Q3 2024 Earnings Summary
- Improved Restaurant Operating Margins: The company reported restaurant operating margin for the quarter of 14.2%, an 80 basis point improvement year-over-year. They expect to see further improvements, with margins potentially reaching 15% and an "upward trajectory" in margins going forward.
- Sustained Outperformance in Sales and Traffic: Chili's is consistently outperforming the industry, with sales beating the industry by more than 7% and traffic by nearly 4% for the entire quarter. This outperformance continued even when advertising was reduced, indicating strong brand momentum and market share gains.
- Effective Menu and Marketing Initiatives Driving Growth: The launch of new menu items like the "Big Smasher" burger, combined with menu simplification initiatives, is expected to drive incremental traffic and improve margins. The company's advertising is creating "longer tails", meaning sustained sales even after advertising ends, due to improved guest experience and operational efficiencies.
- Anticipated commodity inflation increase of approximately 2% in Q4 could negatively impact margins, as noted by Mika Ware: "In the fourth quarter, we do expect [commodity inflation] to tick up a little bit, probably in that 2% range."
- Significant menu price increases to "high 7s, almost 8%" in Q4 may lead to potential customer resistance or decreased traffic, as discussed by Joseph Taylor and Mika Ware: "So it's high 7s."
- The "big smasher" burger was launched without formal market testing, which introduces risk if the product doesn't resonate with customers, as Kevin Hochman stated: "We did not test the big smasher like in a formal market test... So we don't have any data to share with you on that."
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Margin Improvement
Q: What drives your profit flow-through outpacing top-line growth?
A: Our bottom-line outperformance is driven by top-line growth creating leverage throughout the P&L. We've become better operators post-COVID, with improved labor efficiency and reduced turnover enhancing productivity. Wage inflation has normalized to about 3.7%, down from prior 5%–6% levels, contributing to higher margins. -
Labor Costs and Turnover
Q: How should we think about labor costs going forward?
A: We've leveraged labor costs by lapping prior investments and improving team member productivity due to lower turnover. Manager turnover is around 5%, and hourly turnover is about 26%, only 2% above the industry average. We expect similar improvements in labor costs in the fourth quarter. -
Comp Sales Outperformance
Q: How has Chili's sales gap to the industry trended, and can you sustain it?
A: Our sales have consistently outperformed the industry, with sales gaps of 6.8% in January, 8.5% in February, and 6.6% in March. This outperformance is driven by continued simplification in our restaurants and improved guest experience, resulting in longer-lasting effects even when advertising is paused. We anticipate this momentum to continue as we keep enhancing operations and removing friction for guests. -
Pricing and Mix Dynamics
Q: What's your latest thinking on pricing and its impact on mix?
A: We implemented a pricing action of about 3%, focusing on protecting critical prices like our $10.99 price point. Mix improvements are evident as we've seen neutral mix trends after menu merchandising adjustments. We expect fourth-quarter pricing to be in the high 7%–8% range due to this recent action and incremental pricing in specific markets like California. -
Product Simplification and New Launches
Q: How did the Big Smasher Burger perform, and what's next?
A: While we didn't conduct a formal market test, we're encouraged by the positive reception, including being the #1 trending topic on Twitter during launch. Operational simplifications, like eliminating the need to pound chicken for sandwiches, have eased kitchen processes. We'll focus on burgers for the next 3–6 months and plan to relaunch fajitas in late Q2 of fiscal '25, aiming to enhance a business that's over a $200 million segment for us. -
Advertising Strategy
Q: Can the 3 For Me value message drive traffic amid competition?
A: Yes. We're enhancing our value messaging with harder-hitting campaigns, using fast food as a comparison to highlight our superior value. We've introduced the Big Smasher Burger with unlimited sides for $10.99, which is unbeatable in both fast food and casual dining. Furthermore, we're leveraging our CRM program to deliver customized offers as we build deeper guest profiles through our expanded Ziosk platform, aiming to market more effectively at minimal cost. -
Guidance and Future Outlook
Q: Any unique items in 2024 to consider for modeling into 2025?
A: No significant systemic changes are expected. We're focused on efficient operations and don't anticipate any major adjustments impacting our long-term growth algorithm. Year-end reviews will address typical items like accruals and incentive compensation, but nothing out of the ordinary is foreseen.