EAT - NYSE

Good day, and welcome to the Brinker International Earnings Call Q2 FY ‘24. [Operator Instructions] 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.

Thank you, Holly, and good morning everyone, and thank you for joining us on today's call. Here with me today, are Kevin Hochman, our Chief Executive Officer and President; and Joe Taylor, our Chief Financial Officer. Results for our second quarter were released earlier this morning and are available on our website at brinker.com. As we always do, Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our safe harbor regarding forward-looking statements. During our call, management may discuss certain items which are not based entirely on historical facts. Any such items should be considered forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risk and uncertainties, which could cause actual results to differ from those anticipated. Such risk and uncertainties include factors more completely described in this morning's press release in the company's filings with the SEC. And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. And with that said, I will turn the call over to Kevin.

Thanks, Mika. Good morning everyone, and thank you for joining us as we shared continued progress against our long-term strategy Q2 marked another quarter of year-over-year improvement in the business. We delivered strong financial results while continuing to grow share during the quarter with Chili's, beating industry sales by 4% and traffic by 2%. It's another data point that gives us confidence. The strategic choices we have made to accelerate the business profitably are working. Our advertising strategy is driving guests in and the improvements we're making to the guest and team member experiences are bringing guests back. While we are still in the early innings of these strategic shifts, we're pleased with the progress, both in terms of the direction and the consistency of results. Now let's start with the improvements to the guest experience, where our operations teams continue to make steady and sustained improvement. The simplification efforts as well as the changes to the labor model are working. Guests are telling us the food is more delicious and more consistent. The service is more attentive, and our restaurants are more welcoming, which is leading the better overall experience and higher intent return scores. The main KPI, our organization looks at on a daily basis to understand guests experience is guests with a problem. When we started this journey almost two years ago, more than 5% of our dining guests reported problems with their experience. Now this number is down to 3.6%, which is a record low for our brand, since we began tracking the metric. The work that our Chief Operating Officer, Doug Comings, and his field teams are leading is working to deliver sustainable improvements in the guest experience. Now, let's talk about the progress we're making with the team member experience. We know a better guest and team member experience starts with more stable management teams, and we continue to make great progress there. Our 12-month turnover improved another two points to 22% during the second quarter, accelerating our outperformance on retention versus the industry, which puts us at the very top echelon of restaurants. We think three things are driving this improvement in managerial turnover. First, the continued rollout of manager's ideas on how to improve the team member and guest experience has them more engaged. Second, those changes are in fact making their jobs easier to make guests and team members feel special. And third, the sustained improvement in sales is making their jobs more rewarding with higher total compensation. Our managers are telling us their quality of life has significantly improved, and in turn, they're able to execute more consistently and focus on strengthening restaurant culture, which is leading to a better experience for their teams and their guests. As a result, we're also now starting to make real inroads on hourly turnover, which improved again this quarter. Hourly turnover has been our operator's obsession metric this fiscal year, and their focus on hourly training and simplifying jobs has made a material impact on this KPI for the front half of our fiscal year. Now, we still have upside to be in that upper echelon of restaurants on hourly turnover like we already are on managerial turnover. But based on the team member initiatives being worked on, I'm confident we'll make even more progress on the KPI in the back half of this fiscal. Now, I'd like to talk a little bit about advertising and the positive impact it is having on our traffic. Our advertising focus is on our unbeatable 3 for Me value platform, and that's resonating with the consumer. A high quality complete meal at a great value is winning with guests. And when we turn this messaging on, we are seeing noticeable lifts in traffic, both versus our own runways as well as versus the industry. We are encouraged to see the campaign starting to build our longer term KPIs too. Chili's unaided awareness, which is the ability for a consumer to recall the brand without the prompt of advertising, has increased 9% over the past year. So what's next in advertising? Testing new ways to talk about our offerings, as well as bring new food news to the 3 for Me platform to keep that messaging fresh for our customers. Lastly, we're encouraged by how the improved dining experiences working in conjunction with the marketing. Compared to last year, when we were back on air, we are now seeing more sustained business lifts post the advertising bursts. We drove positive traffic in October, while we were on TV, and we continued to beat the industry in traffic for the remainder of the quarter. While we continue to improve overall traffic trends, we did see lower mix than prior quarters. Some of this was expected as we laughed to October 22 -- 2022, menu changes that reduced the number of 3 for Me, offers of the unexpected mix decline most of that was self-inflicted. The good news is we now know and understand the whys and changes are underway to reverse some of the impacts that we've seen on mix. There are two key factors contributing to lower mix. The first is menu merchandising. Our strategy to merchandise wings in quesadillas as appetizers on our August menu effectively significantly drove those items. We believe that strategy would drive significant incrementality through attachment, but it drove more trade down than we expected because some guests order these items as their entrees. We dropped a new menu yesterday that we believe will help reverse some of this negative mix trend. We adjusted the menu merchandising to de-emphasize these items and included additional opportunities for trade up. The other factor that impacted mixed during the quarter was our decision to stay with 3 for Me messaging, which is clearly resonating in driving incremental traffic. But we did see a lower level of add-ons, alcohol and trade up versus previous advertising waves indicating we may be seeing a more conservative consumer. We expect maintaining leadership value on air will continue to drive Chili's growing sales and traffic share, but we might see some softening and mix given where the consumer is. Now, let's talk about Maggiano's. I want to congratulate the Maggiano's team for a strong holiday. In Q2, they delivered 6.7% sales growth, which was 4% better than the industry, coupled with an impressive 300 basis point improvement in margins. We continue to be pleased with the strength of Maggiano's business, and I'm very excited to welcome our new Maggiano's president, who I believe is the perfect leader to accelerate the brand's Dine-in off-premise and banquet growth. Dominique Bertolone is a highly respected food and beverage executive who spent more than 20 years with MGM Resorts International, progressing from leading highly regarded restaurants like -- to serving as the Senior Vice President of Food and Beverage strategy for all of MGM, where he led more than 18,000 employees and drove more than $2 billion in sales. Dominique and the team are quickly working to develop a strategy to elevate the Maggiano's experience, lean into the Maggiano's differentiated brand, and improve the brand's four wall economics, and ultimately accelerate Maggiano's growth. I look forward to sharing the team's progress in the coming tours. In summary, we've had another solid quarter and progressing the strategy both in operational improvements and financial performance. Chili's value message is driving trial. Our improving experiences is driving frequency, and we continue to drive innovation to keep our food and beverage platforms fresh. We feel good about the progression of our strategy and believe both our brands are well-positioned as we move through the back half of the fiscal year. Now, I'll hand the call over to Joe to walk you through the quarter in more detail. Go ahead, Joe.

Thanks Kevin, and good morning everyone. Second quarter operating results reported this morning represent a very solid quarter of continued growth in the business driven by higher top-line sales and improved margins. We have previously indicated our strategy is designed to meaningfully improve the traffic dynamics of our brands through a better guest experience and effective marketing efforts. Additionally, we are looking to steadily improve margins while making the necessary operating investments into the restaurants to support sustainable growth. Our strong performance in the second quarter is good indication. We are making progress in all these key areas. As to specific results, for the second quarter of fiscal year ‘24, Brinker reported total revenues of $1,074 billion, up 5.4% from prior year, an improved restaurant operating margin of 13.1%, and adjusted diluted earnings of $0.99 per share, a 30% increase versus prior year. At the brand level, Chili's post comp, store sales of 5% for the quarter, while Maggiano's recorded a comp sales gain of 6.7%, both brands nicely hurdled strong quarters from the prior year. While overall comp sales met our expectations for the quarter, the component makeup of the sales did take on a different stack. While price was as expected, we did experienced higher traffic and lower mix versus our expectations. Chili's reported traffic of negative 0.6%. We are still experiencing the year-over-year impact of the planned de-emphasis of virtual brands, including the discontinuation of Maggiano's Italian Classics and materially reduced promotional activity for It's Just Wings. In the second quarter, reduced virtual brand activity negatively impacted Chili's traffic by approximately 2.5%. Excluding the traffic decline from virtual brands, Chili's base business traffic for the quarter was a positive 1.9%, a great indication the traffic-driving aspects of our strategy are resonating and attracting many new guests. Maggiano's also delivered a solid second quarter, fueled by a strong holiday season. The brand reported positive sales of 6.7%, driven by 10.5% price, 0.4% mix, partially offset by negative 4.2% traffic. Overall, the Maggiano's business is moving in the right direction, with positive traffic in dining rooms and banquets, the two most profitable channels of the model. Now turning to our strengthening restaurant margins. Our restaurant operating margin for the second quarter was 13.1%, an increase 150 basis points year-over-year. Sales leverage from top-line growth, cost of sales moderation and effective cost management by our operators were the primary factors driving the improvement. We are particularly encouraged by our strengthening margins in the context of also being able to make meaningful operating investments in the important areas of labor, R&M and marketing. These levels of investment will help to build and sustain our business model, as we move forward. I would mention a couple of underlying specifics within the various areas of restaurant level margin. Food and beverage costs were materially improved from the prior year, notably in key areas, such as poultry, ground beef and oils. From a labor perspective, we continue to experienced wage rate gains in the mid-single-digit range in addition to the hours we invested into the labor model. And restaurant expense was impacted by the investments in marketing and repair and maintenance expense beyond the benefit from sales leverage and cost-effective management and other expense lines. Improved restaurant and operating margin supported growth in our quarterly EBITDA, with this important earnings measure reaching $107 million, an 18% increase from the second quarter of last fiscal year. The improved operating performance also led to incremental capital deployment in key areas of our capital allocation strategy. During the quarter, Chili's completed and opened five new restaurants, all of which are off to excellent starts. Approximately $31 million were invested into our existing fleet in the form of R&M and re-image work. Importantly, we repaid $39 million of outstanding revolving credit borrowings as part of our ongoing efforts to strengthen the balance sheet and lower leverage ratios. Our total debt-to-EBITDA ratio reduced to 2.1x at quarter end. In this morning's press release, we updated two key pieces of our annual guidance. Brinker's annual total revenues for the current fiscal year are now expected to be in the range of $4.3 billion to $4.35 billion. Our adjusted earnings per share is now expected to be in the range of $3.45 to $3.70. Our existing guidance for weighted average shares and annual capital expenditures were also reiterated. While we don't provide specific quarterly guidance, I would comment that the January period we are ending today has experienced particularly tough and continuous weather issues across a broad swath of the country. Our updated guidance does include an estimate of the negative impacts from the January weather, with the understanding that third quarter results will be particularly impacted by the tough start to the quarter. Apart from the weather impact, we continue to believe the critical drivers of our improving performance remain intact. We now move into the second half of our fiscal year. We remain committed to the strategies that are positively impacting the performance of our brands. Guests are responding to the improved experience they receive in the restaurants. Our marketing presence is breaking through in highly effective ways, and our key investments, both from an operational and capital perspective, are coming together to enhance the sustainability of our efforts. We look forward to continuing to highlight our progress in the coming quarters. And with our comments now complete, let me turn the call back over to Holly to moderate our Q&A.

[Operator Instructions] Your first question for today is coming from Jeff Farmer with Gordon Haskett.

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

No, Jeff, this is Joe, and good morning. We think weather is the biggest delta going into the weather. We were seeing results that were really meeting our expectations. So again, what was driving the business coming out to the quarter seemed to have carried over into January. The biggest deltas and the -- it's a murky situation with the amount of weather that extended over really three and a half weeks. But again, as I said, I think the drivers are still pretty much intact. The weather impact is probably going to really be in the $10 million to $12 million range for that quarter. It's a pretty significant because of the extent in the range that the weather impacted across the country.

Yeah, I mean, the other thing that we look at, Jeff, just so -- is Kevin, we look at how we're doing versus the industry given the industry also has the same weather. We look across a swath of different concepts and it looks like the gains that we saw in Q2, they're not changing. So we feel like, at least from a relative performance standpoint, it really is the weather versus anything that's happened in our business.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So, let me just share with you how we're thinking about the business, and I'll let Mika chime in if there's any additional detail on the numbers that you want to give. So number one, we haven't seen any material change in the operations of our business. Like the measures that we track internally, which we believe are a key indicators of what will happen in the future, they continue to get better. So, we didn't talk about it in the prepared comments, but things like food grade scores, server attendance scores, intent to return they all continue to improve. And so that gives us confidence that the strategies that we put in place just continue to work. And so putting forward the advertising that continue to drive the business, we don't believe we'll have any -- we won't see any different changes to the outcomes of the things that we're doing. So we feel very confident in the plans. We don't look at the weather being a long-term thing. So, certainly, we look at the measures of how we're doing versus the industry when we see an event like weather to make sure that the continued operational performance ahead of our industry peers is continuing to happen. And we're seeing that. So there's nothing that would tell us that anything operationally has changed in the business or that our strategy needs any kind of tweaking. I mean, the other thing that we haven't talked about is the success of the barbell strategy. So we've talked a little bit about the consumer pulling back, who's coming in for 3 for Me. But we're also seeing very healthy trends in the other areas. So, that's really allowed us to continue our margin improvement, even though as you guys have seen, mixes pull back a little bit. So we feel very confident about the operational metrics of the business. We don't think anything has changed from what we've been looking at, and that's why we're very confident in the balance of the year.

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

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

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

Your next question is coming from John Ivankoe with JPMorgan.

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

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

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

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

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

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

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

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

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

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

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

Yes. Let me answer with you how we are thinking about how to finance the advertising and build plans that we are confident will continue to expand margins. And then if you guys want to chime in with any kind of detail on that, that's great. We are going to continue to focus on simplification. We didn't talk about it in the prepared comments, but we have got several initiatives that will be coming to market that will help us ease the load on labor, as well as help us with some SKU productivity. Like you guys see a big COGS number and it looks like it's very deflationary, most of that is from commodities, but there is also some embedded simplification in those things that it's hard to tease out. For example, what's coming forward is, we are eliminating our we have a smaller burger SKU that we use at lunch. We do a double burger. It's harder to execute for the teams. It's another SKU that we have got to manage a beef in the heart of the house. We're going to eliminate that and just go to our single patty which is 7.5 ounces. The net of it is -- it gives the guests actually a little bit more beef in that lunch burger. It actually costs us a penny less. And then from an efficiency standpoint, it is much easier to manage one SKU than all these different SKUs. So, that's an example where we think the customer's going to get a better experience, but we're also going to save a little bit of money, but most importantly, make it easier and more efficient for the team members to execute. We're also looking at removing some other equipment in terms of slicers that require a lot of cleaning and extra time and just going to more consolidated onion SKUs. So there's probably about five other things that we're working on in that area that will have, will help margins over time. Maybe not as much as the deflationary environment that we're seeing, but certainly things that will help in an environment where things are a little tighter. The other thing I would tell you is I think that barbell strategy, we're going to continue to lean in on it. So we're seeing time and time again where having opening price points that drive traffic, but then allowing the guest that comes in that doesn't really care about the opening price point to be able to trade up is working. So, for example, our Crisper launch you can still get an opening price point on Crisper that's incredibly attractive, but we're now transacting a decent portion of our Crisper mix at over $16 with the six count. So that's an example -- I think we tend to think of the consumer as one person, and they're not really one person. There's a price sensitive guest that we're winning with exceptional value, and then there's a guest that comes in and they're going to get what they want. And at the end of the day, if you can deliver on consumer needs whether it's on a low price point or whether it's on premium products or larger bundles, you're going to win over time. And I think that's what's happening with this barbell strategy.

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

Your next question is coming from Andrew Strelzik with BMO.

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

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

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

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

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

Just a question on Maggiano's. Kevin, can you talk -- what are the key priorities are for this business over the next couple years? You've shared some aspirational targets on AUVs and margins, maybe what are some of the strategies the team will be focused on in order to progress there and then related what would you need to see to think some -- growth might make sense at some point?

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

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

Without getting into the quarterly pacing of F ‘25 quite yet, Brian, I think you're thinking about it, right? Again, you carry price obviously for a year. Some of the bigger laps of pricing start to take place right at early in F ‘25. So again, I expect to, and we're taking advantage of some opportunities all along. We told you we'd look at the pricing opportunities in the second half of this year. The menu we dropped yesterday included close to 2% of incremental price. Again, low level menu to menu. We're moving a menu drop forward a month in later part of the fiscal year. You get a little bit you get a little benefit from that, but it'll probably carry a similar amount of pricing. And then I think what you can try and see as you kind of go through a future menu drops, is that 2% to 3% kind of target range. Not committing to that. There's not -- I'm not giving you any kind of F ‘25 guidance, but you'll see some higher levels of pricing, as you move through roll-offs in the first part of F'25 and then start to normalize, I would suspect down into that kind of lower single-digit range as you move further into the year. Again, I think that's still some good opportunities there.

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

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

Yes. I can't give you a lot of detail. Again, I think there is some opportunity there in the margin. Year-over-year might be flattish to slightly up. I'd like to see the -- I don't have a lot of read through yet. Today is the last day of the period the close will start moving through some of those specifics. Shout out to our operators, as I watch kind of the progression of expense management. They have done a great job of managing through those cycles. It's extremely difficult to manage through some of those kind of weather impacts. And they have done a good job in maintaining labor levels and some of what they can control during the process add levels you would hope to see them do. But don't have a clear read through. Clearly, its one period. You got say two more periods to go that will have impact to those margin levels, too. It's just nice to kind of look at and see the sun shining down here right now.

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

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

Your next question is coming from Jeffrey Bernstein with Barclays.

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

It's a good question, Jeff. It's a tough one to answer because the data that we track is all mixed. You guys probably see the same thing. On one hand, you see like low unemployment and continued wage growth and we saw some pretty big upticks in consumer sentiment in December On the flip side, you see increase in borrowing and credit card balances past due and significant percentage of households are resuming paying on the student debt. So there's like all these mixed signals that would tell you it's going one way, but it's also going the other way. And our own data, we also see mixed messages, right? So we see healthy spending on higher end items. We don't see a pullback in any of our consumer income demographics, right? But on the flip side, we're also seeing improved responsiveness to TV ads that that showcase really sharp value. And then those customers that are coming in incrementally are not -- they're not buying as much alcohol or dessert. So, what does it all mean? What we think it means is that there are different consumers. So we believe that those mixed messages mean there are some consumers that are going to be more conservative and there are some consumers that are not really going to change their behaviours one way or the other. And so we've got to make sure that we are prepared and ready to attract both. So from the consumer that is more price sensitive, we got to make sure we have industry leading value. We have to continue to make sure that we improve our experience because if they're pullback trips, they're going to choose the concepts that have a more consistent experience that they know they can count on. And then we got to make sure that across the menu there's areas that they can access. So, for example, continuing to innovate on the margarita of the month at $6, continuing to innovate on 3 for Me. Starting at $10.99, making sure that guests are aware of those offers so that we can continue to win the traffic share game that we've been winning. On the flip side, we've got to continue to bring more premium items and more premium food and beverage offerings so that we can continue to balance that and continue to grow margin. So for example, this is a great example this month we launched the Spicy, which is a very premium drink with Espolon, Reposado, Grand Marnier, Halapenio, we priced it at $10, right? But we also brought a new $6 margarita to with a Straw-Eddy that has a premium tequila and a premium vodka. So I think you're just going to see more of us innovating both on the high end and the low end because we've got to protect the guests that's price sensitive, but we've also got to make sure we have things that consumers want if they're there and they're not as price sensitive. So, I think we're going to continue. I mean, it sounds very similar to what I've told you the last couple quarters. But at the end of the day, it seems to be working we're growing traffic share, we're growing PPA ahead of the industry, right? And we're expanding margins. And those would be the three metrics you'd look at to say is a barbell strategy working. If there's some consumers that are little more price sensitive.

And then just my follow-up, Joe, just recognizing the January weather issue. Wondering if you can maybe share the exit rate in December. I know the full fiscal second quarter for Chile's company operated was in the 5% range, but just trying to get a sense for how trends flowed through the quarter. Again, making, I don't know whether you want to share January specifics, but obviously that's an anomaly. And looking forward, I think you guys had previously said you expect mid-single-digit comps for the full year. So is that still reasonable? I think you did fives and sixes the first half January, a little bit of an anomaly, but is that still a reasonable range for the remainder of the year?

Yeah, we're still sticking with our mid-single-digit res for the year. That's where I want to, again, you would've expected a little bit lower level of comp at the end of our quarter because of the big comp we had. And in October, so your comps are always going to follow your marketing windows and 10 poles and that's the way the quarter played out. We also were lapping a pretty good December last year. So that probably had a little bit of --. So again, everything is staying on track from a revenue growth standpoint. And that mid-single-digit range is clearly what we're feel we can accomplish as we kind of move through the rest of the year.

Got it. But no quantification on the January ballpark where that comp was settling out?

Yes, not at this point. I mean, again, I'm going to avoid period results. I have given you some pretty good data on that, but it's a drag. It's going to something we have to try and make up as much, as we can as we kind of move through the rest of the period. But again, I think it's an anomaly. It's not something you should be taking into trend consideration.

Your next question is coming from Christopher Carril with RBC.

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

Yes. Again, our thinking continues to be that we can strengthen those margins. Again, taking weather out of consideration, which will have a drag on the margin in the third quarter, and particularly in the Q4, believe we can continue to strengthen margins. You see that a little bit in the back half of the year anyways from a volume standpoint. You get a little bit of seasonality tick up that helps with the sales leverage. But as we can continue to move forward with the strategies that we spend a lot of time talking about today, we think that will have a margin benefit, particularly in the fourth quarter.

Okay. Got it. And then, Kevin...

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

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

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

And then, Kevin, you mentioned the guests reporting a problem metric is at its lowest level since you began tracking it. That's of course encouraging. But maybe can you expand a bit more on some of the other metrics around guest satisfaction, I think you referenced improvement in intent to return. Anything really to help us just think about kind of sustainability of traffic improvement on the back of the investments that you have made?

Yes. These are leading indicators that we lead us to believe that we will continue to see strength. There is no exact beta correlation to this or r-squared correlation to this, right? But the measures that we look at, just so you understand, we collect with our pay at the table devices. We issue a survey to our guests, we get a ton back because a lot of them after they pay, it's just right there on the table. So we get over 20 million surveys a year where we ask several questions about guest experience. The measures that we look at from that data is server attentiveness, food grade scores, intensive return, and then the one that we look at on a daily basis is Guess What a Problem? Or what we call GWAP. And all of those just continue to make progress, which gives us a lot of confidence that we'll continue to make progress in the overall experience. Now I will say that is just about Chili's beating itself, which is great, but we want to be the best in the industry. And so when you look at external metrics the good news is for us is there's a lot more upside for us on improving the experience in all of those metrics whether they are food grade scores or consistency. So, that's really what we've talked to our field teams about, which is -- hey, we feel really great about the progress that we made. And it's very tangible. I mean, you can feel it in the restaurants, you can see it in the data, but if we're candid about where we sit in the industry and where we want to be, which is long-term sustained results at the top echelon of casual dining restaurants, we have a ton more work to do and that's what we're focused on.

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

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

I'm going to start out with that. So the majority of that was really the lapse from prior year. So we had two big things that we did. We had -- first, we had lapped a happy hour program where we did less discounting a year ago, and then we lapped the original restructure of the 3 for Me. So that is the majority of the change. And that would get you to about flat so you can take 300 basis points from the last 100 basis points that we reported. That's what Kevin was talking about. We think a lot of that was self-inflicted and we can get some of that back.

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

Yes.

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

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

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

That is all the time we have for questions today.

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

Thank you, everybody. Have a good day.

Thank you for your time.