Bloomin' Brands Inc (BLMN) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Bloomin' Brands Fiscal First Quarter 2018 Earnings Conference Call. (Operator Instructions) It is now my pleasure to introduce your host, Mark Graff, Vice President of Investor Relations. Thank you, Mr. Graff, you may begin.

Thank you, and good morning, everyone. With me on today's call are Liz Smith, our CEO; and Dave Deno, Executive Vice President and Chief Financial and Administrative Officer. By now, you should have access to our fiscal first quarter 2018 earnings release. It can also be found on our website at www.bloominbrands.com in the Investors section. Throughout this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website, as previously described. Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of growth strategies and financial guidance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings, which are available at sec.gov.

During today's call, we'll provide a recap of our financial performance for the fiscal first quarter 2018, an overview of company highlights, a discussion regarding progress on key strategic objectives and an update on 2018 guidance. Once we have completed these remarks, we'll open up the call for questions.

With that, I'd now like to turn the call over to Liz Smith.

Thanks, Mark, and welcome to everyone, listening today. As noted in this morning's earnings release, adjusted first quarter diluted earnings per share was $0.71, up 22% from last year. Combined U.S. comp sales were up 2.8% in the first quarter. This included an estimated 60 basis point unfavorable impact from weather.

Q1's performance marks the fifth consecutive quarter of sales outperformance versus the industry. This reflects a continuation of the momentum from 2017 and further validates our growth strategy.

For more than 18 months, we have been making substantial progress, against our strategy, to reallocate spending away from discounting while concurrently reinvesting back into the customer experience. These investments were prioritized towards customer facing improvements, including food quality and portion enhancement, service upgrades and improved ambience.

The benefits of this strategy were first reflected in strengthening brand health measures, what's filed was improving traffic trends and have continued to build over time. The investments we're making are paying off and restoring the portfolio to growth. This, of course, wouldn't be possible without the strong level of execution and enthusiasm of all of the operators in the field and their dedication to putting our customers first.

In addition to investing in the customer experience, we are focused on building incremental sales layers to further accelerate sales momentum over the medium and long term. This includes building out data personalization capabilities, the Dine Rewards loyalty program and the rapidly growing off-premise business. We believe these investment priorities are appropriately aligned with customer preferences and that our momentum and share gains will continue. We will remain nimble and agile while showing the patience necessary to do what is right over the long term.

Now turning to results by brand. In Q1, Outback's comp sales were up an impressive 4.3% and outperformed the industry by 410 basis points. It is clear that all of the investments we are making to elevate the customer experience are driving traffic. As a reminder, these investments include enhancements in steak preparation and portion sizing, reducing complexity within the restaurant and improved ambience to the exterior remodel that contemporizes our design.

For the quarter, Outback's traffic was up 2.2% and represented the third consecutive quarter of positive traffic gains. We are very pleased with the quality of the traffic as it has been broad-based and each lever is contributing. We continue to see the benefits from reducing our reliance on discounting and shifting our resources to feature differentiated brand benefits. Our Dine Rewards program is strengthening our customer loyalty. The investments we are making in data personalization capabilities will further enhance our customer engagement, while improving our ROI. The positive momentum is also showing up in brand and health measures.

We saw year-over-year increases across key social trends, including food, portions, as well as price value. These measures are indicators of underlying business momentum. Last year, we substantially completed the multiyear rollout of the Outback exterior remodel program, and we'll shift focus to interior remodels in 2018. We are testing multiple design prototypes and expect to complete the interior program over the next 3 years. Ensuring our assets are current remains a top priority. We are also relocating Outback restaurants as quickly as quality sites become available. Given the strength of the pipeline, we expect to relocate another 14 restaurants this year. We currently are seeing 20% to 40% sales lifts when we relocate restaurants. Outback is well positioned to further take share as it has the proper balance of great brand experience, strong marketing and growing customer attachment. Carrabba's had a strong quarter, with Q1 comp sales up 0.9%. Traffic was down as expected as we continue to strip out the more promotional elements that crept into the brand over the years and return Carrabba to its root of authentic Italian dining. Total marketing was down 25% in the quarter and discounting was down 22%. We also focused on more proprietary programs such as wine dinners, Amore Monday and the growing off-premise occasions to drive healthier traffic.

We started this significant shift from mass marketing to mass personalization in the second half of last year. You saw this, as we pivoted from national TV marketing and LTOs towards quarterly specials that showcase our superior and authentic Italian cuisine.

We are focusing more on grassroots marketing and are doubling our available dollars to partners to engage in their communities. As the year unfolds, we will continue to wean promotional traffic from the base and replace it with more sticky, high-value consumers.

Turning to Bonefish. Q1 comp sales were down 0.1%; and excluding an estimated 80 basis point weather impact, they would have been positive for the quarter. Bonefish is focused on investing in food and the dining experience as we return to our roots of a lifestyle brand known for fresh fish, innovative drinks and superior service. Earlier this year, we launched the partner selection where partners have the ability to choose the local fresh fish specials for their restaurants. As a result, we are seeing an increase in special mix as well as strong customer feedback scores. Bonefish is also migrating its marketing resources away from national towards more local programs. Everything is approached through a lens of strengthening the connection with the customer and keeping them in our ecosystem. This local philosophy helps define Bonefish as the unchained chain.

In Q1, Fleming's comp sales were up 2.9% and significantly outperformed the high-end segment. Fleming's was the last of the domestic brands to begin the journey of reducing its reliance on discounting. While discounting was down in the quarter, the traffic decline was less than we anticipated. Moving forward, Fleming's will work on differentiating the brand from the traditional high-end steakhouse through localized menu selection and customer segmentation.

Domestically, we will continue to invest in the very successful Dine Rewards loyalty program, which now has more than 6 million members. This program is performing well and driving strong engagement across the portfolio. We will evolve the program to even further leverage the customer segmentation opportunities provided by the data.

Our investments in CRM will strengthen our customer engagement through more personalized communication while providing a higher return from our marketing spending.

By every measure and customer survey out there, the potential for off-premise and delivery provides a large and incremental tailwind for casual dining. According to a recent CREST survey by the NPD group, nearly 1/3 of millennials use delivery more than once a week, while half of baby boomers use it less than once a month. This highlights consumers' desire for inconvenience and foreshadows where market demand is going.

We have fine-tuned the operations model in 240 delivery restaurants to ensure we meet the high levels of service demanded by the delivery customer. We anticipate rolling more stores out in the second half of the year. In addition, we now have 4 expressed locations, which combine Outback and Carrabba's in a delivery and takeout-only format, and we expect to open more this year. The smaller footprint concept will be utilized to expand our reach into both new and fill-in trade areas. We will be patient and deliberate as we build this capability to meet expectations of customers in this all-important occasion.

Now turning to International. Brazil comps were up 1.1% in the first quarter, despite a difficult political environment. Even though economic and consumer metrics have improved, the political situation and resulting consumer unrest has made headlines and had an impact on every business, particularly, in Rio, where late-night traffic has been impacted by security concerns.

The demand and love for our restaurants remains at an all-time high, and we continue to meaningfully outperform our peers.

In Asia, we are very pleased with how the business in South Korea has performed with our franchise partner. We are contemplating a similar approach in China, where we would move away from a company-financed model to a franchise or joint venture model.

In summary, our growth measures are performing well and have resulted in another strong quarter. In 2017, in consideration of our strategy shift, we recognized the need, during our calls, to give insight on the upcoming quarter at Outback, a departure from our standard practice.

I will give that color again today so was not to signal anything unintentionally. In keeping with that, Outback's trend in April, continues to be very strong and is meaningfully outperforming the industry, as in past quarters. However, in future quarterly updates, we will resume our policy of refraining from providing intra-quarter updates.

I have included this in my comments today, so that next quarter, when I do not give intra-quarter updates, it will not be seen as a signal, but it returned to what we believe is a more prudent quarterly comp discussion.

Q1 was an excellent start to what we are confident will be a successful year at Bloomin' Brands. We're excited about the prospects ahead, and look forward to updating you as the year progresses.

And with that, I'll turn the call over to Dave Deno to provide more detail on Q1. Dave?

Well, thank you, Liz, and good morning, everyone. I'll kick off with discussion around our sales and profit performance for the quarter.

Before I begin, I'd like to point out a few items related to our first quarter results. First, when I speak to results, I'll be referring to adjusted numbers that exclude certain costs and benefits. Please see the earnings release for reconciliations between non-GAAP metrics and their most directly comparable U.S. GAAP measures. We also provide a discussion of the nature of each adjustment.

Second, our first quarter results include the impact of adopting a new revenue-recognition standard. We've also recapped our historical period, including the first quarter of 2017 to conform it to this new standard. When I mention Q1 2017 results, I will refer to these recapped numbers. The financial impact of revenue recognition to both Q1 2018 and Q1 2017 is an increase to EPS of approximately $0.04. If you'd like more details regarding our adoption of this new standard, including our 2017 financial impact by quarter, please refer to Exhibit 99.2 to the Form 8-K for this to the SEC this morning.

Finally, our Q1, 2018 fiscal calendar, begins one week later than Q1 2017. This is shift impacts for comparability of the 2 periods. Q1 2017 includes several high-volume days between December 26 and December 31. Q1 2018, excludes the high-volume days. This shift had an approximately $0.03 negative impact to Q1 EPS. With both in mind, the first quarter financial results versus the prior year were as follows. GAAP diluted earnings per share for the quarter was $0.68 versus $0.46 in 2017. Adjusted diluted earnings per share was $0.71 versus $0.58 last year. Total revenues decreased 3.3% to $1.1 billion in the first quarter. The decrease was driven primarily by domestic refranchising and the 1-week shift in the calendar. This is partially offset by an increase in comp sales and an increase in franchise revenues.

Combined U.S. comp sales finished Q1 up 2.8%. This included an estimated 60 basis point unfavorable impact from weather. Keep in mind that our Q1 comp sales are reported on a comparable calendar basis to eliminate the impact of the 1-week calendar shift.

Liz went through the comps by concept, so I'll now turn to other elements of our Q1 performance. Adjusted operating income margin was 7.4% in Q1 versus 8.2%, a year ago. It is important to note about 30 basis points of the decline was from the calendar shift. In addition, margins were negatively impacted by wage inflation, product mix, operating expense and commodity inflation. We also continued to make investments in the service model. These investments are starting to show up in our sales results, and we expect to make progress on margins as the year progresses. We are confident that we will see operating margin growth this year on a comparable 52-week basis. The Q1 adjusted tax rate was 5%. This was lower than expected due to some discrete tax items that are included in our Q1 rate. Although, we do expect our rate to increase in future quarters, we have updated our tax rate guidance, and I will discuss that in -- more in a moment.

On the development front, we opened 12 systemwide locations in the first quarter, including 9 International locations, 2 Express locations and 1 Fleming's. We've repurchased $55 million of the stock so far this year. We'll continue to opportunistically repurchase stock and return cash to shareholders.

I would now like to take you through some thoughts on our 2018 guidance. First, the impact of adopting the new revenue recognition standard is now included in our adjusted diluted earnings per share guidance. For the total year 2018, we expect a $0.05 reduction in adjusted diluted earnings per share. This is consistent with the impact of applying the new standard to fiscal 2017, as outlined this morning. Despite the anticipated unfavorable $0.05 impact of this change on fiscal 2018 results, we are maintaining our 2018 adjusted diluted earnings per share outlook of $1.38 to $1.45. The adjusted diluted earnings per share growth rate on a comparable basis is now approximately 16% to 21%, up from our original guidance of 11% to 16%.

Second, we now expect our GAAP tax rate to be 6.5% to 7.5% and our adjusted tax rate to be between 8.5% and 9.5% for the year.

Our 2018 tax rate is expected to be 250 basis points lower, due to the discrete tax benefits of Q1 2018, that I mentioned earlier, and the tax benefit of certain stock option exercises. All other aspects of our 2018 guidance, remain intact.

In summary, Q1 was a great start to 2018, building off our very strong finish to 2017. We remain confident that we are making the right and necessary investments to support long-term growth.

Clearly, our investments in the core customer experience are paying off. We remain disciplined stewards of capital, and our improving capital structure provides increased flexibility to return cash to shareholders.

And with that, we will now open up the call for questions.

(Operator Instructions) Our first question comes from the line of Michael Gallo with CL King.

I just want to ask just a question. I guess just unpacking some of the drivers at Outback and obviously, you had -- you have a lot of things that's going on. I was wondering if we could parse out in any more detail how much you think the combination of whether the reduced discounting or some of the things that were done or remodels or Dine Rewards, or, I guess, just to what degree the strength is being -- what do you think, I guess, the biggest factors are? Do you think they are all just contributing modestly? Is delivery -- I know it's not in a tremendous number of stores, so it's hard to imagine that, that was a tremendous layer. But just to kind of better understand what you think is driving such great outperformance relative to the category.

Sure, Michael. The first thing I'd start with is that all of those things are working, and all of the patient investments we've made over the last few years are really paying off. So let me add some color to that. We had another plus 4% comp, I indicated, the April is very strong for Outback. And what's driving that, first and foremost, you go with the elevated and investments that we've made in the customer experience. We are just performing and executing at a really terrific level on Outback. So the investments we made -- we made $40 million of investments in elevating the customer experience in food, in portioning, in service. Then you layer on top of that the ambience investments that we've made. The 4% to 5% lift that we got on the exteriors, now we're rolling into the interiors and we're real excited about the new prototype and the potential that has. So that momentum continues. And then you go into the other layers that we've made investments in, such as Dine Rewards, which has been a real, real success for the category. We have over 6 million users, and it's really improved customer perception and customer loyalty and connectivity, and then additionally, really getting out of that mass discounting and pulling back and putting it in to more targeted, personalized communication. We spent a lot of time, and we'll continue to have a lot of time increasing the connectivity of customers through data personalization. We're always going to have exciting LTO windows. But to -- when you put all that together, the brand health of Outback is going to be a short-term, medium- and long-term story that we feel really good about. And just one other thing I'd say on off-premise, because you mentioned that, we believe the off-premise opportunity is well in front of us. But you're right, it wasn't a significant contributor to the comp. It was under 20% of the growth in the comp. So I think it was like 0.8%.

That's very helpful context. And then just a quick follow-up, the labor line, you certainly have outperformed admirably well, obviously, some of that is the comp leverage but I think on a -- the whole number was down as well, which is a lot different than that we were seeing out of your peers. So anything specific in terms of at the restaurant level how you're managing labor? Or anything you can you speak to on that front?

Yes. We've experienced about 4% inflation, and we have talked over the years about the tools we put in place and worked very hard to do that, and those tools are coming into fore for us. And that's a line of productivity for us along with cost of goods sold and other places. So that's where the -- Michael, that's where the sound management by our operating team and our leaders are coming into play. Because we have the tools in place now to help us better understand labor and where it's going.

And we're particularly proud of that given you see our customer satisfaction metrics on service being increasing year-over-year. So that great labor management combined with an improved customer experience in stores is a win, win.

Our next question comes from the line of Brett Levy with Deutsche Bank.

If you could share a little bit of color just on what you're seeing across the competitive landscape and anything specific to is there anything across the country at Outback that you're seeing one area doing better attachments, just customer behavior? And then just the follow-up on loyalty, are you seeing anything that you can share along spending, transactions, just cross brand relations?

Sure. So I'll start broadly on the CDR industry. I mean, you're kind of question, What are we seeing? We're certainly seeing a bit of an improved environment, however, as you guys know, for the 12th year, and for the, I don't know, 48th quarter or maybe -- who knows, the traffic was down again 2.9%. We think that's a reflection of continued ongoing capacity coming in to the category in the form of independents and other food -- ways to eat. The ways to eat food away from home continues to proliferate. I mean, most retailers are now putting in their own cafés, that type of things. So I think overall, consumer excitement and the disposable income increases and the general confidence bodes very well for eating out. I think you just have much more competition and ways people can eat out, and it's really pressuring the installed base of same-store sales. What you do see, however, is that within the same-store sales, you're going -- you have a bifurcation, a growing bifurcation between folks that are meaningfully gaining share and folks that are having a tough time. And we see that as breaking out along the lines of really putting the consumer at the center, elevating your game, that's driving consumer connectivity, translates into share gains and growth. And it's a very fragmented industry. So I think people that do that will continue to see outsized share gains, and certainly, that's what we've seen on Outback. And that's the model that we're applying across the portfolio. So I think healthy consumer environment, a lot of excitement about eating, more competition because of more capacity, but still, it's all about customer centricity and knowing your customer. As it relates to Outback, it's really broad-based strength across, because when you talk about the levers of investments, those were kind of national programs. Now we're going to continue to drive roll-off premise across the country. Florida has been very strong for us, I think for a number of CDR folks as well. That's the only kind of region, I would call out, we have a big footprint in Florida. But the rest of the country is performing very well. And then in terms of loyalty, which is kind of a great example of a national program. Loyalty is performing exactly as we hoped, and I don't want to get into the specifics because the power in it is now we're learning so much about our customer. We're really able to mine our data base with even more personal segmented things, that's kind of loyalty 2.0 to come, which we're really excited about, things that we'll be able to do there. But what I would tell you is that, it's driving growth across all of the brands and that over -- that 200 basis point plus, we definitely have seen cross fertilization across the brands, which we're really gratified by, right? So a lot of our casual dining customers have discovered Fleming's, and they maybe probably would know that they hadn't qualified for that 4th business gone there. So it's really leveraging the benefits of our portfolio and performing extremely well.

Our next question comes from the line of Jeffrey Bernstein with Barclays.

Two questions. One just on the comp trend, if you could just give a little bit more granularity. I mean, obviously, it seems like a lot of drivers to that 4%-plus Outback comp. I'm just wondering when the biggest buckets I think you talked about were loyalty, remodels, relocations. Just wondering if there's any quantification of how those come together in terms of within that 4% and whether you think the internal remodels that you're now beginning will effectively replace the lift you got from the externals. And another question, Dave, just specific to the operating margin. I know you were quite clear that you expect on a 52-week basis that you're going to see growth. So I'm just wondering if you could step back and look at the portfolio over time. It just seems like in years past, closing the gap relative to peers has proved difficult, but that was due to the comp challenges and the beef inflation and whatnot despite all the cost saves. I'm just wondering as you look at '18 and beyond, with the cost saves ongoing, with beef deflationary, with comps solid, I mean, how should we think about margins over the next 12 to 24 months? Is there any impediment to those really starting to grow meaningfully over the next coming quarters and years?

Jeff, I'll talk about the comp. We're not going to go down and parse this. This was more -- I'm sure you can appreciate 0.2, 0.3. We invested on this journey over 2 years ago in elevating every aspect of 360 degree experience, and all of them have to be working to see the kind of lift and sustained momentum that you -- that we're seeing on the brands. So in terms of quantifying biggest impact, certainly, first and foremost, the real increase in the customer experience in the store, the elevated customer satisfaction levels, the elevated intent to return, all the investments we made in food, in quality, in service, there's no question that, that's -- the reason people come in to dine is the experience in the box. So you'd have to say that those investments in the $40 million that we made over the past 2 years are -- you're now seeing all the volume of those investments starting to come through, and that will play into Dave's comment on margin. Additionally, the other sales levers that we've developed that are really kind of -- differentiated and proprietary are also really performing well. The loyalty program as you said, are own data capabilities. Gosh, it wasn't a couple of years ago that we had only, I don't know, 3 million or 4 million selected e-mails. I think we have over 12 million now, and we're able to talk to them in a personalized manner. And we think that, that certainly, it has increased our return on investment when we do speak to them. And then finally, as you said, ambience is really important, and we were really thrilled with the exterior remodel. And we do expect the interior remodel to perform very similarly to the remodel that we kicked off in 2010. So, that's going to be a 3-year journey, and it's our commitment to never get behind again on assets. And I guess the last thing I'd say is that off-premise is absolutely something that we're going to continue to grow and that we see big opportunity in. And we have some stores, and I'm not going to get into the layer that happened -- our teaching stores and our first-mover stores that are just knocking the ball out of the park. Off-premise was up for us, but that's going to continue to grow, and we still see that as an incremental occasion as it's coming out. So I think just the good news is, is there's not one thing to anniversary. There's not one thing to lap. There's just a lot of investments that are now bearing fruit and an elevated experience. Dave, maybe you want to talk about the margins?

Sure. Jeff, on the operating margin piece, a couple of structural things, I want to call out before I get into the details going forward. But as I mentioned on the script, the calendar shift had about a 30 basis point impact on margins, and we are now winding down the sale leaseback program, the very successful sales leaseback program. And that did have an impact on our operating margins. But let's talk about going forward. A few things that make us feel good about the expansion we're going to see in our operating margin percent along with sales growth: number one, the traffic growth that was just talked about and you asked about; number two, the productivity opportunities we continue to have in food cost management, we talked about the labor cost at the beginning of the call, those opportunities remain and we still have opportunities in front of us over the next few years to continue to make progress on productivity; number 3, the investments that we've made at Outback over the last year or 2, we're still going to make Outback -- investments in Outback and other brands, as we -- as see -- as we see fit, but they won't be as large as prior quarters, because a lot of that heavy lifting is now behind us. So when you bring those things together, traffic growth, productivity opportunities, the investment cadence, those things, Jeff, give us the reason to believe on the operating margin percent expansion.

Our next question comes from the line of John Ivankoe with JPMorgan.

Also a question on margins. I mean, Dave, if you were to make the adjustment not only for calendar but also for sale leaseback, were U.S. margins -- U.S. store margins up or down in the first quarter?

First quarter, down slightly.

Okay, so on that comp, I mean, which is obviously, a very good comp and certainly understand the productivity initiatives that you have, I mean, would you have expected to get leverage in the first quarter? And if you can kind of -- I know you were talking about operating margins before but if we can talk about store-level margins, including where you are in traffic, which, obviously, sounds very good, where you are in pricing, and also give us an update if you can on beef, which obviously looks to be favorable, not just through the end of '18 but also '19 at least on a future's market basis?

Sure. John, I think the main thing is as we look at the cadence of investments by quarter, they are more heavily weighted toward the first quarter. So that's -- as you look at the timing of it, and that's why I'm able to make some of those statements that I am making regarding operating margin percent expansion. So that's the big piece. When you look at our margins, you've got to look at some of the structural stuff, but you also have to look at some of the investments that we made in Q1. So like I said, we're going to continue to invest in the business but that cadence will drop off in future quarters. So that's the first reason. In commodities, we feel good about where we stand, beef has been locked up, and we do face some poultry headwinds and a little bit dairy, but overall, we feel in good shape. And hopefully, the commodities will be helpful as we go forward.

And could you quantify those investments in the first quarter, just so we can keep our models straight?

I probably shouldn't do that kind of detail just because there's some competitive stuff there, John, but I can tell you, it's a pretty big difference as the quarters move along.

Our next question comes from the line of Jeff Farmer with Wells Fargo.

Just wanted to follow up on loyalty. Your -- as you said your Dine Rewards program has roughly 6 million numbers. I'm just curious if you guys will share with us what percent of transactions across the portfolio are executed as part of that program? Or if you can do that, just how quickly that program has been growing?

Yes, we are not going to get into any level of detail beneath that. I think we've shared the -- it's been -- the original objectives was 100 to 200 basis points and its certainly well at the high-end of that. And every quarter, we give you guys the number of user growth. So we're still seeing the same kind of benefit with people joining, i.e., the low fruit hasn't all been picked. I mean, it just continues to perform extremely well and drive traffic across the portfolio, and we think that's going to continue. And what we're doing is as we get smarter and smarter with and learn more and more about our customer, of course, then you can really leverage specific dialogue with them, which we've started to do, right? And so instead of mass communication to the Dine Rewards folks, since we know a lot about you, we're now mining our database to tailor our communications. And that's pretty powerful.

Okay, and just unrelated follow-up. Dave, saw the 8-K on the change in revenue with recognition accounting detail, that's out there. But any guidance that you can offer in terms of how we should be thinking about how to grow franchise and other revenues, that line, moving forward in the backdrop of the new accounting standard as we get into '19 and '20? And then as part of that the offsetting expense that shows up in the other restaurant operating expense line just the relationship between that expense and the revenue. So I threw a lot at you there, but any help on how to account for this in the next couple of years, that would be helpful.

I don't -- I'm not prepared to go in a kind of detail on something along those lines on this call. But at the same time, that's a very small part what we have because we're a very small franchise-based organization. Most of the revenue recognition stuff was around the gift card accounting. But there's very little on the details behind the franchise thing that really impact the business. We're happy, Jeff, to on a separate call to follow up with you in more detail, if need be. But it's a very small part of our business.

Our next question comes from the line of John Glass with Morgan Stanley.

On the improvement in the Outback comp and your insights into consumers, are you getting this higher frequency from your existing customers? Are you getting lapsed users, people who haven't been in the brand for a long time but sort are reengaging? Can you sort of assess how you think about where the traffic is coming from? And you talk about gaining market share on a comp basis relative to Knapp, you are. But if you look at the total sales in the category, your key competitors are growing units and you are not. So maybe on that basis, there isn't as much share gain. Do you see -- or when do you see that opportunity to reengage in growing units, particularly at the Outback brand? Or do you look at this as off-premise is going to be such a big piece of the industry over time that may be more units are needed to gain share, and maybe it's more about delivery or other forms of off-premise?

So, John, my global answer to your question is yes. So let me break that out for you. We are seeing growth in both frequency of our existing users as well as bringing people in and reactivating lapsed users, right? And that's the power of the "and." So we're driving frequency, but we're also driving penetration and reengagement of our lapsed users, which is great. When you look at what's driving that it's all the programs we talked about, but also, the loyalty program isn't just rewarding existing users. It's really expanded folks and brought people back to the portfolio that -- or encourage them to dine at one of our other restaurants that maybe they hadn't ever dined that. So a new -- someone that's been at Carrabba's maybe would've gone to some other place if they wanted a steak occasion, and now they're coming to Outback and having a really good experience. So it's doing both of those things, and we're real pleased about that. What I would say about new units is that we believe really strongly that you have to earn the right to put up new units by hitting the cover off the ball in your existing units, and we've always been that way. You saw us pausing Bonefish; you saw us pausing Carrabba's. We do see the opportunity for off premise to be tremendous. I mean, we've publicly stated. We believe it's going to be 25% to 30% opportunity. And then it's going to be around 80% incremental, and there's nothing that we've seen to suggest otherwise. And so I'd say 2 things, we do believe there is opportunity for additional Outbacks out there. I mean, we've said that we would love to put up an additional 50 more units of Outback. I mean, it's -- you know as well as I do, better than I do probably, that A-quality real estate pads are very competitive to get there. So we've stated that we think there's an opportunity for 50 more Outbacks. We also have a queue waiting to relocate Outbacks, because every time we relocate them, they grow like -- they increase volume like 40%. We certainly believe that Fleming's is a big opportunity. The last 4 Fleming's we've opened have been amazing. They've been at the run rate of, gosh, I don't know, 150% to 160% of the volume of the average fleet, I think. That's -- so that's going to continue. And then when you look at the Express units, which is a smaller footprints, which combines the power of the Outback and Carrabba's in a delivery and pickup-only format, we think there is a real opportunity for that to fill in gaps where we're not even in there. So ours is going to be a growth story all around, but first and foremost, you got to grow and maximize what you own but, certainly, we see opportunities in units, as we just kind of discuss, and then there's the International piece where we do continue the cadence.

Our next question comes from the line of Karen Holthouse with Goldman Sachs.

So it had a couple of years now with a lot of moving pieces, and we're thinking about margins, both on the cost saves and then on these reinvestments -- on the reinvestments. Maybe just looking forward because you sort of level-set us on how you think about the underlying earnings algorithm or how to think about the relationship between same-store sales and operating margin expansion, kind of knowing everything we know about the labor and wage environment and whatnot.

Sure. We will grow -- our plans certainly are to grow same-store sales, like we have, and operating margin expansion, percentage expansion. I talked earlier about the levers to do that with: traffic growth, productivity and the level of investments beginning to not be quite as steep as they were. We're still going to invest behind the business, but they're not -- the heavy-lifting is behind us. So, Karen, we look at those 3 things. That's an important part. Liz just talked about the opportunity for new units and relocation. That's an important part of our algorithm. So we've talked about a 10% to 15% total shareholder return gain each year at each of those. Sales growth, operating margin expansion, new units are all part of the algorithm.

Well, maybe another way to look at it would be how do you think about the level of comparable store sales or traffic growth that you would need to grow margins, as sort of the breakeven point?

We've always talked about 2% comps.

Our next question comes from the line of Brian Vaccaro with Raymond James.

I wanted to just circle back on the Q1 comps and appreciate the color on the weather headwind you mentioned. But could you also quantify if you saw much of an Easter or spring break shift in Q1?

It was small for us.

Yes, Fleming's was the only brand really that...

Fleming's was the only -- yes.

It's a very small piece of our comp, Brian.

Okay, and I want to circle back on the off-premise as well. Can you give us what the off-premise sales mix that Outback was in the quarter? And it sounds like you're pleased with the execution after making some refinements. Can you revisit some of the changes you made? And then also how many units you expect to offer delivery in by the end of '18?

Sure. So as a percentage of the business, we were pleased with the year-over-year growth in off-premise for Outback. As a percentage of the business in Q1, it was about 11.9% of the business for Outback and double-digit -- low double-digit growth. In terms of -- we are currently in 240, as you indicated, that's including Carrabba's. So figure 160 Outback, the other 80 Carrabba's. And we have put in a lot of work to get that operating model for delivery exactly where it needs to be to deliver on customers' expectations. We are -- believe, we're in a good position to start rolling those out, again, in the back half of the year. I don't want to get into the exact numbers, because for us, it's absolutely -- they have a lot of hurdles they've got to pass before. We left them turn on delivery to make sure that they're delivering at a high level. So there's a tremendous demand, as you can imagine, from our managing partners. But we're being very rigid about when we roll out and how we roll out. We do feel confident that we have that model worked out in the stores and so we're going to be rolling them out again starting at the half point of the year.

Okay, great. And then just one last one, if I could on the food cost side. Dave, could you give us what the year-on-year inflation was here in the first quarter? And then as you think about '18, John mentioned it, with the beef cost outlook improving, but you didn't change the commodity outlook. Is that something that you do with your contracts? Is that just an embedded conservatism on the food cost outlook? Anything incremental there?

Yes, it was about 3% first quarter, and we've got we were at very good position on beef. We're concerned about the poultry, like I mentioned. We'll see how the year transpires. If there's upside, great, but it's early, but we've held our held to our guidance based on -- with the positions we made on beef. And also, when we will look at other commodities.

Our next question comes from the line of Greg Francfort with Bank of America.

I've got 2 questions. Dave, just in terms of the loyalty program, does that make you more interested in possibly going out and looking at other brands or trying to add other brands to the portfolio now that you have a vehicle for which you're basically enticing customers to try other brands in your portfolio? And then, Liz, a question for you. With Outback, who are you taking share from? Is it other large casual dining chains? Or is it mom-and-pop units? Because I'm trying to figure out sort of where the share gains are coming from right now?

Well, one of the advantages of being a portfolio of companies is it affords you a lot of options to consider different things. As Liz talked about, we're always looking at our portfolio and how can we best go to market. We don't have anything to announce today or any kind of indications that we're going to be acquiring anything. But at the same time, we do have a portfolio, we do have opportunities, we do have great cash flow, we do have a great loyalty program, we've got people capability and so we can use these things to look at other parts of the business and other companies. But right now we're very pleased with what we have and the performance that we're seeing out of our company.

Yes, in terms of share gains. As you know this is a highly fragmented category, right. And so you're not going to be able to do any switching analysis that would say I'm getting 0.1 from this and 0.2 from that. And so you really need to look at that Black Box and Knapp data. And what it suggests is that, certainly, we're making in rows versus our CDR competitors and you can see who's taking share and who is losing share. And you're seeing, as I said, an increasing bifurcation between share gainers and share losers as the last 18 months has gone on. We see a correlation in those brands and look at them as our key competitors that have really invested in elevating the customer experience and driving that and I think that, that's the biggest determinant of share gains and share losses in this environment versus are you an independent or not. Clearly, though, the amount of independents and the number of independents is and will continue to grow as you see more and more retail spaces come open and be converted to restaurants and so there's no question that we've talked in the past about increased capacity, which chips away at everyone's installed same-store sales base. But given the fragmented nature of the category, we see our ability to continue to take share with the underlying health that we're seeing to be pretty substantial.

Maybe a one quick follow-up to that, if I could. It seems like the largest players have all reduced the focus on discounting, and I'd say you guys, Brinker, and Darden. And I'm wondering where that customer, that sort of very-price-conscious customer is going? Is it just that they're may be going back to food home or they sort of being forced to trade up? I guess, what's the dynamic there that's happening with those sort of particularly price-conscious consumer?

Well we started the journey away from discounting a couple of years ago, right? So for us it's been a multiyear reengagement on connectivity. I think -- we've always said that the customer uses the lens through total brand value. That's total benefits divided by price. And I'm going to go back and saying the brands that have not just taken out discounting, because that doesn't work. Just kind of stay as you are in and kind of rip out discounting, that doesn't work. You have to elevate the experience, give people more, which is a definition of value, while you take out the discount. That's what we've done, I think, that's what some of our competitors have done effectively. But let's face it, there's still plenty of discounting abound to -- abound in this restaurant to go to if you're purely driven by price. But I think we shared when we started this journey that something like, only like 20% the consumer's and CDR, I believe it is, are really driven just by price and that we felt like we in addition to the category were over -- were overplaying to that segment and that's really what started our own personal pullback and journey. And I think a lot of other CDRs also saw that and I can't speculate on their reasons, but they certainly strengthened their experience. And so I think there's plenty of opportunities if that's what drives you in this category, but it's certainly not the majority of consumers that price only drives them.

Our next question comes from the line of Matthew DiFrisco with Guggenheim Securities.

Most of my questions were answered. I just had one quick clarification. Did you guys -- are you committed to only using third-party delivery service with your delivery rollout, or are there multiple users? If so, can you just tell us which ones are partnering up with?

So we're committed being with omnichannel, right? Wherever and however the consumer wants to use us, they can. And so in restaurants where we do have third-party affiliations and in markets where we do have third-party affiliations, we also have deliver-direct in those markets and we find them to be a slightly different customer. Who we are teamed up with and who are working with is also as nimble and agile as that statement, and it varies according to market. So we're open to any -- we will be there in any and all ways the customer wants to order us.

Okay, did you then say, though, that you're testing your own drivers? And you have your own [stores]?

Oh, yes. That's been the case for 2 years.

On small orders?

Yes, in all those 240 stores, we have our own delivery network. Now some people still choose to go through the Grub Hubs, the UberEATS and we are there as well. We find them to be a bit of a different consumer, it's very interesting the one's that order direct tend to be more the family and the Family Bundles that we have and, not surprisingly, the UberEATS order and that comes in closer to 8 and 9 at night, which is kind of nice because the rush is over, it tends to be more of a millennial that eats late or after work, and so they're very complementary. But we started the practice of building our own delivery capability 2 years ago.

Would you only offer delivery in a restaurant that makes sense economically for you to have a driver? Or would you also consider smaller markets, smaller-volume delivery stores if you just turned on the switch for third parties?

Yes, we'll go restaurant by restaurant by restaurant on making decisions and we're not to do delivery and in some cases -- in every case, we'll offer our own delivery system, which we're building that capability very strongly, and will look at digital third parties. But it's more -- Matt, it's more of a what does the market look like, what does delivery look like in that market, et cetera. That's the important piece that we're looking at.

Well, and the other thing that I think you saw in the 4 Express locations, which is a great opportunity to fill in to geographies where we can't go, because the prevalence and interest and people -- delivery and pickup is just going to continue to grow and grow and grow.

Our next question comes from the line of Sharon Zackfia with William Blair.

I guess a follow-up on the delivery question. I mean, the delivery-only locations that you have are really intriguing and I know it's really early. But do you have any ballpark idea and how big that idea can be in the U.S.? And is there any applicability to that in Brazil? And then secondarily, actually on Brazil, was there any impact from the real in the quarter? I didn't catch that if you mentioned that.

Yes, on currency, very, very little impact on currency.

I'll comment on the Express locations and then -- and Dave -- there's 4 of them and we're having a ball seeing how they unfold and figuring them out, a lot of very cool learnings. 70% of our customers and our -- and this is where our scale in our portfolio really comes to advantage. So, 70% of the orders that go through these, people also are getting items from Outback and they're getting items from Carrabba's. So the mix and match that we hope would be there, will be there. We do think there is a big opportunity, but there's 4 of these, and we're going to continue to open them. On the Brazil front, all I'd say is the people like to eat at home in Brazil and have take out too. So, Dave, I don't know if you want to?

Now it's a really interesting opportunity and I think the main thing is, we have the people capability to address this opportunity because of the experience we have in our company on off-premise.

I guess one follow-up. Are there any efficiencies or learnings from the Express locations that you could apply to the broader restaurant base?

Yes, and we do. I don't want to get into it because there's some pretty interesting competitive pieces there, but, yes, like anything, when you have a good idea and if it's anything you have, you can use it in many different ways, not only for that particular idea but in other aspects as well for the company. And Liz talked about one of them, which is the ordering from -- a person ordering 2 different things from 2 different -- from Outback and Carrabba's. But, Sharon, beyond that, there's different things that we're looking at that could be interesting, yes.

Our next question comes from the line of Andrew Strelzik with BMO Capital Markets.

So, I have 2 questions. In the past, you've offered a fairly muted outlook for casual dining overall and we started to see that the industry data is gotten better. I’m wondering if you think that, that is sustainable and what's driving and if your view there has changed at all. My second question: The accounting change was a benefit to EPS for the quarter, but it will be a negative for the year. So just so that we all understand and model this correctly, can you help us out on when that's going to flip?

Most of the -- on the accounting side, most of the stop will happen in the fourth quarter and you go back, you can look at the new results by quarter, look at the 8-K, and you'll see the flow last year to help you. But it will come -- the downside will come in the fourth quarter.

Yes, in terms of the CDR outlook. I'm going to start with I think there's really -- there's a positive consumer environment with consumer disposable income and they are really interested in the dining-out experience, interested in food, interested in experiences. So that's all positive and the consumer macros certainly support that. On -- when I talk about the muted outlook, let's remember that in Q1 for the, I don't know, maybe 13th year in a row or -- Q1 traffic was down 2.9%. The category was basically flat, but the traffic was down 2.9%. This goes back to what I've been talking about, which is that you have a lot of new entrants coming in. I mean, think of all the retail space that is still out there that needs to be converted and that needs -- and what's going into a lot of these spaces is new restaurants. So you have the supply coming in that's pressuring installed base of same-store sales. And I don't think -- I don't see that dynamic changing. I think the great news is, is that since it's so fragmented that you're going to have an opportunity even with overall capacity growth. We're -- we'd love to get unit capacity to put up those additional Outbacks to hurry up and relocate those. But I think you're going to see an opportunity for folks that continue to drive that elevated customer experience to gain share. So again, I think that the same-store sales base is measured by the installed group that's there in general.

Ms. Smith, there are no further questions at this time, I'll turn the floor back to you for any final comments.

Great. Well, we appreciate everyone for joining us today. And we look forward to updating you on our portfolio on the Q2 call. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.