Bloomin' Brands, Inc. Q4 FY2024 Earnings Call

Greetings, and welcome to the Bloomin' Brands Fiscal Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow management's prepared remarks. Today's event is being recorded. It's now my pleasure to introduce your host, Tara Kurian, Vice President, Corporate Finance and Investor Relations. Thank you. Ms. Kurian, you may begin.

Thank you, and good morning, everyone. With me on today's call are Mike Spanos, our Chief Executive Officer; and Michael Healy, Chief Financial Officer and Executive Vice President. By now, you should have access to our fiscal fourth quarter 2024 earnings release and our investor presentation slides, both of which can be found on our website at www.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 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. Others are discussed in our SEC filings, which are available at www.sec.gov. During today's call, we'll provide a brief recap of our financial performance for the fiscal fourth quarter 2024, an overview of company highlights and current thoughts on fiscal 2025 guidance. Once we've completed these remarks, we'll open the call up for questions. With that, I would now like to turn the call over to Mike Spanos.

Thanks, Tara, and good morning, everyone. Thank you for joining our fourth quarter earnings call. On today's call, I will discuss my observations of the business and steps we are taking to improve business results in 2025. In my first six months, I have become even more excited about the future potential of our business. We have started the holistic strategy work and we will be transparent on our findings as part of our earnings calls in the coming quarters. What we know at this stage is consumers love our brands, and they want us to succeed. We are actively implementing key actions to improve operations and deliver a better guest experience. Michael will discuss our financial performance, including how to understand our company and our financials now that the Brazil transaction closed on December 30, 2024. As I've spent time with our teams in the restaurants, it is clear to me that we have empowered and energized team members that want to win. Our principles and beliefs state that the success of a restaurant is measured by its growth in sales and profits and is the result of taking care of our people, our guests, supplier partners, and communities. Our teams want to deliver an outstanding guest experience and want to win. It is our job to work with our team to make it easier for them to deliver outstanding experiences. We have iconic brands that have a strong right to succeed in on-trend large-scale categories. I have even more confidence in the long-term success of the company as we have ample cash flow and a good balance sheet in order to make any strategic investments. However, the reality is that we are currently not succeeding. As noted in the release this morning, although our fourth quarter results were within our expected guidance range, we underperformed the industry and lost share as defined by Black Box by 260 basis points on sales and 410 basis points on traffic. We are not pleased with our performance and acknowledge that we need to change the trajectory of the business. Our results are also not in any way indicative of the hard work of our team members or the foundational strength of our brands. In working with my leadership team and listening to our partners in the field, it's clear that there are immediate actions we can take to address our near-term business results. We are focused on building sustainable traffic and profitable comparable restaurant sales growth the right way by improving quality, value, and the guest experience. As we move forward, we are focusing on three operating priorities. First is, SIMPLIFY THE AGENDA. Second is, DELIVER A GREAT GUEST EXPERIENCE. Third, is a TURNAROUND of OUTBACK, I will discuss each of these areas and actions we are taking now to improve our results. First, SIMPLIFY THE AGENDA. We have become too complex as an organization. We need to simplify the agenda for both our people in the Restaurant Support Center and in our restaurants. When we simplify the agenda and focus the team on fewer things that are the most important, we serve our people so that they can take care of our guests. We started this effort by re-franchising our Brazil operations. We have a tremendous partner in Vinci and look forward to growing that business together. We have retained a 33% ownership of the business and can sell the remaining portion in 2028. Importantly, having a partner for Brazil, that is based in Brazil and entirely focused on Brazil gives our management team in the U.S. the capacity to focus on growing our domestic, company-owned business and support our international franchisees. This partnership also de-risks our business model. Going forward, over 30% of our total restaurants will operate as franchisees with a steady royalty stream and less earnings volatility. We continue to believe that our international franchise business is strong and can continue to grow new units and comparable restaurant sales. We've also taken actions to become a more operation-centric and simple organization at our restaurant support center. We have implemented an organizational structure that is more cost efficient and more effective in speed of decision-making by flattening layers and empowering our brand presidents with the resources and dedicated teams to drive their business. Previously centralized functions of marketing, training, culinary, off-premises, and domestic franchisee leadership are now housed inside the brand teams for an integrated approach. We have maintained resources within the Restaurant Support Center that deliver more capability and efficiency to support the brands. Our long-term G&A goal will continue to be 5%, as a percentage of revenue. I want to acknowledge and thank our team members that exited the organization this past week due to our organizational restructuring. While it was difficult, it is essential we streamlined the organization, and I know that our team is excited about the future and our growth potential. We will also simplify the agenda inside the restaurants. I've heard it loud and clear coming from our restaurants. We need to make it simpler for our operators to execute all aspects of the guest and team member experience. We need to make fewer items, but make those much better. We are reducing our menu items in all brands by 10% to 20% in 2025. We are removing low satisfaction and low mix menu items based on guest feedback and prep labor complexity. We are moving away from our LTO (Limited Time Offer) strategy that included non-core menu items with discounts presented every 10 to 12 weeks. We will transition to abundant value that is featured as part of our everyday menu offering. We've started with the Aussie 3-Course at Outback and are currently testing simplified menus and everyday value in both Carrabba's and Bonefish. We will measure success based on the guest intent to return, building frequency of visitation, and gross profit dollars. Our second operating priority is to consistently deliver a great guest experience. We know we win with a quality meal at a great value, attentive and engaging service, and an excellent guest experience. We started by reassessing the menu satisfaction of all items, both on and off-premises. We are improving, eliminating, or replacing menu items that our guests consider subpar. We are retraining our standards to recipes and reevaluating cooking procedures to consistently provide the quality and flavor our guests expect from us. We are also working with our supplier partners to enhance our product specifications. We will roll out these improved specifications throughout the balance of the year and continue to improve our center-of-the-plate quality and abundance. In our off-premises channel, we are removing menu items that have low satisfaction, do not travel well, or create complexity for our operators. It is critical that hot food is hot and cold food is cold in all channels. Eliminating these items will improve operational execution and guest satisfaction. Additionally, we are evaluating our technology capabilities to better support our operators and manage demand both in-restaurant and off-premises during peak dinner hours to ensure a great in-restaurant experience. We will now have immediate guest feedback at Outback through our partnership with Ziosk. We can measure guest satisfaction by restaurant and by shift. With features like pay at the table, tap to pay with mobile wallet, and entertainment, Outback is offering guests a faster and simpler experience. We will have the rollout completed by the end of April, and are already seeing efficiencies with our staff as well as an improved guest experience in those restaurants. In our test restaurants, approximately 80% of our guests are using Ziosk pay at the table. Another area of opportunity is our promotional, digital, and consumer messaging. At Outback, we had focused on traffic generation through large-scale campaigns like Steakmas or staycation, both from a marketing standpoint and promotional offer standpoint. We were featuring items in short promotional periods that created complexity for our operators, and we failed to drive value in our core high-equity menu items with compelling food quality and brand impressions. We are shifting our approach to provide clear messaging that highlights craveable food, abundant everyday value, and a reverent fun. Outback's Aussie 3-Course was our strongest performing promotion in 2024. It resonated with our guests and our operators could easily execute it. Our third priority is to focus on the turnaround at Outback Steakhouse. Outback is our largest and most important brand and I will spend the majority of my time focused on that business. Last year, we had many elements in test at an incubation restaurant with a focus on quality, value, and the guest experience. We are excited by the results seen in that lab restaurant and have now moved to test phase. As of the end of February, we will have 14 restaurants in test. We are measuring success by traffic lift, guest intent to return, Outbacker employee engagement, and profitability. We have been leveraging Ziosk to provide real-time feedback. I have been personally involved in the test restaurants with our teams, and I am highly encouraged by the improvements. Seeing the impact in these restaurants has been infectious for our people and their belief in the future growth of the brand. The passion that we see from our Outbackers and the enjoyment that we see from our guests is reminiscent of Outback at its best. Our plan is to continue to monitor the test restaurants as we learn in order to be ready for brand-wide expansion. We will be able to share more on the net investments, test results, and specific actions in the upcoming quarters. While we have an urgency to move fast, the most important thing for us is to get it right and ensure that all investments we make have a compelling return. We need to invest in the quality and condition of our existing asset base at Outback. Beginning in 2026, we are slowing down our new unit pipeline. We will continue to open new restaurants but at a much slower pace. We'll shift our focus to taking care of our existing restaurants and earn the right to open new restaurants again. We have a repair and maintenance survey underway that is evaluating the current state of each restaurant and will be completed by the end of Q2, which will help inform our analysis on remodel scopes. Additionally, our goal will be to remodel more restaurants using prudently lower spend, higher impact scopes, yielding better returns driven by improved traffic. Remodel activity will begin in earnest in the latter half of this year and will take more of the capital dollars moving forward. Michael will give additional details on the financials with our capital expenditure. We need to reinforce an operational mindset at Outback, and that starts with leadership. I'm very excited that Pat Hafner has been promoted to the President of Outback starting mid-January. He's a 29-year veteran of the Outback brand and a true guest-centric operator. He started as a cook at Outback and has progressed through each role, including Managing Partner and VP of Operations. He most recently served as the President of Carrabba's. Pat's high energy and bias for action, coupled with strong leadership to develop high-performance teams will serve him well as he returns to lead our Outbackers. I'm very pleased to announce Kelia Bazile has been promoted to President of Carrabba's, backfilling Pat. Kelia is another exceptional operator, starting as an hourly employee at Taco Bell. After a successful 28-year career at Yum!, including regional operational roles, she joined Carrabba's as a joint venture partner in 2012, served as Carrabba's Vice President of Operations, and most recently as the Vice President of Operations for Bonefish Grill. Her deep operating experience from the cash register to her current role, our passion for people in serious food, our high standards for execution, and her proven track record of maintaining high operation standards makes her an ideal leader for this role. Lastly, before I turn it over to Michael, I would like to provide an update on our capital allocation. Our priorities are reinvesting back into our restaurants, reducing our debt leverage post the Brazil transaction, and returning capital to our shareholders. We are committed to getting our leverage back to below a 3.0 lease adjusted net leverage. We received the first installment of the Brazil proceeds on December 30, 2024, and applied the proceeds to our revolver balance. We intend to use the second installment to be received at the end of December this year towards our revolver as well. As it relates to our dividend, this is our first quarter post the Brazil transaction. We are, therefore, adjusting our dividend such that our dividend payout ratio will be more in line with our historical payout ratio based on the earnings of the business post the Brazil transaction. Our new annual dividend will be $0.60 per share compared to $0.96 per share previously. I want to be clear that we know we need to take actions to improve our results. We are focused on driving everyday value within our casual dining brands while also delivering a great guest experience. Our work will take time, and we will be transparent along the way. We know that we have hard work to do, but the team and I believe in the future. As I committed to you on my first earnings call, my team and I will be strategic and grounded in our operations and decisions we need to make. I will communicate our path and progress in a transparent way, and I hold my team and myself accountable for delivering strong results. With that, I would like to now turn the call over to Michael to review our financial performance.

Thank you, Mike, and hello, everyone. I would like to start by providing a recap of our consolidated financial performance for the fiscal fourth quarter of 2024, and then I will provide additional detail on the Brazil transaction, and how to think about our financials and guidance under continuing operations moving forward. On a consolidated basis, total revenues in Q4 were $1.1 billion, which is down 8% from 2023. This was almost entirely driven by lapping the 53rd week from last year, which was $83.5 million in sales, as well as the net effect of restaurant openings and closures. US comparable restaurant sales were negative 110 basis points and traffic was negative 510 basis points, which was below the casual dining industry. Average check was up 4% in Q4 versus 2023 for our US business, in line with our expectations. Q4 off-premises was 24% of total US sales. Our third-party delivery business is 11% of total US sales, in line with last year. Our Q4 GAAP diluted earnings per share for the quarter was negative $0.93 versus $0.45 in 2023. Our Q4 adjusted diluted earnings per share was $0.38 versus $0.56 in 2023. The primary difference between GAAP and adjusted diluted earnings per share is due to adjustments from the sale of Brazil, including $68 million for the impairment of Brazil assets held for sale related to the FX erosion since acquiring the majority interest in 2013, as well as $34 million in deferred tax expense from the transaction. Additionally, there was a $31 million impairment charge primarily related to 41 older underperforming domestic restaurants in Q4. These impairments were partially offset by a $16 million gain in connection with the foreign currency forward contracts that we entered into the partially offset the risk associated with the installments on the Brazil transaction. Q4 adjusted operating margins were 4.4% versus 7.5% last year. The 53rd week is a highly profitable week and reflected 120 basis points on the quarter in 2023. The remaining 190 basis point difference between this year and last year was driven by overall restaurant level margin decline of 130 basis points. COGS inflation was 2%, in line with our expectations. Labor inflation was 3.2% as we continue to experience inflationary pressure on wages. Restaurant operating expense inflation was low single digits with additional costs from higher insurance and legal expenses, impairment expenses related to previously closed restaurants, and other inventory-related expenses. The margin headwinds were partially offset by the Brazil tax benefit, which was worth approximately 40 basis points on the quarter. Turning to our capital structure. Total debt net of cash was $957 billion at the end of Q4. Subsequent to the transaction closing, we received $104 million from the first installment of the Brazil refranchising transaction and applied these proceeds to our revolver balance in the first quarter. Our leverage metrics are currently above our targeted range. As Mike mentioned, reducing our debt leverage is a primary component of our capital allocation, and we are committed to a lease-adjusted leverage of less than 3 times. We anticipate the next installment of Brazil proceeds to be received at the end of December this year to be approximately $96 million and intend to apply it to the revolver balance. Year-to-date, we have repurchased a total of 10.1 million shares for approximately $266 million. This included shares issued in connection with the repurchase in March of a portion of our convertible notes. We have $97 million remaining under our share authorization program. As Mike mentioned, we are updating our dividend to reflect the reduced earnings from the sale of Brazil and setting the payout ratio in line with our historical average. The Board declared a quarterly dividend of $0.15 a share that is payable on March 26, 2025. Now, turning to continuing and discontinued operations, and then our guidance for the upcoming year and first quarter. As it relates to Brazil, we have transitioned to a franchise model where 100% of the royalty revenues will be recorded in the franchise line, consistent with our other third-party franchisees. This reflects a more stable revenue stream, which is good for our company in the long term. Going forward, we will present the company's 2024 performance in terms of continuing operations, which has Brazil removed as an equity market and the royalty revenue recognized in the franchise line. On a continuing operations basis for the full year 2024, total revenue was $3.950 billion, adjusted restaurant margin was 13.3%, adjusted operating income margin was 5.0%, and adjusted diluted earnings per share was $1.45. Brazil, within discontinued operations contributed 0.9% in adjusted restaurant margin, 0.2% of adjusted operating margin, and $0.34 in adjusted diluted earnings per share. We had historically received a 5% intercompany royalty or approximately $26 million in 2024, which was eliminated in consolidation in our historical financial results. This royalty revenue remains in continuing operations for historical periods per GAAP standards within the franchise revenues line. The Brazil tax legislation benefit is included within discontinued operations and was worth $21 million in total revenue, approximately $10 million in operating income, and approximately $0.14 of adjusted diluted earnings per share. Our retained 33% ownership will be recognized using equity method investment accounting. Work is still underway to determine income flow-through of our remaining equity ownership, including fair value accounting considerations in Brazil. However, we do not anticipate that the post-tax contribution will produce a meaningful contribution to our net income in 2025. As we think about our go-forward guidance, please compare to continuing operations. We expect the full-year US comparable restaurant sales to be down 2% to flat. Adjusted diluted earnings per share are expected to be between $1.20 and $1.40. We expect commodities inflation to be between 2.5% and 3.5%, driven in large part by beef inflation. We expect labor inflation to be between 4% and 5%. We expect our full-year tax rate assumption to be close to 0%, driven by our FICA tip credits. Brazil royalty revenue will be lower than our historical intercompany royalty rate and is on the lower end of our published range of 2.75% to 5%. This will create an approximate $10 million headwind comparing future royalties to historical continuing operations, due to GAAP accounting requirements that were previously mentioned. Additionally, our earnings per share guidance includes approximately $10 million in investment in Ziosk, product enhancements, and IT infrastructure. Mike mentioned the G&A savings initiative and organizational design work. This action will bring approximately $22 million of annualized G&A savings, of which approximately $17 million will be realized in 2025. We expect total G&A to be approximately $225 million for 2025, which includes approximately $12 million from reloading compensation and approximately $10 million of IT and infrastructure investments. We will earn interest income on the second payment from the Brazil transaction, which will lower our net interest expense for the year. Capital expenditures are expected to be between $190 million and $210 million. We are shifting our focus from new restaurant development to investing in our base business through maintenance and remodels that we can create more value from our existing operations. We believe there is unit growth opportunity for our brands, but particularly for Outback, we need to focus on getting the guest experience right before we earn the right to grow units. As many of our new units planned this year were committed, we plan to open approximately 18 to 20 new restaurants in the US this year in markets and locations we are excited about. That number will decline dramatically in 2026. We expect our franchise partner in Brazil to open approximately 17 new units with 15 new units from other franchise partners. As it relates to the first quarter of 2025, similar to the rest of the industry, we experienced negative impacts from weather in the start of this year, offset by holiday shifts from New Year's and Valentine's Day. Combined, these represent approximately negative 100 basis point comparable sales impact on the quarter and have been included in our comparable sales guidance. We expect US comparable restaurant sales to be between negative 50 basis points and negative 150 basis points. We expect Q1 adjusted diluted earnings per share to be between $0.55 and $0.60, which includes approximately $0.04 negative net impact from weather and holiday shifts. And with that, we will open up the call for questions.

Yes, thank you. We will now begin the question-and-answer session And the first question comes from Alex Slagle with Jefferies.

Thanks. Good morning. A question for you, Mike Spanos. You've expressed the importance of taking care of the people and helping ensure they can do their jobs well and enjoy everything and help the guest. And I guess, you highlighted a number of planned changes on this front. I just want to kind of get a sense of the time line for these actions and if there's any other big changes you want to look at to get kind of where you want to be?

Yes. Hey, Alex, just to be clear, you're talking about org structure around simplifying the agenda, just so I'm clear on your question.

Yes. Sorry about that. Simplifying the agenda.

Yes. Understood. From an operational perspective, we started implementing changes quickly with Pat and Kelia in leadership positions. In Brazil, we acted swiftly to reduce risk and streamline the business, which is now completed. The organizational structure posed challenges last week, but we have progressed. This was mainly to simplify the hierarchy, empower teams, and allocate resources at the brand level to improve decision-making speed. Regarding the menu, three brands will see about a 10% to 15% reduction by May, with Outback aiming for closer to 20%. As we refine the base menu and assess our test stores, we will be careful and methodical in our approach. Additionally, I mentioned that Ziosk will be implemented by the end of April, and I'm pleased with our week-to-week progress. For limited-time offers and everyday value, we are currently promoting OSI 3 Course, which will likely show greater benefits in the second half of the year due to some calendar delays, having started right after Valentine's Day. The other casual dining brands, Bonefish and Carrabba's, are also testing and rolling out abundant value. Fleming's will focus on enhancing execution, maintaining our usual offerings like Tomahawk Tuesday and other regular promotions.

Got it. That's helpful. And a follow-up in thinking about the blended same-store sales range for the first quarter. Should we consider similar trends by brand as we saw in the fourth quarter? Is there a reason to think a different trajectory for certain brands?

Yes, Alex, I think your takeaway is right, meaning what you saw in the fourth quarter in terms of trend by brand and also Outback, you should assume that's consistent in the first quarter, similar trends.

Thank you. And the next question comes from Jeffrey Bernstein with Barclays.

Great. Thank you very much. Two questions. The first one, just talking more about the comp trends. I think you talked about in the first quarter that the impacts of weather and holiday shifts is 100 basis points to the full quarter. But do you get a sense there are any underlying changes in consumer spending beyond just weather and holiday shifts? I know most are questioning whether the consumer is perhaps a little bit more conservative or cautious in their spending. And within that, if you could just share the components you're assuming in that comp for both the first quarter and the year? And then I had one follow-up.

We are experiencing a fluctuating market with a selective consumer, but I believe this is primarily a short-term issue. This fluctuation is influenced by factors like weather, geopolitical events, and changes in the calendar, as we noticed during the fourth quarter with Thanksgiving, and in Q1 due to Valentine's Day moving from a Wednesday to a Friday, along with some other elements tied to short-term inflation. In terms of consumer behavior, there is a tendency for consumers, particularly those with household incomes below $100,000, to manage their spending more carefully. This is evident in the reduced demand for appetizers, beverage pairings, and desserts compared to the fourth quarter. Looking at longer-term patterns, I remain optimistic. Sales were strong on Valentine's Day, and when we offer the right value, consumers are inclined to visit us more often. I maintain a positive outlook on the away-from-home market and believe the trends are favorable. We're focused on connecting with consumers where they are to engage them effectively. Regarding your last question, this short-term volatility is factored into our guidance for both Q1 and the entire year.

Just to clarify, the components that you're assuming within the first quarter and full-year comp in terms of traffic versus pricing?

For the first quarter, we're expecting comparable sales to decline by 1.5% to 0.5%. This suggests that traffic is likely decreasing by about 4% to 5%. Pricing is expected to be around 4%, which would result in an average check increase of 3% to 4% due to some mix changes. As Michael mentioned, commodity costs for the first quarter look promising, likely a bit over 1%, while labor costs are projected to rise by about 4% for the quarter.

Got it. And then my follow-up is just on the bigger picture leadership and discussion with the activist. Just wondering your early relationship with the Board and activists, whether you think everyone's got kind of similar vision and priorities, maybe whether there are other strategic initiatives to focus on besides, like you said, you already spun out Brazil, but besides the Outback experience, just how we think about oversight of the brand, current management team, anything you want to share on there? Thank you.

Yes, absolutely. The Board is fully aligned, very constructive, and very collaborative regarding the activists and Starboard. They are encouraging me and the management team in the right direction, helping us improve. We are all dedicated to focusing on what drives sales, enhances profits, and supports sustainable traffic growth.

Thank you. And the next question comes from Brian Harbour with Morgan Stanley.

Thanks. Good morning everyone. When discussing a great guest experience, what does the feedback indicate is the main opportunity? Where do you see the biggest gap in guest experience today?

It's in consistency of execution.

Okay. Got it.

If I may elaborate on that, quality, value, and guest experience are all essential components. What I care about is that when guests leave the restaurant, they should feel excited to return and have a strong intent to come back, which will increase their frequency of visits. That is what truly matters. Additionally, this means that our team members should also feel positive about that experience. As a result, we should see traffic growth, high satisfaction, and improved gross profit dollars from these efforts.

Okay. If you're going to be focusing on sort of reimaging, putting capital into existing stores, is there a certain cohort of stores we're talking about? Do you think that the majority need some investment? Is there sort of just a broader reimage cycle? What would you expect that to look like, and anything on timing?

Yes. We expect around 50% of the stores to be updated, and we aim to complete those remodels within the next two to three years, mainly focusing on Outback.

Thank you. And the next question comes from John Ivankoe with JPMorgan.

Hi. Thank you. The question is really on your average ticket. And certainly, I understand what the percent menu price increases have been over the past couple of years. But I really want to look in terms of where we've landed on an absolute level in terms of the variety of items that your customers are ordering. So the first question is, do you think the average ticket is right for the brand? Might there be an opportunity to lower the average ticket to drive sales, which I understand is very difficult to drive sales and profitability if you do lower the average ticket, and really try to frame this kind of in the context of what consumers see as various alternatives to specifically the Outback brand, whether in casual dining or eat at home or fast casual or what have you?

Yes, John, thanks. I think it's a very good question, and it's the heart of revenue management, and it's the heart of how we set up the menu. The first thing I would say is, we do need to meet the guests where they're at, and I believe we need to have abundant everyday value in all three of the casual dining brands. And what we found, especially found at, obviously, three course, we're able to accomplish that with a healthy mix, a healthy mix in terms of what the guest engages with and a healthy mix in terms of how we think about our PPA and how that flows through into the P&L. And we like that. It also assumes that we're also going to have to be thoughtful in terms of the craveable innovation, and we're also going to be thoughtful about affordable opening price points for the guest. And what that orients us to is, thinking about the business in terms of gross profit dollars because there's going to be trade-offs to your point. And we know what that negative mix will be on year as we invest in value, and that's embedded in our guidance and assumptions.

Okay. Thank you. And are there any initial tests, various packages of remodels that you think kind of makes sense for the brand? I don't know if we're talking $0.5 million a box, $1 million a box, something more than that? And what type of investment to sales lift ratio should, at least, we be kind of conceptually penciling in the model over 2026, 2027?

Yes. Hey John, what we're finding is, as Michael said, first of all, I think we need to earn the right before we start putting out new stores. And I'd say that especially as relevant to Outback. And what we're finding is we can do lower spend, higher touch, and a better bang for the buck with really thoughtful spending. And we're seeing that in terms of the guest’s satisfaction experience. We're seeing that with traffic returns, and that's going to be the orientation.

Yes, John. So I think what we'll see is we'll see the pull down in new units, and those dollars, roughly, call it, $40 million will shift into remodels as we get into 2026 going forward.

Thank you. And the next question comes from Lauren Silberman with Deutsche Bank.

Thanks so much. I wanted to go back to the check management. Can you unpack that a little bit more in terms of what's driving the trade down, lower-priced items, attachment, alcohol mix? And how much different that is versus what you've been seeing in recent quarters?

Yes. It's up, Lauren. So it's been slight. We saw about 100 to 150 basis point movement from Q4 to Q1. We think that's definitely short-term. And we're also making moves in terms of our beer and alcohol, wine, liquor, etc., as well as our appetizers and desserts to meet the guests where they're at. What we are finding is we're going to need to innovate in those areas. We've already done that with mocktails across our beverage portfolio, and we're doing it across the other attachments as well. Yes, I understand. I didn't catch you for a moment there. Regarding commodities, we anticipate a range of 2.5% to 3.5%, with about 76% of that locked in. We specifically expect beef to be in the mid-single digits. All of this is factored into our guidance and forecast.

Thank you. And the next question comes from Jeff Farmer with Gordon Haskett.

Thanks. You guys certainly touched on a lot of things today, but bigger picture, specifically with Outback, what do you see as sort of the greatest untapped opportunity to drive traffic in the near term at that core Outback concept?

It's all about executing consistently, and I want to emphasize that. Outback is a solid business and a strong brand with a fantastic team behind it. It's well-positioned within its category, and there are definitely opportunities for improvement. I'm very optimistic that we can successfully turn this business around, although it will take some time as we shift the organizational culture. We have a clear vision of our goals and are refining the elements of our plan and business model. While we're moving quickly, it's crucial that we get it right. We will maintain clarity on our strategy as we progress. There is still a lot of work ahead, but I believe in the solid fundamentals of this business and our ability to revitalize it, which is a sentiment shared by the team.

Okay. And then unrelated, as it just sort of going back to the 2025 same-store sales guidance, a couple of questions here. So what does that assume about casual dining segment traffic as a whole, just how that does? And then you touched on this. So in addition to that, your ability to actually win market share sort of going up against a casual dining peer group that's aggressively promoting value and doing some of the same things you guys are doing. So a lot of questions there, but ultimately, what does your 2025 same-store sales guidance assume about what the casual dining segment traffic looks like in 2025 and your ability to win share?

We expect casual dining traffic to decline by approximately 3%. We will see if this situation improves as we move past this volatile period. Winning market share relies on our consistent execution; it involves maintaining strong value each day to attract good traffic and increase visit frequency. This is about delivering quality, value, and experience, along with effective marketing and executing the basics exceptionally well every day. Additionally, I believe that our offerings like The Aussie 3-Course or other value options will enhance brand trust and contribute positively to our market share as we progress.

Thank you. And the next question comes from Sara Senatore with Bank of America.

Thank you for the clarification. Let’s start with a question. You mentioned a focus on remodels, whereas previously there was an idea that relocations were necessary. My understanding from what you said is that the trade areas and locations are acceptable, and the issue is more about the physical spaces. Can you confirm that the concern is not about being in optimal locations, which may have been a misunderstanding based on past strategies? That’s my first question. If the locations are satisfactory, then perhaps the relocation strategy is reconsidered. I also have a quick question regarding margins.

Sure. Relocations are still very much part of the program. We like relos. It's just the reality of getting them done and how many we can get done. So it is relocations plus remodels.

Okay. And then on the margins, I guess the question I had was you talked about value and the strength of The Aussie 3-Course. But if I look at the margin complexion, it looks like cost of goods were actually quite a bit lower than we expected. So going forward, should we think about the complexion of the restaurant level margins perhaps is changing with maybe higher cost of sales, but ideally leverage on labor and other?

Yes, I believe our cost of goods sold will remain fairly stable. A significant portion of the productivity built into our plan is reflected in our supply chain, which allows us to maintain these costs. However, we are still facing labor pressures due to declining traffic. We anticipate that The Aussie 3-Course will help drive traffic to our restaurants, which presents opportunities for leverage when that traffic improves. Currently, I expect our cost of goods sold to remain stable, while labor costs may continue to decline slightly due to inflation throughout the year.

No, I don't think so. I mean, I think ultimately, we'll be able to drive traffic with that value. There's certainly some cost components there, but we also pick up other ancillary costs, plus our productivity, like I said, sort of supports our COGS.

Thank you. And the next question comes from Brian Vaccaro with Raymond James.

Hi. Thanks. Good morning. My question was on the 2025 guidance and obviously, a lot of moving pieces here, but I was hoping you could provide some guardrails on your store margin expectations for the year. And could you just clarify to what level of investment did you embed in your guidance as part of the turnaround?

Yes. Hey, Brian, I'll start with the first part, which is the investment aspect. The purpose of the test is crucial, and anything we undertake will yield compelling returns. As you've noticed, we've started this year by being able to self-fund through increased productivity. We will carefully monitor key metrics such as foot traffic, customer satisfaction, return intent, employee engagement, and gross profit. As we progress with the tests, we'll make sure to keep everyone informed.

Yeah. And the only thing I'd add there is our restaurant level margins will have pressure from labor and other restaurant operating inflation as we think about going forward.

Okay. And I guess, could you also just shifting gears to the Outback lab restaurant, if we could? Could you just elaborate on some of the nitty-gritty sort of changes you've made that have either improved back-of-house efficiency or some of the guest-facing changes that one would notice? Just some more on that. What's proving to be most promising? I know, it's still early days, but just curious on that.

Yes. I'm not going to get into details for competitive reasons. And as I said, we're in test. But what I will tell you is this, we are dialing into the quality. We're dialing into the value, and we're dialing into the guest experience. What gets me really excited is what I've seen in the initial results are very encouraging, especially on traffic, and especially on frequency of visitation from our loyals. They are coming more often. And what I know is our Outbackers are really pumped about this. Our guests are very excited as they leave the restaurant. And that's why we're moving into the test phase. And as we learn more, we'll be transparent in our results at the right time.

Can you discuss guest perceptions regarding the core steak category and highlight any specific changes you are making to the steak menu?

So we're good. We feel good about our steak accuracy, our steak consistency, but we're always working with our supplier partners. There's a lot of technology out there. We're staying really close in terms of the size of cows specifically, what that means in the size of loins. And therefore, what does that mean in terms of the specs and the tolerances. And therefore, how do we then translate that into how we cook the platform, everything, the seasoning, the cooking standards, and we got to meet guest expectations. I just think that's a very constant, perfecting the known and getting better every time. That's what we're doing. And we look at it with our menu SAT scores. We look at our ECRA scores. We look at our consistency scores, and we do that by protein type.

Okay, and sorry, Mike, just one more quick one, just on the G&A guidance, I think you said $225 million for the year. Correct me if I'm wrong on that, but just walking through that. So you have savings from Brazil and then, you have savings from the workforce reductions. But that's partially being offset by reloading bonuses and then $10 million of IT investments. Did I get all that right?

That's correct. So there's $12 million of the bonus reload. There's $10 million of IT infrastructure investments. Some of that is Ziosk and then there's offset by the $17 million savings from the org design.

Thank you. And the next question comes from Brian Mullan with Piper Sandler.

Hi. Thanks. Just to follow-up on that G&A question. I believe that would probably put you north of 5% of sales this year. So one, do we have that right? And then two, if that's right, how would you plan to get down to that 5% of sales goal you referenced? Is that going to be entirely through revenue growth? Or is there perhaps more dollars you can take out from here after you've had some more time doing all of your strategic work?

Yeah. You got it right. I mean the goal is 5%. We're not there now. We're probably in about a 5.5% to 5.8% range this year. And to get it right, you got to tackle it both ways. The best way is to drive profitable sales and just become more efficient and leverage the assets. But we're always going to be more productive. And we're going to be really prudent in our spending and thoughtful in our investments.

Okay. Thanks. And then a question on capital allocation, in regards to the dividend change if I'm understanding right, you framed that as mostly related to the Brazil sale and maintaining a payout ratio, I think, more than anything else. My question is, as you look forward and also try to execute on remodels and reducing balance sheet leverage, is further reducing the dividend on the table? Or should we think about this dividend, this is permanent now?

Yeah. So it's part of our holistic strategy in terms of capital allocation. And as Michael said, and we talked about, it's, one, we're going to focus on the base business. That's number one. Two, we're going to go at the debt to get to that 3.0 lease leverage ratio. And then the third is we're going to return cash to shareholders. And we thought the dividend, and we think the dividend is the most reliable, predictive, consistent way to bring cash back to shareholders. And we're going to stay at that. And if that changes, we'll let you know.

Thank you. And the next question comes from Dennis Geiger with UBS.

Great. Thanks guys. I just wanted to ask another one on, how you're envisioning the Outback value strategy. As you move away from the LTO strategy and transition to that abundant value with the Aussie 3-Course seemingly as the answer there. Is there anything else to add sort of on what you've been seeing from that promotion of late, maybe how incidence levels are trending there, any other kind of customer feedback or behavior around the offer? And I guess related to that, just if anything more on how the 3-Course sort of addresses, how you and your customer envisions Outback's value position and maybe the value shortfall in recent years? Thanks guys.

Yeah, I got it. So I think it's all about brand trust, and it's all about frequency of visitation, getting one more visit out of our guests. What we're finding with OSI 3 course, and I found this with abundant everyday value over many years, you just create better guest trust and they're visiting more often. And especially in the short-term, we're meeting the guests where they're at right now, especially in this period of choppiness. As far as the experience, what's been really encouraging to me is you think about the OSI 3 course, you got the $14.99, $17.99, the $20.99, although we're leading with that $14.99, we are seeing a significant amount of guests trading up to that six-ounce sirloin at $17.99 or the eight-ounce sirloin at the $20.99, and that works really well on the P&L. The other thing we're seeing is in terms of the dessert, I mean, we offer the New York Style Cheesecake, but we are seeing a significant amount of guests trading up to spending another $3 to get a chunk of thunder or the dessert they want. And to me, what it shows is the price benefit equation of value works with guests. And when you execute, it works. And this is the other thing that's important. It's part of our everyday menu offering. Our teams get it. They can get the groove in the back of the house and execute it and know they're going to execute it really well and deliver a great guest experience. Instead of creating the complexity of bringing in a new item every 10 to 12 weeks, it creates more prep labor. It becomes frustrating for our teams in the back of the house, and it's confusing for our guests as well. So I feel really good about it. We'll, obviously, need to continue to monitor it like any offer. I think there's always going to be the right periods of innovation we bring in, whether it's opening price points or craveable items. But I do think you need these hero items, traffic-driving items that work, and we're finding right now, it works for the team. It works for the guests, and it works on our P&L.

Helpful. Thanks Mike.

Thank you. And the next question comes from Christine Cho with Goldman Sachs.

Yes, thank you for the opportunity. So firstly, I was wondering how you're baking in the impact of the 10% to 15% menu reduction into the full year guidance? And I think more importantly, how are you thinking about balancing that simplification of operations, including the menu reduction with that renewing traffic momentum and maintaining a compelling value proposition? What would be some of the areas of investment or optimization you would need at the store level across labor, marketing, and tech to achieve that goal? Thank you.

Well, Christine, what I found and what we found across the board is simplifying the menu, you start; one, you start with the guest. If it's a low mix item and it's perceived by the guest to be a sub-par item, we don't want it on the menu. If it's then creating complexity increasing our prep labor costs, that's not a good thing. So I find them to be very complementary. As we simplify the menu, we're much sharper. We're much better in terms of the quality and the consistency of the experience with the guest, and it enhances morale and it brings down our labor costs in the back of the house. So that's how we've been attacking this, and we'll continue to attack it across all the brands.

Thank you. And the next question comes from Jon Tower with Citigroup.

Yeah. Great. Maybe dovetailing on to that question. In terms of how you're thinking about investment into the business, do you feel like the stores, particularly Outback, have the equipment in place that is necessary to pull off some of this menu transformation? And do you see yourselves needing to spend more money on training in the near term to get employees up to snuff to provide that guest experience you're looking for?

We have the equipment and restaurant infrastructure needed to provide an excellent guest experience and support our team. We’re continually exploring technology that can streamline their work while enhancing the guest experience. For instance, Ziosk is an example of this. It’s also important to remember that driving limited-time offers involves significant training costs, as it requires ramping up staff for 10 to 12 weeks. When operating under a consistent everyday value, it allows us to maintain our execution and effectively allocate those training resources. We have strong operational leaders who will be present in the restaurants, particularly during peak shifts on Fridays and Saturdays. Coaching and leading the team is a valuable aspect of training, and we are dedicated to that as well.

Okay. Maybe just kind of following up on that point of the LTOs here throughout the year. Do you feel like with that, you'll be able to perhaps even cut back on your marketing spend? Or I guess, maybe flipping that around a little bit, how are you going to communicate that everyday abundant value to consumers on a consistent basis without the message necessarily growing stale?

Yeah, good question. Well, first, I found usually consumers get far less tired with offers before usually company folks get tired with the offer. So I'll start there. Second, you're right, we are finding probably about a $10 million save in marketing from non-working because with LTOs, you've got all that non-working, you're doing creative, you're putting out a new message. It just drives costs there. So the beauty there is we can decide, are we going to reinvest that back into more marketing with great returns that drives profitable traffic. And if we don't feel good about that, we don't spend the money there. And that's going to be across all the brands.

Got it. Thanks for taking the question.

Thank you. And the next question comes from Andrew Strelzik with BMO.

Hey, thanks for taking the questions. I had 2. You touched on remodels and relocations, but I'm just curious, as you kind of dug into the existing store base, how we should think about closures, whether that's in '25 or beyond? And then, the second question, based on the time line of some of the initiatives taking place in the first half of the year, it seems like you'd be set up for a better back half, at least from a top line perspective, from a comp perspective. But if I just use the midpoints of the 1Q guide and the annual guide, it doesn't really reflect that. So, am I just getting caught up in ranges there? Are you implicitly assuming a better back half? Or are there some offsets to that, that you're assuming? Thanks.

Yes. I understand, Andrew. I'll begin with the remodels and store performance. We have identified some underperforming assets and have developed action plans to enhance execution, boost customer traffic, and drive profit growth. This is a key focus for our leadership team. We will continue to evaluate these stores as part of our overall strategy. If we find that performance is not improving, we will need to decide whether to renew leases. Regarding guidance and the second half of the year, we believe our guidance is appropriate considering recent trends. We anticipate that OSI 3 Course will provide us with more momentum in the latter half of the year. As previously mentioned, we expect the short-term fluctuations we've experienced in the latter part of Q4 and Q1 to persist throughout the year. However, if these fluctuations decrease, we hope to see improved momentum with OSI 3 Course. Additionally, we are optimistic about the enhanced everyday value offering at Bonefish and Carrabba's, which we hope will gain traction. We will keep you updated on this.

Thank you. And this concludes our question-and-answer session. I would like to turn the conference back over to Mike Spanos, CEO, for any closing remarks.

Thanks again for your time, and we really appreciate the engagement. We look forward to further updates on our next earnings call. Have a great day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.