things of that nature.

Across the whole happy hour side of the equation.

May have also generated some mix opportunities as guests move.

Between their menu items so.

But most of it is going to be the discounting side of that side of the equation.

Okay, So 10% price, maybe some positive mix traffic that's less negative so.

We're talking about at least mid single digit comp kind of is what's happening right now in the business.

That math is right in the sweet spot yes.

And then just to confirm when you talked about that very helpful industry commentary, where youre doing better than where the gap is closing as that industry commentary based on that track.

Okay.

It's both Knapp track and Black box, we look at those very closely you kind of get a little bit.

Shorter insights through the Blackhawk side of the equation.

But spend time.

With both.

Okay got you I was just asking because when we get when we don't so we can kind of get back on the.

Commentary yeah.

And then just a last.

Quick one and I might have written this down wrong. So I apologize, but you were talking about the change of the revenue and I thought I heard something about a 70 basis point impact to something in the first quarter was that store level margin or what was that commentary tied to.

That was the reclassification Nicole of some of the.

We reclassified certain items detailed in there it's about $7 million that we re classed out of <unk>.

Franchise and other revenue intercompany sales that are more directly related to in store.

Operations. So we thought it is a more appropriate place to make it it would have impacted your first quarter, Rob by about 70 basis points.

It was a benefit.

It was a benefit doesn't doesn't impact total revenues doesn't impact operating income does not impact EPS, it's just that that calculation.

Just to make sure so and it's just following somewhere else in the P&L and so we just.

Can take that I guess that benefit and carry that forward and store level margin.

70 basis points on a 6% margin is.

Meaningful.

Yeah, and again, that's obviously, a very low restaurant operating margin as you go into <unk> yeah Yeah.

Okay. Okay, and then we just carry that forward it already classify as for the year again, it doesn't change anything in.

Obviously guidance or like I said, the bottomline, but.

But how you construct the P&L changes a little bit.

Also we have restated all prior year to make it apples to apples and we're going to put on three years of history on the website. So everybody can understand exactly what we've done.

Perfect, we will grab that there. Thank you so much.

Thank you and the next question is coming from Jeffrey Bernstein from Barclays Jeffery.

Jeffrey Your line is live.

Great. Thank you.

Two questions one just on the comp trends I. Appreciate October was stable with September and seemingly September improved relative to earlier in the quarter.

But I know you also noted some easing traffic.

So Joe I just wanted to clarify I think you said, you're assuming down mid single digit traffic in fiscal 'twenty three I thought last quarter. It was low single so just wanted to clarify that.

And what do you think you are seeing any impact from a slowing macro.

I'm just wondering whether you think there's any signs of that coming into play just yet or any signs of competitors already being more aggressive in terms of their promotional activity in the face of a slowing macro just trying to size up your thought process around what could be a slowing trend in coming months and quarters.

Yes.

That that piece of the equation probably creates the.

The blurriness of their ability to predict traffic out over the course of fiscal year, but I think we're from what we can see right now what we expect from our business standpoint, and from what we would anticipate emanating from some of these initiatives, particularly the lower level of discounting.

Yes that mid single mid single digit range is kind of our best view of the world right now macro could obviously impact that as we kind of move forward I mentioned that there could be some uncertain economic times ahead of us where when that hits and where.

Relative to our fiscal year obviously.

Everyday on online you can you can see a variety of debates about about what's coming as we move farther into 'twenty. Three so that could have an impact again, one of the things I watch to us again that gap to the industry. The industry is going to be hit by the macro and so we're all going to.

Bear the brunt I think you are I think it's realistic to say that there is some.

Marginal level of pullback as it relates to the lower economic.

Guest chili's.

In particular has a has the breadth of the demographics out there. So I would expect to the extent that macro is impacting chili's will feel some of that.

That's why it's very important to protect the value perception. So we have that.

One of the critical pieces of protecting the $10 99 on.

On the three for me.

Is to be prepared for more value.

Oriented environment, how we talk about that and making sure that people.

We are aware that we have that value. It's also an important piece of the equation and as Kevin detailed we would intend to do that.

If you moved into.

Those tougher economic time, so it will have an impact we are watching closely right now we're not seeing we're not seeing evidence and you can see it from the mixed dynamics that youre getting meaningful trade.

Trade down within within the guest yet either so but it is definitely on everybody's mind.

There is probably three things that we need to stay focused on.

To offset any potential headwinds that we do see from tough macros like one is just making sure that the things that we talked about in our long term strategy on great food, great hospitality, great atmosphere, and making sure that our team members are having a good experience. So they can delight the guests like that's going to become even more important if customers start pulling back.

Just because they can't afford to have that experience. So.

Certainly the stronger.

The stronger the stronger concepts that are operating more consistently are probably going to win at least market share in that environment and then obviously that will help as the macro is getting a little bit easier of the second one is as we take all of this pricing that we talked about we need to make sure that we do protect our budget value for that cash strapped guest and I think we've done a nice job of that with the current iteration. It's one of the reasons why we.

Haven't heard.

Too much feedback from our operators on making those menu changes because there is still <unk>.

Many options that are incredibly attractive price points and then the third one would be actually telling customers about it. So you asked the question of what are we seeing from a competitive set.

Generally speaking we've seen them not go it's not a race to the bottom it's more about how do we provide abundant value at higher price points versus what we've seen in the big competitors in casual dining we are kind of doing the same thing with three for me, where it's not the lowest price point out there, but it certainly is unbeatable value. When you look at everything that you get and we need to make sure that we talk about it right because.

At the end of the day, if we don't advertise it it's hard to drive incremental traffic.

And so.

More excited about the idea of.

Not only protecting those things actually.

Investing some dollars in telling the customer about it and seeing what that what that could do to offset some of the headwinds in traffic. So I think what we focus on those three things I think over time will be will be in a good place.

Understood and then just my follow up just obviously, you're not seeing any sign of slowdown just ship, but specific to the restaurant margin side of things.

Mr seem to be excited if the sales were to hold for the industry. We know that menu pricing is outsized we get the impression that inflation is easing.

So again barring a macro slowdown it would seem like there is potential for significant margin recapture and earnings growth.

As we move through the next few quarters I'm wondering whether you would share that sentiment or maybe we are underestimating the inflation impact or any kind of directional thoughts on the restaurant margin for the <unk> and more importantly for the full fiscal 'twenty three and that type of scenario. Thank you.

I would definitely sure that that assessment, but both specifically to us.

In macro late to the segment.

Sure.

That's the big the big what what if on the traffic side of the equation, but the good news is that.

Even if you saw some.

Some level of dip or some level of recession as you come back through that Youre still.

Better positioned coming out of that.

By by the pricing actions, we're taking and the improvements we're making in the base business.

We want to be very cognizant of what's going to be going on over the course of the next six to nine months, we also want to make sure.

Repairing ourselves for the following.

Nine to 12 months as we kind of make some of these these moves but.

As I said in my comments, we are expecting.

Growth and meaningful margin expansion as we go through the rest of this fiscal year.

Thank you.

Thank you and the next question is coming from John Glass from Morgan Stanley John Your line is flat.

Good morning, Thanks for squeezing me in Hey, Kevin as you think about the long term strategy pillars, you've talked about is there an opportunity to relaunch the brand in some way I guess, where I'm coming from is chili's has been famous for spicy southwestern.

Interest in food I don't know you still get credit for that in the same way maybe once did is there an opportunity to highlight that things in the context that we see.

Content that over time.

Multi driving traffic and maybe that brand distinction has been lost them along the way.

Understanding it's to focus on value now that it's an opportunity to in some form or fashion, we launched the brand really more distinctly or do you not see that as being a key initiative.

Absolutely we didn't talk about it in a ton of detail today, but we have a cross functional team led by our Chief Marketing Officer, George Felix We just completed our North Star work, which is essentially a lot of the things that you just talked about which is what are the things that makes chili's, So special and differentiated and then how do we start bringing it to life in a more relevant way across our menu our surf.

This model.

How we treat team members and pretty much everything that we do how do we decorate stores, how do we build new restaurants right. So.

We're in process right now.

Cascading that down throughout the organization.

And starting to create action plans on how to bring that to life. So I think a lot of times folks think that it's a 32nd TV AD that will reposition the brand and the reality is we've got to do the heavy lifting to make sure that the brand really exhibits that all throughout the organization and the menu and and the team members and the service model before we would go do some kind of big being.

Hey, we're back.

Rebrand so.

My thing is we've got we've got to put the hard yards. It to make sure that we actually are making the improvements that we're talking about I think if we do those things that will be very easy to do the type of thing that you just talked about but we've got we've got to put the work in and making sure that we're that we're really delivering incremental benefits and incremental improvements that really would solidify our positioning there.

Markets and then we can talk to customers about it so more to come on that I wish I had more detail to tell you when the date was but the.

The most important thing we can do right now is working on those four pillars and make improvements in that over time, I think youll see the marketing come to life and kind of projected things that youre thinking about.

Thank you.

Alright. Thank you Kevin Thank you, Joe and that concludes our call for today, we appreciate everyone joining us.

We look forward to updating you on our second quarter results in February and have a wonderful day bye bye take care everybody.

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

[music].

Good day, ladies and gentlemen, and welcome to the Brinker International Q1 fiscal 2023 earnings Conference call.

At this time, all participants have been placed on listen only mode. The floor will be opened for questions and comments following the presentation.

It is my pleasure to turn the floor over to your host Micah Ware ma'am the floor is yours.

Thank you Paul and good morning, everyone and thank you for participating on today's call with me are Kevin Hochman, 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.

Oracle facts any such items should be considered forward looking statements with the meaning of the private Securities Litigation Reform Act of 1995.

We will provide insight into the company's ongoing operations.

And with that said I will turn the call over to Kevin Thanks, Mike and good morning, everyone.

Over time this morning, I would like to share the results of the changes we talked about in August to create near term momentum and the progress that we've made in defining chili's northstar in the longer term strategy.

Our team in charge of growth implemented initiative, we call raise the bar comprised of new drink offerings delicious, new food like loaded quarterly fries, and the Chili's, Philly and robust happy hour platform and marketing that positions, Chile as the bard destination during football season.

The business, we quickly learned that simplification has to be an ongoing priority for us. So we will regularly partner with operators to implement more ways to make it easier to run restaurants.

We expect over time. These efforts will show up on the P&L through lower waste improved labor productivity better margins and increase retention.

We also implemented a new pricing strategy to help expand restaurant margins and grow profits by providing a value price point for cash strapped guests, who needed moving away from frequent deep discounting reducing the amount of mix on deal and increasing trade up opportunities to drive check last week, we launched a new menu with 407.

Basis points of price, including a reconfigured value platform. We protected 10 99 is the entry price point for our three for me value menu, but we right size the number of offerings to reduce the overall mix and the value platform. We also introduced more premium price points at 13, 99, and $15 99 for those value focused.

Guess what.

Something more like Staker shrimp as a result of these three for me menu changes, we are seeing more trade up off the value menu and we're selling more full revenue entrees off the Ala Carte menu.

We expect these growth simplification and pricing initiatives will allow us to invest back into restarting our marketing voice sometime in Q3.

In the new calendar year, we know that cash drop customers will be seeking great deals without sacrificing quality and were making plans to create broader awareness of our unbeatable chili's value.

Now, let's talk a little bit about our long term strategy.

Since our last call we completed the work on the Chili's Northstar and longer term strategy. We are now in process of aggressively putting plans in place that we believe will strengthen chili's position in casual dining.

Liver value to our guests and deliver value to our shareholders over time.

We started by defining the four strategic pillars that we believe are fundamental to growing market share now and sustainably over time, each pillar will have a senior executive voter action plans and Kpis that we will measure and track performance against.

Our first pillar as team members, which is all about making the job easier more fun and more rewarding for our operators and our <unk>.

The three areas, we prioritize here are stabilizing turnover, ensuring that we're fully staffed and reducing complexity to make it easier to run our restaurants.

While we've seen both manager and hourly turnover start to improve we still have more work to do to return to pre pandemic levels.

That she will add huge value in this role and help us tackle our turnover challenge.

The second pillar is food and drink, which defines the core categories that we want to win on we will double down on our four segments that we're already known for which also happened to be huge opportunity in growing segments of what Americans eat burgers Fajitas chicken, Chris Bruce Margarita is we.

We believe that making sure that we have the best possible offerings in each of these categories, we will improve the guest experience and increase traffic in our pricing power over time.

To enable our restaurant teams to focus on those core segments will continue to remove skus in operational complexity from the categories were over invested in like salads and sandwiches and of course, we will protect our other famous recipes, which are customer favorites like baby back ribs, Skillet queso and our southwest egg Rolls. An example of how this plays out to grow the business.

We're working on re launching our chicken crisper platform in the back half of the year Boneless fried chicken is a huge segment and we see tremendous upside.

Our insights tell us customers want a variety of dipping sauces, the best possible fries and the ability to get larger piece counts of chicken tenders, and we already have a terrific chicken tender product and by expanding the flavor profiles using gets just wings sauces that are already in the restaurants upgrading our fries reengineering of the.

To provide trade up opportunities. We think we can explore that segment of the business. This is what we mean by more focus on large strategic growing segments of our menu.

Our next pillar is hospitality. This is all about making sure we deliver a great experience for both our dining guests and our off premise guest on the dining side, which represents two thirds of our business working to redefine our labor model to make service jobs easier. So they can spend more time connecting with our guests they've told us that serving the gas.

Asked is why they chose to work in the hospitality business and we need to allow them more time and more focus on making our guests feel special.

We're serious about improving hospitality and we will make some needed investments in this critical part of the business.

From an off premise standpoint, it is now over $1 billion of business for us today, which tells US our guests see chili's as a whole meal replacement. So we've structured our organization to be more deliberate about improving the off premise experience end to end remaining friction for both guests and team members in optimizing food quality for takeout and delivery.

Every.

We believe this focus will accelerate the growth of this important part of our business.

The fourth and final pillar is atmosphere, there's two legs to this pillar. The first is providing a better atmosphere for our heart of house kitchen team members by ensuring the restaurant facilities and equipment are well maintained and fully operational like many others, we deferred some maintenance items during COVID-19, which we know is.

Impacting the experience for team members and guests. So we're working to accelerate getting restaurant maintenance and equipment back on track to pre pandemic levels.

The second leg of atmosphere is the guest facing experience in our dining rooms, and bars, we're committed to making the chili's atmosphere more fund environment for our guests as they returned back to our restaurant dining rooms.

Last week, we finished cast getting the Northstar strategic pillars throughout operations and across the restaurant support center refining it based on their input and their response has been incredibly positive our operators are already feeling the impact of short term changes we've made to make it easier to run their restaurants and grow the overall business. We just completed our annual employee feed.

<unk> survey both at the restaurant support center here in out in the field engagement intent to say saw very significant lifts driven by implementing team members recommendations to simplify operations and also giving them more of a voice in our business outcomes.

This is a multi year strategy for the Chili's brand with investments designed to improve four wall economics over time. We also have plans in place to improve the guest experience to mitigate the negative traffic headwinds in this fiscal year, we're focused on strengthening our voice in the marketplace building incremental sales platforms around core equities and improving the team member experience.

<unk>, which we believe will strengthen our ability to move through a tough macro environment.

Now I'll hand, the call over to Joe to walk you through the numbers go ahead, Joe Hey, Thanks, Kevin and good morning to everyone on the call for the first fiscal year 'twenty three Brinker International reported total revenues of $955 million, a restaurant operating margin of 6% and an adjusted loss of <unk> 57 per share.

These results lived up to the expectations, we discussed in our previous analyst call.

Top line company sales performed well supported by positive comp sales for the quarter and the addition of restaurants acquired and opened since the first quarter of last year.

Despite the tough inflationary environment, our operators delivered restaurant margins slightly better than we planned at.

At the brand level Chili's posted a comp store sales increase of three 8% driven by price at seven 4% and mix gains of 3%.

An important part of the comp makeup this quarter, whereas our concerted effort to move away from higher levels of discounting, particularly through our loyalty program and bar offerings. This did contribute to the brand's negative traffic of six 6% for the quarter, but also supported positive mix and lower comp expenses related to the offers.

In addition, we believe some guests are reacting to the tougher economic environment with fewer restaurant visits.

<unk>, which enables us to narrow the pricing gap relative to the industry.

Chili's continues to offer good value opportunities for those guests, who might otherwise shy away and even with our more aggressive pricing, we remain favorably positioned to our sector.

Marciano has reported a very strong quarter with positive sales of 18, 2% driven by favorable traffic of nine 3% and increased price of five 8% along with improved mix.

<unk> recorded positive traffic in all major revenue channels, including dine in banquet and off premise overall.

Overall their first quarter business performance exceeded pre pandemic results their dining rooms have recovered and they're strong off premise performance has remained in place.

Last piece of the recovery as banquets, which will play out over the course of the next two months.

Events held this past quarter exceeded expectations and the banquet pipeline for the upcoming holiday season looks promising.

Moving on to restaurant margins.

First as indicated in this morning's press release, we are reclassifying certain revenues intercompany sales from the franchise and other revenue category as it relate more directly to restaurant level performance. We believe this more accurately reflects our restaurant level performance and provides a more relevant comparison to our peer group. The first quarter restaurant operating margin benefited about 70 basis.

<unk> points due to this reclassification.

As expected for the quarter, we experienced commodity inflation of approximately 24% with significant year over year cost increases from chicken and beef driving the inflation.

The three 5% increase in food and beverage cost was the primary impact to the overall loss for the quarter.

We are now seeing most of our main commodity markets, particularly chicken move to lower cost levels supporting our expectations of a much improved cost environment as we move further into the fiscal year.

On the labor front wage rate increases have moderated although they remain in the mid single digits for the first quarter. Our hourly staffing levels continued to improve and we are starting to make necessary progress in lowering overtime and training costs.

In addition, our operations leadership is starting to make progress with turnover, which should result in better team member and guest experiences over time.

While restaurant expense did benefit from top line growth when compared to last year's first quarter, a significant year over year inflation led to one 7% year over years.

Merrily driven by increases in delivery fees utility costs, and higher restaurant repair and maintenance.

Looking ahead, we anticipate growing company sales and expanding restaurant margins as we progress through the rest of the year.

In terms of development, we are moving into a period, where we will consistently open new restaurants with five scheduled for the second quarter and 18, including one relocation for the fiscal year.

We just opened our newest location location in Athens, Texas.

<unk> mid sized community east of Dallas, where we clearly received a warm welcome. The opening was very successful generating nearly $100000 in sales during its first week. This.

This demonstrates the power of the Chili's brand and the potential to develop locations and a variety of markets.

At the same time, we continue to evaluate our fleet at the lower end of the performance spectrum, mostly due to aging locations and we anticipate closing eight to 12 restaurants this fiscal year.

Now with a tough first quarter behind us we're moving forward through the rest of the fiscal year with a good line of sight to an improving operating performance.

With this in mind, we are reiterating our full year guidance provided on our last earnings call.

As Kevin detailed in his comments, we are quickly moving forward to improve the chili's brand and a focused and sustainable manner.

<unk> is now back in full force and prime for a celebratory holiday season, and importantly, the worst of the inflationary headwinds. We believe are now behind us.

Granted there are likely some uncertain economic times to maneuver, but as we strengthen the capabilities of our operations and create a more relevant easier to operate and distinctive experience for our guests we will create the opportunity to be successful and whatever conditions prevail.

We entered the rest of our fiscal year optimistic for the growth and improvement ahead.

With our comments now complete let me turn the call back to Paul and moderate questions about the top of the hour.

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.

He asks about closing your question you. Please pickup your handset is listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions.

Yes, Jeff It's Joe Good morning, Let me give you a little insight there we think it's going to be coming down I would expect to see something in kind of in the mid teen range. As you think about the current quarter and then mitigating further into the back half down into the mid to upper mid single digits.

So I think we will will be those ranges you would expect to see.

And then just one unrelated question. So it sounds like you were able to decrease.

The number of orders or checks on discount from I think it was 37% last quarter to a low 30% level this quarter.

Where would you guys like to see that number get to meaning percentage of orders on discount and if you were to get to that level what type of check benefit would that provide for you guys.

If the economy.

Gets tougher we might have to be a little bit more aggressive maybe pull back a little bit odd continuing to do this but right now based on everything that we're seeing we're going to continue to manage that number down and hopefully we'll get below <unk>.

The next time, we talk but we just got to make sure that we monitor the economic environment make sure. We don't get ahead of our skis on anything that we need that we think the customer needs.

Yeah, and I think.

And Jeff I think another piece of that is as we start to evaluate how we think about offers theres opportunity there to where in the past.

Most offers were going out as a free something or I can fill in the blank after that theres probably.

Opportunities to restructure that program, where there's in essence, its an offer but maybe it's.

As the price point attached with the tusa, rather than a freebie, it's for $1 $2 or something of that nature.

So it can still be an offer from a number of check but it can be a more profitable offer relative to where we were.

Alright, thank you.

Thank you. Thank you. The next question is coming from Alex Slagle from Jefferies. Alex Your line of sight.

Thanks.

Morning.

The sales momentum both at Chili's, and Marciano seemed to accelerate a bit quicker than expected and just curious to the degree that surprised you and how much of this momentum is sustained and we will just maybe thinking about how you layer. These near term drivers that some of the longer term.

Drivers down the road.

Yes, Alex we are pleased with.

That directional acceleration, we saw accelerated as.

As we moved through the quarter October is maintaining.

That pace coming out of the.

Out of the quarter. So we're pleased with that and we're seeing it.

Being driven by some of the initiatives, we spoke about the bar, which is obviously not just an impact within the bar it impacts the entire entire restaurant.

Seeing receptivity to the pricing.

Changes, we have made and some nice mixed ramifications of the way we've kind of started to reconfigure the menu and focus on some of those core equity. So I think it's I think it is sustainable.

It's something.

But we would expect to continue as we move further into the fiscal year.

Okay.

On the other restaurant expense line, the utilities and repair and maintenance, which I guess you called out maybe it's our focus going forward.

Delivery fees, how much of this elevated costs out of your control are in control.

Trying to figure out how much continues through to Q2 in the back half yes.

Yes, I think it's a great question I think there is a little bit of both when you think of delivery fees. Some of that a lot of that was driven by actions we took to expand those delivery aggregators.

And grow the.

Some of the virtual brand offerings.

Looking at that year over year comparison, and you're also getting some again similar to what you saw on food and beverage some larger year over year comparisons that I don't think we will continue at the same.

Year over year comparisons as we move so I think particularly when I think about the utilities and some of those.

A bigger expenses within restaurant expenses, I think youll start to see gravitation more to the.

The level year over year.

On a comparative basis I don't think it will have quite the same level of drag on a percentage basis as we go farther into the fiscal year.

Okay got that thank you.

Thank you and the next question is coming from John <unk>.

<unk> from Jpmorgan, John your line of lives.

Thank you Kevin I was curious the more time that you've spent with the brand and obviously at very heavy company operated structure and even some of the menu changes that you're talking about seem to be national in scale.

Just wondering if if youre kind of seeing an opportunity to maybe start to localize your business a little bit more regionalize your business.

Little bit more I mean.

We have so much such a disparity of kind of consumers and behaviors.

Competition, what have you that it's done on a local market I was wondering if there's any pockets or opportunities that you see that.

The way to actually optimize and get scale from this business might actually not be taking a completely national approach, but maybe it's suppressing it more locally or regionally.

Yes.

I have experienced in national chains.

Sure.

Kind of two things I think in your question.

I think you are probably speaking more about the menu, which.

Which we'll get to in a second in the first place I think that we have to be really sharp about understanding regional differences in pricing tiers. So.

Whether you're in a high cost market or.

Depending on the level of casual dining activity I think we have to be really sharp about understanding where can we take pricing where do we have to be as competitive as we possibly need to be in order to.

As far as like in terms of food or regional differences.

It is a discussion that we're having internally here I would tell you.

I think there might be room for a little bit.

<unk>, but for the most part what I've seen in my time in working on National brands as we need to be focused on big things that will impact.

We will make big impacts to the business and typically those are things that can be expanded at all no 1000, plus restaurants and have the scale of our buying power behind it as well as as we get back on.

At a restaurant advertising.

It makes way more sense to be national from a cost standpoint, both in terms of producing the advertising as well as getting the best possible rates. So I wouldn't anticipate seeing very much region reality in terms of our menu there might be a little bit of customization that we do like on regional craft brews and some things that we hear from the operator.

But I don't anticipate that being a major part of any kind of strategy that we do going forward.

Okay. Thank you for that and there was a soft delusion and I'll be more specific in this case.

Terms of the ownership.

I'm sure you probably know many very talented franchisees from your previous organization that probably would actually do very well franchising chili's, if that opportunity came to them and it is.

Firstly is obviously there is a disparity of performance across markets and you probably have some stores that can be run run by a franchisee.

And would be dilutive or maybe excuse me not dilutive or perhaps even accretive to operating income dollars. So there could be maybe a portfolio management.

Type of.

And exercise to go through us.

What your previous experience has been in terms of the success at that drove across the organization.

Yes, well I appreciate the question honestly, we haven't given much thought to that since we are working on our long term strategy. What we've been focusing on is what are the long term things that we need to address in order to have sustainable profitable growth over time.

The four pillars that I talked about on the prepared remarks food hospitality atmosphere and team member experience. That's really what we're focused on right now we really just have not even remotely talked about ownership and franchise models. Because we're really focused on things that are going to win with the guests.

To help us grow faster and do it more sustainably.

John I would also echo in that.

Corporate ownership and community connectivity are not mutually exclusive.

Ideas in fact, when we talked on the last call I think we highlighted a lot of focus we're giving to making sure that our restaurants in a community and they are very much part of our local communities increase that.

Activity to give back nights and things of that nature. So.

Engagement and connectivity to the local communities that our restaurants are in is in part an important piece of the dialogue as we kind of move forward.

I got that thank you.

Thank you. The next question is coming from Brian Vaccaro from Raymond James Brian Your line is less.

Good morning, and thanks for taking my questions and sorry, I joined a few minutes late.

You've commented on this I forgive me for that but I wanted to ask about the performance of the three for me platform. Since you made some changes to the program can you can you just give us a sense of how thats mixing in terms of sales or transactions and to what degree the profitability of the platform has improved versus prior versions.

Yes, so I'll walk you through Brian .

The changes that we made and then Joe wants to chime in with any more specifics. He is welcome to so.

So we dropped a new menu on $10 25.

That had kind of a restructured three for me platform.

We reduced the mix of the.

The menu mix.

Of the of that platform. So we reduced from 12 offers to nine.

And we also went from four price tiers to three price tiers and the intent of that was to drive more trade up within three for me as well as higher guest check both for three for me.

Customers as well as customers that then would trade out of three for me and go back to the Ala Carte menu and as I said on my prepared remarks.

We were in the high <unk> in terms of discounted.

Tickets, we're now in the low <unk>, so we've seen a meaningful impact.

We've seen significant.

PPA or average check increases.

For those that by three for me.

We've also seen a reduction of mixing three for me as some have moved back to the Ala Carte define the items that have removed from the three for me for me.

The other changes that we made even on the tiers above $10 99.

Several of those items were priced as a bundled offer below the Ala carte price, which obviously would.

Pushed the customer to buy the bundled price because it's less we've corrected that with this menu update so.

All of those items that are on the bundled three for me menu are now higher priced still incredible discount for the customer, but higher priced than the Ala carte items.

And then we added some options to the higher tiers of three for me to drive trade up so at our 15 99 tier that now has Cajun chip pasta and two steak offerings six ounce sirloin and our carnet asada. So not all value customers just want the basic they want to be able to trade up and we've seen some success behind that too.

Reposition him back on the La Carte menu.

And that has also helped us get out of some of those discount checks. So.

So we are losing quite a few changes to those one in terms of the overall number of three for me. The overall mix of the three for me.

PPA that we're getting out of three for me customers and then obviously that mix that goes to Ala Carte is helping with PPA for the overall box too.

With increased profitability to the structure of the program also reduces the.

Cost dynamics of the platform itself too so not only youre getting.

The favorable lift and the favorable PPA, it's coming against a a.

Lower costs.

Our perspective on the platform too so yeah, we're one week into it.

Obviously.

Pretty excited about what we're seeing.

Come out of it and we will watch it develop it as we kind of go through.

The rest of the quarter, but.

It's performing across all of that all of the metrics, including the mix back into the Ala Carte side of the equation.

At or above.

Above where we would have expected it to perform.

Okay. Thank you that's helpful and Joe on the annual revenue guidance can.

Can you remind us what you've embedded in that guide in terms of chili's traffic and sort of average check expectations I know you talked about pricing.

I think high single digits, but maybe you could sharpen our step on that and then also just on mix specifically would you expect mix to continue to be a more meaningful contributor in this ballpark like we saw in the first quarter than we've seen historically.

Brian .

Sharpen that to the extent of reminding what I said on the last call as we've reiterated the guidance and you hit on the on the traffic and we do expect chili's to run at a negative traffic.

Mid single digit range as we kind of move through the fiscal year pricing will be at those levels that we've told you about mix is is kind of the delta.

Encouraged by the mix and the sustainability of what we're seeing on the mix side of the equation didn't really give you.

Specific range.

I guess I'll sharpen it by saying.

Through the first quarter and what we're seeing.

As a sustainable level of mix for the near near term.

Very encouraged by that.

Okay, and then last one from me just on the Labor line, it's pretty solid performance this quarter and so I think you mentioned seeing some normalization finally, seeing some normalization in training and hiring costs and that's been very outsized in the last 12 to 18 months.

Is there a way you could ballpark sort of how much progress you've made maybe as a percent of sales or however, you characterize it and how much opportunity still remains on that front.

Yeah as it relates to those items I don't think I said normalization, we're seeing wage rates.

Start to stabilize kind of in that mid single digit range, which is down from last year.

A couple of percentage points.

Seeing improvement and the overtime and the beginnings of improvement on the training side of the equation IV both of those as still having opportunities as we kind of move.

Forward through the rest of the fiscal year training.

The managerial side of the equation has.

Stabilized pretty much getting back into the pre pandemic I'd like to see a little little more opportunity for improvement there.

And while it continue to move the needle forward on the hourly side of the equation, which drives a lot of training expense. So it's.

It's getting better but I still think there's good opportunity within those two specific areas as we kind of move forward obviously the benefits we're seeing.

From sustaining our price dynamics in.

Our mix lifts will help in that category as you kind of move forward.

Thank you I'll pass it along.

Thank you. The next question is coming from Jon Tower from Citi.

John Your line is live.

Thank you for taking the questions.

First go into the marketing conversation I believe Kevin earlier.

On the call you had mentioned the idea of marketing coming back online later this year.

And I know I believe you've been on TV for a little while now so I'm curious how we should think about.

This rolling through.

Likely the channels are going and whether it's traditional media versus more digital et cetera.

Yes, So last call. We did talk about wanting to start building back those investments into the business, but we needed to have clarity on where the brand was going to be positioned.

We needed some new news to bring guests back in.

With our goal to increase that spend both this fiscal and then some more for next fiscal we only spent about 1% today pre pandemic. We were at 4% I don't think we're going to get to all the way to bright there.

We are going to incrementally start adding back marketing dollars and then really monitor the return that we're getting on those and if it's good we'll continue to build in it and if it's not we'll have to retool right.

The menu, but we have not invested dollars to make customers aware of those amazing offers and so.

Any any of the incremental spend that we put into the business next.

In the back half will be funded from.

Removing some of this deep discounting and removing the menu mix that we talked about at three for me and we will be putting dollars into really focusing on the value the value components of our business just because we think thats going to be things that resonates with our cash strapped customer coming out of the holidays looking for not just low prices, but high quality and.

Abundant value and we think that we are very well positioned.

The casual dining and the restaurant industry to deliver on that so you likely will see more food focused advertising that focuses on the offers versus brand spots that you might see from somebody else but.

The most importantly, we can do as we get back on air is making sure that we're getting the return on investment that we want from our marketing dollars because that gets the whole flywheel going so.

And then as far as the last question I think you had was the the elements that we would invest in.

We don't have those details flushed out yet certainly we've been primarily focused on digital with our limited spend in the past. So I would hope that we'd be able to get back onto on the TV, but im going to let the marketers figure out what the best with the best recommended spend is based on the levels of spend and what we're trying to accomplish so.

More to come on that but very exciting about what the team is working on it now I think that we have a clear north star and the things that we want to focus on and how we want to position ourselves within casual dining I get excited about putting money back into marketing and starting to tell our story again.

Got it. Thank you I appreciate all the color there Im curious just pivoting a little bit too.

<unk> retention.

I believe it's still elevated versus history, it's improving sequentially, but probably not exactly where you want it to be so just curious.

What you've heard from your employees is too.

I guess now ex employees.

Why they're leaving where theyre growing and frankly, what you guys are doing to address this.

Yes, I mean, there's a couple of challenges and I think when we talked about the kind of a long term north star and the four pillars. Many of those even though theres just one pillar. That's those team members. Many of the other pillars will help with team member retention.

That's one big piece, we heard the other big piece, we heard was hey, how can we make this easier and more fun again to work in a chilly so like when we're at our best servers and back of the house, we are working together, having fun, even if it was a busy service.

They've got through that service and they felt like they really accomplished something big and so we've got to get back to that that atmosphere are both in the back of the house of the restaurants as well as the front of the house and so the simplification that we talked about on the first call and I alluded it to it in my prepared comments, that's going to be an ongoing thing and I will tell you like when we looked at the employee engaged.

<unk> surveys over the last few weeks, we do once a year, we saw record increases in terms of engagement and intend to stay and we think that is a direct reflection on two things one that they now have a voice on what are the changes that we're going to make in our restaurants to make it easier to operate and to the fact that the changes are happening and they're continually to happen right and so.

Every month or two they are seeing the changes happen, it's making an impact on making their lives easier and so they know that we're all of us together to make it more funded more easy to work in a chili's I think if we focus on those two things I think we're going to see significant improvements over time, and that's going to help both the labor line as well as probably more importantly, the customer service levels.

Great. Thank you I appreciate the time.

Thank you. The next question is coming from Katherine Griffin from Bank of America. Catherine Your line is nice.

Hi, Thanks for taking my question, so I wanted to kind of.

Like all of that I'll, just add some color, but just specifically on the fiscal 2023 guidance I think it would be helpful. Again, just sort of narrow down some of the puts and takes that would get you to either the low end or the high end of the guidance range.

Okay.

For EPS.

Well obviously.

And again the guidance is out there and we've had a lot of commentary around it I think from a puts and takes standpoint, obviously you look at the cost structures first and foremost so.

The ability to continue to see the movement and improvement year over year on particularly food and beverage is going to be a big piece of the equation.

As we make.

From a top line perspective, I think our ability to make.

Further traction and improving the guest experience.

It's going to be a big piece of that equation, but obviously the mixed dynamics that.

We see coming out of some of the changes we make will have.

If I think about the incremental impact that that creates.

Upside that that would be a Q1 from the top line.

But I think the reality is that should come from both sides of the equation, but the topline growth has opportunities.

As it relates to our initiatives and.

Particularly the mix side and then the cost structure.

Further improvements.

Exceed our initial expectations.

Obviously will flow.

Flow towards the bottom line, we may choose.

Kind of move through this fiscal year on how we think about the.

The reinvestment that we've talked about on both of these two calls so there are opportunities to reinvest in the business, which will have.

The long term benefit of structure of trading a stronger foundation that can.

Driving the subsequent fiscal years. So we will obviously take the time and be thoughtful about how we if we do see incremental savings in different places how do we.

Either reinvest that back into the business to drive further top line or improved guest experience and what flows to the bottom line.

Hopefully it gives you a more insight yes, no absolutely. Thank you.

But I guess, if I could just follow up I mean, when we talk about.

Sort of ambition to narrow the price gap versus the industry does that mean that youre expecting to lose some of the lower profitability of transactions I think it'd be helpful to just hear again sort of what the expectation is going forward on traffic like specifically within the context from share gains because.

Some of the traffic that thats in gain from lower relative pricing is that risk. So just any thoughts on how we should assess that risk would be it would be helpful.

Yes, I think the reality is in the moves we're making as we will probably see some traffic losses as it relates to the.

The discounting side of the equation, but again, we're trying to.

Create a stronger profitable model from on an ongoing basis, we think thats worth.

The tradeoff right now we're seeing.

A nice net positive benefit as we kind of move through.

The first the <unk>.

First four months really continuing on through October I think where the interesting things as we go through.

Some of the moves we've made on the discounting side of equation why typically we will see an initial traffic.

Traffic reaction, we saw that gap narrow as you move farther through in particular in October when I look at traffic gap to the industry.

Right now it's.

It's a trade we're willing to make because it's definitely reaping bottom line benefits as we go forward.

Great. Thanks, I appreciate it.

Thank you. The next question is coming from Fred Wightman from Wolfe Research your line of size.

I put it more in the closer to the steady as we kind of move through it now October .

Is probably the first full month of a lot of the changes we've made as it relates to the.

Offer removals and some of the discounting chain.

Changes and of course.

You saw the menu drop coming at the very end of the month, so not a lot of impact.

Outside of this last week or two.

It ends today.

So thats not going to impact the October numbers. This month, but it's exciting to see what that potential impact could be as we kind of move forward. So.

I put it in the steady, but it was a nice sequential improvement up to two this steady performance and again our price.

And mix is.

<unk> exceeding.

Any of the traffic losses, we've experienced during that period of time.

And Thats still the cadence. We currently have obviously, we reserve the right to.

To make.

Subsequent changes, but what we what we did is really took planned mid year kind of January price increase and pulled it forward to this October menu since we had the menu.

Already in the works to go so we were able to embed some incremental pricing opportunities there.

If we maintain it.

You would obviously see the.

The impact year over year in November and December is at that higher level. So we spoke about and then unless we take further actions if any nature you will start to see kind of a steady pullback as we lap prior year pricing actions. So.

You would see that start to come back down more into the upper mid single digits since you moved towards.

At the end of the fiscal year, but we will continue to evaluate the pricing dynamics and opportunities as we kind of move forward.

Makes sense. Thank you.

Okay.

Thank you and the next question is coming from David Palmer from Evercore ISI.

David Your line is nice.

Thanks, Good morning.

Wanted to come back to the guidance I wonder.

How you view that guidance versus the changes you want to make to set the brand up for the long term and during this call you've said it.

Waiting the business a bunch of times and it sounds like you want to improve the guest experience and make a pivot in marketing and then I think you've also noted that youre going to have an analyst day coming in the second half of the year. So just thinking about how.

This guidance really contemplate some margin wins from rethinking some things like the virtual brand strategy and the delivery menu pricing.

But also perhaps some margin sacrifices.

The assessing of team service model.

Net impact to your to your earnings in the near term to fund long term repositioning.

<unk>.

Yes, David.

I appreciate the question I am going to decouple, it a little bit for you.

From a from how to think about what I am very encouraged by the direction of the business.

Obviously the guidance was provided not too long ago. This is the first quarter. We will continue to evaluate guidance and we have further opportunities to talk to you about that as we kind of move through the rest of the fiscal year, but again, we're removing through this but we anticipate it to be a very tough quarter and it was.

And feeling good about the direction of the business and the upside we have.

Based on the on how we are moving forward now that being said the other piece of the equation is how do we think about it.

Investing back into the business and that's a constant conversation, we're having as a leadership team as we kind of go forward.

And frankly, I don't want to put a lot of it in the context of the guidance, we're going to make.

What we think are smart decisions for the long term benefit.

Of the brand.

As we look at that where that comes from and how it's funded.

Isn't necessarily going to have to be.

<unk>.

Sacrificing margin in the short run too because again as we think about how we reallocate costs and where we're seeing.

Benefits on our cost structure relative to what we originally thought for the year.

Those give you really near term opportunities to think through.

What what needs to foundation, we go back into the business and what opportunities do we have to flow to the bottom line. So.

It helps color the discussion but.

Think philosophically and Kevin you can add anything you want to I think we need to be thinking about how to build a.

An improved foundation.

Both of our brands businesses for the long term and we'll make the right decisions.

Regardless of which fiscal year, we're thinking about.

Going forward, but again very very encouraged by the increased ability to do that based on the current operations of the company.

I mean, just the one thing I'd add is I'm sure, we'll be able to share a little bit more detail at the Investor day.

In the back half.

And the way, we're thinking about the investments David is really on labor.

Labor R&M marketing and then some new equipment to help automate some of the back of the house.

We call it <unk> three or kitchen of the future three so.

The good news is we have line of sight to what those things are and we have some pretty good ideas on how we finance them now.

Now, it's just about kind of the pacing and sequencing of what Joe was talking about.

Where does it hit when do we make the investments et cetera, so, but we'll have more details on that.

As you think about the Investor day next in the back half so.

And does this.

This guidance contemplate us sort of a step up in and those investments run rating into the perhaps the next fiscal year, but included in this year, but for the second half of the year. When those investments will be made does it does this guidance include those investments.

It does in the short run.

And again, the pacing and sequencing of that.

We can change as we kind of go forward based on need and opportunity kind of as I said.

Talk through but there are levels of investments back in those areas that are specifically contemplated in the guidance and then we'll update those as we kind of move through the rest of the fiscal year and are definitely flows into next fiscal year.

Thank you.

Thank you and the next question is coming from Nicole Miller from Piper Sandler Nicole Your line is live.

Thank you so much good morning.

On price.

Was the price actions still 400 basis points in August and then to get closer to the 10% is at about 150 basis points in October that Youre talking about.

And I want to make sure that isolating just price and that's not including next at 10%.

And Nicole.

It wasn't 400 basis. So again, if you look at the pricing actions taken there was the July pricing action.

The way I think we've talked about it.

On the last call there was probably in the $1 30 range.

Under 1%, 1% impacting.

August with.

And a little over 60 basis points coming on in September . Some of these actions are taken off menu too.

So it's it's.

It's how you impact some of your off menu.

Third party channel delivery things of that nature.

The $4 70 is the price action that we took related to the menu last week.

So obviously it impacts one week of October , but will impact at that level going going forward. So.

So there were some specific you had a kind of early in the first quarter menu you had some subsequent off menu pricing actions and then this big one this.

This last week.

Okay for semi and then when you look at the mix sitting with around 3% in the first quarter is all of that or the vast majority with less discounting because im wondering how does like the improvement in <unk>.

Chuck goodness of the bar plan, which probably doesn't count as an entre traffic count.

But its dollar spent is that does that show up in mix is it meaningful and is there anything else meaningful and mix.

I think the two big discounting is clearly driving most of that.

That upside in mix I do think some of the bar initiatives as it related to.

Some of the restructuring of price points and things of that nature.

Across the whole happy hour side of the equation.

May have also generated some mix opportunities as guests move.

Between their menu items so.

But most of it is going to be the discounting side of that side of the equation.

Okay, So 10% price, maybe some positive mix traffic that's less negative so.

We're talking about at least mid single digit comp kind of is what's happening right now in the business.

That math is right in the sweet spot yes.

And then just to confirm when you talked about that very helpful industry commentary, where youre doing better than where the gap is closing is that industry commentary based on that track.

Okay.

It's both Knapp track and Black box, we look at those very closely you kind of you get a little bit.

Shorter insights through the Blackhawk side of the equation, but spend time.

With both.

Okay got you I was just asking because when we get when we don't so we can kind of get any factor of.

Commentary yeah.

And then just a last.

That was the reclassification Nicole of some of the.

We reclassified certain items detailed in there it's about $7 million that we re classed out of <unk>.

Franchise and other revenue intercompany sales that are more directly related to in store.

Operations. So we thought it is a more appropriate place to make it it would have impacted your first quarter ROM by about 70 basis points.

He was a benefit.

It was a benefit doesn't doesn't impact total revenues doesn't impact operating income does not impact EPS, it's just that that calculation yes.

Yes, just to make sure so and it's just following somewhere else in the P&L and so we just can't.

Can take that I guess that benefit and carry that forward and store level margin and 70 basis points on a 6% margin is.

Meaningful.

Yeah, and again, that's obviously, a very low restaurant operating margin as you go into <unk> yeah Yeah.

Okay. Okay, and then we just carry that forward at all reclassify as for the year again, it doesn't change anything in and obviously guidance or like I said, the bottomline, but but but how you construct the P&L changes a little bit.

And Nicole also we've restated all prior year to make it apples to apples and we're going to put on three years of history on the website. Just so everybody can understand exactly what we've done.

Perfect, we will grab that there. Thank you so much.

Thank you and the next question is coming from Jeffrey Bernstein from Barclays.

Jeffrey Your line is live.

Great. Thank you.

Two questions one just on the comp trends.

October was stable with September and seemingly September improved relative to earlier in the quarter.

But I know you also noted some easing traffic.

So Joe I just wanted to clarify I think you said, you're assuming down mid single digit traffic in fiscal 'twenty three I thought last quarter. It was low single so just wanted to clarify that.

And what do you think youre seeing any impact from a slowing macro.

I'm just wondering whether you think there's any signs of that is coming into play just yet or any signs of competitors already being more aggressive in terms of their promotional activity in the face of a slowing macro just trying to size up your thought process around what could be a slowing trend in coming months and quarters.

Yes.

<unk>.

That that piece of the equation probably creates the.

The blurriness of their ability to predict traffic out over the course fiscal year, but I think.

From what we can see right now what we expect from our business standpoint, and from what we would anticipate emanating from some of these initiatives, particularly the lower level of discounting.

That mid single.

<unk> single digit range is kind of our best view of the world right now macro could obviously impact that as we kind of move forward I mentioned that there could be some uncertain economic times ahead of us where when that hits and we're you know relative to our fiscal year obviously.

Every every day online you can you can see a variety of debates about about what's coming as we move further into 'twenty. Three so that could have an impact again, one of the things I watch to us again that gap to the industry. The industry is going to be hit by the macro and so we're all going to.

The brand I think you are I think it's realistic to say that there are some.

Marginal level of pullback as it relates to the lower economic.

Guest Chili's and.

In particular has a has the breadth of the demographics out there. So I would expect to the extent that macro is impacting chili's will feel some of that.

That's why it's very important to protect the value perception. So we have that.

One of the critical pieces of protecting the $10 99 on.

On the three for me.

Is to be prepared for more value.

Oriented environment, how we talk about that and making sure that people.

We are aware that we have that value is also an important piece of the equation and as Kevin detailed we would intend to do that.

If you moved into.

Trade down within within the guest yet either so but it is definitely on everybody's mind.

There's probably three things that we need to stay focused on.

To offset any potential headwinds that we do see from tough macros like one is just making sure that the things that we talked about in our long term strategy on great food, great hospitality, great atmosphere, and making sure that our team members are having a good experience. So they can delight our guests like that's going to become even more important if customers start pulling back.

Just because they can't afford to have that experience. So.

Certainly the stronger.

The stronger the stronger concepts that are operating more consistently are probably going to win at least market share in that environment and then obviously that will help as the macro is getting a little bit easier of the second one is as we take all of this pricing that we talked about we need to make sure that we do protect abundant value for that cash strapped guest and I think we've done a nice job of that with the current iteration. It's one of the reasons why we.

Haven't heard.

Too much feedback from our operators on making those menu changes because there is still <unk>.

Many options that are incredibly attractive price points and then the third one would be actually telling customers about it. So you asked the question of what are we seeing from a competitive set.

At the end of the day, if we don't advertise it it's hard to drive incremental traffic.

And so.

More excited about the idea of.

Not only protecting those things actually.

Understood and then just my follow up just obviously, you're not seeing any sign of slowdown just ship, but specific to the restaurant margin side of things.

Mr seem to be excited if the sales were to hold for the industry. We know that menu pricing is outsized we get the impression that inflation is easing.

So again barring a macro slowdown it would seem like there is potential for significant margin recapture and earnings growth.

As we move through the next few quarters I'm wondering whether you would share that sentiment or maybe we are underestimating the inflation impact or any kind of directional thoughts on the restaurant margin for the <unk> or more importantly for the full fiscal 'twenty three and that type of scenario. Thank you.

I would definitely sure that that assessment, but both specifically to us.

In macro late to the segment.

Sure.

Yes, that's the big the big what what if on the traffic side of the equation, but the good news is that.

Even if you saw some.

Some level of dip or some level of recession as you come back through that Youre still.

Better positioned coming out of that.

By by the pricing actions, we're taking and the improvements we're making in the base business.

We want to be very cognizant of what's going to be going on over the course of the next six to nine months. We also want to make sure we're <unk>.

Repairing ourselves for the following.

Nine to 12 months as we kind of make some of these these moves but.

As I said in my comments, we are expecting.

Growth and meaningful margin expansion as we go through the rest of this fiscal year.

Thank you.

Thank you and the next question is coming from John Glass from Morgan Stanley John Your line is nice.

Interest include I don't know if you still get credit for that in the same way maybe once did is there an opportunity to highlight that things in the context that we see a a concept that over time has had difficulty driving profit and maybe that brand distinction has been lost them along the way.

Youre, saying its the focus on value now, but it is an opportunity to in some form or fashion, we launched the brand really more distinctly or do you not see that as being a key initiative.

Well, absolutely we didn't talk about it in a ton of detail today, but we have a cross functional team led by our Chief Marketing Officer, George Felix We've just completed our North Star work, which is essentially a lot of the things that you just talked about which is what are the things that makes chili's, So special and differentiated and then how do we start bringing that to life in a more relevant way across our menu.

Our service model.

How we treat team members and pretty much everything that we do how do we decorate stores, how do we build new restaurants right. So.

We are in process right now.

Of cascading that down throughout the organization.

Hey, we're back.

Rebrand so.

Markets. Then we can then talk to customers about it so more to come on that I wish I had more detail to tell you when the date was but the.

The most important thing we can do right now is working on those four pillars and make improvements and then over time I think youll see the marketing come to life and kind of projected things that youre thinking about.

Thank you.

Alright. Thank you Kevin Thank you, Joe and that concludes our call for today. We appreciate everyone joining us and we look forward to updating you on our second quarter results in February and have a wonderful day bye bye take care everybody.

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

Q1 2023 Brinker International Inc Earnings Call

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