Brinker International Inc (EAT) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Brinker International second 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 call over to our host, Tony Laday. Sir, the floor is yours.

Thank you very much, Tom. Good morning, everyone, and welcome to Brinker International's second-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. During 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 could 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 believe these 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 Financial section of the Investor tab. Consistent with 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 referenced.

On our call today, you will hear from Wyman Roberts, Chief Executive Officer and President of Brinker International; and Guy Constant, Chief Financial Officer. Following the remarks, we will take your questions.

Now I will turn the call over to Wyman.

Thanks, Tony, and good morning, everyone. Now before we get started, I just want to acknowledge that this is the first quarterly Brinker call since 1999 that Doug Brooks isn't participating. Doug's leadership has been a driving force behind the success of Brinker, and I personally appreciate the confidence he has shown in the team and his continued influence during the transition over the next year. You know, they just don't get any better than Doug Brooks.

Okay. So, today, I'd like to share with you our Company results for second quarter and some highlights for each of our brands. And then I'll turn it over to Guy for a deeper dive into the numbers before we answer your questions.

So, as you saw in our press release this morning, we reported an adjusted second-quarter earnings per share of $0.50, a 6.4% increase over our prior-year. Comp sales during the quarter increased 0.9% on a 2.1% traffic decline. This marks our eighth consecutive quarter of positive sales growth.

So, I want to spend you a minute giving you some insight into the dynamics within the quarter, to give you a more complete picture of our performance. First, weather negatively impacted our results by 40 basis points. But the more significant impact relates to the timing of the holiday season versus the end of our fiscal quarter, which ended on December 26.

Because Christmas fell on a Tuesday this year, the holiday break for most school districts ran later than last year, which, for our fiscal calendar, crossed over into our fiscal third-quarter. So, given these changes in holiday timing, we thought it was important to talk about the first week of our third quarter, because we run some of the highest volumes of the year during that holiday week.

So while Brinker's reported comp sales for December came in at 0.4%, when adjusted for the holiday, comp sales were up 2.1% for December and 1.5% for the quarter. And at Chili's, we continue to take share as measured by KNAPP and Black Box. In fact, our positive GAAP was over 300 points in December, which is an improvement over October and November. These results demonstrate our ability to continue to deliver on our promise of strengthening our business model with a balanced approach of increasing topline sales, improving our operational efficiencies, and returning cash to shareholders. And all of our businesses delivered solid results.

Q2 was an especially important quarter for Maggiano's, and they successfully wrapped a strong holiday season last year, and continued their topline sales growth trends by delivering their 12th quarter of comp sales growth. They also continued to build on the impressive margin gains they began earlier this fiscal year with a more than 90 basis point improvement for the quarter, primarily through their efforts to improve waste.

As we look forward, we're excited to leverage this stronger business model by growing the Maggiano's brand through smaller, more efficient, prototype. We're in the process of finalizing site selection and development plans, and we look forward to sharing those plans with you soon.

Our global business also delivered another positive quarter, marking its 12th quarter of comp sales growth as well. There are a lot of companies talking about jumping into the international marketplace as an opportunity for growth. I'm proud to say it -- we recently celebrated our 20th anniversary in Mexico, demonstrating the solid foundation we've established with the Chili's brand internationally. With our openings over the next several months, we'll have close to 100 restaurants in the Mexico market. And during the quarter, we grew our international system by seven net restaurants, bringing our total to 274.

For Chili's domestically, after a pretty tough October, we saw strong results in November. And when you adjust for the changes in the holiday season, December's numbers were solid as well. Margins were a little tougher to deliver in the first half because of the heavy lifting required for rollouts, but now that we've completed the new point-of-sale in kitchen installations for all our company-owned restaurants, we're hitting our goals and we feel confident about sustaining those margins going forward. Guy will give you more detail on that in a few minutes.

In December, we introduced a new menu. We refreshened our Lighter Choices category with new mango chili chicken and mango chili tilapia. We expanded our appetizer and dessert categories with the introduction of a freshly baked chocolate chip cookie and soft pretzel appetizers -- items that work well with our new kitchen equipment.

And now, we're rolling out our first major platform that takes advantage of our new ovens -- pizza. We're in the process of rolling out pizzas to all of our company-owned restaurants early third-quarter, and will bring it to all our franchise systems once their new kitchens have been installed, more towards the end of the quarter. Then we'll go on air with these great new products during the fourth quarter.

We're looking forward to sharing some of our new product news with you during our investor conference next month in Dallas, where we'll give you a sneak peak at some of these great new items, as well as some of the items that are still in development. We're also eager for you to experience our new restaurant prototype in person, which we opened this quarter in Dallas and North Carolina. The restaurant had a beautiful contemporary look and feel, and guests are responding very well at both locations.

Regarding the next phase of our growth strategy, we're under construction on several sites now and the pipeline is filling quickly. We are on track to deliver on our commitment to grow the brand by 10 to 15 restaurants per year, starting next year.

And as we look ahead to the second half of this year, we're confident we can successfully continue to take share, deliver strong margins, and hit our EPS targets. Why is that? Because we've built a strong foundation for the brand through the hard work we've done to install our new kitchens, introduce a new service model, make significant improvements to our core menu, and offer compelling value platforms.

This foundation gives us a solid base to build from and new news to bring to our consumers, which has worked well for us in our 2 for [$20] platform and at lunch, where we're two years from introduction, and we continue to grow that daypart by keeping it fresh and relevant to our guests. This strategy delivers more sustainable and predictable results, versus a limited-time-offer strategy that leaves you susceptible to giving up huge margins for having sales that you may have trouble getting back once the LTO has run its course.

We don't have those kind of one-time occurrences in the mix any more. Our value scores continue to look good. We've got exciting culinary innovation in the pipeline. We continue our restaurant reimages and a smarter, more aggressive, marketing strategy. And our guest satisfaction scores continue to improve at both brands, which indicates that our efforts to pace and sequence the volume of change for our operations teams is working, and we're enabling them to deliver a consistently great experience. That's the strategy we believe will grow the business going forward.

So, another solid quarter for Brinker. But looking ahead, we're facing the same challenges as the rest of the industry. The category is in tougher shape than we would have thought at this point in time. But the good news is, we've developed a business model that sustains our brands through tough times like these. And that's how we'll continue to outperform the category, even when we start to see the economy improve through indicators like lower unemployment and increased consumer confidence.

In the meantime, our commitment is to stay the course, ever mindful of our competition is doing, but to run our own race and to stay committed to our strategies. And with that, I'll turn the call over to Guy to walk you through the financials. Guy?

Thanks, Wyman. As you just heard, our second-quarter earnings per share before special items was $0.50, demonstrating again our ability to drive ongoing shareholder value by sticking to our balanced approach of delivering everyday value to our guests, and increasing profitability in our restaurants.

Before we take a deeper dive into the results, I wanted to remind you that we introduced a new income statement format last quarter that separates total Brinker revenues into company sales and franchise and other revenues. So, consistent with last quarter, 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 Q2 revenues were $689.8 million, an increase of 1.2% over prior-year. Total reported company-owned comparable restaurant sales increased to 0.9% on a 1.8% price increase and positive 1.2% mix, partially offset by negative 2.1% traffic. Weather negatively affected the quarter by approximately 40 basis points, primarily due to the impact of Hurricane Sandy and harsh winter weather during the holiday season. Capacity was flat for the quarter.

Franchise and other revenues increased 2%, due primarily to 18 net franchise openings, international comparable restaurant sales of 2.7%, and domestic comparable restaurant sales of 2.2%. Cost of sales decreased 40 basis points from prior-year to 27.6%, driven by the favorable impact of menu pricing, the continued moderation of commodity inflation, and slight improvements in alcohol mix.

Currently, 70% of our commodities are contracted through the end of fiscal 2013, and 41% are contracted through the end of calendar 2013. Given this visibility, we project the rate of commodity inflation for full-year calendar 2013 to average approximately 2%, increasing throughout the year.

Restaurant labor increased 10 basis points to 32.5%, driven primarily by a recent rise in employee health insurance claims and overtime associated with the accelerated rollout of our kitchen equipment early in the quarter. Absent these items, restaurant labor would have improved 50 basis points year-over-year, largely due to productivity associated with the new equipment.

Restaurant expense was $162 million and flat to prior-year as a percentage of company sales. This included year-over-year improvements in utilities, supervision expense, repair and maintenance costs, and leverage on higher company sales. And, as mentioned in prior calls, we lapped a large favorable adjustment to Workers' Compensation insurance in the prior year that offset these reductions.

Depreciation expense increased to $1.8 million to $33 million, driven by the continued rollout of our key capital initiatives. General and administrative expenses were $31 million, which was about $200,000 less than the same quarter last year, despite slight increases in performance-based compensation. Interest expense was about $550,000 higher than prior-year, due largely to a higher average debt balance, partially offset by the impact of lower interest rates.

The tax rate before special charges was 32.7% versus 29.7% in the prior year, an increase of 300 basis points. The higher tax rate was driven by higher earnings and the temporary expiration of employee tax credits that were in place last year. However, since these credits were reinstated as a result of the fiscal cliff discussions, we expect our steady-state tax rate to return to our guided rate of around 31% for the balance of the fiscal year.

Capital expenditures for the quarter were $32.8 million, with year-to-date cash flow from operations at $131.3 million. In the second quarter, we completed installation of the new kitchen equipment in all company-owned Chili's restaurants, and are still on track for completion of all domestic franchise-owned restaurant installations by the end of March.

We also completed the rollout of our new point-of-sale system in all company-owned Chili's restaurants. We've completed 255 Chili's reimages to date. And by the end of fiscal 2013, we anticipate being complete on 370 company-owned restaurants reimages. We now have fully completed the reimage in 11 markets, with an additional four markets in progress.

During the quarter, we bought 1.5 million shares for $45.1 million, funded in part through a partial drawdown in our revolving credit facility. And we ended the quarter with approximately $93 million of available cash on our balance sheet. Since the end of the quarter, we've purchased 1.2 million shares for approximately $41 million. This brings our year-to-date share purchase to $167 million or 5.1 million shares, leaving an outstanding authorization of about $494 million.

As Wyman mentioned, we continue to execute on a strategy that is built on a solid foundation for delivering reliable results. And we remain confident we can achieve both our fiscal 2013 and longer-term earnings goals.

With that, I will now turn the call over to Tom to open the line for questions.

(Operator Instructions) David Palmer, UBS.

Two quick questions. Have you recently taken some pricing in company restaurants? And if so, what sort of year-over-year pricing are you expecting for the second half of fiscal '13? And separately, could you perhaps quantify the lift you're seeing from your reimaging so far? Thanks very much.

Sure, David. Pricing, we took pricing in the second quarter, which was a little earlier than we took it last year. We took pricing in the third quarter last year. So, we do expect to continue to run around the middle of the 1% to 2% range that we've guided for pricing for this year. And so we would expect that to continue through the balance of the year.

As for reimages, we continue to see strong results. As we've discussed before, based on the investment we're making and in order to get a mid-teens return on that investment, we need to see sales of 3% or higher. And we are exceeding that comfortably in the restaurants that we have reimaged. And as we discussed last quarter, in the markets where we have a -- where we've done a lot of the reimages or completed a lot of them to date, such as California, our regional results are even stronger than they are for the balance of the system.

So, we feel very good about the reimage program. And it continues on, as expected.

Thank you very much.

All right, David.

Michael Kelter, Goldman Sachs.

I wanted to ask -- traffic declined every month this quarter. And that's even when you adjust for weather and calendar shifts. And negative traffic hasn't happened for a quarter at Chili's in a few years now. Has anything in the environment changed? And do you need to adapt in some way? Or just keep doing what you're doing?

Yes, Michael, it's Wyman. So, we obviously have seen those trends across the industry. And so they're a little disconcerting for us as well. But we think it's just a more -- some more of the sporadic nature of the consumer that we've seen, really, over the last few years. Right?

So we see these dips, and then they tend to rebound. So where the industry had been running more in the 1% traffic declines, during this quarter, it drifted down to more like 2% and 3%. And we kind of drifted with that. So, yes, it was disappointing to see that, but we don't think it's anything significant in terms of a long-term play. We just think it's more of the kind of the ebb and flow that we've seen from a consumer perspective.

As far as addressing it, we think our strategies continue to work well. We continue to take share at the same level. And that's really the key for us. We believe these things will level themselves out over some time here, and that the key is to continue to just maintain our ability to take marketshare. And we're doing that both from a sales and a traffic standpoint. So we don't see major -- a need to adjust our strategies in any major way.

And then, separately, you're rolling out pizza this quarter, you previously tested it. Now that the rollout is official, can you talk about more specifically what you learned in the test? And how confident that you are that it will be a robust sales driver? Anything you're able to share would be helpful.

Well, we don't really want to share a whole lot about our marketing strategy too early, you know, and we're not really going out with it until the fourth quarter, from an advertise perspective. So we'll have more information we'll share with you in February.

But suffice it to say, we're excited about it. You know, we wouldn't roll it if we didn't think it was going to be incremental to our business. And from that perspective, we're, you know, long -- the long-awaited pizza introduction is now underway. And we're looking forward to getting it in our restaurants, and being able to use that as another foundational platform to continue to build the strength of the Chili's brand.

Thank you very much.

Thanks.

John Glass, Morgan Stanley.

First, just back on the holiday shifts, I appreciate that your quarter ended earlier maybe than some others and you picked up that extra week. But I was also under the impression that an earlier -- a Christmas that shifted to a Tuesday kind of freed up a weekend. And so maybe there was a positive benefit. So, was there a positive benefit to that shift that you didn't mention, or not?

Yes, John, I mean, there was -- you pick up that extra weekend, but really what happened was the impact of kids being out of school really shifted to a much greater degree into that week after Christmas, and the week -- really, the next week into that first week of January. And so, that had a bigger impact than just picking up that extra weekend did. Because that's when consumers are out and they're in that celebratory mood, and they're able to dine more frequently because kids aren't in school.

Okay. And then, I guess, I know you don't like to talk about kind of current trends, but you've got a couple of big things. One, obviously, a much tougher lap this quarter. So if you could just put that in context, how do we think about the third quarter from a lapping perspective? Were there any calendar shifts either around the holidays we just passed or the Easter holiday that are worth noting as well?

Hey, John, it's Guy. Well, as Wyman just mentioned, the school shift is obviously a help now to our third quarter, as you could probably read into, just when we add the period following our second quarter to our results to comment on the holiday shift, as we spoke of not just in the release but earlier in the call. That would certainly give you some indication that the fact that school was out this year the week after New Year's, or the week of New Year's, which it wasn't last year, will certainly be a benefit to the quarter.

And as I think we've discussed a few times on the call, these weeks during the holiday season are some of the highest volume weeks that we have. And so, while it did have a pretty significant impact to the second quarter, the net effect of that will be that it will have a significant positive impact to the third quarter.

In looking forward, is there anything else that changes the calendar? And also maybe just because payroll tax has been so discussed in the industry, do you have a view of that as one of the factors that you're considering as you think about the third quarter as well?

Well, no. There are no other calendar shifts for the balance of the quarter, other than Valentines moving from a Tuesday to a Thursday. But the net effect of that, it not being on a weekend, is certainly a positive. But other than that, no.

As for the payroll tax issue, I do think it's a little early to tell. I mean, it's literally in the last week or so, I guess, that people would have been getting paychecks and seeing the impact for the first time. So, I can't say that we could give you an early read on that.

What I would say is that, as Wyman talked about, the consumer, when there seems to be the discussion whether it's debt ceiling or election, or any of that sort of news, hits the airwaves, it has seemed to have made consumers a little nervous or anxious for some of that to stop, and get back to the underlying trends that, really, we've been seeing the last two or three years.

But we believe we've figured out a way to compete successfully in that sort of environment, and we don't need the economy to get better, although we'd like it to. But we don't need it to get better in order to continue the success that we've put up for the last couple of years.

All right, thank you.

Jeffrey Bernstein, Barclays.

Just a couple of questions. First, as it relates to the comp, it seems like obviously we're seeing volatility. I'm maybe wondering whether you'd say it's an increase in volatility or choppiness through the quarters. But with that being the case, how do you think about the restaurant margins, whether it be through this quarter or going forward?

How do you best manage your business when you're not sure week-to-week how things are trending? I'm just trying to first get an assessment in terms of how you think about the margin and how we should think about that over the next couple of quarters, if the choppiness prevails. And then I had a follow-up.

Hey, Jeff, this is Wyman. So let me just talk to the choppiness. You know, we really haven't seen that much choppiness. I mean, it, again, I'd call it a little more of an ebb and flow of the base in terms of the consumer. But, again, when you adjust for the holiday timing, this consistent 1% to 2% positive comp sales trend is really kind of what we've been doing. The category has been kind of running a little bit flat. And again, it's been ebbing and flowing.

As Guy had mentioned, if some bad news hits out there and consumers tend to pull back a little bit. But overall, there appears to be this kind of level that we moderate back to. And so I don't think it's necessarily as choppy as maybe seeing it again with the adjustments for the holiday, you can see the October/November/December numbers are all within that 1% range basically. And so we don't see it as maybe volatile as you may be seeing it.

I'll let Guy address the margins.

Hey, Jeff, on the margin front, I know we've talked about this a lot, but this is why we think it's so important that we've done the work we've done on the margins. Because it's allowed us to really produce double-digit EPS growth consistently now for -- what are we on? -- nine or 10 quarters of doing that now. And in an environment that I think we'd all say the -- at best, is okay, in terms of top line and where the consumer has been, given what's been happening with jobs.

So, the work we've done on margins does provide us that stability that we maybe would like to see a little more of from the consumer. But it provides us the stability in earnings we've been able to deliver. And it's something we can rely on. And other than when we spend a little extra on overtime to finish the rollout of some of these initiatives that have been big drivers in producing these good results, we would expect to continue to drive pretty significant margin improvements, particularly going into the back half of the year.

Which leads me, I guess, to the follow-up, in terms of -- it sounds like some of your markets have all of the updated equipment and reimages and whatnot. I'm just wondering if you can use that as a segue into terms of what they're seeing vis-a-vis your 400 basis point promise or guidance? I'm just wondering whether you're now learning from them that there might be more upside to that? Or what's been the biggest surprises in terms of the upside to the margin?

Well, I mean, cost of sales has been a nice surprise in terms of margin upside, that isn't necessarily directly associated with the initiatives; although certainly, the implementation of Aloha/Menulink will help us. Although we just completed that in November, so we actually think there's continued upside to that going forward.

I think the great work that's been done in our supply chain group and their partnership with culinary in terms of what we've been doing with new menu introductions has really helped us do better on that line than we had originally thought. You may recall we talked about that line being flat this year, and this is the second quarter now we've beat cost of sales. And I think we're pretty comfortable saying now that we're going to see cost of sales lower year-over-year, when you take into account the impact of the full-year. So that's been a bit of a surprise.

As for the achievability of the 400 basis points of margin improvement, we're absolutely confident we'll be able to do that. And our experience with the markets that have all those initiatives gives us that comfort. And as we said last quarter on the call, I think our operators have done a great job now that they're getting some experience and a little more time with the equipment, that I think they do believe that there is additional upside to that target as well, that we'll be able to factor into our long-term plans.

I think -- hey, Jeff, I just think the biggest surprise with this whole margin play and the improvement we've seen over the last few years, and we're continuing to see, is the impact it's had on our ability to improve margins, take market share, grow sales, increase guest satisfaction, and increase team member engagement. That's really been the biggest surprise.

And the thing that's kind of changed the game for us is that, in the middle of a major margin improvement strategy, we've been able to strengthen the brand and really make a much more competitive promise to our guests and our team members. And that's the thing that's got us really excited about where we're going.

Thanks. Just lastly to clarify, I think you both mentioned in your prepared remarks that you were comfortable with the earnings guidance for fiscal '13 and beyond. I'm just wondering we should therefore assume the 17% to 25%? Is there any unusuals in the third and fourth quarter? Or should we still assume third and fourth quarter both within that earnings growth range?

Yes, Jeff, everything is still as planned. As you may recall, we always thought this second quarter was going to be below our 17% to 25% guidance, which, by its nature, would imply that we would be closer to the higher end of that range in the back-half of the year. We still believe that will be the case.

Great, thank you.

Thanks.

Sara Senatore, Sanford Bernstein.

A couple of follow-up questions. One is, just in terms of the traffic trend or the composition of the comps, can you just talk about quickly, do you think there was anything -- any impact from having taken price a little more quickly than you had expected -- or than you had done last year?

And also, if you could just talk a little bit about where the positive mix is coming from? Was it from the Lighter Choices category? Are you still getting benefit from some of the other platforms that you've introduced? And then I had a follow-up on the unit growth question.

Hey, Sara, Wyman. The pricing, we did take it a little earlier but not real early in the second quarter. So we've only got several weeks -- we took it in December. And so it wasn't the major driver to the changes in the mix or the PPA. So -- and we don't think because it was taken late in the quarter that it had a major impact to our traffic trends. We didn't see anything that was related to the price increase as far as traffic trends go.

In terms of the other things that are helping our mix, it's really across-the-board. It's some of the new items that we've added. It's the continued alcohol program that we've now been out aggressively pushing, and the operators have been focused on for over a year now. We continue to drive that piece of business. So we're getting it from several pieces of the business.

Obviously, all that we know are more favorable to us, and so we're focusing on them to help improve the overall profitability. So, between the price and the alcohol beverage program, the rest of it's all fairly small pieces that add up.

Great. And then just on -- thank you -- and then just on the unit growth, can you just talk a little bit about the idea of going back to unit growth? I think you started out the commentary by saying the demand environment is a little bit weaker than you would have expected at this point. Is there any risk? You know, it's a relatively modest pace of unit growth that -- but even at a 1% pace, you absorb some of the share gains that you've been getting in the form of comps through unit growth?

Hey, Sara, it's Guy. I think, as with any investment we've made over the past couple of years, we've been very careful to make sure that we deliver the kind of return on incremental invested capital that I think has allowed us to deliver the kind of results we have for the last little while. So we're always careful.

I think one thing to remember about Chili's is, while we are everywhere, we are fairly deeply penetrated in some markets and we're somewhat underpenetrated in other markets. And so there are opportunities in trade areas that we're not in today that present us opportunities for growth. And so, as with any -- again, as with any investment, we're going to be very careful to make the right decisions, but we do believe that the modest unit growth that we're looking at is something that can be absorbed, as long as we keep a focus on making sure we get good returns.

Thank you. And (multiple speakers) --

Especially after a four-year hiatus. We haven't really built restaurants in the US in quite a while, so there are some opportunities that have made themselves available over the last few years that we'll take advantage of.

Got it. Thank you very much.

Thanks, Sara.

(Operator Instructions) Jeff Omohundro, Davenport & Company.

Just two quick ones. First on the tax rate commentary. Could you just elaborate a little bit more -- was the commentary that you returned to the 31% in Q3, Q4? Or was it for the full year, suggesting there might be a little improvement in Q3, Q4? And then G&A, what was a bit lower year-over-year, are you still comfortable with the expectation for, on a full-year basis, achieving down G&A? Thanks.

So I'll do the second one first, Jeff. Yes, we feel very comfortable we'll achieve the estimate we had that we'll be down in G&A for the year. On your first question, our steady-state tax rate now going forward will be around that 31% guided rate, now that those credits are back in place.

Very good. Thank you so much.

Thanks, Jeff.

Joe Buckley, Bank of America Merrill Lynch.

I just wanted to clarify the holiday shift again. Is the real key that your quarter ended the 26th this year instead of the 28th last year, so you had two fewer of those big sales days? Is that a significant part of it?

A little bit, Joe, but it really -- so, you lose a little of those days that get pushed into the third quarter. But again, it really had more to do with the when kids were out of school.

And so, last year, with Christmas falling on the weekend, schools were out pre, that week before. And with the following -- falling on the Tuesday, schools didn't really get out until the week of and then extended out further, which pushed all -- a lot of the holiday school vacations into our third quarter those days. And those are big days -- again, as we've talked about, those are days when people are out. And it's primarily those weekdays, right, that become a little more like a weekend because kids aren't in school.

I think, Joe, the other thing that exacerbates it is, as everyone on the call would know, is we run a Thursday to Wednesday week, when much of the industry runs a Sunday to Saturday week. And so, if you looked at our last week of the quarter, our gap to the industry -- so, back to your earlier question -- everyone in the industry would have experienced that shift in school timing.

So, we all were faced with that to some extent. But because of the way we count our week from Thursday to Wednesday versus the rest of the industry, our gap to the industry, I mean, we were negative in the last week of the period, but we were significantly positive in the first week of the third quarter. The overall lap being that, if you looked at the two weeks as a whole, our gap to the rest of the industry actually increased a little bit in that two-week period. So, some of it also has an impact on when we count our weeks versus the rest of the space.

Sure. Guy, just a question on the food cost guidance for calendar 2013.

Yes.

Just how do you expect that 2% to flow? I think you said it will be more modest in the first half of the calendar year, and a little more in the second half. And can you comment if beef is part of what is in the 40% or so that's contracted or covered?

Sure. So, yes, Joe, so you heard me right -- we expect it to be a little lower than that earlier in the year, and perhaps closer to that number in the back half of the year. So we are expecting commodity inflation to increase somewhat as the year goes on.

As for beef, some of it is part of the contract. We can't really contract for ground beef any more. That tends to be something we can just lock in supply but not price. But for things like steaks and fajita beef, those items are under contract.

Okay. Maybe just one more quick one. How is the gift card season this year versus last?

Yes, it was okay, Joe. We were basically flat, down a point. We chose not to be as aggressive as some of the competition out there. So, again, keeping track of what the competitive environment looks like, you saw several players step up their level of discounting, some of them at levels that were really pretty amazing, in terms of trying to get people to come in and buy gift cards.

So we felt pretty good about our ability to maintain our basic business without discounting it any deeper than we had in the past, and taking advantage of the shifts in the categories that continue to evolve in that business, as the consumers move more toward purchases in third-party versus purchases in restaurants. So, we're continuing to do a good job, I think, from a marketing perspective on adjusting and doing the right thing to balance that. But --.

Okay, thank you.

All right. Thanks, Joe.

Chris O'Cull, KeyBanc.

Guy, I believe you said excluding the overtime and health insurance claims, labor would have improved 50 basis points year-over-year this past quarter?

That's correct.

Is that the run rate we should expect in the back half of this fiscal year?

We talked about, at the start of the year, Chris, that we thought our labor line would be 50 to 70 basis points better for the year. And we're still comfortable with that guidance.

Okay. Is there any unusual -- quarter-to-quarter, is there any unusual claims that you're going to be lapping or charges?

Not for the balance of the year, no.

Okay. Okay, great. And then, Wyman, my question is regarding Maggiano's. Does the soft traffic the past 12 months at Maggiano's change your view on the development potential or the accelerating development at Maggiano's the next few years?

No, I mean, it -- we're looking at it, obviously, and we want to look at strengthening -- the strength of the business across all the metrics. But overall, the profitability and the returns for the brand are looking very, very good. With the cost of sales improvements, the business model is actually getting stronger.

Now, again, we do look at traffic, and we're trying to understand. And what we do understand where those trends are coming from and what's driving some of that. So we may need to balance the model a little bit to address some of the softer traffic aspect of the business. But overall, Maggiano's team has done an outstanding job improving the overall profitability of the business, even with some of those lower traffic numbers, and getting us even more excited about growing that brand as we go forward.

And I apologize. I may have missed this -- what was the development expectation for the brand over the next year or two?

We think in the neighborhood of 12 Chili's next year and two to three Maggiano's.

Okay, great. Thanks, guys.

All right, Chris. Thanks.

John Ivankoe, JPMorgan.

Two questions, if I may. First, as you look at introducing some new products on the menu as to allow to your new kitchen platform, do you think that will be positive mix? Or potentially negative mix, if some of those items might be shareable? In other words, what has been the impact in tests, as you've kind of had some visibility of what the impact will be to average ticket?

So, John, are you talking about the things we just introduced, the things I talked about? Or are you talking about more -- are you talking specifically about pizza?

Well, yes, I mean, pizza being one and whatever else you guys kind of have in your pipeline that you presumably will see in a couple of months.

Wyman Roberts. Okay.

I mean not the -- in other words, so you're thinking about fourth-quarter even into fiscal '14?

Yes. So, obviously, the key to a lot of this is, we don't do anything without thoroughly testing it, right? So we have a real good understanding before we roll anything nationally, as to the impact it's going to have on our check and on our cost of sales. And so, obviously, we wouldn't do that if we thought it was going to be detrimental.

We continue to see things like the things we just added, the mango chili tilapia and the mango chili chicken, which are on our Lighter Section menu. We're able to actually get better margins on that part of our menu, so they're helpful and accretive to the margin there.

And obviously, with pizza, we've kind of positioned it in a way that it isn't -- it doesn't look like it's being shared that much. We've kind of designed it around an individual portion. It's a good portion, so maybe you can take some home, but we're not seeing a lot of sharing. And obviously the cost of sales on that item are very favorable.

So, we're encouraged by that. And we continue to just make sure through the testing process that we have all those things kind of figured out before we roll.

Okay. That's some very good color, thank you. And then secondly, a footnote in your release off the balance sheet quantified that your net book values of land and building. And there's been, obviously, a lot more discussions about companies that pursue a REIT structure or perhaps kind of unlock some of the value, market value, of these properties might be significantly more than your net book value.

So, if it's an appropriate venue to talk about it, I mean, what would be the positives and the negatives of a structure like that? And is -- that would be something that you could consider in the future?

So, John, as you can imagine, we look at all of those opportunities on a fairly regular basis. But given our investment grade credit rating and the access we have to be able to tap into the debt markets, as you've seen, we've drawn on our revolver and we believe that that capacity exists.

It's a lot more expensive proposition for us to monetize our real estate than it would be for us to look at the credit markets. In part due to what you said, that the market value is significantly higher than the book value of our land. And so, the tax hit we would take in addition to the cap rate that we would experience by doing that, it just makes a whole lot more sense for us to go tap into 4% or 5% money than it would to spend more to monetize the real estate.

Okay, very good. Thank you.

All right, thanks, John.

Alvin Concepcion, Citi.

I was just wondering, year-over-year, have you seen a major change in the promotional environment in the industry so far this year, relative to what you saw in December or even the quarter, however you'd like to talk about it? And then, secondly, I think you've previously talked about advertising being pretty similar year-over-year for the remainder of the year. Is that still the current thinking?

Yes, Alvin. So, we haven't; you know, we've heard rumblings. And we continue to look, but we haven't seen any impact to date. And, historically, it really hasn't been the thing that drives share when people get aggressive, like with promotion and margin.

So, we'll continue to monitor, but we're committed to our strategies going forward. We think that those are the way to continue to build a business for the long haul. And with regard to marketing spend for the back half, yes, basically, we're in that same levels as last year. We're always aggressively looking to shift our mix to where we get the biggest impact. And so -- but from a budgetary standpoint, we're very similar to prior-year.

Thank you very much.

Thank you.

Jeff Farmer, Wells Fargo.

Just coming back to -- I think it was John's question earlier, about pizza. I'm curious, at this point, do you guys see that as a standalone platform? Or do you think you'd roll it into 2 for[$20]? How do you anticipate merchandising that?

Jeff, I -- I mean, we obviously have it all figured out. It's rolling in a couple of weeks. I don't know if I really want to get too specific before it rolls, just from a competitive standpoint. So, I think I'll just --

Yes, let's leave it there. That works.

Yes. Yes, in a week, you can go in and see in the restaurant, you'll see.

Okay. Then, on a different topic, just sort of coming back to the margins. So, I guess if you just go back and you look at that first group of restaurants that received the new kitchen equipment and POS system, are they continuing to deliver, I guess I'd call it, incremental margin favorability? Or is that margin benefit largely achieved in the first couple of quarters? And then they've sort of done their job and then the next group of upgrades takes over? How should I think about that?

I think there's a couple of different levels, Jeff, so it's a fairly quick impact that we see the productivity improvements, particularly around the implementation of the kitchen line -- the kitchen of the future equipment. But we saw -- so that's the first level you get.

And then there's a second level that comes when you can get an entire area or an entire region with the kitchen equipment. Because now they can draft off each other and you've got the area Director, Regional Director, working one consistent system across all the restaurants, rather than still trying to manage old lines and new lines.

So I think that bumps up to the second level. And I think there will be a third level. In fact, I know there will be a third level. Because as our operators -- now many of them have had the kitchen equipment for a number of months now, and you know we had our old kitchen for 35 years. But some of our restaurants have only had the new kitchen for 35 days or 35 weeks.

And so, I think once you get muscle memory and practice and experience with the existing kitchen, I think our operators are already identifying opportunities to maybe hit a third level of savings and productivity improvements around the kitchen -- not to mention faster ticket times and improved food consistency, and the ability to roll out new items. So, I think there will be another level of margin improvement in addition to what we've seen so far.

All right, helpful. Thank you.

Thanks, Jeff.

Howard Penney, Hedgeye Risk Management.

I think you've answered this question but I'm going to ask it anyway. In the -- when a brand or a company is struggling and in trouble, there's a whole host of possibilities of things that they can do to improve the perception of the consumer, whether it's attacking the middle of the P&L like you did, new products and advertising; maybe changing their cooking process and/or discounting -- where does discounting fall, as you think about it, as a competitive strength that needs you to take you into your war room, and say, okay, we need to think about the business differently and react and respond?

Hey, Howard -- Wyman. Yes, so I think we've been clear, but thanks for letting me kind of restate it again. We don't see discounting or major margin give-up as the best or appropriate strategy for a long-term success. Right?

So we really do believe it has to do with, you know, creating a better consumer proposition, more relevant brand, and reinvesting back into the business, and adding those foundational elements to the business that are going to make us really successful. And that includes new food as well as operational excellence. And so that's where our focus is.

Now -- I will say, you know, every once in a while, in a region or an area if we feel some competitive pressure, we have, through more subtle marketing tactics, the ability to go in and apply a little more pressure or introduce something a little more specifically. But we see that as a much more localized approach and not the way we want to position the brand in the broad way. We think we're much more sensitive to how the brand gets viewed, and we don't think discounting broadly is the way to build a strong brand.

Thank you.

All right. Thanks, Howard.

Steve Anderson, Miller Tabak.

Earlier on the call, you mentioned about the sales in your refresh rebranded markets were up above the 3% hurdle rate, and above that in some of the California markets. There are a few markets as you renovate, like you've been running up against the two-year mark. And do you have any metrics for that? Are they still outperforming systemwide average?

Steve, it's Guy. No, those restaurants are holding firm. So, our goal there was to get the initial one-year bump, and then try and maintain that as we go forward. And so you're right. The initial five sort of test markets that we did are now into year two of the reimage.

And we're very happy about how they continue to perform, and how guests are perceiving the reimage, giving us credit for having a more relevant environment a fresher look, a better atmosphere. And, of course, that permeates through to other metrics as they tend to -- if you're happy about how the restaurant looks and what your experience is, the food tastes better and the service is faster as well -- which, in fact, they are. So we're seeing it resonate even into year two in a lot of those early markets.

Great. Thank you.

Thanks, Steve.

We'll take our last question from the line of Nicole Miller Regan with Piper Jaffray. Your line is live.

This is Josh on for Nicole. Thanks for taking my question. Looking at the commodities -- the updated commodities guidance of 2%, kind of the pushes and pulls there, is that lower than expected beef and pork inflation are on the protein side? Or maybe actual deflation on the produce side? Just a little commentary there.

And then on the Maggiano's side, it looked like the traffic trends more or less followed Chili's throughout the quarter. I just wanted to get a sense for how banquet dining shaped up in particular on that year-over-year comparison. Is that something you did differently on the marketing side? Or maybe just more a result of the broader industry trends? Thank you.

All right. So let me handle the commodity one and then I'll talk about Maggiano's. So, unfortunately, we don't see beef getting any better for probably a couple of years, just given the pressure on that category. And we're not really seeing herd sizes expand at this point. So, I would not say that beef is coming in more favorably than we thought. It continues to be aligned with a lot of pressure.

I think poultry prices have been favorable, so we're very happy. We just recently finalized that contract and we've very happy with where that landed. And really, the rest of our commodity basket, the inflation is fairly muted. Really, most of the inflation that we're seeing is in the beef category. And everywhere else, we've done a real nice job managing that -- again, both through the efforts of our supply chain team and through culinary.

Maggiano's, the banquet business, it was interesting what happened in the quarter. Given the way Thanksgiving fell and the way Christmas fell, we actually had five weekends of banquets versus four in past years. So, early on in the period, it didn't look very good for banquets, because what was happening is, four weekends of banquets got spread over five weekends. But certainly, that performance got dramatically better as the period came to a close. And we ended up higher in banquet sales year-over-year, which was a nice positive result for Maggiano's, lapping a very good year last year, as well.

Great, thank you.

Thank you.

Okay. So, listen, in closing, let me just wrap it up and say we know there are a lot of economic and environmental factors that we can't control, factors that impact every business and not just ours. The good news is what we can control is working well for us.

With the strategies and the team we have in place, the Company's financial health just keeps getting stronger and our future looks brighter. We continue to consistently deliver positive comp sales and margin improvements across the Company, as well as strong guest satisfaction and team member engagement scores that just keep getting better.

All the work our team has done to complete our key capital initiatives gives us the foundation for further culinary and marketing innovation, which will help us continue to steal share and achieve our goals. We look forward to seeing you all in Dallas on February 26 and 27 for our investor conference. Thank you for your time on the call today.

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.