Bloomin' Brands, Inc. Q3 FY2021 Earnings Call

Greetings and welcome to the Bloomin' Brands' Fiscal Third Quarter 2021 Earnings Conference Call. It is now my pleasure to introduce your host Mark Graff, Senior Vice President and Investor Relations. Thank you, Mr. Graff. You may begin your presentation.

Thank you, and good morning everyone. With me on today's call are David Deno, our Chief Executive Officer; and Chris Meyer, Executive Vice President and Chief Financial Officer. By now, you should have accessed our fiscal third quarter 2021 earnings release. It can also be found on our website at bloominbrands.com in the Investor section. Throughout this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of recent trends. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings, which are available at sec.gov. During today's call, we'll provide a brief recap of our financial performance for the fiscal third quarter 2021, a discussion regarding current trends and select Q3 2021 guidance metrics. Once we've completed these remarks, we'll open up the call for questions. And with that, I'd now like to turn the call over to David Deno.

Well, thank you, Mark, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q3 2021 diluted earnings per share was $0.57 in comparison to $0.10 in Q3 2019. This significant profit improvement represents a third quarter record for the company. Our strategies are working and reaffirm our ability to deliver on key commitments, and drive even more sustainable growth. This success is directly tied to the planning and hard work that has taken place in our company over the last few years. In 2019, we presented a comprehensive plan to build a stronger, leaner, operations-centered company, one focused on providing even better service and food to customers. This plan is designed to significantly improve total shareholder return. Before we get into the details of the third quarter, I want to take a few minutes to review the initiatives from the 2019 plan, which are the driving force behind the strength of our results. First, grow in-restaurant sales by improving service levels and food offerings. Over the last few years, we have made investments in these areas to elevate the customer experience across the portfolio, especially at Outback. As a result, we are taking market share. In the third quarter, U.S. same-store sales were up 9.5% on a 2-year basis versus 2019. This was 600 basis points ahead of the industry. Second, through our leading off-premises business, we capitalized on our strong off-premises capabilities during the pandemic and the high off-premises retention levels in 2021 are contributing to sales outperformance. During the third quarter, the company generated over $236 million in U.S. off-premises sales, representing approximately 27% of total U.S. sales. Importantly, profit margins in the off-premises channel are approaching the margins of the in-restaurant business. This is the result of initiatives that were completed in the last few quarters. We expect off-premises to remain a large and growing part of the business going forward. Third, rapidly improved operating margins by growing sales and reducing costs. We've established a detailed margin framework to grow operating margins to 8% of revenue, representing a nearly 350 basis point improvement from 2019 levels. This starts by growing healthy traffic across the in-restaurant and off-premises channels. We also reduced reliance on discounting and promotional LTOs, and pivoted advertising spend towards more targeted, higher ROI digital initiatives. In addition, we remain disciplined in managing the middle of the P&L and are aggressively pursuing efficiencies in food, labor and overhead. Importantly, several technological and equipment innovations are in test that we intend to roll out to the restaurants in the coming quarters. These innovations should further improve customer service and reduce costs. Margins in the third quarter were ahead of this long-range goal. We remain steadfast in our efforts to achieve the margin framework we committed to and we'll continue leveraging recent learnings to more efficiently run and support restaurants. Fourth, become an even more digitally savvy company. In Q3, approximately 70% of total U.S. off-premises sales were through digital channels, a 251% increase over 2019 levels. Over the past year, we have implemented a new online ordering system and mobile app to support our digital business. Both of these have outperformed expectations. You can expect to see more activity on these fronts in the coming quarters. And finally, build a much stronger balance sheet. Given the very good year-to-date results, we have generated a great deal of free cash flow and are paying down debt. Our credit metrics are improving each quarter, and we remain on track to achieve the goal of 3x lease-adjusted leverage by early next year. A healthy balance sheet also provides great flexibility to return cash to shareholders through share buybacks and dividends as well as pursue business opportunities that will enhance shareholder value. One of the areas that we are excited about accelerating is new unit growth at Outback and Fleming's. Outback is a leading brand with substantial opportunity for unit growth. The success of the Outback relocation program is a clear indicator of this demand. In the past 5 years, we have relocated approximately 50 restaurants with sales lifts of 35% and average unit volumes of $4.6 million. We recently developed a new less expensive prototype that will enable more meaningful restaurant growth with healthy returns. Importantly, new Outback locations are also opening above $4 million in average unit volumes. We also have the opportunity to open additional Fleming's in California and Florida, two of our best performing markets. Fleming's is a proven category leader and will be a source of growth for the company. We are actively building the pipeline for growth and look forward to discussing this in the coming quarters. In February, we will outline a new restaurant development plan for a meaningful increase in unit growth in the coming years. Now turning to Q3 and current business trends. Recently, there have been some discussions regarding product shortages in the restaurant industry. Fortunately, because of the strength of the relationship with our suppliers and the hard work of our supply chain team, we have not encountered any major shortages. We continue to actively manage our network to ensure the restaurants are appropriately supplied with products to meet the growing consumer demand. There's also been discussion in the industry of staffing challenges. While we are not immune to these issues, we have made significant investments in our people. For instance, during the pandemic, we did not have any layoffs or furloughs. This decision has contributed to the retention and employee engagement scores that are among the best in the industry. In addition, our turnover is better than industry averages. This enabled us to better serve our guests and deliver the hospitality that our customers expect. Now for a sales update. Combined U.S. comp sales were up 9.5% in Q3 versus 2019. The quarter started up strong through July. However, in August, we saw some moderation from the resumption of traditional seasonality and concerns over the delta variant. Additionally, we made the decision not to replicate significant promotional activity that ran in 2019 at Outback Steakhouse. The offers we chose not to repeat include the Steak & Lobster promotion for $16.99, Steak & Unlimited Shrimp at a discounted price and offers tied to the launch of our third-party delivery channel. These programs started in early August of 2019 and had the collective traffic impact of approximately 10 percentage points over the last 8 weeks of Q3 2019. Although there were merits to this activity, repeating this promotion into 2021 did not make sense for our company in the current environment. While there was a negative traffic impact in Q3, it did have a positive impact on profitability. In Q3 2021, U.S. adjusted restaurant-level operating margins grew by 430 basis points over 2019. Through the first 4 weeks of the fourth quarter, U.S. comp sales are up 5% versus 2019. The impact of our decision not to replicate 2019 promotional activities has carried into the fourth quarter. We should be done lapping this heavy promotional spend in mid-November. Importantly, our sales continued to outperform the industry, which gives us confidence in the momentum of the business. These results would not have been possible without the talented and dedicated employees throughout our company. I would like to thank the hard-working team members in the restaurants and at the restaurant support center. Your commitment to serving guests with the highest levels of service, hospitality and experience is what makes our restaurants so successful. In summary, Q3 was another terrific quarter. We remain ruthlessly focused on executing against our key initiatives. We are optimistic about our ability to continue to capitalize on these opportunities and drive total shareholder return. And with that, I will now turn the call over to Chris who will provide more detail on Q3, what we expect for Q4 and provide preliminary thoughts on 2022.

Thanks Dave, and good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal third quarter of 2021. Given the significant impact of COVID on Q3 2020 results, most of our discussion today will compare against the third quarter of 2019, which we believe provides better context to our underlying performance. Total revenues in Q3 were $1.01 billion, which was up 4.8% from 2019, driven by an improved sales environment in the U.S. Total revenues in the U.S. segment were up 8% versus 2019. This increase was fueled by higher off-premises sales and increases in average check. Total revenues in our international segment were down 15% on a 2-year basis. The decline in international revenues was driven by Brazil, which had continued headwinds from COVID-related capacity constraints in Q3. As I will discuss in a moment, the sales trajectory for Brazil is much improved thus far in Q4. Q3 U.S. comp sales finished up 9.5% on a 2-year basis. Average unit volumes were approximately $70,000 per week in Q3. In the last earnings call, we discussed how July average unit volumes were $71,000 in the U.S. That number dipped down into the $65,000 per week range in late August and early September as we did see impact from the emergence of the delta variant, coupled with some resumption of traditional seasonality. Since the middle of September, we have seen weekly sales momentum build as weekly sales volumes have now accelerated back closer to $68,000 per week. As Dave discussed, we did see a larger degree of comp sales compression versus 2019 in September and into October, driven almost entirely by not replicating 2019 promotional activity. To give some additional context, our 2021 average unit volumes have maintained a consistent weekly gap to 2019 average unit volumes for the industry since the end of July. Q3 sales gains were driven by a healthy combination of traffic and average check versus 2019. Our increases in average check were driven by increased menu mix, a reduction in discounts and to a lesser degree, 2019 pricing actions. Turning to off-premises. This business has proven to be very sticky even as in-restaurant volumes have improved. In Q3, off-premises represented 27% of U.S. sales, which was only slightly down from 28% in Q2. Off-premises revenues were 29% of sales at Outback and an impressive 36% of sales at Carrabba's. All of these metrics have held steady early in Q4. Importantly, the highly incremental third-party delivery business continues to grow and was 10% of U.S. revenues in Q3. Off-premises is a large part of our ongoing success and will remain a key part of our growth strategy moving forward. Brazil Q3 comp sales were down 5.1% versus 2019. Brazil COVID cases remained elevated in June, which was the start of Brazil's third quarter. As the vaccination rate in Brazil increased and case counts began to moderate, we saw an immediate increase in sales. Comp sales versus 2019 turned positive at the beginning of August and are up 7% on average versus 2019 over the past 8 weeks. Our team in Brazil continues to execute at an extremely high level, and we are confident in their ability to navigate the current environment. As it relates to other aspects of our Q3 financial performance, GAAP diluted earnings per share for the quarter was $0.03 versus $0.11 in 2019. Our Q3 results include a $62 million payment made to the founders of Carrabba's as we acquired their remaining royalty stream during the quarter. This large one-time item was excluded from our adjusted results. Adjusted diluted earnings per share was $0.57 versus $0.10 of adjusted diluted earnings per share in 2019. Adjusted operating income for the quarter was $83 million. This result exceeded our adjusted operating income from 2019 of $22 million. This significant profit performance represented a third quarter record for our company. Adjusted operating income margin was 8.2% in Q3 versus 2.3% in 2019. This improvement is driven by our strong sales recovery, ongoing efforts to drive efficiency into our business and lower marketing expenses. In terms of our Q3 adjusted performance by cost category, COGS was 105 basis points favorable to 2019, driven primarily by waste reduction and increases in average check. The labor line was 120 basis points favorable to 2019. The large change in average unit volumes for 2019 drove significant leverage on labor in Q3. In addition, we also benefited from simplification efforts. This showed up in a permanent reduction in food prep hours. Operating expenses were 205 basis points favorable to 2019 due primarily to a $21 million reduction in marketing expense and higher average unit volumes. This favorability was offset by increases in to-go supplies and third-party delivery fees related to the growth in off-premises. On the G&A front, Q3 was down $4.9 million from 2019 net of adjustments. This includes the ongoing benefit of cost savings initiatives that we have detailed on prior calls. In terms of our capital structure, total debt at the end of the third quarter was $854 million. Our trailing 12-month lease-adjusted leverage ratio is 3.3x. We are making significant progress towards the targeted leverage ratio of 3x net debt-to-adjusted EBITDAR. Once we reach our targeted ratio, we will evaluate further debt paydown or other uses of cash to enhance shareholder value. Turning to Q4 guidance. We expect Q4 total revenues to be at least $1.02 billion. As I indicated earlier, we have been averaging $68,000 per week in U.S. weekly average unit volumes for the first 4 weeks of Q4. Our guidance for total revenues assumes weekly average unit volumes to increase to approximately $71,000 in the U.S. for the balance of the quarter, excluding Thanksgiving week. As a reminder, Thanksgiving week is traditionally a much lower volume week than other weeks in Q4 due to the lost operating day. We expect adjusted EBITDA to be at least $115 million. We expect GAAP EPS to be at least $0.45 with adjusted EPS of at least $0.50. These profitability measures for EBITDA and EPS would represent significant growth levels versus 2019. For perspective, in 2019 our fourth quarter adjusted EPS was $0.32. We believe our Q4 guidance reflects continued optimism for our current performance in the U.S. and a more bullish outlook on Brazil as they finish out their quarter. In terms of full year 2021 guidance, we have two items that need to be updated. First, we now expect commodity inflation to be approximately 1.5% versus our previous guidance of approximately 1%. Although we are locked on beef, we are seeing pressures in some commodities that we are unable to lock into longer term arrangements. Second, we now expect labor inflation to be approximately 4.5% versus our prior guidance of 3% to 3.5%. This is largely driven by increased wage pressures given the competitive landscape as well as increased training and retention efforts. Finally, although it is early, I wanted to provide some initial thoughts on commodity and labor inflation for 2022. We will provide much more fulsome guidance on 2022 in February. We expect commodity inflation to be approximately 10% next year. The commodity market is currently seeing elevated levels of inflation across all proteins given strong consumer demand and product shortages due to supply chain disruptions. In addition, higher input costs across labor, fuel, freight and packaging are contributing to increases as well. While this risk has been minimized in 2021 due to the great work of our supply chain team and favorable contracting, we expect to see these elevated levels of inflation continue into next year. We have not taken any significant contracting positions at this point in time as we typically make these decisions in early December. We will provide additional visibility on the call in February. The labor market remains challenged. And in addition to the impact of recent legislation, we are paying higher wages in a highly competitive environment. We believe this will lead to labor inflation that is in the mid-single digits next year. While the inflationary pressures from commodities and labor will be significantly elevated relative to historical periods, we are confident that we have offsets to mitigate these headwinds. These offsets include technology-driven productivity opportunities, overhead reduction, menu pricing and a significant recovery in Brazil. In terms of pricing, we are taking a 3% increase in late November. As a reminder, we have not taken a material menu price increase since late 2019. We will continue to monitor current inflationary trends for further potential pricing actions. Since the onset of the pandemic, we have shown the ability to adapt to a constantly changing landscape. And although there are many variables that can change heading into 2022, we are committed to achieving the 8% long-term operating margin framework that we laid out for investors earlier this year. We will provide more details on all aspects of our 2022 guidance, including sales, inflation, margins and capital in the February earnings call. In summary, this was another successful quarter for Bloomin' Brands, and we are well on our way to becoming a better, stronger operations-focused company. And with that, we will open up the call for questions.

Our first question comes from the line of Jeffrey Bernstein with Barclays.

I had one question and then one follow-up. The question on the margin side of things. It seems like you guys are fairly confident in your ability to combat the headwinds and achieve your margin targets. I'm just wondering in terms of timeframe for this to be achieved. And is it possible to see margin expansion in '22, despite the cost headwinds? And I think you mentioned your commitment to the 8% operating margin. I'm just wondering if you can talk specifically about when you think those might be achieved considering the more recent structural cost pressures we're seeing. And then one follow-up.

Yes. Sure Jeff. It's Chris, good morning. I think as you think about 2022, first of all, it's very early, right? So we'll give more guidance in February when we get to the call. But if you think about the construct of the way that the year could come together in 2022, given the guidance that we provided on commodities and labor, you kind of have to think about it like this. If you start with 10% commodity inflation, that would represent for us about $100 million of cost headwind next year. And then if you add in mid-single-digit labor inflation that we talked about, that would be maybe another $45 million of inflation headwind. And OpEx, you're going to get typical inflation, maybe a little more elevated than normal, another $25 million. So all in all, if you look at next year in the construct of how we're thinking about it, that's about a $170 million of inflation headwinds that we would have to offset to keep that framework that we've been discussing. So then it's just a question of the offsets, right? So we already told you guys that we're taking 3% menu pricing and that's going to get you, give or take, $100 million of upside to help offset the $170 million. Then we also talked about Brazil. Let's give context around Brazil. Brazil made $30 million in 2019. In 2021, they're tracking to breakeven for the year. And now they've added new restaurants over the last couple of years. So Brazil could represent a very significant tailwind again to help offset that inflationary pressure. And then between productivity opportunities that we still believe we have in front of us, a reset of our incentive compensation next year, other overhead opportunities or if necessary, we're not beyond taking a little more menu pricing, if that's necessary. There are absolutely, when you add all those levers up, there's a path to offsetting the inflation pressures that we could see next year and holding on to the 8% operating margins. Now the question that you asked is where does that fit in? Well, there's still a lot more to think about in terms of traffic and marketing ROI and how that comes back into the business. But we'll get more into that in February when we have a little better visibility once we get past the holiday season. The important thing, I think, for you and for our investors is that we feel very good about our ability to manage the inflation pressures that we see in front of us.

Yes. I just want to add too, Jeff. We're very committed to the 8% margin. If you look at our Q3 numbers, our operating profit margin is up significantly versus 2019. You look at our Q4 discussion, up significantly versus 2019. So we've got the levers in place to make that happen.

Yes. And I think one more thing to add just to the question is if you think about Q4 and what's different about Q4, keep in mind that the Brazil recovery hasn't started yet in full effect in Q4 because their year ends at the end of November. So we're not going to get the full benefit of Brazil. And the menu pricing that we've discussed doesn't go into effect until late in Q4. We only get about 5 weeks of that benefit. That's why the Q4 margin is a little more muted than what you might see next year.

Our next question comes from the line of Brian Mullan with Deutsche Bank.

Just a question on the sales deceleration in the fourth quarter versus 2019. You ran through some of the promotional activity at Outback you're lapping. That was helpful. It sounds like that ends in a couple of weeks. But it looks like Carrabba's and Bonefish have slowed up in October as well relative to the third quarter trend. So are there promotional activity at those two brands that you also decided not to pursue? Or were those only specific to Outback?

There were definitely promotional opportunities. Perhaps most of the things we did at Bonefish as well that we elected not to do this year. So you're seeing some of that in their same-store sales growth in Q4. But the Carrabba's numbers are just remarkable as are the Fleming's numbers. So to have those kind of sales gains quarter-over-quarter is really great. And we talked about the Outback piece in my discussion. But just to remind everybody again in Q4 and Q3 of 2019, we ran Steak & Lobster for $16.99, Steak & Unlimited Shrimp at a discounted price and we did some offers tied to the new delivery channel. You add all those up at Outback, that's worth 10 percentage points in traffic, and we decided how to run that because we want to build the brand for the long term, and we had substantial margin increases in the brand support and during that time period. So that's some of the rationale.

Yes. And the only thing I would add to that is if you look at Carrabba's, they did run LTOs. They ran limited time offers back in 2019, similar to Outback. The big difference between what you're looking at at Outback maybe relative to some of the other brands is the two LTOs that we ran between mid-August and mid-November, the Steak & Unlimited Shrimp and then the Steak & Lobster promotion. Those are the two most effective traffic-driving promotions that we run, albeit at a discounted price, but they are very effective at driving traffic. And that's the real delta between what you're seeing at Outback and maybe some of the other brands.

Our next question comes from the line of Brett Levy with MKM Partners.

When you think about where you are right now in terms of your labor positioning, you're on solid footing. And we've heard some other companies out there really sound like they're more focused on driving traffic even if it's a little bit more of a hit to cost. How are you thinking about that holistically in terms of really trying to gain that market share, trying to drive that traffic and maybe get leverage in volume as opposed to just the protection of margins and costs from pricing and just streamlining the business?

Brett, we always want both, right? We want traffic gains and we want to preserve our margins. So that's really what we're trying to do. And I can't speak to other companies, but I can speak to what we did. And during the pandemic, we didn't let anybody go, we didn't furlough anybody. So when the business came back, our people were already there. And if you look at our employee engagement scores and our turnover scores, both are really great compared to the industry. So we have certainly taken the right labor profile to grow the business. Our job is to do both, manage the margins and grow traffic, and we will definitely do that.

And then just one more question on the consumer. Can you give any more detail into are you seeing any pockets of variants, either incremental pressure or outsized gains across brands across the region?

Well, Fleming's numbers are remarkable. The high end is doing extremely well. All of our restaurants are doing well on the demand side, and the Fleming's numbers are particularly strong; it's a great business. But Chris, do you want to add anything on geographic pockets?

There are definitely still regional differences, both on the sell side and even on the labor side. It's still this bifurcation; we continue to have strength in the Southeast—Georgia, North Carolina, Texas, Tennessee—those players continue to do really well. Still pockets in the Northeast and the Midwest, whether it's Michigan, New York State, etc., where we have a little more issue in terms of driving volume. But for the record, on a 2-year basis, those states' stores are positive. It's just they're not as positive as the balance of the system. That same goes for the labor side. The pockets where we've had more challenging issues with staffing tend to be more in the Northeast and the Midwest.

Our next question comes from the line of John Glass with Morgan Stanley.

First, Chris, just a follow-up. On your fourth quarter guide, the assumption of average weekly sales improving, is that just a function of seasonality? Or do you assume that once you lap this promotion, things improve? How do you build to that? And I think you said that excludes Thanksgiving. Is there a way to think about the total quarter as reported in the fourth quarter on average weekly sales basis?

Yes. It probably goes down to about $70,000 per week if you include Thanksgiving week. In terms of the overall guide, it does include both seasonality and a step-up in volume as the quarter progresses. But again, if you're talking about the lapping of activity, that's not going to have an impact on overall absolute volumes. It really is more a product of just the seasonality step up as the quarter progresses.

And John, just as you know, the last three weeks of the quarter are big for us. We'll be prepared for that and a great holiday season; the last three weeks are significant.

I mean it's an 'at least' guidance for a reason. This year has been anything but typical and there's so many unknowns over those last three weeks, and we'll see how they come together.

And you talked about technology and equipment investments. I think maybe some of that's going into the restaurants now, at least that's my recollection from what you said on my notes. Can you dimensionalize what you think that opportunity is for labor-saving standpoint so we understand how you might be able to mitigate some of this wage inflation for those sort of newer ideas or nontraditional benefits?

I'm not going to get into great detail for competitive reasons as to what we think the labor pace might be, but I'm extremely optimistic about the equipment and tests that are getting ready to roll. For Outback, the cooking equipment and what we can do to manage labor moving forward can really help us out. That is part of the equation, but also the equipment improves the customer experience—the product comes out faster, table turns improve, and cooking accuracy will improve. This is in test and we're rolling it out as quickly as the supply chain lets us. On the front of the house, like many restaurant companies, we have technology-enabled products to help our servers and enable greater table coverage. I won't provide pieces and parts or details on exactly what that will do to labor, but know these are initiatives well along in place and will be part of our plans for 2022 and beyond.

Our next question comes from the line of Jeff Farmer with Gordon Haskett.

Just a follow-up on staffing. One of your casual dining peers pointed to capacity constraints driven by staffing shortfalls that drove roughly a 3% to 4% same-store sales headwind in the quarter. Did you see any level of that dynamic play out across the quarter for any of your concepts?

No, we really didn't. There are pockets to manage, and Chris talked about some parts of the country, but our payroll practices and values really paid off for us. We didn't let anybody go during the pandemic, we had the team in place, and we haven't seen that kind of headwind.

Okay. And then the core question for me, mid-single-digit wage reinflation in 2022. So just looking for a little additional color on the components here. There's the Florida piece of it, but beyond that in terms of thinking about wage rates across your system, are you tackling that on a market-by-market basis? Or have you gotten to a point where you just sort of have mandated an increase in wage across the system? How are you tackling getting a level of wage that attracts employees moving forward?

No. It's not a national thought. It really is a market-by-market, market-specific approach. Every market has different elements in play that we have to adjust to. So it really is not a national mandate. But pressures are pretty systemic across the country.

Our next question comes from the line of John Ivankoe with JPMorgan.

I was curious about the 10% traffic impact that you think you saw from promotions. Did that also apply to October? And I guess the elimination of those promotions did apparently help the third quarter dollar profit. Is it also helping the fourth quarter dollar profit?

Yes. The Steak & Lobster promotion ran in 2019 all the way through the middle of November. That is something we continue to see impacting the same-store sales comparability for Outback. And given the discount associated with that promotion in 2019, not replicating it has a positive impact on profitability and margins.

Okay. All right. Interesting. And secondly, some people will focus on October Outback comp, which I think is underperforming the industry. I just want you to think about what some of that cause may be; maybe it is 100% or more than 100% due to that promotion. Are you seeing any incremental staffing challenges or incremental reduced operating hours in the month of October that you didn't necessarily see in the third quarter to try to understand that trend change that we saw in Outback relative to the industry?

John, I respectfully disagree with the premise about operating performance. If you look at our revenue per week at Outback, it continues to be very good and consistently outperforms the industry in 2021 on a weekly basis. So the difference is clearly tied to 2019 activities, which we spelled out in detail and believe account for about 10 percentage points in traffic. We chose not to replicate that for many reasons. On the second part, we have not seen incremental staffing challenges beyond pockets; overall, our staffing levels are in good shape.

And I recognize I kind of asked the same question in two different ways in October, but you're very clear, Dave. Thank you for the clarification. And then secondly, as we look at commodities, you and your team did a great job in '20. When you think about '21, I guess why is 10% the right number in commodities? Why couldn't that number be something materially worse as you're basically in such a difficult comparison in '20? And even if we think about first half versus second half, might it be an unbalanced year where the first half could be materially worse than 10%, and then there's a hope that it normalizes in the second half of the year?

We haven't finished our supply chain contracting yet; that's typically done in December. We think the 10% estimate is accurate based on our market basket and commodities beyond beef. You can't simply translate beef inflation into the entire basket, as we have pasta, seafood, and other commodities that mute the overall impact. Based on what we know today, we think the 10% guide is appropriate.

The way we think about locking in is to maintain flexibility. The 10% guidance is the thought that we would lock in for the full year on beef, which takes some variability out of the first half/second half dynamic. Beef is one-third of our overall commodity basket, so when you look at the first half/second half dynamic, you could see more elevated inflation in the first half, and as you lap some elevated levels in the back half, that could come down. But our thought is holistic and we try to lock in many goods for the full year to reduce variability. If opportunities arise to lock differently for the back half, we'll take advantage of that.

And we haven't talked about chicken as a commodity for you from a contract perspective. Can you remind us where you are in the chicken contract and if that poses a potential risk in '22 versus '21?

Chicken contracts are annual, but chicken pricing was more elevated this year. You can expect chicken next year to be at or below the level implied by the 10% overall commodity guidance.

Our next question comes from the line of Jared Garber with Goldman Sachs.

Chris, it was encouraging to hear that you're looking at pricing activity about that 3% to offset some of the inflationary headwinds. Can you help frame where the price will flow through? Obviously, you've got a couple of brands to think about here. I think one of the things over the last year or 18 months has been rightsizing that Outback value proposition. I just wanted to get a sense of how you're thinking about that 3% across the brands.

We look at pricing brand by brand. We made significant headway last year in how we go to market with Outback, both on products and pricing, so we're careful with what we do there. Overall, across the portfolio we will get to roughly 3%, but there might be differences by brand. I prefer not to get into brand-specific pricing for competitive reasons, but we consider the value equation for our customers when making pricing decisions. Importantly, we haven't taken price since 2019, so while there's not unlimited headroom, we're in a good competitive position on pricing.

We preserved the tenants at Outback of the price decreases we took with the new menu. For example, we lowered prices on our 8-ounce steaks to reduce the gap between the 6 and the 8 to encourage trade-up; we preserve that gap. All the tenants of the Outback pricing changes are still in place. Our pricing is still well below inflation and we believe it's in line with where much of the competitive set is landing.

And then just one quick follow-up. I appreciate all the margin color this quarter, but can you help remind us where the level of marketing spend and marketing activity is right now versus 2019?

It's been pretty consistent. We're at about 1.3% to 1.4% of sales in Q3, roughly $20 million below 2019. We've kept a consistent gap in overall spend. Of course the LTOs and things we're supporting are different, but it's been consistent in our approach versus 2019.

Would you expect that level to continue into next year?

We'd reserve the right next year to potentially increase marketing spend. It will depend on factors including the competitive marketplace and consumer mindset. We've said that our long-term margin framework contemplates marketing closer to the 3% of sales range. That doesn't mean we'll spend 3% in 2022; it depends on execution timing. Longer-term, once margins are in order, top-line growth through unit expansion and same-store sales will require investing in the marketing engine over time. It's a question of when we turn that back on.

During the pandemic we learned a lot about marketing ROI, where to spend, and digital tools. We've made significant progress with the Outback app and other tools. As we think about marketing going forward, we have the tools to be more efficient and effective.

Our next question comes from the line of Alexander Russell Slagle with Jefferies.

On the off-premise profitability approaching dine-in, how close is third-party delivery to parity? Or should we continue to think about stronger carryout margins offsetting lower delivery margins? And do you see overall off-premise profitability stable at this level or is there room for further improvement down the road?

Third-party will be a little lower than in-restaurant experience and lower than curbside. Curbside can be a little better than in-restaurant margin given the lack of service labor. We've refined the margin calculation for off-premises with curbside leading. The lower third-party margin is offset by pricing and increased sales. Third-party profitability is not prohibitively low; we have some pricing on those vehicles that help offset it. We feel pretty good about current third-party margins.

On third-party sales we're clearly seeing new customers. The channel is growing, and we're excited about its future opportunities. I'm glad our profitability has come into shape for the company.

Our next question comes from the line of Brian Vaccaro with Raymond James.

Just wanted to circle back on recent sales trends and try to see through that promotional mismatch. Chris, you mentioned average weekly sales volumes maintaining a consistent positive weekly gap since the end of July. Can you expand on that a bit? Is that for Outback specifically or overall U.S.?

I'll handle that first and Dave can handle progression. We use industry benchmarks like KNAPP and Black Box. Black Box provides weekly average unit volume for casual dining. If you compare that benchmark to Outback's weekly average unit volumes, that volume gap has stayed consistent since our July results. That calculation takes the 2019 promotion noise out. That gives us confidence that Outback sales continue to be strong and profitable. The story at Outback is consistent with the total company and portfolio. Carrabba's has maintained a high level of off-premises and has been a bit stronger throughout the same time period.

All right, great. That's helpful. On the commodity front, what was Q3 commodity inflation? And what does the updated annual guide imply for Q4 in terms of inflation?

Commodities were 2.5% in Q3, and they would jump up to 4.5% in Q4.

And then last one for me. I wanted to ask about the equipment and technology opportunities into next year. Given tight supply chains, can you speak to your ability to source these items and what's a reasonable pace you could roll changes through '22 and into '23?

It's a challenge and we have initiatives in the restaurants and working. It's a little premature to roll up a precise pace. I'd like more time to understand the supply chain, but we'd like to get it in as soon as possible over the next 18 months. The equipment supply chain is the key constraint. The most important thing is we've got something that works that improves the customer experience and helps manage labor.

Our next question comes from the line of Lauren Silberman with Credit Suisse.

Can you talk about where you are with on-premise sales and on-premise transactions versus 2019? For off-premise, did you see sales dollars stay steady throughout the quarter and into Q4, or does it mirror the overall trend?

On the in-restaurant side, we still have an opportunity to grow in-restaurant dining as dining rooms open and customers return. We're hopeful for the holidays and that could be a tailwind. Our job is to grow off-premises, especially carryout and delivery. We're seeing growth in delivery and carryout dollars.

Some data points: our in-restaurant sales in Q3 were down 8%. We have a nice tailwind from off-premises. As in-restaurant volume has improved, curbside has come back a bit. The third-party piece, which is highly incremental and exciting, has held steady and actually grown to 11% of sales over the last four weeks. It continues to grow and that's exciting.

As we think about commodity inflation beyond the near term, how do you think about transitory versus permanent nature of these elevated cost levels given increasing labor across the supply chain? What is normalized versus what might come down?

On the commodity side, it remains to be seen. It's very elevated with a tight supply and high demand, domestically and overseas. That's reflected in current spot markets and our estimates. We feel good about visibility in the first half of 2022, but beyond that we will need to see how demand evolves and how supply responds.

Our next question comes from the line of Jon Tower with Wells Fargo.

A couple of follow-ups. First, what's the rationale for buying out the Carrabba's founders' royalty and timing around that? Second, Dave, you mentioned restarting unit growth, particularly at Outback and potential Fleming's. Can you offer metrics around new store prototypes like cash-on-cash return expectations and what growth is embedded in your longer-term 8% EBIT margin target? Also, you mentioned Outback and Fleming's as priorities; does the omission of Carrabba's and Bonefish imply anything?

On Carrabba's royalty, we bought it because it's great value for the company. The brand is doing extremely well, we have a great relationship with the founders, and financially it was a smart decision; you'll see benefits moving forward. On prototype and costs, we'll unpack our new unit development opportunity in February, including brands we plan to expand and the costs and returns. I can say we have a smaller-footprint Outback prototype in test in Brazil and the U.S. that is off-premise enabled, has high returns, and we'll discuss more in February. Our relocations have average unit volumes of about $4.5 million, and new units open above $4 million. We feel extremely good about Outback. Fleming's results speak for themselves and we're doing well in California and Florida; it's an attractive return. Carrabba's and Bonefish are performing well and could have expansion opportunities later; we're not far enough along to discuss that now. Our priorities are Outback and Fleming's in the U.S., and Brazil is also expected to be a significant offset in 2022.

The Carrabba's royalty was about 1.2% overall. It hit in-restaurant operating expense. By repurchasing it, we will pick up close to $7 million on an annual basis, which will add roughly 20 basis points of margin. It's an efficient way to add bottom-line to the company, particularly given how strong that business is performing.

We have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. David Deno for closing remarks.

Well, thank you, everybody, for the discussion today. We'll wrap up our discussion until February about Q4 and 2021. We will exit 2021 a completely different company than we were in 2019 on many measures. In the February call, we look forward to talking to you about our Q4 results and providing some guidance on 2022. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.