Brinker chief executive Wyman Roberts unpacked several reasons why Chili’s is pushing its best figures in more than decade. Specifically, value takeout and improved operational execution. Let’s focus on the value play first.
“A relevant and compelling offer.”
Roberts was asked during the call if Chili’s expected its performance to plateau or decline as we push further into 2019. The reason being, it simply won’t have weak traffic and sales trends to level against once it starts lapping those results. Roberts doesn’t believe so. Here’s why:
Chili’s has worked—successfully—to build a value platform with staying power. It’s not an LTO or promotional message that pulses and fades away. “They actually build over time as people become more familiar with them,” he said.
Chili’s 3 for $10 deal, which offers an appetizer, entrée, and drink at the price point, has proven to be “highly motivating from a consumer’s perspective,” Roberts said.
In early October, Chili’s reconstituted its on-menu value offerings around the 3 for $10 deal, lunch combos, and its new $25 three-course meal for two (which replaced a 2 for $22 offering). It includes an appetizer, two entrees, and a shareable desert.
Joe Taylor, Brinker’s CFO, said the launch resulted in sequential improvement and positive comp sales in each month that quarter. Roberts added that it’s been effective due to its customer, occasion, and daypart flexibility.
“It's at the right level of preference and its driving traffic because it meets the needs of our lunch, our dinner, as well as our takeout guests,” he said. “The offerings are full portion and high-quality products and the platform is flexible enough to keep it fresh so guest satisfaction and intent to return are very strong.”
Chili’s goal was to embed value its base menu—one that works across all dayparts. This erases the need, from a marketing perspective, to be out there with multiple messages. Chili’s can talk about the offer in a to-go environment, for instance, without adding additional media weight. In fact, Chili’s cut that weight “fairly significantly” in Q2 and still drove results. “The beauty of a compelling message that works across lunch, dinner, and to-go is that we can now add other specifics to the message, if you will, without having to create a new campaign, without having to buy a separate media strategy for it. And that's something we're excited about and that the marketing is already leaning heavily into,” Roberts said.
And Chili’s protected its margins by making some changes to other platforms. One example: the lunch combos that used to start at $6 are now $8. “We've been able to mitigate much of the pressure to the cost of sales through those kinds of change in the other buyer platforms.”
The favorable guest response to Chili’s value offerings still impacted cost to sales margin, Taylor said. The brand took a 40 basis-point hit in that component of its offer. But given the traffic uptick, Roberts called it a “very manageable” trade-off. Cost of sales is a category Chili’s often fronts in casual dining since it has very attractive food margins versus competitors. Chili’s restaurant operating margin in Q2 was 12.4 percent, a 250 basis-point reduction versus the prior-year period. Taylor said value offerings “tend to play out within restaurant operating margins on that cost to sales and the mix dynamic of that cost to sales.”
“We're more than comfortable that the margin give up we're investing in, if you will, with this value proposition is manageable to do both,” Roberts added.
BTIG analyst Peter Saleh expressed some concern over the 3 for $10 promotion’s ability to drive profitability as well as transaction growth. “The sales results suggest Chili’s is resonating with consumers following several years of lagging the industry. However, the persistent margin contraction and lack of earnings flowthrough on a considerable same-store sales beat keeps us on the sidelines,” he wrote in a Wednesday morning note.
Chili’s 2.9 percent comps beat Saleh’s 1.5 percent estimate. The restaurant-level margin decline of 250 basis points to 12.4 percent was credited to revenue recognition change (70 basis points), sale leaseback (110 basis points), promotions and discounts (negative 40 basis points), and higher labor.
Chili’s sales growth was driven by the traffic growth and flat average check, as 90 basis points of net pricing was offset by a 90 basis point menu-mix decline. “We believe this margin decline … will likely prove to be permanent given the changes mentioned above and on-going wage inflation. While we applaud management’s ability to regain traffic momentum, we remain concerned that same-store sales trends buoyed by deep discounts are fragile and may reverse course when lapped in Q4.”