Q1 2024 Earnings Summary
- The company is confident in achieving its full-year guidance due to factors such as Outback's continued sales outperformance, a stronger promotional calendar in the back half, improved guest experience initiatives, lower commodity inflation, and ongoing productivity measures .
- There is potential financial upside from new tax legislation in Brazil, which, if signed into law, could benefit the company but is not yet included in current guidance.
- Carrabba's is experiencing strong off-premises sales growth and is implementing initiatives such as rolling out lunch offerings, successful wine dinners, and kitchen upgrades that are leading to significant cost savings, providing future growth opportunities.
- Heavily back-weighted earnings guidance may be challenging to achieve: The company's full-year earnings guidance relies heavily on stronger performance in the back half of the year, which may be challenging given industry headwinds and softness in consumer spending, potentially putting pressure on achieving earnings targets.
- Cost pressures may compress margins: Ongoing cost pressures, including increased labor costs, higher depreciation expenses due to capital investments, elevated advertising spending, and an expected uptick in commodity inflation (particularly seafood) in the back half of the year, may compress margins and impact profitability.
- Underperformance of Bonefish Grill may weigh on overall performance: The Bonefish Grill brand continues to underperform, with comparable sales remaining under pressure, and it is not a growth priority for the company, which could weigh on overall performance.
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Brazil Strategic Review
Q: What has changed with the Brazil strategic review?
A: The company is actively exploring refranchising its Brazil business, revisiting plans from before COVID. This time, they are considering selling while still retaining governance and determining royalty rates. The Brazil business is in great shape and growing quickly, making it an opportune time to reassess refranchising options. -
Use of Proceeds from Brazil Sale
Q: How would you use proceeds if Brazil is sold?
A: If the Brazil business is sold or refranchised, the company would have significant cash allocation opportunities. Potential uses include debt paydown, share repurchases, and investments in the U.S. business. Specific plans will be addressed when details are finalized. -
Margin Outlook
Q: What are the margin expectations for this year?
A: The company expects continued labor pressure similar to Q1, with marketing spend heavy in the first half and normalizing in the back half. Commodities are favorable, now expected to be 2–3% inflation, down from prior guidance. They have $50 million in productivity improvements planned and anticipate maintaining margins despite the challenging environment. -
Consumer Behavior Trends
Q: Are you seeing changes in consumer behavior recently?
A: The lower-end consumer is facing some pressure, showing signs of check management and reduced traffic. Meanwhile, middle and higher-income consumers are "hanging in there" with consistent trends. Alcohol mix remains stable, and there’s little change in in-restaurant spending patterns. -
Pricing Strategy
Q: Why pull forward pricing despite commodity deflation?
A: The company carefully manages pricing to maintain value for guests. They took modest pricing increases earlier than planned but remain disciplined, taking less pricing than competitors. This approach supports value perception and prepares for market conditions, even as commodities, particularly beef, show favorability. -
Operational Improvements at Outback
Q: What metrics show Outback's operational improvements?
A: Steak accuracy has improved by 500 basis points, and consistency of experience is up 400 basis points, thanks to investments in kitchen equipment and operations. Focusing on serving hot meals on time with great service enhances guest satisfaction. -
Outback vs. Competition
Q: How does Outback perform versus steak competitors?
A: Outback is closing the gap with competitors by focusing on best-in-class operations, offering value, and improving menu offerings. They aim to continue this momentum by enhancing asset quality, ensuring consistent execution, and providing value-driven products to attract and retain guests. -
Promotional Activity and Value Offerings
Q: Are you increasing promotional offerings due to consumer trends?
A: Acknowledging increased promotional activity in the industry, the company plans to respond with value-centered limited-time offers that align with brand heritage. They intend to offer compelling food at great price points without resorting to broad-based deep discounting. -
Carrabba's Performance and Outlook
Q: Can Carrabba's recent outperformance continue?
A: Carrabba's has seen strong sales, particularly in off-premise business suited to their food format. They are improving in-restaurant dining with successful wine dinners and expanding lunch offerings. Enhancing kitchen efficiency is expected to drive productivity gains this year and into 2025. -
Earnings Guidance and Back-Half Weighting
Q: Why is earnings guidance more weighted to the back half?
A: Stronger promotional activity at Outback, easier comparisons in sales and profitability in Q3 and Q4, and anticipated benefits from productivity investments give the company confidence in back-half earnings. They also expect to regain the $0.06 impact from calendar shifts in Q4.