Yahoo Finance Brinker International, Inc. (NYSE:EAT) Q3 2024 Earnings Call Transcript
Brinker International, Inc. (NYSE:EAT) Q3 2024 Earnings Call Transcript April 30, 2024
Brinker International, Inc. misses on earnings expectations. Reported EPS is $1.08 EPS, expectations were $1.15. Brinker International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Brinker International's Q3 FY'24 Earnings Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Mika Ware, Vice President of Finance and Investor Relations. Ma'am, the floor is yours.
Mika Ware: Thank you, Holly, and good morning, everyone, and thank you for joining us. Here with me today are Kevin Hochman, our Chief Executive Officer and President; and Joe Taylor, our Chief Financial Officer. Results for our third quarter were released earlier this morning and are available on our website at brinker.com. As usual, Kevin and Joe will first make prepared comments related to our strategic initiatives and operating performance. Then we will open the call for your questions. Before beginning our comments, I would like to remind everyone of our safe harbor regarding forward-looking statements. During our call, management may discuss certain items which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
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.
Kevin Hochman: Thanks, Mika, and good morning, everyone. Thank you for joining us as we share results from another quarter of strong progress. The last time we spoke in January, the industry was experiencing challenging weather. We were pleased to see our business immediately bounce back and perform well in February and March. And Chili's, with Chili's beating the industry sales by more than 7% and traffic by nearly 4% for the entire quarter. These strong results are driven by the strategy we've been working on for almost 2 years now to improve the guest and team member experience while launching profitable and sustainable traffic driving initiatives. And what's very encouraging from the Q3 results is that in February, when we weren't on TV, we continued to outperform the industry and again in March when we effectively left increased media from last year.
Our traffic driving initiatives combined with real operational improvements are creating tailwinds for the business. I'm so proud of our operators for their focus on the guest experience and the progress they're making. Our main KPI dine-in guest with a problem, where dine-in GWAP dropped to 3.3% this quarter, which is our lowest on record since we began tracking the metric. I want to recognize our 12 operations regional Vice Presidents who have been leading this work from the front. They delivered another quarter of industry-leading manager turnover as well as significant progress on hourly turnover. We know we still have work to do to make sure we deliver consistently great food and hospitality to every guest, as well as to continue to make our team members' jobs easier, more fun and more rewarding.
Those areas will remain a focus for us during the fourth quarter and into next fiscal year. We are encouraged by the progress but we are also motivated by the opportunity ahead of us to raise our bar on the team member and guest experiences to get to that top tertile of casual dining restaurant performance. Next, I'd like to talk about progress on our menu and marketing. Let's start with the burger segment, which has both new product news as well as important simplification initiatives hitting the restaurants now. Just yesterday, we launched a new burger, the big smasher. It's nearly 0.5 pound burger with thousand island dressing, lettuce, cheese, pickles and red onions on our delicious brioche bun. This new burger lives on our regular menu, but for a limited time will be available for $10.99 on 3 For Me as we bring fresh news to our Everyday Value platform.
To drive awareness and incremental traffic, we have a fresh way to talk about Chili's unbeatable value. Our social media team has been watching the conversation that the consumer is frustrated by fast food prices. Through a series of hard-hitting and entertaining ads, we tap into that insight and use fast food as a foil to demonstrate Chili's superior value, and those ads literally have started yesterday. I'm also excited about two simplification initiatives that have been bundled for our restaurant teams with the big smasher launch. The first one is eliminating our secret sauce burger off our value menu which helps us manage 3 For Me mix and remove a soft SKU from the pantry. The second simplification is the removal of the double lunch burger which eliminated the skinny burger patty SKU.
We replaced this with a lunch burger that features our existing 7.5-ounce patty SKU. This move gives the guests more meat, it slightly lowers our food cost and it simplifies operations. And now instead of having to manage inventory and cook two different burger patty specs, operators are perfecting burger execution with one product so they're consistently great for every guest. Another initiative we continue to be encouraged by is the strength of our advertising and its ability to drive traffic. I want to recognize George Felix, our Chili's Chief Marketing Officer, for recently being named at 2024 Nation's Restaurant News Power List. The award recognizes George's consumer-centric leadership of our advertising and our innovation, as well as the work he and his team are leading to increase the relevance of Chili's.
In addition to our national advertising efforts, the team continues to find ways for Chili's to show up in unexpected ways and reach new audiences. Our recent NASCAR sponsorship is a great example. NASCAR fans are Chili's fans and sponsoring popular driver Corey LaJoie's car during the Daytona 500 complete with every one of our general managers' names running on with Corey on the car's hood was a big win for our team in Corey's NASCAR fan base. While the marketing team drives traffic into our restaurants, our operations team continues to raise the bar in bringing guests back. This week is part of our fiscal '25 planning season. We're meeting with our Vice President of Operations to finalize our strategic priorities and choose the fiscal '25 obsession goal.
Based on what I've seen over the past 2 years, when this powerful team gets after it, I have complete confidence we'll move the needle on whatever they set their focus on. To close, it's been a great year so far. The ongoing momentum in our business encourages us that our strategy is working and the investments we're making are strengthening the core business, setting us up for long-term sustainable growth. Before I hand the call over, I wanted to say a big thank you to Joe Taylor, as this will be last earnings call as Brinker's Chief Financial Officer. And we have something here, I'm going to go a little off script here. We have something here at Brinker called above-the-line recognition. We do that for people that go above and beyond that drive our strategy and our priorities.
And so just bear with me for 30 seconds, but Joe has been with us for over 20 years. So he deserves this. So cheers to you, Joe Taylor, for making every guest count and being accountable. Joe, thank you for your nearly 25 years of leadership and service to this company, for your guidance and patience as I learned this business and for grooming such a strong leader in Mika, as she takes over the reins in June. Today, we have a stronger financial position with an incredibly talented finance organization, and thanks to your leadership, Brinker's best days are ahead of us. Cheers to you, Joe Taylor, for leaving a legacy of impact on our business, and on a card here that says, "You've helped bring back guests, engage team members, grow sales and increase profits, and we all stand and clap for Joe." So, I know many of you on the call have worked with Joe for many years, and I just thought it was important to do it in front of all of you.
So thank you for giving me the 30 seconds. And with that, I'm going to turn it over to Joe.
Joseph Taylor: Well, thank you, Kevin, and I appreciate the comments. And so great to have the last call be such a good call, too. So good morning to everyone. The results reported in this morning's press release reflect the continued positive progression of our brand's performance and further solidify our belief in the long-term sustainability of our strategy. This quarter included solid year-over-year top line growth, comp sales well above industry averages and nicely improved restaurant operating margin. In terms of the specific results for the third quarter of fiscal 2024, Brinker reported total revenues of $1.120 billion with consolidated comp sales of positive 3.3%. Our adjusted diluted EPS for the quarter was $1.24. Both brands reported top line sales growth with Chili's comps coming in at positive 3.5% for the quarter, with price partially offset by negative mix in traffic.
A particular note, Chili's delivered positive dine-in traffic for the quarter. Our continued move to deemphasize virtual brands and redirect dollars to better support our core operations negatively impacted Chili's traffic by approximately 2.5% for the quarter. In addition, weather had an estimated 1.1% negative impact. Maggiano's reported 1.7% comp sales, driven by positive price and mix, partially offset by negative traffic. Dominique and his team are making great progress in developing the guest experience and menu offerings that are focused on improving traffic and mix, particularly in the dining room. We look forward to sharing more details in future calls. Now turning to margins. The third quarter saw another meaningful expansion of restaurant operating margin, primarily driven by top line growth and an improved year-over-year food and beverage cost environment.
Restaurant operating margin for the quarter was 14.2%, an 80 basis point improvement year-over-year. Our food and beverage expense was favorable 170 basis points as compared to last year's third quarter driven by higher price and menu mix. Labor expense as a percent of company sales was favorable 20 basis points compared to prior year. Top line growth offset wage rate inflation of approximately 3.7%. We continue to invest in the business during the quarter, reflected by an increase in restaurant expense of 120 basis points versus prior year. An increase in advertising and greater levels of R&M spend were the two largest additions to this component of ROM. The improved operating performance also positively impacted the cash flow for the quarter.
Third quarter EBITDA was $122 million, bringing our year-to-date level up 31% to $302 million. Our significantly improved cash flow generation gives us more flexibility to reinvest in our brands while also reducing leverage to strengthen our balance sheet and manage borrowing costs. For the quarter, we recorded approximately $50 million of capital expenditures, with a focus on capital improvements to existing restaurants, updating IT systems, reimages at both brands and new restaurant development. We opened two new restaurants during the quarter, both of which are off to great starts, averaging more than $100,000 in weekly sales, nicely above Chili's brand average. These, along with our new openings earlier in the fiscal year, continue to demonstrate good guest appetite for Chili's coming to their specific market.
We further repaid $85 million of revolving credit outstandings during the quarter. Our funded debt-to-EBITDA ratio improved to 1.95x at quarter end. In this morning's press release, we updated specific pieces of our previously provided annual guidance. Brinker's annual total revenues for the current fiscal year are now expected to be in the range of $4.330 billion and $4.350 billion. Capital expenditures are currently on pace to be between $185 million to $195 million for the fiscal year. And our estimate for annual adjusted earnings per share has increased to a range of $3.80 to an even $4. In close, our third quarter was successful from not just a financial perspective but also demonstrate our ability to leverage improved restaurant operations, broad-based marketing and excellent value across a variety of price points to consistently outperform the casual dining sector.
I would note the first period of our fourth quarter, which ends tomorrow, is shaping up as a very strong continuation of these themes. We are carrying excellent momentum into the last quarter of our fiscal year and intend to leverage this operating performance and the plans being developed for fiscal year '25. I genuinely believe there are exciting times ahead for our team members and our guests that will translate to excellent results for our brand. And with our comments now complete, I will turn the call back to Holly to moderate questions that you might have. Holly, take it away.
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