Brinker International Inc (EAT) 2023 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Brinker International Q1 Fiscal 2023 Earnings Conference Call. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Mika Ware. Ma'am, the floor is yours.

Thank you, Paul. And good morning everyone, and thank you for participating on today's call. With me are Kevin Hochman, our Chief Executive Officer and President; and Joe Taylor, our Chief Financial Officer.

Results for the quarter were released earlier this morning and are available on our website at brinker.com. As is our practice, Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions.

Before beginning our comments, I would like to remind everyone of our safe harbor regarding forward looking statements. During our call, management may discuss certain items which are not based entirely on historical facts. Any such items should be considered forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All such statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such risks and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. And of course on the call, we may refer to certain non GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations.

And with that said, I will turn the call over to Kevin.

Thanks, Mika, and good morning everyone. I'm now 5 months into this role. And I'm encouraged by our quick progress to grow top line sales and to simplify operations while we still have work to do. And there's some uncertainty in the macro environment to navigate the business is moving in the right direction. And we're putting the initiatives in place that we expect will grow the business and improve our 4-wall economics over time.

This morning, I'd like to share the results of the changes we talked about in August to create near term momentum and the progress that we've made in defining Chili's North Star in the longer term strategy.

The last time we talked I had chartered 2 teams, one focused on driving sustainable and profitable sales layers and the other one taking unnecessary cost and complexity out of the business to reinvest in more impactful areas.

Our team in charge of growth implemented initiative we called Raise the Bar comprised of new drink offerings, delicious new food like loaded curly fries and the Chili's Philly, a robust Happy Hour platform and marketing that positions to Chili as the bar destination during football season.

Our field restaurant teams are excited by the new offerings, and we're seeing more energy at the bar as well as improvements to sales and mix. We plan to build upon that momentum to drive profitable traffic to additional sports driven group viewing occasions like March Madness and the NBA Playoffs, which will also include new food and drink offerings.

Our simplification team led efforts to streamline operations finding ways to quickly reduce complexity and focus on growing the core Chili's business. They made good progress collaborating with operators to take things out of the system that didn't add to the guest experience and to make our teams jobs easier so we can spend more time and more energy on the things that will really improve the business.

We quickly learned that simplification has to be an ongoing priority for us. So we will regularly partner with operators to implement more ways to make it easier to run restaurants. We expect over time these efforts will show up on the P&L through lower waste, improve labor productivity, better margins and increased retention.

We also implemented a new pricing strategy to help expand the restaurant margins and grow profits by providing a value price point for cash strapped guests who needed moving away from frequent deep discounting, reducing the amount of mix on deal, and increasing trade up opportunities to drive check.

Last week we launched a new menu with 470 basis points of price, including a reconfigured value platform. We protected 1099 as the entry price point for our 3 For Me value menu, but we rightsized the number of offerings to reduce the overall mix in the value platform.

We also introduced more premium price points at $13.99 and $15.99 for those value-focused guests who want a little something more like stake or shrimp. As a result of these 3 For Me menu changes, we are seeing more trade-up off the value menu and we're selling more full revenue entrees off the ala carte menu.

We're also well underway to rightsizing our investments in My Chili's Rewards promotional offers. That change in addition to decreasing our value menu mix has reduced the percentage of checks on deal from the high 30s to the low 30s. As expected, we did see traffic slip a little bit with the initial reduction of discounts, which we're closely monitoring, and we're also seeing favorable mix and profitable growth as a result of these changes.

We expect these growth simplification and pricing initiatives will allow us to invest back into restarting our marketing voice sometime in Q3. In the new calendar year, we know that cash strapped customers will be seeking great deals without sacrificing quality, and we're making plans to create broader awareness of our unbeatable Chili's value.

Now we'll talk a little bit about our long-term strategy. Since our last call, we completed the work on the Chili's North Star and longer-term strategy. We are now in the process of aggressively putting plans in place that we believe will strengthen Chili's position in casual dining, deliver value to our guests and deliver value to our shareholders over time.

We started by defining the 4 strategic pillars that we believe are fundamental to growing market share now and sustainably over time. Each pillar will have a senior executive owner, action plans and KPIs that we will measure and track performance against.

Our first pillar is team members, which is all about making the job easier, more fun and more rewarding for our operators and our hourlies. The 3 areas we prioritize here are stabilizing turnover, ensuring that we're fully staffed and reducing complexity to make it easier to run our restaurants.

While we've seen both manager and hourly turnover start to improve, we still have more work to do to return to pre-pandemic levels. To accelerate our progress, we restructured to bring critical people functions closer to our operations, and I'm pleased to share that Aaron White, who was most recently our Co-COO, has taken on the role of Chief People Officer.

During her 21-year Chili's career, Aaron has held leadership roles in human resources and operations, and I'm confident that she will add huge value in this role and help us tackle our turnover challenge.

The second pillar is food and drink, which defines the core categories that we want to win on. We will double down on 4 segments that we're already known for, which also happened to be huge opportunity in growing segments of what Americans eat, burgers fajitas, chicken crispers and margaritas.

We believe that making sure that we have the best possible offerings in each of these categories, we will improve the guest experience and increase traffic in our pricing power over time. To enable our restaurant teams to focus on those core segments, we'll continue to remove SKUs and operational complexity from the categories we're overinvested in, like salads and sandwiches.

And of course, we'll protect our other famous recipes, which are customer favorites like baby back ribs, and our southwest eggrolls. An example of how this plays out to grow the business. We're working on re-launching our chicken crispers platform in the back half of the year. Boneless fried chicken is a huge segment, and we see tremendous upside.

Our insights tell us customers want a variety of dipping sauces, the best possible fries and the ability to get larger piece counts of chicken tenders, and we already have a terrific chicken tender product. And by expanding the flavor profile using its just wing sauces that are already in the restaurants, upgrading our fries, re-engineering on the merchandising to provide trade-up opportunities, we think we can explode that saving to the business. This is what we mean by more focus on large strategic growing segments of our menu.

Our next pillar is hospitality. This is all about making sure we deliver a great experience for both our dine-in guest and our off-premise guests. On the dining side, which represents 2/3 of our business, working to re-define the labor model to make servers jobs easier so they can spend more time connecting with our guests.

They've told us that serving the guest is why they chose to work in the hospitality business, and we need to allow them more time and more focus on making our guests feel special. We're serious about improving hospitality and we will make some needed investments in this critical part of the business.

From an off-premise standpoint, it is now over $1 billion of business for us today, which tells us our guests see Chili's as a home meal replacement. So we've structured our organization to be more deliberate about improving the off-premise experience end to end, moving friction for both guests and team members and optimizing food quality for takeout and delivery. We believe this focus will accelerate the growth of this important part of our business.

The fourth and final pillar is atmosphere. There's 2 legs to this pillar. The first is providing a better atmosphere for our heart of house kitchen team members by ensuring the restaurant facilities and equipment are well maintained and fully operational.

Like many others, we deferred some maintenance items during COVID, which we know is impacting the experience for team members and guests. So we're working to accelerate getting restaurant maintenance and equipment back on track to pre-pandemic levels.

The second leg of atmosphere is the guest-facing experience in our dining rooms and bars. We're committed to making the Chili's atmosphere more fun and vibrant for our guests as they return back to our restaurant dining rooms.

Last week, we finished cascading the North Star strategic pillars throughout operations and across the restaurant support center, refining it based on their input. And the response has been incredibly positive. Our operators are already feeling the impact of short-term changes we've made to make it easier to run the restaurants and grow the overall business.

We just completed our annual employee feedback survey both at the restaurant support center here and out in the field. Engagement intensity saw very significant lifts driven by implementing team members' recommendations to simplify operations and also giving them more of a voice in our business outcomes.

While this is a multiyear strategy for the Chili's brand with investments designed to improve 4-wall economics over time, we also have plans in place to improve the guest experience to mitigate the negative traffic headwinds in this fiscal year.

We're focused on strengthening our voice in the marketplace, building incremental sales platforms around core equities and improving the team member experience, which we believe will strengthen our ability to move through a tough macro environment.

We're planning an Investor Day later this fiscal year, so our senior leadership and I can share more details around our longer-term strategy. We look forward to seeing you all and we'll announce the date soon.

Now I'll hand the call over to Joe to walk you through the numbers. Go ahead, Joe.

Thanks, Kevin, and good morning to everyone on the call. For the first quarter of fiscal year '23, Brinker International reported total revenues of $955 million, a restaurant operating margin of 6% and an adjusted loss of $0.57 per share. These results lived up to the expectations we discussed in our previous analyst call.

Top line company sales performed well, supported by positive comp sales for the quarter and the addition of restaurants acquired and opened since the first quarter of last year. Despite the tough inflationary environment, our operators delivered restaurant margins slightly better than we planned.

At the brand level, Chili's posted a comp store sales increase of 3.8%, driven by price of 7.4% and mix gains of 3%. An important part of the comp makeup this quarter was our concerted effort to move away from higher levels of discounting, particularly through our loyalty program and bar offerings.

This did contribute to the brand's negative traffic of 6.6% for the quarter, but also supported positive mix and lower comp expenses related to the offers. In addition, we believe some guests are reacting to the tougher economic environment with fewer restaurant visits.

While our year-over-year price is higher than we have typically carried, we continue to feel good about our ability to price at this level as we move through the next couple of quarters. Inclusive of our recent menu introduction that Kevin referenced, our second quarter price will be close to 10%, and we anticipate full year menu pricing of approximately 8% to 9%, which enables us to narrow the pricing gap relative to the industry.

Chili's continues to offer good value opportunities for those guests who might otherwise shy away. And even with our more aggressive pricing, we remain favorably positioned to our sector.

Maggiano's reported a very strong quarter with positive sales of 18.2%, driven by favorable traffic of 9.3%, an increased price of 5.8% along with improved mix. The brand recorded positive traffic in all major revenue channels, including dine-in, banquet and off-premise.

Overall, their first quarter business performance exceeded pre-pandemic results. Their dining rooms have recovered and their strong off-premise performance has remained in place. The last piece of the recovery is banquets, which will play out over the course of the next 2 months. Events held this past quarter exceeded expectations and the banquet pipeline for the upcoming holiday season looks promising.

Moving on to restaurant margins. First, as indicated in this morning's press release, we are reclassifying certain revenues into company sales from the franchise and other revenue category as it relate more directly to restaurant level performance. We believe this more accurately reflects our restaurant-level performance and provides a more relevant comparison to our peer group.

The first quarter restaurant operating margin benefited about 70 basis points due to this reclassification. As expected for the quarter, we experienced commodity inflation of approximately 24%, with significant year-over-year cost increases from chicken and beef driving the inflation.

The 3.5% increase in food and beverage cost was the primary impact to the overall loss for the quarter. However, we are now seeing most of our main commodity markets, particularly chicken, moved to lower cost levels, supporting our expectations of a much improved cost environment as we move further into the fiscal year.

On the labor front, wage rate increases have moderated, although they remain in the mid-single digits for the first quarter. Our hourly staffing levels continue to improve, and we are starting to make necessary progress in lowering overtime and training costs.

In addition, our operations leadership is starting to make progress with turnover, which should result in better team member and guest experiences over time.

While restaurant expense did benefit from top line growth when compared to last year's first quarter, a significant year-over-year inflation led to 1.7% year-over-year increase, primarily driven by increases in delivery fees, utility costs and higher restaurant repair and maintenance.

Looking ahead, we anticipate growing company sales and expanding restaurant margins as we progress through the rest of the year. In terms of development, we are moving into a period where we will consistently open new restaurants with 5 scheduled for the second quarter and 18, including 1 relocation for the fiscal year.

We just opened our newest location in Athens, Texas, a great midsize community east of Dallas, where we clearly received a warm welcome. The opening was very successful, generating nearly $100,000 in sales during its first week. This demonstrates the power of the Chili's brand and the potential to develop locations in a variety of markets.

At the same time, we continue to evaluate our fleet at the lower end of the performance spectrum mostly due to aging locations, and we anticipate closing 8 to 12 restaurants this fiscal year. Now with the tough first quarter behind us, we're moving forward through the rest of the fiscal year with a good line of sight to an improving operating performance. With this in mind, we are reiterating our full year guidance provided on our last earnings call.

As Kevin detailed in his comments, we are quickly moving forward to improve the Chili's brand in a focused and sustainable manner. Maggiano's is now back in full force in prime for a celebratory holiday season. And importantly, the worst of the inflationary headwinds we believe are now behind us.

Granted, there are likely some uncertain economic times to maneuver, but as we strengthen the capabilities of our operations and create a more relevant, easier to operate and distinctive experience for our guests, we will create the opportunity to be successful in whatever conditions prevail. We entered the rest of our fiscal year, optimistic for the growth and improvement ahead.

With our comments now complete, let me turn the call back to Paul and to moderate questions into about the top of the hour.

(Operator Instructions) And the first question is coming from Jeff Farmer from Gordon Haskett.

I think you guys said commodity inflation was 24% in the quarter. Could you share your expectation for commodity inflation for the balance of the year or for the full year, rather?

Yes, Jeff, this is Joe. Let me give you a little insight there. We think, one, it's going to be coming down. I would expect to see something kind of in the mid-teen range as you think about the current quarter and then mitigating further into the back half down into the mid to upper mid-single digits, I think will be those ranges you would expect to see.

Okay. And then just one unrelated question. So it sounds like you were able to decrease the number of orders or checks on discount from, I think it was 37% last quarter to a low 30% level this quarter. Where would you guys like to see that number get to, meaning percent of orders on discount? And if you were to get to that level, what type of check benefit would that provide for you guys?

Yes. I can't give you specifics on that. I can tell you it's less than where we are today. So we like -- we're excited that we got it from the high 30s to the low 30s, and we think it should be sub-30%, but we don't have an exact number. And of course, as if traffic trends were to continue way are, we feel good about where we're headed. Obviously, if the economy gets tougher, we might have to be a little bit more aggressive and maybe pull back a little bit on continuing to do this.

But right now, based on everything that we're seeing, we're going to continue to manage that number down. And hopefully, we'll get below 30s the next time we talk. But we just got to make sure that we monitor the economic environment, make sure we don't get ahead of our skis on anything that we need to -- that we think the customer needs.

Yes. And I think -- and Jeff, I think another piece of that is as we start to evaluate how we think about offers, there's opportunity there, too, where in the past, most offers were going out as a free something, right, fill in the blank after that. There's probably opportunities to restructure that program where there's -- in essence, it's an offer, but maybe it's, as a price point of touch with the 2. So rather than a freebie, it's for $1, $2, something of that nature things. So it can still be an offer from a number of check, but it can be a more profitable offer relative to where we were.

The next question is coming from Alex Slagle from Jefferies.

Seem like the sales momentum both at Chili's and Maggiano's seem to accelerate a bit quicker than expected. And just curious to the degree this surprised you and how much of this momentum is sustainable? Just maybe thinking about how you layer these near-term drivers with some of the longer-term drivers down the road?

Yes. Alex, we are pleased with that directional acceleration. We saw it accelerate as we move through the quarter. October is maintaining that pace coming out of the quarter. So we're pleased with that.

We're seeing it being driven by some of the initiatives we spoke about the bar, which is obviously not just an impact within the bar, it impacts the entire restaurant. We're seeing receptivity to the pricing changes that we have made and some nice mix ramifications to the way we've kind of started to reconfigure the menu and focus on some of those core equities. So I think it is sustainable and it's something that we expect to continue as we kind of move further into the fiscal year.

Okay. And then a question on the other restaurant expense line with the utilities and repair and maintenance, which I guess you called out maybe as a focus going forward and delivery fees. How much of this elevated cost is out of your control or in control? And just trying to figure out how much continues through the 2Q and into the back half?

Yes. I think it's a great question. I think there's a little bit of both. When you think of delivery fees, some of that -- well, a lot of that was driven by actions we took to expand those delivery aggregators and grow the -- some of the virtual brand offerings when I'm looking at that year-over-year comparison.

And you're also getting some -- again, similar to what you saw on food and beverage, some larger year-over-year comparisons that I don't think will continue at the same year-over-year comparisons as we -- so I think particularly when I think about utilities and some of those bigger expenses within restaurant expenses, I think you'll start to see a gravitation more to the level year-over-year on a comparative basis. So I don't think it'll have quite the same level of drag on a percentage basis as we go further into the fiscal year.

And the next question is coming from John Ivankoe from JPMorgan.

Kevin, I was curious, the more time that you've spent with the brand is obviously a very heavy company-operated structure and even some of the menu changes that you're talking about seem to be national in scale. I was wondering if you're kind of seeing an opportunity to maybe start to localize your business a little bit more or regionalize your business a little bit more. I mean, we just have so much -- such a disparity of kind of consumers and behaviors and competition, what have you, that exists on a local market. I was wondering if there's any pockets or opportunities that you see that the way to actually optimize and get scale from this business might actually not be taking a completely national approach, but maybe it's pressing it more locally or regionally?

Yes. I have experience a national change. And I share kind of 2 things, I think, in your question. I think you're probably speaking more about the menu, which we'll get to in a second.

I mean the first place, I think that we have to be really sharp about understanding regional differences in pricing tiers. So whether you're in a high-cost market or depending on the level of casual dining activity, I think we have to be really sharp about understanding where can we take price and where do we have to be as competitive as we possibly need to be in order to operate in those markets.

So from a pricing standpoint, we tend to look at things more regionally and be more customized on how we go to market, whether it's with bar specials or food specials or where the everyday menu pricing is and tiering.

As far as like in terms of food and regional differences, it is a discussion that we're having internally here. I would tell you, I think there might be room for a little bit of regionality.

But for the most part, what I've seen in my time in working on national brands is we need to be focused on big things that will impact -- will make big impacts to the business. And typically, those are things that can be expanded in all 1,000-plus restaurants and have the scale of our buying power behind it as well as, as we get back on at a restaurant advertising, it makes way more sense to be national from a cost standpoint, both in terms of producing the advertising as well as getting the best possible rates.

So I wouldn't anticipate seeing very much regionality in terms of our menu. There might be a little bit of customization that we do, like on regional craft brews and some things that we hear from the operators, but I don't anticipate that being a major part of any kind of strategy that we do going forward.

Okay. And there was a soft delusion, and I'll be more specific in this case. In terms of the ownership, I mean, I'm sure you probably know many very talented franchisees from your previous organization that probably would actually do very well franchising Chili's if that opportunity came to them. And especially as obviously, there's a disparity of performance across markets, and you probably have some stores that could be run by a franchisee and would be dilutive or maybe -- excuse me, not dilutive or perhaps even accretive to operating income dollars. So there could be maybe a portfolio management type of an exercise to go through with less company store ownership increase franchise ownership, and that would allow the franchisee to be very connected to the local markets, as I was alluding to earlier.

Is that entering into your thought process? I mean, could we see a very different company to franchise type of ownership composition over the next 3 or 5 years? I mean do you think that makes sense based on what your previous experience has been in terms of the success that, that drove across the organization?

Yes. Well, I appreciate the question. Honestly, we haven't given much thought to that since we've been working on our long-term strategy. What we've been focusing on is what are the long-term things that we need to address in order to have sustainable profitable growth over time.

So the 4 pillars that I talked about on the prepared remarks, food, hospitality, atmosphere and team member experience. That's really what we're focused on right now. We really just have not even remotely talked about ownership and franchise models because we're really focused on things that are going to win with the guests and help us grow faster and do it more sustainably.

Yes. And John, I would also echo in that. Corporate ownership and community connectivity are not mutually exclusive ideas. In fact, when we talked on the last call, I think we highlighted a lot of focus we're giving to making sure that our restaurants in a community, and they are very much part of local communities, increase that connectivity, give back nights and things of that nature.

So engagement and connectivity to the local community that our restaurants are in is an important piece of the dialogue as we kind of move forward.

The next question is coming from Brian Vaccaro from Raymond James.

Sorry, I joined a few minutes late. So if you've commented on this, forgive me for that. But I wanted to ask about the performance of the 3 For Me platform since you made some changes to the program. Can you just give us a sense of how that's mixing in terms of sales or transactions and to what degree the profitability of the platform has improved versus prior versions?

Yes. So I'll walk you through, Brian, the changes that we made. And then if Joe wants to chime in with any more specifics he's welcome to.

So we dropped a new menu on 1025 that had kind of a restructured 3 For Me platform. We reduced the mix, the menu mix of that platform. So we reduced from 12 offers to 9, and we also went from 4 price tiers to 3 price tiers. And the intent of that was to drive more trade up within 3 For Me as well as higher guest check both for 3 For Me customers as well as customers that then would trade out of 3 For Me and go back to the a la carte menu.

And as I said in my prepared remarks, we were in the high 30s in terms of discounted tickets. We're now in the low 30s. So we've seen a meaningful impact. We've seen significant PPA or average check increases for those that buy 3 For Me. We've also seen the reduction of mix in 3 For Me as some have moved back to the a la carte to find the items that have removed from the 3 For Me.

The other changes that we made, even on the tiers above $10.99, several of those items were priced as a bundled offer below the a la carte price, which obviously would push the customer to buy the bundled price because it's less. We've corrected that with this menu update. So all of those items that are on the bundle 3 For Me menu are now higher priced, still an incredible discount for the customer, but higher priced than the a la carte items.

And then we added some options to the higher tiers of 3 For Me to drive trade up. So, at our $15.99 tier that now has cage and chip pasta and 2 steak offerings, 6 oz sirloin and carne asada. So, not all value customers just want the basic. They want to be able to trade up, and we've seen some success behind that, too.

And then the last thing is we took some of our classic favorites out of 3 For Me. So the cage and chicken pasta, the chicken fajitas and the Margarita-Grill chicken, those are destination items for Chili's. And we repositioned them back on the a la carte menu and that has also helped us get out of some of those discounted checks.

So we're seeing quite a few changes to those one in terms of the overall number of 3 For Me. The overall mix of 3 For Me, the PPA that we're getting at is 3 For Me customers, and then obviously, that mix that goes to a la carte is helping with PPA for the overall box too.

With increased profitability, too. The structure of the program also reduces the cost dynamics of the platform itself, too. So not only are you getting the favorable lift in the favorable PPA. It's coming against a lower cost perspective on the platform, too.

So yes, we're 1 week into it. Obviously, pretty excited about what we're seeing come out of it, and we'll watch it develop it as we kind of go through the rest of the quarter. But it's performing across all of the metrics, including the mix bag into the a la carte side of the equation at or above where we would have expected it to perform. Okay.

That's helpful. And Joe, on the annual revenue guidance, can you remind us what you've embedded in that guide in terms of Chili's traffic and sort of average check expectations? I know you talked about pricing, I think, high single digits. But maybe you could sharpen us up on that. And then also just on mix specifically, will you expect mix to continue to be a more meaningful contributor in this ballpark like we saw in the first quarter than we've seen historically?

Brian, I'll sharpen it to the extent of reminding what I said in the last call as we've reiterated the guidance and you hit on the traffic, we do expect Chili's to run in a negative traffic mid-single-digit range as we kind of move through the fiscal year. Pricing will be at those levels that we told you about.

Mix is kind of the delta, and I'm encouraged by the mix and the sustainability of what we're seeing on the mix side of the equation. I didn't really give you a specific range. But I guess I'd sharpen it up by saying through the first quarter and what we're seeing is a sustainable level of mix for the near term. I'm very encouraged by that.

Okay. And then last one for me, just on the labor line. It was pretty solid performance this quarter. And Joe, I think you mentioned seeing some normalization, finally seeing some normalization and training and hiring costs. And I know that's been very outsized in the last 12 to 18 months. Is there a way you could ballpark sort of how much progress you've made maybe as a percent of sales or however you characterize it? And how much opportunity still remains on that front?

Yes. As it relates to those items, I don't think I said normalization. We're seeing wage rates start to stabilize kind of in that mid-single-digit range, which is down from last year a couple of percentage points.

We're seeing improvement in the overtime and the beginnings of improvement on the training side of the equation. I view both of those as still having opportunities as we kind of move forward through the rest of the fiscal year.

Training, the managerial side of the equation has stabilized, pretty much getting back into the free pandemic, like to see a little more opportunity for improvement there. And we'll continue to move the needle forward on the hourly side of the equation, which drives a lot of that training expense.

So it's getting better, but I still think there's good opportunity within in those 2 specific areas as we kind of move forward. Obviously, the benefits we're seeing from sustaining our price dynamics and our mix lift will help in that category as you kind of move forward.

The next question is coming from Jon Tower from Citi.

First, going to the marketing conversation. I believe Kevin earlier in the call, you had mentioned the idea of marketing coming back online later this year. And I know, I believe you've been off television for a little while now. So I'm curious how we should think about this rolling through in terms of the message to the consumers are going to be more product versus, say, brand? And is it going to be focused on value versus a premium? And how you're thinking about the level of spend versus history? And frankly, the channels are going in, whether it's traditional media versus more digital, et cetera?

Yes. So last call, we did talk about wanting to start building back those investments into the business, but we needed to have clarity on where the brand was going to be positioned. We needed some new news to bring guests back in. And then obviously, we've got to find incremental funding sources, either through cost reduction or sales growth and contributions.

So I think we've got line of sight to getting those things solved, if some of those things are solved and some of those things we're working on. And we will be adding some advertising dollars in the back half of this fiscal with our goal to increase that spend, both this fiscal and then some more for next fiscal.

We only spend about 1% today. Pre-pandemic, we were at 4%. I don't think we're going to get all the way to bright there. But we are going to incrementally start adding back marketing dollars and then really monitor the return that we're getting on those. And if it's good, we'll continue to build on it. And if it's not, we'll have to retool, right?

We've done some pretty good things on the business that we think what we could advertise. So we've got like these market readers in the month that are incredibly attractive. We've obviously got this unbeatable value in the industry at 3 For Me on the menu, but we've not invested dollars to make customers aware of those amazing offers.

And so any of the incremental spend that we put into the business next in the back half will be funded from removing some of the deep discounting and removing the menu mix that we talked about on 3 For Me, and we'll be putting dollars into really focusing on the value components of our business just because we think that's going to be things that resonates with a cash scrapped customer coming out of the holidays, looking for not just low prices, but high quality and abundant value. And we think that we are very well positioned both casual dining and the restaurant industry to deliver on that.

So you likely will see more food-focused advertising that focuses on the offers versus brand spots that you might see from somebody else. But the most important thing, we can do as we get back on air is making sure that we're getting the return on investment that we want from our marketing dollars because that gets the whole flywheel going.

And then as far as the last question I think you had was the elements that we would invest in. We don't have those details fleshed out yet. Certainly, we've been primarily focused on digital with our limited spend in the past. So I would hope that we'd be able to get back on the TV, but I'm going to let the marketers figure out what the best recommended spend is based on the levels of spend and what we're trying to accomplish.

So more to come on that, but very exciting about what the team is working on. And now I think that we have a clear North Star and the things that we want to focus on and how we want to position ourselves within casual dining. I get excited about putting money back into marketing and starting to tell our story again.

Got it. I appreciate all the color there. I'm curious just pivoting a little bit to employee retention I believe it's still elevated versus history. It's improving sequentially, but probably not exactly where you want it to be. So just curious what you've heard from your employees as to -- or I guess now ex-employees as to why they're leaving, where they're going and frankly, what you guys are doing to address this?

Yes. I mean, there's a couple of challenges. And I think when we talked about the kind of the long-term North Star and the 4 pillars, many of those -- even though there's just one pillar that says team members, many of the other pillars will help with team member retention.

So one thing that we heard from servers was they're covering too many tables and they got into the business because they want to serve guests and provide hospitality and that's why you choose restaurant versus some other type of work. And we've got to make it easier so they can focus on fewer tables and focus more on the guest.

Another one that we heard was they have too many tasks to do. And so, one of the things that we're testing right now is busters, bringing back busters in all of our restaurants so that the busters can focus on keeping the restaurants clean and maintained, and we feel that the server is focus on what they want to do, which is greeting and delighting and making guests feel special. So that's one big piece we heard.

The other big piece we heard was, "Hey, how can you make this easier and more fun again to work into Chile?" So like when we were at our best servers and back in the house, we're working together, having fun, even if it was a busy service, they got through that service, and they felt like they really accomplished something big. And so we've got to get back to that atmosphere, both in the back and the house of the restaurants as well in the front of the house.

And so the simplification that we talked about on the first call, and I alluded to it in my prepared comments, that's going to be an ongoing thing. And I will tell you, like when we looked at the employee engagement surveys over the last few weeks, we do them once a year, we saw record increases in terms of engagement and intent to stay.

And we think that is a direct reflection on 2 things. One, that they now have a voice on what are the changes that we're going to make in our restaurants to make it easier to operate; and two, the fact that the changes are happening and they're continuing to happen, right?

And so every month or 2, they're seeing the changes happen, it's making an impact on making their lives easier. And so they know that we're all in this together to make it more fun and more easy to work into Chili.

I think if we focus on those 2 things, I think we're going to see significant improvements over time, and that's going to help both the labor line as well as probably more importantly, the customer service line.

The next question is coming from Katherine Griffin from Bank of America.

So, I wanted to kind of appreciate all the thoughts and the color. But just specifically on the fiscal 2023 guidance, I think it would be helpful again to sort of narrow down some of the puts and takes that would get you to either the low end or the high end of the guidance range for EPS?

Well, obviously -- and again, the guidance is out there, and we've had a lot of commentary around it. I think from a puts and takes standpoint, obviously, you look at the cost structures, first and foremost. So the ability to continue to see the movement and improvement year-over-year on particularly food and beverage is going to be a big piece of the equation.

As we make from a top line perspective, I think our ability to make further traction in improving the guest experience is going to be a big piece of that equation. But obviously, the mix dynamics that we see coming out of some of the changes we make, we'll have, if I think about the incremental impact that creates an upside, that would be a key one from the top line.

But I think the reality that should come from both sides of the equation, but top line growth has opportunities as it relates to our initiatives and particularly the mix side and then the cost structure, further improvements that exceed our initial expectations, obviously, will flow towards the bottom line.

We may choose as we kind of move through this fiscal year on how we think about the reinvestment that we've talked about on both of these 2 calls. So there are opportunities to reinvest in the business, which will have the long-term benefit of creating a stronger foundation that can drive in the subsequent fiscal years.

So we will obviously take the time and be thoughtful about how we -- if we do see incremental savings in different places, how do we either reinvest that back into the business to drive further top line or improve guest experience and what flows to the bottom line. So hopefully that gives a little more insight.

Yes. No, absolutely. But I guess if I could just follow up. I mean, when we talk about sort of ambition to narrow the price gap versus the industry, does that mean that you're expecting to lose some of the lower profitability transactions? I think it would be helpful to just hear again sort of what the expectation is going forward on traffic, like specifically within the context of share gains because I think some of the traffic that's been gained from lower relative pricing is at risk. So just any thoughts on how we should assess that risk would be helpful.

Yes. I think the reality in the moves we're making is we'll probably see some traffic losses as it relates to the discounting side of the equation. But again, we're trying to create a stronger profitable model from -- on an ongoing basis. We think that's worth the trade-off. Right now, we're seeing a nice net positive benefit as we kind of move through the first 4 months really continuing on through October.

I think what the interesting things as we go through some of the moves we've made on the discounting side of the equation, while you typically will see an initial traffic reaction. We saw that gap narrow as we move further through. And particularly in October, when I look at traffic gap to the industry, one where we've moved to exceeding the industry from a comp perspective as we move through the month of October. And the traffic piece of that equation has narrowed to the industry as we kind of have gone through that. So right now, it's a trade we're willing to make because it's definitely reaping bottom line benefits as we go forward.

The next question is coming from Fred Whiteman from Wolfe Research.

Joe, I just wanted to follow up on that October comment. I think earlier in the call, you made a comment that the October momentum was maintaining the pace coming out of the quarter. Was that a comment on sort of the sequential rate of change and improvement that you were seeing? Or is the actual total operating performance sort of steady and the rate of change has slowed?

I'd put it more in -- closer to the steady as we kind of move through it. Now October is probably the first full month of a lot of the changes we've made as it relates to the offer removals and some of the discounting changes. And of course, you saw the menu drop coming at the very end of the month, so not a lot of impact outside of this last week, our period ends today. So that's not going to impact the October numbers a month, but it's exciting to see what that potential impact could be as we kind of move forward.

So I put it in the steady, but it was a nice sequential improvement up to this steady performance. And again, our price and mix is materially exceeding any of the traffic losses we've experienced during that period of time.

Makes sense. And then on pricing, I think last quarter, you said around 8%. It looks like that ticked up a bit this quarter to 8% to 9%. Is the sequencing of that as far as a bigger contribution in the middle of the fiscal year and then eventually getting to where pricing is a net positive in 4Q unchanged? Like is that still sort of the cadence to think about?

Yes. That's still the cadence we currently have. Obviously, we reserve the right to make subsequent changes. But what we did is really took a planned midyear kind of January price increase and pulled it forward to this October menu since we had the menu already in the works to go. So we were able to embed some incremental pricing opportunities there.

If we maintain it, you would obviously see the impact year-over-year in November and December is at that higher level that we spoke about. And then unless we take further actions of any nature, you will start to see kind of a steady pullback as we lap prior year pricing actions. So you would see that start to come back down more into the upper mid-single digits as you move towards the end of the fiscal year. But we'll continue to evaluate the pricing dynamics and opportunities as we kind of move forward.

And the next question is coming from David Palmer from Evercore ISI.

I wanted to come back to the guidance. I wonder how you view that guidance versus the changes you want to make to set the brand up for the long term. During this call, you've said evaluating the business a bunch of times, and it sounds like you want to improve the guest experience and make a pivot in marketing. And then I think you've also noted that you're going to have an Analyst Day coming in the second half of the year.

So just thinking about how this guidance really contemplates some margin wins from rethinking some things like the virtual brand strategy and the delivery menu pricing. But also perhaps some margin sacrifices, the assessing of team service model and any advertising spend that the company may have sacrificed in recent years that you want to get back to support some of the things you want to do.

So could you perhaps talk about that and how you would view those things perhaps being a net impact to your earnings in the near term to fund long-term repositioning?

Yes, David. I appreciate the question. I'm going to decouple it a little bit for you from how to think about. One, I'm very encouraged by the direction of the business. Obviously, the guidance was provided not too long ago. This is the first quarter. We'll continue to evaluate guidance and we have further opportunities to talk to you about that as we kind of move through the rest of the fiscal year.

But again, we're moving through this what we anticipated to be a very tough quarter, and it was, and feeling good about the direction of the business and the upside we have based on how we're moving forward.

That being said, the other piece of the equation is how do we think about investing back into the business, and that's a constant conversation we're having as a leadership team as we kind of go forward.

And frankly, I don't want to put a lot of it in the context of the guidance. We're going to make what we think are smart decisions for the long-term benefit of the brand. As we look at that, where that comes from and how it's funded, isn't necessarily going to have to be sacrificing margin in the short run, too. Because again, as we think about how we reallocate costs and where we're seeing benefits on our cost structure relative to what we originally thought for the year, those give you really near-term opportunities to think through what needs to foundationally go back into the business and what opportunities do we have to flow to the bottom line.

So it helps color the discussion, but I think philosophically, and Kevin, you can add anything you want to. I think we need to be thinking about how to build an improved foundation of both of our brands businesses for the long term, and we'll make the right decisions regardless of which fiscal year we're thinking about going forward. But again, very encouraged by the increased ability to do that based on the current operations of the company.

Yes. And I mean, just the one thing I'd add is, I'm sure we'll be able to share a little bit more detail at the Investor Day in the back half. And the way we're thinking about the investments, David, is really on labor, R&M, marketing and then some of the new equipment to help automate some of the back of the house, what we call KOF III, or Kitchen of the Future III.

So the good news is we have line of sight to what those things are, and we have some pretty good ideas on how we finance them. Now it's just about kind of the pacing and sequencing of what Joe was talking about, where does it hit, when do we make the investments, et cetera, so. But we'll have more details on that as you think about the Investor Day, next in the back half, so.

And does this guidance contemplate sort of a step-up in those investments run rating into perhaps the next fiscal year but included in this year. But for the second half of the year, when those investments will be made, does this guidance include those investments?

It does in the short run. And again, the pacing and sequencing of that, we can change as we kind of go forward based on need and opportunity kind of as I talk through. But there are levels of investments back in those areas that are specifically contemplated in the guidance, and then we'll update those as we kind of move through the rest of the fiscal year. And it definitely flows into next fiscal year. Yes.

And the next question is coming from Nicole Miller from Piper Sandler.

On price, was the price action still 400 basis points in August and then to get closer to the 10%, is it about 150 basis points in October that you're talking about? And I want to make sure that's isolating just price, but that's not including mix at 10%?

Yes, Nicole, it wasn't 400 basis. So again, if you look at the pricing actions taken, there's a July pricing action that I think we talked about on the last call, that was probably in the $130 range under 1% impacting in August with a little over 60 basis points coming on in September.

Some of these actions are taken off menu too. So it's how you impact some of your off-menu third-party channel delivery, things of that nature. So the $470 is the price action that we took related to the menu last week. So obviously, it impacts 1 week of October, but will impact at that level going forward.

So there were some specific, you had a kind of early in the first quarter menu. You had some subsequent off menu pricing actions, and then this big one this last week.

Okay. 470. And then when you look at the mix, I think it was like around 3% in the first quarter. Is all of that or the vast majority with less discounting? Because I'm wondering how it is like the improvement in the attractiveness of the bar play in, which probably doesn't count as an entree traffic count but it's dollar spent. Does that show up in mix? Is it meaningful? And is there anything else meaningful in mix?

I think to be -- I mean, discounting is clearly driving most of that upside in mix. I do think some of the bar initiatives is related to some of the restructuring of price points and things of that nature across the whole Happy Hour side of the equation may have also generated some mix opportunities as guests move between their menu items. But most of it's going to be the discounting side of the equation.

Okay. And so 10% price, maybe some positive mix, traffic that's less negative. So we're talking about at least a mid-single-digit comp kind of is what's happening right now in the business?

That math is right in the sweet spot, yes.

And then just to confirm, when you talked about that very helpful industry commentary where you're doing better and where the gap is closing, is that industry commentary based on [Naptrack]?

It's both Naptrack and black box. We look at both of those very closely. You kind of -- you get a little bit shorter insights through the black box side of the equation but spend time with both.

Okay. Got you. I was just asking because when we get and when we don't. So we could kind of keep your commentary.

Yes, exactly.

Yes. And then just a last quick one. And I might have written this down wrong, so I apologize, but you were talking about the change of the revenue. And I thought I heard something about a 70 basis point impact to something in the first quarter. Was that store-level margin? Or what was that commentary tied to?

That was the re-classification, Nicole, of some of the -- we reclassified certain items and it's detailed in there. It's about $7 million that we re-classed out of franchise and other revenue into company sales that are more directly related to in-store operations. So we thought it's a more appropriate place to make it. It would have -- it impacted your first quarter ROM by about 70 basis points.

It was a benefit?

It was a benefit. It doesn't impact total revenue. It doesn't impact the operating income. It doesn't impact EPS. It's just that calculation.

Yes. Just to make sure -- and it's just following somewhere else in the P&L and so we just can take that, I guess, that benefit and carry that forward in store level margin. I mean, 70 basis points on a 6% margin is meaningful.

Yes. And again, that's obviously a very low restaurant operating margin as you go forward.

Understood. Yes. Okay. And then we just carry that forward, it all reclassified for the year. Again, it doesn't change anything in, obviously, guidance or like you said, the bottom line.

Yes.

But how you construct the P&L changes a little bit?

And Nicole, also, we've restated all prior year to make it apples-to-apples, and we're going to put 3 years of history on the website just so everybody can understand exactly what we've done.

And the next question is coming from Jeffrey Bernstein from Barclays.

Two questions. One, just on the comp trends. I appreciate October was stable with September and seemingly September improved relative to earlier in the quarter. But I know you also noted amazing traffic. So Joe, I just wanted to clarify, I think you said you're assuming down mid-single-digit traffic in fiscal '23. I thought last quarter, it was low single. So I just wanted to clarify that and whether you think you're seeing any impact from a slowing macro. Just wondering whether you think there's any signs of that coming into play just yet? Or any signs of competitors already being more aggressive in terms of their promotional activity in the face of a slowing macro? Just trying to size up your thought process around what could be a slowing trend in coming months and quarters.

Yes. And that piece of the equation probably creates the blurriness of the ability to predict traffic out over the course of fiscal year. But I think we're -- for what we can see right now, what we expect from a business standpoint and from what we would anticipate emanating from some of these initiatives, particularly the lower level of discounting.

Yes, that mid-single-digit range is kind of our best view of the world right now. Macro could obviously impact that as we kind of move forward. I mentioned that there could be some uncertain economic times ahead of us where -- when that hits and where relative to our fiscal year, obviously, every day online, you can see a variety of debates about what's coming as we move further into '23. So that could have an impact.

Again, one of the things I watch too is, again, that gap to the industry. The industry is going to be hit by the macro. And so we're all going to bear the brunt. I think you are -- I think it's realistic to say that there is some marginal level of pullback as it relates to the lower economic guests.

Chili's, in particular, has the breadth of the demographics out there. So I would expect to the extent that macro is impacting Chili's will feel some of that. That's why it's very important to protect the value perceptions we have that one of the critical pieces of protecting the 1099 on the 3 For Me is to be prepared for a more value-oriented environment, how we talk about that and making sure that people are aware that we have that value. It's also an important piece of the equation.

And as Kevin detailed, we would intend to do that if you moved into those tougher economic times. So it will have an impact. We're watching it closely right now. We're not seeing evidence, and you can see it from the mix dynamics that you're getting meaningful trade down within the guests yet either. But it's definitely on everybody's mind.

Yes. I mean there's probably 3 things that like we need to stay focused on to offset any potential headwinds that we do see from tough macros. Like one is just making sure the things that we talked about in our long-term strategy on great food, great hospitality, great atmosphere and making sure that our team members are having a good experience so they can delight the guests. Like that's going to become even more important if customers start pulling back trips just because they can't afford to have a bad experience.

So certainly, the stronger concepts that are operating more consistently are probably going to win at least market share in that environment. And obviously, that will help as the macros get a little bit easier.

The second one is as we take all this pricing that we talked about, we need to make sure that we do protect abundant value for that cash strapped guests. I think we've done a nice job of that with the current iteration. It's one of the reasons why we haven't heard too much feedback from our operators on making those menu changes is because there's still many options that are incredibly attractive price points.

And then the third one would be actually telling customers about it. So you asked the question of what are we seeing from our competitive set. Generally speaking, we've seen them not go -- it's not a race to the bottom. It's more about how do we provide abundant value at higher price points is what we've seen on the big competitors in. We're kind of doing the same thing with 3 For Me, where it's not the lowest price point out there, but it certainly is unbeatable value when you look at everything that you get.

And we need to make sure that we talk about it, right? Because at the end of the day, if we don't advertise it, it's hard to drive incremental traffic. And so I get more excited about the idea of not only protecting those things, but actually investing some dollars and telling the customer about it and seeing what that can do to offset some of the headwinds in traffic. So I think if we focus on those 3 things, I think, over time, we'll be in a good place.

Understood. And then just my follow-up, just obviously, you're not seeing any sign of a slowdown just yet. But specific to the restaurant margin side of things, investors seem to be excited if the sales were to hold for the industry. We know that menu pricing is outsized. We get the impression that inflation is easing. So again, barring a macro slowdown, it would seem like there's potential for significant margin recapture and earnings growth as we move through the next few quarters. I'm wondering whether you would share that sentiment or maybe we're underestimating the inflation impact or any kind of directional thoughts on the restaurant margin for the 2Q and more importantly, for the full fiscal '23 in that type of scenario?

Yes, I would definitely share that assessment both specifically to us and macro to the segment. That's the big what, what if on the traffic side of the equation. But the good news is that even if you saw some level of dip or some level of recession, as you come back through that, you're still better positioned coming out of that by the pricing actions we're taking and the improvements we're making in the base business.

So we want to be very cognizant of what's going to be going on over the course of the next 6 to 9 months. We also want to make sure we're preparing ourselves for the following 9 to 12 months as we kind of make some of these moves.

But as I said in my comments, we are expecting growth and meaningful margin expansion as we go through the rest of this fiscal year.

And the next question is coming from John Glass from Morgan Stanley.

Kevin, as you think about the long-term strategy and the pillars you talked about, is there an opportunity to re-launch the brand in some way? I guess where I'm coming from is Chili's has been famous for spice, southwestern, adventures in food. I don't know, do you still get credit for that in the same way, maybe once did? Is there an opportunity to highlight that same as in the context, obviously, a concept that over time has had difficulty driving traffic and maybe that brand distinction has been lost somewhere along the way? I understand it's to focus on value now. But is there an opportunity to, in some form or fashion, re-launch the brand really more distinctly, or do you not see that as being a key initiative?

Well, absolutely. We didn't talk about it in kind of detail today. But we have a cross-functional team led by our Chief Marketing Officer, George Felix. We just completed our North Star work, which is essentially a lot of the things that you just talked about, which is one of the things that makes Chile so special and differentiated. And then how do we start bringing that to life in a more relevant way across our menu, our service model, how we treat team members and pretty much everything that we do, how do we decorate stores, how do we build new restaurants, right?

So we're in process right now of cascading that down throughout the organization and starting to create action plans on how to bring that to life. So I think a lot of times, folks think that it's a 30-second TV ad that will reposition the brand. And the reality is we've got to do the heavy lifting to make sure that the brand really exhibits that all throughout the organization and the menu and the team members and the service model before we would go do some kind of big bang hey, we're back rebrand.

So my thing is we've got to put the hard yards in to make sure that we actually are making the improvements that we're talking about. I think if we do those things, it will be very easy to do the type of thing that you just talked about, but we've got to put the work in and making sure that we're really delivering incremental benefits and incremental improvements that really would solidify our positioning in the market, so then we can then talk to customers about it.

So more to come on that. I wish I had more detail to tell you when the date was. But the most important thing we could do right now is work on those 4 pillars and make improvements. And then over time, I think you'll see the marketing come to life and kind of project the things that you're thinking about.

All right. Thank you, Kevin. Thank you, Joe. And that concludes our call for today. We appreciate everyone joining us, and we look forward to updating you on our second quarter results in February. Have a wonderful day. Bye-bye.

Take care, everybody.

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.