Brinker International, Inc Q2 FY2024 Earnings Call

Good day, and welcome to the Brinker International Earnings Call for the second quarter of fiscal year 2024. It is now my pleasure to introduce your host, Mika Ware, Vice President of Finance and Investor Relations. The floor is yours, ma'am.

Thank you, Holly, and good morning everyone, and thank you for joining us on today's call. Here with me today are Kevin Hochman, our Chief Executive Officer and President; and Joe Taylor, our Chief Financial Officer. Results for our second quarter were released earlier this morning and are available on our website at brinker.com. As we always do, Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our safe harbor regarding forward-looking statements. During our call, management may discuss certain items which are not based entirely on historical facts. Any such items should be considered forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risk 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 in 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 Kevin.

Thanks, Mika. Good morning everyone, and thank you for joining us as we share our continued progress against our long-term strategy. In the second quarter, we experienced another quarter of year-over-year improvement in the business. We achieved strong financial results while also increasing our market share with Chili's, outperforming industry sales by 4% and traffic by 2%. This gives us added confidence. The strategic decisions we have made to accelerate the business successfully are proving effective. Our advertising strategy is drawing customers in, and the enhancements we're making to both guest and team member experiences are encouraging repeat visits. Although we are still at the beginning of these strategic changes, we are pleased with our progress concerning both direction and consistency of results. Let's begin with the enhancements to the guest experience, where our operations teams are steadily improving. Our efforts to simplify operations and modify the labor model are yielding positive results. Guests are reporting that food is tastier and more consistent, service is better, and our restaurants feel more inviting, which contributes to an overall improved experience and higher intent to return. A key performance indicator we monitor daily regarding guest experience is the percentage of guests reporting issues. When we began this initiative almost two years ago, over 5% of our dining guests reported problems with their experience. This figure has now decreased to 3.6%, marking a record low for our brand since we began tracking this metric. The initiatives led by our Chief Operating Officer, Doug Comings, and his field teams are effectively delivering sustainable improvements in the guest experience. Now, let’s discuss the advancements we’re seeing with the team member experience. We understand that enhancing both guest and team member experiences starts with stable management teams, and we are making great strides in that area. Our 12-month turnover rate has improved by two points to 22% during the second quarter, further separating us from industry retention rates, placing us among the top restaurants. There are three key factors contributing to this improvement in management turnover. First, ongoing implementation of managers’ ideas to enhance the team member and guest experience has engaged them more. Second, these changes have eased their workload, allowing them to make guests and team members feel valued. Third, improved sales have made their roles more rewarding, leading to higher overall compensation. Our managers report significant improvements in their quality of life, enabling them to execute more consistently and focus on strengthening restaurant culture, which results in better experiences for both teams and guests. Consequently, we're also starting to see positive trends in hourly turnover, which improved again this quarter. This fiscal year, hourly turnover has been a key focus for our operators, and their emphasis on hourly training and job simplification has meaningfully impacted this metric in the first half of our fiscal year. We recognize there is still room for improvement to match the top-tier restaurants on hourly turnover, as we already do with managerial turnover. However, I am confident that ongoing team member initiatives will lead to further progress on this metric in the latter half of the fiscal year. Next, I'd like to speak about the positive impact our advertising has on traffic. Our advertising emphasizes our unbeatable 3 for Me value platform, which is resonating well with consumers. Offering a high-quality complete meal at a great price is appealing to guests. When we promote this messaging, we see significant increases in traffic, both in comparison to our own benchmarks and the industry. We are pleased to observe that this campaign is starting to strengthen our long-term key performance indicators as well. Chili's unaided brand awareness, meaning consumers recalling the brand without prompts, has grown by 9% over the past year. So, what’s next for our advertising? We will test new methods of presenting our offerings and introduce new food news to the 3 for Me platform to keep our messaging fresh for customers. Finally, we see great potential in how the improved dining experience aligns with our marketing efforts. Compared to last year at this time, we are experiencing more sustainable business growth following our advertising campaigns. We drove positive traffic in October while airing our commercials and continued to outpace the industry in traffic for the remainder of the quarter. While we are working to improve overall traffic trends, we did experience a lower mix than in previous quarters. Some of this was anticipated as we compared against the 2022 menu changes that reduced the number of 3 for Me offers, but much of the mix decline was due to our own decisions. The good news is that we have identified the reasons, and changes are being enacted to mitigate the negative impacts we’ve encountered with the mix. There are two primary factors leading to the decrease in mix. Firstly, our menu merchandising strategy featuring wings and quesadillas as appetizers on the August menu effectively drove attention to those items. We believed this strategy would spur significant incremental sales through attachments, but it resulted in more customers trading down than we had anticipated, as some guests ordered these items as main courses. We introduced a new menu yesterday that we believe will help counter some of this negative mix trend. We adjusted our menu merchandising to reduce emphasis on these items and included more opportunities for up-sells. Secondly, our decision to maintain the 3 for Me messaging, while effective in driving traffic, resulted in fewer add-ons, alcohol sales, and trade-ups compared to previous advertising campaigns, indicating we might be witnessing a more cautious consumer. We anticipate that maintaining our leadership in value messaging will continue to drive Chili's sales and traffic share, but we may experience some softening in mix based on current consumer behavior. Now, let’s move on to Maggiano's. I want to commend the Maggiano's team for a successful holiday season. In the second quarter, they achieved 6.7% sales growth, outpacing the industry by 4%, along with an impressive 300 basis point margin improvement. We are pleased with Maggiano's business performance, and I am excited to welcome our new president, Dominique Bertolone, whom I believe is the ideal leader to accelerate the brand's growth in dine-in, off-premise, and banquet segments. Dominique is a highly respected food and beverage executive with over 20 years at MGM Resorts International, where he advanced from managing esteemed restaurants to becoming the Senior Vice President of Food and Beverage strategy, overseeing more than 18,000 employees and generating over $2 billion in sales. Dominique and the team are swiftly developing strategies to enhance the Maggiano's experience, reinforce the brand’s uniqueness, improve its financial performance, and ultimately accelerate growth. I look forward to sharing the team's advancements in the upcoming quarters. In summary, we've had another strong quarter, making progress on both operational improvements and financial performance. Chili's value messaging is driving new customers, our improved experiences are encouraging repeat visits, and we are consistently innovating to keep our food and beverage offerings appealing. We feel optimistic about our strategic advancement and believe both brands are well-positioned as we navigate the latter half of the fiscal year. Now, I'll turn the call over to Joe for a more detailed review of our quarter. Go ahead, Joe.

Thanks Kevin, and good morning everyone. Second quarter operating results reported this morning represent a very solid quarter of continued growth in the business driven by higher top-line sales and improved margins. We have previously indicated our strategy is designed to meaningfully improve the traffic dynamics of our brands through a better guest experience and effective marketing efforts. Additionally, we are looking to steadily improve margins while making the necessary operating investments into the restaurants to support sustainable growth. Our strong performance in the second quarter is a good indication. We are making progress in all these key areas. As to specific results, for the second quarter of fiscal year ‘24, Brinker reported total revenues of $1.074 billion, up 5.4% from prior year, an improved restaurant operating margin of 13.1%, and adjusted diluted earnings of $0.99 per share, a 30% increase versus prior year. At the brand level, Chili's posted comp store sales of 5% for the quarter, while Maggiano's recorded a comp sales gain of 6.7%, both brands nicely hurdled strong quarters from the prior year. While overall comp sales met our expectations for the quarter, the component makeup of the sales did take on a different stack. While price was as expected, we did experience higher traffic and lower mix versus our expectations. Chili's reported traffic of negative 0.6%. We are still experiencing the year-over-year impact of the planned de-emphasis of virtual brands, including the discontinuation of Maggiano's Italian Classics and materially reduced promotional activity for It's Just Wings. In the second quarter, reduced virtual brand activity negatively impacted Chili's traffic by approximately 2.5%. Excluding the traffic decline from virtual brands, Chili's base business traffic for the quarter was a positive 1.9%, a great indication the traffic-driving aspects of our strategy are resonating and attracting many new guests. Maggiano's also delivered a solid second quarter, fueled by a strong holiday season. The brand reported positive sales of 6.7%, driven by 10.5% price, 0.4% mix, partially offset by negative 4.2% traffic. Overall, the Maggiano's business is moving in the right direction, with positive traffic in dining rooms and banquets, the two most profitable channels of the model. Now turning to our strengthening restaurant margins. Our restaurant operating margin for the second quarter was 13.1%, an increase of 150 basis points year-over-year. Sales leverage from top-line growth, cost of sales moderation, and effective cost management by our operators were the primary factors driving the improvement. We are particularly encouraged by our strengthening margins in the context of also being able to make meaningful operating investments in the important areas of labor, repairs and maintenance, and marketing. These levels of investment will help to build and sustain our business model as we move forward. I would mention a couple of underlying specifics within the various areas of restaurant level margin. Food and beverage costs were materially improved from the prior year, notably in key areas such as poultry, ground beef, and oils. From a labor perspective, we continue to experience wage rate gains in the mid-single-digit range in addition to the hours we invested into the labor model. Restaurant expense was impacted by the investments in marketing and repair and maintenance expense beyond the benefit from sales leverage and cost-effective management in other expense lines. Improved restaurant and operating margin supported growth in our quarterly EBITDA, with this important earnings measure reaching $107 million, an 18% increase from the second quarter of last fiscal year. The improved operating performance also led to incremental capital deployment in key areas of our capital allocation strategy. During the quarter, Chili's completed and opened five new restaurants, all of which are off to excellent starts. Approximately $31 million were invested into our existing fleet in the form of repairs and maintenance and re-image work. Importantly, we repaid $39 million of outstanding revolving credit borrowings as part of our ongoing efforts to strengthen the balance sheet and lower leverage ratios. Our total debt-to-EBITDA ratio was reduced to 2.1x at quarter end. In this morning's press release, we updated two key pieces of our annual guidance. Brinker's annual total revenues for the current fiscal year are now expected to be in the range of $4.3 billion to $4.35 billion. Our adjusted earnings per share is now expected to be in the range of $3.45 to $3.70. Our existing guidance for weighted average shares and annual capital expenditures were also reiterated. While we don't provide specific quarterly guidance, I would comment that the January period we are ending today has experienced particularly tough and continuous weather issues across a broad swath of the country. Our updated guidance does include an estimate of the negative impacts from the January weather, with the understanding that third quarter results will be particularly impacted by the tough start to the quarter. Apart from the weather impact, we continue to believe the critical drivers of our improving performance remain intact. We now move into the second half of our fiscal year. We remain committed to the strategies that are positively impacting the performance of our brands. Guests are responding to the improved experience they receive in the restaurants. Our marketing presence is breaking through in highly effective ways, and our key investments, both from an operational and capital perspective, are coming together to enhance the sustainability of our efforts. We look forward to continuing to highlight our progress in the coming quarters. And with our comments now complete, let me turn the call back over to Holly to moderate our Q&A.

Your first question for today is coming from Jeff Farmer with Gordon Haskett.

You mentioned weather, but any other drivers you can point to for the weaker January sector traffic trends?

No, Jeff, this is Joe, and good morning. We believe weather has had the biggest impact as we enter this period. We have seen results that are aligning with our expectations. The factors driving the business at the end of the quarter appear to have continued into January. The weather has created a complicated situation over the last three and a half weeks. However, I think the underlying drivers are still largely intact. The impact from weather is expected to be in the $10 million to $12 million range for that quarter, which is quite substantial given the broad extent of its effect across the country.

We also analyze our performance compared to the industry, considering that everyone is experiencing the same weather conditions. We examine a variety of different concepts, and it appears that the improvements we observed in the second quarter remain consistent. From a relative performance perspective, it seems that the impact is primarily attributed to the weather rather than any internal factors in our business.

And just one more, you guys did touch on it, but could you just provide a little bit more color on the customer or consumer response to that fourth flight of TV, or national TV in January, relative to what you saw with the first three flights? Is the consumer still responding sort of as aggressively as they were early on?

Well, it's always tough to tease that out when you have the weather that we had in January. What I can tell you is we continue to see that expansion on both sales and traffic versus the industry, which would lead us to believe it's having similar impacts. Obviously, you are not going to see the same burst that you saw in Q2, given what happened with the weather, right? But in terms of relative performance versus the industry, we have been very pleased with the advertising.

Your next question is coming from Brian Vaccaro with Raymond James.

Just on back to the fiscal second quarter comps, and I wanted to dial in on the mix a little bit if we could. Could you provide more color on what the mix of the 3 for Me platform was in the quarter compared to last? And are you seeing a higher preference for the $10.99 price tier versus higher tiers?

I'll start off and then Mika can give you a little bit more granularity. So we saw about, we keep quoting the percentage of checks on deal that had been going down steadily, and then it kind of flattened out over the last couple of quarters. We did see that tick up about two points. So the percentage of checks on deal went up from 29% the previous quarter to 31% this quarter. So we are seeing a little bit of a tick up there. And then within the tiers of 3 for Me, we are seeing a little bit more preference on $10.99%, but it still is the minority of the checks that are purchased or 3 for Me are still at the $14.99 and $16.99 here. So to answer your question very directly, Brian, it's like two points more on checks on deal and then a slight more preference to $10.99, but not anything really significant.

Okay, great. Thank you for that. Go ahead, Mika.

Yes. And just a detail on that. So our preference, we've always said, it always runs in that mid-teens. It was because of the success of the second quarter, we did see it tick up to probably from about 14% to 15%. So we did have a little tick up there.

And then I guess as it relates to, Joe, there was a question about January and the weather, and it sounds like you are confident that, it was weather that disrupted things. So is it reasonable to assume you have seen some improvement, as the weather has warmed up in certain pockets of the country here in the last week or so?

Yes. As you come out of the big weather swaths, this last really five, six days, we have definitely seen a reversion back to some of the way the performance is looking prior to the weather. That gives some comfort. Again, we want to be cognizant and watch the consumer closely coming out of the holidays. We will continue to do that as we move through the see quarter. There is a feeling of a little bit more conservatism in the consumer, but still have plenty of dollars out there to be captured. And when we see those gaps to the industry continue to grow and we think again that value on your consumer is gravitating in our direction.

And then just one more on advertising, if I could. In January, I believe the plan as you had laid it out was to run four weeks. I was curious if you altered that plan or adjusted weight in any way or maybe it was too late to do that as the weather set in? And then could you also just talk about the TV plan for the rest of the fiscal year? Any changes versus what you previously communicated?

I can share the insight on that. Yes, certainly, when you are talking about TV, it's much harder to get out of that quickly. When you see the weather that's coming, certainly, you can tail it back a little bit of digital, but the bulk of the spend is unable to pivot out. That obviously would have been the thing to do if you had that kind of freedom. Going forward, we have about 11 weeks remaining in the advertising. So remember, we talked about 27 weeks for the total fiscal year. We have 11 weeks that we have not spent yet. The bulk of that will be in the months of March and May. And none of this has changed our plans. We feel very confident about where we are. That's why we had the guidance that we gave. And we feel like we're going to continue to make investments into the business to continue to accelerate what we're seeing in traffic and sales.

And then on the dollars of ad spend, Mika, on the last call, you provided some helpful color on kind of what the dollar spend was in the quarter and how to layer that out just to set reasonable margin expectations. I don't know if you have that in front of you, but could you share that if you do, and that'll be it for me.

Yeah, and so they do alter just a little bit as we move and that it's a big ad spend, but for the third quarter, I would expect about a $20 million increase year-over-year in advertising spend.

Your next question is coming from Chris O'Cull with Stifel.

Kevin, the company mentioned the slowing comps toward the end of the second quarter. Obviously the weather impacted the start of the third quarter. So I guess I'm just curious what gives you confidence to raise the total revenue guidance for the year?

Let me share our perspective on the business, and Mika can add any additional details on the numbers if needed. First, we have not observed any significant changes in our operations. The internal metrics we track, which we believe are critical for forecasting future outcomes, continue to improve. We didn’t mention this in the prepared comments, but indicators such as food grade scores, server attendance scores, and intent to return are all on an upward trend. This reassures us that the strategies we have implemented are effective. Regarding advertising, we expect it will keep driving business results, and we do not foresee any significant changes in our outcomes. We have strong confidence in our plans. We don’t consider weather as a long-term factor. We monitor our performance against the industry, particularly during weather-related events, to ensure we continue to outperform our peers, and so far, we are witnessing that. There’s nothing indicating a change in our operations or a need to adjust our strategy. Additionally, we haven’t discussed our barbell strategy's success much. While we've noticed some consumer pullback with the 3 for Me offering, we are also seeing positive trends in other areas. This balance has allowed us to maintain margin improvement, despite slight changes in mix. Overall, we are very confident in our operational metrics and do not believe anything has shifted from our previous assessments, which is why we are optimistic for the remainder of the year.

And Chris, this is Joe. The change we made was raising the lower end of that guidance up, I mean, again, we're continuing to outperform where we thought we would be. From a top-line perspective, we have much better insight to the ability to move the needle from an advertising perspective. So that 11 weeks that Kevin was talking about and the sustainability of those sales that come out of those gives us a lot more confidence as we move our internal expectations up further in that original range. So it's really bringing the bottom up basically sending the message that we're comfortable at functioning at, and the middle to upper middle parts of that range as we kind of go forward.

And then Joe, just as a follow-up, was the EPS guidance increased a result of other line items besides just the revenue?

Yes. It was really a great reflection on the margin improvements we are seeing. Again, sales leverage contributes to those margin improvements, so they are obviously directly tied together. But not only the ability to move the revenues up and get that incremental sales lever, but continuing to make some progress on further margin expansion as we go into the rest of the year.

Your next question is coming from John Ivankoe with JPMorgan.

As I hear about the effectiveness of advertising and you are going to think I'm trying to be your CMO. Why not significantly increase your percentage of spend where you currently are? I mean, if the industry, I mean, at least it used to be both consider that you could get $2.5 of sales for every additional dollar of advertising that's something that you would want to do. I guess how far are we, do you think in terms of just kind of getting back to that marginal level to where you are deciding it's like, additional advertising brings additional profitable sales versus not? I mean, if you were to completely clean slate '24 is maybe you can think about '25 what would that advertising be as a percentage of sales?

Let me answer how we think about it and then I'll let Mika talk about the actual percentage that you are asking for, John. So number one, we are making a pretty big bet on the increase in advertising. So we did 20 incremental million last fiscal this year, it's more than 50 more million incremental on top of that. From my perspective, I feel like we have been moving very fast to reset demand creation in this business. And it can be point one is that the numbers are pretty significant. Number two, it takes some time to build capability to do all these things right, so obviously, we had to rebuild our TV capability. We had to rebuild some of our insights capability. Now we are in the middle of rebuilding our CRM program to be much more effective and efficient. So these things take time. So even if I said our endgame is to continue to move that higher in the next couple of fiscal years, it takes time to build capability to be able to effectively deploy those dollars. And so far, the team has done an excellent job. George Felix and his team couldn't be more proud of them on how they continue to build our capabilities. I think we have done a great job with TV and now we are really focused on digital. I would expect that to continue to ramp up as we continue to build that capability. So the answer to your question, John, is we are spending significantly more and investing more in the business, but we also have to continue to build capability in order to effectively deploy those dollars.

John, it's Mika. Just to back that up, we doubled our advertising as a percent of sales. So last year we were about 1.5% and this year we are just at 3%, so that's getting close to pre-COVID level before we pull back on that. The pieces are a little bit different, like Kevin said, but we are definitely going to continue to look at that line and invest where it makes sense.

Kevin, did I catch an illusion that '25 kind of goes up as a percentage of sales again over '24. And I guess, just maybe like the max limit, I would have to go back and look four years ago. I don't think many casual diners have ever spent above 4%, at least not materially more. Would that be kind of like the maximum of the spend that you would imagine the brand getting to?

Yes. I don't think we're close to that level. I mean, we are not even focused on a ceiling. We are just focused on making sure the next dollar that we deploy has the return that we have seen in the previous dollars or better. So, right now, from the returns that we've been seeing in the traffic gains, and then more importantly, that the traffic gains are more sustainable given the experience improvements, gives us confidence to continue to lean forward and invest. So the answer would be, we would expect this to invest more in ‘25. And what the ceiling is, I don't know, I don't think it's the number that you threw out there. I think it's probably less than that. But we'll continue to focus on are we getting the returns that we want from the deployed spend.

And in terms of who was actually brought in, what was it a customer that was coming to Chili's during COVID or slightly after COVID and just not as often, and was it a completely lapsed customer? Was it a new customer or did you, I may have missed this. Do you have that level of intelligence in terms of who you're actually bringing into the door?

We don't yet. I mean, we have our data now tokenized, which we talked about. We were working on the last call. It's going to take another quarter to officially deploy that. And they have be able to have better answers to what you just asked. And we know in general there, it's a generally a younger customer responding to the advertising. But we don't have the granularity that you just asked for of like how long, where they were elapsed and when was the last time they ever visited a Chili's. So, hopefully, we'll have more information on that as we continue to build our CRM capability. And then going forward, we'll just be building out those profiles more and more. We have now 18 months of prior data that's been tokenized, and then as we put that into the restaurants, we'll be able to start building out the profiles of all these guests to be able to answer your question with a lot more granularity.

Your next question is coming from David Palmer with Evercore ISI.

You talked about the menu shifts that you made with featuring wings and quesadillas more, and that caused some trade down and you noticed some lower trade up from the 3 for Me consumer. I think you talked about a new menu launch today that would, I'm curious, what would that feature, what sort of changes and are there any other adjustments you're contemplating for some of these consumer realities you're talking about?

Let me start with the menu merchandising changes, and then I'll talk about how we're thinking about adjusting to the kind of where the customers right now. So from a menu standpoint, we're rolling back. So we had really blown out the picturing of wings on the menu with the thought that we were going to bring the virtual brand into Chili's. And the thought there was we were going to drive more wing attachment to alcohol-only guests as well as drive trade-up for those guests that are coming in for dinner, for appetizers. So when you picture something, the guests will order more of it. Right? Just that simple. And that's exactly what happened. Unfortunately, many of those guests are trading down from entrees versus either that incremental add-on to a bar tab or an incremental trade-up on an appetizer. We've removed the pictures of wings off the menu, it's back to being line-listed, and we expect that mix will come down on wings because of that move, and that will reduce the amount of trade down that we're seeing from entrees into wings. We've done the same thing on quesadillas. So the thought process there was quesadillas are a very expensive appetizer, but it's a very cheap entree. And so we were not listing it as an appetizer. So we had put it in the appetizers, we had pictured it, and in fact, it drove more trade down in entree. So we again removed that picturing, we've line-listed quesadillas only in the entree section, and we've completely removed it from appetizers. So we believe those two moves will help us reverse some of the mix hurts that we've seen. The second thing that we're doing is we're getting more aggressive about merchandising, at least in the feature card, some of our more premium items. So what you will see if you go into a Chili's today is a new feature card, which is basically a full-color gigantic insert that goes into the menu, that drives and typically whatever we feature on that, that will drive mix of it. And so we are featuring our fajita trio, which is our highest-priced fajita, offering the Triple Dipper, which is by far our best appetizer from a PPA in a profit standpoint, and we are featuring the classic sirloin. And then the other side of the feature card, so these are all three significant trade-ups for both dollar ring and profit. And then on the other side of the feature card, we are featuring all of our premium margaritas, so El Nino, Casamigos, and Spicedarita, which all are at $10 or higher, right? And that's been one of the things that really has helped us in mix over the last four quarters is we continue to have the $6 market of the month for that price-sensitive guest that they come in for that. But we have been able to more than double our ultra-premium margarita mix, I'm talking about margaritas sold at $10 and above, by focusing the menu merchandising on those things. That's allowed us to keep our aggressive pricing at the $6 level, but still continue to expand margins through expanding the high-end of the barbell on premium. That's the menu merchandising stuff that we are working on that is being deployed as of yesterday. As far as anything else that we are doing to respond to a more price-sensitive guest, we will continue to focus on 3 for Me in the advertising. We are, as I said in the prepared comments, testing some new angles as well as bringing some news to 3 for Me that you will see in the coming quarter. We are excited about that. The second thing that we are doing is we are making sure that we have the heroes at the bar, where we know that can drive trips in a price-sensitive environment really rounded out. Previously, we had $3 and $4 Modelo, Negros, and Bud Lights. We have added chain wide, Coors Light and Miller Lite. So now we have the top four beers for happy hour at a very attractive price point that we can still make money on, but is attractive enough that's going to bring that guest in. We are going to continue to focus on how do we continue to push the envelope on value but continue to expand margins. I hope that answers your question, but that is what we are focused on, David, in terms of the change in consumer.

Just one follow-up and that is, you talked about sort of build on John's question about the increased advertising and keeping that going into fiscal '25. Do you envision maybe funding that differently now that you are seeing this consumer reality that you are seeing? Do you still have the same sort of pricing power and mix that check driving capabilities through the menu? And if not, if that is slowing or diminishing in some way, can you maybe click in with some of the other stuff you would have been contemplating at one point, smart cooking grills and other sort of cost-driving, productivity-driving stuff that might cost you on the CapEx, but that could get you some margin to fund what you want to get done on the advertising?

Yes. Let me explain how we are planning to finance our advertising and develop strategies that will help us maintain and even grow our margins. We will continue to focus on simplification, which we did not mention in our prepared comments, but we have several initiatives in the pipeline that will alleviate labor pressure and improve SKU productivity. You may notice a large cost of goods sold figure, which appears deflationary, but much of that is due to commodities. However, there is also simplification embedded in it that is difficult to pinpoint. For instance, we are eliminating a smaller burger SKU that we use during lunch—a double burger that is harder for teams to manage. We will transition to our single patty, which is 7.5 ounces. This change will provide guests with slightly more beef in their lunch burger, cost us a penny less, and make it easier for our team members to handle just one SKU instead of multiple. We're also considering removing some equipment like slicers that require extensive cleaning and transitioning to more streamlined onion SKUs. There are about five other initiatives in progress that should improve margins over time, if not to the same extent as the current deflationary environment, but they will certainly contribute positively in tighter conditions. Additionally, we will continue to focus on our barbell strategy, which has proven effective at driving traffic with competitive price points while also allowing customers who are less price-sensitive to trade up. For example, our Crisper launch offers a very attractive entry price, but we're finding a significant portion of our Crisper mix is being sold at over $16 for a six-count option. This illustrates that consumers are not a monolith; we have price-sensitive guests who appreciate great value and others who prioritize getting exactly what they want. Ultimately, if we can meet the needs of customers at both low price points and premium offerings or larger bundles, we are likely to succeed in the long run.

And David, the only thing I would add to that from a pricing standpoint is I don't think the story is totally over yet as it relates to price. First, there will be carryover some of the pricing actions we've taken this year as you move into the first part of FY ‘25. We clearly are going to price at much lower levels, and we have priced in the past. But I think we're getting to be more educated around how we price and have a more specific ability to price where that is available to us without having an impact. On the traffic side of the equation, we spent a lot of time in the fall working with Deloitte's consulting group on really building the revenue growth management muscles, understanding elasticity at a better level as part of that equation. We have a team now that is formed here to look on an ongoing basis at where those opportunities lie, how you use the platforms in a better level where the regionalities and how price and opportunity can be applied at a restaurant level. So I think we're just going to be a lot smarter about it as we kind of move into FY ‘25 and still have some benefit of higher levels of price relative to what we typically carried in that one and a half, it'll come way down and we'll be back down into that first into the mid-single-digits and then start to move down towards that 2% to 3% as you move through ‘25. But we still have opportunity there and while maintaining price points kind of across that entire barbell that are very appealing to the guests. So, I think that story still has another chapter or two to go there. We'll just do it in a more at a lower level and a more specific basis.

Your next question is coming from Andrew Strelzik with BMO.

My first one in the prepared remarks, you spent a bunch of time on kind of managerial trends, turnover, et cetera, and sentiment. You touched briefly on the hourly side. What else can you share in terms of what you are seeing from an hourly employee perspective, whether it's the improvement in turnover, can you quantify that? Any other benefits you're seeing from an operational or kind of otherwise sentiment perspective would be great to hear.

Yes. Managerial, we feel amazing about, and it continues to extend our lead versus the industry. We are at the very top tier of restaurants right now. Hourly, we are still behind the industry, although that gap is clearly starting to close, like we are starting to see that line come down faster than the industry's line. We are still about 12 points different versus the industry, so there is opportunity. Our Vice President of Operations recently got together actually last week and talked about what are more specific things that we can do to accelerate that improvement. Some of it's going to improve faster than the industry just because that managerial level continues to be more and more stable, which is going to help with hourly turnover. But then some of it is, what additional things do we need to do in order to improve that total employee proposition. There are a couple of things. One is we are going position-by-position to understand what are the ones that are driving the highest turnover. For example, in the front of the house, the number one driver of turnover is actually folks that don't make it out of training. And so when we double-click on why that is, we have put a lot of virtual training in during COVID and the reality is, the team members that come to work for us, they want to get started either serving guests or whatever the role is. And so we are moving more towards side-by-side training, less virtual training. We think that more of our hourly employees that come work for us will stay with Chili's past that 30, 60, 90 day mark because we are going to get them off to a faster start. The second thing I think is going to help with hourly is the continued tweaking of the labor model to make sure that, each hourly employee understands specifically what's their areas of responsibility. That's the other big thing that we did with the Vice President of Operations, who literally walked through everything that a team member experiences, both in the front of house and the heart of house, talking about what are the friction points for them and how do we get more clarity on what their roles and responsibilities are. We will have more to share on that in the coming quarters on specific initiatives, but I think we have a pretty good beat on like what are the opportunities, and now we've got our leadership working on what those initiatives are that will accelerate beyond just stabilizing managerial turnover, which I think will continue to have a tailwind on hourly.

And I wanted to also ask on commodity inflation and particularly with chicken prices turning inflationary here kind of on an underlying basis. I know that's been a big source of margin favorability for you guys. How should we expect that to flow through the food basket and kind of what are your expectations for food inflation over the balance of the year, the puts and takes across the basket of chicken and otherwise?

Hi, Andrew. It's Mika. That's a great question. Previously, as we have talked about, we were on the 45 day rolling with the market. We have recently locked in some poultry pricing. We always expected poultry to be inflationary in the back half. It's actually more favorable, still inflationary, but less inflationary than we originally anticipated. That's actually been a good guide for us in the back half. We have had a few other contracts and things. Dairy has been positive. We have some positivity in ground beef. We actually have had some positive news on that front. We are still going to be slightly inflationary in the back half, but for the full year, it's now going to be slightly deflationary. We made up some ground there in those markets.

Your next question is coming from Brian Mullan with Piper Sandler.

Just a question on Maggiano's. Kevin, can you talk about the key priorities for this business over the next couple of years? You've shared some aspirational targets on AUVs and margins, so what are some of the strategies the team will focus on to make progress, and related to that, what would you need to see to believe that some growth might make sense at some point?

We're very bullish about where Maggiano's can go. So Dominique Bertolone has come into the business. He's been with us for about two months now. He spent a ton of time in the field just understanding what are opportunities for the business and just getting to know the people and building trust with our senior restaurant leaders. They are excited about what he's bringing to the table so far. So, he sees a brand that could be much more elevated than where it is today. Starting with improved service levels. The foods amazing. So how do we continue to update the food, but the food is in a really good place. How do we elevate the service levels? And then how do we give guests more of what they want from Maggiano's versus just being the lowest price thing out there? And so, he's really challenging the team on what was Maggiano's built on and how can we be that amazing brand again? And I think they're excited. They're calling about bringing the magic back and it's literally providing the organization right now. So I think the things that you're going to see are, number one, there's going to be some simplification of things that we don't think add a ton of value so that the brand can reinvest in service areas that are going to make a much bigger impact on both traffic and guest check. Number two, I think you're going to see some new and exciting innovation come out of that team. The type of innovation that's shareable and chatable with guests to help build traffic over time. And then number three, I think you're going to see with improved unit economics, I think you're going to see us starting to identify areas to start expanding the brand beyond its current footprint. But we don't really have news to share on that last part yet because we're so focused on improving the operation, improving the service levels, and bringing that new innovation into the business. But next quarter, I know we're going to have some updates to give you on where we're headed based on the speed that that team is moving. And I'm very excited about talking about the growth prospects for Marciano's in the future.

Then just a clarification on pricing. And Joe, you spoke to some of the work you were doing with consultants and your new capabilities. I interpreted what you said as perhaps pricing would be above that 2% to 3% in the first half of fiscal '25, and then maybe down towards that two to three in the second half. And understanding plans can change. Do we have that right? Is that kind of the current thinking for next year? Your early thinking?

Without going into the detailed quarterly pacing for fiscal year 2025 just yet, Brian, I believe you have an idea of it. Pricing is obviously carried over for a year, and some significant pricing adjustments will happen early in fiscal year 2025. I expect that we will be taking advantage of various opportunities along the way. We mentioned previously that we would assess pricing opportunities in the latter half of this year. The menu we introduced yesterday included nearly a 2% increase in price, albeit on a low-level menu-to-menu basis. We are also moving a menu drop forward by a month later in the fiscal year. This will provide a slight benefit, but pricing will likely remain at a similar level. As you look at future menu drops, you should anticipate a target range of about 2% to 3%. While I am not committing to that or providing any specific guidance for fiscal year 2025, you can expect to see elevated pricing as we navigate the initial stages of fiscal year 2025, followed by a normalization down to a lower single-digit range as the year progresses. There are still strong opportunities available.

Your next question for today is coming from Alex Slagle with Jefferies.

Any color on the margin impact on the 3Q related to the January weather hit and perhaps being more difficult to manage labor and other things, albeit volatility and I know it's a big ad spend quarter also. Just kind of curious if that makes it harder to hold this restaurant-level margin flattish quarter-over-quarter or how you are thinking about that?

Yes, I can't provide many specifics. However, I believe there are some opportunities in the margin. Year-over-year, it might remain flat or see a slight increase. I would like to have more information, but today is the last day of the period, and we'll begin to see those specifics soon. I want to acknowledge our operators, as I observe their progress in expense management. They have done an excellent job navigating these cycles, which can be quite challenging, especially with weather impacts. They have successfully maintained labor levels and managed what they can control during this period at desirable levels. However, I still lack a clear picture. This is just one period, and we have two more that will also affect those margin levels. It’s encouraging to see some positive signs right now.

The cost of goods, again, you kind of talked about it, but sort of breaking records. I mean, is this a level you think you can hold in the fiscal '25 or are there certain things about commodities and pricing and the merchandising work that would suggest the cost of goods sort of creeps back a bit higher suggest next year?

Again, it will all depend on the evolution of those commodity markets. I would expect commodity markets to get back probably into a more normal pacing. That typically means you see say, a little bit of inflation that you definitely expect as you kind of go into fiscal year. But obviously, not a lot to share as to specifics on that. But I think long-term, we are expecting kind of more normalization of the commodity markets as we move forward from here.

Your next question is coming from Jeffrey Bernstein with Barclays.

Two questions. The first one, Kevin, I think you mentioned, you alluded to conservative more conservative consumer. I think you got that from early signs of maybe the mix of 3 for Me slipping a little bit. Just wondering what metrics do you watch from here to assess whether it's more of a conservative consumer slowdown and how you'd respond? It does seem like we have seen an industry uptick in promotional activity. I wasn't sure, if that's just the normal January post-holiday or whether you see it as something more. Just any thoughts on how you would measure more consumer conservatism and thoughts on the competitive landscape?

It's a good question, Jeff. Answering it is challenging because the data we analyze shows mixed signals. On one side, we have low unemployment and ongoing wage growth, along with significant increases in consumer sentiment in December. Conversely, there is a rise in borrowing and overdue credit card balances, and many households are starting to pay back student debt. These mixed signals suggest one thing is happening while also indicating something different. Our own data reflects these mixed messages as well; we observe strong spending on higher-end items without any pullback across our consumer income demographics. However, we also notice that responsiveness to TV ads highlighting great value has improved, and new customers are buying less alcohol or dessert. What does this mean? We believe it suggests that there are different types of consumers. These mixed signals indicate that some consumers are likely to be more cautious, while others won’t change their behaviors significantly. We must be prepared to attract both groups. For the price-sensitive consumers, we need to offer leading value and continually enhance our experience because if they reduce their visits, they will opt for brands that provide a consistent experience they can trust. We also need to ensure there are menu options accessible to them, such as our $6 margarita of the month and the $10.99 3 for Me initiative, and make sure guests are aware of these offers to maintain our competitive edge in traffic share. At the same time, we must continue to introduce more premium items to balance our offerings and grow our margins. For example, this month we launched the Spicy, a premium drink with high-quality ingredients priced at $10, along with a new $6 margarita featuring premium tequila and vodka. You will see us continue to innovate at both ends of the spectrum because we need to cater to price-sensitive guests while also having appealing options for those who are less price-conscious. So, we expect to keep moving forward. This is consistent with what I've shared in recent quarters. Ultimately, it appears to be effective since we're growing our traffic share, increasing per guest spending beyond the industry average, and expanding our margins. These metrics indicate that our dual strategy is functioning well, especially given that some consumers are more price-sensitive.

And then just my follow-up, Joe, just recognizing the January weather issue. Wondering if you can maybe share the exit rate in December. I know the full fiscal second quarter for Chile's company operated was in the 5% range, but just trying to get a sense for how trends flowed through the quarter. Again, making, I don't know whether you want to share January specifics, but obviously that's an anomaly. And looking forward, I think you guys had previously said you expect mid-single-digit comps for the full year. So is that still reasonable? I think you did fives and sixes the first half - January, a little bit of an anomaly, but is that still a reasonable range for the remainder of the year? We're maintaining our expectation of mid-single-digit growth for the year. One would anticipate a somewhat lower level of comparable sales at the end of our quarter due to the strong performance in the prior year. In October, the comparables tend to align with our marketing initiatives, and that influenced how the quarter unfolded. Additionally, we are comparing against a solid December last year, which may have impacted results slightly. Overall, everything is on track for revenue growth, and we are confident that we can achieve that mid-single-digit range as we progress through the year. Yes, not at this point. I mean, again, I'm going to avoid period results. I have given you some pretty good data on that, but it's a drag. It's going to be something we have to try and make up as much as we can as we kind of move through the rest of the period. But again, I think it's an anomaly. It's not something you should be taking into trend consideration.

Your next question is coming from Christopher Carril with RBC.

Maybe holding aside the weather impact, how are you thinking about restaurant-level margins here in the back half of the year? I know there is a bunch of moving pieces here around the lapping of labor and R&M investments and now you're past the lap of the very elevated commodity inflation that you saw in the first half of '23. Curious how you are thinking about overall restaurant margins relative to the improvement that you've seen in the past couple of quarters?

Yes. Again, our thinking continues to be that we can strengthen those margins. Again, taking weather out of consideration, which will have a drag on the margin in the third quarter, and particularly in the fourth quarter, believe we can continue to strengthen margins. You see that a little bit in the back half of the year anyways from a volume standpoint. You get a little bit of seasonality tick up that helps with the sales leverage. But as we can continue to move forward with the strategies that we spend a lot of time talking about today, we think that will have a margin benefit, particularly in the fourth quarter.

Got it. And then, Kevin...

And Chris, one thing, just what we have talked about in the past is, we thought we could increase our annual margin a little over 1% year-over-year. I'm more bullish on what we can do there. I think we can move it up closer into that 1.5-ish range, give or take up in that range.

Got it. And that's specific to the second half here for 2024?

That was the full year, that's what we have talked about in the past.

Yes. These are indicators that lead us to believe we will continue to see strength. There is no exact correlation to this, but the measures we examine involve the data we collect through our pay-at-the-table devices. We conduct a survey for our guests, and receive a significant number of responses since many complete it right after they pay. We gather over 20 million surveys a year, asking several questions about guest experience. The metrics we analyze from this data include server attentiveness, food grade scores, customer return rates, and a daily measure known as "Guess What a Problem" or GWAP. All these metrics are showing improvement, giving us confidence that we will keep enhancing the overall experience. While these successes reflect how Chili's is improving, we aspire to set the standard in the industry. Fortunately, there is substantial potential for us to enhance the experience across all metrics, whether for food grades or consistency. We have communicated to our field teams that we are pleased with the progress made, which is evident in the restaurants and the data. However, being candid about our position in the industry and our long-term goal of achieving sustained results among the top casual dining restaurants, we recognize there is still much work to be done, and that is our focus.

Your next question is coming from Jim Sanderson at Northcoast Research.

I wanted to go back to negative mix just to make sure I understood some of the feedback you've provided. Can you give us a sense that the shift from quarter-to-quarter, I think it was about a 400 basis point decline in mix was that primarily related to the menu issues that you called out in the sense that you may have been able to hopefully remedy those with the menu changes or is a lot of that really related to just the conservatism of the consumer that just happened in the quarter?

I'm going to start with that. The majority of the change was really due to the differences from the previous year. We had two significant factors. First, we had a happy hour program last year where we offered fewer discounts, and then we experienced the effects of the initial restructuring of the 3 for Me program. This accounts for most of the change. If you factor that in, you could see it as about flat, which means you can subtract 300 basis points from the last 100 basis points we reported. That's what Kevin was referring to. We believe much of this was self-inflicted, and there is potential for recovery.

Alright, so the idea that you can get to kind of a flattish mix impact is still in process.

Yes.

Alright, just another question on balance sheet real quick. Any feedback on how we should look at the impact on interest expense for once you refinance your second terms of debt in October?

No, I think we've kind of give you the guidance for the some thought processes on the year. That's an FY ’25 action. That I think you're referring to the remaining bonds that come that mature in the fall of this year. So that'd be ‘25 and that'll get incorporated into the FY ‘25 guidance, which will depend on rate curves at that time. Our intent is to refinance those under our existing revolving credit with all the capacity we have on that side of the equation. So more to come as you kind of refine that view and we head into the next fiscal year.

And Jim, we've talked about year-over-year interest being about $10 million to $12 million a year-over-year.

That is all the time we have for questions today.

Thank you everyone for joining us, and we look forward to talking to everyone on our next earnings call.

Thank you, everybody. Have a good day.

Thank you for your time.

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