Brinker International Inc (EAT) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International first quarter of 2013 conference call. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions and comments following the presentation.

It is now my pleasure to turn the floor over to your host, Tony Laday. Sir, the floor is yours.

Thank you, Tom. Good morning, everyone, and welcome to Brinker International's first-quarter fiscal 2013 earnings call, which is also being broadcast live over the Internet.

Before turning the call over, let me quickly remind you of our Safe Harbor regarding forward-looking statements. In our management comments and in our responses to your questions, certain items may be discussed 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. 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.

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. Reconciliations are provided in the tables in the press release and on Brinker's website under the Financials section of the Investor tab.

Consistent with our prior practice, we will be silent on inter-period sales or other key operating results yet to be reported as the data may not accurately reflect the final results of the quarter reference.

On our call today, you will hear from Doug Brooks, Chairman and Chief Executive Officer; Guy Constant, Chief Financial Officer; and Wyman Roberts, President of Chili's Grill & Bar. Following their remarks, we will take your questions.

Now we will turn the call over to Doug.

Thank you, Tony. Good morning, everyone. I'm going to briefly share with you our Company results for the first quarter and then turn it over, as usual, to Wyman and Guy for a deeper dive into Chili's and the numbers before we answer your questions this morning.

As you saw in our press release, we reported an adjusted first-quarter earnings per share of $0.37, a 23% year-over-year increase. And comp sales during the quarter increased 2.6%, marking our seventh consecutive quarter of positive sales growth. These results again demonstrate that we continue to deliver on our promise to strengthen our business model by increasing top-line sales and improving our operational efficiencies. All of our brands -- Chili's, Maggiano's, and our global restaurants -- contributed to our performance, and I'll briefly highlight the results of each business.

At Chili's, we ended the quarter up 2.8% positive in comp sales and 0.4% in traffic positive. And we continue to see operating margin expansion year over year. In a few minutes, Wyman will give you a closer look at how the team achieved these results, and he will discuss how Chili's will keep that momentum moving into the future.

At Maggiano's, we reported 0.9% growth in sales, marking our 11th consecutive quarter of positive top-line comp sales, a 2.5% decrease in guest counts, and 330 basis points in margin improvement, driven by some rigorous waste control and the favorable impact of pricing.

Maggiano's banquet business was softer this quarter, but banquet bookings for the second quarter -- historically our peek season for special occasion and private dining -- are ahead of last year's pace. And Maggiano's will continue to drive margin improvements, especially through waste control and kitchen prep, strengthening its business model by reducing cost of sales and improving their overall profitability.

In our global business, we grew comp sales by 1.1%, and we opened nine net restaurants this quarter around the world. We currently operate 267 restaurants in 32 countries and two territories. The drivers of our global business continue to be in Mexico and the Middle East. And while the Middle East did soften this quarter, we still achieved solid growth in our global business.

While we are not immune from the pressures the industry is facing, I believe the long term strategies we have in place are working. The new kitchen equipment and point-of-sale systems are rolling out at an accelerated pace, and we continue to see the results we expected. Our reimage program is on schedule, and we're excited about those results. We continue to enhance our menus with better quality food and introduce new offerings to both our value platforms, as well as our core menu, and we're pursuing culinary innovation to deliver new platforms that will expand our guest base.

These key initiatives are strengthening our business model and driving growth in a more predictable and sustainable way, which positions our brands to continue to take share from our competitors and gives us confidence we'll deliver on our promises, including our long-term goal of delivering the 400 basis points of margin improvement and doubling of EPS.

Now let me turn it over to Wyman to share the exciting work that continues to take place at Chili's. Wyman?

Thanks, Doug, and good morning, everybody. As you heard from Doug, Q1 was another solid quarter for Chili's. It marked our sixth consecutive quarter of positive comp sales and our seventh consecutive quarter of positive comp traffic growth, and our team's ongoing commitment to running a more efficient business enabled us to continue to significantly improve our margins and overall profitability at Chili's. These results demonstrate the effectiveness of our long-term strategies to grow the business through sustainable traffic-driving initiatives, which differentiates Chili's from the rest of the category.

We continue to work hard at building a solid foundation for the brand that will help us withstand the kinds of macroeconomic pressures our industry is facing because it certainly is not an easy environment out there. Late in the first quarter and even into the current quarter, topline trends softened significantly across the category. With economic pressure continuing, consumers remain cautious in their spending.

But Chili's was able to mitigate this impact because of the strength of our value proposition, along with some additional media weight during the quarter.

First quarter was an especially busy quarter for our team. As planned, we accelerated the rollouts of our key capital initiatives because we proved through our robust testing process last fiscal year that these initiatives will give us strong returns.

So, during the second quarter, we will finish installing our point-of-sale and back office systems, as well as our kitchens in all of our company-owned restaurants. And we will continue rolling out our reimage program at an aggressive rate.

Meanwhile, our franchise partners are ramping up their new kitchen installations as well, which puts us on track to leverage this new platform systemwide by the end of our third fiscal quarter. We are committed to implementing these foundational initiatives across the system quickly, but to do so without negatively impacting guest experiences.

So, during the first and second quarter, we are asking more of our key team members than we normally do. And that cost us a bit in over time, so we're seeing some short-term pressure on our labor line with the trade-off of maintaining a positive guest experience during these implementations is well worth it.

From a culinary standpoint, the team has been working hard to refresh our menus with offerings that highlight Chili's southwest positioning, and the first quarter was no exception. We refreshed our two for $20 and lunch combo value platforms and introduced new menu items with southwest flavor profiles like Chipolte Chicken Fajitas and Santa Cruz Steak.

Another big focus during the first quarter was in our bars. We continue our efforts to raise the bar at Chili's. In reimaged restaurants, we are creating a much more relevant bar atmosphere, and across the system, we are training and developing our bartenders and servers to deliver a higher caliber experience. And we are introducing new products that leverage what we're known for, great margaritas and ice-cold beer.

And that strategy paid off again. During quarter one, we ran a 13.9% alcohol mix, which is up 70 basis points over last year.

From a marketing perspective, we continue to promote our refreshed value platforms on air. We know value remains a priority for consumers, and our two for $20 and lunch combo platforms speaks to that need. Our guests are pleased with the value they get from Chili's. We see that clearly in our value scores. Our value proposition is as strong as it's been in the last three to four years, and we're maintaining great margins as well.

So the model is working hard for us, which is a key component of moving the brand forward and continuing to outperform the category.

We also continue to supplement our national advertising strategy by leveraging our email database to promote local news like the reimaged program and local and national charitable events like our partnership with St. Jude's Children's Hospital.

Giving back is such a vital part of the Chili's culture, and during the month of September, we dedicate a lot of time and energy to supporting St. Jude's. This cause is so important to us as Chiliheads, and the team does an incredible job raising money to help children with cancer.

Last month alone we raised over $5 million, bringing our total contributions to more than $46 million, and our 10-year goal of $50 million, we're confident that we'll exceed that next year.

Working together to serve a higher purpose like St. Jude creates a remarkable sense of pride in our restaurants and in our operations leaders, which increases engagement scores across our teams, reinforces the impact we have in our communities, and gives Chili's a strong competitive advantage in the marketplace.

It also gives our entire team even more motivation to take the brand to the next level.

So, as the Chili's team works to further strengthen the brand in a soft environment, I would like to talk to you about three things you can look forward to over the coming weeks and months.

First, our new national advertising campaign; second, increased innovation and efficiencies across the brand by leveraging our capital investment; and third, incorporating what we've learned for our reimage programs as we begin to open new restaurants.

First, our new ad campaign launched earlier this month. The campaign is called More Life Happens Here, and it's the result of a great deal of research into what differentiates the Chili's experience from our competitive set and why guests choose us over another brand. We're excited about this campaign because it reinforces what guests love about Chili's, and it resonates and connects with consumers on a deeper, more emotional level.

Second, completing our key capital initiatives will enable us to increase innovation, as well as efficiencies across the brand. With our point-of-sale and back office systems, we'll be able to better manage our labor and cost of sales thanks to much more accurate and timely reporting. This system also has potential longer-term benefits in terms of managing our email database and implementing customer relationship marketing programs.

With regard to our new kitchen equipment, as many of you have experienced in person, it opens up several new menu categories for us. For example, we're currently testing a pizza platform, which is probably the worst-kept secret out there. It's been in 41 restaurants for more than a month now, and the results are encouraging. This is just one of many platforms we're exploring with this new equipment, and we're learning everything we can about potential new products through a multi-staged testing process to ensure that whatever items we launch systemwide can be executed consistently and achieve high satisfaction and value scores from our guests.

We know that once we complete our kitchen implementations, we'll also realize the full labor savings across the brand that we already see in the restaurants that have been operating with these new kitchens.

And third, we've been able to incorporate the updated look from our reimaged restaurants into a restaurant we recently built from the ground up. We opened that restaurant two weeks ago in the Dallas area, and we're delighted with the fresh contemporary look and how positively our guests are responding. We look to open 10 to 12 restaurants a year once we get the pipeline full, and we're making good progress toward that goal. So while new restaurant openings aren't a major part of our growth strategy this year, next year they do play a bigger role.

So all-in-all, another solid quarter for Chili's. We believe our long-term strategies are the right ones to help us deliver more sustainable, predictable results. But looking ahead, we're facing the same significant headwinds as the rest of our industry.

Nonetheless, our commitment is to stay the course, ever mindful of what our competition is doing, but to run our own race, to stay committed to our strategies, and to continue to outpace the category.

And with that, I'll turn the call over to Guy.

Thanks, Wyman. As Doug mentioned, our first-quarter earnings per share before special items was $0.37 versus $0.30 in the prior year, a 24.6% improvement demonstrating again our ability to drive sales and traffic through everyday guest value while also running a more efficient business.

Before we take a deeper dive into the results, I wanted to highlight the new income statement format seen in our press release this morning. To provide greater insight into our Company-owned restaurant profitability, we have separated total Brinker revenues into two components.

The first is Company sales, which represents the sales of our Company-owned restaurants only. The second is franchise and other revenues, which represent all other Brinker revenues, including franchise, royalties and fees, Maggiano's banquet service charge income, and the net of gift card breakage revenue and gift card revenue discounts. We believe this distinction of major revenue streams provides improved clarity on assessing our comparable performance in the middle of the P&L.

So, as I talk about year-over-year basis point changes for cost of sales, restaurant labor, and restaurant expense, please note that such changes are based on those costs as a percentage of Company sales. Now to the results.

Brinker Q1 revenues were $683.5 million, an increase of 2.3% over prior year. Total Company-owned comp restaurant sales increased 2.6% on a 1.6% price increase, 0.9% mix, and 0.1% traffic. Capacity was slightly negative with less than 1% impact.

Franchise and other revenues declined about $800,000 versus prior year, driven by a decline in breakage revenue due to increased gift card usage, partially offset by an increase in franchise and royalty revenue.

Cost of sales decreased 20 basis points from prior year to 27.8% driven by the favorable impact of menu pricing and other items of 40 basis points, partially offset by unfavorable mix of 10 basis points, primarily related to state sales, and unfavorable commodities of 10 basis points stemming from higher meat and seafood, partially offset by lower produce, dairy, and poultry costs.

Currently, 81% of commodities are contracted through the end of calendar 2012, and 35% are contracted through the end of fiscal 2013 with visibility into soon-to-be finalized contracts that would reflect a nearly 60% contracted base for the full fiscal year.

Restaurant labor improved 30 basis points to 33%, driven primarily by leverage on higher revenues, productivity from the continued rollout of our kitchen equipment, and lower manager training costs year over year. Hourly productivity was offset by increased overtime incurred to support the accelerated rollout of our kitchen equipment and point-of-sales systems. We expect these overtime costs will continue through the early part of the second quarter, but will subside as the rollout of these key initiatives is completed through the balance of the quarter.

Restaurant expense was $2.5 million or 100 basis points lower than prior year. The improvement was largely driven by lower repair and maintenance expense, credit card fees, and utility costs, coupled with leverage on higher revenues, partially offset by a loss from our equity investment.

Depreciation expense increased $1.4 million to $32.6 million, driven by the continued rollout of our key capital initiatives.

General and administrative expenses were $37.3 million, an increase of $4.5 million over the same quarter last year, primarily driven by an increase in stock-based compensation expense and to a lesser extent, higher professional fees, performance-based compensation expense, and payroll costs.

Interest expense was about $160,000 lower than prior year, due largely to the impact of a one-time right off of deferred financing costs in the prior year and lower interest rates in the current year, partially offset by the higher average debt balance this year.

The tax rate before special charges was 31.2% versus 30.2% in the prior year, an increase of 100 basis points driven by the impact of higher earnings.

Capital expenditures for the year were $37 million with year-to-date cash flow from operations at $32.9 million.

Currently, the new kitchen equipment is installed in about 780 Chili's restaurants. We are still on track for the completion of all Company-owned Chili's restaurants installations by the end of December and completion of all franchise-owned restaurant installations by the end of March.

Our new point-of-sale system is in about 760 restaurants today, and we are still on pace to complete our full rollout by the end of December.

We've also completed around 215 Chili's reimages to date, and we project a total of about 370 completed Company-owned restaurant reimages by the end of fiscal 2013.

We have now fully completed the reimage in nine markets with an additional four markets in progress.

During the quarter, we bought 2.5 million shares for $86.3 million, funded in part through a drawdown on our revolving credit facility. This leaves an outstanding authorization of $579 million. And we ended the quarter with approximately $64 million of available cash on our balance sheet.

The financial health of the Company remains strong. We've once again seen positive comp sales at Chili's, Maggiano's and in our global business. And as Wyman mentioned, the success of our key capital initiatives is allowing us to accelerate the pace of those rollouts, setting us up to leverage their impact system-wide in the third quarter. And our bottom-line results continue to demonstrate our balanced approach to investing in our people and assets, managing debt, maintaining appropriate liquidity, and returning cash to our shareholders. This includes the recent 25% increase in our quarterly dividend from $0.16 to $0.20 per share.

This year is off to a solid start, but there is much work still to be done. As we look ahead to the second quarter, overall employment growth continues to be sluggish, resulting in a persistently cautious consumer. And as Wyman mentioned, industry sales are softening. We expect both of these factors to continue in the second quarter, causing the momentum we have seen in sales and traffic growth to slow and likely causing second-quarter comparable restaurant sales growth to be at or even below the low end of our 2% to 3% guidance.

We are also facing some unique year-over-year margin challenges in the second quarter. Last year's second-quarter earnings-per-share disproportionately benefited from a sizable decrease in worker's compensation insurance expense related to lower claims experience. And as Wyman mentioned, we expect continued hourly overtime associated with the accelerated rollout of our new kitchen equipment and point-of-sale system at least through part of the second quarter.

So, consistent with our guidance commentary in August, these factors will affect our second-quarter earnings-per-share growth, causing it to fall below the full-year fiscal 2013 guided range of 17% to 25%. As such, we now project that second-quarter earnings-per-share will approximate $0.48 to $0.50. But while our first and second quarters of this fiscal year are challenged by short-term factors, we remain confident we can achieve both our fiscal 2013 and long-term earnings goals.

And with that, we can now turn the line over to Tom for questions.

(Operator Instructions). Jeffrey Bernstein, Barclays Capital.

Just a question on the comp trends. You don't usually comment or allude to current trends, but it seems like there's something worth pointing out here in terms of an easing. I think you mentioned later -- for fiscal first quarter and now you're saying into the fiscal second quarter.

I'm wondering, first of all, if you could just talk about what you're looking at to kind of gauge that. Obviously, you have your own data, but September seemed okay. I'm just wondering what you look at from an industry perspective to assess the health and current trends.

And then if you could just broadly talk about what you're seeing perhaps within your numbers in terms of changing in consumer behavior or buying patterns, perhaps what's been the biggest driver. It sounds like you mentioned value on a few occasions, so it sounds like the two for $20, and the lunch is the biggest driver. But if you can prioritize that.

Lastly, if you can just give an update on that pizza. I know you said it was the worst-kept secret, but what is the early test market feedback or thoughts around the rollout of something like that? Thanks.

Hey, Jeff. Wyman. So let me knock them off one at a time, a couple of questions in there. So first, the category has definitely seen a little bit of a slowdown, starting in September. Earlier we were just looking at map data, primarily Black Box and KNAPP, both, kind of show that the industry felt some slowdown starting in September and continue to see some of that softness working into October. And so that's why we wanted to share that with you, just because that's what we're experiencing.

We don't anticipate -- we see -- so what do we know? We just know that's what's going on out there today. We anticipate that it's probably just going to fluctuate and be a little more erratic as we move through these economic times. But what we're doing about that specifically is we're just sticking with our strategies, and value has always been a part of our strategy at Chili's. And we're continuing to communicate the strong value propositions that we have, and they continue to resonate very well.

So to your point, the messages that we're focused on and the propositions we're putting out there are around our value platforms. So two for $20 in lunch combos, we're refreshing those with new news to keep them fresh and relevant. But that's how we're addressing the softness in the category.

And we continue to outperform the category. We think we will continue to take share in the category, but it is a little bit softer than we had seen earlier in the summer.

With regard to pizza, I mean I can just tell you it's just one of many test platforms that we have out there now as we start to really get the system closer to completion of the new kitchen platform. We're experimenting, if you will, or testing several different ideas.

Pizza is one of them. It's -- so far I would just say it's encouraging. Guests are enjoying the product, and we're now just learning more about it, and we'll determine later on as to whether or not we roll with that or not.

Just as a follow-up to clarify what you mentioned on the broader industry slowing, with the change in trend lines in the industry and perhaps the slowing for yourselves as well, is there any tactical change in what you are promoting to this change, how you look at November, December, January, or is it you continue with the same platforms you had before? I was just wondering how you make any changes to adjust for that.

Yes, we're fluid. We don't want to be over-reactive to short-term trend changes in the industry, but at the same time, as we say, we look at the competition, we look at the industry, and we decide whether or not we need to maybe be a little more aggressive. But right now, we don't think that's necessary. We think the messages that we have and the offers that we're putting out there are adequate. We'll continue to see other concepts maybe be a little more aggressive. And we see some of that in some of the data out of KNAPP and NPD. But, again, we don't see ourselves getting pushed too far into a different strategy.

Got it. Thank you.

Thank you.

Michael Kelter, Goldman Sachs.

Recognizing the fact that your traffic trends are better than KNAPP, even so, they're only marginally positive, and now you say you might see a deceleration. Are you okay with minimal traffic growth if you can continue comping in the 2% to 3% range? And if you do maintain that kind of an algorithm, do you still think you could hit the long-term guidance you have held up that it's mostly driven by the cost cuts?

Are we okay with it? Yes, Michael, Wyman again. Obviously our strategy is to grow traffic. We think that's an important part of the overall business strategy. Again, I think we're going to run into some cyclical shorter-term windows that may be tougher from a macro perspective, and we may drop a little below. But we absolutely think it's important to look at that difference between your sales growth and your traffic growth.

When you look at the difference between our traffic pattern and our sales pattern, it's probably one of the smallest ones you're going to see out there. You're seeing a lot of 5 and 6 point gaps between sales and traffic patterns within the category and in the industry, and we think that's a risky strategy. Just long-term, that much pricing is going to work, I think, against you down the road.

So yes, we'll continue to try and focus on targeted positive traffic, and I think our strategies will get us there in the long term.

But to answer the second part of the question, yes, we think we can get there. We'll have some blips along the way maybe that we run a little softer than we would like to, mainly because of the category. But overall, we think we've got plans in place that will keep us in that positive traffic range and, again, significantly better than the category. So continuing to steal share and allow us to hit the targets we've talked to you about.

And given one of those initiatives that seems to be pretty important in driving positive traffic is the remodels. I mean to date you haven't given us a time on the financial impact of the remodels, what the lifts are, what the returns are, what the comps are, for example, in the nine markets that you've already rolled it out versus the rest of the country. Can you give us a little more to go on on the remodels?

Michael, it is Guy. I can jump in on that. So I think we have been pretty straightforward in sharing that our results are better than the 3% goal that we've set out there, which means the returns are better than the 15% that we were shooting for. And you may recall, we back-solved and said we need to hit 3% to get to the 15%. We're seeing better results on that in total, and in specific markets, numbers are even higher than that.

So we're very encouraged by that. It has led to some important changes in regional trends in our business. Our California results have been very strong, and not surprisingly, that's where we've done a lot of our reimages. And so we think that bodes well as we roll the reimage out to the rest of the system.

Thank you very much.

You're welcome.

(Operator Instructions). David Palmer, UBS.

I don't think you provided any change to your guidance for the year, but obviously, last year you beat that guidance range. I think it was 17% to 25% guidance last year, and you did over the high-end with similar same-store sales growth as to what you done this quarter. But I'm getting the feeling that perhaps the same-store sales that you are doing now might come with a different earnings outcome and not just for the timing through the year but for the overall year. How do we think about that?

David, this is Guy. So we hit the high end of the range this quarter, 24.6%. So we said 17% to 25%. So I guess we didn't beat the top end of the range, but we were certainly right at the top end of the range.

And we still feel for the full year we're going to hit the 17% to 25% range that we set out at the start of the year. Now we have confidence in that because all the fundamentals that have driven the turnaround over the last few years are still in place, and I can tick through those.

We've hired and promoted talented people and given them the training and tools to be great leaders. We've engaged our team members to make the business better, and they've now become our advocates and promoters to our guests. We're completely focused on delivering a great guest value proposition. We utilize technology like the new kitchen equipment and new prep processes to improve the food quality and the labor productivity. We're investing the margin improvements back in the business to support the guest experience and deliver great value through team service and two for $20 and lunch combos. We're keeping the brand fresh and relevant through reimages. We're being innovative, as Wyman said, with the new platforms. And we're focused on returns, not just earnings growth, even though we do think we're going to hit that 17% to 25%.

And so we're not going to get distracted by one quarter's results. Like what we'll next quarter where we'll see a runout of the overtime and the lap of some unique good guys a year ago.

And at the end of the day, when it's all done, when we have money left over that doesn't help us do everything we just talked about, we're going to give it back to the shareholders.

So we're still seeing job growth. That does bode well for casual dining. We'd sure like to see more job growth, but right now the job growth is still positive, and we're still executing the plan that's been successful over the last two years. So that's why we have confidence we can hit the 17% to 25%.

But say even if you used last year versus this year, were there specific things you would call out? Obviously, next quarters you can call out by quarter some timing risks, a timing issue, but is there a very clear reason why similar comps wouldn't drive similar results? I mean what are those reasons if you look at last year, which was a spectacular year, versus this year?

Well, again, what we saw in the first quarter we think is indicative of what we can do for the full year, but the second quarter isn't going to be as strong. And we talked about that last August. And we're talking about that again now in order to make sure that you guys have as much visibility into what's happening in the second quarter.

Some of that is year-over-year good guys we saw last year, which shouldn't be news to anybody. And sure, maybe we're seeing a bit of a slowing in the industry as a whole, but we've seen these kind of blips even in the last two years that for periods of time the consumer gets a little bit more skittish than it has been at other times. But, again, the fundamental long-term jobs growth is still there, and we think that's going to bode well for the category as a whole. And since we're beating the category and have been pretty consistently, we think that will continue to support good results like we got last year.

Thanks, Guy.

Thanks, David.

John Glass, Morgan Stanley.

First, I just wanted to take a slightly longer view on the notion of these new cooking platforms coming up. And first, it sounds like the first of these launches nationally, you talked about pizza as a test, probably won't come until the end of the third quarter. So just confirm that was what you were suggesting on the rollout.

And how many -- once you're into this new cadence of the new equipment, what do you think the right cadence is in terms of these new platforms? Is it one a year, and you want to really focus on it? Do you think you can have a couple or three a year? How do you think about that going forward?

And then I have a follow-up for Guy.

Yes, I think so. Correct. We'll have all both Company and franchise restaurants outfitted with the new kitchen equipment by the end of the third quarter. So we'll be ready to go with new innovation that can only be done on that line by then.

In terms of pace -- and so we anticipate bringing something out in the late third, early fourth quarter. In terms of pace and how we would roll new lines from that equipment, it will just depend. Our operators are outstanding. And if we felt the need to put a new product offering out there every quarter, I think we could probably handle that, but we probably wouldn't go that aggressively. We would probably do it every six months probably is a more realistic timeline for introducing full platforms. But there is always smaller innovation that can be rolled out, more on a quarterly basis. And that is how we look at it now.

We make menu changes now every quarter -- small ones, ones that can be rolled into our system without creating a lot of disruption with our guests or our operators. But we're always looking to improve the menu, and every quarter we do something. And we have for the last two years. Every quarter improved what we consider making improvements to the base menu. And so our operators are very familiar with absorbing change, making the product better.

Two quick ones for you. One is G&A was supposed to the flatter down this year, and it was up this quarter, and you mentioned stock-based comp. Does that mean that you're changing now that maybe the formula has changed, or was this an anomaly and it's not going to be ratable?

And then can you also just tease out how much of the labor -- you levered labor, so how much of it was delevering some of those things that you talked about that are going to also impact the second quarter? What's the order of magnitude from some of these overtime expenses you talked about?

Okay. So John, you're right. Our G&A did run high at the first quarter at 5.5%. I guess unfortunately one of the only drawbacks of a higher stock price is that it causes our stock-based compensation expense to increase, especially since the price peaked right around the time we made the grants. And that comprised more than half of the Q1 year-over-year increase in G&A.

And as we look forward to the rest of the year, our historic range of 4% to 5% still applies -- closer to the top of the range in a good year due to higher incentive comp, closer to the bottom in a weaker year, and we still project the full-year G&A to be down slightly, just as we did at the start of the year.

As for the labor costs you indicated, overtime probably cost us 20 to 30 basis points in the first quarter. So that order of magnitude for the second quarter is probably a good one as you model that.

Just to be clear, the stock-based comp piece, is that fixed now in G&A, though, or does it vary quarter to quarter?

It's fixed.

Okay. So that part won't go away. It won't change. It will simply be the compensation expense that will get you down to closer to 5%?

But to clarify, John, so the way stock-based compensation expense works under the accounting rules is when you first make the grant, you end up taking a larger chunk of the expense upfront because all employees that are retirement eligible need to have all the compensation accelerated at the time you make the grant. And so you get a much smaller impact on the stock comp expense in the second and third quarters and fourth quarters. It's always bigger for us in Q1 because that's the quarter we make the grant.

Okay. Great. That helps. Thank you.

Joe Buckley, Bank of America.

Guy, two questions I guess. One on the overtime. Why is it surfacing now apparently for the first time, and does it imply you change something in terms of it actually being Brinker labor behind the kitchen remodels, or is it more of the training costs and things of that nature?

No, it is the overtime, Joe. And the reason it's popped up now is because August and September, as everyone on the call will know, are the lowest volume months for the space, just due to the cyclicality of how traffic comes in.

So we've accelerated the rollout in late August, early September significantly more than we had in previous months, especially for Aloha MenuLink. Maybe not necessarily for the kitchens. It might have been a little bit faster. But Aloha MenuLink was much faster.

And so you had a lot of restaurants that were getting those two rollouts more on top of each other than we would have liked. But we also knew that this was the right time to roll it up because the volumes were the lowest, and it was the best time for the operators to absorb it.

And so, rather than have them dealing with those kinds of things with the holiday season as they come up, we were able to accelerate it, get it done a little bit sooner. And that's why we think that by the time October rolls away, we will start to see that overtime come back to more normal overtime levels than what we saw in the first quarter.

Guy, one more just on the new revenue, the breakout, which makes it a lot simpler than having to go to the website, but I'd guess I'm a little surprised that gift card numbers are run through with the franchise for revenues. So your sales, the Company-operated sales, does that not reflect gift card redemptions?

No, they do. The redemptions are in the Company-owned sales, but the discount costs and the breakage income are in other revenue.

So the breakage income, that's what we recognize. We like every other company in our business recognizes breakage income as to what percentage of gift cards we think won't get used at some point down the line, and we take that in as income. And what you saw this quarter, and you saw a bit of it in the last two quarters, is that you're seeing increased usage of gift cards versus historical averages. And so as a result, we've had to lower that breakage income a little bit. And that's what you see showing up in that other line.

Okay. Where you see discount on the gift cards, that's discounting your cards to the --?

Third-party retailers, yes.

Okay. Thank you.

All right.

Chris O'Cull, KeyBanc.

Wyman, what gives you confidence that comps in the back half of fiscal 2013 can return to that 2% to 3% range given the comparisons are tougher?

A couple of things. Just the innovation that we've got in the pipeline is probably the primary reason that we have confidence in the back half.

We also are delivering a better guest experience, and our strong value ratings give us confidence that we'll continue to see consistent performance moving forward.

We've wrapped on -- I know when people think about wraps, we had a strong quarter last year and you're going to wrap on that this year, oftentimes those are driven by LTOs, limited-time offers and promotions. And so it does become, okay, so what are you going to do to top the promotion you did last year.

Our growth has really come from foundational changes to the menu and to our business proposition. So we don't -- while we're always diligent about, hey, what have we got coming up that we have to wrap on, it's not nearly as daunting as those concepts that are working off a limited-time offer or some promotional idea that they now have to one up.

So it's really a much more stable model for us. So, as we look out, we know there are some things, primarily weather is more favorable last year. We don't anticipate having that good of weather this year. So we may see some headlines there, but beyond that, we feel good about the stability of everything we've got.

In the advertising --

I'm sorry --. Nevermind, go ahead.

The advertising weight was greater, I think, in the first quarter, but yet the full year is going to be relatively flat year over year. Is that right? So I guess my question is, where you may see a lighter weight year over year for the balance of the year?

Yes, you're more -- correct, so you're absolutely correct. We did have more weight level in the first quarter. The difference isn't going to be significantly noticeable. It's not good to be noticeable on any quarter. We've really just trimmed and balanced as we go through the rest of the year to make up for that.

But the way levels were not hugely significant in terms of what we ran in the first quarter versus last year -- 300 basis points, which is not insignificant, but not enough to skew the rest of the year as we find opportunities to level it out.

Chris, just to clarify, this is Guy. The full year will be up. The full year was not flat with the first quarter up. The first quarter was up, but the full year wasn't going to be up.

Now it won't be up as much clearly in quarters two, three, and four. That will be fairly similar year over year, but in total, the full year will be up in advertising.

Okay. That's helpful. And then my last question just relates to the new pizza. What specific changes are needed to add pizza to the menu, and would you characterize this product as difficult for the traditional bar and grill chains to replicate?

Well, all of the changes are operationally -- they really stem -- first, you've got to have the equipment, right? So that's the biggest thing is getting that kitchen equipment in.

So to answer your second question first, yes, it's going to be difficult to knock that off if you don't have a piece of equipment that can --?

What is the specific equipment?

These impinger ovens, which again, most bar and grills don't have impinger ovens. Some do, some don't. But most don't. So that what really makes something like a pizza platform possible for us.

The changes are not insignificant, but again, it really gets back to the quality of your operations team and their ability to train and manage complexity. And we've got a great operations team that's been able to -- at least, in these test restaurants, do a great job kind of absorbing this product offering and others, as we've talked about, into this new lineup.

The equipment itself also helps with this complexity because it simplifies the overall process. So when we put this equipment in, we did save labor, and that's because this is -- it's a simpler kitchen to run. And what that also allows us to do is to actually to put more in it. Because of the simpler nature of the operations, you can actually do more things without risking a negative guest experience. So we're excited.

Great. Thanks, guys.

John Ivankoe, JPMorgan.

I think a couple of follow-ups, if I may. Firstly, you do get more experienced with the new kitchen equipment, how much have your ticket times improved at lunch? Has it been something very measurable, or have the guests chosen to spend that extra time sitting at their tables? In other words, is that a major throughput opportunity for you?

Hey, John. Wyman. So we have absolutely seen a decrease in the ticket times coming out of the kitchen. So one to two minutes, which may not seem like a lot, but that's a pretty significant percentage decrease in terms of how long it takes to get the food out of the kitchen.

And then after that, it really is up to the guest, right? I mean some choose to just -- every guest wants their food as quickly as they can get it. There's really nothing you can do probably more than provide guests with their food quickly and hot. And so the kitchen really works toward that. Whether or not they decide to take those extra couple of minutes and enjoy their meal and their company or whether they use it to get out a little faster, that's really up to them. And we see some -- some of our guests doing both.

So but we also have seen an improvement in our speed's measurements as we track with our guests.

And secondly, did you say how much pricing you're contemplating for calendar 2013 and what you think might be right for the customer in the competitive environment at this point?

We did, John. At the start of the year, we said that we would be in that 1% to 2% range where we thought we'd be at the lower end of the range early on in the year. We still think competitively that that puts us very favorably against others who at least right now from what we can see are trying to make up the difference or the challenges in sales that they're seeing with more price. And we think this traffic first strategy has served us very well and has allowed us to steal a lot of share over the next couple of years. And as others continue to price aggressively, that allows us to continue that opportunity, we believe.

Okay. And then finally, you mentioned in your prepared remarks some margin initiatives at Maggiano's. How far along are you in that, and what might be the ultimate margin opportunity of that brand?

Well, John, we're pretty far along in it. And it's like we did at Chili's a couple of years ago, we just sort of re-examined long-term prep procedures and processes, and the complexity of Maggiano's kitchen actually gave us a lot more potential for improvement. And I think we saw about 300 basis points in the middle of the P&L at Maggiano's this quarter, and we're still working some of those.

I think also we're getting great value scores from the guests. So when you look at the Classic Pasta to mark the meal and we've actually seen probably in that Maggiano's competitive landscape more high-end competitive discounting going on.

So the value scores are up. The consumer is giving us great prices about it. And we think the middle of the P&L is going to allow us to improve the margins at Maggiano's still to some point in the future.

Great. Thank you.

Thanks, John.

Bryan Elliott, Raymond James.

First, a quick follow-up. Guy, you talked about how the stock-based comp sequentially comes down. Can you give us some help on what that number might -- what kind of range that might come in at for the year? As things stand now, obviously it is volatile and unpredictable based on stock price, but a little help on that might help people.

I don't have it at my fingertips, but it is part of the G&A line, and we do still expect the G&A line to be down overall year over year in absolute dollars.

So a significant amount in the first quarter, probably still up a little bit in the second quarter, but clearly we'll make up more than that in the back half of the year. So overall, G&A dollars to be flat this year.

Okay. Even with --

Or down --

Clearly stock comp clearly is going to be up, right, though, based on Q1?

Yes, absolutely.

Yes. Okay. All right. Fair enough.

And then more substantively I guess, as you are seeing the results and looking at tickets and things like that, maybe just help us a little bit. How are you thinking about the slowdown and how is it manifesting? Are you seeing the classic kind of beverage and dessert incidents falling? Is your research telling you anything? How much seems to be psychological and fear versus actual spending power? Any kind of thoughts on that would be helpful.

Yes, Bryan, a couple of things. So, first, if you start at the top end of it with the consumer, we are seeing in various different insight avenues that we have that the consumer is just a little bit nervous. I mean consumer confidence bouncing around at that mediocre level, pretty volatile. You're familiar with all of that.

The consumer's expectation on brands I think in some of the stuff we've seen is higher, so they're starting to raise a higher bar. And I think that just goes with the pressure they're feeling on their pocketbook. And so that to us reinforces what we're already doing, which is all about value proposition, improving the operational execution and getting the brand to be as relevant as possible through the reimage programs, the investment in the kitchen -- all the work that's being done to help the operators deliver a better guest experience, their work on raising the leadership in their restaurants. That's how we go after what we're seeing from a broader perspective, from a competitive perspective.

As you said, we think how you succeed in this environment is not to get too aggressive on pricing right now. Trying to do everything you can to maintain your business model and maintain your profitability through good management in your margins, which we are doing and actually getting them better, and then maintaining a small a pricing increase as you can while consumers get themselves through these tough economic times.

So that's our approach. We actually are encouraged when we see categories, some of the fast casual guys pricing at some very significant differences to us. We think that, again, is going to shrink that differential that they have between us and them. And that makes us a more viable opportunity for a lot of guests that we know would love to come and sit down and have the kind of meal that they can get at Chili's.

In recent weeks with the slowing of sales, have you seen, for example, the mix of two for $20 go up? That seems to have been pretty stable in recent quarters.

We haven't seen -- and, again, I think I mentioned, how it's manifesting itself in our restaurants with our guests, our check averages and our ability to sell alcoholic beverages continue to hold fairly well. So we don't see a huge downshift in what we call add-on sales, appetizers, beverages, desserts.

Now part of that is, again, we're doing a very good job in the restaurants of creating new opportunities and creating innovation around those categories to keep the guests engaged and involved. Our mix within some of our high-value platforms is pretty consistent. And that's again why we're not too worried about lapping or wrapping over trends as much as some others. We're seeing this steady mix within our value platforms that we had when we kick them off and now as we roll over them.

So it's a pretty steady state. We'll get a little fluctuation here and there, but nothing like you would see if you were working a limited-time strategy, promotional strategy.

Great. Thanks much.

All right.

Howard Penney, Hedgeye Management.

Two questions. One, the cadence of the sales trends for the industry decelerated through the quarter, yet you didn't see that same deceleration. As a matter of fact, September saw an acceleration in your market share versus the others. And I was wondering if there was some sort of explanation for that? And then why would that hold true for October if October is slowing and why would you not see better trends?

And then the second question is on the Chili's system. A couple of percentages, if you don't mind. It's there a Chili's store that has not been touched in some way -- meaning is there not a kitchen or a paint job or a remodel? And then what percentage of the stores have both and what percentage of the stores have been remodeled? Thanks very much.

Yes, Howard, on the shift in what we saw in September and why we may not see quite that same relationship going into October, we did have -- so when we talked about the increased media weights, most of that did occur in September. So we did have a little bit of a stronger media plan this year versus last year for us in September.

So that helped us, I think, stretch ourselves relative to the competitive set. We don't think that the differential is dramatic going forward. We still anticipate seeing similar kind of trends going forward. But that's why we probably saw a little bit of a bigger pump in that differential in September than you saw in August.

With regard to the second question, I think if I got it right -- and, Guy, maybe you can help me, in terms of how many restaurants -- are you asking how many restaurants are reimaged today?

Yes, as of this quarter or actually maybe at the end of the second quarter, what percent of those stores have been reimaged?

Roughly 200.

Yes, we had about 25% of the restaurants that are reimaged now, Howard. And I would say probably 80% of the restaurants now have both the kitchen and the new point-of-sale back-office systems. There are a handful that will still be rolled out in the end, but nobody is without any of the -- there's nobody that doesn't have at least one if not -- most of them have at least two of those three big initiatives that we're talking about.

And what percentage of the stores have both, the kitchen and the remodel?

80%, 90%.

No, in the remodel --

We only have about 25% of the remodels. So I would say 15% to 20% have both the kitchen and the remodel.

And is there a difference in the store performance in terms of comp lift for the store that has been remodeled and has the kitchen, or is that not that significant?

I think it's probably a little too early to tell on that one, Howard, but clearly we have gotten some markets that are doing really, really well on the reimage, particularly in California. And many of those restaurants are now getting their kitchens. So we moved them first on the reimage, they were some of the later ones to get the kitchen rolled out.

When do you think you'll be at 50% reimage?

I would say sometime in the middle of fiscal 2014, maybe second quarter fiscal 2014. So about this time a year from now.

You'll be 50% reimaged?

Close. We'll be about 45% done by the end of the fiscal year. About [370] by the end of the fiscal year and then with another quarter at 60% or so, probably gets us halfway. So I would say about this time a year from now.

Okay. Thanks very much.

Jeff Farmer, Wells Fargo.

Guy, I think on the last call you implied that you didn't expect to see too material a drop in share repurchase in FY 2013 relative to FY 2012, which that number looks to be about $300 million. So recognizing you're not going to be providing specific guidance, but is that $300 million at least, a dollar number at least in the ballpark for repurchase?

I think we can do something pretty similar to what we did in dollars terms in fiscal 2012, Jeff. Given that we still believe we can hit the earnings numbers that we said we would at the start of the year and given the available capacity we still have to tap into our revolver if we need to as those earnings grow, I still think it's reasonable to assume we could do something very similar to what we did in fiscal 2012.

And then just one quick follow-up. As it relates to pizza -- again, I know you're not going to share too many details -- but can you at least provide some high-level color on the potential price points and gross margin levels for the new products relative to what you have on the menu now? I'm getting a lot of questions about whether or not this is going to be mix positive, margin positive. How should we think about it based on what you know now?

Well, Jeff, I don't know that we can tell you yet for sure where we'll land on the pricing, but what I will tell you it is significantly better food costs than what would be average on our menu, which I'm sure doesn't surprise anyone here that's familiar with the pizza business.

Sure. Okay. That's it for me. Thank you, guys.

Great. Thanks, Jeff.

Peter Saleh, Telsey Advisory Group.

I'm sorry if I missed this, but did you guys comment on your advertising spend in October, and did you pull that back, or was that up on a year-over-year basis? And how committed are you to increasing the advertising for the full year?

Peter, now, we think again for the second, third, and fourth quarters our advertising will be pretty similar year over year. Maybe a little bit more. Most of the increase in advertising that we had for the year happened in the first quarter. But there is still some increase that will happen in the balance of the year as well.

So I would say October we had pretty similar weights year over year, maybe a little bit less, but it will all balance out as we go through the rest of the year.

And I'm sorry, what was the second part of your question, Peter?

How committed are you to the advertising, which I think Guy implied in his comment, in terms of for the rest of the year?

Yes, one of the good things now that we've had a couple of years, Peter, of positive sales and traffic and we expect that to continue going forward is that it's allowing us to increase our advertising budget without actually having to impact the overall margin costs to the business. And so two straight years of increased traffic has allowed us to increase our advertising spend, which allows us to get some of the leverage that you see in some of these faster growing, fast casual concepts that are growing a lot of their sales based just on advertising growth.

So we can now play in that game a little bit as well because we've got growth in our sales base that allows us to generate more advertising.

Great. And then if this consumer weakness continues for maybe more than a month or a couple of quarters, do you think you could push a little bit more on value, or how would you approach that scenario?

So Peter, you never know what the future can bring, right? In the last couple of years, we have seen these blips with the consumer from time to time. What happened last year in August around the whole debt ceiling debate and then the growth came back to that very slow, but steady growth that we've been seeing now for a couple of years.

And so that's what we think is going on right now, although no one knows. I think what I would say and I think we said before is if this is the start of winter, so to speak, and this lasts a little bit longer than we think, I like our position. I like the work we've done in the middle of the P&L, It has allowed us to store up nuts for the winter, so to speak, and put ourselves in a better position, I think, than the rest of the industry right now.

I'd like a better economy and more job growth because I think that would help us perform even better. But I think relatively speaking, we're likely to be more successful if we're heading into tougher times than we might be even if we were heading into better times.

Great. Thank you very much.

All right, Peter.

Mitch Speiser, Buckingham Research.

First, on the cost outlook, I believe in August you said 2% to 3% commodity inflation. I don't know if you mentioned it on this call. I believe commodities are up pretty sharply since the August conference call. Is there any update on the commodity cost outlook for fiscal 2013?

Yes, Mitch, this is Guy. Yes, we did say at the start of the year we thought our overall cost of sales would be flat and that commodity inflation was going to run between 2% and 3%. A little lower at the start of the fiscal year, a little higher at the end of the year.

I know that was considered to be somewhat aggressive when we said it, but with a little more visibility now, I actually think we're still in that range for the fiscal year with even a little bit of a favorable bias on those numbers. And we do have pretty good visibility. We have about 60% of our commodity basket now either contracted or in stages where we know where the pricing will land. So we feel pretty confident in our estimates. We actually think now cost of sales may actually end up slightly favorable for fiscal 2013 versus the flat we originally thought.

Beef, of course, is still the greatest inflation concern and doesn't show any sign of getting better, likely won't for a couple of years, at least, in our view. But being a varied menu brand and the ability to merchandise around our menu, we think we can actually keep cost of sales flat and perhaps even a little bit favorable this year.

Great, thanks. And a separate question. You mentioned California is doing well for you, driven by the reimages. Can you talk about the rest of the country? Are there any pockets of slowdown regionally or in particular states that are noteworthy?

Yes, this is Wyman. We are seeing -- one thing we are seeing is consistent performance from the Chili's brand across the country by region. We're continuing to outperform the competitive set in every region that we look at.

So the brand continues to perform well everywhere. You also could see in our numbers, our franchisees had a really strong quarter. And so that was, again, a confirmation of the strength of the brand throughout the country.

We are obviously, as Guy mentioned, we're seeing better results in markets that we have reimaged as California is the biggest one of those. And for the most part, it's pretty consistent outside of that. A little bit of mixed results in some of the Northeast markets, but overall, pretty consistent across the rest of the country.

Great. Thanks. And just my last question, on the franchisees, they are rolling out the kitchen systems, I believe. In terms of reimages, can you give us a sense of how many of the franchisees have the reimages and how you see that timetable unfolding to get the franchisees on board with the reimages?

Mitch, this is Guy. Well, of course, right now they are focused on rolling out kitchens and making a significant capital investment in support of their confidence in the brand by doing that. And so we appreciate that and recognize that that's a big commitment for them right now.

On the reimage side, some elements of the reimage we're rolling right now actually started in the franchise community anyway. And so I think as they roll out new restaurants, which they will, I think those will be in the new look that we've done now. And I think they'll see the opportunity to capture on elements of the reimage. Probably not until they've finished the investment they're making in the kitchens right now, which will help them to have even further topline growth, make their business healthier and make them want to invest more in the physical asset through a reimage.

Great. Thanks very much.

Thanks, Mitch.

Our last question for today is coming from Sara Senatore, Sanford Bernstein.

Just a couple of follow-ups. One is I know we've been beating the pizza question to death, but can you just talk about -- last time you gave us some sense of what your mix for steak is versus the rest of the industry and how that changed once you introduced steak? So I just wanted to see if pizza is as big of an opportunity as steak was when you roll that out.

And then the other piece -- and I don't think you addressed this -- but I was just trying to look at the model in terms of where you beat on margins. It looked like it had initially guided to restaurant expenses being flattish. I don't think that is where you were expecting to get as much upside on the margin this year, and yet that was the biggest piece of it. So can you just talk about that as well?

Hey, Sarah. Wyman. Let me just touch your pizza question, and I'll pass the margins over to Guy.

So on pizza, again, it's in test. I don't want to be premature on whether or not -- what size of an opportunity it is. We know there are concepts out there in the bar and grill category that runs 15% of their mix in pizza.

So we know it has the potential to be a large mixing category for us. In tests, it's doing well. I will say our commitment to doing something like this would -- we wouldn't roll it if we didn't think it could make a difference in our business. And, therefore, the hurdles we've talked about in the past of being 5% to 10% of your mix to really make it worth the effort is probably a reasonable expectation if we were to roll any new platform that is as significant as something like a pizza or some of the other platforms we are playing with.

Sara, on the restaurant expense question, you're right. This quarter was a significant upside on restaurant expense, but somewhat expected in part due to two issues. One, the change in credit card fee legislation didn't take affect until October last year. That's the line where that hits. So we're expecting to see positive impact of that in the first quarter. But you wouldn't expect to see that going forward.

And then the second quarter you won't see it up nearly as aggressively because of this worker's compensation expense issue that I mentioned earlier. So the combination of credit cards in the first quarter, restaurant expense in the second quarter will mean that we won't see as much positive impact on the restaurant expense line going forward.

Overall, though, we still think flat, maybe slightly positive is where we'll end up on restaurant expense for the year. Of course, that line is highly leveraged by sales. So it will be dependent on where sales are for the year.

Thank you.

Thank you, Sara.

Okay. Well, thank you, Tom, for facilitating the call this morning, and thanks to all of you for listening. I guess I'd just close with a couple of comments.

No real new news from us. We're sticking to our plan. We're positive about where Chili's and Maggiano's are positioned and the initiatives we've been working on. We're confident in our long-term strategy and our ability to overcome on these short-term cyclical economic challenges.

We have already invested in the guest experience, and the guest continues to give us higher marks. And I know Wyman mentioned this, but I want to thank all of our restaurant team members and leaders in both Chili's and Maggiano's. If you look at the work they've taken on since we announced our plan to win in March of 2010, it has been sizable, and the results have been very impressive.

So, again, those initiatives -- we're providing value to the guests; two for $20 lunch combos; Classic Pasta. The value scores are up. The team member engagement scores are up. I think our work force is probably more pleased with the decisions management and leadership have made than I can ever remember. And we're improving the middle of P&L with those capital initiatives, and we're excited about innovation that is moving in front of us.

So we're also looking forward to the elections getting behind this so we can focus on the future with less uncertainty and maybe a little less negative talk out of the marketplace.

So here's to great holidays and successful business results in our second quarter. Thanks, everybody.

Thank you very much, 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.