Brinker International, Inc. (NYSE:EAT) Q1 2024 Earnings Call Transcript
Brinker International, Inc. (NYSE:EAT) Q1 2024 Earnings Call Transcript November 1, 2023
Brinker International, Inc. beats earnings expectations. Reported EPS is $0.28, expectations were $0.03.
Operator: Good day, and welcome to the Q1 F '24 Earnings Call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware, Vice President of Finance and Investor Relations. Ma'am, the floor is yours.
Mika Ware: Thank you, Holly, and good morning, everyone. And thank you for joining us on today's call. Joining me today are Kevin Hochman, our Chief Executive Officer and President; and Joe Taylor, our Chief Financial Officer. Results for our first quarter were released earlier this morning and are available on our website at brinker.com. As usual, Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our Safe Harbor regarding forward-looking statements. During our call, management may discuss certain items which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
A busy restaurant kitchen with a chef carefully plating a meal.
All such statements are subject to risk 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 filing 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 being said, I will turn the call over to Kevin.
Kevin Hochman: Thanks, Mika, and good morning, everyone. Thank you for joining us as we recap another quarter of progress against our long-term strategy. For the first quarter, we delivered a 6% comp sales growth, which is Chili's fourth consecutive quarter of outperformance versus the casual dining industry. Our focus on improving the guest and team member experience while launching profitable and sustainable traffic driving initiatives continue to increase momentum on our business. And importantly, our traffic gap versus the industry narrowed throughout the quarter despite the discontinuation of Maggiano's Italian Classics virtual brand and cycling through the deep discounting on the remaining virtual brand, It's Just Wings.
This traffic progress demonstrates the improving strength of our core Chili's business. Our investments, both in the guest experience and marketing, are working according to plan. Our data shows we've steadily gained share of wallet over the past four quarters across all day parts, particularly dinner, and across all income groups, with higher income households growing the fastest. As we move further into the fiscal year, we anticipate delivering sustained traffic growth ahead of the industry. Currently, we're on air with our third wave of advertising since restarting campaigns in March, and we continue to be encouraged by the sales results. We're on air where people are watching and consumers are responding well to our unbeatable $10.99 platform, which delivers a complete value that gives us a competitive edge in the current consumer environment.
As we moved into October, we accelerated traffic growth versus the industry and delivered positive Chili's traffic for the month. We believe advertising superior value, delivering an improved guest experience, and continuing simplification is the best plan to deal with any economic headwinds. We'll continue to monitor it closely and make sure we have the best possible plan to sustainably grow market share. Now let's talk about menu progress. Last quarter, I gave you an early update on our Chicken Crisper relaunch, one of our core four platforms. Since then, we also introduced our National Hot Crisper. And with the new lineup in market for over a quarter, we have a better line of sight to its performance. Through recipe simplification, selling larger piece counts, and pricing behind improved sauce and side innovation, the average Crisper food cost as a percentage of sales has moved from 23% to 20%, and we are now selling 40% more Crispers.
A much bigger business with lower food costs and better margins is a great result. It shows what this business can do with a focus on core innovation, and this initiative is a big driver of our improved financial performance this quarter. Last quarter, we also gave you an update on the new bar menu launched in late August, which featured new premium margaritas and introduced our It's Just Wings brand to the Chili's bar and dining room. While it's still early, the results are promising. We're seeing mixed move into the new premium margaritas, and we are seeing guests trade out of 3 for Me and into full-priced wings and crispers, which is improving both sales and margins. We're hard at work at the next wave of Core Four improvements, and we look forward to sharing more details in the coming quarters.
The momentum in our results doesn't happen without strong, stable leadership in our restaurants. Through our efforts to simplify the menu and operations, we've made significant progress making our operators' jobs easier and more rewarding. As a result, we've lowered our 12-month manager turnover now to 24%, which is 14 points better than the industry. When you improve manager turnover, you would expect hourly turnover to start to improve too, and I'm pleased to report we are starting to see improvements in hourly turnover, which is now down 44% on an annual basis. Looking to the back half of the year, we have made a decision based on the results of the advertising campaign and a stronger base business in place to add an additional four weeks of advertising during the third quarter.
This will increase our weeks on air from 21 to 25 during fiscal 2024, which will help us continue to accelerate sales and traffic growth throughout the fiscal year as we build a guide path to drive sustainable long-term sales and traffic growth over the next few years. This commercial plan, along with continued simplification, will continue to accelerate our business results. I'm pleased with the continued progress against our long-term strategy. It's clear the changes we are making to the service model while increasing our voice with advertised value is a winning plan. We are rebuilding the Chili's business the right way, and we're encouraged by the growth we are seeing in sales and traffic, as well as improvements to restaurant operating margins.
Now I'll hand over the call to Joe to walk you through the numbers and share guidance for fiscal 2024. Go ahead, Joe.
Joe Taylor: Hi, thank you, Kevin, and good morning, everyone. The results we reported this morning represent a solid start to our fiscal year and provide good indications our strategy to focus and simplify operations, improve the guest experience, and importantly, once again, speak with a louder voice about all Chili's has to offer is gaining traction. First half of the quarter benefited from an effective marketing window, supporting comp sales gains for the quarter above industry average. As we moved through the quarter, we realized improvement in key P&L areas, led by food and beverage costs, which on a combined basis nicely exceeded our expectations. Specific to the financial results reported, Brinker's consolidated revenues for the quarter totaled $1 billion and $12 million, with consolidated comp sales growth of positive 5.8%.
Our adjusted diluted EPS for the quarter was $0.28. And our adjusted EBITDA for the quarter was $72 million. At the brand level, Maggiano’s reported fiscal first quarter comp sales of 2.6%, composed of 9.5% price partially offset by negative mix and traffic of 1.2% and 5.7% respectively. Chili’s reported a comp sales growth of 6.1% for the quarter, driven by price of 8.8% and positive mix of 3.1%, partially offset by negative traffic of 5.8%. To provide a little more insight into the quarterly traffic performance, our strategic decision last year to deemphasize the virtual brands contributed approximately 4% of the overall traffic loss. The remaining negative traffic of less than 2% can be attributed to the base Chili’s business, a level we feel is indicative of the progress we are making in improving traffic for the brand.
Pricing levels for the quarter remain elevated above more historical norms, but also are contributing nicely to improving our restaurant economics and restoring operating margins. As we move through the rest of the fiscal year, we will take less price with planned menu launches and will see year-over-year price levels drop further. While we believe we still have dry powder going forward, we plan to be more strategic in meeting the consumer where they are willing to spend. Now turning to margins, we've seen significant year-over-year improvement in our restaurant operating margin, reaching 10.4% for the quarter, up from 6% last year. Sales leverage from our improved price mix positioning, a continuing shift of guest traffic into dining rooms, improved commodity markets and manager labor cost improvements all contributed to the quarterly gain.
Our first quarter food and beverage expense was favorable 490 basis points when compared to last year. This key expense area recorded significant benefit from pricing actions during the past year. In addition, lower and more stable chicken prices and the increase in chicken mix from our successful Crispers merchandising further improved year-over-year performance. Dairy and pork markets were also favorable and contributed to an overall deflationary market for a comparable commodity basket. Based on current market conditions and contract positioning, we expect the second quarter to also experience commodity basket deflation and then move to a lower single digit inflationary environment for the second half of the fiscal year. Labor expense, as a percent of company sales, was favorable 10 basis points compared to prior year.
Manager turnover returning to lower, industry-leading levels and sales leverage against fixed labor costs were the driving factors of the year-over-year improvement. Hourly labor was comparatively stable for the quarter with the emergence of an improving trend in turnover. Wage rate inflation remains elevated relative to historical norms in the mid-single digit range, but appears to have stabilized. We believe our improved labor model is creating a more supportive environment for our hourly team members and helping to keep overall labor expenses in line with company sales growth. As expected, restaurant expense in the quarter was 60 basis points higher year-over-year, primarily due to our planned increases in advertising and repair and maintenance spend.
Again, we experienced a favorable impact of sales leveraged against fixed restaurant expenses as well as improvements in several other area of restaurant expense line items, particularly off-premise related expenses and utility costs that helped offset some of the planned expense growth in this component of ROM. Moving further down the P&L, interest expense was $4.7 million higher year-over-year due to the current rate environment and the refinancing of one of our bond offerings earlier this year. G&A increased due to higher performance compensation expenses, greater 401(k) participation, and increased IT related costs. The improvement in operating performance and subsequent stronger levels of cash flow further improved our leverage positioning with funded debt-to-EBITDA at the end of the quarter at 2.3 times.
We continue to forecast further reductions in the leverage ratio both from improved cash flow and the pay down of revolving credit borrowings targeting year end leverage ratio of two times. This morning's press release included an increase in our guidance for fiscal year EPS and reiteration of the other points of guidance provided last earnings call. Based on our first quarter performance and improved restaurant economics, we are increasing full year EPS guidance to a range of $3.35 to $3.65. And finally, as it relates to our current second quarter, let me provide some insight for two important expense categories to help educate your quarterly sequencing of performance in your models. Now that we have a better line of sight into the timing of our F24 marketing activities, we currently expect Q2 advertising expense to be elevated between $2 million and $3 million compared to an even spread of the expense throughout the year.
Additionally, our Q2 G&A expense is anticipated to be similar to slightly above the $42 million recorded in Q1, primarily driven by an increase in incentive compensation due to improved operating performance. Anticipated Q2 G&A expense also impacts full year G&A, now expected to increase $13 million to $14 million compared to prior year. As I said at the beginning of my comments, we are off to a good start to the year, gaining increasing confidence in the execution and possibilities afforded our brands from our strategies. While cognizant of potential economic challenges, we are encouraged as to how guests are responding to our messaging, the benefits we are seeing from improvements in the guest experience and a return to improved restaurant operating margins.
We look forward to sharing further progress as we move through our upcoming quarters. And with my comments now complete, I will turn the call back to Holly to moderate questions. Holly, it's all yours.
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