Earnings Call Transcript
Brinker International, Inc (EAT)
Earnings Call Transcript - EAT Q2 2023
Operator, Operator
Good day, and welcome to the Brinker International Q2 F2023 Earnings Call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware, Vice President of Finance and Investor Relations. Ma'am, the floor is yours.
Mika Ware, Vice President of Finance and Investor Relations
Thank you, Holly, and good morning, everyone, and thank you for participating on today's call. Joining me today 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 we always do, Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our Safe Harbor regarding forward-looking statements. During our call, management may discuss certain items which are not based entirely on historical facts. Any such items should be considered forward-looking statements 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
Thanks, Mika, and good morning, everyone, and thank you for joining us as we share insights on the momentum we're seeing in the business, progress against our strategy, and plans to maintain that momentum. I'll start with Maggiano's, which delivered a very strong second quarter sales and margin growth as some of the business model changes have had accelerated recovery. We expected Maggiano's performance to exceed pre-COVID levels during the quarter and the team delivered. Comp sales were up 21% year-over-year and margins improved significantly. One of the big drivers of growth during the quarter was the off-premise business, which delivered an 82% increase versus pre-pandemic levels. Maggiano's off-premise sales are highly incremental. Customer insights are telling us that off-premise sales, which are meals consumed at home are at different occasions than the dining get-togethers and celebrations that Maggiano's is known for. And Maggiano's guests who visit us for everyday home meals are visiting more often than the dining guest. So off-premise for Maggiano's drives two things that we really like: incrementality and frequency. The solid recovery of the core business plus the incrementality of the fast-growing off-premise channel coupled with an improved business model makes us very excited about the future of Maggiano's. Now for Chili's. At Chili's, we've made solid progress strengthening the core business and generating momentum in our results. Second quarter same-store sales were up 8%. We've returned to profitability and are steadily improving the guest and team member experience. As you recall during our last call last quarter, I shared we were starting to implement our longer-term strategy to sustainably grow the core business by focusing on the key areas that will differentiate and best position Chili's in the marketplace. While there's still a lot of work ahead of us, I am encouraged by the progress our team has made across four pillars of our strategy. The first pillar is team members with the goal of making their jobs easier, more fun, and more rewarding, which we believe will lower turnover, increase engagement, and ultimately lead to better team member and guest experience at Chili's. We continue to make meaningful progress simplifying both our menu and operational procedures in our heart-of-house. As I mentioned last quarter, simplification is not a one-time event but an ongoing commitment to our team. Our leadership team and I continue to host listening tours all around the country. And as managers and team members see changes happening, they are feeling heard and understand that they have a direct say in the future of their operation. These changing beliefs are now resulting in both significantly improved employee engagement scores and lower turnover, especially at the manager level, which is now below pre-pandemic levels. We still have work to do on the hourly front as we claw back from staffing challenges, but the hourly turnover numbers are now also trending in the right direction. Hospitality is our second pillar. We're in the process of evolving our service model to provide better service for both dine-in and off-premise guests. Servers now have more support as we staff key positions to ensure shifts are more manageable and guests feel welcome and cared for. As a result of these changes, our restaurant teams are telling us they feel more supported than ever. In fact, a few weeks ago, I was in our Florida market and all of the managers told me this is the first holiday season in years that the restaurant felt completely manageable with a lot less stress on their teams. These first two pillars are working together to improve team member engagement and turnover, as well as driving significant improvements to our guest satisfaction metrics. When you see team member engagement turnover and guest satisfaction all trending in the right direction, it's typically a good sign for the business. And I'm excited to see this happening because it's a confirmation that we're making inroads in the things that really matter. The third pillar is atmosphere. We're ensuring our buildings and our equipment are well maintained and we're bringing more energy and vibrancy back to our restaurants. It's a big focus for us this year to ensure that all of our equipment is in working order and that the restaurants look great. In addition to the labor changes, this should improve both the team member and guest experience. We're encouraged by the progress here too, but given the levels of deferred maintenance during COVID; we still have work ahead of us. And our final pillar is food and drink. We're committed to winning on the four core equities that set Chili's apart: burgers, crispers, fajitas, and margaritas. Our Raise the Bar program, the Happy Hour offering, and the new bar menu we launched in the first quarter delivered impressive increases to alcohol sales, PPA, and mix during the second quarter. And now we're building on the success with an updated bar menu that features more premium drink offerings to delight our guests and grow the business. This menu highlights our breadth of classic Margaritas along with some new products including the Sangria-Rita and the Henrietta. The Sangria-Rita is taking a very popular southwestern favorite, a frozen margarita swirled with Sangria and bringing it to our customers nationwide. And the Henrietta is a re-imagined Chili's favorite. The last time we launched a margarita made with Hennessy, it was wildly popular as we promoted it as the margarita of the month. Now we've re-imagined this as a higher quality premium margarita that will price reflect this premium positioning. This is just the first wave of the robust bar innovation pipeline the team has developed. We'll launch these updated bar offerings later this month in time for the NCAA basketball tournaments, the final month of the NBA regular season, and the start of our internal Margarita Madness program, which is a fun check-driving contest we know is a huge engagement driver for our team members and translates to a more vibrant atmosphere and increased sales. We'll have significantly more margarita innovation coming to the permanent menu later this year, as well as an all-new CRISPRs platform that's running through our new innovation stage-gate process and is currently in test markets that we're very encouraged by. We look forward to sharing more details on both platform upgrades during the June Investor Day meeting. Now let's talk about traffic at Chili's. During the first half of the fiscal year, we reset pricing strategy and reduced the amount of checks on deal, as well as the frequency and depth of couponing in order to work some less profitable traffic out of our system. Now with a stronger foundation driving our improved performance, we're able to manage our investments more effectively to build incremental traffic into the business. This quarter, we'll start reinvesting some of our dollars we saved from less discounting to get back on TV with a Three for Me value platform. We're excited about being on air, which will be the first time in over three years that we'll be on TV. At a time when consumers are seeing record restaurant prices and smaller portions, we're coming in with industry-leading abundant and complete meals at a sharp price point. The Three for Me platform also includes more variety than many other bundles in the marketplace. And for just $10.99, the guest gets a full-size entrée with unlimited chips, unlimited salsa, and a bottomless soft drink. For the business, the platform encourages a trade-up to more premium and margin-accretive offerings at $13.99 and $15.99, which we will merchandise in the restaurant. In fact, the majority of Three for Me volume moves at the $13.99 and the $15.99 price point. And now with the addition of out-of-restaurant advertising, Three for Me will play the role of traffic driver in our business. We believe promoting this platform through national media as well as the opportunity to reboot our loyalty offers will help us drive incremental traffic and win market share regardless of the macroeconomic conditions. Lastly, I want to spend a little time talking about additions to our Chili's executive team that will strengthen the leadership of our organization. I'm excited to share that Jesse Johnson, a senior leader at the world-class advertising agency Wieden and Kennedy, has joined our marketing team as VP of Marketing, working for our Chief Marketing Officer, George Felix. Jesse is an accomplished marketing and advertising leader who has worked on some of the world's most iconic brands, creating news and excitement to everything he touches. And most importantly, he brings an energy and a passion for our Chili's brand. Jesse has already been embraced by the team as they work to develop a robust strategy to drive traffic in the near term and strengthen the brand over time. I'm also excited to welcome James Butler as our new Senior Vice President of Supply Chain. James is a well-respected, highly strategic supply chain leader who recently served as SVP leading the supply chain co-op of a very large multi-unit restaurant concept. Having worked with James in the past, I know he will bring a high level of fresh thinking and leadership to our business that will not only help make progress in our supply chain but will help accelerate the advancement of our strategy. We believe with a world-class leadership team, a stronger Maggiano's business, and executing on Chili's four strategic pillars, we're making the right choices for our business, improving the experience for our guests and team members, and driving our four-wall economics will help our business regardless of the macro environment. With this focus on the core business, Maggiano's will unlock its growth potential, and Chili's will be a stronger, more competitive brand. And that's why I'm encouraged about our future at Brinker. Now I'm going to hand over the call to you, Joe, to walk you through the numbers.
Joe Taylor, CFO
Hey, thanks, Kevin, and good morning, everyone. The fiscal second quarter operating results reported this morning represent a nice move forward for the business. Sales benefited from continued consumer demand, our ability to price more appropriately and strong mixed results. Our in-restaurant economics started to recover, and the improving commodity environment became more evident, and importantly, guest feedback improved in response to our initiatives. For the second quarter of fiscal year 2023, Brinker reported total revenues of $1.019 billion, a restaurant operating margin of 11.6%, and adjusted earnings of $0.76 per share, an increase of $0.05 from the prior year. At the brand level, Chili's comp store sales increased 8%. We executed incremental pricing actions in the quarter both on the menu and in third-party delivery channels resulting in year-over-year pricing of 10%. Even with this more elevated price structure, we feel comfortable with our overall price and value positioning relative to the competition. As we mentioned last quarter, an important part of our sales strategy is our concerted effort to move away from higher unnecessary levels of discounting. This, coupled with our October menu restructure of the Three for Me platform, resulted in a positive quarterly mix of 5.6% for the brand. Negative traffic at Chili's of 7.6% was in line with our expectations and was clearly more than offset with the ability to incrementally price and drive mix. Maggiano's had an outstanding quarter fueled by a great holiday season. The brand reported positive comp sales of 21.2%, driven by traffic of 8.4%, price of 7.7%, and favorable mix. Digging deeper, Maggiano's realized improved traffic in all revenue channels: dine-in, banquet, and off-premise, with their overall business now exceeding pre-pandemic levels. Our restaurant operating margin for the second quarter was 11.6%, representing a decent beginning to establishing stronger double-digit margins on a consolidated basis. Let me make some specific comments as to the components of our ROM. Food and beverage costs were unfavorable 110 basis points year-over-year with commodity inflation coming in around 19%, down from 24% in the first quarter. Cost increases for the quarter were largely driven by inflation in poultry and beef and recent spikes in produce related to weather and yields. While we anticipate inflationary pressure for the balance of this fiscal year, we expect these pressures to moderate each quarter, moving below 10% in Q3 and further down to the mid-single-digit range by Q4. Labor costs were 130 basis points favorable versus prior year, benefiting from sales leverage, partially offset by increased hourly wage rates, and a higher quarterly manager bonus payout due to the improved performance. Wage rate inflation for the quarter was approximately 5%. As Kevin mentioned, we are in the process of updating our labor model to improve the work environment for our team members and the dining experience for our guests. The changes to the model started late in the second quarter and were more broadly worked their way into the system over the course of the fiscal year. We are working to fine-tune the number of labor hours needed to deliver the improved experiences for our team members and guests. Early results have driven positive guest metrics and better sales flow through during peak hours, as well as contributing to improving turnover rates at both the hourly and managerial levels. Importantly, we now believe we can generate the desired improvements while investing a bit less in the model than originally anticipated. Restaurant expense for the quarter was elevated 70 basis points versus prior year due to overall inflationary costs in several expense areas and an increase in investment for repair and maintenance. The R&M expense increase reflects our work to improve the overall condition and cleanliness of our restaurants and to catch up on deferred maintenance as supply chain issues and labor normalize. Additional momentum for Chili's is evidenced in the performance of the brand's new restaurant development. Through Q2, four new restaurants were added to the fleet, and three more came online in January. All are opening at very strong levels, some above $100,000 a week, as communities such as San Juan, Texas, Inverness, Florida, and Owensboro, Kentucky embrace the brand. We have seven more openings planned for the back half of this fiscal year and look forward to sharing those incremental results on future calls. At the halfway point in our fiscal year, we are taking the opportunity to update our annual guidance. This update incorporates various investments we are making into operations and assumes the continuation of the current economic environment with no material downturn. We are raising our fiscal 2023 full-year guidance to include the following: Revenue is now anticipated in the range of $4.05 billion to $4.15 billion. EPS is anticipated in the range of $2.60 to $2.90, and CapEx is expected to be between $170 million and $180 million for the fiscal year. In closing, we believe our strategic initiatives, operational investments, and heightened team member focus is moving our business in the right direction. We're excited to now reengage key traffic-driving opportunities to build further momentum in our performance while understanding the short-term potential impacts from macroeconomic conditions. The heightened engagement of our restaurant teams around the direction we are taking is exciting to see, and we are highly appreciative of their efforts every day to bring the Chili's and Maggiano's experience to life for our guests. It is through them that we will see our success. Now with our comments complete, let's open the call for questions. And Holly, I'll turn it back over to you to moderate the Q&A.
Operator, Operator
At this time, we will be conducting a question-and-answer session. Your first question for today is coming from Andrew Strelzik at BMO.
Andrew Strelzik, Analyst
Hi, thanks for taking the question. My first one, I was just curious about the traffic cadence in the quarter; if you could speak to that. I know last quarter you said you had some early softness with the menu change, so I'm just curious how that evolved since that time, and obviously the industry data in January has been quite strong. So anything you can say about whether or not that's continued or any color would be great.
Joe Taylor, CFO
Yes, Andrew, good morning. The traffic cadence throughout the quarter was actually relatively consistent. Not a huge variation as we moved through the second quarter. And actually, we were strengthening as you headed through December. December was a good month until you got to right at the end where you had an impact of weather that really hit the tail end of December. I think you probably saw that in some of the industry numbers you looked at. And we were not immune. But very consistent results throughout the quarter. I think the dynamics of traffic are definitely carrying forward into January. As you might expect with the COVID lap, we have seen an acceleration on the comp side of the equation, very similar to what you're seeing from the industry trends. But I think the underlying dynamics that have been driving the business are still in place as we move into the first part of the calendar year. January's going to be unique with its COVID lap; you're also seeing, as I said, looking at my window at the frozen tundra of Dallas, you're seeing some weather moves as well you move throughout January. So I look forward to thawing out and continuing to move forward.
Andrew Strelzik, Analyst
Got it. Okay. That's helpful. And then I just wanted to ask you about the investments that you made; you referenced late in the quarter on the labor model. What exactly have you done so far? You referenced some improvements in metrics. If you could speak to those a little bit and how you're thinking about maybe the next round of labor investments and the timing of that. Thanks.
Kevin Hochman, CEO
Yes. Just so you understand how we designed the program. Mika Ware has been leading a team both field leadership as well as folks in our restaurant support center at our home office to best understand if we were going to put labor investments back into the business, where would it make the biggest impact. The first round of those changes from that team we rolled out towards the tail end of December; it's not an on/off switch, so it takes some time to get the hours and the bodies back into the building. But the focus areas were one, on giving servers more time to focus on fewer tables so that they could better serve those tables; two, adding additional runner/buster positions to try to keep tables cleaner during service more frequently in restaurants with high bar traffic, we added or had the option to add a second bartender to manage that traffic, not just at the bar, but also at the tables that were in the bar area. And then we added an expeditor position who is managing the heart-of-the-house. And that really frees up the manager to stop doing that team member task and actually do leadership things and coaching and all the things that you want a highly paid manager to do. So that's kind of the changes that we deployed in round one. Round two is still being worked on and tested, so I don't have the details to give you until we're ready to go. The metrics that we've seen improve, so guest experience as a problem, which is like our number one guest metric that we look at daily, has improved pretty significantly throughout the quarter. So we feel really good about that. I shared at our last call that our team member engagement had significant bumps in increases both in the field as well as at our restaurant support center. So we're seeing the changes in the field having a meaningful impact on manager turnover. We were pleased to report in our prepared comments that manager turnover is now beneath where it was pre-pandemic. So we feel like we've made huge strides there, and we're starting to see hourly turnover now improve too. But obviously, there's some more work to do to get to pre-pandemic levels on that. So when we talk about metrics, we're talking about team member engagement, manager engagement, and then obviously whether the guest is having a better experience, and we're seeing all those things improve. The other thing that we're seeing is our food grade scores. We had some of the best food grade scores that we've had in a long time. And so as you think about the team members having a better experience, having more labor in the restaurants, they can make better food. And then if they make better food and provide better service, then the guest has a better experience. And so we're seeing all those things trend in the right direction. I don't want to say that victory is accomplished and there's not a lot more work to do. But as I said in previous calls, as long as we continue to make progress every quarter, we know that we're making the right moves in the right direction.
Andrew Strelzik, Analyst
Great. I appreciate all the color.
Operator, Operator
Your next question is coming from Dennis Geiger with UBS.
Dennis Geiger, Analyst
Great. Thank you. First I wanted to ask about pricing levels and what you're seeing with respect to any pushback from the customer. It sounds like the customer satisfaction levels are improving and traffic was largely consistent with your expectations, which is encouraging, but any additional commentary on what you're seeing as it relates to pricing levels and how the customer is digesting that?
Kevin Hochman, CEO
Yes, I'll start and then I'll see if Joe has anything to add. So we have seen the low-end customer tail off. And we saw that before we took incremental pricing. So the low-end customer was coming less frequently before we even started the new strategy and that has continued. We haven't seen a change in that trend one way or the other. For the guests that are coming, they are willing to spend considerably more. So we're seeing mix shifts pretty significantly. So we had a 10% price increase effectively on the stack, right? And we had a 5% mix increase that is a result at the end of the quarter. And so what's happening is the folks that are not buying Three for Me are moving to the à la carte items that are priced higher, but they're also buying more appetizers and more non-alcoholic soft drinks because they're not included in the à la carte, right? So just some of the data we have: 24% less Three for Me meals that are being purchased per day. Our per check average on Three for Me purchases is up $1.38. And as I said in my prepared comments, over more than half of the Three for Me menu is actually moving at higher price points, the $13.99 and the $15.99 price points. In fact, over two-thirds are moving at that. So net, what we're seeing is the customers that continue to come are accepting the price increases. And the good news is our value scores this quarter actually ticked up, which would be surprising given the price increases. We think that's because the service levels have improved, right? The idea of value is not just price point, but it's also what you get and how consistent it is. So that's how we've been seeing the guests; the guests that continue to come are willing to spend more. And both the service levels have improved as well as our value scores.
Dennis Geiger, Analyst
I appreciate that's helpful.
Joe Taylor, CFO
Dennis, I’d like to add some insight regarding the menu price increase. Year-over-year, you're looking at numbers in the 10% range. The actual increase we implemented in October was about 4.25%. It's also important to note that many guests aren’t reflecting on their experience from a year ago; rather, they are focused on what they experienced previously. Thus, the 4.25% increase might be more relevant in considering how they might respond, and thus far, their reaction has been quite positive.
Dennis Geiger, Analyst
That's very helpful. Thanks, Joe. Just one more question, Kevin, you mentioned focusing on increasing traffic share with Three for Me and the upcoming advertising. Could you talk about what you observed in the quarter or even in January regarding market share? Also, if you're able to discuss the significance of driving market share in relation to profitability, any comments on that would be great. Thank you.
Kevin Hochman, CEO
Yes. I can provide a high-level overview. I don't have the switching data available, but we believe we increased our dollar share during the quarter. According to our analysis, we may have lost a slight amount of traffic share. As mentioned in our prepared comments, this is due to the reduction of some unprofitable traffic. We plan to keep monitoring this situation since we obviously don't want to lose traffic. However, we anticipated this outcome, particularly as we moved away from some aggressive discounting practices that were previously offered through email. Those customers were benefiting from free offers, alongside our lowest price promotion on Three for Me. As we've moved away from those customers, we have seen a slight decline in traffic compared to the industry, but in terms of dollars, we believe we are currently outperforming the industry.
Dennis Geiger, Analyst
Great. That's helpful. And Kevin, I would say relative to the competition, our positioning improved as we went through the quarter in discussing our relative position with the folks that kind of monitor the overall industry, both brands really performed in December at the top of the heap. They were two of the highest-performing brands in the competitive set for that period. So nice relative performance as we move through the quarter.
Operator, Operator
Your next question for today is coming from John Ivankoe with JP Morgan.
John Ivankoe, Analyst
Hi, thank you for the opportunity. I wanted to discuss capital allocation and priorities. Historically, this business has generated significant cash, but COVID and other factors have led to some interruptions and changes in focus. How are you approaching medium-term capital expenditure? This year's projection of $170 million to $180 million seems to be on the higher side of expectations. What is the outlook for that going forward? Will it increase due to new units or efforts to remodel and improve stores for both customers and employees? Additionally, regarding debt to EBITDA, should we expect improvements through debt repayment, or will those ratios naturally enhance as EBITDA increases? I'm trying to identify the point at which a substantial portion of funds can be returned to shareholders. Thank you.
Joe Taylor, CFO
Yes, let me address them in reverse order. We will definitely continue to reduce our debt. We also expect the ratio to improve with EBITDA growth as we progress. Our goal is to lower the overall ratio to below 2.5 times, aiming for between 2 and 2.5 times on a debt-to-EBITDA basis. We believe we are making good progress in that direction as we proceed through the remainder of this fiscal year. Regarding additional capital expenditures, there will certainly be opportunities. We plan to focus on new restaurant development while ensuring we keep up with our maintenance and repair investments. As Kevin mentioned, there is still work to be done in that area, and we spent about 25% more on maintenance and repairs this past quarter. We will continue to invest on the restaurant expense side, and there are additional capital opportunities as we move forward. This will be paced appropriately, and we will also explore new opportunities, including improvements to kitchen equipment over the next couple of years. As we finalize the actual numbers, we will clarify how we plan to allocate that capital. It wouldn’t surprise me if Capital Expenditures rise above current levels, and we will provide transparency on the reasons and destinations for those funds. The business is capable of generating substantial cash flow, and as we enhance our core operations, there are clear reasons to do so. One significant opportunity is to increase incremental cash flow, which gives us the flexibility to decide whether to reinvest in the business for returns or return some to shareholders. This will be an ongoing process, John, over the next 6 to 12 months as we evaluate all these components.
John Ivankoe, Analyst
That's perfect. Thank you for unpacking the question. Good job. Thanks, Joe.
Operator, Operator
Your next question is coming from Eric Gonzalez with Citibank Capital Markets.
Eric Gonzalez, Analyst
Good morning. My question is about labor during the quarter. Labor costs were quite low, around 33%, which is a significant decrease and I believe the lowest we've seen in several years for that period. I'm curious if the reclassification revenue contributed to this, and I'd also like to hear about some of the operational factors affecting our margins. Did we perhaps underspend due to the staffing environment? Furthermore, regarding investments, can you provide any quantification? I understand you mentioned it would be less than previously expected, but what impact can we anticipate in the current quarter, and what kind of timeline should we expect before those investments yield results?
Joe Taylor, CFO
Yes, it's great to see you're still in the same position, Eric. Labor definitely benefited from sales leverage. As we mentioned, some of the incremental hours we plan to reintegrate didn’t significantly impact the second quarter because we started implementing them later. You'll notice more of that as we progress through the rest of the fiscal year. We were also able to provide a substantial manager bonus, which is encouraging as it reflects our capacity to reward our team members for their contributions while maintaining a favorable labor cost as a percentage of sales. There are various factors to consider in the labor model. We experienced some year-over-year benefits, particularly in team member-related insurance, which was beneficial. Keep in mind that our labor model is influenced by traffic levels, so reduced traffic resulted in fewer labor hours needed relative to those volumes. Moving forward, I anticipate that labor as a percentage of sales will increase somewhat over the next couple of quarters, likely in the range of 40 to 60 basis points compared to the second quarter. Much of this will depend on our top-line performance. There's a good leverage aspect to labor, so improving sales can enhance our labor efficiency. Overall, I don't expect significant deviations in labor as a percentage of company sales, and we should see it stay within that 40 to 60 basis points range.
Eric Gonzalez, Analyst
All right. Did you mean sequentially 40 to 60 basis points from the first quarter?
Joe Taylor, CFO
That's sequentially from the second quarter.
Eric Gonzalez, Analyst
Yes, regarding the second quarter, could you share details on the to-go mix during that time? I apologize if I missed that information. Additionally, I know you increased prices in the delivery channel, so could you provide some figures on that? I'm curious if you are experiencing any resistance in that area, especially since delivery is quite expensive compared to carryout. Given the significant price difference and the current economic challenges, what do you think is driving the steady demand for delivery? Is it mainly due to aggressive customer acquisition by aggregators, or do you believe there is long-term viability for that channel?
Joe Taylor, CFO
Yes, the delivery channel is showing resilience and it's connected to consumer behavior. The demographic using this service tends to lean towards those with higher economic standing. Currently, the resilience and willingness to continue using the delivery channel remain strong. We've observed that to-go off-premise sales have maintained a range of 30% to 35% for the quarter, indicating stability. Notably, Maggiano's has successfully attracted a new level of guests to their off-premise options, resulting in a significant year-over-year improvement of over 80% in that area. This presents a promising new channel for growth as we move forward.
Operator, Operator
Your next question for today is coming from Chris O'Cull with Stifel.
Chris O'Cull, Analyst
Hi, good morning, guys. I had a follow-up question, Kevin, related to Chili's pricing and discounts. I'm just wondering how the company's determined what the impact of the pricing and discount removals will be on traffic because I would think the company would need to conduct either a test or at least evaluate the impact over several months just given the frequency of the Chili's guest.
Kevin Hochman, CEO
Yes. So that's a great question, and even someone asked me that the last call, and candidly, I didn't think we could wait to do a pricing test. We typically would do something like that. In order to understand the impact, I think we were so far behind on pricing versus the balance of the industry. I thought we needed to lean forward so that we could start investing in the things that are going to improve the experience of the restaurant. I will say we are adamant about protecting an opening price point for the guests that would otherwise not be able to afford Chili's or casual dining. This is why we've protected $10.99, and that's why we're going to be advertising that later this quarter and really shout the abundant value as well as the quality of the food that you get. When you think about $10.99 as a price point for a complete meal with unlimited chips and salsa, a full-size entrée, and a bottomless drink, and compare that to even fast food or QSR, that's pretty unbeatable. So I think as long as we make sure that we are honest about protecting the price points for that guest that really needs it in order to come in, I think we're generally going to be okay. And I think that's why we've seen the mix in Three for Me; a lot of the folks that are coming in either have gravitated back to the à la carte menu when we removed the favorites out of that menu. Or they've gone ahead and traded up based on the variety that's available there. If they want steak or they want shrimp, they can still get it within Three for Me. So we'll continue to monitor it. Obviously, the big question mark that everybody has, and we're not immune to it either, right, is what's going to happen with the economy and maybe we relate to pricing, but we still have a pretty big delta between where our competitors are and where we are. So we feel pretty good about our positioning within the context of casual dining pricing. And then as long as we maintain those opening price points that we feel are really, really aggressive, regardless of the dining channel you're in, we feel confident that we'll stay close within that one to two Point delta versus the industry on traffic. If we can do that, we'll continue to grow dollar share.
Chris O'Cull, Analyst
You mentioned Chili's going back to TV advertising. Please continue.
Joe Taylor, CFO
Chris, I wanted to add that this has not been a one-time event regarding the changes we've implemented. We started removing discounts back in the first quarter, and this effort began to solidify around August. Additionally, we reintroduced the new bar menu at the beginning of September, which also eliminated discounting in that area. This has been an ongoing effort throughout the first half of the fiscal year. Many of these changes have been in place for a while, and we've been monitoring their effects closely over the past few months. We're seeing a positive response, particularly in the bar segment where the removal of discounts has led to results that exceed our expectations. You're right to suggest that we need to keep an eye on the long-term effects, but these changes are performing well, and we haven’t observed any concerning issues that we might have anticipated.
Chris O'Cull, Analyst
Could you help level set our expectations for what impact the return to TV advertising could have on traffic? I'm just wondering if was fiscal 2Q expecting to be or do you expect it to be the worst in terms of traffic performance and then sequentially improve from there?
Kevin Hochman, CEO
Well, I don't think we want to give you guidance on what we expect from the advertising. What I can share with you is it'll be about abundant value at a sharp price point. We are going to have sufficient weights that we believe it will meaningfully move the business. But I can't share with you how long that advertising will be on and when will it start for competitive reasons. But I hope either at the next earnings call or at the June investors meeting to share all of that detail with you.
Operator, Operator
Your next question for today is coming from David Palmer with Evercore ISI.
David Palmer, Analyst
Thanks. Question on dining room traffic. Could you talk about what your dining room traffic trend was year-over-year and how those traffic levels compare to 2019? And just generally speaking, how you think dining room traffic will trend the rest of the year?
Joe Taylor, CFO
Yes. We are seeing growth in the dining room business, although traffic is slightly down compared to pre-pandemic levels. When we reduce discounting, it affects our largest segment, which is the dining rooms. We've also made some enhancements in the bar area. Overall, the business is moving in the right direction. Similar to our overall performance, the trade within the dining room has been favorable. Kevin discussed some developments on the Three for Me platform, much of which is happening in the dining rooms, along with the revitalization of the margarita program. While there is a slight decrease in traffic, we are seeing a significant uplift in price and mix, providing a strong offset.
David Palmer, Analyst
I understood that your dining room traffic was down significantly compared to pre-COVID levels. Is that correct? I also wanted to inquire about your labor hour growth. You mentioned increasing that a bit. How do you feel your current labor hours compare to pre-COVID, and where do you expect to be in the future? I'm very interested in understanding the balance between labor and dining room traffic.
Joe Taylor, CFO
Yes, again, we're starting the process of dialing that up; that really started in late December. So we'll continue to fine-tune that as we go forward. I'm not as focused on pre-pandemic versus current. I think again, we're focused on how do we drive the better guest experiences and the metrics that show that the guest is responding to better service, better food, and better atmosphere. So we're going to keep, I think some of that analysis more in the current environment as opposed to looking back three years in that regard. Yes, I think your traffic at low point in the dining room is in the range that you're thinking. I think that's not an inappropriate way to think about it, but again, well offset by all the other moves we're making.
David Palmer, Analyst
If I misunderstood your question, I apologize. Could you clarify if the traffic decline for Chili's was around 7% to 7.5%, which aligns with your expectations based on the trade-offs and pricing strategies? Furthermore, while January might be an unusual month, I'm curious about how traffic comparisons might normalize in the summer. Is there a point at which a traffic decline becomes unacceptable for you? At what level might you consider making adjustments? How should we perceive your approach to traffic going forward? Thank you.
Kevin Hochman, CEO
We believe that as long as we're progressing positively in terms of sales and profitability, we feel confident in our decisions. However, if we begin to see signs that this isn't the case, we will take action. We're closely monitoring the situation. Our strategy involves maintaining low starting price points while allowing for price increases on certain items, enabling us to reinvest in the customer experience. We are optimistic that this approach will help us continue to grow. If the circumstances change, particularly with economic trends moving against us, we may need to reevaluate and possibly revert to more discounts or protect certain prices. At this moment, we haven't observed anything that would necessitate a shift in our strategy. As long as we maintain traffic levels a few points above the industry average, our situation remains favorable, allowing us to reinvest in areas like advertising, service, and food quality to further increase traffic over time. We will keep monitoring the situation and reserve the right to adjust our strategy if there are significant changes in the data, but so far, we haven't seen any reasons to alter our approach.
Operator, Operator
Your next question is coming from Brian Vaccaro with Raymond James.
Brian Vaccaro, Analyst
Hi, thanks for taking my questions and good morning. Kevin, you mentioned that the low-end consumer has not been coming in as much, and I believe you indicated that this trend existed even before the pricing changes in Three for Me. While this may relate somewhat to the broader economic situation, I'm interested in how much you think it might be linked to decreased awareness since you weren't advertising during the pandemic. Do you have any data or studies on this that you could share as we consider the potential benefits of reinstating advertising?
Kevin Hochman, CEO
Yes. Currently, we don't have specific studies on the matter, but we do have data related to top of mind awareness. In marketing, especially within the restaurant sector, this awareness is crucial since people are always thinking about food. With about a third of our business occurring online, consumers can easily purchase from Chili's whether they are at home, shopping, or dining out. It’s essential that Chili's is included in their considerations when they decide where to eat. If we are not part of that thought process, we miss the opportunity to attract customers. We aim to enhance our top of mind awareness through advertising, focusing on the message of great value at an appealing price. Our advertising will clearly represent Chili's by utilizing familiar elements like our logo and jingles. We have noticed a significant drop in top of mind awareness during the pandemic while we were off air, and we anticipate improvements as we reintroduce our advertising. However, it will take time to see these changes reflected in the data. Currently, it’s challenging to estimate traffic increases from our advertising since we have been inactive for a while. Once we gather more insights into the TRP and its correlation with traffic, we can better assess the effects of resuming our advertising efforts.
Brian Vaccaro, Analyst
Is it reasonable to assume that Chili's awareness has dropped more compared to peers? Many brands have reduced their advertising, except for one large national chain that I know of. Has Chili's underperformed more in this regard? Can you provide any comparisons to 2019 related to this?
Kevin Hochman, CEO
Yes, our awareness has decreased compared to pre-pandemic levels, and we will provide more details on this at the June Investor Day when we discuss our marketing and advertising strategy. This represents a significant opportunity for our business. From an advertising perspective, it is essential to regain our presence in customers' minds so that we are included in their considerations of where to eat.
Brian Vaccaro, Analyst
Okay. Got it. Thank you. Joe, I wanted to just circle back on your labor comment a couple of questions I've got. I think you said, in that up 40 bps to 60 bps versus what you just saw in the second quarter. And just a quick skim of historical pre-COVID, it would seem that your second half labor cost ratio is typically a little lower than Q2 or even the first half just on higher seasonal sales volume. So I just wanted to clarify, is that 40 to 60 kind of trying to hone in on the actual investment that we need to think about? Other dynamics around seasonality, or perhaps that's an all-in expectation, call it that, that you'll be kind of in the mid-33s embedded in your second half guidance? I just want to clarify that.
Joe Taylor, CFO
Yes, Brian, I put it in the latter piece of the equation. It's kind of the all-in; obviously, yes, you would expect to see some sales leverage benefiting that area if you had a normalized set of hours going into the system. Obviously, we're going to be putting some more hours in as we go through the rest of the fiscal year. We're also anticipating probably some higher opportunities too on the manager bonus side of the equation, things of those nature. There are all kinds of puts and takes in that line. But the guidance I kind of gave you relates to the all-in effect of what else would expect to see coming on the labor side.
Brian Vaccaro, Analyst
Okay. Okay. Thank you for that. And then also, Joe, while I have you, can we just drill down on the other OpEx line for a second? I know there's a lot of moving pieces: R&M, utilities, and now thinking about bringing advertising back, just to name a few. And are there certain categories, you talked about advertising going up in the second half of the fiscal year, but are there certain categories that are expected to decline and help offset those dollar increases? Or should we expect that other OpEx dollar line to be moving higher than the high-260s it's been in recent quarters?
Joe Taylor, CFO
As we progress, I expect the overall dollar figures to increase. One of the primary factors will be the advertising component as we build that advertising accrual into the operating expenses. This is where we will notice the change. Generally, I anticipate that restoration and maintenance expenses will be at a higher level than usual as we focus on improving the condition and cleanliness of the restaurants. Some of the investments, like janitorial costs, will be reflected in that line instead of labor. So, rather than going towards labor, the expenditures are being allocated to operating expenses for additional janitorial hours. There are also several factors still under the impact of inflation. However, I believe most of those will start to stabilize as we progress through the year, but you should still plan for some ongoing inflation when comparing year-over-year. Therefore, I expect to see absolute dollar amounts increase from what was previously mentioned. Additionally, there is a strong likelihood that sales leverage will start to affect these items as well. From a percentage standpoint, I anticipate it will remain relatively stable or even improve slightly. We will make appropriate decisions regarding expenses related to advertising and restoration and maintenance as we continue forward.
Brian Vaccaro, Analyst
Okay. Great. And then just two quick housekeeping items. Do you have the percent of sales that was off-premise for each brand in this second quarter?
Mika Ware, Vice President of Finance and Investor Relations
Chili's was just over 30%, and I don't have Maggiano's percentage memorized right now.
Kevin Hochman, CEO
Low-20s.
Brian Vaccaro, Analyst
27%, Maggiano's. Okay. And last one for me, sorry to keep going so long, but the tax rate Joe, embedded in your guidance.
Joe Taylor, CFO
Again, we expect that that low-single-digits to mid-single-digits tax rate on an annual basis.
Operator, Operator
Your final question for today is coming from Jeffrey Bernstein at Barclays.
Jeffrey Bernstein, Analyst
Great. Thank you very much. Two questions, just the first one, speaking to the broader macro; one of the largest QSR players yesterday spoke about an assumption for a mild U.S. recession, presumably a downturn from here. I think you mentioned not assuming a downturn. So I'm just wondering what impact do you think would come from a mild recession on your business? And how would you respond in terms of maybe a change in strategy if need be? And then I had one follow-up.
Kevin Hochman, CEO
Yes. Let me start with just how we think about like where we're positioned and then I'll talk to you about what I think how the customer's going to change based on if the macros were to worsen. So number one, I like where we're positioned on value even with the recent price increases that we've taken; we're playing catch-up versus the industry, and so there's still a pretty large gap versus where our pricing is versus our competitors. So I feel good about that. Our value scores have actually improved since we took the pricing in October on the everyday menu. I think that's a function of improved service levels. The other thing that we have that we didn't have in the recession back in 2008; several others have too, but we have 12 million loyalty members, and we have a direct way to talk to them. And so we can target value a little bit sharper than we could back then. So I think it's a huge opportunity for us, because then you can go a little sharper if you need to go sharper with the guests that we know need it because we'll be able to see if they pull back on their trips. So instead of just blasting out a value to everybody, I think the second thing is that we've got to continue to accelerate our simplification and get to a place where we're making fewer items, we're making them a whole lot better, and that's going to improve margins and as well as allowing us to invest some of that back into the business. And then I think the third thing is I think we got to try to stay on advertising at a hot price point, because that's going to obviously mitigate the traffic headwinds that you're going to get from a macro. I think those are the things that we would then tweak, but I don't see us like a major reverse course of our strategy. I do think you'd see the pendulum swing back a little bit more to the center in terms of balancing the long-term investments with some of the short-term traffic drivers.
Jeffrey Bernstein, Analyst
Understood. And then just the follow-up; for full-year fiscal 2023, looks like at the mid-point you raised your EPS guidance by I guess $0.10, but it looks like at least versus consensus that you beat the second quarter by $0.25. So I'm just wondering if you can maybe prioritize whether or not you think your guidance is still conservatism or perhaps the second quarter beat relative to internal expectations was more modest than maybe consensus, or perhaps as you mentioned earlier, maybe you're factoring in the incremental labor and advertising and R&M and whatnot. Just trying to prioritize what led the pretty significant second quarter beat relative to the more modest increase in the full-year EPS. Thank you.
Joe Taylor, CFO
Yes. Jeff, regarding the outperformance compared to the consensus, I'm not going to focus too much on how the consensus arrived at those numbers. It was a quarter that surpassed our internal expectations as well, but there might be a difference between those figures. We're considering what would be a reasonable target as we see positive momentum in the business while also being aware of the macroeconomic factors at play. This includes the investments we've discussed. As we approach the second half of the year, we may have the chance to accelerate some investments, provided the macro conditions remain favorable. We're evaluating all these aspects carefully, mindful of the economic uncertainties that everyone is discussing, and we want to ensure we don't overextend ourselves.
Operator, Operator
Your final question for today is coming from Brian Harbour with Morgan Stanley.
Brian Harbour, Analyst
Yes. Good morning. Thank you. Maybe I'll just ask about the mix piece of your comps. Is that something that you actually expect to kind of pick up from here? Because obviously the reduction of discounting was kind of the most immediate impact, but what have you started to see so far from the bar initiative or some of the product changes?
Kevin Hochman, CEO
A significant aspect of our strategy, which we refer to as the core four—crispers, margaritas, burgers, and fajitas—involves introducing innovation to these offerings to improve both pricing and mix. For instance, in the current test of crispers, we used to have three different offers but now have reduced it to two, all of which are the same size. This doesn't align with customer preferences for chicken tenders, as competitors offer multiple sizes. We are now experimenting with counts of four, five, and six, along with additional sauces from our virtual brands and upgraded sides. We anticipate that these tests will lead to notable improvements in mix within crispers and overall per-person average and check gains, provided consumers are willing to trade up rather than down. So far, we are optimistic about the test results, showing that by meeting customer needs meaningfully, they are inclined to spend more. This positive trend should also be reflected in our fajitas over time. However, the challenge is implementing everything simultaneously, as our restaurants and support center can only manage a limited amount of change effectively. We've recently worked with our leadership team to strategize how to evolve the menu and enhance mix through innovation at a manageable pace, which is why changes are not all happening within a single year. We believe this approach to mix could significantly drive growth as we aim to provide the best value for our guests, not just the lowest price point in the industry.
Brian Harbour, Analyst
Okay. Great. Thank you. And then just on menu pricing, you said what the number was in 2Q, and I think you had previously expected it to roll down kind of closer to 7% as we end the year. Is that still the case? Like is your cost outlook still kind of supportive of that pricing level, or do you think you might add some more as the year ends?
Joe Taylor, CFO
We will continue to evaluate various options, and I do not expect to introduce any additional price increases on the menu this fiscal year. However, as we consider our next menu, there are some mix opportunities. We might explore some lower off-menu pricing based on our current situation and how we foresee things progressing through 2023. I expect to end up in the 8% range as we approach June, and we should see a decrease to around 10% as we move forward and step back from some of the previous year's adjustments. Ultimately, I anticipate an exit rate close to 8%.
Mika Ware, Vice President of Finance and Investor Relations
All right. So that concludes our call for today. We appreciate everyone joining us and look forward to updating you on our third quarter results in April. Thank you, everyone.
Kevin Hochman, CEO
Thank you, everyone.
Operator, Operator
Thank you. This concludes today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.