What You Need to Know About Chili's Turnaround Plan
The second quarter was meaningful for Brinker International on a variety of fronts. But for the parent company of Chili’s and Maggiano’s Little Italy, one topic trumped the others: It was the first full period in Chili’s self-described “turnaround strategy.”
The more than 1,600-unit casual dining leader reported sobering traffic numbers in recent quarters. Compounded by hurricanes Harvey and Irma, traffic sunk nearly 9 percent to start fiscal 2018. 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.
Chili’s executive team responded with a massive menu cut that slashed 40 percent of the offerings. The goal was straightforward: make its food better and deliver it faster. This also spoke to a deeper issue, however—one facing many casual-dining brands around the nation. Did the legacy chain wander too far from its core guest over the decades? And how was that strategy hurting in-kitchen operations? Chili’s expansive menu, which featured everything from Mango Chile Tilapia to Buffalo Fried Cauliflower, was a critical issue. The company responded by turnings its focus back to differentiating offerings instead of adding new ones—fajitas, ribs, burgers, and margaritas. The company even revived its “I want my baby back” jingle to stir those nostalgic strengths.
During a conference call on January 30, following the brand’s second-quarter report, a period where same-store sales declined 1.5 percent versus the prior-year period and traffic fell 4.4 percent, CEO and president Wyman Roberts said Chili’s is beginning to see those figures turn positive. “At Chili's, this was the first full quarter in our turnaround strategy and we continue to see sales and traffic move in the right direction,” he said. “Operational execution is improving and we are delivering food faster and hotter. We've cut the number of our longest ticket times by half and we are seeing meaningful improvements in our key guest satisfaction methods.”
The numbers reflect these moves. The 1.5 comps drop is significantly better than Q1’s 3.4 percent number. The 4.4 percent traffic decline is also clearly an improvement from the 9 percent mark. And yes, some of that can be attributed to better weather throughout the period. Brinker also enjoyed a 2.3 percent and 0.6 percent improvement in pricing and mix, respectively. But even looking back, those comps compared favorably with the prior-quarter decline of 3.4 percent and 3.3 percent drop in the year-ago quarter.
Roberts added that employees have appreciated the simpler menu as well. Turnover is down and stronger engagement is being reported
“We’re encouraged by the momentum, but we're not satisfied. As we continue our laser focus on bringing back guests with higher quality food and better service, we're also pushing harder to strengthen our overall value proposition and get consumers even more reasons to come back to Chili's,” Roberts said.
An important note emerged in regards to Chili’s remodeling program, which has mostly been kept close to the company vest. Chili’s said it’s using some of the incremental cash generated from tax changes related to the recent reform to accelerate the program. Starting in Q1 of fiscal 2019, Chili’s expects to invest in a brand-wide reimage initiative that will “impact every restaurant over the next three years,” Roberts said.
Chili’s said The Tax Cuts and Jobs Act of 2017 negatively impacted GAAP net income by $3.9 million 8 cents per diluted share in the quarter. The company also noted about a 10-cent positive impact from the change in its effective tax rate due to the recently passed tax legislation.
“Factoring out this rate change and the other adjustments related to the tax legislation, our adjusted earnings per share would have been 77 cents for the quarter, an improvement of 8.5 percent by compared to the second quarter last fiscal year,” chief financial officer Joe Taylor said in the call. Brinker also increased its fiscal year earnings per share guidance range to $3.42–$3.52 from $3.25–$3.35 in response.
Roberts didn’t provide much color into the remodeling program, saying Chili’s would provide details as it progresses. So far, there are almost 50 restaurants updated in the New England area and Roberts said Chili’s is “seeing good returns on the investments we’ve made.”
“We won't start the re-image program until the first quarter of 2019,” he said. “That's when we'll actually start building them out, right now we're permitting and getting ready, but we're excited about the look, we're excited about the returns we've seen and the ability to keep the brand relevant and keep reinvesting back in the Chili's to stay competitive.”
Roberts added that in regards to the tax savings Chili’s plans to invest, this doesn’t represent a significant amount and won’t change the company’s capital structure too much.
Another growth area for Chili’s involves its digital improvements. Brinker named Wade Allen its senior vice president and chief digital officer in early January. Allen joined Brinker in 2014 as vice president of digital guest experience.
“We believe there is significant wide space here to further differentiate our story and increase our traffic momentum by targeting consumers uniquely with offers to meet their specific needs and compel them to visit Chili's more often,” Roberts said.
Chili’s delivered positive to-go sales during the second quarter, Roberts added, driven by double-digit increases in online ordering. And more are coming.
“Now that the franchise system is on board, we have significant upside potential with the to-go business,” Roberts said. “Starting at the back half of the year, we will leverage the power of our national marketing channels and focus our teams on delivering a great to-go experience.”
Brinker has driven year-over-year growth in delivery every year since it started about a decade ago with Maggiano’s, the company said. Brinker has evolved its efforts with multiple third-party vendors, like Amazon, and expects to ramp up once it gets the model right, Roberts said.
Chili’s is also taking aim at the lunch daypart. This is being accomplished through new food and operational enhancements, Roberts said, to “deliver more compelling value for lunch guests, which we are implementing starting this quarter and supporting with national marketing efforts.”
Lunch has lagged behind a bit compared to dinner in regards to the new menu. That’s partly why the brand is planning to specifically address it through campaign-driven models in the coming months. Roberts said Chili’s could use value to leverage this daypart over its competitors.
“The beauty of Chili's is that the difference between price points on the menu, at lunch and dinner, are not that dramatic,” he said, adding that alcohol shifts the check average at dinner, not food. “We also know that most people have a lunch restaurant and they have a dinner restaurant and their lunch restaurant tends to be closer to their work and their dinner is closer to home which makes all the sense in the world. So you're not trading out occasions as easily as I think it might appear on the surface.”
The menu targets—better food, speed, and consistency—line up with lunch guests, he added.
Like Roberts, Taylor said Chili’s is on its way to turning the tide, but there is still plenty of work to be done. “Much planning, research, training, and operational alignment went into the efforts to refocus the brand around its strength,” he said. “…It's been a good start, but we have much work still to do to build on the initial momentum. Sequential improvements and positive sales growth are central to our plans and we believe very attainable.”