BLMN - NASDAQ

Greetings, and welcome to the Bloomin' Brands Fiscal First Quarter 2023 Earnings Conference Call [Operator Instructions]. It is now my pleasure to introduce your host, Tammy Dean, Senior Director of Corporate Finance and Investor Relations. Thank you, Ms. Dean, you may begin.

Thank you, and good morning, everyone. With me on today's call are David Deno, our Chief Executive Officer; and Chris Meyer, Executive Vice President and Chief Financial Officer. By now, you should have access to our fiscal first quarter 2023 earnings release. It can also be found on our Web site at bloominbrands.com in the Investors section. Throughout this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release and on our Web site as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of recent trends. These statements are subject to numerous risks and uncertainties that could cause actual results to differ in a material way from our forward-looking statements. Some of these risks are mentioned in our earnings release, others are discussed in our SEC filings, which are available at sec.gov. During today's call, we will provide a brief recap of our financial performance for the fiscal first quarter 2023, an overview of company highlights and current thoughts on 2023 guidance. Once we've completed these remarks, we'll open the call up for questions. With that, I'd now like to turn the call over to David Deno.

Well, thank you, Tammy, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q1 2023 diluted earnings per share was $0.98, which compares to $0.80 in Q1 2022, up 23%. Q1 2023 marks the best quarterly diluted earnings per share in the company's history. Combined US comparable sales were up 5.1% with each brand having positive same store sales. The first quarter reads further validate the strategic and operational framework we outlined for the year and set us up to deliver our commitments. I will be giving an update on our plans in a minute. Before doing that, I would like to thank our teams in the restaurants and restaurant support center for their unwavering commitment to serving our guests. Through dedication to great hospitality and service and experience is what makes our company so successful. As we look to build upon the momentum of the first quarter, we continue to remain focused on executing our plan to grow the business. As a reminder, our priorities include driving same store sales growth, maintaining off-premises momentum, sustain the progress in operating margins, becoming a more digitally savvy company and increasing new restaurant openings. Let me now turn to our first priority, which is to grow sales and traffic in our restaurants. Growing sustainable traffic, especially at Outback is our biggest priority. To achieve this goal, we are executing a number of initiatives. To start, let me provide a brief update on our use of technology to improve execution and consistency in the restaurants. The handheld technology rollout for our service was completed at the end of Q4. The Outback team is now focused on optimizing the experience in the dining room to deliver a differentiated guest experience. The tablets allow our service to cover more tables while providing an even better experience to our guests. Tablets are not replacing personal interaction, they are enhancing it as servers now spend more time with guests. In addition, we continue to roll out new cooking technology, including advanced grills and ovens. The rollout is on track to be completed in the third quarter. This cooking technology is improving product quality and meal pacing. Like handhelds, the kitchen investments are also improving the customer experience and productivity. The second part of building sales and traffic is more targeted marketing designed to leverage our heritage, build brand equity and drive frequency. Outback brought back the no rules just right platform at the beginning of Q1, but this is more than just marketing. It's an attitude. It's how we reenergize our restaurants with new food offerings, exceptional service and, most importantly, it ties back to our past. No rules just right is aimed at highlighting our great menu and the everyday value that we offer to our guests. In Q1, we leaned into our Aussie routes with both food and beverage innovation. The third element to our sales building strategy is the introduction of new layers at all of our brands. For example, during the first quarter, Fleming's launched social hour. It captures our wonderful food and drink offerings during the early evening. We also continue to grow our catering business within Fleming's and look forward to the innovation that's coming from this business. Another sales layer is wine dinners at Carrabba's. Wine dinners showcase the innovation and product quality Carrabba's known for, while providing a great value for the guests and a good return for the company. We will continue to provide updates on sales layers at all of our brands throughout the year. The final sales driving strategy is additional spending on remodels this year. We paused our remodel efforts during the pandemic and have since developed a variety of scopes that can be deployed based on varying needs of our restaurants. We are on track to remodel over 100 locations this year. This is the beginning of a multiyear effort to touch a large percentage of our business. Keeping our assets looking their best is a key element of growing traffic. All the initiatives I just described are designed to build sustainable traffic now and over the long term. Turning to our second priority, continuing the momentum in the off-premises business. The total off-premises business was 23% of US sales in Q1, and our third-party delivery business continues to perform well. Importantly, off-premises profit margins are comparable to margins of the in-restaurant business. In addition, catering is becoming an important and growing opportunity for our brands. The Carrabba's team remains an industry leader in this space. Both Outback and Bonefish are also seeing a momemtum in catering. As a result of all of the above, we expect off-premises to remain a large part of our business. Our third priority is to sustain the major progress we have made in operating margins over the last four years in a highly inflationary environment. Margin improvements start with growing healthy traffic across the in-restaurant and off-premise channels. We also reduced the reliance on discounting and promotional LTOs and pivoted advertising spend towards more targeted, higher return digital channels. Additionally, we remain disciplined in managing the middle of the P&L and are aggressively pursuing efficiencies in food, labor and overhead. As Chris will discuss, despite persistent inflation, we've been able to achieve our margins well above 2019. We remain committed to achieve 8% operating margins over the long term. The fourth priority is to capitalize on our progress to become a more digitally savvy company. In Q1, approximately 79% of total US off-premises sales were through digital channels. The new online ordering system and mobile app have exceeded our expectations. The new app has 3 million users. You can expect to see further activity as we improve the functionality and features of our app and digital offerings. And the final priority is to build more new restaurants, especially at Outback, Fleming's and in Brazil. Each of these brands have strong sales and profit margins and offer great returns. Outback has the opportunity to significantly expand its restaurant base. We will continue to invest and grow Fleming's and we also have the ability to more than double our footprint in Brazil. In summary, we are off to a terrific start. We are focusing on achieving our 2023 goals while building a great business that will continue to thrive. And with that, I will now turn the call over to Chris.

Thanks, Dave, and good morning, everyone. I would like to start by providing a recap of our financial performance for the fiscal first quarter of 2023. Total revenues in Q1 were $1.2 billion, which was up 9.1% from 2022, driven by a 5.1% increase in US comparable restaurant sales as well as a 14.3% comp sales increase in Brazil. In our US brands, traffic was down 70 basis points in Q1. This was a significant improvement from Q4 even after factoring in a 330 basis point favorable impact on Q1 traffic from the lapping of Omicron and unfavorable weather. As we indicated in our last call, we began to see improvements in traffic in December and these trends continued into the first quarter. Average check was up 5.8% in Q1 versus 2022. This is in line with what we discussed on last quarter's call. In terms of pricing, we would expect to see the impact of pricing slowly come down as the year progresses. There will be a larger step down towards the end of Q3 as we lap price changes from last year. We will consider taking some level of new pricing later in the year but our goal is to take as little pricing as possible in this environment. At 23% of US sales, Q1 off-premises was down 100 basis points from Q4. Given the heavier volumes we tend to see in Q1, this change was expected and was primarily a migration from our curbside business to in-restaurant dining. In recent weeks, we have seen off-premises return to 24% of US sales. Importantly, the highly incremental third party delivery business was flat from Q4 at roughly 12% of US. sales. Third- arty has remained at approximately 12% over each of the past five quarters, even as in-restaurant dining has returned. In terms of brand performance, Outback total off-premises mix was 26% of sales and Carrabba's was 30% of sales. Off-premises remains sticky and is a large part of our ongoing success and as Dave mentioned, it will be a key part of our growth strategy moving forward. And the final note on Q1 sales. Brazil Q1 comps were up 14.3%. Brazil's first quarter reflected the lapping of COVID-related operating restrictions from early 2022. Q1 was the last quarter where favorable COVID lapse will have a significant impact on year-over-year trends. Also, as a reminder, Brazil comp sales do not include the benefit from the Brazil tax exemption we discussed on the last earnings call. As it relates to other aspects of our Q1 financial performance, GAAP diluted earnings per share for the quarter was $0.93 versus $0.73 of diluted earnings per share in 2022. Adjusted diluted earnings per share was $0.98 versus $0.80 of adjusted diluted earnings per share in 2022. This represented the most profitable quarter in our company's history. The difference between our GAAP and adjusted results was in our share count and was related to required accounting treatment for the hedge we have on our convertible bonds. Operating income margin was 9.7% in Q1 versus 9.4% in 2022. Restaurant-level operating margins were 17.9% versus 17.1% last year. Margins improved for a couple of reasons. First, international operating margins were up 770 basis points driven by Brazil as they are lapping COVID impacts from Q1 2022. Second, the benefits from our US pricing and productivity initiatives more than offset inflation. As it relates to inflation, commodity inflation was up 6.6% in Q1 and labor inflation was up 6.4%. Restaurant operating expense inflation improved from Q4 but remained elevated at 9.4%. This was driven by higher utilities, R&M and advertising. Overall, inflation in the first quarter was in line with expectations. Depreciation expense and general and administrative expense were both up in Q1 relative to last year in absolute dollars. This is consistent with our increased levels of capital spending and our investments in infrastructure to support growth. Overall, we feel good about our margins and we remain well above pre-pandemic levels. Also in Q1, our adjusted tax rate was 14% and includes the benefit from the Brazil tax exemption. Turning to our capital structure. Total debt was $768 million at the end of Q1. This puts our current lease adjusted leverage ratio below 3 times. In terms of share repurchases, year-to-date, we have repurchased 1.1 million shares of stock for $27 million. We still have $113 million remaining on the new authorization that the Board approved on February 7th. The Board also declared a quarterly dividend of $0.24 a share payable on May 24th. We are pleased with our balanced deployment of free cash flow and we'll continue to deploy dollars against additional debt paydown, share repurchases and our dividend. Now turning to our 2023 and Q2 guidance. First, we are reaffirming all aspects of our 2023 guidance previously provided on our February 16 earnings call. And second, as it relates to the second quarter, we expect US comparable restaurant sales to be 0.5% to 1.5% and we expect Q2 adjusted earnings per share to be between $0.62 and $0.67. Year-over-year comparisons will become more difficult in Q2 relative to Q1 as we will not have the same level of benefits either domestically or internationally from lapping COVID impacts in 2022. In addition, strong Q2 trends from last year make it our most challenging lap of the year. In summary, this was another successful quarter for Bloomin' Brands, and we are well on our way to becoming a better, stronger operations focused company. And with that, we will open up the call for questions.

[Operator Instructions] Today's first question is coming from Jeffrey Bernstein of Barclays.

One question, one follow-up. The question would be on the second quarter guidance. I think there's some industry and investor concerns of slowing comps at least in April, although clearly choppy with the shifts and whatnot. But your guidance maybe corroborates that. And I think, Chris, you mentioned that the compares get tougher and no longer you have the Omicron benefit, whatnot. But can you just talk about maybe the exit rate you saw for the first quarter or maybe what you're running in April? Any change in consumer behaviors you're seeing in any of these brands? Just trying to get a sense for whether or not there's any validity to fears of most recent slowdown in the underlying. And then one follow-up.

Look, our Q2 performance is tied directly into what Chris guided so far for the quarter. So if you look at the trends in the quarter, that's incorporated in our Q2 guidance. And as we mentioned, March, April and May are really our biggest overlaps of the year. So our trends still are good and our customers are hanging in there. So we feel good about where the guide looks and we feel good about the full year as we reiterated our full year guidance.

And just to give you some math behind the guide. So if you look at the guidance range of, call it, 50 basis points to 1.5%, I would say you could expect in that guide, maybe a 5% or maybe a little higher average check built into that guide. So that would put your traffic basically at the midpoint of down 4%, which if you stripped out Omicron and unfavorable weather from the Q1 results, it basically is flat from Q1 in terms of our overall traffic guide for the quarter. And then again, I know we tend to not like 2019 as much, but I know that some folks are still looking at 2019. If you look at 2019 results from Q1 to Q2, we've actually seen a tick up in both comps and traffic versus 2019, pretty material tick up comps and traffic versus where we were in 2019 in both based on what the last five weeks or so of Q1 looked like versus the first three or four weeks of Q2. So we feel pretty good about the overall guide at least in terms of where the consumer is. I think a lot of the noise about Q2 has more to do with the lapse than our trends today.

And then just the follow-up is on the menu pricing. I think you mentioned in the first quarter, you had close to 6% average check. I'm just wondering specifically how much are you running in pricing in the first quarter. Maybe any resistance that you're seeing year-to-date, or what your expectations are for pricing as we move through the year? I feel like there's the most recent concern on taking new pricing with food at home now falling below food away from home, which seems to have been a nice level of protection for our restaurants for such a long time, maybe there's reason to feel the need to be more cautious on the pricing going forward?

Yes, a few things. So pricing was about 7.5%, I think, 7.6% in Q1. We would expect that to tick down as the year progresses. And look, I think we've done pretty well in relative pricing, particularly versus the competition. We took effectively zero pricing in 2020. We maybe took 2% or so in 2021 and then 7% or so last year. So through the end of 2022, we were less than 10% higher in pricing versus where we were at the start of the pandemic. And our pricing is still well below inflation that we've seen over that same time period. We do have some pricing built into the back half of the year that we think can help given some of this persistent inflation, but it won't be near the amount that we took in Q3 or Q4 of last year. Our predisposition, as we said in the prepared remarks, is to take as little pricing as possible this year. And it just depends on how this year plays out. If we don't think we have the pricing power with the consumer then we may not take it. But given our strong start in Q1, we may have some flexibility on taking less pricing as the year progresses but we're not going to make those decisions until as late as possible.

And you just mentioned the strong start with the first quarter. The fact that you reiterated the full year guidance with the first quarter being such a healthy beat from at least an earnings perspective, the reason why there was perhaps no raise to that guidance. Is there anything particular going on that leaves you a little bit more cautious for the rest of the year, or is that just prudent to see which I would think would be in environment?

Yes, prudence is a good word. I think there's two things to that, right? So we feel really good about our full year guide. Q1 was obviously a great start to the year, but there's a lot that can unfold in the next nine months. And it just feels a little bit early to be changing guidance. And I'd say one technical thing is what I just mentioned. I mean to the point -- to this point, the consumer seems to be doing pretty well. But again, I mean, there is some uncertainty out there. So we want to preserve the flexibility potentially to take as little pricing as possible in the back half of the year. And pricing can have a big impact on your financial results but it also, in terms of traffic, can have longer term implications. So we want to reserve the right to take less pricing if we need to.

The next question is coming from Alex Slagle of Jefferies.

On the cost of goods being 31.3%, I mean, I imagine Brazil tax benefit maybe helped to some degree. But other than first quarter of '21, I don't think I've kind of seen it that low going back really ever. I mean it seems like inflation and pricing outlooks remain the same. So curious if you could offer more perspective on what's driving that.

I take a couple of things before Chris gets into some of the details. And we talked about the investment in technology in the script and we talked about in other conference calls. And clearly, the technology investments we're making in the restaurants in the kitchen and everything else is paying off and we're seeing that. And you see it not only in cost but we hope to see it over the long term in customer satisfaction. With that I'll turn it over to Chris.

And we talked about the tax benefit maybe helping overall margins by like 30 basis points or so. So that isn't the big driver here in cost of goods sold. It goes back to a little bit of what Dave said. I mean I think the piece that we expected in Q1, cost of sales performance was the pricing piece because that is pretty predictable. But I think the piece that was maybe a little bit of a surprise is how efficient we're running these restaurants and how smart we've got with this technology. It's a really, really good sign for us that the things that we're doing from an investment standpoint are going to pay off big time for the company moving forward.

As a follow-up in South Korea. I see your partners have closed down a bunch of the virtual kitchens and have been opening a higher number of traditional restaurants, it seems. I wonder if you could offer any color on the approach there, or if there's anything we should think about more broadly and how you're going about development in the international franchise and JV markets?

Yes, throughout our whole company, we really see the opportunity to build restaurants. And they will be delivery and carryout enabled, but we see the opportunity to go beyond virtual kitchens and build efficient, wonderful boxes that are in restaurants enabled and also can do delivery and carryout in any virtual work at all. But our strategy is going up against our traditional development, both here and overseas.

The next question is coming from Lauren Silberman of Credit Suisse.

Congrats on the quarter. I wanted to ask a bit more about what you're seeing with the consumer. Any signs of changes in behavior, check management, trade down, any differences you're seeing across brands?

Let me break the brand apart between fine dining and casual dining. Fine dining customers is really doing well and continues to do well. So that segment is strong. On casual dining, basically, we're seeing a customer hang tight overall. We're seeing our higher end customers come in with similar frequency using our restaurants, and we're especially seeing it around special occasions. We had the best week ever in our history on Valentine's Day and we're hoping for a really wonderful Mother's Day. So we're seeing that piece of the consumer doing pretty well. On the lower end consumer, we are seeing continued frequency but maybe a little bit of management on the guest check side as they come into our restaurants. And our offers in our LTOs that we're offering, like, for instance, the stake in lobster macaroni and cheese for $16.99 at the entry point and Outback helped address some of that. So that's what we're seeing from the consumer right now.

And I'd say just to give you -- you mentioned trade down and mix, just to give you some perspective. So we talked about pricing. So that does imply that mix was down like 180 basis points or so in the quarter. So it's probably important to some perspective on that. As Dave said, there is a piece of that, that we think is consumer trade. Our app mix is lower. But the majority of that mix has to do with revenue center shifts. So we know we got some of the areas where we are seeing some of our strongest growth also carry a lower check average. Catering sales, for example, have basically doubled from where they were a year ago and continue to grow. But the average check per person is much lower on a catering transaction. But again, it's very profitable for us. Lunch is another area where we're continuing to see growth. Again, the check on lunch is lower than a check you would see on dinner. LTOs have been very popular, right? And again, they carry a little bit lower check average. So there's a lot of things that I would call more engineered in terms of our check that we're seeing, our mix that we're seeing in Q1 and then continuing into Q2. But at the same time, it is fair to say there is a bit of check management.

And then just a follow-up on the 2Q guide. Can you just break down what's embedded for operating margins, I guess, the puts and takes relative to 1Q, is there anything outside of sales leverage?

No, it's mostly sales leverage. I think commodity, I think you might see stitch lower commodity inflation as well as labor inflation. I think just as we start to lap areas from a year ago, those things will continue to get a little bit better in Q2. But it really is -- I mean, honestly, if you look at the Q1 results and our Q2 guide and you just take the implied sales change and you do a flow through on that, that pretty much gets you close to our guide for the quarter. So it really is more of a sales flow through conversation than anything else.

The next question is coming from John Ivankoe of JPMorgan.

I want to ask a bigger picture question and maybe some specifics around it. So Dave, obviously very experienced in this industry and we've certainly seen customer bases change in this industry, use cases change, competition change. And one of the things and of course and this is kind of industry expert commentary that you kind of hear is that the millennial and Gen

Yes, it's very clear, John. I think it's an excellent question. So it's a very broad question. I'll try and answer it as concisely as possible. But in my own background, I've got a lot of experience in QSR and a lot of experience in casual dining. And I can tell you, I'm thrilled to be in casual dining. $80 billion category without a huge market share leader with a lot of chance to grow and take share. So it's convenience more important, absolutely, John. And we're seeing that in our delivery carryout business and our third party delivery continues to be very strong. Now what we saw in the pandemic was when restaurants open back up, people missed restaurants and I even think those millennials will graduate into casual dining as they enjoy the experience. It's up to us to offer a fantastic occasion at great value. So that's part one of this. Part two is, John, we're seeing as we open new restaurants, especially at Outback, the volumes are way exceeding what our base is. And so when we go into new territories with good assets, the customers are there. So I strongly reject the argument casual dining is an industry that's fading away, it's got great opportunity. And I think importantly, if you look at some of our price points that we offer versus maybe other parts of the industry, be it fast casual or QSR, we offer pretty good value, John, compared to some of those other players. So I think I'm very bullish on the casual dining industry, new development, new channels of distribution, carryout and delivery the digital opportunity is there, it's big, we got to know our customers. And so I'm very bullish on casual dining.

Some old friends of ours used to talk about earn the right to own and maybe related to that earn the right to grow. And I want to ask this in the context of that Outback unit growth, if same store traffic is down 5% and we're talking about growing units. I mean those are things, again, looking at it dispassionately from the outside, those are two comments that don't really jive with each other. I mean many people would say, you don't have the grow until you stabilize your same store traffic, because the new stores that you're open, even if they open high in year one, they're going to decline like the rest of the base. So talk about that decision a little bit more, the decision to open more units, more Outback US specifically. And I do want you to address if there's any changes in the fiscal '23 CapEx budget and what you think '24 will be higher or lower than '23.

2023, no major changes there, John, our CapEx guide. But on the openings, clearly, we're seeing strong new unit openings, and we have earned the right to own and grow. And I'm very familiar with that phrase, and then use it my entire career. I think, John, what Chris mentioned, we are looking at a point in time right now at relapping the strongest period from last year. We expect in our guide traffic trends to improve the balance of the year. And the industry itself will grow, especially those strong players. But John, if you could see our new unit investment returns, where we're going in and how those units are performing, there's really, really terrific. In fact, we opened a new Carrabba's just north of Tampa here that has among the highest volume in the entire system. So clearly, there's an opportunity to grow these brands beyond where they are today as we go forward. And I think the traffic trends, as you will see, as we begin to lap some of the launching list from last year, our traffic trends will improve, and I remain very bullish on the industry and our company.

And let me just add on that, John. If you look at the financial performance of Outback specifically relative to where it was pre-pandemic, it looks like a very different performance in the sense that the P&L is far more efficient. The returns, again, I mean, you go back to 2018, 2019, it was harder to make that argument to grow because the returns weren't there because the P&L wasn't in a great place. The P&L is in a much better shape now at Outback. One of the compromises those that we made with that in 2019 is we stripped out all the discounted occasions from 2019 out of the numbers and we have not built all of that back into our traffic to this point. But again, we're okay with that at this point, because the P&L is in much better shape. Now is the time to the point we keep raising to build back that healthy traffic into our base. 2023, 2024 as we layer in all these layers, that's when that’s going to start to feed in. We feel really good about new unit opportunities with the P&L that we have today.

And lastly, John, we talked about some of the sales layers, and you've been following closely the technology in our restaurants, and we're going to have that opportunity. And as we talk about 2024, we've got an important offsite for our company coming up at the end of May. We'll discuss where we're going in 2024 with that and provide some more context coming up. But it's a little too early to talk about '24.

And then this is related. I mean, obviously, very strong numbers out of Brazil that really been the case, kind of pre-pandemic, post pandemic. Are there any lessons and how have you solved the customer issue or the secular issue in Brazil to have such strong performance, and are there any lessons? And I know you've obviously taken some of the kitchen technology from Brazil and brought it into the US, so that's back-end stuff. Is there anything that you could do with the front end or really like customer facing brand work from Brazil that can be applied to US of just say, hey, listen, there's really some best practices that can be done here to make Brazil and the US the relevant brand that it was really in the last couple of decades?

No, I agree with you, John. And with that, I took our brand presidents down to Brazil earlier this year, and we talked that through in great detail. We talked about all the time. Two things that Brazil does really well that we're continuing to push in the US. Number one, innovation, product innovation, marketing innovation, and you're seeing that down there and we're helping, we're talking more with each other and you're going to see more of that from us. And I'm not going to get into that for competitive reasons. Number two, the use of technology and data. They've been fantastic down there. We're good here. We can do even better here. Now in fairness to the Outback US team, it's a completely different competitive set down there. Outback is the only steakhouse down there by far, and we own a great position there and we leverage it like you can't believe. And we're going to continue to grow it. But there is really no major state competition down there other than Outback. But the innovation and the technology is terrific there.

The next question is coming from Sharon

I just have two questions. I'm curious whether you're seeing any changes in the competitive or promotional environment in the US? And then secondarily, I don't think I heard how labor turnover is trending. If you could talk about that and then the corollary benefits you might be seeing in kind of order accuracy or table turns or customer satisfaction?

We have long been a leader in retention in the industry. Our turnover rates are very good, the trends are good and there’s managing partner that runs the restaurants, whether it's the manager, whether it's our team members. So we'll put our numbers up against anybody. It's really good. And Sharon, you see that in customer measures, right? You see it in the service measures, you see it in food measures. And we're making remarkable progress against that and our measures are just as good, especially at Outback and anywhere in the industry. So we're very pleased about that. On the customer side, we are seeing an uptick in discounting in the industry, but not against the folks that we directly compete with. And so obviously, we can't control what the customer does. But we want to be very prudent with our discounting and promotions. We want to continue to offer things that we're grateful for the customer and also offer good return for the company. That's one of the reasons why our margins are hanging in there so well. But we want to build healthy traffic through sales layers. We don't want to participate in any big time discounting or promotions even though we've seen an uptick in parts of the industry. And I'd stress again, some of the things that we're offering, for instance, the Sirloin & Lobster Mac & Cheese for $16.99 at Outback is really a terrific product. So that's where we tend to play, Sharon.

The next question is coming from Jeff Farmer of Gordon Haskett. Please go ahead.

Just really a couple of follow-ups. So we touched on this, but a casual lining peer attributed the lion's share of some of the April same-store sales choppiness to Easter holiday and spring break shifts. It sounds like you guys have sort of a similar view. But the question is why are you so confident that the casual dining consumer is not changing behavior and what is increasingly looking like sort of a more challenging consumer environment?

Because Jeff, we haven't -- we've seen our trends hold up, and you have to be really -- if you look at restaurant industry, we've been talking about this ever since COVID and the emergence of COVID. You have to look at week-to-week and month-to-month trends and the wackiness of last year is really going to take into account. So like we said on this call, the trends we are seeing remain good, and we're just trying to provide our best thinking as far as what Q2 and the rest of the year looks like in our guidance.

Yes. And again, I'll just reiterate what I said earlier. If you look at the last 5 weeks or so of Q1 in the first 5 weeks or so of Q2, we've seen a pretty decent step-up in terms of sales and traffic relative to 2019. And again, it's not always the best litmus test because there's a lot in 2019 as well, but it is a little more consistent in terms of what we're seeing compared to last year, which did have quite a bit of up and down.

And then second and last question. I think you just said that pricing was 7.6% in Q1. Pricing in Q2 and Q3, can you just provide us with those numbers, assuming no additional price increases are coming?

Yes. If there's no additional price increases, it will definitely kick down into the Yes, it might still be at 7% or so in Q2, but then Q3, it takes a pretty decent chunk down from there. And then you would end the year with, again, if we didn't replicate anything, you would end up with low single-digit pricing.

Yes. I also want to reiterate what Chris said earlier, Jeff, when you look at pricing, you look at the last 3 years. I mean we've been very moderate in all 3 of our -- in our 3-year look on this, and that's what we're trying to do going forward.

The next question is coming from Sara Senatore of Bank of America. Please go ahead.

I just wanted to sort of go back to this idea, you talked about reduced discounting traffic and now you've brought a new sort of more profitable base to build on. But I was trying to understand, I guess, a couple of things about that. One is, that's versus 2019, I'm curious like sort of how long that evolution took. We're sort of 3 years plus into this. So is it just the case that it took a long time? Or as we think about building off a new base, I guess, why now versus maybe in the last year acknowledging that COVID was a little disruptive. And then related to that, could you talk a little bit about that sort of how you think about that margin traffic trade-off because, as you heard, we've done a really nice job with the margins traffic is still, I think, modestly negative and has been for a little while. So as we think through kind of the outlook ahead, I understand you have a lot of sales layers, but it sort of force to make that trade-off, how would you approach it?

Well, first of all, we always want both. And there's a top line to traffic too, which is a great service product and in innovation. So that's the first part of it. We want to manage the traffic equation and the margin equation. And it took us a while outback to work through the discounting. And obviously, COVID was a huge interruptor to all that. That took 2 years over long you want. But like we've talked earlier today, we feel like we're that's behind us. We have like-for-like traffic we can look at. We've seen our guides, traffic builds coming as the year progresses and we get past the wackiness of 2022. But most importantly, the sales layers we talked about right? The innovations in food, no rules, just write at outback, the remodels, the investments in technology. Those are the things that we're driving against to continue to make progress on traffic. And they have the ancillary benefit, especially with our technology investments to help with margins. So that's how we're trying to manage both. We don't have an interest in getting involved in deep discounting to drive margins -- drive sales, excuse me. We want to offer great food and value at a fair price and continue to make progress on productivity to help protect margins.

And then just in terms of those drivers that you talked about, are you able to sort of give a sense of like the magnitude as you think about the contributions? Just again, in the context of 2Q, I think, the implied traffic is perhaps still not positive. And so as you roll these things on, I guess, what does the build look like?

Yes. So basically, what we're going to see is during the year, traffic will build from some of these sales layers. I'm not going to get into the worth this much or is this much or that much, but they will come together and build and you'll see as a result, if you look at our full year guide, improvement in traffic trends as the year goes along. So it's those particular sales layers that we're trying to work through on the food side and the technology side and bring them in quarter by quarter by quarter to help build traffic in our restaurants.

And some of these are going to have a little bit longer tail as well, right? I mean some of the technology investments we're making. Again, it's hard to quantify an exact traffic lift from putting in new technology that makes you more efficient. But those -- that's going to have a tail heading into 2024, not just from a productivity standpoint, but really from a sales standpoint as well. So every one of these things is taste in sequence. The catering, for example, we're already seeing it. We doubled our catering sales year-over-year. That's already starting to show up in the numbers. So they're all going to play a different role in terms of how it seeds in through the year in this environment.

What I found after all these years in the business is you have to have multiple sustainable layers, not just LTOs and promotions, multiple sustainable sales layers to consistently grow the business, and that's what we're trying to do.

The next question is coming from Brian Harbour of Morgan Stanley.

Chris, you talked about kind of the approved P&L in Outback units. How much is the build cost on the new Outback? And so I'm curious just what the returns are today. How you think about the hurdle rate on the new Outback or maybe also a remodel perhaps?

Yes. We're looking at 20% cash-on-cash returns at Outback for a new unit. I think the build cost is -- it's -- yes, it's about 20%. I'm sorry, it's about 20% up from where it was.

Maybe just on delivery, too. It sounds like, I mean, obviously, that continues to grow on a year-over-year basis. What have you been doing specifically to kind of continue to grow that channel? What else can you do to kind of continue to expand the delivery business?

Yes. The third-party delivery business continues to be strong for us. And it is a segment of the customer base that a younger customer base that continues to grow, and we're capturing that. And so what we're doing basically are two things -- three things, excuse me. One, we're making sure our assets are in shape for delivery and they got delivery rooms and enabled that way. Two, we've trained all of our people to work with our third-party providers to provide the delivery experience that they've really come to know and trust. Three, we have wonderful family offers, family bundled , especially at Carrabba's that is tremendous food and tremendous value and we're playing -- casual dining has the opportunity to play in the delivery space that for many years, we didn't play in. And I think we have a chance to take share and grow as a result. And so we're seeing that in our business.

The next question is coming from Brian Vaccaro of Raymond James. Please go ahead.

I just wanted to clarify some of the comments on recent sales trends just to make sure I interpreted them correctly. So first, did you say that quarter-to-date comps are in line with the Q2 guide above 0.5% to 1.5% -- or did you embed an acceleration versus what you're seeing here in April? And then second, Chris, did you say comps versus '19 started to accelerate in March and April? If so, could you put some numbers around that? And I'm just curious what you think is driving that sequential improvement.

Yes, I'll take the first part and turn it over to Chris. So the guide that we gave for the quarter, our trends are consistent with that guide. They're not that guide, but they're embedded in that guide. So that's why I want to -- how we want to lay that out. And you'll see, I think, that pieces come together nicely in Q2. For the improvement versus 2019 is the stuff we've been talking about, Brian, which is the sales layers, the operations of technology. Now I'll throw over to Chris for anything else that he'd like to add.

Well, the only clarifying -- so what I said was if you look at March and you look versus 2019 and then you look where we are over the first 4 or so weeks of our second quarter, we have seen a step up in sales and traffic relative to 2019. So the step-up didn't start occurring in March. In fact, the early part of Q1, as we said on our last call, we had seen some pretty good trends heading into the first part of Q1. And that slowed down a little bit on -- versus '19 over the back part of the quarter, but we've seen that tick back up again here early in Q2. Hopefully, that provides a perspective.

And that's what gives us the bullishness you're hearing on where we think sales and traffic are going for the longer term for the company.

And one thing I've been thinking about is just the increased advertising spend at Outback. Can you remind me when did that begin? How has that impacted sales? And are you pleased with the ROI you're seeing there? And kind of how does it inform your future, your plan over the next few quarters?

Yes. We don't anticipate going back to a level of advertising we once had because we've not so much about our customer and our digital efforts. But we have upticked our expended out back the last few months not tremendously because we're seeing the returns and the advertising that we expected. And we think we have a great platform with no rules just right to talk about that. And therefore, we'll continue to watch our advertising. And with the beauty of digital, Brian is, you can put it on or off very, very quickly. And we're not afraid to invest where we're getting the returns. But I don't anticipate it's going back to pre-COVID advertising spending as a percent of sales. But you'll see more from Outback around the no rule, just right platform going forward.

And then just last one for me. I just had two quick ones on the margins. Chris, your Q1 obviously came in well ahead of your guidance. I'm curious what drove that upside in the store margins versus your expectations?

Sure. Yes. I think a few things. One, sales were better than we expected. -- in Q1. Valentine's Day week actually set a weekly sales record for our company. So that was very encouraging. And we also had some -- as I mentioned earlier, we had some COGS favorability above a bit above what we were expecting. Some of these productivity opportunities have started to see really quickly. There was also some, again, being overly specific on some operating supply favorability. The other piece of this, though, is look at your it -- in the press release, look at the International segment. It was up $16 million. Some of that was a little unexpected in the sense that if you look at Hong Kong, for example, that's a market that opened up much faster than we expected. They were basically shut down. We did not make a penny in Hong Kong last year in Q1. This year, in Q1, we made like $4 million. So that was a big improvement that -- there was a little bit unexpected heading into the quarter. We also had some FX favorability that again was a little bit unexpected because the currency can be a little volatile. So look, there's a few things that drove that. But the biggest things are -- look, we overdelivered on sales and some of the efficiencies that we're seeing in our P&L were really, really strong.

And we were able to do that in a highly inflationary environment, which is really important, and that's part of our productivity as well picking it.

And if you look at that second quarter guidance, it looks like just quick math, it looks like it embeds store margins, maybe in the high 15% or 16% range or so. Could you confirm that's in the ballpark? And just some perspective on -- I know Q2 is usually lower than Q1, but are there any specific cost dynamics in Q2 worth highlighting versus what we saw in Q1 or anything temporary, unusual in Q1 as we think about Q2?

Yes. Look, there's always some little things, Brian. But I guess I would tell you that the Q2 guide, you would say margins are probably down a little in Q2 versus last year. But I would say op margins still in that 7% to 7.5% range for the quarter. Restaurant margins probably closer to flat year-over-year. It would be a ballpark.

The next question is coming from Jon Tower of Citigroup.

So I'm just curious, you and a number of your competitors in the public market and chains that have talked about recently getting rid of -- or not getting rid of, but deemphasizing discounting and trying to attract a more profitable transaction in their stores. It seems like it's a broadly held goal or effort across the industry on the chain side. So I'm curious, one, if you think you can hang on to that if the environment worsens going forward or, say, one of the competitors get a little bit more rational with discounting. And then two, how kind of the competitive dynamic in the marketplace, particularly with a lot of the closures on the independent side kind of filters into your thinking around this?

Yes. Clearly, Jon, we have a chance to take share because some of the closures that happened. And also the new restaurants coming into play, which we aren't seeing so much right now in the U.S., but we will see in years ahead. So there's some of that going on. But I think I can't speak for competitors, Jon. I know where we stand, which is value is service plus food divided by price. And if we can offer consistent knowable value, like some of the promotions at Outback or some of our other things that we're doing in other brands like Carrabba's or Bonefish, consumers respond, especially when you take a look at what the digital marketing environment provides by getting more specific with customers. If we can do that, speaking for our company, we don't have to rely on some of the deep discounting that was done before the pandemic. And we won't stay focused particularly on this -- and it's some competitor in the very short term, decides to do that, we'll continue to do what we do and go up against it, and watch what's going on in the competitive marketplace, but we don't have an interest in doing that. We want to stay offering great value with the programs we have. Finally, at Outback, the combos we offer, steak and lost, shake and check, shake and rip, tremendous value. Very few competitors offer it, our customers love it and you look at the price points that we offer, there's a great value with those combos as well. So that's -- that's, Jon, how we're trying to attract our customers and move forward.

In that circumstance, do you see yourselves potentially pulsing media a little bit higher than you have? I know you've cut back quite a bit in recent years, which made sense, but could we see a return back to pre-COVID levels?

We have not be back to pre-COVID levels, but media follow the idea, follow the money. So if Outback has some tremendous innovation, and we're seeing it with our customers, we're going right? And you can turn it on and off like that with the digital efforts, right? So we will see that with our customers. Also, we talked earlier about our third-party delivery. We are watching that very carefully and how do we support that? So those are some -- some of the things that are going on, Jon, as we manage the traffic and margin dynamics.

Yes, Jon, if you remember, we used to spend back prior to the pandemic, 3.5% of sales as a company on marketing. And then we laid out sort of our restaurant margin map to get where we needed to be. And at that point in time, we were saying, "Hey, look, we're just thinking about cutting marketing back down in range. The reality is we've been running in the low 2s for the last year or 2 we feel pretty good about where we are in terms of the returns we're seeing. So I think that the truth long term, if the question is where we go long term, it could be somewhere in between. But we're never going to go back to that 3% to 3.5% thought process on marketing.

And then just in terms of going back to the conversation about some of the closures in the marketplace, it does sound like the lending environment is certainly getting more challenging and I would assume that's going to impact a handful of the independent or smaller regional chains out there. And I know you're still at the emerging part of getting the brand or the company to start growing new stores again. But in that respect, have you started to hear from landlords, perhaps better deals than what you're even hearing about a few months ago because the environment is getting more difficult for the competition to open new stores?

We hope to, John, but it's still -- we're looking at quality sites, and it's still a tough negotiation, not with landlords with the competition to get the best sites because that's really important for us because we look at our site placement, we get good sites in a great trade area and a great market. The returns are in the sales, they are terrific. So we're not going to go into C&D players. I'm not saying that’s were independent thought. We’re not going to go into the C&D sites. We’re not saying that were independent thought. We’re in a A and B locations is there sort of fair amount of competition for that. But our attaching clearly with our new restaurants is to take share.

The next question is coming from Dennis Geiger of UBS.

Another one on advertising, if I could, as I believe it's 1 of the more impactful drivers of traffic maybe this year. You talked about good ROIs. But as it relates to how well the marketing is resonating, anything you can share sort of on recent awareness levels maybe relative to peers, how that's trended? I'm not sure if that's the best metric necessarily, but is there anything to share on the awareness perhaps that's benefiting from some of the marketing?

Yes. I think awareness is hanging in there. It's nothing really trends that are really I can speak to quite yet. But I think as we continue to do this work, our awareness levels will improve. I'm also hoping that in some of our smaller brands like Carrabba's, we can continue to build awareness. But nothing I can really report yet on the awareness front that's really building for our company.

Then I would say one of the reasons why you do go on television as a medium though, is to build up that awareness. So that's sort of the first part of the funnel that we're trying to build from a marketing perspective. We are back on TV. We know that, that helps with awareness. And so you're going to -- you've probably seen us, but you're going to see us more on TV than maybe we have been in the last couple of years.

And then one more semi related, just some of the work that you've done in the last few years, enhancing customer service, different things with menu, et cetera. Are you getting that credit from the customer yet given how many times the customer comes a year? Or does that take time to build, and you're still maybe not seeing the benefit from some of the work you've done over the last couple of years, and that's kind of still to come?

Yes. Given casual dying is a relatively light use occasion. Overall, we do have people that come frequently. It will take some time to build. But I am thrilled with the progress we're making in their customer measures in all of our brands. And where we stand versus competition, the product we're making, and I've seen this in the industry over the years. We continue to make progress like this, it will show up on our sales. But because of the relatively light frequency of casual dining, it's not going to show up as quickly as maybe some other parts of the industry. But it's the things we've been talking about is the technology investments and our retention levels are really helping us.

We're showing time for one last question today. The final question will be coming from Andrew Strelzik of BMO.

I just had a question, another one on the value proposition over time. And I guess, a couple of quick things. Number one, do you think that grocery prices impact business trends for your business? And do you think about or how do you think about what gives you the confidence that if grocery prices were to reset lower that wouldn't create a challenge for your value proposition? And do you have, I guess, lastly, more opportunity maybe to your digital assets or otherwise, are there ways in which maybe you're more nimble now than in the past? And I know this is more of an industry question, but I would -- I'd love to get your perspective for your brands.

Grocery prices is something that informs us and we watch. But what drives our performance is what we do. Okay? On the value side, on the customer service side, obviously, we've talked today a lot about not getting ahead of our skis on price increases. We've been very careful about that. We're watching what's going on with the grocery space. Before I tell you if you come in to Outback Steakhouse or craves and get prepared meal with great service and not have to cook, that's a huge value, huge value for our company. So that is what we're driving to grow our business. On the technology front, absolutely on the digital side, this is much more of an opportunity than it was years ago, and we tend to be on the forefront of that within casual dining and use that asset and use our customer information and invest behind it to grow our business and our traffic. That is absolutely top priority for us.

At this time, I'd like to turn the floor back over to Mr. Deno for closing comments.

Well, thanks, everybody, for attending the call today. We appreciate it. We look forward to updating you on our second quarter results in July. Thanks, everybody.