Bloomin' Brands, Inc. Q1 FY2023 Earnings Call

Greetings, and welcome to the Bloomin' Brands Fiscal First Quarter 2023 Earnings Conference Call. It is now my pleasure to introduce your host, Tammy Dean, Senior Director of Corporate Finance and Investor Relations. Thank you, Ms. Dean, you may begin.

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 access to our fiscal first quarter 2023 earnings release. It can also be found on our website at bloominbrands.com in the Investors 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 and 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 in a material way from our forward-looking statements. Some of these risks are mentioned in our earnings release, while others are discussed in our SEC filings, which are available at sec.gov. During today's call, we will provide a brief recap of our financial performance for the fiscal first quarter 2023, an overview of company highlights, and current thoughts on 2023 guidance. Once we've completed these remarks, we'll open the call up for questions. With that, I'd now like to turn the call over to David Deno.

Well, thank you, Tammy, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q1 2023 diluted earnings per share was $0.98, which compares to $0.80 in Q1 2022, up 23%. Q1 2023 marks the best quarterly diluted earnings per share in the company's history. Combined US comparable sales were up 5.1%, with each brand having positive same-store sales. The first quarter results further validate the strategic and operational framework we outlined for the year and set us up to deliver on our commitments. I will be giving an update on our plans in a minute. Before doing that, I would like to thank our teams in the restaurants and restaurant support center for their unwavering commitment to serving our guests. Their dedication to great hospitality and service is what makes our company so successful. As we look to build upon the momentum of the first quarter, we continue to remain focused on executing our plan to grow the business. Our priorities include driving same-store sales growth, maintaining off-premises momentum, sustaining progress in operating margins, becoming a more digitally savvy company, and increasing new restaurant openings. Let me now turn to our first priority, which is to grow sales and traffic in our restaurants. Growing sustainable traffic, especially at Outback, is our biggest priority. To achieve this goal, we are executing a number of initiatives. To start, let me provide a brief update on our use of technology to improve execution and consistency in the restaurants. The handheld technology rollout for our service was completed at the end of Q4. The Outback team is now focused on optimizing the experience in the dining room to deliver a differentiated guest experience. The tablets allow our service to cover more tables while providing an even better experience to our guests. Tablets are not replacing personal interaction; they are enhancing it as servers now spend more time with guests. In addition, we continue to roll out new cooking technology, including advanced grills and ovens. The rollout is on track to be completed in the third quarter. This cooking technology is improving product quality and meal pacing. Like handhelds, the kitchen investments are also improving the customer experience and productivity. The second part of building sales and traffic is more targeted marketing designed to leverage our heritage, build brand equity, and drive frequency. Outback brought back the 'no rules, just right' platform at the beginning of Q1, but this is more than just marketing; it's an attitude. It's how we reenergize our restaurants with new food offerings, exceptional service, and, most importantly, it ties back to our past. 'No rules, just right' is aimed at highlighting our great menu and the everyday value that we offer to our guests. In Q1, we leaned into our Aussie roots with both food and beverage innovation. The third element to our sales-building strategy is the introduction of new layers at all of our brands. For example, during the first quarter, Fleming's launched a social hour that captures our wonderful food and drink offerings during the early evening. We also continue to grow our catering business within Fleming's and look forward to the innovation that's coming from this business. Another sales layer is wine dinners at Carrabba's, showcasing the innovation and product quality Carrabba's is known for while providing great value for guests and a good return for the company. We will continue to provide updates on sales layers at all of our brands throughout the year. The final sales-driving strategy is additional spending on remodels this year. We paused our remodel efforts during the pandemic and have since developed a variety of scopes that can be deployed based on the varying needs of our restaurants. We are on track to remodel over 100 locations this year. This is the beginning of a multiyear effort to touch a large percentage of our business. Keeping our assets looking their best is a key element of growing traffic. All the initiatives I just described are designed to build sustainable traffic now and over the long term. Turning to our second priority, continuing the momentum in the off-premises business. The total off-premises business was 23% of US sales in Q1, and our third-party delivery business continues to perform well. Importantly, off-premises profit margins are comparable to the margins of the in-restaurant business. In addition, catering is becoming an important and growing opportunity for our brands. The Carrabba's team remains an industry leader in this space. Both Outback and Bonefish are also seeing growth momentum in catering. As a result of all the above, we expect off-premises to remain a large part of our business. Our third priority is to sustain the major progress we have made in operating margins over the last four years in a highly inflationary environment. Margin improvements start with growing healthy traffic across the in-restaurant and off-premises channels. We also reduced reliance on discounting and promotional limited-time offers and pivoted advertising spend towards more targeted, higher-return digital channels. Additionally, we remain disciplined in managing the middle of the P&L and are aggressively pursuing efficiencies in food, labor, and overhead. As Chris will discuss, despite persistent inflation, we've been able to achieve our margins well above 2019. We remain committed to achieving 8% operating margins over the long term. The fourth priority is to capitalize on our progress to become a more digitally savvy company. In Q1, approximately 79% of total US off-premises sales were through digital channels. The new online ordering system and mobile app have exceeded our expectations, with the new app having 3 million users. You can expect to see further activity as we improve functionality and features of our app and digital offerings. The final priority is to build more new restaurants, especially at Outback, Fleming's, and in Brazil. Each of these brands has strong sales and profit margins and offers great returns. Outback has the opportunity to significantly expand its restaurant base. We will continue to invest and grow Fleming's, and we also have the ability to more than double our footprint in Brazil. In summary, we are off to a terrific start. We are focusing on achieving our 2023 goals while building a great business that will continue to thrive. And with that, I will now turn the call over to Chris.

Thanks, Dave, and good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal first quarter of 2023. Total revenues in Q1 were $1.2 billion, which was up 9.1% from 2022, driven by a 5.1% increase in US comparable restaurant sales as well as a 14.3% comp sales increase in Brazil. In our US brands, traffic was down 70 basis points in Q1, which was a significant improvement from Q4, even after factoring in a 330 basis point favorable impact on Q1 traffic from the lapping of Omicron and unfavorable weather. As we indicated in our last call, we began to see improvements in traffic in December, and these trends continued into the first quarter. Average check was up 5.8% in Q1 versus 2022, in line with what we discussed on last quarter's call. In terms of pricing, we expect to see the impact of pricing slowly come down as the year progresses. There will be a larger step down towards the end of Q3 as we lap price changes from last year. We will consider taking some level of new pricing later in the year, but our goal is to take as little pricing as possible in this environment. At 23% of US sales, Q1 off-premises was down 100 basis points from Q4. Given the heavier volumes we tend to see in Q1, this change was expected and was primarily a migration from our curbside business to in-restaurant dining. In recent weeks, we have seen off-premises return to 24% of US sales. Importantly, the highly incremental third-party delivery business was flat from Q4 at roughly 12% of US sales. Third-party has remained at approximately 12% over each of the past five quarters, even as in-restaurant dining has returned. In terms of brand performance, Outback total off-premises mix was 26% of sales, and Carrabba's was 30% of sales. Off-premises remains sticky and is a large part of our ongoing success, and as Dave mentioned, it will be a key part of our growth strategy moving forward. The final note on Q1 sales: Brazil Q1 comps were up 14.3%. Brazil's first quarter reflected the lapping of COVID-related operating restrictions from early 2022. Q1 was the last quarter where favorable COVID lapse will have a significant impact on year-over-year trends. Also, as a reminder, Brazil comp sales do not include the benefit from the Brazil tax exemption we discussed on the last earnings call. As it relates to other aspects of our Q1 financial performance, GAAP diluted earnings per share for the quarter was $0.93 versus $0.73 of diluted earnings per share in 2022. Adjusted diluted earnings per share was $0.98 versus $0.80 of adjusted diluted earnings per share in 2022. This represented the most profitable quarter in our company's history. The difference between our GAAP and adjusted results was in our share count and was related to the required accounting treatment for the hedge we have on our convertible bonds. Operating income margin was 9.7% in Q1 versus 9.4% in 2022. Restaurant-level operating margins were 17.9% versus 17.1% last year. Margins improved for a couple of reasons: first, international operating margins were up 770 basis points driven by Brazil, as they are lapping COVID impacts from Q1 2022. Second, the benefits from our US pricing and productivity initiatives more than offset inflation. As it relates to inflation, commodity inflation was up 6.6% in Q1, and labor inflation was up 6.4%. Restaurant operating expense inflation improved from Q4 but remained elevated at 9.4%, driven by higher utilities, repairs & maintenance, and advertising. Overall, inflation in the first quarter was in line with expectations. Depreciation expense and general and administrative expense were both up in Q1 relative to last year in absolute dollars. This is consistent with our increased levels of capital spending and our investments in infrastructure to support growth. Overall, we feel good about our margins, and we remain well above pre-pandemic levels. Also in Q1, our adjusted tax rate was 14% and includes the benefit from the Brazil tax exemption. Turning to our capital structure, total debt was $768 million at the end of Q1. This puts our current lease-adjusted leverage ratio below 3 times. In terms of share repurchases, year-to-date, we have repurchased 1.1 million shares of stock for $27 million. We still have $113 million remaining on the new authorization that the Board approved on February 7th. The Board also declared a quarterly dividend of $0.24 a share payable on May 24th. We are pleased with our balanced deployment of free cash flow and will continue to allocate dollars against additional debt paydown, share repurchases, and our dividend. Now, turning to our 2023 and Q2 guidance. First, we are reaffirming all aspects of our 2023 guidance previously provided on our February 16 earnings call. And second, as it relates to the second quarter, we expect US comparable restaurant sales to be between 0.5% to 1.5%, and we expect Q2 adjusted earnings per share to be between $0.62 and $0.67. Year-over-year comparisons will become more challenging in Q2 relative to Q1 as we will not have the same level of benefits either domestically or internationally from lapping COVID impacts in 2022. Additionally, strong Q2 trends from last year make it our most challenging comparison of the year. 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.

Today's first question is coming from Jeffrey Bernstein of Barclays.

One question, one follow-up. The question would be on the second quarter guidance. I think there's some industry and investor concerns regarding slowing comps at least in April, although clearly choppy with the shifts and whatnot. But your guidance maybe corroborates that. And I think, Chris, you mentioned that the comparisons get tougher and you no longer have the Omicron benefit. Can you just talk about maybe the exit rate you saw for the first quarter or maybe what you're running in April? Any change in consumer behaviors you're seeing in any of these brands? Just trying to get a sense for whether or not there's any validity to fears of the most recent slowdown in the underlying. And then one follow-up.

Our Q2 performance is tied directly into what Chris guided so far for the quarter. If you look at the trends in the quarter, that’s incorporated in our Q2 guidance. March, April, and May are our biggest overlaps of the year. Our trends still are good, and our customers are hanging in there, so we feel good about where the guide looks and we feel good about the full year as we reiterated our full-year guidance.

To give you some math behind the guide, if you look at the guidance range of, call it, 50 basis points to 1.5%, I would say you could expect in that guide, maybe a 5% or maybe a little higher average check built into that guide. So that would put your traffic basically at the midpoint of down 4%, which if you stripped out Omicron and unfavorable weather from the Q1 results is basically flat from Q1 in terms of our overall traffic guide for the quarter. And again, I know we tend not to like 2019 as much, but I know that some folks are still looking at 2019. If you look at 2019 results from Q1 to Q2, we've actually seen a tick up in both comps and traffic versus 2019, based on the last five weeks or so of Q1 versus the first three or four weeks of Q2. We feel pretty good about the overall guide at least in terms of where the consumer is. A lot of the noise about Q2 has more to do with the lapse than our trends today.

And then just the follow-up is on the menu pricing. I think you mentioned in the first quarter you had close to a 6% average check. I'm just wondering specifically how much you're running in pricing in the first quarter. Maybe any resistance that you're seeing year-to-date, or what your expectations are for pricing as we move through the year? I feel like there's the most recent concern about taking new pricing with food at home now falling below food away from home, which seems to have been a nice level of protection for our restaurants for such a long time. There seems to be a reason to feel the need to be more cautious on the pricing going forward?

Yes, a few things. So pricing was about 7.5%, I think, 7.6% in Q1. We would expect that to tick down as the year progresses. We've done pretty well in relative pricing, particularly versus the competition. We took effectively zero pricing in 2020. We maybe took around 2% in 2021 and then about 7% last year. Through the end of 2022, we were less than 10% higher in pricing compared to where we were at the start of the pandemic. Our pricing is still well below the inflation we've seen over that same time period. We do have some pricing built into the back half of the year that we think can help given some of this persistent inflation, but it won't be near the amount that we took in Q3 or Q4 of last year. Our predisposition is to take as little pricing as possible this year. It just depends on how this year plays out. If we don't believe we have the pricing power with the consumer, then we may not take it. But given our strong start in Q1, we may have some flexibility on taking less pricing as the year progresses, but we won't make those decisions until as late as possible.

And you just mentioned the strong start with the first quarter. The fact that you reiterated the full year guidance with the first quarter being such a healthy beat from at least an earnings perspective, the reason why there was perhaps no raise to that guidance. Is there anything particular going on that leaves you a little bit more cautious for the rest of the year, or is that just prudent considering the environment?

Yes, prudence is a good word. There are two things related to that. We feel really good about our full-year guide. Q1 was obviously a great start to the year, but there's a lot that can unfold in the next nine months. It feels a little bit early to be changing guidance. I'd say one technical thing is related to what I just mentioned. To this point, the consumer seems to be doing pretty well, but again, there is some uncertainty out there. We want to preserve the flexibility to potentially take as little pricing as possible in the back half of the year. Pricing can have a big impact on your financial results, but it also can have longer-term implications on traffic. We want to reserve the right to take less pricing if we need to.

The next question is coming from Alex Slagle of Jefferies.

On the cost of goods being 31.3%, I imagine the Brazil tax benefit may have helped to some degree. But other than the first quarter of '21, I don't think I've seen it that low going back really ever. It seems like inflation and pricing outlooks remain the same. So I'm curious if you could offer more perspective on what's driving that.

There are a couple of things before Chris gets into some of the details. We talked about the investment in technology in the script and in other conference calls. The technology investments we’re making in the restaurants in the kitchen and everything else is paying off, and we’re seeing that. You see it not only in cost, but we hope to see it over the long term in customer satisfaction. With that, I'll turn it over to Chris.

We talked about the tax benefit helping overall margins by about 30 basis points, but that isn’t the primary driver in cost of goods sold. The performance of cost of sales in Q1 was primarily driven by predictable pricing, but the surprise was how efficiently we are running these restaurants with the new technology. This bodes well for our future.

As a follow-up on South Korea, I see your partners have closed down a bunch of the virtual kitchens. They're opening a higher number of traditional restaurants. I wonder if you could offer any color on the approach there, or if there's anything we should think about more broadly with how you're going about development in the international franchise and JV markets?

Throughout our whole company, we see the opportunity to build restaurants. They will be delivery and carryout enabled, but we see the opportunity to go beyond virtual kitchens and build efficient physical restaurants. But our strategy is focused on traditional development, both here and overseas.

The next question is coming from Lauren Silberman of Credit Suisse.

Congrats on the quarter. I wanted to ask a bit more about what you're seeing with the consumer. Any signs of changes in behavior, check management, trade down, or any differences across brands?

Let me break the brand apart between fine dining and casual dining. Fine dining customers are really doing well and continuing to do well. That segment is strong. In casual dining, we're seeing customers overall hang tight. We’re seeing our higher-end customers come in with similar frequency, particularly around special occasions. We had the best week ever in our history on Valentine's Day and we're looking forward to a wonderful Mother's Day. We’re seeing continued frequency from the lower-end consumer with perhaps a little bit of management on the guest check side as they come into our restaurants. Our offers, like the steak and lobster macaroni and cheese for $16.99 at the entry point and Outback, help address some of that.

Just to give you some perspective, while there is some consumer trade down, the majority of shifts in our mix have more to do with revenue center shifts. For example, our catering sales have essentially doubled from where they were a year ago, but the average check per catering transaction is much lower than in-restaurant dining, and lunch sales are also growing at a lower check average.

Just a follow-up on the Q2 guide. Can you break down what's embedded for operating margins in terms of the leading and lagging indicators relative to Q1? Is there anything outside of sales leverage?

No, it's mostly sales leverage. Commodity inflation is expected to decrease a bit, as well as labor inflation. As we begin to lap periods from a year ago, those dynamics will continue to improve in Q2. It is primarily a conversation about sales flow.

The next question is coming from John Ivankoe of JPMorgan.

I want to ask a bigger picture question and maybe some specifics around it. David, obviously very experienced in this industry, and we've seen customer bases and use cases change, and competition change. Some industry analysts comment that the millennial and Gen Z consumer, at least those without families, aren't casual dining customers. There's this argument that casual dining is in decline. Could you address this, whether you see this as a trend? Is casual dining an industry that can generate positive same-store traffic through a cycle? Or is it an industry that can create value for shareholders even in a perpetually negative same-store traffic environment?

It's a very broad question, and I'll try to answer it concisely. I can tell you, I'm thrilled to be in casual dining. It’s an $80 billion category without a huge market share leader and with plenty of opportunities to grow. Convenience is more important now than ever, and we're seeing that reflected in our delivery and carryout business—our third-party delivery continues to be very strong. What we saw during the pandemic showed that when restaurants reopened, people missed dining out, and I believe millennials will eventually graduate into casual dining as they enjoy those experiences. It’s our job to offer fantastic occasions at great value. Furthermore, when we open new restaurants, they often outperform our historical averages, indicating strong customer demand. Therefore, I strongly reject the notion that casual dining is fading away; it has great opportunities.

Regarding Outback's unit growth, if same-store traffic is down 5% but you're talking about growing units, those comments seem contradictory. Could you expand on the decision to open more units, particularly more Outback units in the US? Is there any change in the fiscal '23 CapEx budget? What do you forecast for '24 in relation to '23?

For 2023, there are no major changes in our CapEx guide. On the openings, we're seeing strong new unit performance, and we have earned the right to grow. Traffic trends are expected to improve as we get past the strongest comparisons from the previous year. Industry growth dynamic means strong players will excel. Our new unit investment returns are terrific, indicating there is potential to grow these brands beyond current levels, and we're bullish on traffic trends moving forward.

If you look at the financial performance of Outback specifically today compared to pre-pandemic, it looks very different. The P&L is far more efficient now, making growth more viable. The performance was tough in 2019, but now with the P&L in much better shape, we’re optimistic about restoring healthy traffic as we blend in new sales layers over the next couple of years.

We’re also enhancing our customer engagement with technology investments, and we have a significant offsite coming up for strategic discussions that will also inform our 2024 plans.

Regarding the strong performance in Brazil, are there any lessons from Brazil that can be applied to the US to enhance performance?

Absolutely. I took our brand presidents down to Brazil earlier this year, and we discussed this in detail. Two things Brazil excels at are product innovation and technology. We're encouraging more cooperation between teams in the US and Brazil to enhance our strategies, and there's no major competition in Brazil, which allows us to leverage our position effectively.

The next question is coming from Sharon Zackfia of William Blair.

I have two questions. I'm curious whether you're seeing any changes in the competitive or promotional environment in the US? And then, secondly, I don't think I heard how labor turnover is trending. Could you discuss that along with any corollary benefits in areas like order accuracy, table turns, or customer satisfaction?

Our turnover rates are very good. We have long been a leader in retention in the industry. Our numbers are really impressive against anybody else. You can see that reflected in customer satisfaction metrics, where we're making remarkable progress in both service and food quality, especially at Outback. On the promotional side, we see an uptick in discounting in the industry, but not from our direct competitors. We want to be prudent with our promotions to ensure good returns for the company. We aim to build healthy traffic through sales layers without resorting to excessive discounting.

The next question is coming from Jeff Farmer of Gordon Haskett. Please go ahead.

Could you clarify some of your comments on recent sales trends to ensure clarity? Did you say that quarter-to-date comps are in line with the Q2 guide of above 0.5% to 1.5%, or did you embed an acceleration compared to what you're seeing in April? Additionally, did you say that comps versus 2019 started to accelerate in March and April? If so, could you put some numbers around that?

Our trends are consistent with the guidance we provided, and we expect those pieces to come together nicely in Q2. For the improvement versus 2019, the sales and technology investments we've discussed are driving those trends. I will let Chris add more.

What I mentioned about March and the first four weeks of Q2 is a step-up in sales and traffic relative to 2019; however, the prior year was inconsistent, making it challenging to establish a definitive comparison. Overall, we feel optimistic about our sales and traffic.

I wanted to loop back to discussions around advertising spend. Can you remind me when that began, how it's impacted sales, and whether you are pleased with the returns? How does it inform your plans for the coming quarters?

We don’t foresee returning to our previous advertising levels prior to COVID. Our recent uptick is modest due to the positive returns we're seeing from our advertising and the platform with 'no rules, just right.' Our investment in digital marketing allows for quick adjustments.

Yes, we’ve been running marketing costs in the low 2% range for the last couple of years. Long-term, we could find a balance between our current percentage and pre-COVID levels depending on future campaign performance.

The next question is coming from Sara Senatore of Bank of America.

I wanted to revisit this idea of reducing discounting, indicating a need for a more profitable customer transaction. I'm curious about what that evolution looked like and how long it took, considering we are three years post-pandemic. Additionally, when thinking about profitable growth at this stage, what trade-offs are you considering between traffic and margins?

We want to manage both traffic and margin. Admittedly, it took a while for Outback to work through the discounting, significantly impacted by the pandemic interrupts. But we believe we are now moving forward with our traffic and sales layers to support sustainable growth.

These investments, including technology, are harder to quantify directly in terms of traffic and sales, but they are strategically important for the entire company moving forward.

The next question is coming from Brian Harbour of Morgan Stanley.

Chris, can you detail the build cost on new Outback units and what the current returns are? Furthermore, what's the hurdle rate on new Outback units, or possibly remodels?

We're looking at 20% cash-on-cash returns at Outback for a new unit. The build cost has increased about 20% from previous estimates.

With delivery growing year-over-year, how have you been able to expand that channel, and what are you doing to continue its growth?

The third-party delivery business continues to be strong for us. We're ensuring our physical assets are delivery-enabled while training our teams to work effectively with our third-party providers, offering family bundle deals, and strategically leveraging our casual dining status in the delivery space.

The next question is coming from Brian Vaccaro of Raymond James. Please go ahead.

I wanted to clarify your comments on recent sales trends. Did you say that quarter-to-date comps are in line with the Q2 guide of above 0.5% to 1.5%? Or did you embed an acceleration versus what you're seeing in April? Additionally, did you say that comps versus '19 started to accelerate in March and April?

Our trends are consistent with the guidance provided. We are confident that factors supporting our economic outlook will support growth in Q2 as compared to previous quarters.

The favorable sales dynamics are expected to be felt beyond the comparisons due to digital enhancements made to operations, indicating a positive trend looking forward.

The next question is coming from Andrew Strelzik of BMO.

Do grocery prices impact business trends for your business? If grocery prices reset lower, how do you perceive that will challenge your value proposition? Finally, are you more nimble now than in the past, particularly regarding your digital assets?

Grocery prices inform us, but performance is driven by the quality we bring to our customer experience. The value we offer through service is what retains our customer base. Our advances in technology provide more flexible and immediate responses to shifts in the digital landscape, which enhances our future growth strategy. Thank you, everyone, for attending the call today. We appreciate your presence. We look forward to updating you on our second quarter results in July. Enjoy the rest of your day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time or log off the webcast and enjoy the rest of your day.