Good morning, ladies and gentlemen, and welcome to the Brinker International Q1 F2021 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. And the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware.

Ma'am, the floor is yours..

Thank you, Kate, and good morning, everyone. With me on today's call are Wyman Roberts, Chief Executive Officer and President; and Joe Taylor, Chief Financial Officer. Results for the quarter were released earlier this morning and are available on our website at brinker.com.

As usual Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives. We will then open the call for your questions. Before beginning our comments, it is my job to remind everyone of our Safe Harbor regarding forward-looking statements.

During our call, management may discuss certain items 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..

Thanks, Mika, and thanks, everyone, for joining us this morning to review our first quarter performance and share highlights what we see for the future of our business.

Looking broadly at the quarter, we're encouraged by the continued improvement in the environment, the consumers increasing engagement with the category, and we hope to see those trends continue. We know there are still challenges out there, especially with Independence.

Brinker continues its strong recovery posting a better than expected first quarter and delivering earnings of $0.28 a share. Both brands increased their progression from last quarter with Chili's reporting comp sales of negative 7.2% and Maggiano's negative 38.6.

And both brands delivered solid sequential improvement throughout the quarter with Chili’s ending September down just 1.4% and Maggiano's down 32.5. Polished casual is obviously a more challenged segment that's facing greater headwinds, but the Maggiano's team is doing a great job managing their cost structure and flow through.

We feel good about where Maggiano's is from a relative perspective. And we're excited about the bold strategy Steve Provo and the team are putting in place to build the business. The Chili's brand continues to see the expectations from both a relative and an absolute perspective. The month of September marked our return to positive traffic.

And that's pretty impressive given there are still major states like California, New Jersey, not yet near full dining room capacity. This brand continued its nearly three-year streak of outperforming other casual dining chains in that track driving a 16-point gap in sales and 23 points in traffic this quarter.

When we broaden our view of the category to include Independence, our gap widened significantly. Current credit card data shows a whole category down 30%, which reflects the ongoing impact of this pandemic and the reality of what is likely to be a meaningful shift in the competitive landscape.

In this tough environment, I couldn't be prouder of the resilience and agility of our operations team. For the quarter, the improved restaurant operating margin 60 basis points year-over-year. When the pandemic hit back in March, the market drove us all to dramatically cut costs.

Since then we've judiciously evaluated every cost within our P&L and we've been diligent about re-establishing our spending levels. In many cases, we're comfortable maintaining a level of spend below pre-pandemic levels. One of the biggest changes we made was to rethink our marketing spend.

We significantly reduced traditional television advertising, so we could invest more aggressively in digital and direct channels that work harder for us like My Chili's rewards.

And with the increased desire for convenience, we're shifting to support all our brands more aggressively with delivery resulting in higher third-party delivery fees and promotional expenses based on where we're tracking with sales and the efficiency of our P&L, we feel really good about these decisions.

Our top priority has been and remains the safety of our team members and guests. We're committed to supporting our team that's working so hard to take care of our guests. We've now brought back most of our hourly team members and we've been able to help them maintain their hourly wage levels. We've also kept our management structure intact.

We know how critical their leadership is to our guests and our business. And we're proud that they – that we've been able to bonus our managers close to target. Nobody could have predicted this pandemic back in the spring. And we're thankful we didn't have to change strategies when it hit.

Instead, we leaned into the same strategies that have been helping us take share for the last three years. And they've been even more effective since the pandemic.

But even before that, our challenge was to prove to ourselves and to you that we could create a growth model out of a legacy business in a category that seen meaningful declines and traffic over the years. We have always believed growth is available in this category if you do the right things.

By delivering a better guest experience, a strong value proposition and more effective marketing, we unlock sustainable organic growth within our base business. And our results demonstrate we're doing the right thing. Our improvements to the base enabled us to introduce our first virtual brand, It's Just Wings.

An incremental growth vehicle that offers convenience and value in a way no one else is positioned to do. And there's been a lot of discussion about what a virtual brand is. It's Just Wings is not a disposable vehicle. We're committed to this brand for the long haul.

There are barriers to entry in doing virtual brands well, and Brinker is uniquely positioned to do it right. We have the scale, the asset ownership, available capacity and our well-equipped kitchens, the right technology and unbelievably strong operators who can focus and deliver consistently.

When we rolled out, It's Just Wings overnight to more than 1,000 restaurants. Now that's easier to say, but tremendously hard to do. So I know everyone's curious about how it's going so far. We're excited with how the brand is already performing and we're well on track to meet our first year target of more than 150 million in sales.

We're encouraged by what DoorDash sees with regard to consumer data. The brand is already generating high satisfaction scores and strong repeat usage. It's really resonating with consumers, which we know is critical to the health and long-term success of any brand.

Going forward, our focus is to ensure we're executing at the highest level possible and we're maximizing the brand's growth potential. It's Just Wings started as a virtual brand. But as we wire an execution and accelerate growth, it may take different trajectories.

We're evaluating internal and external opportunities to increase awareness levels and expand access to consumers. This is just phase one for It's Just Wings. We also believe we have capacity to expand our virtual brand portfolio. We're testing a few ideas to better understand consumer demand and ensure that we can execute at a high level.

We'll have more to say on that in the not too distant future. Obviously, we see a lot of upside for virtual brands. Listen, with the uncertainty surrounding COVID and the economy, we anticipate some volatility ahead.

Like the rest of our country and the world, we are hoping and planning for a vaccine and an end to the sickness and deaths from this virus. We're hoping and planning for economic stability and continued recovery in a post-election environment. But despite the things, no one can know, here's what we do know.

We will keep running our own race and work in our strategy. We will stay flexible and agile and we'll take care of each other and our guests. We will continue to manage our P&L and our balance sheet with discipline to create an even more stable model for our shareholders.

And we will boldly grow these brands, so we can continue to be a great place for our team members to work and our shareholders to invest. And with that, I'll turn it over to Joe.

You go Joe?.

Hey, thanks, Wyman, and good morning, everyone. As you just heard, we begin our fiscal year 2021 with momentum on the top and bottom-line. We continued our recovery by delivering adjusted diluted EPS of positive $0.28, marking our return to profitability after just a one quarter hiatus.

For the quarter, Brinker’s total revenues were $740 million and consolidated reported net comp sales were negative 10.9%. Importantly, comp sales materially improved as the quarter progressed with September consolidated comp sales down only 5.2%.

Chili’s continued to lead the casual dining sector ranking as the number one brand in the KNAPP-TRACK index each month in the quarter. And as Wyman indicated beat by significant margins in both sales and traffic. In September, Chili's achieved another important milestone and recovery posting positive traffic for the brand of 2.2%.

Another way to see Chili's impressive progression is to look at our net comp sales results. Excluding those restaurants and markets not fully open for indoor dining during the quarter, such as California and New Jersey.

These restaurants represent approximately 86% of the Chili’s system and they were only negative 1.3% for the quarter and positive 3.6% for September. Now turning to margins. Restaurant operating margin for the first quarter was 11.6% and noteworthy 60 basis points improvement versus prior year.

Food and beverage expenses were favorable 10 basis points versus prior year due to the favorable menu mix offset by low level of commodity inflation. Labor was favorable 120 basis points versus prior year. Now several items contributed to this improved performance.

First, labor expense relative to prior year benefited from the shift in sales from dine-in to off premise in the quarter. Second, favorability was also buoyed by the fact some of our higher labor cost states reopened at a slower pace during the recovery, a benefit that will diminish as we move forward.

And of course, naturally we'll take the sales that go with adding that labor back into the equation. And finally, labor expense benefited from the ability to seamlessly integrate our It's Just Wings brand into the existing labor model, a point of leverage we plan to sustain.

The labor favorability was partially offset by the increase in restaurant expenses, which was up 70 basis points for the first quarter versus prior year.

Sales deleverage and higher delivery related fees and packaging expense were the primary increases, while lower advertising and repairs and maintenance expenses help to mitigate the overall increase. Generating positive cash flow is an important part of our recovery process. With the business improving, we generated operating cash flow of $83 million.

After capital expenditures of approximately $14 million, our free cash flow for the quarter totaled more than $69 million. Our first priority for cash generation is to invest back in the business. And as such, we have resumed both restaurant reimages and new restaurant development.

We have increased our CapEx budget for the year and now expect to spend approximately $100 million during this fiscal year. As Wyman reiterated, strengthening the balance sheet is also a key area of focus. As such, our second cash priority is to pay down debt.

And we executed against this strategy during the quarter, reducing our long-term debt by approximately $50 million. We will continue to lower leverage as we move forward from here, targeting and adjusted dead level of 3.5 times EBITDAR. Now turning to our current second quarter.

Let me provide some color as to our expectations for the quarter and then some specific guidance metrics for the quarter. Today marks the end of our October period and it appears we will continue the positive progression of comp sales established during the first quarter.

We expect Chili’s to further build its positive traffic performances period, getting the second quarter off to a very fine start. While we anticipate year-over-year improvements in Chili's operating performance in the second quarter, our consolidated performance will likely reflect a more difficult holiday environment for the Maggiano's brand.

With that being said, let me provide some specifics for Brinker's performance in the second quarter. We expect consolidated comp store sales to be down in the mid-single digit range. We believe Brinker's restaurant operating margins will be relatively similar to prior year.

Adjusted earnings per diluted share are estimated to be in the range of $0.40 to $0.60. And weighted average diluted shares are estimated to be in the 45 million to 46 million share range. I would also note we have a holiday flip in the second quarter with Christmas Eve and Christmas Day moving into the third quarter.

This holiday shift will have a positive impact to second quarter comp sales. It will be offset in the first period of Q3. Despite the ongoing challenges in our operating environment, we continue to demonstrate strength and resilience. Our first quarter performance is a testament to our ability to deliver results.

While operating in a pandemic environment comes with some uncertainties, there is no doubt we will continue to execute our share gaining strategy, take care of our guests and team members and be a leader in the restaurant industry for the short and long-term. And with that, let's move to your questions.

Kate, I'll turn the call over to you to moderate..

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And our first question today is coming from Chris O'Cull. Please announce your affiliation, then pose your question..

Hi, it’s Stifel. Good morning, guys..

Hi Chris..

Wyman, you mentioned that the opportunity for additional virtual brands, my question is how many virtual concepts do you think a typical Chili's restaurant could support and what are the limiting factors for that?.

It's a great question, Chris. It's not so much about how many, it's how much volume. And so ideally you'd like as few as possible that do large volume, right? So we think It's Just Wings is nowhere near its – the end of its potential growth.

And so we'll continue to grow that that brand from what we're saying now is at least $150 million brand to some higher level. And the constraint is really, it's your kitchen capacity. I think there are certain limitations that just come with the current setup that you then would have to start to modify. It's not a large number.

It's not – we're not talking, this is a single digit, low single digit a fair, whether it's one, two or three just kind of depends on how it plays itself out and kind of how we work. There's also the opportunity when you have as many points of distribution, which really the virtual brand game is about point of distribution.

And as penetrated as we are in a lot of markets, you don't necessarily have to put every brand in every distribution point. Not every kitchen has to carry every to still get you coverage for those guests that are looking for a delivery options. So there's a couple of variables that we're continuing to learn and test as we as we build it out.

But it's not – it's a relatively small number, I mean it’s all about sales growth. The good news is we know in our restaurant, we have $5 million Chili’s that do that kind of volume, even though our average is three. So we know we have a lot of capacity to put more food out of that kitchen than our average.

And that's what we're – and so we're optimistic that we've got plenty of room to grow the virtual brand business because of that..

That’s helpful.

And just one other question, Joe, could you break down how much of the margin improvement at the restaurant level was driven by the incremental flow-through of the It's Just Wings business versus fundamental changes that have been made in restaurant?.

Yes, it was definitely additive to the equation, growing that top line in virtual brands as an example of how we're going to do that, but also growing the top line as we bring dining rooms more fully back on is important piece of that equation. Now in the 40 basis points range, when you look at it from an all-in standpoint Chris..

Okay, very helpful. Thanks guys..

Thanks Chris. .

Thank you. Our next question today is coming from Andrew Strelzik. Please announce your affiliation, then pose your question..

BMO. Hey, good morning guys. My questions are on the margins. You talked about 2Q being kind of in line with year ago and excuse me, you mentioned labor and advertising as benefits it'll dissipate over time.

So when you think about going from up year-over-year to kind of flattish, what are the dynamics at play in 2Q that we should be aware of specifically to that quarter. And then more broadly, when we're looking at comps being down and margins in line to better than year ago.

I mean, how are you thinking about whether it's back at a 100% capacity, plus It's Just Wings or however you want to frame it, how are you thinking about how much better margins could ultimately be in this business, kind of in a post COVID environment. Thanks..

Yes. So, Andrew, I think the – when you start thinking about the delta Q1 to Q2, I mean the unique difference basically is going to be driven off of the Maggiano's side of the equation.

Obviously, Maggiano's historically has always had an extremely strong second quarter built along a lot around the banquet special events and celebratory nature of the holidays. And our anticipation right now is we want to see, that same similar environment playing out.

So while it typically has an oversized contribution to the consolidated equation in the second quarter. You're going to see a little bit more of a headwind to that coming out of coming out of the Maggiano's side.

I anticipate as we look at the Chili's brand to continue to see actually growth in the margins from that piece of the business, but it's just the relative contribution out of Maggiano's that you would typically get in the second quarter. I think of that as a very second quarter specific kind of thought process.

And then far as standing on a long-term basis, again, I think that be go back again to growing that top line. So I think as I mentioned within the labor discussion, when you look at the virtual brands and their ability to impact margins, it's very leverageable.

I mean, again, we brought It's Just Wings into the equation with very, very little change to the labor model within the restaurant. Obviously as you bring incremental growth to the equation, either through It's Just Wings or an additional virtual brand continue to look at that model.

But generally speaking, you're going to get high leveragability coming out of that equation. And then again, dining rooms are still coming back online and you will get further leveragability as we grow that base piece of the business too, which is a very important part of the equation.

I know we focus a lot in virtual brands, but the sequential improvement we've seen in the dining rooms as they've come back on over the quarter is just if not more important to the equation.

So again, there are pieces of the business from a modeling – from a margin standpoint that we're very comfortable, we've improved, and that's improving after off of a fairly efficient model that already existed.

We weren't looking at a lot of low hanging fruit from a margin efficiency standpoint, but we've been able to find some and then Wyman again, talked about some of the changes we're making and how we think about business drivers, such as media and delivery platforms and things of that nature..

That’s very helpful. Thank you very much..

Andrew, thanks..

Thank you. Our next question today is coming from David Palmer. Please announce your affiliation, then pose your question..

Thanks, Evercore ISI. Good morning. You – Joe, you mentioned that the restaurant margins would be about flat. I think you said year-over-year in the fiscal second quarter, how much of a drag is Maggiano's projected to be in that quarter? How much might that be a greater drag from the first quarter? And I have a follow-up..

Yes, again, without getting into the brand level specifics, it's probably, again, if I look at where I expect Chili’s to go I would see further improvement in the margins on their side of the equation. So that improvement is going to be somewhat offset. It's going to be mainly offset by the Maggiano's drag.

This is very outsized earnings quarter for that Maggiano's piece of the equation. Again, that's specific to the second quarter. So as we move further into the year that tends to mitigate itself. So I'm greatly pleased to see where we continue to drive the Chili's business.

And that's the sustainability of where I would expect to see margins go in a longer period of time..

And then just a follow-up on to go and delivery looking longer term, this seems to be something of an area of upside for you.

Are there clues about the most reopened markets where you've had a chance to have that on-premise business mature up? And does that provide a clue to you that you could share with us about how sticky at a higher level this to go and delivery business can be? Any statistics there would be very helpful. Thanks..

Yes. Well, David, it's interesting, right? So, you got to kind of start with what we know about consumers, right? And there's still a large group of consumers who are not going out to restaurants, right? So depending on whatever survey you look at, it's 30% or more of the population, it's just not going to go out.

They'll do dine-in or they'll do take out, but not go out. So what we do know is in restaurants that are seen volumes get back to pre-pandemic levels. So we are in the dining room. So we are, even with that headwind, we have restaurants that are getting close to 80%, 90% of their pre-pandemic sales levels in the dining room.

And we're seeing very solid 30% mix, 35% – 30%, 35% mix of take on delivery. So it looks right now to be fairly sticky. Again, I think post pandemic and a vaccine, what that percent of the population that then says, okay, now I'll go back into restaurants, what that does to the mix.

But we feel very optimistic or very comfortable that the convenience experience by the broad market now isn't going revert back to where it was pre-pandemic. We're going to see significantly higher take out and delivery and that's without virtual brands. So obviously as we saw the virtual brands in the mix that, that adds to that mix.

So, that's kind of how we're looking at it..

Thank you..

Yes. Good, talk to you, David..

Thank you. Our next question today is coming from Greg Francfort. Please note your affiliation, then pose your question..

Hey, it’s Bank of America. I had two questions. The first was just a math question on the second quarter. When I look or plug down mid single digit comp and the margin [indiscernible] model, I'm getting higher EPS than the guidance.

And I'm just curious if there's something on DNA or G&A that I'm missing, or if I'm just off on something? And then the second question I had was for Wyman, you made a comment – or you made a comment in the prepared remarks about what It's Just Wings could evolve to over time.

And it seems like there's a few options for that, but I'm curious how you're thinking about what those options are, is that standalone concepts that pushing harder into third-party goes kitchen is just what you meant by that comment. Thanks..

And again, without getting into too detailed of a modeling discussion on this call, it could be a matter of the – again, the Maggiano's outsized drag in the second quarter relative to how you're thinking about of the model.

There is going to be a little bit of G&A was slightly beneficial in the second, excuse me, in the first quarter compared to prior year. So that normalizes a little bit more in the second quarter, relative to last year second quarter. So not quite as big a benefit there.

And you could probably had about a $2 million oversized benefit in the first quarter, which really relates to the treatment of incentive-based compensation this year versus last year. So that normalizes a little bit in that regard.

So you may want to make some adjustments there, but I'm going to make the assumption that it's probably the relative treatment of Maggiano's..

Got it..

Greg, without – again, we're not going to share a lot of our future growth ideas on the call just from a competitive standpoint. But suffice it to say, we're excited about the potential to do other things with this brand.

It's a very strong brand, is getting great consumer acceptance and appeal our partnership and our learning with our partners DoorDash on how to position it, how to market it more effectively. The team that's working on it is excited about other ways to put this product out to a broader consumer base.

And so we're looking at several ideas that we think could significantly grow off of the base we've talked about. And as we kind of execute and test those, we'll share those results..

Thanks, Wyman..

Yes. Thanks, Greg..

Thank you. Our next question today is coming from Nicole Miller. Please announce your affiliation, then pose your question..

Piper Sandler. Thank you and good morning.

The first question is probably pretty understandable by you're comfortable with less marketing, but I want to understand the change in message or tone, and are you comfortable with less discounting? And is that something that you think you could carry forward?.

Nicole, again, a great question. We are because we have such strong built-in value propositions in the menu. I mean, when you look at value scores across the category, Chili's has some of the highest, if not the highest in casual dining. So our values built in every day and it's been out there long enough, it's got really strong awareness levels.

We will continue to incent through direct and digital. So it's not like we're not – but we're not going to do a limited time promotions. And in the historic sense, right, that's just not – first, we don't see their effectiveness. I mean, it really is about effectiveness, not like we have any.

And we're just trying to grow the business the best way possible. And as we evaluate our effectiveness with those and really the competitions, we just don't see them being that effective. And so we're moving to what we think and what we can measure much more effective marketing channels. And the team's done a great job building our database.

The operators have done a great job executing against more direct vehicles as consumers and our guests come in. So we're very comfortable that that's how we can continue to if we need to incent folks to come in above and beyond what's out there on the base menu..

Okay. And then just the last question on It's Just Wings, clearly nothing but incremental in terms of sales and margins. But as soon as you talked about that, and however, many months ago, it was, my email has been flooded out with every single day with a concept doing the same thing.

So how do you ensure that your marketplace partner doesn't only land the same support to your peers and especially given the data that they do have? Not that they would use your data and you by name specifically, but nonetheless they have the data..

We have a great relationship with DoorDash, it's – any partnership is built on trust. We trust them to do the right thing. We know they're treating us – they're treating their other customers confidentially with us. And so we assume that's the same way they run their business. I have absolutely no concerns about that. Tony is a very ethical guy.

So we have no concerns that that they're doing their business the right way. And we're partnering with them to grow the business in a very transparent way, but how do we partner better to market through their site to be more effective to get the brands awareness levels up..

And Nicole, the other….

[Indiscernible] I don’t even want that out there, but you're just, you're basically okay if they help other people do the exact same thing.

I mean, I guess you're just saying there's enough room in this category and there's enough capacity in restaurant to do this, is that the point?.

Well, again, I don't think that's unusual to any channel at all and in the industry.

There's going to be competitive forces at play, regardless if it's on premise or off premise, I think the fact that we can do it at such a large scale on national footprint is definitely the differentiating factor there, as opposed to a brand you might get an email on that's doing it in a small regional setup. So that's a big difference, Nicole..

And if I misunderstood Nicole, I think the scale matters. I mean, it's the points of distribution that to put out a thousand restaurants, It's Just Wings overnight. That's really what makes this a big idea. I mean, and that's unique to us.

People just don't have that many restaurants that they own, that they can generate the kind of sales, it flows through incrementally and creates the kind of potential profit. So it is a unique, and that have kitchens that have some capacity in them to do this and the capability to pull it off.

So it's an easy – it's an easier said than done thing to create a virtual brand and especially to sustain one. So I think some folks are kind of looking at doing virtual almost pop-ups that they'll use to help get them through COVID, but that's not our strategy. This is definitely a long-term growth vehicle.

And one we see working well for us going forward..

I appreciate that. Thank you very much..

Thanks, Nicole..

Thank you. Our next question today is coming from Jeff Farmer. Please announce your affiliation and then pose your question..

Thank you. Gordon Haskett. And two questions as well. So just sticking with It's Just Wings. You guys made the point that three million systems sales generated in the last week of July. I'm just curious if you can share any information in terms of how that's progressed.

Are you seeing any type of growth from that three million system sales level in July?.

Jeff we're just kind of – we don't want to get into the nitty-gritty, like every week kind of projecting or sharing data. We're comfortable with the $150 million plus, potential for this brand, it's not a growth potentially to get there.

We're in those levels now and we're very comfortable about how the brand is performing and our ability to grow from there..

Okay. That's helpful. But unfortunately I have one more nitty-gritty question for you, which is on, you did share that Chili's central sales, I believe were down 1.4% exiting the month of September. That's impressive.

But in terms of any commentary on October and Chili's, anything you can share with us?.

Yes, Jeff as, I think, and let me reiterate some of the comments in the – in my script again, we expect and Chili’s was also positive 2.2%. And September and traffic, we expect that to grow that will grow in the month of October.

And we’re going to continue to see a further positive progression off of that September number? I'm not going to give a specific back to positive or anything of that nature, but we're definitely going to be moving closer in that direction as we finish up this period.

So, it's a positive on both of those traffic and comp sales from a progression standpoint is our expectation..

All right, thank you..

Thanks, Jeff..

Thank you. Our next question today is coming from Brian Vaccaro. Please match your affiliation and pose your question..

Thank you, Raymond James. And good morning, everyone. Wanted to just start on Chili's sales trajectory and some of the dynamics there. Wyman you noted in your prepared remarks, the ongoing industry pressures, and especially on the independence.

And I'm curious how that’s showing up in your performance across markets? Are you seeing outsized gains in smaller markets versus mid-to-larger size markets where perhaps there's a more meaningful supply reduction?.

No. Brian the big difference still with regard to market performances is COVID response. So again, in these markets, California, New Jersey, Wisconsin, where there are more extreme dining room constraints, that's where you're seeing tighter – obviously less sales.

And the share gains, again, looking through the data with the various that we can, we see pretty consistent share gains across markets. So I think the strategies we're using are broad-based, they're working across the country and we're seeing fairly consistent share, gains that way.

And it really has more to do with, again, what's going on in specific states like California, where we may not be as aggressive in California with putting out outdoor dining as some folks have.

And so we may not be taking as much share and in that state, as some others that have put out much bigger patios and gone more all in on and an external kind of dining experience..

All right, that's helpful.

And sorry if I missed it, but what was the off-premise sales mix at Chili's in the quarter? And then could you help frame where you are on effective capacity? And perhaps remind us kind of where you are enrolling partitions and other initiatives to maximize your dining capacity?.

Yes, Brian, and for the quarter, and again, you saw progression of this as you moved through the quarter, but for the quarter you were in that upper 40s, 47%, 48% off premise conversely the low 50s on the dining room side of the equation. And again, that was if you remember, we talked kind of a fifty-fifty mix coming out of the prior quarter.

So you can contend to see us as dining rooms, come back, open a shift in that progression..

Yes, and in terms of capacity – yes sorry go ahead..

Yes. So with regard to capacity we're – again it's very hard, Brian I'm not trying to be vague here. It's just every market is different. Every – I can't even give you a state number because it's county by county. But in general there's always going to be the six foot with regard to distance, social distancing that we're sticking with.

And so that puts – I just say that keeps you at least at 25% or the most you could get was 75%. If you just said, hey, we're going to open it up and just do social distancing. And you put the partitions in. We aren't there, so I'd say we're probably closer to 50%. If I were to just give you a number, somewhere around 50%.

In high volume restaurants, we are looking to be a little more aggressive with putting in some plexi to allow us to get a little bit more – to get greater utilization of tables, but we're somewhere in that 50% to 75% range. And again, some markets are a lot less because some markets are mandating 25%. So it really is a market-by-market story. .

Yes, understood. Okay, thank you. I'll pass it along..

Yes..

Thank you. Our next question is coming from John Ivankoe. Please announce your affiliation, then pose your question..

Hi, thank you. There's obviously some kind of discussion about holiday in general perhaps being, I guess, a risk for the industry overall, as people – do have – whether it's office parties, or just family gatherings, or friends’ gatherings, what have you just as you had the – I wonder whether those are going to happen.

And secondly, whether the restaurants that were previously very busy during the month can kind of accommodate – basically accommodate these people with some of the capacity restrictions that we just talked about.

So how are you thinking about I guess implicating your comp guidance, the Thanksgiving, the Christmas timeframe, I guess, is kind of the first point, do you think there is any kind of risk at Chili's? I mean does Chili's, over-index with larger table sizes, for example, during that month? And if he could remind us for Maggiano's for the quarter, what percentage of the December quarter businesses banquets and larger parties as you can measure it?.

Hey John, I'll take the first one on Chili's and let Joe kind of give you what we can on the Maggiano's mix. It really is not as big an issue for Chili's. Chili's if you look at our Chili's sales trends over the years, second quarter is a relatively consistent quarter for us.

We have some higher days obviously, and we have a couple of we're close Thanksgiving and Christmas, so those mitigate some of those higher days. But it's nowhere near the seasonal holiday impact that you see at Maggiano's, I mean, obviously, or other brands where we're not necessarily the celebration destination place.

It's where people do come in when they are at shopping. So there is higher some higher usage, but it's nowhere near as great as you would see in other brands and including our brand Maggiano's. So we don't see that we think the way we look at it and again, we're just speculating like everybody else.

But as we look at the data, and we see what's going on kind of through this first quarter, we know there's going to be some change in habits. Obviously there'll be less travel, there'll be less shopping, more online, but we also know they still don't want to cook. These consumers are not going to want to cook these meals.

They're not going to – they're going to want to have food prepared for them. And whether or not they're out, and then we deliver it to them or whether they do come in and we think we're going to see similar kind of trends at Chili's and we have the capacity.

Unless something happens outside of our control with the virus, we think we'll have the capacity to kind of deliver kind of trends we're currently seeing.

Anything you’ve got?.

Yes, and John, the one other thing I'll remind you as it related to Chili's, in the quarter, again, we do, and it's good for both brands. So we do have the benefit of the holiday shift for Christmas, which is a closed day for us and the second quarter shifts into there. So you do have some underlying support to coming out of that piece.

It's probably about a 1%, lift-ish in that range to the quarter. So just when we get to the reporting of the second quarter, I want to make sure everybody is aware of that. So that will be a benefit.

From Maggiano's standpoint of the holidays, I think, the best barometer historically is the banquet side of the equation, which typically would make up about 20% of their business during this quarter. And that's also a nice driver from a margin standpoint.

So when I talk about the headwinds that are unique to the second quarter, as it relates to margins, that that's driving a big piece of that equation. And again, we're contemplating that that built into the perspective we've given you as it relates to the quarter. So, we'll see how the environment plays out over the next two months..

And it just to make it a little bit of a joke, I mean, I think plenty of people could have predicted the pandemic as of the spring. I got to chuckle on that.

As of the prepared remarks, because I was kind of thinking about April as we were kind of in the middle of everything, but anyway, hopefully that joke is well received or not, but anyway, it's good to hear you guys. And I'm glad everything is going so well..

Thanks John. .

Thanks John. .

Nice talking to you..

Thank you. Our next question today is coming from Jeffrey Bernstein. Please announce your affiliation, then pose your question..

Thank you very much from Barclays. Two questions first, just on the broader Chile sales outlook, Wyman, it does seem like consumers want to go back to restaurants. I know you mentioned 30% have not yet entered. But it does seem like sales should continue to improve as capacity restriction ease further, which seems like the biggest headwind.

But if you put increased capacity aside, it does seem like multiple peers have mentioned, maybe not assuming any further sales improvement from here prior to a vaccine, especially with the COVID spikes, and the colder weather and a recession potentially upon us.

So just thinking specifically to Chili's whether you anticipate further sales improvement near term, and it sounds like the Chili's comp is still modestly negative or whether you do believe you can still see some significant, further reacceleration in that trend over the next few months? And then I have a follow-up..

Hey Jeff, I think the – it's a complicated question, right. In terms of – because you have some major markets like California that is reacting and responding significantly different than let's take a major market like Texas to the same virus.

So, if California starts to – is willing and starts to feel like they can then open up their market, even in a COVID world, similar to other states, then we'll see growth in Chili's overall sales. We know they are a significant drag to our number right now.

Joe mentioned that if you take that, what is it, 14% of the restaurants that aren't open in a COVID world, like kind of like the rest of the country and we see significant improvement to the numbers we've shared with you.

So that's just, yes, in a COVID world, if everyone kind of can run at open dining rooms at limited capacity, we still have growth potential in a COVID world. And then obviously the big upside comes when COVID moves away.

And that's an interesting – again, given the 30% of the population saying, they are not going to restaurants until there is a vaccine, that tells you there's some pent up demand out there. Now they're using takeout and delivery, but I’d tell you our dining rooms have a lot of potential to get very busy once there is a vaccine.

Does that help?.

Got you. And then follow-up is just, it was mentioned about independents and the challenges they are facing, obviously the pandemic is difficult for all. But it seems like many are talking about significant independent closures as a silver lining for the large chains, allowing for some market share gains. I’m wondering whether you're seeing that yet.

And then a couple of industry sources that said we're just not seeing it to the same magnitude that maybe was expected initially. So just with your thousand plus restaurants across the country so you would have a pretty good gauge on to what magnitude are we really seeing independent store closures at this point? Thank you..

You know, again, first we absolutely are sympathetic to the impact the pandemic is having on others in this space. And we aren't tracking independent closures. And based on the previous question, we haven't seen any noticeable correlation to that.

Again the results are all being influenced by so many factors, guests not willing to go to dining rooms, the response to the communities and the government in that space and then what's going on competitively. So very hard to kind of tease that element out. But we know that's going to be there.

Obviously there's going to be some shift in the landscape of restaurants when it's already happening. But I think it's just very hard to tell now because you've got consumer behavior that doesn't line up to normal.

So once we get that in the mix and the demand starts to replicate what it historically had, then you'll get a better sense for what that looks like..

Understood. Thank you..

Thanks, Jeff. .

Thank you. Our next question today is coming from Alex Slagle. Please announce your affiliation and then post your question..

Thanks, Jefferies, good morning.

I had a question on the other virtual brand test you are doing, and what these tests look like relative to what you experienced with It's Just Wings and what you're doing different and how you evaluate your options here?.

Yes, Alex, so we don't, just like we didn't share a whole lot with you of anything about it, It's Just Wings before we rolled it to a 1,000 restaurants, we don't really like to talk about what we're testing for obvious reasons. But we're excited. I'll just tell you that. I don't think – I think there are other big ideas out there like It's Just Wings.

We have to test the first two things we're testing and evaluating is demand. Is it a big idea? Can we generate the kind of sales potential that gets us excited? Like in It's Just Wings does, and then can we execute it? And those are the two things that I think are critical to the long-term viability of a virtual brand and making it worth the effort.

And we think there could be a couple of those ideas out there and we're aggressively learning..

Thanks for that.

And then on development you've phrased your development outlook slightly, is this a function of more sites available, or better visibility on getting construction resources and activities in motion? And any thoughts on the expected cadence to those openings?.

Yes, it's a combination of that Alex. And again, I think, it was important to get the process going because development is a longer-term process. So I mean, we've already opened six new restaurants so far this fiscal year a couple more to go to round out the year.

So the work being done now, will actually have a bigger benefit, really, when you think about the second half of 2022 and into 2023. Again, I'd like to get that level of development back up into where you're really looking at 1% to 2% of net capacity growth from the new development side of the equation.

So all the efforts going into making sure we can build that pipeline, feedback we're getting, again where it's difficult to, as Wyman said before, they are kind of really parse out impact of independence, but we do see that to some degree when you work with the development side of the equation, when you think about site opportunity both de novo and possibly going into sites that become available, as you kind of go through this situation.

So there are an increasing number of those out there that may lead to some opportunities, but again we have the resources now in place and the pipeline development starting to take off we’ll build that that new restaurant development..

And I'll just add, opening restaurants in the pandemic is something that we were nervous about. And these six restaurants that we've opened have all performed very, very well, kind of above expectations in an absolute perspective. So that gives us a lot of confidence as we get more aggressive with our development plans..

Great. Thank you..

Thanks Alex..

Thank you. Our next question is coming from John Glass. Please announce your affiliation, then pose your question..

Thanks. Good morning. It's Morgan Stanley. My question is on wages. And with the election, close by the conversation is about whether we have around of minimum wage increases at the federal level, holding aside prognostications as whether that will or won't happen.

Can you maybe just frame how different your store margins are in states where you already have a much higher minimum wage statement and minimum wage, maybe closer to what a federal would be? We’re setting another way or asked a different way, what's the average wage rate today in your business, just so we can sort of frame where you are versus what may potentially come?.

Yes, I don't know John, if we want to go into that level of detail. What I can tell you is, first, there's a lot of rhetoric in there always is, especially pre-election around these topics.

We just talked about the very difficult environment that's facing restaurant industry right now, especially independence, and there's going to be legislation that puts even more pressure on this industry.

That that gets done, I think, is going to be a very interesting conversation when it really gets time to do that in your state to your restaurant tours, the people that are employing that are right now facing millions of unemployed restaurant workers it's just a very interesting conversation when the reality actually comes to the table and what that does to the industry.

That said, what we're proud of is that our average server makes over $20 an hour. Our average heart of the house team members, are making well over minimum wage. So we don't have – our team members are making good wages. And we'll work on and deal with kind of legislation as it comes. I will say, this is where scale and size helps.

Again, if anyone is going to be able to navigate through this and continue to offer value propositions. Then we offer three for ten in California, tells you that we have figured out how to be as efficient as possible in the highest wage state still deliver great value propositions and make money. So we'll figure it out..

Just to follow-up in states like I’ll use, your example of California are restaurant margins lower than the chain average, or does volume offset it? Is there any way to sort of frame where state, where wages are much higher are restaurant – how much lower are restaurant margins?.

Well I'm not going to give you the specific numbers on, but obviously the percentages are lower, but the volumes are higher.

And that's where, again, because you've got the ability to bring scale, to play, to do things, to leverage technology and do the things that allow us to be more efficient, it just puts more pressure on the smaller guys that don't have those resources.

So from a competitive standpoint, it may actually make more sense for us to see that, but we don't wish that on the industry, it's just not a good thing. And again, our servers are making over $20 an hour. And that's what we're proud of..

Thank you..

Thanks, John..

Thank you. Our next question today is coming from Eric Gonzalez. Please announce your affiliation, then pose your question..

Hey, thanks. It's KeyBank. I appreciate the detail on wings earlier.

Maybe this part was danced around a little bit, but I'm just going to ask you directly, what was the same store sales lift from It's Just Wings in the quarter? And then separately, can you talk about the marketing strategy for remainder of the year, like how important new innovation or new menu news will be in the months ahead? It doesn't seem like it's a big focus now, but perhaps that's due to capacity being more of a constraint.

But do you think that that changes in the months ahead and maybe your marketing strategy shifting to digital, do you think it could bring back some TV going forward? Thanks..

There was a lot in there, Eric. Yes, we're not going to give you the numbers broken out, but it's pretty simple math. I mean, we keep saying it’s a $150 million plus brand, and that it's on that trajectory now. So if you just do the basic math and you have our total sales, you'll get in the ballpark. So that's a fair number.

The response to the marketing again, I think you have to, from our perspective, what a lot of people did during the pandemic was reduce menus, simplify down, we didn't do that. We've kept everything out there.

So from our consumer's perspective, we feel good that the things they love about Chili's are still there, they've been there through the whole time period, and that's what they know and love about the brand. Innovation right now is not a top priority for us. We continue to innovate. We still have our margarita of the month.

If you didn't get the Spider Bite you better hurry. I think you got a couple more days before that margarita goes away and we bring out the next one. So we are still innovating and we're using digital, and direct and all our channels to convey those messages. But we are leaning heavily into the quality of the food that we deliver every day.

And the value propositions are built into our menu every day. And they seem to be doing fairly well for us..

Thanks..

Turning to marketing mix….

I’m sorry..

Well with regard to marketing mix in the future, Eric, we'll see again, I started in this industry 36 years ago, and as a marketer doing limited time promotions and on national television. So I know very well how effective they have been. I just don't think that's necessarily the world today.

And we'll continue to – our marketing team is going to continue to do and try the more effective approach to driving brand awareness and building the brands and driving traffic. And if that doesn't work, we'll shift back around, I mean, we're flexible and agile..

Thanks. Just on the mix comment before, I think, you made a comment that it was in the high 40s your To Go mix.

Would you be able to maybe tease out delivery versus takeout breakdown?.

It's still maintaining about it a 2:1 ratio on the To Go to delivery, To Go being the higher piece of that equation. And will need to move on Eric. Thank you. .

Thank you..

Thank you. Our next question today is coming from Dennis Geiger. Please announce your affiliation, then post your question..

Thank you, it’s UBS. One and just a quick follow-up to Jeff Bernstein's question.

Just if you could talk about further sales gains from here, if state restrictions don't change and I apologize if I missed it but just maybe given whatever existing capacity you still, you may have in the dining rooms right now, maybe for driving a further step up off-prem, if independents and small chains struggle a bit more this winter.

Can you kind of increase those gains within the current state restrictions right now, do you think?.

Yes, I think we are doing some things with regard to additional – making the increase in our capacity within the current constraints. So again, use of plexi and things like that, that still provide a very safe environment for our guests, but allow us to open up a few more tables. So there are some of those options out there.

And we're moving down that path. Again, the big opportunity within the COVID world is just to get to the point where some of these more constrained states, cities, and counties start to open up dining rooms to even the 50% level, right? I mean, that's where there's some bigger opportunity in the COVID world. And that, that's a very fluid thing.

The good news, I mean, I know it's half empty, half full kind of proposition as we see COVID kind of move up in some cases, but the good news is that I don't – it's going to get managed there'll be pockets, and then we'll address it and we'll move through it. And we've seen that really now several times through, in certain markets.

So we don't anticipate a major retraction, or reduction in traffic based on COVID cases, it'll be more pocketed and that's something we can work through. And so that's just how we see the business. And again, we'll address that on a market-by-market basis..

Got it.

And then if I could just on the development opportunity Joe, I think, you just highlighted, just wondering if there's anything more to share there, understanding this is looking out a little bit, but is it company stores, will it be franchisees size of store? Is there anything beyond what you've said that you can share, obviously the businesses is strong and this field does feel like an opportunity to accelerate that? Just anything if there's incremental – anything incremental there at this point, Joe? Thank you..

It definitely is an opportunity. And when I'm referring to getting to that 1% or 2% capacity growth from new development, that's for company owned. Again, we're going to be the more aggressive player in that development opportunity. And I think the development is also broad-based, I mean, we're looking throughout the country..

Thank you..

Thank you. Our next question today is coming from Chris Carroll. Please announce your affiliation, then pose your question..

Thanks. Good morning. It's RBC Capital Markets. So I just wanted to ask first, specifically about digital sales.

And I'm curious to hear if you have any early observations from what are presumably your growing digital sales mix on the back of the – it's just the wings launch? And then just how sticky those sales are relative to your expectations?.

We’re running – where are we at now? We're 40, yes we're in the 40s. And again, this is one of those things where we want dining rooms to open up more. And as we see that we shift from a more digital world to back to the real world in the dining rooms that we actually want to see more of. But we're in that 40% range right now.

And the stickiness, especially around It's Just Wings is very good. And again, based on benchmarks that were made aware of we're in very good shape with regard to how both Chili's and the It's Just Wings brand are kind of connecting with the digital users..

And Chris from a relative standpoint, that's about – that's more than twice at a level we had really going into COVID. So nice spike there and stickiness at a much higher level. So new normal being set..

Got it, got it. Thank you. And then just on the mix component of the comp, I mean, presumably off-premise is creating a significant portion of that drag.

But is there any impact from It's Just Wings specifically on the mix? And how do you see mix playing out as presumably on-premise and overall sales continue to trend in the right direction?.

It’s a great question, Chris? And I think, again, something people may not be picking up as much. First, we haven't priced, right.

And again, I think, you're seeing, when you just look at the – our differential between traffic and sales, you can tell that there's some mix and pricing issues going on within our brand, but also within – with response from others. So we're being very cautious about pricing right now.

We think we have – we're really not planning on a lot of price right now. So that's future potential for us. And then the mix hit from primarily alcohol loss of alcohol sales when you move, it's not an It's Just Wings issue. It's an alcohol issue.

So when you move consumers out of the dining room and into a takeout environment, you lose alcohol sales that are fairly good clip. And we're doing everything we can to get alcohol sales out into the takeout world. But it's still a significant mix shift.

And that will come back as dining rooms – as dining rooms come back, our percent alcohol mix for the guests that are back in the dining room is actually up. And so it's just the mix of guests that are in takeout versus dining is creating that major drag. And as we open up the dining, that's significant opportunities.

They will just come back organically as they come back and they will drink..

And we have seen that. So again, that progression of openings, you do see the mix improving in those restaurants as they get more dining capacity..

Got it. Thanks very much..

Thank you. All right, that’s all the questions we have for today..

Thanks you. Yes..

All right..

So we've run out of time, but thank you everyone. We appreciate you joining us on the call today and look forward to updating you on our second quarter results in January..

Have a good day guys..

Hey, thanks everybody..

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..