Mika Ware - Brinker International, Inc. Wyman T. Roberts - Brinker International, Inc. Joseph G. Taylor - Brinker International, Inc..

Brian M. Vaccaro - Raymond James & Associates, Inc. John Ivankoe - JPMorgan Securities LLC David Palmer - Evercore ISI Nicole Miller Regan - Piper Sandler & Co. Chris O'Cull - Stifel, Nicolaus & Co., Inc. Alexander Russell Slagle - Jefferies LLC Gregory R. Francfort - BofA Securities, Inc. James Rutherford - Stephens, Inc.

Jeffery Daniel Farmer - Gordon Haskett Research Advisors Jeffrey A. Bernstein - Barclays Capital, Inc. Brett Levy - MKM Partners LLC Robert Mashall Derrington - Telsey Advisory Group LLC.

Good morning, ladies and gentlemen, and welcome to the Brinker International Q4 2020 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. And the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware.

Ma'am, the floor is yours..

Wyman Roberts, Chief Executive Officer and President; and Joe Taylor, Chief Financial Officer. Results for the fourth quarter were released earlier this morning and are available on our website at brinker.com. Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives.

Then, we will open the call for your questions. Before beginning our comments, I must 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 item should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated.

Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. And of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations.

And with that said, I will turn the call over to Wyman..

Put the safety of our guests and team members first; and continue to perform and take share. I couldn't be more proud of how our operators and our support teams have delivered on both of those promises, and how we're creatively and boldly building our future together.

No matter what lies ahead, with the talent on our team, the power of our brands and the scale at our disposal, we start from a position of strength. And with that, I'll turn the call over to Joe..

Total revenues of $563 million; a restaurant operating margin of 6.4%; and an adjusted loss per diluted share of $0.88.

Included in the $0.88 loss is a burden of approximately $0.18 due to the timing of recording expenses related to annual and long-term incentive compensation plans beyond what would typically be recorded in the fourth quarter in our G&A expense.

Throughout this crisis, our team has done an exceptional job of taking care of our guests and team members and has proven an equal ability to effectively manage expenses in the face of meaningful sales decreases. Our managers have been efficient in utilizing our scheduling tools to optimize the labor hours to fit the current business environment.

Hourly labor and payroll tax have a good degree of variability and were favorable year-over-year. Although total labor, including restaurant management, was unfavorable in the quarter by 260 basis points driven by sales deleverage.

Restaurant expense margin for the quarter increased by 6.2%, again, primarily due to sales deleverage, despite our operators reducing year-over-year spend in this area by more than $29 million.

We recorded meaningful savings in advertising spend, repair and maintenance, and supplies related to on-premise dining, a portion of which we believe will be ongoing. As to cost of sales, we were positive 30 basis points versus prior year, primarily due to favorable menu mix.

I earlier commented, our restaurant operating margin from the quarter was 6.4%. However, in conjunction with the progress we made top line, our operating margin improved through the quarter, increasing to 12.2% for the June period.

Assuming an improving operating environment, we believe we are set up for additional margin improvement as we carry-forward identified efficiencies, further open dining room capacity and leverage sales from our virtual brand, It's Just Wings.

Strengthening the balance sheet is an important part of our financial strategy moving forward, and we are currently focusing free cash flow towards debt reduction and liquidity enhancement.

To further enhance our liquidity position, we executed an equity offering in the quarter, raising approximately $139 million, which was used to pay down revolving credit debt.

Our overall total debt balance at fiscal year-end was approximately $1.2 billion, a reduction of just over $220 million from the end of the third quarter, as revolving credit borrowings decreased from $700 million to less than $473 million.

Our liquidity which we consider to be cash balances and revolving credit availability, now exceeds $575 million. In addition, we recently completed a 15-month extension of our revolving credit facility, now maturing in December 2022.

As sales and cash flows improved, we resume new restaurant development activity that have been temporarily halted early in the quarter. We plan to open or relocate four new Chili's restaurants during this current quarter. Now, to operating guidance.

While in past years, we would typically provide annual guidance for Brinker, during this earnings call, potential volatility and unknowns to the current operating environment makes that exercise difficult.

Instead, we are providing some limited guidance as to our consolidated performance for the current first quarter and anticipate providing quarterly insights as we move through the year. For Brinker, in the first quarter, we expect consolidated comp store sales to be down in the low to mid-teens range.

Adjusted earnings per diluted share are currently estimated to be a loss in the range of $0.25 to $0.40. We anticipate positive operating cash flow, and weighted average shares is estimated to be 45 million to 46 million shares. Would also like to remind everyone that fiscal year 2021 includes a 53rd week, which takes place during the fourth quarter.

Despite the difficulties experienced from this pandemic, our team has risen to the challenge.

Our strategy of focusing on value, convenience and safety has proven to be well received by our guests, has given us the ability to outperform our competition, and leaves us very well positioned to continue to take market share as we move through the fiscal year.

I greatly appreciate the hard work and commitment from our team members, especially those on the frontlines serving our guests each and every day. I have every confidence we will continue to demonstrate our ability to sustain our progress and return to growth on the top and bottom line for the long term.

And with that, Paul, let's open the call up for questions..

Certainly. Ladies and gentlemen, the floor is now open for questions. And your first question is coming from Brian Vaccaro. Brian, your line is live. Please announce your affiliation and pose your question..

Thanks, and good morning. I just wanted to circle back to the It's Just Wings concept. I think you said, you believe, it can generate around $150 million this year in sales.

Just curious, I know it's still early days, but can you just give us a sense of how that's contributed to the quarter-to-date comps, and how you've seen that build even through the first, four or five weeks? And could you also provide some more color on the brand's margin dynamics?.

Hey, Brian. We'll give you a little bit of insight. We're not going to give you everything you're asking for. But obviously, you can kind of do the math. It's $150 million brand and roughly $3 million plus a week in sales. It's pretty much incremental to our business. So, it adds that much to the sales levels.

So, it's low-single digits, mid-single digits, kind of in that range. And we've seen really great response to the brand and the product. As we've rolled it out now, we're in week seven. So, it's been very well received. Sales have grown nicely. And it's met or exceeded our expectation pretty much on every turn.

And as I mentioned, the margins and the leverage we have with this virtual brand is significant. There's no capital per se. And we had to buy a couple of small refrigerators in a couple of restaurants, but for the sales volume that it generates, it's really capital-free.

And we get to leverage all of the expertise we have in our restaurants, in terms of culinary ability. We get to leverage the equipment that we already have.

And things like our combi, which is a great piece of equipment that allows us to smoke our ribs, now also allows us to smoke wings and offer a differentiated product from a lot of people in the category. So, we're very excited about the virtual brand. We're pleased with its results. And we just see a future potential down the road to grow it..

All right. And then, I also wanted to just ask about initiatives that you've been working through to optimize capacity within your restaurants.

Where are you on installing plastic partitions or working to expand outdoor seating? And can you remind me, what percent of the seats in a typical Chili's are booths?.

Yeah, I don't have the number of booths. What do you think, Mika? Yeah, about 45% of our seating is booths. Outdoor capacity is not been area of focus for us through the pandemic. As we've gotten a little bit more into this summer, and now looking into fall, it looks like we may be out there a little longer.

In some states, we are starting to put out some additional outdoor spaces. But the results you're seeing us deliver, which again a top in the category, are without us having to do a whole lot of external or extraneous work in having to build patios or tents in any major way.

We're doing that off of the capacity we have in our dining rooms today, which, for the most part, is about 50%. So, we have a lot of upside as we get more and more comfortable with being able to see people in maybe closer proximities..

And clearly, again, as we mentioned in July, getting 36% of your restaurants back into positive comp territory without having to do those incremental activities. Thanks, Brian..

Thanks, Brian..

All right. Thanks. Brian..

Thank you..

Thank you. And the next question is coming from John Ivankoe. John, your line is live. Please announce your affiliation and pose your question..

Hi. Great. Thank you. With JPMorgan. First, a clarification on the 36%. Was it concentrated in a couple of states, maybe some parts of Florida, Georgia, Texas? So, if you can just kind of make a comment, or were you able to have it more spread out than the southeast? And secondly, if I can, and I'm going to see if I can ask this question correctly.

Is there a level of sales, maybe percentage of previous average unit volumes, where you expect to get back to previous store level margins, either in percent or even in dollar margins that you care to talk about today? Obviously, I mean, a lot of businesses are running themselves much more efficiently than they were in the past.

And you're actually able to achieve previous percent margins or dollar margins with a lower level of sales. And if you don't mind, I'd like to have a third question as well, if I'm not being too greedy. Thanks..

A third? John Ivankoe, going for it. You're going for the triple. Yeah, so I can't even remember your first question now, John. So the first question was regionality..

The first question, does it....

No. I know. I know, John. I'm joking. Yeah, okay. So, the first question, the beauty of what we're seeing is it's broad-based. So, we're – of those 36% spread out across the country, market by market, some in Texas and Florida, as well as other parts of the country. The Mountain States are doing very well.

Obviously, California being close to – in restaurant dining has been a little bit of a pullback from what we saw in the fourth quarter. So, we walked into July, and we had to kind of deal with California closing dining rooms, which was probably the biggest setback we've had.

And so, we're very confident that as we get restaurants reopened everywhere, we'll see these positive sales trends grow even more. And with regard to your question around at what level do we attain the profitability – our historic profitability levels.

As Joe mentioned, we're finding, like you're hearing from so many other folks, when you zero base a concept and you take out so much cost and then you get to rebuild it, you find opportunities. And we're finding those opportunities.

So, we do think there probably is a more efficient – well, we believe there is a more efficient model going forward, and so, the level of which, the sales that we've had historically will deliver better profitability. So I don't have a specific percentage for you. I don't know if we want to give you that, but I'll let Joe talk to that..

And then, obviously, you add It's Just Wings into the equation..

Right..

Again, highly leverageable sales coming on that side. So, clearly, the biggest opportunity over the course of the rest of the fiscal year is getting capacity back online. Dining rooms reopened back up into that 90% levels.

But what we can really control, again, is the efficiency that the operators are finding and how to run the restaurants, and then adding the virtual brand in the equation..

Yeah..

So, I think, there's definitely strong beliefs around our ability to increase margins..

Thank you so much for that. And then, secondly, obviously, G&A is kind of – there's so many different stories of G&A in fiscal 2020. The question is on fiscal 2021, just kind of thinking about – I don't know if you would fully accrue bonuses on the current level of comp that you have in the first quarter. Obviously, it's so much better than the fourth.

But can you kind of help us hone in on what you think could kind of be a reported G&A number in 2021? Obviously, whether it's on IC, or whether it's on head count or different projects that you're doing. It's probably a number that I need the most help with at this point..

Yeah. And again, I think that will evolve as the year evolves, too, based on where we see the business trajectory.

I think, it will be reasonable to see us get the number, from a percentage basis, should start with a 4%, and how far we can drive that down – or it's going to depend on some of the dynamics we just talked about and some efficiencies we see on the G&A side.

We will definitely spend fewer dollars in G&A in this fiscal year than we have in the past typical years. And we'll continue to – but we're going to continue also invest appropriately. Included in G&A is IT spend, and that's an extremely important piece of business, and we will invest along those lines.

Obviously, incentive compensation programs have variable dynamics to them depending on where the business goes. You would expect in lower than traditional business environments to see lower spend in that regard. And I think that's the way some of those programs will work as we move through this year.

And as we continue to build the business, hopefully, we'll build some of those results also. So, again, I don't think, at the end of the day, from a percentage basis, it's going to be a radically different environment.

But again, that's one of the unknowns and one of the reasons we're kind of keeping our thought processes in these conversations to a quarterly basis..

Thanks so much guys..

Thanks John..

Thanks..

Good talking to you..

Thank you. And the next question is coming from David Palmer. David, your line is live. Please announce your affiliation and pose your question..

Thanks. Evercore ISI. Good morning. What is your to-go sales mix lately in the partly open dining room locations? I think you mentioned that it dropped maybe below 50%. And what is your seating capacity in your dining rooms, or the partially opened dining rooms as a percent of normal? And I have a quick follow-up..

Hey, David. That's an easy question because it's got the same basic answer....

...answer almost..

50%. So, we're – again, as more dining rooms open and people get a little more comfortable, we see it drop a little bit below that 50%. But we're basically 50% in the restaurant and 50% out, right, at this point. And for the most part, where our dining rooms are open, we're running 50% capacity. And we've been very conservative.

Again, our first promise was to keep our team members and our employees safe. And we've had masks on everyone from the very beginning of this pandemic. And we social distance, and we really did social distance in our restaurants.

And so we're going to continue to do that, but we're looking at ways to maybe get some additional capacity in, now that we have a better sense for what we have to do to stay safe and continue to provide that environment..

And then, I know this is a bit of a million-dollar question-type question. But how much higher could AUVs be in the outyear, getting beyond COVID versus pre-COVID? And obviously, we're thinking about the to-go sales. You're annualizing $1.4 million in to-go sales.

It does make you wonder if you've discovered some of that is going to be sticky after this is all over. But there's so many other factors that you must be thinking about as well. How do you think about that and versus other factors that maybe you want to tell us about? Thanks..

Well, I mean, David, I don't think anyone would say this is a robust environment for casual dining. And the fact that we've got 36% of our restaurants running positive comp sales tells me that we're doing some good things and that there is upside potential. And that's with still 15%, 16% of our restaurants that don't have dining rooms open.

So, I think it kind of – we're optimistic that there is quite a bit of top-side room for our brands to grow and to leverage the capacity that we have with some virtual brands, as well as just getting the core business stronger.

And in this post-pandemic environment, we think the things that we've been doing, the value proposition, leveraging scale, leaning the digital technology is going to allow us to be even to be even more successful. So, I don't have a number for you, but we look to grow per restaurant sales, and we see some significant upside potential..

Thank you very much..

Thanks, David..

Thanks, David..

Thank you. And the next question is coming from Nicole Miller. Nicole, your line is live. Please announce your affiliation and pose your question..

Thank you. Good morning. Piper Sandler. Two quick ones. The first is, there's a lot of excitement about It's Just Wings that I'll tell you have been asked about.

What kind of human capital time investments do you have to make? Could you just walk us through both – the store level sounds pretty easy, but from an executive level, just help – just assure us that there's no disruption on your end, as you kick-off this opportunity and others?.

Hey, Nicole. That's a great question. I think – so this is where another strategy of ours, scale, comes into play, right. So, we have the luxury at Brinker to be able to put some really talented people in position to manage businesses. And Steve Provost was heading up Innovation last year.

And in that process, we looked at a lot of things beyond virtual brands, including ghost kitchens and mobile kitchens and a litany of things. And to have somebody of that quality and caliber of leadership taking us through that journey and finding the best place for us to land is a luxury that a lot of people don't have.

And so, we have the ability to take a leader and a team and keep them somewhat isolated and work on a lot of innovation ideas. And then, when it became time to roll it into the system, we did it overnight. And now, it sits within our brands fairly seamlessly. We have some talented leaders now kind of responsible for growing and building that business.

And Steve stepped into the Maggiano's world to help us kind of navigate Maggiano's through this current time period and into the future. So, I feel very good that the leadership we have isn't being distracted from the core, if that's the kind of just key issue you are trying to get to.

But I also feel really great that the quality of the people working on this business, and it is a significant incremental piece of business, are also talented and motivated to move forward..

That's very important and appreciated. Thank you. Last question, you basically shored up the balance sheet. You're obviously – positive same-store sales are within line of sight and happening for a good chunk of the base.

What's just the holistic view of capital deployment now, in terms of the traditional methods around dividend share repurchase, development, et cetera?.

Yeah. Nicole, I think, as I mentioned in the comments, right now, we're continuing to shore up that balance sheet. We will be reducing our leverage position on a go-forward position. And as we continue through that process, we'll give you more updates, as it relates to what that looks like and what those levels will be.

But they will be significantly reduced as we kind of go forward. And as we build the business back up, we're going to also continue to do capital allocation that invest back in the business. As I indicated, we've started back very quickly within the development side of the equation.

We will bring capacity online over the course of the next several years. And we're going to also invest back into the fleet similar to the reimage programs that we were working on pre-pandemic. So, I really look at that initial pandemic period of time as just really a pause in the activities that we were doing pre-pandemic.

As it relates specific to the share repurchase activity and dividend activity, more to say down the road, as we kind of move through these next couple of phases. But clearly, returning excess cash flow to shareholders, still, is very much a long-term focus for us..

Thank you..

Thanks, Nicole..

Thank you. And the next question is coming from Chris O'Cull. Chris, your line is live. Please announce your affiliation and pose your question..

Thanks. It's Stifel. Good morning, guys.

Wyman, do you think Brinker has advantages to launching virtual concepts that other restaurant chains do not have, or do you expect other chains to start launching virtual concepts for delivery?.

Hi, Chris. Absolutely, I mean, I think, again, and back to the strategies of scale and company ownership. There's a – you're right. First, with regard to speed, I don't know anyone that could do over 1,000 restaurants with a virtual brand overnight.

And that's also – the relationship we have with DoorDash is also instrumental and strategic in this whole virtual brand and delivery strategy of ours. So, we've chosen a little bit of a different path than some others, and we think that, that is an advantage for us. And we're going to continue to lean into that and build off that.

And we're just – we're in the first innings of this game. So, will there be other people that work on virtual branding and try and do a similar kind of stuff? I have no doubt, it's a good idea. But do they have the capability to do what we've done and to leverage it the way we leveraged it? I don't think so.

I think our operators are really the kind of somewhat an unrecognized source of power for us. We just got such a great operations team. We have the quality of systems in our restaurants that allow us to do some of this additional complication.

So, at a time when people were cutting menus and simplifying the world, and trying to simplify it down, our operators were stepping up. We didn't reduce our menu at all. We actually roll out a virtual brand to the restaurants in the middle of this crisis. And they embrace it and deliver really a home run for us.

Just kind of goes to the quality of the people we have running our restaurants every day..

That's helpful.

And then, Joe, could you give us a sense for how much of Maggiano's fiscal 2Q revenue is typically attributable to banquets or large-party occasions? I'm just trying to get a sense of what comps could look like if people are still avoiding group events by the holiday season when I think AUVs expand meaningfully?.

Yeah. I think, again, it is a significant – that's the quarter where banquets do play an oversized run. I don't have the specific number right here, but it's a meaningful piece of what they do within the second quarter. And they have a lot of work ongoing right now to try and shore up that space.

When you think about the Maggiano's business model, that is probably the weakest piece of the equation. They've done a number of other great things on how to broaden their business. They've seen a trajectory that is also improving. You saw this negative 66% going down to into the mid-40s.

We're continuing to see improvement as they move forward from that level. But as we move to the second quarter, looking at that banquet space could be a bit of a hurdle to get over. It's about 3% in the second quarter that their model drives off of – the comp sales drive off of that banquet space. And again, they have a lot of energy devoted.

They know the issue in the second quarter, but working it aggressively..

Great. Thanks guys..

Thanks, Chris..

Thank you. And the next question is coming from Alex Slagle. Alex, your line is live. Please announce your affiliation and pose your question..

Thanks. Jefferies. Good morning. Appreciate the details on the restaurants already driving positive comps. So, I was wondering if you could – can you talk about the characteristics of those restaurants and the biggest differentiating factors..

Hey, Alex. No, there really isn't anything unique about them. They're spread out throughout the country. Obviously, with the rollout of It's Just Wings, some of them are some of our higher-performing wings restaurants. So, those sales are helping them get over prior-year levels. But it really isn't any one characteristic.

And that's why we're kind of encouraged about what we're seeing across the country..

Okay.

And do you have any thoughts on narrowing down the menus just to eliminate unnecessary complexity and improve speed, or at this point, is that not seem like it's holding you back?.

No.

And I know – I think you're relatively new to us, right?.

Yeah, welcome, Alex..

Yeah, so welcome. Two years ago, we did a major menu simplification effort, where we took 40% of our menu items at Chili's and reduced the scope of the menu. So, again, when I talk about strategies that we've had in play for a while, menu simplification is something we did in a significant way two years ago – a little over two years ago now.

And so, we feel very comfortable. I mean, comfortable enough with the complexity of our kitchen that we were able to bring Its Just Wings into the kitchen, and not see any kind of guest – negative guest impact to the guests in the dining room, dining in Chili's with regard to the food or the delivery of the food or the service.

So, we keep a very close watch on our guest metrics, now both those that are taking it out or getting it delivered, but especially, those in the dining room. And we don't see any need to have to deal with the complexity at this point. We keep a close eye on it to make sure it doesn't creep..

Yeah. And Alex I think as you heard me mention, we had net positive menu mix in the second quarter. To a certain extent, the guest is simplified for us, but narrowing back to some of the tried and true favorites, when you think about Crispers, and burgers and things of that nature.

So, we've kind of seen a little bit of narrowing of where their choice is, which does provide a little bit of simplification, if you think about it in that regard, where we don't have to take things off the menu. But that does focus our operators in those areas. So, we have the ability to follow the consumer where they want to go..

That's great. Thank you..

Great..

Thank you. And the next question is coming from Gregory Francfort. Gregory, your line is live. Please announce your affiliation and pose your question..

Hey. Bank of America. I had two questions. The first is, I think it was in response to – I don't know if it was Glass or Ivankoe's question on just margins and some of the areas you guys have been able to find efficiencies through this process.

Can you maybe talk about what some of those areas are? Is it labor? Is it food waste? I guess, any sort of broad scopes on that would be helpful. And then my second question is on pricing power, and coming out of this. And I'm sort of curious.

When I talk to some of the casual dining companies, I'm getting very sort of mixed feelings on whether or not pricing can be pushed a little bit harder, or if you guys want to be a little bit more restrained? And I'm sort of curious where Chili's shakes out on that front. Thanks..

Greg, we'll probably tag team the cost side of it. I'll just say, in general, again, back to operators at the – outside of the pandemic, when we – in March, when we really had to address the dramatic shift in business and closing of dining rooms, the cost structure leverage came from our managers. They really just managed labor extremely well.

They did a lot of the work to get us through some of those early tough days, which allowed us to kind of reduce our variable labor costs significantly with the reduction in sales.

And then, as we started to build back into the dining room and build the business back up, you had this very unique opportunity to say, hey, I mean, I got rid of all these costs because I didn't have my dining rooms open, so now, I'm going to build the cost back in.

Let's evaluate each of these investments again to make sure that what we've been doing for years really does make sense, or that maybe somebody that was doing it slightly different in one part of the country, we now have better visibility into it. And while some of these things seem small, when you've got over 1,000 restaurants, they add up quickly.

And so, Joe can give you some color on what some of those examples are. But we found some very good opportunities that we think will stick with us..

Yeah, Greg, when I look at the main components, again, I think there will be opportunities in labor, and that's probably drive off of running our labor systems effectively. So, again, as you bring the business back on line, we're always looking at some efficiency opportunities on how you use technology. We may do some of that as we go forward.

But I think it's really using the systems closely and effectively as we kind of build the business back up. I think when I look at the progression of margins that I talked about over the quarter and into the – and the improvements we're seeing into this quarter, the restaurant expense area is where you see a lot of very identifiable ones.

Strategically, we've made some decisions around advertising that are going to play out very nicely from a margin standpoint. That's the digital power of the company that can shift to a more digital and more efficient strategy there. And then, you look underneath that. And this is where there's line item after line item after line item.

It can be as knife sharpening, linens, R&M expense. You just kind of go down a laundry list of costs that kind of perpetuate themselves in the business model until you have to look at them in this environment and take them down and then rebuild them. And frankly, we're identifying millions of dollars of opportunities as we wind things back up again.

So, I think there will be some nice opportunity within the restaurant expense area as we kind of build forward. And we're seeing it already as we move through that first period..

And then, just quickly, with pricing. I think, right now, we don't have any – there's no dramatic headwinds that are forcing us to consider aggressive pricing strategies. And we're, as we have been again for the last few years, focused on driving traffic into our restaurants, whether it's now in the dining room or even through takeout and delivery.

And so, we're really focused about how do we get more bodies into the restaurants and a little less about taking the check up. So, we'll continue to keep our margins strong, but really, our focus is on traffic.

And so, our pricing strategies will probably be a little more conservative as we make sure – especially as the consumer starts to deal with the economic realities of the pandemic here in the near future. So, that's just our overall approach..

Yeah. What's I think most exciting about those gaps to the industry is that traffic side of the equation..

Yeah..

And so, we're very focused on, on very wide, wide gaps, 18% in the quarter. And frankly, I think we have some abilities to strengthen those gaps as we move forward..

Thanks, Wyman and Joe..

Thank you. And the next question is coming from James Rutherford. James, you're line is live. Please announce your affiliation and pose your question..

Thanks. I'm with Stephens Inc. I just wanted to start off sort of based on that last comment around sort of the consumer. We know that stimulus checks provide bit of boost to the whole space, the portion of last quarter.

So, I'm just curious, if you've seen anything already in terms of the week-to-week comp progression here quarter-to-date that would give any indication that as those unemployment benefits sort of roll off, that consumer gets a little bit more squeezed, whether it would roll through to kind of your results, and what you've seen so far this quarter?.

Yeah, James, really great question. Top of mind for all of us, right. As those $600 checks kind of disappeared, we were nervous and curious as to how it's going to impact the business. You saw our July results. I'll just say, we're almost two weeks now into our August, and the results have gotten better. Our trends have strengthened.

And so, now, we're several weeks past those unemployment checks rolling off, and we haven't seen any indication that it's having an impact on our business. That doesn't mean it won't. That doesn't mean – we're not saying that, we're just saying line of sight now.

And how we're managing our business, frankly, is week-to-week, quarter-to-quarter, to some degree, just because of the nature of what's going on with the pandemic. But so far, so good on that front. We don't kid ourselves though that there is some tough economic times ahead for some people, in some parts of the country.

And that's where having a great value proposition and having convenience – and I don't know if you've looked at the It's Just Wings product, but the value proposition in that concept is really outrageous. I mean, it's what we like to say, as the tagline says, stupid pricing.

So, I think we're in good position to deal with some of the – to give the consumer what they need as things tighten up a little bit, without having to resort to some limited-time offer stuff or slashing prices. We have just a great value proposition embedded in our concepts, and It's Just Wings just builds on that..

And I think, James, the commentary around the consumer, and particularly, as we think through how we wanted to build our thought process for this quarter, I wanted to be a little circumspect around the guidance we gave you based on that issue in itself. So, we need to see how that plays out over the course of the next several weeks.

And we're also heading into what would traditionally be that back-to-school period of time. And obviously, this is going to be probably the most unique back-to-school, in parenthesis, that I think we've ever seen.

So, how that factors into what would typically be some of our lower-volume periods of time will be interesting over the course of the rest of this quarter. But kind of those two issues are kind of ones that kind of give a little bit of cloudiness to where we think this business can go in the short run..

Yeah. I mean, I'll just add on that. And I know it's not part of your question, James. But the biggest concern we have, and as the country has, is where does the virus go? And obviously, we've seen things spike and then get back under control.

And that's going to be the big determinant of our results, I think, in the short term, if the country can continue to wear masks, and stay socially distanced, and do what we do in our restaurants, which is somewhat frustrating. So, now, I'll just give you a little frustration. But I think we're going to be in good shape.

If we start to see things spike, then we're going to see consumers react and pull back a little bit. And those are the variations of the business that we just don't control. But without that, we feel pretty good..

Well, that's encouraging, and it's a helpful perspective. I just wanted to follow-up with one other question. I think you also sort of teased that the virtual Wings concept may be the first of several.

And just to help us frame that, do you see an opportunity for multiple virtual concepts with a similar potential to this It's Just Wings concept? And whether those – should we think about those as being potentially in 2021? Are these something much further down the road than that?.

Yeah, I mean, obviously, we think there's more potential. We're going to be very smart about, first, making sure It's Just Wings is a strong brand that's executed well, and that we're growing it through multiple channels. And then, we're – it wasn't our first brand that we tested, by the way.

We were in test with another brand before we decided on Wings. So, we continue to test and innovate and look for ways to grow our business. And the virtual brand story isn't played out. I won't go any deeper than that. Stay tuned. We'll see. We rolled this one out fairly quickly, and that's probably how we'll roll the next for now.

Hopefully, it won't have a lot of fanfare, but when it hits, it hits big..

Great. Best of luck. Thank you..

Thanks..

Thanks..

Thank you. And the next question is coming from Jeff Farmer. Jeff, your line is live. Please announce your affiliation and pose your question..

Thanks. Gordon Haskett. Actually, I have a follow-up on an earlier question, and then one more question after that.

So, in terms of the follow-up, for these restaurants that posted positive same-store sales, operating at really that very limited capacity, 50% sitting capacity, did you guys make any aggressive efforts to shift demand to non-peak dayparts or weekparts? How did you do that knowing that you have some bottlenecks on the weekends and some evenings? How did you accomplish that positive comp number?.

Well, Jeff, I mean, the biggest way you accomplish is you're doing a lot of take on delivery. And then you throw It's Just Wings, which is another delivery concept on top of that, so a lot of the volume is now happening outside of the restaurant.

We still, as a company, with restaurants that are open, are seeing positive company-wide average sales growth early week. It's the weekend where the capacity issues come in, that we start to give it back a little bit. And that's just understandable, when you got 50% of your dine room tables closed off.

So, yeah, it wasn't anything specific to – again, those restaurants didn't do anything different. They just are either in areas, where there's a little bit more support for the brand, and/or maybe there they're a little bit stronger It's Just Wings pickup. And maybe, just in general, stronger delivery market.

So, all of those things kind of go into the mix, but it really is – how are we doing this? We're doing it earlier week, more than late week. And we're doing it through delivery and take out, more than dining room. And that's enough to offset – to get us back to positive comp sales..

All right. That's helpful. And then, just probably the third or fourth question on It's Just Wings.

When you were testing that, what did you see, in particular, that got you excited? And how did you promote that product or offering in those test markets? How did you actually get your customers to know that there was an option to go and get wings delivered from a Chili's box?.

So, it's an interesting story. Like I mentioned, we'd already been in markets with an alternative virtual brand into the early winter. And we were getting ready to take this Wings concept, and put it into a national kind of test, and then COVID hit.

And we didn't – normally, when we do something like that, we put our culinary people out in the field, and travel stopped. So, we said, listen, let's just take it to Dallas. So, we tested this thing in seven restaurants in Dallas for about two months.

And we're encouraged enough about consumer acceptance, about operational ability to deliver that we rolled it nationally to 1,050 restaurants with that basis. And it's proven out to be exactly what we thought it would do, and then some.

And so, I'm not saying that's an ideal way to test naturally rolled-out concepts, but I would say, in the middle of a pandemic, that our people were excited about stepping up and not holding back, and that we weren't just looking to cut costs and hunker down, that we were looking to grow the business.

And again, proved to ourselves that – yeah, that success for casual dining and bar and grill is to get more capacity into the buildings and kitchens that we already have, and not build more of those. I mean, I don't know we're just excited about that idea..

Yeah. And specifically, then, when you look at some things that are very encouraging, we're already seeing a 30% plus reorder in the first six to seven weeks, which is significantly high. We're seeing a above expectations in the add-ons.

So, an add-on's, it's the – add on an extra fry, add on those incredible fried Oreos, add on extra sauces, which helps drive that check, and actually gives you that powerful incremental flow-through. The ratings we're seeing from the consumer are right near the stronger ends of what we wanted to see..

And the only surprise was just, we've got a handful of restaurants that are doing volumes we never anticipated. There are – the top 3%, 4% of our restaurants are doing numbers that are really phenomenal, I mean, amazing..

Okay. All right. Appreciate that..

And Jeff, and that's without putting a lot of firepower behind the marketing..

Yeah. From a marketing standpoint, we just used DoorDash. I mean, DoorDash is our partner. We just get on their carousel. We've done free delivery. As a way, we put free delivery or try free in there to get you in and get some awareness levels. And we just continue to use that..

Hey, we have about....

Appreciate it, guys. Thank you..

Yes..

Keep going..

Thank you. And the next question is coming from Jeffrey Bernstein. Jeffrey, your line is live. Please announce your affiliation and pose your question..

Thank you. Barclays. Two questions. First one, just on the to-go business. It seems like whether the dining room open or not, you got to-go sitting at 50% mix. So, I'm just wondering how you think about retaining that to-go customer? Maybe you're doing, well, one-to-one marketing.

Any kind of color there? And whether you think those customers are the same as your traditional customers or maybe incremental? Just trying to figure out where the mix of to-go could level off a year or so from now based on your kind of read of those customers..

Yeah, it's going to be interesting, Jeff, to see where it levels off. Obviously, a lot of the increase in to-go came from the dining room guests that couldn't get into dining rooms or didn't want to come into dining rooms as they opened. And so, we know there is some of that trade-off.

As we've opened dining rooms, though, we haven't seen as much of a drop as we would have thought potentially. And so, that's why we're continuing to see strength. This is where the beauty of our digital and our loyalty database come into play. We have 8 million growing guests that talk to us on a kind of weekly basis.

And we know which ones of those are coming in through the dining room and have shifted over to takeout. And so, we can get a pretty good sense for how the guest is kind of shifting their behavior based on COVID. And we'll keep track of that.

And then depending on what makes sense, we'll make sure we're giving them kind of the incentives they need to dine with us. Either way, we're agnostic. We'll take either one of those channels with regard to whether or not they – as long as they come in..

Got it. And then just a follow-up on an earlier question in terms of doing more with less.

I mean, I guess just the month of June using that as a proxy, I think you said your comps were down 13%, and your restaurant margins were positive 12%, which a 12% margin is better than some of the margins you reported when your comps were down a whole lot less than 13%.

So, just maybe asking a prior question a different way, where can the margin settle if sales have returned to historic levels, or maybe what's the biggest line item that would achieve that, or maybe there's some reason why these margins wouldn't ramp up as the sales improved from here? Thank you..

Yeah, Jeff. I mean, I think, Jeff, we don't have a specific number. We don't have the model laid out exactly, as I know people would like. We just know there's a lot of room. Joe kind of walked through some of the restaurant operating expense opportunities that we're seeing.

Marketing is another area that we're definitely evaluating with regard to what's the right spend there as we invest more into digital and some of these other avenues. I will say, the sales that we've achieved right now and our relative position in the category, which is, number one, came with very little marketing spend.

That doesn't mean we're not going to spend marketing in the future, it just says, hey, that's an opportunity for us to continue to evaluate how we spend and how we drive traffic, and what the levers are. So, what we are very optimistic about is that the future model will be more efficient. I can't give you a percentage..

Yes. I think, Jeff, a lot is going to obviously depend on that top line capacity growth as the restaurants come back. What I can tell you – and again, let's be a little careful about any one given period, remembering July is a five-week period for us, so you get some leveragability into those numbers.

But what I can tell you is July's flow-through really isn't radically far from what we saw the last July. I mean, you're talking within tens of basis points of what we did last July. So, achieving that on those capacity levels. Again, when I talked about reopening restaurants and adding It's Just Wings into the mix, we'll have a positive.

So, there is decent upside coming from a margin standpoint as we kind of move forward..

Thank you..

Thanks, Jeff..

Thank you. And the next question is coming from Brett Levy. Brett, your line is live. Please announce your affiliation and pose your question..

The off-premise; the virtual brands; and other areas other areas like that? Thanks..

Again, from a capital allocation standpoint, we're going to focus on pretty much the same areas we focused on. The interesting thing – I'm going to reverse what you said, the virtual brands don't necessarily require a lot of capital investment.

Again, frankly, there was really no true capital investment that went into launching a top 200 brand, in this case. That's the uniqueness and the power of using the capacity we've already established from a capital investment perspective. I think as we move forward, technology's always going to be front and center from an investment standpoint.

We will typically, through capital and G&A, be in that $40 million to $50 million range of investment. And I would see that as kind of an ongoing piece of the equation. I think there will be opportunity on the new restaurant development side. And again, we're committed to making sure that our current existing fleet is kept current.

And so, I envision as we move into the latter half of this fiscal year and next fiscal year, be reimaging again at a decent pace. From a capital dollar standpoint, I think this year will definitely be well below last year's spend. It is, frankly, a bit of a moving target for us as we see where the business goes as it comes back online and grows.

We will have the opportunity to increase some of that capital investment. But you can expect probably a year-over-year final capital payment meaningfully below last year, but on a trajectory of getting kind of back towards the level of capital investments you've seen the last couple of years pre-pandemic..

Thanks, Brett..

I think we have time for about two more sets of questions..

Hey, Bob..

Okay. The next question is coming from Bob Derrington. Bob, your line is live..

Yeah, thank you. Not to belabor a point, but certainly, we're pretty excited, I think, as most are about the virtual brands. I'm just wondering is – we've seen one of the major fast-casual brands within the industry use free delivery as a carrot to really kind of drive customer interest.

Wyman, is that one of the things that you can use, I guess, in ebb and flow, depending on the demand and how you want to ultimately improve it, spike it, hold it back? Is that a carrot you're...?.

Yeah, yeah. Sure, Bob. I think, again, the primary marketing tool is DoorDash and getting awareness levels of a brand that is really coming from nowhere. You've got to get some visibility, and a real powerful way to do that is through getting it on the right carousel.

And whether it's the free delivery or try free, try first time offer, those are reasonable investments to make, especially given the cost structure of this brand and how it fits into our portfolio. And again, as we've said a couple of times, because there's not a lot of incremental costs associated with this, you can afford to do some of that.

Similar to the fast food concept, I think, I know what you're talking about, and has had fairly good success doing that extensively. So, yeah, that's how we look at it. And I think that's a key tool, in the marketing tool chest, if you will, tool box, to kind of get – build awareness and drive it..

The value that you offer....

Doesn't mean everybody gets it that way. Well, it just doesn't mean everybody gets it that way. It's not free for every – that free delivery doesn't go to every offer, but it's a powerful marketing tool..

And one of the great things you see in the early stages of this brand is the trial coming from DoorDash users that have not utilized Chili's. So, north of 60% of the trial for It's Just Wings, we're tapping into a new DoorDash user, so broadening that base and that appeal..

A quick follow-up, if I may. The check average opportunity, certainly, It's Just Wings offers, in my view, a very compelling value to consumers. Is that the niche that you kind of focus on, Wyman, as you look out towards other opportunities? And could you do something as – we know the public is enamored with spicy chicken sandwiches.

Could you do something within spicy chicken sandwiches to create a virtual brand?.

I'd love to innovate on the call, Bob. It's a very good thing. Now, again, we're looking at a lot of different concepts, ideas. The first priority is to get It's Just Wings established and growing and strong. And it's off to a great start, but we think it's got a lot of upside. So, we're not going to get distracted too early with what's next.

But it's not necessarily the only way to go in at a virtual brand. It's Just Wings is It's Just Wings. It's statement is around a value proposition and how we go after it.

But we're looking at other concepts, and again, we've tested some concepts that don't necessarily walk in or present themselves to the consumer on just kind of that – on a value proposition based on the same value proposition that It's Just Wings does. And they also have shown some very encouraging opportunities with regard to sales potential.

So, to answer your question, I just think we don't see the whole world of virtual brands being positioned exactly like It's Just Wings..

Great. Thank you..

Thanks, Bob..

Thank you. And final question coming from Sara Senatore. Sara, your line is live, please announce your affiliation and pose your question..

Thanks. This is actually Leo (01:05:46) for Sara from Bernstein. So, I have a question on Chili's, same-store sales for restaurants that have off-premise only. The same-store sales trend in July for this restaurant is very similar to the trend that we saw in the end of April, right before you started to reopen dining rooms.

So, is that because of restaurants still don't have any dining room capacity are the hardest-hit states where the recovery has been smallest? Any color on that would be great. Thank you..

Yeah. I think the question – and I'm not totally sure if I got this right. But yeah, our restaurants that are not open, so that's 15%, 16% that don't have dining room open are experiencing similar trends to what we saw earlier when we were in that situation, that down 40-ish percentage.

And I think you may – because we don't build big patios and haven't built big patios or outdoor spaces with the typical Chili's, there have been – the difference between what some concepts have seen in April and what they've seen in June and July is that, in April, it was shut down everything.

And in the June and July, if you've got big patio spaces, you can leverage those a little more. And so, they're seeing maybe a little bit of a pick up there. Kind of in California, that's where you've seen it the most. I think the first closure in California was everything, and the second closure is indoor dining.

And so if you had bigger patios, you may have gotten some better results. But our – because we don't leverage patios as much as some others, we've seen a little less of that. But it's all about – again, 85% of the restaurants are open for dining.

We think these others will open sooner than later as the virus – and people wear masks, and we get this thing under control. And they realize that, hey, you can do that and still have social distancing in restaurants. And then, we're going to be back to, again, these low-single digits and in a lot of restaurants, positive comp sales..

Thank you..

All right. Thank you..

All right. Thank you, everyone. We appreciate everyone joining us on the call today. And we look forward to updating you on our first quarter results in October..

Thanks, everybody..

Bye. Thank you..

Be safe..

Thank you, everyone..

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