Brinker International spent the first quarter strategizing its turnaround story. The second was about implementation. Now, it’s time for results.
The parent company of Chili’s and Maggiano’s Little Italy said during a May 1 conference call that it “started to see momentum with significant changes in traffic” during the third quarter, a period that ended March 28. Brinker reported net income of $46.9 million, or $1.02 per share, compared with $42.4 million, or 86 cents per share, year-over-year. Revenue was $812.5 million, up from $810.6 million, and better than FactSet’s $807 million estimate. Brinker’s stock climbed nearly 3 percent to $44.87 in Tuesday trading and is up 12.2 percent year to date.
Chili’s company-owned same-store sales dropped 0.4 percent, while U.S. franchise units fell 3.2 percent, and international declined 0.2 percent. Maggiano’s saw a 0.5 percent lift in comps.
Notably, Chilis traffic slipped 2.1 percent. It fell 6.2 percent in the same quarter a year ago. Just two quarters ago it was down nearly 9 percent. For the fourth quarter of 2017, it declined 6.5 percent and was down 5.8 percent for the entire fiscal calendar, year-over-year, at company-operated units.
So Chili’s has made significant strides in this targeted metric, especially when you consider how broad the changes it needed to make were.
Perhaps the biggest was a 40 percent reduction in the brand’s menu—an effort meant to optimize operations, speed up service, and allow Chili’s to focus on improving its core offerings. CEO Wyman Roberts said the moves are returning positive results.
“We're seeing sales and traffic improvements across both dayparts and we believe this momentum is sustainable because of the foundational work we've done to strengthen Chili's overall value perception,” he said. “We've improved our menu, our atmosphere and we're providing a faster, more consistent and convenient experience. All of this is having a positive impact on the value perception of Chili's. And a strong value perception is critical in this very competitive environment.”
The company shifted to a traffic-based strategy to let these upgrades speak for themselves, which includes investing in burgers, ribs, fajitas, and margaritas, instead of its former promotional-based message that chased deal-focused customers. Chili’s announced it was nixing LTOs last April.
“Our focus is getting people into the restaurant and letting them experience the improvements that have been made and we're seeing that across pretty much all the markets,” he said.
The digital story unfolding at Chili’s is a compelling one as well. Online ordering is live across the system. It boosted more than 30 percent in the third quarter, Roberts said, and continues to climb. To-go business upped to more than 11 percent of total sales. Roberts said Chili’s plans to devote eve more resources to work on its off-premise business. Delivery accounts for a very small part of this equation for Chili’s, although it’s been a Maggiano’s staple for close to a decade now. Online and curbside are currently driving the growth for Chili’s. But that could eventually change.
“There are a lot of tests out there with a lot of third-party providers as well as a new group of really smart people within the organization kind of tasked with evaluating that,” Roberts said of delivery.
Chili’s also exited American Express Co.’s Plenti Rewards program in the quarter. Customer feedback, the company said, proved the program too complex. Brinker is rerouting focus to its My Chili’s Rewards platform.
“With the Plenti program going away, we have that opportunity to assess kind of where do we want to go next. We have the My Chili's Rewards program. And while it was a points-based program in the past, we've decided to not get into a points-based program,” Roberts said, adding that Chili’s will focus on growing the database first.
“We're kind of in a recruitment mode, and there's a little bit of investment involved in that. But we are absolutely convinced that the future of marketing is going to be led by digital and we want to be on the forefront of that as well as other technology,” he said.
Chili’s broad changes include a new store design. The company started construction on its reimaging program, which it hopes to refresh 250 restaurants in fiscal 2019. Joe Taylor, Brinker’s chief financial officer, said Chili’s expects a mid-single-digital lift from the program. The cost is going to run between $200,000–$250,000 per restaurant.
Roberts said the goal is about putting “the brand in a more relevant light.”
“All the work we've done really over the last almost year and a half, as we've worked with different versions of this reimage, puts a bigger focus on the bar, but more importantly, opens up the restaurant to be the kind of space that is more relevant for today's consumers. I think it creates more energy,” he said.
“And you've got a brand that's unbelievably strong, but it's 43 years old,” Roberts added. “So, you've got to continue to remind people that we're investing to keep it relevant for today's consumers.”
This was also the quarter Brinker dialed up its marketing efforts. Chili’s hit the air to “remind people about our lunch combo offering,” Roberts said, a move that drove “several percentage points of improvement in lunch traffic.” Chili’s followed with its 3 for $10 promotion and a $5 margarita platform with a new innovation every month.
Roberts said the marketing strategy has been impactful thus far.
“We hadn't really gone out there with that message for a while. And then getting more specific in the promotional aspects as well as in some of the direct marketing aspects has helped move that business significantly and is a major reason why we've seen the momentum we've talked about here from kind of where we were December, January to where we sit in March and April,” Roberts said.
Cost of sales, as a percent of company sales, increased compared to the prior year due to food investments into beef and chicken and promotional activities, Brinker said. These investments were partially offset by increased menu pricing.
Chili’s opened two domestic and eight international units in the quarter to bring its total to 1,254 U.S. stores and 380 international restaurants. There are 52 Maggiano’s.
Brinker announced that it secured it first partner in China, and the operator will cover the Shanghai region.
“Our core strategy to improve our quality, consistency and value is working well for us across our entire business. We're confident we can sustain this momentum. We are energized by the work that teams are engaged in and we're excited about the continued investments in opportunities ahead,” Roberts said.