Earnings Call Transcript - EAT Q4 2022

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Brinker International Q4 F '22 Earnings Conference. 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, VP of Finance and Investor Relations at Brinker. Ma'am, the floor is yours.

Mika Ware, VP of Finance and Investor Relations

Thank you, Paul, and good morning everyone. And thank you for participating on today’s call. With me are Kevin Hochman, our Chief Executive Officer and President; and Joe Taylor, our Chief Financial Officer. Results for the quarter were released earlier this morning and are available on our website at brinker.com. As is our practice, Kevin and Joe will first make prepared comments related to our operating performance and strategic initiatives. Then we will open the call for your questions. Before beginning our comments, I’d 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 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 Kevin.

Kevin Hochman, CEO and President

Thanks, Mika, and good morning, everyone. With this being our first call since Wyman's retirement, I wanted to take a moment to recognize him as the leader of our great company for the past nine years and to thank him for our many strategic accomplishments. In addition to being a coach and a friend to so many Brinker team members, Wyman led growth of our brand, significant technology improvements, and developed an industry leading off-premise business. I know he's listening and cheering us on, so on behalf of our 62,000 team members, thank you Wyman for entrusting your legacy to us and preparing us for the future. This organization has a solid foundation: well-known brands that have stood the test of time, an ownership model that allows us to move quickly, a strong leadership team, and the most dedicated operators in the industry. During my first two months on the job, I've spent a lot of time in the field with our restaurant teams and our above-restaurant leaders to better understand their challenges and to exchange ideas on how we can accelerate the business together. I'm happy to share they are hungry for growth, and they have great ideas on how we can make running restaurants easier, more profitable, and a better experience for both our team members and our guests. While informing our longer-term growth strategy with our senior executive team in order to deliver better results over time, we must deliver meaningful improvements to the four-wall economics of owning a Chili’s and owning a Maggiano's. We're working quickly to identify the things we can do to grow the business sustainably, improve the guest experience, reduce cost and complexity, and implement more strategic pricing which will in turn expand restaurant margins and grow profits. Our evolved pricing strategy will include providing focused everyday value for guests who need it, but we'll move away from frequent and deep discounting. We'll also right-size the mix of everyday menu items offered on deal, but we'll make sure there's something available for the cash-strapped customer who needs a superior value to enjoy casual dining. We will also do a better job of recovering expenses for inflated commodities, as well as the added cost for delivering Chili's, Maggiano's, and our virtual brands. I have chartered two teams of senior executives to make quick interventions that will build momentum in our business. One team is dedicated to near-term ideas to drive sustainable and profitable sales layers. They have been charged with identifying customer insight-driven sales opportunities, as well as bringing exciting new initiatives to our dining rooms to help accelerate traffic recovery. The other team is charged with simplifying operations so we can improve our guest experience. We will take unnecessary cost and complexity out of the business, which will free up labor for reinvestment in things that will help us win with the guests. The team is looking at all aspects of operations, from focusing the menu to streamlining back-of-house prep to eliminating time-consuming processes that don't add value to our guest experience. We shared some of those early ideas with our operators at our Annual Chili’s General Manager Conference last week and I have to say the team is very excited to get after it. I have also asked our Chili's Executive team to refocus the portfolio of projects we are working on, to prioritize the most important, and to stop the ones that won't have a meaningful impact on our core business. I'm very pleased with the progress we are making on the prioritization front. As for our longer-term strategy, our biggest opportunity is to focus on the core Chili's business. We must identify how our brand can uniquely add value for guests in a modern and relevant way, strengthen our positioning within casual dining, leverage technology to remove friction for guests and team members, and continue to reduce unnecessary complexity, all of which should lead to a better guest experience, higher sales, and stronger four-wall economics. I'm also very pleased to share that we brought on George Felix as our new Chili's Chief Marketing Officer. George is known for taking well-known brands and reminding customers what makes the brand special in a contemporary relevant way. He is currently working to define our Northstar positioning in the market, which will help us make strategic choices on marketing, as well as help guide us on where to focus operations and improve our guest experience. I'm excited that George is already making an impact with several of our sales-driving and simplification initiatives. As for Maggiano's, it's on a good trajectory. The improvements we made to both off-premise business and removing costs from the middle of the P&L during COVID has allowed the brand to emerge much stronger. Maggiano's menu travels off-premise exceptionally well, and now that dining rooms are coming back, we have lots of runway for growth. I couldn't be prouder of the work that Steve Provost and his team have led to get Maggiano's through the pandemic, which I would expect will continue to be a source of growth for our business. We find ourselves in interesting times with the inflationary environment, a dimmer economic outlook, and a cautious consumer. I'm confident that interventions we're putting in place today to simplify operations, to win with the guests, to implement more strategic pricing, to launch sales-driving initiatives, and to take costs out of the business will help us fight through our near-term challenges. They will also build the momentum we need to put the business in a stronger position for longer-term sustainable growth. Now I'll hand the call over to Joe to walk you through the numbers. Go ahead, Joe.

Joe Taylor, CFO

Hey, thank you, Kevin, and welcome to the quarterly earnings calls, and good morning, everyone. As detailed in this morning's press release, Brinker reported total revenues of $1.22 million for the fourth quarter of fiscal year '22. Consolidated comp sales for the quarter rose 3.1% as pricing and mix increases offset negative traffic. Fourth quarter adjusted EPS was reported at $1.15. Now let me unpack several pieces from the top line to the bottom line results. As a reminder, we had a 53rd week in the fourth quarter fiscal '21, which impacts the year-over-year comparison of revenues, margins, and EPS for the recently completed quarter and fiscal year. Our restaurant comp sales are stated as 52-week comparisons. At the brand level, Chili's comp sales on a year-over-year basis were positive 0.3% lapping fourth quarter comp sales of 59.8% in the prior year. Looking at sales performance relative to the pre-COVID environment, fourth quarter average weekly sales of $59,500 were up 4.5% when compared to the fourth quarter of fiscal '19. Traffic was negative at Chili's for the quarter and decelerated throughout as some guests appeared to react to the challenging inflationary environment, particularly during the weeks of very elevated gas prices. We also experienced approximately a 1% negative sales impact to the quarter as some restaurants were not able to fully open dining rooms, particularly at peak times, or had to throttle back online orders, giving limited staff availability. I'd note that Chili’s traffic trends since the end of the quarter saw sequential improvement into August, although they remain in the mid single-digit negative territory. We did see positive sales and traffic in Chili's dining rooms for the quarter as guests returned to more normal dining routines. At the same time, their off-premise channels remained strong, constituting approximately 34% of sales during the quarter. Maggiano's continued a solid recovery, posting positive restaurant comp sales of 30% for the quarter, driven by positive price, favorable mix, and strong traffic from the return of their dining room guests. When compared to the pre-COVID fourth quarter of fiscal '19, average weekly sales increased 7.3%. Importantly, the post-COVID level of the brand's off-premise business remains intact at above 20% of sales, providing a meaningful avenue to improve guest frequency as the brand moves forward. Brinker's franchise and other revenue increased year-over-year, due to incremental gift card breakage and increased banquet revenue related to Maggiano's. Moving further down the P&L, our fourth quarter restaurant operating margin was 10.3%, down from prior year due to the magnitude of inflation we experienced throughout the major categories of restaurant margin. Restaurant margin was also negatively impacted by approximately 80 basis points from lapping the 53rd week of the prior year. Food and beverage costs as a percent of company sales were unfavorable 310 basis points, compared to the prior year. As you might expect, this was driven by higher commodity costs, with inflation hitting close to 15% for the quarter, a high for the fiscal year. Every major commodity category was negatively impacted, with poultry being our largest year-over-year increase. Chicken mix is high across our menus with approximately 52% of our overall protein mix exposed to the high cost dynamics of the poultry market. Fortunately, we're now starting to see steady cost reductions for chicken working their way into our supply chain, a trend that has the potential to create favorable cost comparisons as we move further into the fiscal year. Labor for the quarter was unfavorable 70 basis points, primarily driven by wage rate increases in the 6% to 7% range, additional hours utilized in the restaurants as we incrementally staffed our dining rooms, and continued elevated levels of training expense for new team members as a result of higher turnover rates than we traditionally experienced. Restaurant expense was unfavorable 280 basis points as higher energy prices inflated our utility expense and we experienced higher rent and increased repair and maintenance costs. We also lapped a one-time advertising-related credit of approximately $6 million taken in the fourth quarter of the prior fiscal year. Operating cash flow for the fourth quarter and fiscal year remained strong with $41 million and $252 million recorded for those timeframes respectively. Adjusted EBITDA for the quarter totaled $100 million, bringing the fiscal year adjusted EBITDA to $355 million. Now turning to our outlook for fiscal year '23. This morning's press release included several target ranges for our current fiscal year. Our cautious view of economic conditions, particularly for our value-oriented guests, reflects negative traffic expectations in the low single-digits for Chili's. We believe the significant headwinds from commodity inflation will lessen as we move through the year, a trend that could continue for a period beyond the current fiscal year. Our year-over-year increase in food and beverage costs is forecasted to be at their highest point, almost 400 basis points in the current first quarter, before narrowing mid-year and turning favorable year-over-year by fourth quarter. For the year, food and beverage costs are expected to be up in the neighborhood of 100 basis points. For the full year, we have the following expectations: revenues in the $3.9 billion to $4 billion range; CapEx in the $155 million to $165 million range; weighted average shares in the $44 million to $45 million range; and annual adjusted EPS in the range of $2.45 to $2.85 for the fiscal year '23. As it relates to pricing, we are planning near-term pricing actions at both brands. Chili’s is expected to exit the first quarter at close to 8% price, a level the brand will maintain throughout the fiscal year. Maggiano's will exit the first quarter in the mid-5% range and is anticipated to average closer to 7% for the year. Regarding restaurant development, the schedule for our current fiscal year has slowed somewhat, as several anticipated openings have pushed into fiscal 2024. We now anticipate opening 19 new locations during the fiscal '23 year. Let me provide some insights on quarter one. Our current first quarter is likely to be the low point of our operating results for the fiscal year, as we work through the cresting of inflationary pressures for our brands. With that in mind, let me provide some specific insights for the quarter that also help define the expected meaningful positive progression of operating performance as we move into and through the remaining quarters of the year. As is typical, we expect the first quarter to be our lowest revenue quarter, generating between $920 million and $930 million of company sales for the period. The year-over-year impact of inflationary increases for the first quarter will increase costs in all the major categories of restaurant margin. Food and beverage expenses alone are expected to be up more than $50 million for the quarter; when combined with the lower revenue of this quarter, we expect restaurant operating margin to be between 4.5% and 5.5% for the first quarter. This restaurant margin will result in an overall operating loss for the quarter, with a negative operating margin expected in the mid-3% range, and first quarter adjusted EPS estimated in a range of negative $0.70 to negative $0.60. While we anticipate a disappointing start to the fiscal year, we maintain clear line of sight to meaningfully improved operating performance throughout the year as incremental pricing, lower food and beverage costs, and sales driving initiatives all kick in during subsequent quarters. On behalf of the Brinker leadership team, we're pleased to have Kevin on board. He has quickly focused the team on simplifying operations, improving four-wall economics, and driving growth in the core business. I'm confident this will not only move us through the current more difficult operating environment in better form, but will provide the foundation for sustainable long-term growth and better profitability for Brinker and its brands. And with my comments now complete, let us turn it back over to Paul to moderate your questions.

Operator, Operator

Thank you. The floor is now open for questions. The first question is coming from David Palmer from Evercore ISI. David, your line is live.

David Palmer, Analyst

Thanks. Good morning. Just a question on strategy. Kevin, you talked about some opportunities to improve the economics of the four-walls with perhaps pricing being a part of that. But I’m wondering more about the investment areas that you see as an opportunity? Is that labor? Is that marketing? How are you thinking about ways that you can improve that guest experience that you were talking about and drive sales in your highest margin business? Thanks.

Kevin Hochman, CEO and President

Yes. Thanks for the question, David. So we're thinking about it in two ways. One is there are some short-term interventions that we have to make that we just cannot wait to make those interventions based on where the business environment is now. What I've had the team working on is the short-term wins and then I’ll talk in a second about what we're doing from a longer-term basis. So I've charged a team with how do we improve restaurant margins quickly. Obviously, the number one thing is to grow comp store sales, so we've got a growth team that we spun up that is looking at what are different areas that we can quickly grow the business and, kind of, mute some of the headwinds of traffic that we've seen. Obviously, strategic pricing, which we talk about in our prepared comments, there is a significant reduction in discounting that we're working on. That's in a couple of areas: one is we give away a lot of free food in our My Chili's rewards. There's probably a better way to do that and still maintain the traffic that that drives, without constantly giving away free food every week, as well as redoing some of the value sections of our menu so that we don't have so much of our menu mix on deal, but still have very attractive exciting offers on home meals for that guest that's cash-strapped, who otherwise couldn't enjoy casual dining. We're also working on some cost reductions that will also help with labor simplification in the restaurant. Specifically, that's eliminating low mixing or redundant menu items, eliminating redundant pantry SKUs that are in the back of the restaurants, removing unneeded dishware, which will help with both labor and some cost of smallwares, eliminating unneeded processes that happen that don't really help the guests, but end up being literally years of labor hours annually that we're spending money on, and then reducing administrative work in the back of the restaurants that's not helping the guest. We're also working on some new item innovation to drive traffic, which I'm excited that you'll see in the next couple of weeks start to roll out; which will also help drive some traffic in our bar. The last thing that we're doing is updating our strategic loyalty program to drive more traffic with reducing some of those discounts I was telling you. That's kind of the short-term interventions that we're making. I'm meeting with my leadership team off-site in the next couple of weeks that we're going to talk about what are the big things that we need to do over the next few years to unleash both restaurant margins and accelerated growth for our business. Those are the big discussions on labor and equipment and all the things that we need to make long-term improvements in the guest experience, and I hope when we're ready to surface those interventions that we'll be able to share them with all of you.

David Palmer, Analyst

Thanks. I'll pass it on.

Operator, Operator

Thank you. And the next question is coming from Nicole Miller from Piper Sandler. Nicole, your line is live.

Nicole Miller, Analyst

Thank you very much. Joe, I have a question for you first, and then one for Kevin if there's time. Joe, you mentioned that dining rooms are at 34%. Could you explain the revenue structure for dining room off-premise in the fourth quarter or for the year? It would also be helpful to get insights into the other categories, particularly regarding any fluctuations.

Joe Taylor, CFO

Yes. Nicole, I think the comments you're referring to is 34% in the fourth quarter of Chili’s sales mix was off-premise, which is relatively consistent for the brand. We did see slight traffic improvement and positive comp in the dining rooms for the quarter; you’re starting to see, I think, a little bit more of a normalization of that dine-in experience. So the relative mix dine-in to off-premise has remained relatively consistent in that kind of two-thirds, one-third mixing area over the course of the year.

Nicole Miller, Analyst

Perfect. Just want to match that up with what margins might be in those channels? And then Kevin, can you talk about the customer base you have today. And as you think through the strategy options and totally understand you're thinking through them? Is it changing that mix? Is it changing the frequency? Both, like how are you thinking about that?

Kevin Hochman, CEO and President

Well, we have to start with just who our customer base is today, and it's pretty broadly spread out. So it's not like we're overrepresented with low-income guests or high-income guests; it's pretty much representative of the casual dining population. And so we have to play a barbell on this. Number one, we have to make sure that the low-income guest who is extremely cash-strapped has offerings on the everyday menu that they know they can get an affordable meal at Chili's and be excited about that, and continue to come in. On the flip side, we've got to mitigate how much trade down that we get from our guests that can afford more, as well as start to innovate so that we can drive both check and traffic with that guests. We think there are a lot of opportunities both in terms of food innovation, as well as in drink innovation to drive a higher guest check, as well as drive more traffic with those guests.

Nicole Miller, Analyst

Thank you.

Operator, Operator

The next question is coming from Chris O'Cull from Stifel. Chris, your line is live.

Chris O'Cull, Analyst

Thank you. Good morning, guys. I had a question for Joe and Kevin. First, Kevin, I'm interested in hearing your assessment of the virtual brands and maybe how important you believe those brands will be to the company's future growth?

Kevin Hochman, CEO and President

Yes. Let me just start with virtual brands. They will continue to play a meaningful role in our business; I mean, they're currently about 6% of mix. That said, we do need to right-size the time, attention, and investment for our sales layer that’s 6% of the business. Specifically, we have to make sure that we're rightsizing the amount of incremental pantry SKUs, ingredients that we need to service these brands. For example, on the Maggiano's virtual brand, it's currently 26 unique SKUs to service about 2% of the business; that is just too much, right? So we've got to make sure that we cut that number probably down to more than half. We think we're going to retain most of the sales mix on that business, but make it a whole lot easier for our team members to run that part of the business, as well as mitigate a lot of the food waste that shows up in cost in our business. The opportunity on It's Just Wings is a lot less in terms of simplification, because it was designed to marry within our kitchen exceptionally well. There's really two things we're working on in that brand. One is we have a smoked wing on that lineup that is extremely low mixing; it provides a lot of food waste. We think that most of that volume will migrate back into It's Just Wings, so we think that we can improve the P&L on It's Just Wings by eliminating that item. The other thing we're working on for It's Just Wings is because a lot of those orders come in a very tight window and typically during that busy dinner service, we get stopped up sometimes on zone one, which is our fry zone. We've got to make sure that we figure out ways to build capacity in that area, because I think both It's Just Wings, as well as in the Chili's business that zone one will be a source of growth going forward. We're going to take pricing on virtual brands as the vast majority of business goes out to delivery customers, who are much more focused on convenience and are willing to pay for that convenience. I know that from my pizza days. We're also going to be taking some of the virtual brand investment and putting it back on core Chili's. If you just look at the numbers, even in just off-premise, core Chili's does roughly five to six times the business than our virtual brands. We think there's also opportunity, not just in the virtual brands, but growing off-premise on the core Chili's business. We also have some growth ideas for virtual brands, so one of the big ideas that I'm really bullish about that we're going to be rolling out next week is taking all of the It's Just Wings wing flavors and curly fries and putting them on core Chili's. If you think about that, core Chili's does about 24 times of sales of It's Just Wings, so why not take these amazing flavors and these amazing curly fries? Put them into the Chili's business as a premium at the bar. We are very bullish on what that could mean for the business. Likewise, we have an amazing, we call it chicken crisper; it's a chicken tender. Why not take that product on Chili's and put it into It's Just Wings to create a meaningful business in that segment? Chicken tenders in the chicken segment is a lot bigger than chicken wings. We think we'll probably never sell more chicken tenders than chicken wings on It's Just Wings, but we think it could be a meaningful source of growth without any new incremental SKUs or incremental training or incremental process for the back of the house. So we're very bullish on being able to leverage some of the great items on It's Just Wings on core Chili's, as well as doing it vice versa to grow both businesses.

Chris O'Cull, Analyst

That's helpful. Thank you. Just had another quick one for you, Joe. It looks like the company expects earnings to increase about 18%, 19% for the last three quarters of the year assuming the midpoint of your guidance for the first quarter and the full-year? Is that about right? And are there any unique things that are going to drive that growth?

Joe Taylor, CFO

Yes, we anticipate a forecast that begins on a negative note but accelerates quickly in the last three quarters. Several factors are contributing to this, including the pricing strategies we have discussed and the reduction of discounting, which will have a positive effect as the fiscal year progresses. The overall inflation cycle, particularly in commodities, is expected to improve significantly as we advance through the year, leading to a favorable year-over-year comparison in the fourth quarter. We can clearly see this upward trend coming, and it aligns with the guidance points you're mentioning.

Operator, Operator

Thank you. And the next question is coming from Jeffrey Bernstein from Barclays. Jeffrey, your line is live.

Jeffrey Bernstein, Analyst

Great. Thank you very much. Two questions: first, Kevin, excited to obviously have someone from the industry leading the team. I'm just wondering if you can maybe talk about the differences you see between running a QSR versus a casual brand and seemingly franchise system, this is primarily company operated systems. If you could talk about maybe the lateral implications or the potential synergies that you see, maybe what your greatest strengths are as you make that transition from one side of the business to the other?

Kevin Hochman, CEO and President

Well, you know, it's a great question. I’d start with some of the real positives that I see. The fact that we own most of our restaurants has allowed us to move a whole lot faster than we would be able to do in a franchise system. We need to make some quick interventions. The teams have really responded well, and it's allowed us to move very fast. As we get further down the road in terms of technology improvements, one of the things that I'm talking about with our leadership team is what can we use technology to do to make it both a better experience for the guests, as well as take some of the work out of the team members' hands. In a world where we own most of our restaurants, that gets a whole lot easier to test and roll out much faster. Technology, as you know, and everybody that covers the industry knows, is where everything is going. I think that's going to be a huge advantage for us. Some things I can bring from my QSR days that I think can help the business include more strategic pricing. QSR does an exceptional job of understanding how to make sure that the great values they offer advertise and drive traffic. We need to make sure that we have industry-leading value with our 3 for Me program that starts at $10.99; and yet, in my experience, because we haven't spent a whole lot of dollars on it, a lot of customers don't know about it. So one of the lessons in QSR is if you're going to have a great value, you need to make sure that you talk about it. Quite frankly, we've been a little bit invisible in our business in the last few years, and we need to get back on air once we're ready to do that. Another thing I think we can bring is how to manage the merchandising of value and the merchandising of items at the restaurant level to make sure that we're driving as much check and trade-up as we can, as well as minimizing trade down. These are very obvious opportunities that I've seen early on, and that we're working on. I think you're going to see improvements in our restaurant margins because of some of those learnings I'm bringing from QSR.

Jeffrey Bernstein, Analyst

Understood. The follow-up is just because of the fact that you've come from a portfolio of brands. I was wondering whether you could have some thoughts on how you see Brinker best positioned when you look back a decade or so and then Brinker had eight or nine brands, now running two along with a couple of virtual brands. I was just wondering how you think about a portfolio versus a single brand approach, whether you have any views on that as you look forward?

Kevin Hochman, CEO and President

Yes. I don't have a perspective on that now. I know that's probably not the answer that you want to hear. I'm really focused on improving the four-wall economics of both Chili's and Maggiano's; and that's really what I've kept the team focused on right now. Obviously, if we can do that successfully, that opens up a whole lot more opportunities in the future for whatever we want to do in terms of a long-term strategy. But it starts with making sure that we have very strong restaurant margins and four-wall economics because we own all these Chili's and Maggiano's, and that's what I'm committed to doing with the team.

Operator, Operator

Thank you. And the next question is coming from Andrew Strelzik from BMO. Andrew, your line is live.

Andrew Strelzik, Analyst

Hey, good morning. Thanks for taking the question. I just had two for me: first is a follow-up. Do you have a sense based on obviously the cost environment, pricing that you're talking about, some channel shifts that have occurred over the last couple of years? Do you have a sense for what restaurant margin in this business should be able to achieve, kind of, as you have a goal maybe in mind as you kind of work towards implementing the strategies that you've talked about? And then my other question is just on capital allocation priorities. Obviously, no buyback in the guidance, which is not unusual. Lower CapEx, it sounds like some delays on the unit growth. I'm just curious, should we expect any changes there, kind of, over time? And does accelerating unit growth, which I know has been in the plan, make sense now? Thanks.

Kevin Hochman, CEO and President

Yes. So let me take the restaurant margin question and then I'll kick it over to Joe on the new build question. So we're kind of in the low double-digits right now, I think between 10% and 11% restaurant margins. We think that we can probably get to the mid-teens. Now I don't have a specific timetable exactly on when. When we look at it, I think we can get a couple of points when we think about strategic pricing and reducing discounting. Then we think about operational improvements and leverage; if we can get the business growing. I think mid-teens is achievable and that's where I'm going to have the team focused on. I think if we can get to those numbers, certainly it's going to unlock a lot of value for our business, and that's what I have the team laser-focused on.

Joe Taylor, CFO

I think that goes right into the capital allocation nicely because obviously, that will feed future capital allocation discussions as we go. Andrew, you're right; this year capital allocation is pretty straightforward; we're focused on CapEx dynamics, that $155 million to $165 million, which is the same buckets we've typically seen in there from development to re-imaging. Obviously, a big chunk of that is return maintenance expenses within the current fleet in IT. So it's a fairly straightforward and typical construct on the CapEx side equation. The new build construction has slowed somewhat; the markets are a little bit longer date and timeline on some of the construction. You have seen some increased costs, which has caused us to pull back in different places to make sure that if we are constructing, we're constructing within a dynamic that we think we can get a good return. We've been pleased with the restaurant development we've done in the last couple of years and the operational performance of that cohort. So yes, I'm comfortable as we kind of move forward continuing the restaurant development. We think it is a great opportunity to provide some incremental growth into the equation as we go forward. Obviously, improving the four-wall economics is one of the best things we can do to continue to bolster the performance return of not only the existing fleet, but these new builds as we move them forward.

Brian Mullan, Analyst

Hey, thank you. Just a little bit of a follow-up on development. The 19 that you are going to open this year, are these still ones that are simply under some form of construction now? And then you're pausing a bit for the rest of the time while the operations get tightened up? Or is that not the case just a little clarity there? And then Kevin, it would be great to hear your longer-term thoughts on Chili’s development opportunity. How you think about over the long-term? And do you need to see those mid-teens restaurant level margins restored before you'd really want to lean in there aggressively? Just any thoughts on how you're thinking about it?

Joe Taylor, CFO

Brian, I believe it's a reasonable perspective. It's not a definitive conclusion. We have decreased from the higher 20s that we mentioned to 19. However, we have delayed some aspects, particularly regarding the timelines for developing and launching new restaurants. We've also postponed the start times for development and related activities. All 19 are currently in progress, meaning there are committed leases and, in many cases, some level of construction is underway. Most of these openings are expected in the first half of the fiscal year, with a few extending into the early part of the second half. We will continue to refine our pipeline as we approach the fiscal year 2024, and we will share updates as we progress through the remainder of this fiscal year.

Kevin Hochman, CEO and President

To answer your question about how I think about development, I think it's kind of two-fold: one is as we complete our Northstar work about where is Chili’s positioning in the marketplace? I think that will help us think about what does the next-gen Chili’s look like. So obviously, maybe it's not as big a dining room space and it's optimized for off-premise. We certainly can optimize the kitchen. If we understand the Northstar better, that will create obvious lower build costs. Concurrently, if we can improve restaurant margins, that will obviously accelerate paybacks, right? So, in order to answer your specific question of like, are we waiting to get to mid double-digit margins to start accelerating builds again? It's hard to answer that question until we get into the details of how much cost we can take out of the building based on the next-gen Chili’s, as well as how fast we're accelerating margin improvement. But I do think the faster that we can get to better margins, the faster we can return to building again.

John Glass, Analyst

Thanks. Good morning. Congratulations, Kevin. It's great to hear your voice. First, I want to clarify some points. As you work to restore traffic, you're mentioning strategic pricing and reducing discounting. Typically, those actions don't align with improved traffic. Did you find that the discounting and promotions on My Chili's awards didn't actually increase traffic? Is moving away from them not a barrier to traffic restoration? How did you reach that conclusion? Additionally, why do you believe there is a risk of further decline in traffic if some of those promotions are removed?

Kevin Hochman, CEO and President

Yes. Well, as you know, John, there are lots of different ways to drive traffic. One of the things I think we need to evolve over time is driving the right traffic that is sustainable growth versus traffic for traffic's sake. We've seen that the low-income customer start to visit less often, which is why we've seen those traffic trends turn negative. We are implementing several initiatives to call back as much of that traffic back. The first thing is on that low-income customer that I think you're referring to when you're talking about the ability for those discounts to drive traffic. We simply need to do a better job of talking about the unbeatable value that we have on our 3 for Me menu. Specifically, you can get chips and salsa, a burger, fries, and unlimited soft drink refills for just $10.99, and we have a few other entrees that start at that price point too. We had a famous broadcaster, Jeff Lewis, on his radio show; we didn't pay for this, he just went to a Chili's and raved about how much food he got for that $11 price point. Two observations from that broadcast: we have an unbeatable value at a time that customers needed it most, and that was clear hearing him rave about the amount of value he got from that 3 for Me deal. That tells me we have to do a much better job talking about that. So our guests are aware of that value. Right now, we’re spending our limited marketing dollars primarily on talking about free things that are available with My Chili's Rewards or focused on digital off-premise in the virtual brand. I think there's opportunity right there. The second thing we're doing is we're launching what we're calling a Raise The Bar initiative to reignite traffic at the bar, which we think will spill over into the dining room too. Raise The Bar includes a completely new drink lineup, a new bar food lineup, and a happy hour that's available every day. We're also looking at NFL Sunday ticket in our restaurants, which will drive traffic via sports viewership. Beyond NFL Sunday ticket, we're looking at things that we can use outside of football season to help drive traffic. Obviously, those are more full revenue guests that we can get into enjoy food and drink. My Chili's Rewards will still play a big role in driving traffic, but there’s probably a better way that we can utilize it moving forward.

John Glass, Analyst

That's super helpful. Thank you. And Joe or Kevin, the most recent trends you called out in the traffic declines, how much of that is the industry? In other words, you've talked about your share gains in the past. Is this idiosyncratic or more severe at Chili's than the industry? Or what you're experiencing your view as just the industry slowdown in general?

Joe Taylor, CFO

I think the bulk of it is similar to what you've seen in the industry and heard other folks talk about when you look at the fourth quarter. For instance, you saw that traffic deceleration with June being the worst traffic positioning for the quarter; which again coincided with a lot of the very excessive inflationary factors like $5 average gas prices, things of that nature. I will say we have not performed as well relative to the industry as I'd like to see us do. There’s work for us to do in our house too that is beyond the macro environment. That's when we focus on retaining team members; that's a big piece of the equation. We need to bring turnover down to make sure we can get dining rooms fully open during peak times and on weekends; to ensure we do not have throttling of the off-premise online ordering system, which is really their dining room; so we don't want to constrain that piece of the equation too. Simplification is geared at helping to move the needle in that space. We have some work to do there, but I think most of it was similar trends to what you saw from the industry side of the equation.

John Glass, Analyst

Thank you.

Operator, Operator

Thank you. The next question is coming from John Ivankoe from JPMorgan. John, your line is live.

John Ivankoe, Analyst

Yes, hi, thank you. I was listening to the call, talking about things like changes in loyalty, reduction of discounting, pricing; all seem to be very data driven decisions. So I guess the question is, did that data exist before, but whether it was feel or experience, different decisions were made in the past? Do you have new data that's suggesting that some of these changes, I guess, can be made in a positive manner? Or is this still kind of a feel and experiencing type of decision where we're making maybe some of these decisions without necessarily support of data today? And I have a follow-up.

Kevin Hochman, CEO and President

Well, to answer your question, a lot of it is supported with data and/or testing. Some of it is moving faster than I think we would normally do, just given the circumstances. Some of it is just based on my experience with pricing and discounts on two other brands that I kind of led; we were in a similar place of having a huge percentage of their mix on discount. In our example on Chili's, 37% of our checks are moving with some type of discount, and that's just simply too high for our brand. We just need to figure out ways to get that lower. It's not a question of whether we should do it; it's how we should do it. We’re probably moving a little faster than we normally would, but we do think that there is some pricing power in different areas in the business between being a little bit slower than the industry last year on taking everyday pricing, making sure that we have really sharp pricing for that guest that's cash-strapped; that's available in the restaurant every day, which we will maintain; and then the reduction of discounts over time that we think will help us earn better pricing in the business. So to answer your question, it’s a combination of both. The most important thing is that over time, we get to a more sustainable business with better four-wall economics and better restaurant margins.

John Ivankoe, Analyst

That's very helpful. Thank you. And secondly, The KFC brand in the U.S. really became a much stronger brand after it actually significantly shrunk its footprint in the U.S., really decided where it wanted to be with what type of customer and where they felt that the operations could be solid. Are there other opportunities specifically for Chili's for you to really rethink the portfolio and maybe kind of get better and stronger by being at least in the short term smaller? How do you kind of see, I mean, if there's a way to compare and contrast the turnover opportunity at Chili's relative to what was successfully achieved at KFC in the U.S., if that's appropriate?

Joe Taylor, CFO

Hey John, I think we're always going to be taking a hard look at the performance dynamics of the fleet. Honestly, we'll take an even harder look at the spectrum of restaurants. You're always going to have some that are at the lower end of the spectrum. We might be able to be more aggressive on closing and relocating. I think as we kind of go forward, possibly. It’s something we’ll look a little deeper at and maybe not carry as many along. I think we’ve talked in the past about our ability to carry restaurants; since we own all our restaurants, we can kind of bring the fleet along en masse. We probably don't have to be bringing some of them along as we did in the past. I don't see that as a radical change though. I don't want to take you down a path that there’s going to be a significant initiative anytime in the near-term on meaningful closures, but we won't be afraid to close a restaurant or not renew a lease in cases where we don’t see an ability to improve the operation and performance of individual restaurants. So maybe a tick more than you've seen in the past, but nothing planned dramatically in the near-term.

John Ivankoe, Analyst

Thank you.

Operator, Operator

Thank you. And the next question is coming from Jared Garber from Goldman Sachs. Jared, your line is live.

Jared Garber, Analyst

Great. Thank you for the question. Over the last, maybe a year or so we've heard a lot about technology initiatives in the restaurants to help some operations. I think Kevin, you talked a lot about simplification initiatives moving forward. So I just wanted to get a sense of maybe what some of the initiatives that were in place in terms of AI and robotics that were being tested and some other initiatives in the back of house and front of house, and how you think about those things going forward?

Kevin Hochman, CEO and President

Yes. We see significant opportunities in technology. When I first joined, the leadership team outlined all our projects in a matrix format, considering their potential impact on sales and profits over the next few years, as well as their probability of success and the time investment required. We made strategic choices to accelerate certain projects while halting others. Regarding the robotics project you mentioned, we are currently pausing that initiative, but we plan to expedite Kitchen of the Future 3, which involves equipment designed to simplify operations, improve speed, and reduce cooking times for most menu items. We believe that enhancing service speed through this equipment will lead to quicker table turnover and increased sales. We are actively exploring technology as a means to enhance restaurant margins and productivity. We have identified additional areas to focus on, which we will discuss as part of our long-term strategy. There is a clear opportunity to streamline processes for both our team members and guests by leveraging technology better. For team members, we see potential improvements in our back of house operations and kitchen display systems, as well as enhancing order flow in the takeaway segment, which constitutes 35% of our business. There are also several tests we believe guests might appreciate if we implement the right technology in our restaurants for functions like seating, ordering, and payment. This would ease the experience for guests and reduce the workload for our team members. We see a considerable opportunity in improving our mobile site interface, as most of our off-premise guests use it to place orders. We believe we can streamline that process to foster more loyal online customers. In summary, we will discontinue projects that lack a clear return on investment but will focus our efforts on those that are likely to have a significant and swift positive impact on our restaurant margins and overall business.

Jared Garber, Analyst

Thanks. That's really helpful color. And then, Joe, if I could just follow up on a question around pricing. I think you said the expectation is to run about 8% price for the full-year at Chili's. So does that suggest that you'll be taking incremental pricing increases throughout the year to maintain that 8% level? Presumably, you'll have some price actions from fiscal year '22 rolling off at various points around the year. So just wanted to make sure I understood that, that commentary properly?

Joe Taylor, CFO

Yes, you're understanding it correctly. We'll take a series of different price increases, not necessarily just menu price increases; obviously, looking at a lot of different dynamics where you can take actionable price. You'll probably see on a quarterly sequencing, Chili's tick up a little bit above that average level as you kind of move through the middle of the fiscal year. Depending on any incremental decisions we may make down the road, we've left ourselves the optionality on how we think about price in the second half of the fiscal year, you would then gravitate back into that kind of 8% range. So that's kind of the flow of pricing for them.

Operator, Operator

Thank you. And the next question is coming from Dennis Geiger from UBS. Dennis, your line is live.

Dennis Geiger, Analyst

Great. Thank you. Just first wanted to ask another on the pricing levels and really anything that you've seen with expect to pushback or resistance from the customer to-date? Kevin, I know you spoke to having pricing power and pricing below peers in past years. Just curious what you've seen most recently from a feedback standpoint from customers?

Kevin Hochman, CEO and President

Well, we continue to see mix be fine. So we haven't seen really any trade down. What we have seen is the traffic with that low-income guest tail off a bit. One of the things we need to do is ensure that we have two really superior values in our restaurants today. We have a $9 lunch combo, which if you look at the fast food index of combos, it's beneath the head, so that's casual dining, right? And then we have our 3 for Me program, which is essentially an appetizer, an entree, and unlimited drinks starting at $10.99. These are both unbeatable values in the market. We have to do a better job of taking the limited marketing dollars that we have and making sure that we're shouting about those for the guests so that the low-income guests who literally wouldn't be able to choose casual dining unless they have those price points available to them are aware of them, right? That's why we're pivoting some of the dollars that we're spending on comps for My Chili's Rewards and trying to figure out how to reinvest that back into advertising the everyday value that we have today that we think is unbeatable in the market. The other things that we're doing in terms of pricing when we think about like reducing the number of items that are offered on that 3 for Me menu to just make sure we have a couple of things that are really good for that guest, but not discount large swathes of the menu. We think that will have a positive impact on pricing. We're reducing the number of free offers, which we talked about on My Chili’s rewards. And the other thing I don't think we've talked about is just accelerating pricing and recovering the cost of delivering our food both on Maggiano's, Chili's, and the Virtual Brands. Historically, we just haven't recovered all those costs, and we know that guests are very price inelastic and are really about value and convenience over menu price. So it may not be in the context of how you think about pricing power, but there clearly is opportunity and upside on being able to push a little harder on those things in a smart way while protecting those opening price points for guests that just desperately need them.

Mika Ware, VP of Finance and Investor Relations

Hi, Dennis. It's Mika. Poultry and oils are likely the two main contributors to our Q1 inflation. For the first quarter, we are almost fully contracted. We are also well contracted into the second quarter, and we believe the markets will decline, but that's our current situation.

Dennis Geiger, Analyst

Very helpful. Thanks, Mika.

Operator, Operator

Thank you. And the next question is coming from Chris Carril from RBC Capital Markets. Chris, your line is live.

Chris Carril, Analyst

Thanks. Good morning and thanks for the question here. So can you talk about the staffing environment today, maybe focusing on turnover relative to pre-COVID levels? Joe, I think you had alluded to elevated turnover in the 4Q versus historical levels. And then I guess the high level, how are you thinking about balancing all the strategic initiatives that you're anticipating with what you're seeing in staffing today?

Joe Taylor, CFO

Let me jump in on the first part and then Kevin, if you want to jump in on the back half of where we can see that heading. Yes, we're running within the hourly population, we're running much higher turnover rates than we did pre-COVID. Retention is the area that we're really focusing on there. We're not having a difficulty from a hiring standpoint; the number of people staffed in the restaurants is fairly similar to pre-COVID, but it's the turnover rate that's generating higher-than-normal training expenses, utilization of overtime, and some of those dynamics to keep that overall labor cost more elevated than we'd like to be. So we're really focusing a lot of attention on how to improve the retention rates. That starts with making sure we have the right dynamics of hiring practices in place, the right training programs, our initiative around virtual training and onboarding, I think it's going to be effective as we just start to deploy that into the restaurants. That is clearly a hyper focus for how we improve the labor situation. We need to bring those levels, particularly for the hourly GM turnover is very stable where it needs to be; improvements in the overall manager and then a lot of attention on the hourly side of the equation.

Kevin Hochman, CEO and President

Yes. I think this is going to be a work in progress. We do continue to have higher levels of turnover versus pre-pandemic at the team member restaurant level that Joe referred to. During my listening in restaurants, what I've learned is we don't have a problem in attracting enough folks to work in our restaurants. We have a challenge in retaining them. In talking with the operators, what I heard is it's more difficult to work in the Chili's, and it's not as fun to work in the Chili's than it was pre-pandemic. I think we're competitive on wage rates; it's more about the actual work. There are two big things we're working on: the simplification initiatives where we've got this team of senior executives working on things that are going to make it easier to work in the Chili's, and then we're also spinning up some ideas on how to make it fun again to work in the Chili's. So the simplification one is kind of more obvious and near in. There are just a lot of tasks that we do in the back of the restaurant that don't necessarily help the guest experience and can be frustrating for team members. I can give you one example to give an idea of the stuff we're working on. So we have this thing called portioning that we do for a lot of our proteins, which is before service we literally count the number of shrimp or measure the amount of brisket and put that into a plastic bag and then stage that in a cooling area. In my restaurant tours, I saw pretty much every morning I saw people just counting shrimp or measuring brisket. To give you a sense of how much time that could be and how much money that could be for our business, just one hour of prep per day per restaurant is roughly 46 years of labor that we're paying for annually when you add that all up. The team member said, well, I don't know why we count shrimp. Counting shrimp, I put them in a bag. I said, well, how would you do it? They said when the customer orders a shrimp dish, I would count a shrimp and not do it before service. That seems pretty logical and something that we could immediately do. In the past, we put that in because we were really worried about waste and labor rates weren't where they were. When you look at today, with wage rates where they are and turnover rates where they are, and that not being the most fun task to do, why don't we get rid of that and save money in terms of labor? There are so many examples in our business where we can remove some of the costs and complexity out of our business that don't really impact the guest experience meaningfully. From a fun standpoint, there are plenty of ideas that we've heard from the restaurant teams that we think could not just make the business more fun to work in, but actually drive some traffic. One thing we're bringing back that we had pre-pandemic that I heard from the restaurant teams that we announced at our conference last week is 'Give Back Night'. It means any guests in your local Chili’s can ask to use the restaurant for a night and they will attract guests, and 10% of the proceeds will go to that guest's non-profit charity. They will do the recruiting to bring guests into the restaurant because it's for a cause they care about. The team members love it because it's something they can give back to their communities. It's a form of driving traffic and it's a whole lot of fun for everyone. There are so many different ideas that we can do both to simplify the restaurant and make it fun to work in. I think we do those things; you'll see turnover rates for our team start to go down.

Mika Ware, VP of Finance and Investor Relations

All right. Thank you, Kevin.

Chris Carril, Analyst

Thanks, Kevin.

Mika Ware, VP of Finance and Investor Relations

Thank you, everyone for joining us on the call today. That concludes our call, and we look forward to updating you on our first quarter results in November. Everyone have a wonderful day.

Kevin Hochman, CEO and President

Thank you, everybody.

Operator, Operator

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