Earnings Call Transcript
Brinker International, Inc (EAT)
Earnings Call Transcript - EAT Q2 2022
Operator, Operator
Good day, ladies and gentlemen, and welcome to the Brinker International Q2 Fiscal 2022 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware, VP of Finance and Investor Relations. Ma'am, the floor is yours.
Mika Ware, VP of Finance and Investor Relations
Thank you, Kate, and good morning, everyone. Welcome to the earnings call for Brinker International's second quarter of fiscal year 2022. With me on today's call are Wyman Roberts, Chief Executive Officer and President; and Joe Taylor, Chief Financial Officer. We released full results for the quarter earlier this morning, which are available on our website at brinker.com. As usual, Wyman and Joe will make prepared comments related to our operating performance and then we will open the call and jump straight to your questions. Before beginning our comments, it is my job to remind everyone of our safe harbor regarding forward-looking statements. During our call, management may discuss certain items that 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 that could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. And with that said, I will turn the call over to Wyman.
Wyman Roberts, CEO
All right. Thanks, Mika, and thank you all for joining us this morning. I'm pleased with Brinker's second quarter performance and the progression throughout the quarter. It was great to see the effects of the Delta spike dissipate, our momentum come back, and flow through improve. Take on delivery remains strong in the mid-30s, while dining room demand was on the rise. All our brands had impressive holiday results as guests got more comfortable coming together in groups, which helped us deliver a better-than-expected quarter with positive sales of 17.7% and adjusted EPS of $0.71. These results demonstrate that with diminished COVID interference, our business model continues to perform well, particularly at volume. Now we, along with the rest of the restaurant industry, are not without our headwinds. Obviously, there are cost pressures with inflation at the highest levels we've seen in years. We've responded with appropriate pricing actions and with our most recent price increase, our menu price is now up over 4%. We've been deliberate about taking incremental price increases throughout the year to ensure that with every step, we protect our traffic advantage, and we've done exactly that. Chili's continued its trend of beating the industry, marking the 16th consecutive quarter of traffic outperformance. This trend has continued into January, despite the Omicron spike. Our fundamental belief is that the key to healthy, sustainable growth is to have an increasing number of guests choosing us. So we will maintain a disciplined approach to determining the timing and amount of future pricing actions. To ensure we deliver a great guest experience and continue to grow the base business, we're focused on making sure Chili's is staffed with stable, well-trained teams and smooth operational systems. The staffing situation across the country has been the most unique I've seen in my career, but we're pleased with the hiring progress we've made. We have more team members on a per restaurant basis today than we did pre-COVID. Just last week, when I was out in restaurants, managers were saying that they used to see only two or three applicants for a job; they're now getting 10 or more. So we're devoting increased time and attention on providing high-quality training and improving retention for our new hourly team members and managers. The added pressure that COVID has put on our operations team means that retention today is more than just a paycheck; it's also about improving quality of life and creating a sense of belonging. We found new ways to leverage our technology to accomplish these goals. We're implementing a virtual learning platform that allows us to train both hourly team members and managers from the restaurant support center. This is a live interactive experience that improves the speed, quality, and consistency of our training while reducing costs and the burden on our restaurant managers. With this system, we're experiencing a 20% retention improvement for new hourly team members. For managers, we're also focused on increasing career progression and diversity that's so important to our business. We're doubling down on leadership development programs for both new and tenured managers, like our highly successful Women Take The Lead program. We see much higher retention levels among those who've engaged in these programs. Our rehire rates also demonstrate further evidence of the positive impact of these efforts. Historically, the rehire rate for managers who, for whatever reason, chose to leave Chili's and then come back has been in the low to mid-single-digit range. Today, that rate has more than doubled, and it's even higher at the hourly level, which speaks to the power of our culture and the strength of our business. We know how crucial it is to support our teams with efficient systems that enable smooth operational execution, improve the guest experience, and strengthen our base business. This is another area where our technology expertise gives us a big advantage. At Chili's, we recently completed the implementation of two major technology systems. The first is our handheld system, which redefines how we serve our guests. With this system, our servers cover more tables and earn more money. We're already seeing an average of 15% higher server earnings and significant improvements in guest metrics. We've been testing this in restaurants for years now, so we know the potential once it's fully up and running. We're also capitalizing on consumer demand to dine off-premise with a new curbside system that provides a more seamless guest experience. The operators are getting comfortable with it now, and restaurants that have fully adopted are generating 15 to 20-point improvements in guest metrics. These efforts to strengthen our base set us up to accelerate additional growth vehicles. We've ramped up Chili's development plans and currently have in excess of 20 new full-size restaurants in the pipeline. We're also testing small footprint off-premise-centric designs for densely populated markets that don't make sense for full-size prototypes. We've opened our first urban kitchen in Manhattan, offering both Chili's and It's Just Wings. I never thought I'd see the day when I'd see Chili's in Manhattan, but it's been up and running for a month, and we're encouraged by its early performance. We plan to open two small footprint locations in trade areas adjacent to college campuses in the near future. Virtual brands continue to be an important growth vehicle for us. We remain fully committed to this strategy. Our size and scale are uniquely suited to enable growth through this vehicle. It's Just Wings continues to perform well, and as of this week, Maggiano's Italian classics is up and running in over 700 restaurants. We're actively working to expand sales channels, build brand awareness, and accelerate this part of our business. The second quarter proved that when our business operates with minimal COVID impact, guest demand is high, and the model is strong. We generated solid cash flow and good earnings. As we continue to navigate the inflationary pressures and respond prudently for the long-term health of our business, we want you to know, we're committed to keeping our business model strong, and we still have growth ahead of us. We see a lot of opportunity to leverage our scale and ownership model to grow the brands in our portfolio and move the business forward and deliver a great return for our shareholders. This is only possible because of our amazing teams working tirelessly in the restaurants and in the support center, and I want to thank each of them for their passion and commitment. Now I'll turn the call over to Joe to give you more details on the quarter.
Joe Taylor, CFO
Hey, thanks, Wyman, and good morning, everyone. Let me continue the overview of our second quarter by providing additional insight into our operating results, as well as briefly touching on the initial post-holiday operating environment as we move into the back half of our fiscal year. For the second quarter of fiscal 2022, Brinker reported $0.71 of adjusted diluted earnings per share, up from $0.35 in last year's second quarter. Brinker's total revenues were $926 million for the quarter, and our comparable restaurant sales were positive 17.7%. For some context around this performance, our sales trends improved steadily as we moved through the quarter as guests resumed their routines with the waning of the Delta wave of COVID. Our restaurant staffing improved throughout the quarter, and by the holidays, we experienced some of the highest levels of dining room capacity recovery since the beginning of the fiscal year in July. We ended the quarter on a high note with a strong December, driven by several weeks leading up to Christmas. Chili's comparable restaurant sales were 12.1% for the second quarter. Their comparable sales were negatively impacted approximately 1.5% by Christmas shifting back into the quarter from Q3 of the prior year and close to 0.5% from closing early on Christmas Eve. We chose this year to invest back into the well-being of our teammates in the restaurants and sent them home at 4 o'clock to spend time with family and friends. This reaction reduced company sales by approximately $4 million. Maggiano's reported net comparable sales for the quarter of a positive 78.1%. The much improved performance resulted from a higher pace of dining room recovery and importantly, improved banquet sales. The team has also done a nice job maintaining their elevated carryout business, which appears to have stickiness in the mid-20% range even as the other business channels improve. Still recovery to go, but the top-line performance, coupled with an improved business model, allowed Maggiano's to deliver an above expectations quarter, a nice step forward for the brand. During the quarter, Chili's, inclusive of the virtual brands, took several incremental price increases and exited the quarter carrying approximately 3% menu price compared to the prior year. Additionally, as Wyman mentioned, we have taken further pricing actions in January, resulting in Chili's now carrying a price of over 4% and Maggiano's adding 5% price with their latest menu rollout. We do anticipate maintaining price at these historically higher levels for the foreseeable future. Brinker increased its consolidated restaurant operating margin to 11% in the second quarter versus 10.7% a year ago. We continue to be very encouraged in periods of low COVID impact as it allows us to realize the power of the business model and the ability to leverage margins with more normalized top-line performance. Food and beverage costs were unfavorable by 120 basis points, driven by commodity inflation, partially offset by price. We are seeing stabilization in our supply chain and have a good line of sight into the balance of the fiscal year with a large majority of our contracts locked for the next six months. We are expecting high single-digit inflation for the third and fourth quarter. Labor for the quarter was favorable by 60 basis points versus the prior year. Our recruiting and training efforts saw good progress throughout the quarter, and the higher sales volumes in the later part of the quarter worked to effectively leverage the fixed components of these costs. Wage rates at the manager and hourly level remained elevated in the high single digits, and we expect to see this trend continue as we work through the remainder of the fiscal year. As the teams continue to stabilize outside of COVID spikes, we should make incremental progress in reducing costs, such as training and overtime utilization that crept into the system during times of higher turnover and lack of labor availability. Restaurant expense was favorable by 210 basis points year-over-year, as the improved sales performance effectively leveraged the fixed costs included in this category. As we work to further build our sales channels, we should see this leverage dynamic continue and help balance the inflationary aspects in other parts of R&M. Our cash flow for the second quarter remained strong, with cash from operating activities of $67 million and EBITDA of $88 million. Our total funded debt leverage was 2.6 times, and our lease adjusted leverage was 3.6 times, both down slightly from the first quarter but down significantly from the prior year. Let me finish my prepared comments with some perspective related to our January period's operating performance that closes today. As has been widely reported, the Omicron variant spiked rapidly just after the Christmas holiday and played havoc throughout the industry with staffing and sales capacity, particularly with dining rooms. We have not been immune to that impact. After a challenging first couple of weeks, we have seen the spike dissipate in many markets and are seeing improvements in our sales week to week as team member exclusions come down almost as fast as they rose. While it is good to see what appears to be a much quicker resolution of this COVID wave, the January period will be a setback to our overall operating results. It's important that we quickly move back to a more normalized operating environment in order to meet our expectations for the fiscal year. Taking a step back from the volatility in the current environment and looking past the veil of COVID, we remain confident in our ability to drive improved business results across our brands. We see good growth ahead as we invest in our strategic initiatives, open an increasing number of restaurants, and leverage our technological advantages. We also remain very appreciative of our restaurant leaders and teams and the efforts they are making each and every day to deliver the results we simply report. Now that my remarks are complete, let's open the call for your questions. Kate, I'll turn it back over to you to moderate.
Operator, Operator
Thank you. Our first question today is coming from Dennis Geiger at UBS. Your line is live. You may begin.
Dennis Geiger, Analyst
Great. Wyman and Joe, thanks for the insights, really helpful. Just wondering, Joe, I guess following up on some of the comments you just made, if you could speak a bit more to the full year. It sounds like you're talking about assuming the environment starts to normalize pretty quickly, you can kind of meet prior expectations for the full year. But wondering if you could kind of unpack that and just speak a bit more to that and some of the moving pieces there, please.
Joe Taylor, CFO
Yes, Dennis, and good morning. I think one of the keys that you just mentioned is a normalized operating environment. Of course, our expectations for the year don't anticipate an operating environment similar to the first part of January, particularly with those kinds of spikes. So let's assume we're working our way through that. I think, again, as we look at the various factors driving the business, demand is there. I mean, and again, our expectations around the willingness of the guest to interact with the brands in a variety of ways is playing out as we would expect. The inflationary factors are also there too. Again, I think we're comfortable with the perspective we've given you on inflation. We had anticipated a little bit higher inflation on the commodity side in the second half of the year, and that line of sight still exists, which will kind of level us into that mid to upper mid-single-digit range for the year. So I think generally speaking, on the tracks that we were anticipating as we go.
Dennis Geiger, Analyst
Very helpful. Just a quick follow-up, Joe, if I could here. Just on the staffing, it sounds like managing it quite well considering the difficult environment. Any more color on the impact to sales in the quarter? I think you guys have touched on that in recent quarters, how that has been trending recently? And kind of how much more staffing from here, if you could kind of speak to having in those company stores. Thank you very much.
Wyman Roberts, CEO
Yes, Dennis. Hi, Dennis, it's Wyman. So yes, in the second quarter, we were still kind of working through some of these staffing challenges, both finding team members and managers given some of the activity that we saw early in our fiscal year in the summer. And then late in the quarter, the Omicron spike really dealt with call-outs and exclusions, right? There were a lot of people that had gotten sick late in December. The good news, though, is that on the hiring front, as I mentioned in my remarks, we're seeing much better pickup. We have more team members in our restaurants today on average than we had pre-COVID. So we're getting back to being fully staffed. Now there are a couple of hotspots here and there. The HR group has done an amazing job supporting our restaurants and hotspots to really be aggressive in recruiting and hiring, and that's turned out very well. So as Joe said, as we look at our back half, we don't see as many headwinds due to staffing. We're feeling pretty good about our ability to keep our restaurants up and running and open for full hours, keeping the dining rooms full. So the big question really now is just what's COVID going to do as we work through it. Again, we're encouraged by how we've seen Omicron kind of come down, but we need that to continue. But we're ready to do business, and the consumer seems very comfortable coming to the restaurants.
Joe Taylor, CFO
And if I could just tag on to that, the staffing in particular ability to bring dining rooms back up at higher capacity is essential because when we see our highest operating periods, like in December, it's when you're getting, as I mentioned, those dining rooms functioning back up to closer to normalized capacity. That's the opportunity that staffing brings us, as you don't have to throttle that important channel, our most essential channel down as much.
Dennis Geiger, Analyst
Thanks very much, guys.
Operator, Operator
Thank you. Our next question today is coming from David Palmer at Evercore ISI. Your line is live.
Dave Palmer, Analyst
Thanks. And thanks, Joe, for the commentary on the guidance or the fact that you didn't renew that now, but perhaps the way things happened with Omicron in January that you're perhaps eating into that guidance a little bit. I wonder if you could talk about how much January was a setback, in terms of sales, EBITDA for the year. It's almost like a one-time thing if we are getting past the worst of COVID, we'll look at January as its own thing. Could you talk about that? And I have a follow-up.
Joe Taylor, CFO
David, I mean, the period is actually closing today. So I'm not going to get into any details on a period that we really haven't closed the books on yet. It was a meaningful impact, particularly in the first couple of weeks. One of the interesting things I will say too on that quarter is we expanded our gaps to the industry in that environment. We started seeing that gap expanding back in the latter part of the second quarter. We continue to maintain that growth in the gap as we worked through the last several weeks. Those are the kinds of lines of sight we see, but yes, it's not an environment that we hope is episodic, and that December environment is going to be the one that is more analogous to the rest of the year. So that's part of wanting to understand a little bit better, where we go between those two variations of the theme.
Wyman Roberts, CEO
The only thing I'd point to, David, you see the industry numbers. You kind of know what's happened in the industry. As Joe said, we've outperformed the industry. So Omicron was definitely - it had an impact on the industry through the back half of December and into January. We fared better than the industry, but we were impacted as well. As Joe said, though, we're very encouraged by how it's working its way out of the system as you look through the month.
Dave Palmer, Analyst
And as you look at the second half of this fiscal year, it looks like you're going to have pricing, maybe 1.5 points more pricing. Maybe give a sense of your food cost resets and your feel of labor, just things that are a little bit more permanent versus the January stuff, but things that are more permanent feeling things about the second half margin trend versus the first half. And I'll stop there. Thanks.
Joe Taylor, CFO
Again, from a margin perspective, this fiscal year, we expect both of those components to continue to run in that high single-digit rate. We're seeing particularly inflationary environments in the cost of sales pretty much align with our expectations. We have good line of sight through our contracting and on the supply chain side of the equation, so we understand what it is. We've taken incremental pricing actions to help mitigate against that. I think that is, again, the area that there is a belief we’ll have a downward cycle at some point, not calling for a time frame on that, but we still believe commodities are cyclical. Whether or not it's the back half of this calendar year or getting into next fiscal year, there’s probably some relief on the absolutes of those. The labor side of the equation is more structural. We anticipate those inflationary rates of high single digits will moderate over time, but we're still working our way through the structural up-ticks we’ve seen in labor. The labor environment itself, as we've seen more activity coming back into that market, will help stabilize that over time also.
Dave Palmer, Analyst
Thank you.
Joe Taylor, CFO
Thanks, David.
Operator, Operator
Thank you. Our next question today is coming from Jeff Farmer at Gordon Haskett. Your line is live.
Jeff Farmer, Analyst
Thank you.
Joe Taylor, CFO
Hey Jeff.
Operator, Operator
It sounds like he got cut-off. Jeff, your line is still live.
Mika Ware, VP of Finance and Investor Relations
We might have to move on and we'll bring Jeff back when we try him -
Joe Taylor, CFO
We’ll keep going and we'll get Jeff back in.
Operator, Operator
No problem. Our next question is coming from Jeffrey Bernstein at Barclays. Your line is live.
Wyman Roberts, CEO
From one Jeff to another.
Joe Taylor, CFO
Just got another, Jeff.
Jeffrey Bernstein, Analyst
It's not one Jeff, it's another. Couple of questions. One, just wondering if you can talk specifically about the restaurant margins for the second half of the fiscal year, obviously much improved this quarter versus last. But if you think about the line items with the greatest volatility, it sounds like you have a pretty good line of sight into commodities and labor. So I'm just wondering, especially with the pricing now at north of 4% at Chili's, what your outlook is specifically to the second half and whether that price increase is seeing any consumer pushback or whether you see any elasticity issues? It sounds like you're really not seeing any, but just trying to figure out how you would gauge that.
Wyman Roberts, CEO
Hey Jeff, Joe will talk to you about the specific margins. But I do want to talk a little bit about what I think is probably not as clear, and that's the impact of these COVID episodes and spikes as we're calling them, have on our mix. The good news is we continue to drive traffic and beat the industry by not a small margin, but by double-digit numbers on traffic. But it does shift from more dine-in to takeout. That’s a pretty significant check hit. Obviously, the alcohol sales and the other things that don't happen as much when people dine out. Now we're happy to have guests still engage with us, but we see, and we saw in December, we saw in July when COVID starts, we get back these dining room numbers. The impact is significantly more than I think people understand and probably much more than other brands or companies you may follow. The margin story and our ability to cover costs get much better because the check average goes significantly more than the pricing impact. The bigger impact for us is when we shift out of dining room into takeout because of COVID, we lose a lot of average check, and that's just out of our control. When we start to see them come back, all of our checks by channel, so takeout and delivery are up over pre-COVID by double digits. We're just not seeing all of that impact because of the mix shift. As the mix shifts back, we start to feel that, and the margin pressure becomes a lot less now. I just wanted to share that because I do think sometimes it gets lost in the conversation about, are you taking 2% or 3%. We have much more of an impact on shift out of dining room into takeout than what another point in price is going to get us.
Joe Taylor, CFO
Yes. And Jeff, again, as we continue to move through the second half of the fiscal year, while January gives us a little bit of a stub in the toe from a performance standpoint to overcome, I would expect moving out of this environment that you'll see the typical margin growth that you would in the back half of our fiscal year as we tend to obviously see progression in margins as we move through some of our higher volumes in Q3 - in Q4. And I think that environment is still in place. Obviously, the dynamics that have impacted we're actively evaluating on an ongoing basis. And as we think both said in our comments, we'll take further action if we think it's necessary to support that margin growth.
Wyman Roberts, CEO
Just to your point, the pricing we've taken so far doesn't seem to have gotten a lot of pushback. We think in this environment, that's pretty consistent. But we also don't think that this environment is necessarily the environment that's going to hold forever. We want to be very cautious about when consumer perceptions and the economy maybe shift a little bit more so that we have the value propositions and the quality of the brands from a value perspective that drive consumers or appeal to consumers in maybe a different environment, that may or may not come, but typically, they cycle back.
Jeffrey Bernstein, Analyst
Understood. And my follow-up was just to clarify, I know there was no mention of formal fiscal 2022 guidance in your prepared remarks, but the fact that you gave very specific guidance last quarter for the full fiscal year. I just wanted to clarify. It sounds like labor and commodities are in line with what you were thinking. But is it otherwise a reiteration of the total revenue, total EBITDA, and total EPS for the full year, seemingly second-quarter a little bit better? And then January, like you said, stub your toe, but all in all, those key line item metrics are still reiterated for full-year fiscal 2022?
Joe Taylor, CFO
Yes, Jeff, again, we didn't speak to guidance with any updates or further information as it relates to what we gave you the last quarter. So as per our policy, that guidance is still there.
Operator, Operator
Thank you. Our next question today is coming from James Rutherford at Stephens Inc. Your line is live.
James Rutherford, Analyst
Thank you and congrats on the quarter here. I wanted to circle back to the discussion of menu prices and consumer demand, running over 4% menu pricing today at Chili's. Clearly, prices are going up across all of food service and food at-home. I think you said you're not seeing an impact on demand yet. But what risk do you see that the low-income consumer potentially gets incrementally pressured through the year and consumers simply shift at the margin from casual dining into either quick service or more at-home consumption? Just how would you respond if that event occurs?
Wyman Roberts, CEO
We control what we can control, right? What we can control is our value propositions and the quality of our brands. We have one of the strongest value propositions in the industry in casual dining. We've seen consumer shifts during COVID, interestingly, where they shifted up in casual dining. We think that probably the first thing they'll do is probably come back down a little bit. If you think about the amount of steak consumers have eaten during COVID, it's interesting. It's usually higher-priced item. We imagine there may be under pressure, some drift back to the lower check average concepts before they jump. During tough times, consumers generally continue to want to dine out. They want to dine out. It's not like they learned how to cook in COVID. They're still wanting to go out or have food brought to them. We want to make sure that if things get a little tighter, we have a really strong value proposition. That's why we're cautious about how we price and ensure that our actions don't damage the overall value propositions we offer for consumers, which is why we've been able to again beat the category for 16 consecutive quarters on traffic.
James Rutherford, Analyst
That's a helpful perspective. My second question is around unit growth in urban areas. You mentioned your efforts there, but some in the industry have chosen to partner with companies such as Reef in these urban areas. It sounds like you're taking an approach of building your own kind of to-go and delivery-focused kitchens. I'm just curious, what your view is on the pros and cons of the different go-to-market strategies there? How big do you think the total opportunity you have for these smaller footprint stores? Thank you very much.
Joe Taylor, CFO
Yes. We're trying to keep all of our options open in that regard. In fact, the Manhattan location is a third-party kitchen location that we have space in. That might make the most sense in certain circumstances and in really dense urban markets. The options we're looking at right now are the two units that we're considering by college campuses, one here in Dallas and one in Columbus, which are going to be in line, a little larger, around 1,500 to 1,800 square feet that we would lease and manage. So they're all off-premise centric in their approach. There are different ways to approach different incremental markets. We think there's a number of markets that respond extremely well to off-premise both to-go and delivery. It could be some fill-in markets in other places that we have penetrated significantly in the suburban rings that we may go into. We're just more focused on maintaining a pipeline that is in the mid-20s, and they're delivering along that line. We're really excited about what we're seeing as we open these new restaurants. The early returns are very promising with programming the culinary talent. We believe we have a good chance at this going forward.
Wyman Roberts, CEO
And I'll just add that now having a portfolio with a couple of virtual brands in there allows us to leverage these spaces. When you read and study what's happening in this space, a lot of times, they just aren't able to get enough velocity, right? They are not generating enough sales to cover it. This is where our portfolio has helped us and our ability to understand how to run this portfolio in a very tight kitchen environment. The team is working hard, and we'll have a lot more information as we get a couple of these things up and running. But we're encouraged and it could be a meaningful growth vehicle for us in the future.
Operator, Operator
Thank you. Our next question today is coming from Jeff Farmer at Gordon Haskett. Your line is live.
Jeff Farmer, Analyst
Great. Thank you. Hopefully, you guys can hear me this time.
Wyman Roberts, CEO
We got you, Jeff.
Jeff Farmer, Analyst
Okay. Awesome, so I touched on it a little bit, but in terms of - I'm curious, how do exclusions work at Chili's? And what I mean by that is, when those employees are held out for protocols or for whatever reason, do they get paid? And then you guys bring in a secondary employee to make up that shift? How does that work when you actually do have exclusions with your employees?
Joe Taylor, CFO
Yes, Jeff. Well, first, managers and hourly team members getting COVID or being exposed to COVID is a very interesting process, right, over the last two years. The exclusions of managers, obviously, when a manager gets sick, they're salaried for the most part; they're paid and covered. But it's very difficult. If you have a couple of managers come down with COVID, we don't have managers laying around that we can just go and replace them. Oftentimes, that's when the restaurant lacks the leadership it needs to stay open full hours. With team members, it's different. Oftentimes, we don't know because they're hourly. They may or may not come on the schedule; they may just call out. It's not as clear, but we are committed to supporting all of our team members through the COVID experience, and we do everything we can, and I think we do a great job keeping them safe and supporting them. It does put pressure on the restaurant both from a manager and an hourly perspective because it happens without any warning. You just get a call that says, hey, I'm not coming in today. While you want to replace those shifts, it's not always easy to do, especially in the environment we've been running in.
Jeff Farmer, Analyst
That's helpful. And then just one more unrelated. Some of your peers have discussed this over the last week, that greater-than-expected supply chain pressures have added some of their commodity inflation pressure. It sounds like a lot of these supply chain members are seeing similar staffing and production issues as well. So my question to you is, and I apologize again if you've already discussed this, but on your supply chain, have any headwinds there materialized to make your commodity situation a little bit more challenging than it already is?
Wyman Roberts, CEO
Well, again, everyone's been impacted by Omicron. The significant impact it had on the country with people contracting COVID in late December, January, impacted anyone producing product. Just like we were talking about our restaurant managers and team members getting COVID, it happened in plants and production areas. There were some wobble in the supply chain system but we've managed it. The team, after almost two years of figuring out how to work through a COVID environment, has done a great job. It hasn't had a dramatic impact on our restaurants. To this point, we've been flexible to keep our restaurants stocked or supplied. It doesn't mean we don't have issues, but overall, we've done a good job. I'll let Joe talk about the monetary impact.
Joe Taylor, CFO
Yes. I think, Jeff, particularly as you think about where does cost of sales go from here, and start thinking about moving into next fiscal year and what the cyclicality may look like. The underlying inflation that all of us have been dealing with for more than a year now has a component that is coming out of those disruptions you talked about: production cutbacks and the staffing issues within production, distribution, and all the different components of the supply chain. That has fed significantly into the inflationary cycle. As that stabilizes, I believe that's going to stabilize and that level of underlying issues as we move into the next fiscal year, in particular.
Operator, Operator
Thank you. Our next question today is coming from Andrew Strelzik at BMO. Your line is live.
Andrew Strelzik, Analyst
Great. Thank you and good morning. I actually wanted to start by following up on that food inflation and food costs for next year. I'm not looking for guidance, but I'm just curious as you're either starting to have those conversations or going to start having those conversations, what is your philosophy around locking food costs for next year? Are prices at a level that you're comfortable to do that? Would you want to see things change? I'm just curious for your philosophy and willingness to do that at these levels.
Joe Taylor, CFO
Yes, Andrew, I understand that discussing next year may lead to certain expectations. Our approach is that our supply chain doesn’t operate based on fiscal years in terms of market access and contract building. We already have contracts established that extend into the next fiscal year. We continuously assess market flows and gather as much input as possible. Over the past year and for the foreseeable future, ensuring product availability is crucial. We consider these factors as we make contractual decisions. I hope this provides you with more clarity.
Wyman Roberts, CEO
The only thing I'd add is, again, I think there are some products at all-time highs, and they will come down. Where we have typically looked to contract for a longer period, we won't do that as much. We'll play the market a little more. There’s some risk associated with that, but we don't think it's prudent necessarily to lock in on these prices. There’s no historic support for them. We believe on specific products that we're going to ride the market a little more than we typically do.
Andrew Strelzik, Analyst
Got it. That's extremely helpful. And my other question was hoping you could dig in a little bit more on some of the December performance. There’s really strong dining room demand in the weeks before the holidays you talked about, which hopefully might look like a normalized environment at some point. I'm curious what the Chili's off-premise sales looked like at that point? Regionally, was there any - was it a broad base or were there specific markets or regions that did not participate as much? Any learnings or insights from that period that inform your thinking going forward?
Wyman Roberts, CEO
The best story I can share without getting into all of our performances is really the Maggiano's story. As the Delta spike dissipated, we saw a real willingness for consumers and our guests to come back in large groups, and the banquet business performed better than we anticipated. Both the social and business side did better than we had thought. The dining room mix opened up, and we saw that as well. The real bright spot in December from a future perspective, and a consumer insight was what we saw with Maggiano's.
Joe Taylor, CFO
December isn't an outlier. If you go back into last fiscal year, so if I go back into the spring and summer, you're looking through some of those periods, you look at July. The periods that have been nominal COVID show the same happening: the dining rooms aren’t throttled, and the demand is there. You meet that demand more aggressively, and those dining rooms are the engine that drives everything here. It’s very encouraging, and we are confident in that going forward.
Operator, Operator
Thank you. Our next question today is coming from Brian Vaccaro at Raymond James. Your line is live.
Brian Vaccaro, Analyst
Thanks, and good morning. I just had a couple of questions on the quarter itself. Just some clarifications. On the labor side, Joe, on the last call, you provided some good detail on what you view as transitory costs in that labor line. I think it was over 100 basis points. Just to make sure we understand the components over time, training, etc.
Joe Taylor, CFO
Yes. As I mentioned, those are two areas that continue to be elevated. You're looking at the opportunity in the 75 basis point range between the two of them without having to get overly aggressive. Turnover rates are coming down, so you’d expect that to improve those costs over time. But it is still essential to lean into training and the effectiveness of our system, to get that up and running. They’re still negatively impacting more than we’d like to see, but we have good line of sight in how to work those off over time.
Brian Vaccaro, Analyst
All right. That’s helpful. And looking at the labor line and if we look at it on a cost per week basis. I think we're up 4% on our math, maybe versus a pre-COVID trend, and thinking about high single-digit wage inflation; it would seem that hours per store might be down 4% to 5%. Is that generally in the ballpark? And if so, do you think that's sustainable? Could you frame where you think current staffing levels are versus some target that you might have in a post-COVID environment?
Mika Ware, VP of Finance and Investor Relations
Part of that element was due to the fact that even though wages were elevated with staffing issues, oftentimes, you were more understaffed than you wanted to be. That dynamic is what's making it look lower. But it will all normalize, and then we will stabilize and work productivity to our advantage. There's a lot of moving pieces in labor.
Wyman Roberts, CEO
Yes, but it is the dynamic we’ve seen and experienced. A lot of our competitors have P&Ls looking good because they’re not fully staffing restaurants. All of that margin stuff is good, but there’s nothing better than a restaurant running at full capacity, full volume. That’s the focus, not just meeting expectations.
Brian Vaccaro, Analyst
All right. That’s helpful color. Thanks, Wyman. One more for me. Just on G&A, Joe, it was quite a bit lower than we would have expected here in the second quarter. Just clarify the underlying dynamics there? Is that timing? Or has there been a change to your annual guidance? I think you were looking for an increase of $8 million to $12 million year-on-year. Is that still an expectation?
Joe Taylor, CFO
No, I think we’re still running in that ballpark. We’re investing in G&A where we need to and there’s leverageability in it. We saw that this last quarter. Incentive comp is down relative to where it was in the prior year, just a mix of things. We’re being very diligent, and you get less travel and less meetings all those kinds of things that flow into G&A, but overall growth is still in line, probably toward the lower end of that range.
Brian Vaccaro, Analyst
Okay. All right. And sorry, one last one. In that other revenue line, that franchise and other revenue line in this current quarter, I noticed it jumps up pretty meaningfully. Could you provide color on how much of that was related to the higher Maggiano banquet fees? Or was there any impact of gift card breakage or some other one-time dynamic we should be aware of? Thank you.
Joe Taylor, CFO
It really was across a number of different areas. The banquet revenue does flow into there. So as we talk about banquet revenues coming back, gift card revenues are also up. All the things you would expect as dining rooms are open, tabletop revenue. Franchise revenue has been flowing through from international franchises. So it was across several areas. Very few negative numbers flowing through that piece.
Operator, Operator
Thank you. Our next question today is coming from Nicole Miller at Piper Sandler. Your line is live.
Nicole Miller, Analyst
Thank you. Good morning. Can you please share with us the average weekly sales for October, November, and December? And then validate, I look back in the model, and it looks like January in the current quarter would be a lesser average weekly sales compared to February and March. So to the degree you're off in average weekly sales in January, you have a lot of sales opportunity to make up in February and March. Is that right?
Joe Taylor, CFO
Well, again, we don't typically get into specifics. Yes, your average weekly sales are impacted meaningfully in spikes such as you saw. We would intend February and March to be higher volume months than January anyway in a normalized environment. I would expect not only bounce back but continue moving forward.
Nicole Miller, Analyst
All right. Can you talk a little bit about the fleet from a suburban versus urban footprint? Like what percent is suburban, what percent is urban? And how did those areas compare to one another from a Chili's perspective?
Joe Taylor, CFO
Yes. We have very nominal, what I would consider urban penetration. You have some Maggiano's that sit in more urban environments. But overall, Chili's is a suburban, exurban smaller market footprint. So when we think about new initiatives, we may pursue more of those around urban density; we may even see more opportunities based on that. But generally speaking, very little that I would consider to be true urban.
Wyman Roberts, CEO
If you're looking for some regionality play, that's more COVID driven where COVID is having an impact. The Midwest is more heavily impacted, and California is also more impacted. Those variations you’re seeing in the broader story are COVID driven. The good news again is it’s getting better across the board.
Nicole Miller, Analyst
Yes. That’s a really good point. I think that’s helpful. I was also thinking like high-level tech curbside systems. Help us understand where you are in a mall, where are you freestanding? I'm not sure if that's the right application, but where will you get your bang for your buck essentially on some of the investments you're making on that side? Does that even matter? Does the format matter, I guess?
Wyman Roberts, CEO
It does. That’s a good point. The two technology systems I mentioned earlier, the handheld server model works everywhere. The curbside works in 90% to 99% of Chili's locations. I was in a restaurant in Miami that happened to be in a mall. It's not as easy in a mall parking lot where you don't have dedicated spaces, but that’s a rare instance. Most of our restaurants are freestanding, and the curbside takeout system works perfectly well in all of them.
Operator, Operator
Thank you. Our next question today is coming from Jared Garber at Goldman Sachs. Your line is live.
Jared Garber, Analyst
Thanks for the time and all the good color this morning. I wanted to ask on the unit growth side. We noticed that the company-owned unit guide, on a gross opens basis, is now at 4%. I wanted to get a sense of what's driving that? Is it timing related? Did some of those development plans get pushed out into the first part of next year? Just any color on that development cycle would be great.
Joe Taylor, CFO
Yes, Jared, we’re really excited about the development team. The current development pipeline is over 20 units. There is some timing with that, and noting a few that were right at the end of fiscal year slipped into next fiscal year. Nothing material will make me pause. I think '23 will be really exciting as we see more openings in the pipeline. I’m really focused on maintaining a pipeline in the mid-20s, and we can deliver very well on that. We're opening a couple of new restaurants with the prototype that look promising as we incorporate technological advantages. It's exciting to see progress there.
Jared Garber, Analyst
Thanks. That’s really helpful. Just one quick follow-up on that. You talked a little bit earlier about those newer concepts, like your New York City location or college campus tests. Is there something we should be thinking about in terms of average weekly sales like a delta compared to the base business these locations come from?
Joe Taylor, CFO
What we've talked about so far from a pipeline standpoint really is the traditional corporate-owned Chili's. We haven’t updated as we understand more of these opportunities, and then we'll get that kind of information. But everything right now is based on current prototype Chili's openings. We expect to test these other ones, which will give us better insight for you.
Operator, Operator
Thank you. Our next question today is coming from Chris Carril at RBC Capital Markets. Your line is live.
Chris Carril, Analyst
Thanks. Good morning. Wyman, you noted the consumer trading up during the pandemic. Just following up on this from a value perspective. Can you share any further thoughts on guest utilization of your platforms like three for $10.99 and the meal for two? And to what extent do you see any potential for incremental pricing actions on those platforms specifically?
Wyman Roberts, CEO
Well, first, yes. Throughout this pandemic, I’m proud of what the team has done to grow traffic even better than the category. Pricing puts pressure on traffic. We’re strong with traffic, so we probably have some additional pricing power in the menu. We need to be cautious about how we take pricing actions moving forward. We have priced our value platforms this year, and we continue watching them closely. Ratings on those platforms remain solid. We’re always looking at alternative ways to give consumers a great value but also maybe pass a little price along.
Chris Carril, Analyst
Great. Thanks for all that detail. My second question is just following up on labor. I think, Joe, you noted turnover rates are coming down. I'm curious if you could expand a bit on just turnover levels today, particularly in the first few months following hiring. How does that turnover rate compare to more recent levels and perhaps pre-COVID levels? Thanks, again.
Wyman Roberts, CEO
It's been a journey, right? So pre-COVID levels saw a spike in turnover dramatically. They've come down fairly dramatically, not back to pre-COVID levels. We have seen higher levels of turnover, both in hourly and management early on. That’s why we’ve focused on training. If team members are trained well and onboarded, they stay longer; they’re stickier. We're really focused on retention with both groups. That’s why, at the hourly level, it's about training, and at the management level, it's about engaging them with programs like Women Take The Lead. People get it when they remain for a couple of months, which leads to much better tenure experiences.
Operator, Operator
Thank you. Our next question today is coming from John Ivankoe at JPMorgan. Your line is live. You may begin.
John Ivankoe, Analyst
A couple, if I may. First, on the handhelds, are they being used at 100% of the stores, 100% of the time? I know you mentioned it's getting tips up 15% to 20%, there's increased customer satisfaction, but I wanted to understand current usage across the system. Are you realizing or could you realize any margin benefit from that system going forward, not just satisfaction?
Wyman Roberts, CEO
Yes, John. The system has been rolled out nationally, and every Chili's now has it. We are going through the learning curve, just getting familiar with operating a different model where your servers stay on the floor. We’ve had it in some restaurants for years, but that was 10% or less of the system. Now it’s 100% of the system. It’s critically important to get that system effectively. We have great metrics by server and runner as to how they’re using that system. The operators are all over this, and we’re excited about how quickly they’re adapting. We believe it will significantly improve server earnings and retention.
John Ivankoe, Analyst
Okay. All right. And so I guess, to some extent, you answered the question. Getting proficient means, in some cases, that system is being used, in some cases the legacy system is still being used in terms of taking orders? Or where would you kind of put us on the timeline?
Wyman Roberts, CEO
Yes, there’s muscle memory in how orders are taken. There are servers that have been with us for decades, so it’s about getting used to the new technology. We have to get them to rely on runners and the system; the server stays on the floor. It's crucial for us to get that system fully implemented.
John Ivankoe, Analyst
Okay. Thank you. And the second question is on delivery. Could you talk about what that is as a percentage of sales this year versus last year, maybe growth or decline this year versus last year? Whether you think you're potentially reaching all addressable business based on your current relationships and if that might change?
Wyman Roberts, CEO
John, I don't have the numbers in front of me, but what we know is when these COVID spikes occur, we see a shift from the dining room to takeout and delivery. In the second quarter, we saw some of that occur. Our off-premise, both takeout and delivery, has remained in the solid 30% range even as we moved into December. We're satisfied with our position in that area but do see amplification capacity as we expand channels, becoming less exclusive.
Joe Taylor, CFO
Yes, and John, delivery continues to be in that mid-teens mix. I would anticipate it staying in the 15%, 16% range as we move forward.
Wyman Roberts, CEO
Most of the shift back into the dining room will come from takeout because those are the guests that are already familiar with the location.
Joe Taylor, CFO
At Maggiano's, delivery has grown dramatically. It continues to be a strong driver for them.
Operator, Operator
Thank you. Our final question today is coming from Eric Gonzalez at KeyBanc. Your line is live. You may begin.
Eric Gonzalez, Analyst
Thanks for squeezing me in. I'll just ask one question. It's on virtual brands. I was wondering how incremental the carryout channel has been to these concepts. Could you touch on overall concept comp growth from these brands, whether they're comping above the system or maintaining a constant mix of sales?
Wyman Roberts, CEO
The virtual brands are very incremental to our sales story. They offer unique opportunities to explore these ideas. Year-over-year, we're rolling out Maggiano's; there's no overlap there. The business for It's Just Wings continues to be strong. We’ll keep you posted on progress. We're optimistic about what these brands will contribute as we move forward.
Joe Taylor, CFO
They're maintaining a consistent percent mix of total sales, similar to what we've observed. When we throttle a restaurant, it impacts both base brands and virtual brands. So getting out of that throttling environment is essential.
Eric Gonzalez, Analyst
Has the carryout channel been incremental? Or is it still too early to talk about that driver?
Wyman Roberts, CEO
It's incremental, it’s just small still. We're still building awareness levels. The bulk of business is still delivery so we continue to drive awareness of takeout; that’s the focus.
Mika Ware, VP of Finance and Investor Relations
All right. Well, I think we ran out of time everyone, but I appreciate your questions, and look forward to reconnecting with everyone after our third quarter.
Operator, Operator
Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.