Good morning, ladies and gentlemen, and welcome to the Brinker International Q1 F2021 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. And the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware. Ma'am, the floor is yours.

Thank you, Kate, and good morning, everyone. With me on today's call are Wyman Roberts, Chief Executive Officer and President; and Joe Taylor, Chief Financial Officer. Results for the quarter were released earlier this morning and are available on our website at brinker.com. As usual, Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives. We will then open the call for your questions. Before beginning our comments, it is my job to remind everyone of our Safe Harbor regarding forward-looking statements. During our call, management may discuss certain items which are not based entirely on historical facts. Any such item should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. And with that said, I will turn the call over to Wyman.

Thanks, Mika, and thanks, everyone, for joining us this morning to review our first quarter performance and share highlights of what we see for the future of our business. Looking broadly at the quarter, we're encouraged by the continued improvement in the environment, the consumer's increasing engagement with the category, and we hope to see those trends continue. We know there are still challenges out there, especially with Independence. Brinker continues its strong recovery posting a better than expected first quarter and delivering earnings of $0.28 a share. Both brands increased their progression from last quarter with Chili's reporting comp sales of negative 7.2% and Maggiano's negative 38.6%. And both brands delivered solid sequential improvement throughout the quarter with Chili’s ending September down just 1.4% and Maggiano's down 32.5%. Polished casual is obviously a more challenged segment facing greater headwinds, but the Maggiano's team is doing a great job managing their cost structure and flow-through. We feel good about where Maggiano's is from a relative perspective. And we're excited about the bold strategy Steve Provo and the team are putting in place to build the business. The Chili's brand continues to see expectations from both a relative and an absolute perspective. The month of September marked our return to positive traffic. And that's pretty impressive given there are still major states like California and New Jersey not yet near full dining room capacity. This brand continued its nearly three-year streak of outperforming other casual dining chains, driving a 16-point gap in sales and 23 points in traffic this quarter. When we broaden our view of the category to include Independence, our gap widened significantly. Current credit card data shows the whole category down 30%, reflecting the ongoing impact of this pandemic and the reality of what is likely to be a meaningful shift in the competitive landscape. In this tough environment, I couldn't be prouder of the resilience and agility of our operations team. For the quarter, the improved restaurant operating margin was 60 basis points year-over-year. When the pandemic hit back in March, the market drove us all to dramatically cut costs. Since then, we've judiciously evaluated every cost within our P&L and we've been diligent about re-establishing our spending levels. In many cases, we're comfortable maintaining a level of spend below pre-pandemic levels. One of the biggest changes we made was to rethink our marketing spend. We significantly reduced traditional television advertising, so we could invest more aggressively in digital and direct channels that work harder for us like My Chili's rewards. With the increased desire for convenience, we're shifting to support all our brands more aggressively with delivery, resulting in higher third-party delivery fees and promotional expenses. Based on where we're tracking with sales and the efficiency of our P&L, we feel really good about these decisions. Our top priority has been and remains the safety of our team members and guests. We're committed to supporting our team that's working so hard to take care of our guests. We've now brought back most of our hourly team members and we've been able to help them maintain their hourly wage levels. We've also kept our management structure intact. We know how critical their leadership is to our guests and our business. We're proud that we've been able to bonus our managers close to target. Nobody could have predicted this pandemic back in the spring. We're thankful we didn't have to change strategies when it hit. Instead, we leaned into the same strategies that have been helping us take share for the last three years. They've been even more effective since the pandemic. But even before that, our challenge was to prove to ourselves and to you that we could create a growth model out of a legacy business in a category that has seen meaningful declines in traffic over the years. We have always believed growth is available in this category if you do the right things. By delivering a better guest experience, a strong value proposition, and more effective marketing, we unlock sustainable organic growth within our base business. Our results demonstrate we're doing the right thing. Our improvements to the base enabled us to introduce our first virtual brand, It's Just Wings. An incremental growth vehicle that offers convenience and value in a way no one else is positioned to do. There's been a lot of discussion about what a virtual brand is. It's Just Wings is not a disposable vehicle. We're committed to this brand for the long haul. There are barriers to entry in doing virtual brands well, and Brinker is uniquely positioned to do it right. We have the scale, the asset ownership, available capacity, well-equipped kitchens, the right technology, and unbelievably strong operators who can focus and deliver consistently. We rolled out It's Just Wings overnight to more than 1,000 restaurants. Now that's easier to say than to do. I know everyone's curious about how it's going so far. We're excited with how the brand is already performing and we're on track to meet our first year target of more than $150 million in sales. We're encouraged by what DoorDash sees regarding consumer data. The brand is already generating high satisfaction scores and strong repeat usage. It's really resonating with consumers, which we know is critical to the health and long-term success of any brand. Going forward, our focus is to ensure we're executing at the highest level possible and maximizing the brand's growth potential. It's Just Wings started as a virtual brand. But as we finalize execution and accelerate growth, it may take different trajectories. We're evaluating internal and external opportunities to increase awareness levels and expand access to consumers. This is just phase one for It's Just Wings. We believe we have the capacity to expand our virtual brand portfolio. We're testing a few ideas to better understand consumer demand and ensure that we can execute at a high level. We'll have more to say on that in the not too distant future. Obviously, we see a lot of upside for virtual brands. With the uncertainty surrounding COVID and the economy, we anticipate some volatility ahead. Like the rest of our country and the world, we are hoping and planning for a vaccine and an end to the sickness and deaths from this virus. We're hoping and planning for economic stability and continued recovery in a post-election environment. Despite the things no one can know, here's what we do know. We will keep running our own race and work in our strategy. We will stay flexible and agile, take care of each other and our guests. We will continue to manage our P&L and our balance sheet with discipline to create an even more stable model for our shareholders. We will boldly grow these brands, so we can continue to be a great place for our team members to work and our shareholders to invest. And with that, I'll turn it over to Joe. You go Joe?

Hey, thanks, Wyman, and good morning, everyone. As you just heard, we began our fiscal year 2021 with momentum on the top and bottom line. We continued our recovery by delivering adjusted diluted EPS of positive $0.28, marking our return to profitability after just a one-quarter hiatus. For the quarter, Brinker’s total revenues were $740 million, and consolidated reported net comp sales were negative 10.9%. Importantly, comp sales materially improved as the quarter progressed, with September consolidated comp sales down only 5.2%. Chili’s continued to lead the casual dining sector ranking as the number one brand in the KNAPP-TRACK index each month in the quarter. Wyman indicated that we beat by significant margins in both sales and traffic. In September, Chili's achieved another important milestone in recovery, posting positive traffic for the brand of 2.2%. Another way to see Chili's impressive progression is to look at our net comp sales results. Excluding those restaurants and markets not fully open for indoor dining during the quarter, such as California and New Jersey, these restaurants represent approximately 86% of the Chili’s system, and they were only negative 1.3% for the quarter with positive 3.6% for September. Now turning to margins. Restaurant operating margin for the first quarter was 11.6% and is a noteworthy 60 basis points improvement versus the prior year. Food and beverage expenses were favorable 10 basis points versus the prior year due to the favorable menu mix offset by low level of commodity inflation. Labor was favorable 120 basis points versus the prior year. Several items contributed to this improved performance. First, labor expense relative to the prior year benefited from the shift in sales from dine-in to off-premise in the quarter. Second, favorability was also buoyed by the fact some of our higher labor cost states reopened at a slower pace during the recovery—a benefit that will diminish as we move forward. Naturally, we’ll take the sales that go with adding that labor back into the equation. Lastly, labor expense benefited from the ability to seamlessly integrate our It's Just Wings brand into the existing labor model, a point of leverage we plan to sustain. The labor favorability was partially offset by an increase in restaurant expenses, which was up 70 basis points for the first quarter versus the prior year. Sales deleverage and higher delivery-related fees and packaging expenses were the primary increases, while lower advertising and repairs and maintenance expenses helped to mitigate the overall increase. Generating positive cash flow is an important part of our recovery process. With the business improving, we generated operating cash flow of $83 million. After capital expenditures of approximately $14 million, our free cash flow for the quarter totaled more than $69 million. Our first priority for cash generation is to invest back in the business. As such, we have resumed both restaurant reimages and new restaurant development. We have increased our CapEx budget for the year and now expect to spend approximately $100 million during this fiscal year. As Wyman reiterated, strengthening the balance sheet is also a key area of focus. As such, our second cash priority is to pay down debt. We executed against this strategy during the quarter, reducing our long-term debt by approximately $50 million. We will continue to lower leverage as we move forward from here, targeting an adjusted debt level of 3.5 times EBITDAR. Now turning to our current second quarter. Let me provide some color as to our expectations for the quarter and then some specific guidance metrics for the quarter. Today marks the end of our October period, and it appears we will continue the positive progression of comp sales established during the first quarter. We expect Chili’s to further build its positive traffic performance period, getting the second quarter off to a very fine start. While we anticipate year-over-year improvements in Chili's operating performance in the second quarter, our consolidated performance will likely reflect a more difficult holiday environment for the Maggiano's brand. With that being said, let me provide some specifics for Brinker's performance in the second quarter. We expect consolidated comp store sales to be down in the mid-single digit range. We believe Brinker's restaurant operating margins will be relatively similar to the prior year. Adjusted earnings per diluted share are estimated to be in the range of $0.40 to $0.60, and weighted average diluted shares are estimated to be in the 45 million to 46 million share range. I would also note we have a holiday flip in the second quarter with Christmas Eve and Christmas Day moving into the third quarter. This holiday shift will have a positive impact on second quarter comp sales, but will be offset in the first period of Q3. Despite the ongoing challenges in our operating environment, we continue to demonstrate strength and resilience. Our first quarter performance is a testament to our ability to deliver results. While operating in a pandemic environment comes with some uncertainties, there is no doubt we will continue to execute our share-gaining strategy, take care of our guests and team members, and be a leader in the restaurant industry for the short and long term. With that, let's move to your questions. Kate, I'll turn the call over to you to moderate.

Thank you. The floor is now open for questions. Our first question is from Chris O'Cull. Please announce your affiliation and then ask your question.

Hi, it’s Stifel. Good morning, guys.

Hi Chris.

Wyman, you mentioned that the opportunity for additional virtual brands, my question is how many virtual concepts do you think a typical Chili's restaurant could support and what are the limiting factors for that?

It's a great question, Chris. It's not so much about how many; it's how much volume. Ideally, you'd like as few as possible that do large volume. So we think It's Just Wings is nowhere near its potential growth. We'll continue to grow that brand from what we're saying now is at least a $150 million brand to some higher level. The constraint is really your kitchen capacity. I think there are certain limitations that just come with the current setup that you would have to start to modify. It's not a large number. It's not – we're not talking about a low single-digit affair, whether it's one, two, or three just kind of depends on how it plays itself out and kind of how we work. There's also the opportunity when you have as many points of distribution, which really the virtual brand game is about point of distribution. As penetrated as we are in a lot of markets, you don't necessarily have to put every brand in every distribution point. Not every kitchen has to carry everything to still get you coverage for those guests looking for delivery options. So there are a couple of variables that we're continuing to learn and test as we build it out. But it's not – it's a relatively small number; it’s all about sales growth. The good news is we know in our restaurant, we have $5 million Chili’s that do that kind of volume, even though our average is three. We know we have a lot of capacity to produce more food out of that kitchen than our average. That's what we're aiming for, so we're optimistic that we've got plenty of room to grow the virtual brand business because of that.

That’s helpful. And just one other question, Joe, could you break down how much of the margin improvement at the restaurant level was driven by the incremental flow-through of the It's Just Wings business versus fundamental changes that have been made in the restaurant?

Yes, it was definitely additive to the equation, growing that top line in virtual brands is an example of how we're going to do that, but also growing the top line as we bring dining rooms more fully back online is an important piece of that equation. Now in the 40 basis points range, when you look at it from an all-in standpoint Chris.

Okay, very helpful. Thanks guys.

Thanks Chris.

Thank you. Our next question today is coming from Andrew Strelzik. Please announce your affiliation, then pose your question.

BMO. Hey, good morning guys. My questions are on the margins. You talked about 2Q being kind of in line with the year-ago. Excuse me, you mentioned labor and advertising as benefits it'll dissipate over time. So when you think about going from up year-over-year to kind of flattish, what are the dynamics at play in 2Q that we should be aware of specifically for that quarter? And then more broadly, when we're looking at comps being down and margins in line or better than a year-ago, how are you thinking about whether it's back at a 100% capacity, plus It's Just Wings or however you want to frame it, how are you thinking about how much better margins could ultimately be in this business, kind of in a post-COVID environment? Thanks.

Yes. So, Andrew, I think when you start thinking about the delta Q1 to Q2, the unique difference basis is going to be primarily driven off of the Maggiano's side of the equation. Obviously, Maggiano's historically has always had an extremely strong second quarter built along a lot around the banquet special events and the celebratory nature of the holidays. Our anticipation right now is we want to see that same similar environment playing out. While it typically has an oversized contribution to the consolidated equation in the second quarter, you're going to see a little bit more of a headwind to that coming out of the Maggiano's side. I anticipate as we look at the Chili's brand to continue to see growth in the margins from that piece of the business, but it's just the relative contribution out of Maggiano's that you would typically get in the second quarter. I think of that as a very second quarter-specific kind of thought process. For the long-term basis, again, I think that would go back again to growing that top line. So I think as I mentioned with the labor discussion, when you look at the virtual brands and their ability to impact margins, it's very leverageable. We brought It's Just Wings into the equation with very, very little change to the labor model within the restaurant. Obviously, as you bring incremental growth to the equation, either through It's Just Wings or an additional virtual brand, continue to look at that model. Generally, you're going to get high leverageability coming out of that equation. Again, dining rooms are still coming back online and you will get further leverageability as we grow that base piece of the business too, which is a very important part of the equation. I know we focus a lot on virtual brands, but the sequential improvement we've seen in the dining rooms as they've come back on over the quarter is just if not more important to the equation.

That’s very helpful. Thank you very much.

Andrew, thanks.

Thank you. Our next question today is coming from David Palmer. Please announce your affiliation, then pose your question.

Thanks, Evercore ISI. Good morning. You — Joe, mentioned that the restaurant margins would be about flat. I think you said year-over-year in the fiscal second quarter, how much of a drag is Maggiano's projected to be in that quarter? How much might that be a greater drag from the first quarter? And I have a follow-up.

Yes, again, without getting into the brand level specifics, it's probably, again, if I look at where I expect Chili’s to go I would see further improvement in the margins on their side of the equation. That improvement is going to be somewhat offset. It's going to be mainly offset by the Maggiano's drag. This is a very outsized earnings quarter for that Maggiano's piece of the equation. Again, that's specific to the second quarter. So as we move further into the year that tends to mitigate itself. I'm greatly pleased to see where we continue to drive the Chili's business. That's the sustainability of where I would expect to see margins go in a longer period.

And then just a follow-up on to-go and delivery looking longer-term, this seems to be an area of upside for you. Are there clues about the most reopened markets where you've had a chance to have that on-premise business mature? And does that provide a clue to you that you could share with us about how sticky at a higher level this to-go and delivery business can be? Any statistics there would be very helpful. Thanks.

Yes. Well, David, it's interesting, right? So, you got to kind of start with what we know about consumers. There's still a large group of consumers who are not going out to restaurants. Depending on whatever survey you look at, it's 30% or more of the population is just not going to go out. They'll do dine-in or they'll do take out, but not go out. We do know in restaurants that are seen volumes get back to pre-pandemic levels. We're experiencing this in dining rooms. We're even with that headwind, and we have restaurants that are getting close to 80%, 90% of their pre-pandemic sales levels in the dining room, and we're seeing very solid 30% to 35% mix for takeout and delivery. So it looks right now to be fairly sticky. I think post-pandemic with a vaccine, what that percent of the population that then says, okay, now I'll go back into restaurants, what that does to the mix. But we feel very optimistic that the convenience experience by the broad market now isn't going to revert back to where it was pre-pandemic. We're going to see significantly higher take-out and delivery, and that's without virtual brands. As we saw the virtual brands in the mix, that adds to that mix. That's kind of how we're looking at it.

Thank you.

Yes. Good, talk to you, David.

Thank you. Our next question today is coming from Greg Francfort. Please note your affiliation, then pose your question.

Hey, it’s Bank of America. I had two questions. The first was just a math question on the second quarter. When I look or plug down mid-single digit comp and the margin model, I'm getting higher EPS than the guidance. I'm just curious if there's something on DNA or G&A that I'm missing, or if I'm just off on something? The second question I had was for Wyman. You made a comment in the prepared remarks about what It's Just Wings could evolve to over time. It seems like there are a few options for that, but I'm curious how you're thinking about what those options are. Is that standalone concepts pushing harder into third-party ghost kitchens? Is that just what you meant by that comment? Thanks.

Again, without getting into too detailed of a modeling discussion on this call, it could be a matter of the Maggiano's outsized drag in the second quarter relative to how you're thinking about the model. There is going to be a little bit of G&A that was slightly beneficial in the second, excuse me, in the first quarter compared to the prior year. So that normalizes a little bit more in the second quarter relative to last year's second quarter. Not quite as big a benefit there. You could probably add about a $2 million oversized benefit in the first quarter, which really relates to the treatment of incentive-based compensation this year versus last year. So that normalizes a little bit in that regard. You may want to make some adjustments there, but I'm going to make the assumption that it's probably the relative treatment of Maggiano's.

Got it.

Greg, without – again, we're not going to share a lot of our future growth ideas on the call just from a competitive standpoint. But suffice it to say, we're excited about the potential to do other things with this brand. It's a very strong brand that's getting great consumer acceptance and appeal. Our partnership, our learning with our partners, DoorDash, on how to position it, how to market it more effectively; the team that's working on it is excited about other ways to put this product out to a broader consumer base. We're looking at several ideas that we think could significantly grow off of the base we've talked about. As we execute and test those, we'll share those results.

Thanks, Wyman.

Yes. Thanks, Greg.

Thank you. Our next question today is coming from Nicole Miller. Please announce your affiliation, then pose your question.

Piper Sandler. Thank you and good morning. The first question is probably pretty understandable, but you're comfortable with less marketing. I want to understand the change in message or tone. Are you comfortable with less discounting? Is that something you think you could carry forward?

Nicole, again, a great question. We are because we have such strong built-in value propositions in the menu. I mean, when you look at value scores across the category, Chili's has some of the highest, if not the highest in casual dining. Our value is built in every day, and it's been out there long enough; it's got really strong awareness levels. We will continue to incentivize through direct and digital. It's not like we're not – but we won't do limited time promotions. In the historic sense, right, that's just not – first, we don't see their effectiveness. I mean, it really is about effectiveness, not like we have any. We're just trying to grow the business the best way possible. As we evaluate our effectiveness with those, and really, the competition, we just don't see them being that effective. We're moving to what we think and what we can measure to be much more effective marketing channels. The team's done a great job building our database. The operators have done a great job executing against more direct vehicles as consumers and our guests come in. So we feel very comfortable that that's how we can continue to incentivize folks to come in above and beyond what's out there on the base menu.

Okay. The last question on It's Just Wings, clearly nothing but incremental in terms of sales and margins. But as soon as you talked about that, and however many months ago it was, my email has been flooded with every single day with a concept doing the same thing. I'm just curious how you ensure that your marketplace partner doesn't only lend the same support to your peers, especially given the data that they do have? Not that they would use your data and you by name specifically, but nonetheless they have the data.

We have a great relationship with DoorDash. Any partnership is built on trust. We trust them to do the right thing. We know they're treating us and treating their other customers confidentially with us. So we assume that's the same way they run their business. I have absolutely no concerns about that. Tony is a very ethical guy, so we have no concerns that they are doing their business the right way. We partner with them to grow the business in a very transparent way, but how do we partner better to market through their site to be more effective to get the brands awareness levels up.

Nicole, the other...

I don't want to imply anything negative, but are you essentially okay with them assisting others in doing the same thing? It seems you're suggesting that there is enough space in this market and sufficient capacity within the restaurant to accommodate this, is that correct?

Again, I don't think that's unusual for any channel at all in the industry. There are going to be competitive forces at play, regardless if it's on premise or off-premise. I think the fact that we can do it at such a large scale on a national footprint is definitely the differentiating factor there, as opposed to a brand you might get an email on that's doing it in a small regional setup. So that's a big difference, Nicole.

If I misunderstood Nicole, I think the scale matters. The points of distribution make creating a virtual brand much more impactful. To put out a thousand restaurants, It's Just Wings, overnight, that's really what makes this a big idea. It's unique to us. People just don't have that many restaurants that they own to generate the kind of sales that flow through incrementally and create the kind of potential profit. It's an easier said than done thing to create a virtual brand, especially to sustain one. Some folks are looking at doing virtual almost pop-ups that they'll use to help get them through COVID, but that's not our strategy. This is definitely a long-term growth vehicle, one we see working well for us going forward.

I appreciate that. Thank you very much.

Thanks, Nicole.

Thank you. Our next question today is coming from Jeff Farmer. Please announce your affiliation and then pose your question.

Thank you, Gordon Haskett. Two questions as well. Just sticking with It's Just Wings. You made the point that three million in system sales were generated in the last week of July. I'm just curious if you can share any information in terms of how that's progressed. Are you seeing any type of growth from that three million in system sales level in July?

Jeff, we're just kind of – we don't want to get into the nitty-gritty, like every week kind of projecting or sharing data. We're comfortable with the $150 million plus potential for this brand. We're in those levels now, and we're very comfortable about how the brand is performing and our ability to grow from there.

Okay. That's helpful. But unfortunately, I have one more nitty-gritty question for you, which is on, you did share that Chili's central sales, I believe were down 1.4% exiting the month of September. That's impressive. But in terms of any commentary on October and Chili's, anything you can share with us?

Yes, Jeff, as I think, and let me reiterate some of the comments in my script again, we expect, and Chili’s was also positive 2.2% for September in traffic. We expect that to grow and will grow in the month of October. We're going to continue to see a further positive progression off of that September number. I'm not going to give a specific back to positive or anything of that nature, but we're definitely going to be moving closer in that direction as we finish up this period. It's a positive on both of those traffic and comp sales from a progression standpoint is our expectation.

All right, thank you.

Thanks, Jeff.

Thank you. Our next question today is coming from Brian Vaccaro. Please match your affiliation and pose your question.

Thank you, Raymond James. Good morning, everyone. I wanted to just start on Chili's sales trajectory and some of the dynamics there. Wyman, you noted in your prepared remarks the ongoing industry pressures, especially on the independence. I'm curious how that’s showing up in your performance across markets? Are you seeing outsized gains in smaller markets versus mid-to-larger size markets, where perhaps there's a more meaningful supply reduction?

No. Brian the big difference still with regard to market performance is COVID response. In these markets, California, New Jersey, Wisconsin, where there are more extreme dining room constraints, that's where you're seeing tighter obviously less sales. The share gains, looking through the data with various that we can see, we see pretty consistent share gains across markets. The strategies we're using are broad-based, they're working across the country, and we're seeing fairly consistent share gains that way. It really has more to do with what's going on in specific states like California, where we may not be as aggressive as some folks who put out outdoor dining as some folks have. We may not be taking as much share in that state, as some others that have put out much bigger patios and gone more all-in on an external dining experience.

All right, that's helpful. Sorry if I missed it, but what was the off-premise sales mix at Chili's in the quarter? Could you help frame where you are on rolling partitions and other initiatives to maximize your dining capacity?

Yes, Brian, and for the quarter, you saw a progression of this as you moved through the quarter, but for the quarter, you were in that upper 40s, 47%, 48% off-premise conversely the low 50s on the dining room side of the equation. That was if you remember, we talked about a fifty-fifty mix coming out of the prior quarter. You'll continue to see us as dining rooms come back and open shift in that progression.

With regard to capacity, it's very hard. Brian, I'm not trying to be vague here. It's just every market is different. I can't even give you a state number because it's county by county. But in general, there's always going to be the six-foot social distancing that we're sticking with, keeping you at least at 25%. The most you could get was 75% if you just said, hey, we're going to open it up and just do social distancing and put partitions in. We aren't there, so I'd say we're probably closer to 50%. We are looking to be a little more aggressive with putting in some plexiglass to allow us to get greater utilization of tables, but we're somewhere in that 50% to 75% range. Some markets are a lot less because some markets mandate 25%. It really is a market-by-market story.

Yes, understood. Thank you. I'll pass it along.

Yes.

Thank you. Our next question is coming from John Ivankoe. Please announce your affiliation, then pose your question.

Hi, thank you. There is obviously some kind of discussion about holiday in general perhaps being, I guess, a risk for the industry overall. I wonder whether those gatherings are going to happen. I just — how are you thinking about I guess implicating your comp guidance, the Thanksgiving and Christmas timeframes? I guess that is kind of the first point. Do you think there is any kind of risk at Chili's? I mean, does Chili's over-index with larger table sizes, for example, during that month? And if you could remind us for Maggiano's for the quarter, what percentage of the December quarter businesses banquets and larger parties as you can measure it?

Hey John, I'll take the first one on Chili's and let Joe kind of give you what we can on the Maggiano's mix. It really is not as big an issue for Chili's. Chili's, if you look at our Chili's sales trends over the years, the second quarter is a relatively consistent quarter for us. We have some higher days obviously, and we have a couple where we're close to Thanksgiving and Christmas, so those mitigate some of those higher days. For Maggiano's and the holidays, I think the best barometer historically is the banquet side of the equation, which typically would make up about 20% of their business during this quarter. That’s a nice driver from a margin standpoint. When I talk about the headwinds that are unique to the second quarter, that that's driving a big piece of that equation. We could see how the environment plays out over the next two months.

Just to make it a little bit of a joke; I mean, I think plenty of people could have predicted the pandemic as of the spring. I got to chuckle on that in the prepared remarks. But anyway, hopefully, that joke is well received or not, but it's good to hear you guys. I'm glad everything is going so well.

Thanks John.

Thanks, John.

Thank you. Our next question today is coming from Jeffrey Bernstein. Please announce your affiliation, then pose your question.

Thank you very much from Barclays. Two questions: first, the broader Chili's sales outlook; Wyman, it does seem like consumers want to go back to restaurants. I know you mentioned 30% have not yet entered. It does seem like sales should continue to improve as capacity restriction ease further. What are your thoughts on further sales improvement near term? Or do you believe you can still see significant further reacceleration in that trend over the next few months?

Hey, Jeff, I think it's a complicated question, right. Because we have some major markets like California that are reacting and responding differently compared to a major market like Texas to the same virus. If California starts to open up their market similar to other states, then we'll see growth in Chili's overall sales, which we know are a significant drag right now. Joe mentioned if you take the 14% of the restaurants that aren't open in a COVID world like the rest of the country, you can see significant improvements to the numbers we've shared with you. In a COVID world, if everyone can run dining rooms at limited capacity, we still have growth potential.

Got it. And then follow-up on the independent challenges you're facing, are you seeing any gains in the independent closures that were initially expected? What magnitude are we really seeing independent store closures at this point?

We absolutely sympathize with the impact the pandemic is having on others in this space. We aren't tracking independent closures, and based on the previous question, we haven't seen any noticeable correlation to that. The results are all influenced by many factors, including guests not willing to go to dining rooms, community responses to the crisis, and the competitive landscape. It’s very hard to tease that element out, but we know some shift in the restaurant landscape is already happening. It’s just very hard to tell now because consumer behavior doesn’t line up to normal. You'll get a better sense once that begins to normalize.

Understood. Thank you.

Thanks, Jeff.

Thank you. Our next question today is coming from Alex Slagle. Please announce your affiliation and then pose your question.

Thanks, Jefferies; good morning. I had a question on the other virtual brand test you're doing. I'm curious what those tests look like relative to what you experienced with It's Just Wings and what you're doing different and how you evaluate your options here?

Yes, Alex, we don't share a lot about what we're testing for obvious reasons, but we're excited. I don't think there are other big ideas out there like It's Just Wings. The two critical factors we’re evaluating are demand and execution, in terms of whether it's a big idea. Those are the two things necessary for the long-term viability of a virtual brand. We believe a couple of those ideas are out there, and we're aggressively learning.

Thanks for that. On development, you've phrased your outlook slightly. Is this a function of more sites becoming available or better visibility on construction resources and activities in motion? What’s the expected cadence of those openings?

Yes, it's a combination of that, Alex. It was important to get the development process underway because development is a longer-term process. We've already opened six new restaurants so far this fiscal year, with a couple more planned to round out the year. The work being done now will have a bigger benefit in the second half of 2022 and into 2023. We'd like to get back to growth of 1% to 2% of net capacity from new development. The feedback we're getting—it's difficult to parse out the impact on independence, but we do see that to some degree when you work with the development side. There are more opportunities out there that may lead to some options, but we now have the resources in place.

Opening restaurants during the pandemic was something we were nervous about. The six restaurants we've opened have all performed very well, exceeding expectations. This gives us confidence as we become more aggressive with our development plans.

Great. Thank you.

Thanks Alex.

Thank you. Our next question is coming from John Glass. Please announce your affiliation, then pose your question.

Thanks. Good morning. Morgan Stanley. My question is on wages. With the election around the corner, there's discussion around whether we have a round of minimum wage increases at the federal level. Can you frame how different your store margins are in states already at much higher minimum wage rates? What is the average wage rate today in your business?

I don't know if we want to go into that level of detail, John. What I can tell you is there's a lot of rhetoric in the pre-election discussions surrounding these topics. The restaurant industry is facing millions of unemployed workers right now, and it’s an interesting conversation when reality comes to the table and what it does to the industry. That said, our average server makes over $20 an hour, and our average heart of the house team members are making well over minimum wage. So we offer good wages for our team members. We’ll work on dealing with any legislation as it comes, and we’ll navigate through it.

To follow-up, in states like California, are restaurant margins lower than the chain average, or does volume offset it? Can you frame how much lower restaurant margins are?

I'm not going to give you the specific numbers, but obviously the percentages are lower, but the volumes are higher. Because you've got the ability to leverage technology and do things that allow us to be more efficient, it reduces pressure on the smaller guys that don’t have those resources. From a competitive standpoint, it may make the case for us more compelling, but we don't wish that on the industry; it’s just not good.

Thank you.

Thanks, John.

Thank you. Our next question today is coming from Eric Gonzalez. Please announce your affiliation, then pose your question.

Hey, thanks. It's KeyBank. I appreciate the detail on wings earlier. Maybe this part was danced around a little bit, but I'm just going to ask you directly, what was the same-store sales lift from It's Just Wings in the quarter? Can you talk about the marketing strategy for the remainder of the year?

There was a lot in there, Eric. We're not going to break down those numbers, but it's simple math. We keep saying it’s a $150 million plus brand, and at this stage, that puts us in the ballpark. Regarding the response to marketing, a lot of people have simplified their menus. We've kept everything out there, so our consumers know and love about the brand. Innovation isn't a top priority right now. We still have our margarita of the month. We’re still innovating and using digital, direct to convey those messages.

Thanks. Just on the mix comment before, could you tease out delivery versus takeout breakdown?

It's still maintaining about a 2:1 ratio on the To-Go to delivery, with To-Go being the higher piece of that equation.

Thank you. Our next question today is coming from Dennis Geiger. Please announce your affiliation, then pose your question.

Thank you, it’s UBS. Just a quick follow-up; if state restrictions don't change, can you still drive further sales gains, and do you believe you can increase those gains within the current state restrictions?

Yes, we are doing some things to increase capacity within the current constraints. We're using plexiglass and things that provide a very safe environment for our guests but allow us to open up more tables. The big opportunity in a COVID world is to get constrained states to open dining rooms to even the 50% level. The good news is it'll be managed by local authorities, and we'll respond accordingly.

Understood. If I could just touch on the development opportunities Joe mentioned, anything more to share? Is it company stores, will it be franchises, size of store?

It is definitely an opportunity. We’re looking predominantly at company-owned growth. We've opened six new restaurants and expect more in the same model, so we're targeting that growth.

Thank you. Our next question is coming from Chris Carroll. Please announce your affiliation, then pose your question.

Thanks. Good morning. It's RBC Capital Markets. I wanted to ask about digital sales. What are your early observations on your growing digital sales mix since the launch of It's Just Wings, and how sticky are those sales?

We're running in the range of 40%, but we want dining rooms to open up more. Currently, we’re seeing solid stickiness with It's Just Wings. Based on our benchmarks, both Chili's and It's Just Wings are connecting well with digital users.

From a relative standpoint, that's more than twice at a level we had really going into COVID. So nice spike there and stickiness at a much higher level. So a new normal is being set.

Got it, thanks very much.

Thank you. That’s all the questions we have for today.

Thank you, everyone, for joining us on the call today. We look forward to updating you on our second-quarter results in January.

Have a good day, guys.

Hey, thanks everybody.

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