Greetings, and welcome to Bloomin' Brands Fiscal Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow management's prepared remarks. It is now my pleasure to introduce your host, Mr. Mark Graf, Vice President of Investor Relations.
Thank you. Mr. Graf, you may begin.
Thank you, and good morning, everyone. With me on today's call are Dave Deno, our Chief Executive Officer and Chris Meyer, Executive Vice President and Chief Financial Officer. By now, you should have access to our fiscal Q2 2019 earnings release. It can also be found on our website atblumenbrands.com in the Investors section. Throughout this conference call, we will be presenting results on an adjusted basis, An explanation of our use of non GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website as previously described.
Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward looking statements, including a discussion of growth strategies and financial guidance. These statements are subject to numerous risks and uncertainties that could cause results to differ materially from our forward looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings, which are available at sec.gov. During today's call, we'll provide a recap of our financial performance for the fiscal Q2 2019, an overview of company highlights and a discussion regarding progress on key strategic objectives.
Once we've completed these remarks, we'll open up the call for questions. And with that, I'd now like to turn the call over to Dave Deno.
Well, thank you, Mark, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q2 diluted earnings per share was 0.36 dollars and combined U. S. Comp sales were up 0.6%. This represents the 7th consecutive quarter of positive U.
S. Comp sales. Importantly, we also took market share as we outperformed the industry on both sales and traffic. A large part of this continued momentum is due to the progress made behind our strategic investments and relentless focus on core execution in the restaurant. Our focus remains on investing in food and service enhancements to improve the customer experience.
To help accomplish this, we invested over $50,000,000 over the past 3 years. These investments were prioritized towards customer facing improvements. This included food quality, portion enhancements, service and labor investments and efforts to reduce complexity in the restaurant. In addition, we invested over $400,000,000 in remodels to contemporize our brands and improve curb appeal. Consumers have taken notice as it has shown up on improved brand health measures.
In addition to improving our core dining experience, we pursued incremental levers to accelerate growth across off premises, loyalty and digital. These are paying off and contributing to our success and efforts to gain market share. The strengths of these levers have also enabled us to make tactical decisions to improve the long term health of the business. This included an opportunistic 21% year on year reduction of discounts in the Q2 at Outback. We chose not to replicate some value oriented promotions despite a heightened competitive environment.
While it did have an approximately 100 basis point negative impact on traffic, had a positive impact on profitability. We will be agile on our approach to building healthy profitable sales across the portfolio. In addition to building healthy sales, a key element of our ongoing strategy is to improve operating margins. During the Q2, adjusted operating income grew 20% and adjusted operating income margins were up 80 basis points year over year on a comparable basis. This represents the 3rd consecutive quarter of significant margin growth at Bloomin' Brands.
And importantly, we are just getting started in growing our margins. We expect much more to come. Our sustained progress on operating margin reflect a few key items. First, we are reaping the benefits of our ongoing monetization of the investments made over the past 3 years. This benefit is showing up in comp sales.
2nd, we continue to opportunistically reduce the portfolio's reliance on discounting. 3rd, we have maintained disciplined cost management across the company. And finally, our Brazil business is among the best in casual dining with strong sales and margin growth. Overall, we feel great about our progress towards becoming a more effective and efficient restaurant company. We are on track to achieve our 2019 operating income margin commitments.
I want to also thank the over 90,000 team members in the field that make our restaurants so successful. Your passion, hospitality and dedication to always putting the customer first is making a difference every day. I would also like to thank my colleagues in the restaurant support center who provide great service to our partners. Now turning to Outback. Outback comp sales were up 1.3% in the 2nd quarter on top of an already strong 4% increase in Q2 2018.
This is Outback's 10th consecutive quarter of positive comp sales. As we mentioned earlier, we pulled back on discounts at Outback in the quarter. This had an estimated 100 basis point impact on traffic. We are benefiting from the ongoing return from the investments in customer experience. In addition, we are seeing success with enhancements to the service model to strengthen customer engagement.
Keeping our assets fresh also remain a top priority. We tested multiple design prototypes for our interior remodel program. The new design modernizes the look while expanding the off premises room to handle the higher expected order volume. We are starting a soft roll this year and expect to ramp up in 2020. We are also relocating Outback Restaurants as quickly as quality sites become available.
Given the strength of the pipeline, we are on track to relocate 11 restaurants this year. This relocation program continues to deliver impressive results and recent relocations are generating sales lifts well in excess of our 30% target. Outback remains well positioned to take further market share. Chris will provide more detail on the quarterly sales performance at Carrabba's Bonefish and Fleming's in a moment, but let me briefly summarize the key initiatives we are employing across these brands. Number 1, invest behind and simplify operations to enhance the guest experience.
Number 2, offer unique and brand appropriate such as Bonefish 3 course lobster dinner and Fleming's uncorked wine platform to drive frequency. 3, continue to opportunistically remove unprofitable discounting. And 4, invest in our people to continue to lower turnover and increase engagement. Moving to international, Brazil comps were up 3.5% with positive traffic in an improving economic and political environment. The underlying fundamentals of the business remain strong.
As you know, we enjoy very high brand regard and consumer engagement in Brazil. Not only is the base business strong, but our new restaurants continue to generate the highest returns in the portfolio with sales well above expectations. The market is underpenetrated and we are very well positioned to capture this opportunity. We have more than doubled the number of restaurants in Brazil over the last 6 years and now have 99 Outbacks in the country. We believe we have the potential to build at least another 50 Outbacks in Brazil.
In addition, we have exceptionally strong leadership team in Brazil that has the capability to introduce and develop other brands in the country such as Abbraccio, which currently has 12 locations. Brazil, which is on a 1 month lag, started the Q3 with an impressive 27% comp sales increase in June. Given a high consumer appeal and outstanding operations, our new marketing programs are providing a very significant lift. We are also benefiting from a more normalized Since the presidential election last October, the Since the presidential election last October, the overall macro environment in Brazil has improved and expected pension reform by the government is expected to bring further stability and confidence to the market. In addition, investor sentiment is changing and capital inflows have grown dramatically this year.
We are encouraged by the recent positive developments and are well positioned to capture this momentum. Now turning back to the United States. The off premises business continues to perform very well. Delivery is now available in over 6 30 locations across Outback and Carrabba's as the end of Q2. These locations are exceeding internal benchmarks against several key metrics including delivery time and the business is profitable.
With the majority of the rollout complete, we will leverage our increased scale through additional marketing tactics to drive awareness. Over the past 2 years, we've been developing our own house delivery platform while simultaneously testing with 3rd party companies to fulfill our strategy of omnichannel access. We have learned the frequency and behaviors of our off premises consumers and our research and results suggest this is a different type of customer with distinct purchasing patterns. Having our food available where, when and how our customers want it is key to becoming a consumer centric agile company of restaurants. We recently came to terms with a national third party delivery provider.
This channel will complement our existing platform. Importantly, this will help expand our reach to customers who are loyal to the 3rd party delivery companies. We are excited about the prospects ahead to capture more of the growing demand for enjoying restaurant meals at home. Our market test suggests this will have a significant impact on comp sales over the back half of the year once this contract is completed. The Dine Rewards loyalty program now has over 9,000,000 members.
The program is driving strong engagement across the portfolio. We are leveraging the rich data we have collected over the years to enhance the customer segmentation opportunities. This includes deploying new experiential features targeted to our most valuable Dine Rewards members. Our investments in CRM strengthen engagement through customer centric communication, while providing a higher return from marketing spending. These investments and key platforms help fortify the core business and expand our reach to new and existing customers.
We will continue to leverage our scale, portfolio brands and data analytics to enhance engagement and drive increased profitability. In summary, we feel very good about the quarter and the sales layers we have in place to support continued momentum and earnings growth. Before turning things over to Chris, I want to address one other matter that came up during the Q2. Much has been written discussed about African swine fever and and the potential impact it may have on the industry and Bloomin' Brands in 2019 2020. Given the negative characterizations and fears that have been published, it is important to offer perspective on the facts as we know them today to help alleviate some of the concerns.
Number 1, our commodity basket is largely locked for 20 19 and our previous guidance of approximately 2% increase in commodities is in great shape. Number 2, at 3% food cost, pork remains a small part of our overall commodity mix. 3rd, we realized that we may have some substitution impact on other proteins. We have a talented supply chain and R and D team that does a great job creating menus, procuring product and managing food costs. And we have many years of experience working through various inflationary cycles.
I am confident in their ability to navigate this environment we should be able to manage commodity increases in future years within our historic range. Our supply chain team is already far along in our plans for 2020. And finally, we have many ways of addressing increase in commodities. These include among others, 1, the makeup of our 2020 promotional calendar and 2, continuing to work with our suppliers to pursue productivity opportunities in our supply chain. Let me sum this up by saying, we do not expect African swine fever to cause us any issue in achieving our stated goal of 10% to 15% annual increase in total shareholder return, while expanding operating margins in 2020 beyond.
And with that, I'll turn the call over to Chris Meyer to provide more detail on Q2. Thanks, Dave, and good
morning, everyone. I'll kick off a discussion around our sales and profit performance for the quarter. I'd like to remind everyone that when I speak to results, I'll be referring to adjusted numbers that exclude certain costs and benefits. Please see the earnings release for reconciliations between non GAAP metrics and their most directly comparable U. S.
GAAP measures. We also provided a discussion of the nature of each adjustment. With that in mind, our 2nd quarter financial results versus the prior year were as follows. GAAP diluted earnings per share for the quarter was $0.32 versus $0.28 in 2018. Adjusted diluted earnings per share was 0.36 dollars versus $0.38 last year.
When evaluating our results, it is important to keep in mind that our $0.38 from Q2 2018 included a $0.02 benefit for the amortization of deferred gains from sale leaseback transactions. Upon adoption of the new lease accounting standard, we no longer recognize these deferred gains in our financial statements. If you exclude this $0.02 impact of the new lease accounting standard from Q2 2018 results, our adjusted EPS would have been $0.36 Total revenues decreased 1% to $1,000,000,000 in the 2nd quarter. Total revenue decreases were primarily due to unfavorable FX translation and our decision to refranchise 18 Carrabba's restaurants earlier this year. Keep in mind that the Brazilian currency depreciated significantly starting in Q2 of 2018 and has remained elevated since that time.
We are hopeful that year over year FX variances will be less magnified for the balance of the year. U. S. Comp sales were up 0.6%. This marks the 7th consecutive quarter of positive comp sales for the combined U.
S. Portfolio. U. S. Traffic was down 1.4%.
This result was lower than expected, but ahead of the industry driven by a couple of key factors. First, as with last quarter, we saw an opportunity to reduce discounting significantly across the portfolio, particularly at Outback where discounting was down 21% from last year. This had an estimated negative 100 basis point impact on traffic at Outback. And second, overall category traffic was down 100 basis points sequentially from Q1 to Q2 and was at its lowest point since early 2018. We did see some impact from this softness in our Q2 traffic.
In particular, Florida and Texas where we have 25% of our company owned restaurants have remained more challenged than anticipated. We do not anticipate this underperformance in Florida and Texas to be a long term issue. Importantly though, despite these factors, our Q2 traffic outperformance versus the industry increased 50 basis points from Q1 and is a reflection of ongoing momentum in our investments in food and service. Given this momentum and the anticipated lift from our impending delivery partnership, we do expect traffic to build over the back half of the year. In addition, this expected improvement gives us line of sight to be within our 2% to 2.5% comp sales guidance range for the year.
As it relates to our concepts, Dave discussed Outback's Q2 results, but I wanted to provide more context on our decision to pull additional discounting out of the system. As we have discussed, Q2 traffic included an opportunistic 21% reduction in discounting relative to last year. We estimate that this negatively impacted Outback's traffic by approximately 1% in the quarter. Most of this is related to reduced circulation of traditional marketing vehicles. There is also a natural pickup in check average that accompanies this strategy, which helps the overall comp sales result, but does not fully offset the negative impact to traffic.
We are comfortable with this trade off given the quality of traffic that is coming into our restaurants. This quality is enhanced by the improved ROIs on our marketing programs and the monetization of our investments in food and service. One other note related to Q2 Outback traffic. The timing of the Easter holiday reduced Q2 traffic by 60 basis points. Outback was disproportionately impacted by the later Easter than was the rest of our casual dining portfolio.
Taken together with the approximately 100 basis point impact from discounting, Outback's traffic was negatively impacted by an estimated 160 basis points from these two items. Carrabba's comp sales were down 1.6%. Although we are seeing strong growth in our off premises business through catering and delivery, dinner traffic softened in Q2 consistent with the industry. We are confident that our focus on operational simplification, our growing off premises business and the recent launch of our $10 Bring Homemade Home program will help improve dinner traffic in the back half of the year. Bonefish Grill comps were up 10 basis points driven by our new lunch offerings and the success of our 3 core course lobster dinner promotions.
These differentiated occasions helps traffic improve from Q1 despite the softer industry trends. We remain excited about the future growth potential of Bonefish Grill as we continue to revitalize this strong lifestyle brand. Comp sales at Fleming's were up 1.6% and outperformed the high end category benchmark. Importantly, all revenue centers at Fleming's experienced growth in Q2, including our main dining room, our bar and our important private dining business. We are pleased with how Fleming's is maximizing its opportunities to drive traffic and differentiate itself in the competitive high end steakhouse category.
Adjusted operating income margin was 4.6% in Q2. As Dave indicated, this was up an impressive 80 basis points after adjusting 2018 for the impact of the lease accounting change. This represented the 3rd consecutive quarter of significant margin growth. At our Investor Day, we laid out the multiple levers we will utilize to drive sustained margin expansion. These include increasing our average unit volumes in the U.
S, higher marketing ROIs, which includes a measured discount philosophy, ongoing productivity efforts, overhead management and growing our Brazil business. In Q2, each of these levers contributed to our margin improvement. We remain ruthlessly focused on our commitment to grow margins and closing the margin gap to our peers. Moving to tax, our adjusted Q2 tax rate was approximately 5%. Our Q2 tax rate was in line with our expectations, but it is worth noting that we faced a $5,000,000 year over year headwind from the lapping of legacy stock option exercises.
In Q2, we repurchased $107,000,000 of stock. Our company generates significant free cash flow that allows us to invest in the business, pay down debt and return cash to shareholders. While we remain disappointed with the valuation of our stock given the consistency of our performance over the last 2 years, Q2 did provide us with the ability to opportunistically repurchase shares. Finally, we are reconfirming all aspects of our guidance including our expectations for comp sales, margin growth and EPS for the year. In summary, Q2 was another outstanding quarter of margin growth for Bloomin' Brands.
As we look to the back half of the year, we are confident that we have made the necessary investments to drive healthy traffic into our restaurants. We are excited for the launch of our new delivery partnership, which we expect will accelerate incremental occasions at a healthy margin. Importantly, our strong start has positioned us well to deliver on our 2019 objectives. And with that, we will now open up the call for questions.
Thank you. At this time, we will be conducting a question and answer session. You. Our first question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.
Great. Thank you very much. Just two questions. The first one on the 2019 guidance. Obviously, comps remain the focus and it does look like the first half U.
S. Combined being a 1.6 percent is still well below your full year guidance. I'm just wondering if you could prioritize the factors that give you confidence in the reacceleration, whether there's anything that maybe July provided you some relief or any kind of color in terms of the confidence? I know you mentioned delivery. Maybe you could provide some color in terms of why you think delivery will be a significant acceleration or what level of acceleration you'd expect from that in the back half?
And then I had one follow-up.
Sure. Morning. First of all, stepping back on Q2, our businesses outperformed that both on sales and in traffic and every one of our businesses took share. So we were very pleased about that and we're able to do that and grow our operating profit by 20% in the quarter. Now as Chris mentioned in Q2 and I mentioned, at Outback, we made some conscious decisions to pull back on discounts with discounting down 21% net at 100 basis point impact on traffic.
And we will continue to evaluate our discounting PPA trade off during the year. And so we'll continue to do that as we go forward. And that's just a bit of a perspective on Q2. Now as the balance of the year is moving forward, we've made over $50,000,000 of investments in our base business, primarily at Outback and we continue to reap those rewards and we'll see those rewards in our business the back half of the year, especially as we continue to grow our key customer measures. Number 2, we are the leader in casual dining and off premise and we will be soon announcing a partnership with a third delivery a third party delivery company that's going to help our sales growth.
This is a new channel for us and we will keep our existing delivery channel in complement to this new channel. So we are very enthusiastic about the sales gains that this provides and the terms are very favorable to the company. We also have Dine Rewards, which as that enrollment grows, we have over 9,000,000 members. We can continue to look at our marketing spends. And finally, we're going to look at the ongoing benefits and relocation remodel program at Outback.
And then Jeff, I just want to say, this is a U. S. Business question, but I hope you heard that our Brazil business is very strong in an improving environment and comp sales were up 27%
in June. Hey, and Jeff, this is Chris. I think just one thing I would add to that is that part of this third party delivery partnership optimism comes from the testing that we've been doing internally with 3rd party providers. We've seen significant lifts. It's just been up into this point time where the economics of 3rd party, now they make more sense for us.
So that's why we have the optimism on the delivery side. Got it.
And then you mentioned the discounting reduction, which I know you mentioned 21% hurt traffic 100 basis points. Would we expect similar headwinds in the back half of the year? And just curious how you would even go about measuring something like that?
Well, you could take a look at our we have a very sound understanding of what our discounting does and our traffic business and everything. So we've got a really good understanding of what that does to our traffic during a particular quarter. And Jeff, I'm not going to give for competitive reasons, I'm not going to get into what we're going to be doing going forward, but we're always going to be looking at the discounting and PPA trade off as we go forward. But we've been really pleased with the discipline that we've shown on discounting in our company and you can see that in healthier traffic and improved profitability.
Got it. Thank you very much.
Our next question comes from the line of Jeff Farmer with Gordon Haskett. Please proceed with your question.
Great. Thank you. You guys spent the last, I think it was 3 to 4 years building out that direct delivery capability. A couple of things. I'm just curious what delivery sales dollars are needed to breakeven on that investment as it stands now.
But looking forward, as you bring in a 3rd party to participate in delivery, what happens to those economics and that investment that you've made to already build out your own internal delivery capability?
Well, we're going to leverage those economics and we're well above breakeven. Delivery is profitable. We've got our own channel and we've got a multi channel opportunity now with a 3rd party provider. Importantly, in our testing, the 3rd party provider provides us access to a customer that we typically don't see in our own channel. So we're going to use our own channel to really grow the business, improve profitability, improve scale, and we've got our 3rd party opportunity in front of us.
And Jeff, the delivery piece for us, that investment that we made, we've invested in infrastructure, culture, service, which has resulted in increased sales and profitability. That exists for us today. So the ability for us to plug and play a 3rd party will be very easy for us. And then as we go forward, continuing to expand the information and our service on our own channel will be important as well. So we're very, very enthusiastic about the multi channel capability this brings and this is something we've been talking about for quite some time.
And just one more unrelated follow-up. So a lot of conversation about the international segment. You called out some of the strength and some of the optimism that you have moving forward with international. But beyond sort of a, let's call it, a mid single digit same store sales growth level or just a strong same store sales growth level, what is the nature of the improving margin opportunity in that segment?
Well, what we see Jeff is as we get stronger and stronger overseas, we've got an absolutely wonderful business team in Brazil that knows how to leverage costs, grow sales and you're seeing that flow through to the bottom line. And I think we also have an opportunity to develop more and more restaurants going forward. What's really interesting is I talked about the 99 restaurants we have at Outback in Brazil and we've been continuing to open them and they've been opening well above our expectations. So when you look at the openings that we're doing, going into some new markets, filling in some markets, the Outback opportunity there is very, very large. And then we've got 12 Abraxios with the economics improving every single day.
So the combination of a really strong management team with the opportunity in the marketplace with a number one position by far, great locations, this is all coming together very strong for us and it's a underappreciated part of our portfolio that really provides a lot of growth for us.
Yes. And the only thing I would add is that I think that when you look at the Brazil business, all the same levers that we talk about driving margin improvement domestically also hold true for Brazil. When you think about all the things we talked about at Investor Day, they've just done an incredible job of capitalizing on those opportunities, particularly on the top line. Thank you.
Our next question comes from the line of Johnny Bianco with JPMorgan. Please proceed with your question.
Hi, thank you. First a clarification. So June for Brazil will be reported in the Q3, correct?
That's correct. We're on a 1 month lag in Brazil, 3rd quarter.
Okay. And yes, so how different were the comparisons in the Q3 of 2018? In other words, I mean,
it would be easy to
run away with that 27% comp. But how different were the comparisons in Brazil in July August as we think about setting expectations for that important division?
Yes. What we have there, John, is we had we're lapping a trucker strike. We got the benefit of that. We've talked about that in the script. But also we had a really successful promotion down there in the month of
the Last month of the quarter.
Yes, last month of the quarter. So it's really, really, really, really good. And so yes, the benefit of the trucker strike will moderate as Q3 goes along. So you necessarily can't just keep moving like that. But it was a really, really, really good performance for us.
Okay. Yes, absolutely. And then secondly on the G and A side, obviously some very notable decreases in that line year over year. How much of that was just kind of temporary cost containment versus how much of that may be structural and permanent as we think about setting the model going forward?
Yes. And we have a cost management opportunity in our company. We're pursuing it. We continue to look at costs that the customer doesn't see in our infrastructure. These are permanent reductions that we'll be continuing to do going forward.
So it's an opportunity for us as we move forward.
Is 2nd quarter a run rate number or is there potential for that to even be lower?
Yes. I think that we will stick to the idea of us being flat to down in G and A expenses as the year progresses. So yes, I wouldn't get too specific in terms of using Q2 as a
run Thank you.
Our next question comes from the line of John Glass with Morgan Stanley. Please proceed with your question.
Thanks very much. First, just on back to the reduction of discounting at Outback. I've sort of lost track over time. We've talked about this for a while and it's beneficial to margins and higher quality traffic. But where are we if we step back in the last couple of years either like if you want to index and say beginning this process we're at 100 and now we're at 50% reduction or something like that.
And specific to your back half guidance since you're expecting comps to accelerate, is it fair to say you probably aren't likely to do as much reduction in discounting in the back half or is that not fair?
Yes, I would say a couple of things. 1, it's really difficult to say relative to indexes, etcetera. I would say this, discounting will always be a part of our portfolio. It will always be a part of the narrative. There is a role for discounting within the portfolio.
But I think that just as we evaluate this, John, quarter to quarter, we make the call on whether or we think that is the right thing to do relative to the LTOs we're running, etcetera. So I think that it's going to be really difficult for me to benchmark where we are in this journey and how much farther we have to go other than the fact that we're going to make that decision as we move forward on a quarterly basis. Again, we're growing this business for the long term. We're trying to see this idea of building long term healthy sustainable traffic growth that it isn't reliant
comp sales results. Okay.
And then just on
adding the 3rd party
delivery agent,
one is,
I presume
since we haven't heard about it yet, it's July or late July, early August. So maybe this is when you think about the comp sequence of the benefit from it, I presume you're thinking more of the Q4 versus the 3rd. And are you allowing is this an aggregator that you're going to use a marketplace and you're going to deliver the product because you've got the capability or are they going to complement your capability or why not, I guess, said another way use their ability to capture new customers but have your own delivery because that might be a cost savings to you?
Yes. John, to answer your second question, it's going to be both. And it's multi channel. It's an opportunity we're going to capture and we're going to use both opportunities with our 3rd party provider. And you'll we should see some benefit in comps in the Q3 because the agreement is very close to being done and with obviously a bigger impact in Q4.
Okay. Thank you.
Our next question comes from the line of Matthew DiFrisco with Guggenheim Securities. Please proceed with your question.
Thank you. Just had a couple of follow ups there. With respect to the discounting, could you say then I didn't get that clear or not if it's going to be similar in 3Q as it was in 2Q as far as a 21% haircut and the potential impact to traffic? Can you comment on that for the Q3?
Yes, sure. Matt, we aren't
going to get in that kind
of detail because of some of our competitive nature of things, but we will continue to look very carefully at the amount of discounting that we're doing versus competitors and things and we're very pleased with where we're going on the discounting piece. I don't want to get into Q3, it looks like this, Q4 looks like this, but we will continue to address the discounting piece very well. And as Chris mentioned, it will always be part of our portfolio, but I think we'll continue to really take a look at the trade off between discounting and profitability. And our longer term goal, of course, like we've always talked about, is to have our pricing be less than inflation to help with the value equation there.
Okay. Thank you. I guess just a little bit of a follow-up on that. What's changed really in this is a large amount of adjustment on the year over year basis of discounting. Is this a long term plan and philosophical change of management or the positioning of the brand?
Or is it the competitive environment that potentially the license is out there for you don't need to discount as much, and it's a more rational environment?
Yes. No, we've worked for a long time in our company, the last few quarters, we've been talking about this for a while, is to build healthy, sustainable, ongoing organic traffic. And the drug of discounting is you got to be very careful about that and you can't, you can't rely on that to grow sales. So we will like I mentioned earlier, we'll always look at the trade off between PPA and discounting. But as we look at the cost opportunities in our business, productivity opportunities in our business, as we look at what we want our price below inflation, we want to improve the long term value equation for our customer, while investing behind key elements in our business in food and service and we will continue with that strategy.
Excellent. And then just one number I wanted, if you could disclose how much delivery was for the Outback brand? And then I just had a comment I wanted to clarify. Did you say that Texas and Florida where the weakness was limited to 2Q and you're already seeing a slight improvement in that? Or how do you how does that factor into your 2 your second half stronger comp outlook as far as those two regions participating and driving some of that?
Yes, without getting the specifics related to Q3, I would say that if you look at last year and how our Outback business in particular performed in Florida and Texas. There was certainly strength in the first half of the year in those regions. And then as the year progressed, that kind of flipped when you get to the Q4. So I think that if you use the 2 year sort of thought process, that gives us a lot of optimism that as we get particularly into the Q4, you're going to see some strength. And then the other question was related to the delivery.
Yes, as you know, we don't specifically call out delivery. We talk about it in the context of off premise dining. So off premise dining at Outback was about 14%, 14.1% that was up about 18% year over year.
Thank you. Sure.
Our next question comes from the line of Alex Slagle with Jefferies. Please proceed with your question.
Thanks. Just some follow ups on the traffic deceleration in the second quarter. We talked about the discounting and the Easter impact, which makes sense. I was a little surprised that check decelerated further quarter over quarter despite the decrease in discounting. Are there other changes in how customers are using the menu or is there something else different you're seeing?
No. So yes, it's a good point. Our check average was up, I think 3.3% in Q1. It was up 2% in the second quarter. So I think there's a couple of things that are driving that.
As we discussed on our last call, it is our intention to be prudent with our absolute level of menu pricing and we are clear that we expect our per person check average to ratchet down as the year progresses. Absolute menu price increases were lower sequentially from Q1 to Q2, but menu mix was also a pretty prominent component of that and that's just driven more by value oriented LTO price points and that's going to ebb and flow from quarter to quarter. That's not specific as the menu price increase comment that I made earlier. And I think that those a key thing to mention though is that both of those items were partially offset by the increase in check average that's associated with the reduction in discounting in the quarter. But obviously, it was a pretty big Q1 to Q2 sequential change.
And I just want to add restate on the strategy again is we really want to be thoughtful about our pricing compared to inflation. We want to address our opportunities in productivity and cost management, which will help us expand our margins each and every year going forward, which we're demonstrating over the last three quarters.
Thanks. That makes sense. And then on the off premise, have you seen any changes in the growth rate of the to go business versus delivery in recent quarters? And anything to read into that? Or are those two channels been growing at steady rates?
They are growing very nicely. And we are finding that this is a very interesting aspect of our business.
Great. Thanks.
Our next question comes from the line of Brian Vaccaro with Raymond James. Please proceed with your question.
Thanks and good morning. Just a couple on the store margins, if I could. And I wanted to ask about the food costs down 70 bps and also down nicely versus the Q1. Can you help us understand what drove that? Was it the commodity basket or perhaps there were some savings that ticked up?
And how should we expect your second half commodity costs to play out? Is this the ratio we should thinking about in the back half of the year?
Yes. Hey, Brian, it's Chris. So a couple of things. One, I would say that our productivity efforts definitely ratcheted up between the Q1 and the Q2. So productivity played a more prominent role in our cost of goods sold.
And also there was a slightly more moderated level of overall commodity inflation in the Q2, particularly relative to what it was in the Q1. So it's the whole the mantra that we always say is that our pricing and our productivity more than offset the inflation that we were seeing in the business. And look, I think that we're going to continue to be very thoughtful about food costs as we move forward. Again, not going to specifically earmark what the target would be, but I think that we're pretty optimistic about the productivity in our business and our ability to manage food costs within the commodity framework that we provided the approximately 2% inflation.
Yes. And I just want to give a shout out to our supply chain team and our suppliers and our distributors. I mean, it'd be very helpful as we work continue to work through this. And as I mentioned earlier, these things come up and African swine fever, etcetera, we're going to manage through this stuff. And we've got a really, really, really good team And they've done a great job on commodities this year, and they're going to do a really good job on commodities in 2020 and beyond.
All right. And can you remind us what percent of your basket do you have contracted in the back half of twenty nineteen?
We'll get that. I know that we're more than we were a year ago at this point in time, but we're in the honest truth is Brian, we're pretty locked in. There's always going to be some floating commodities that in seafood areas, etcetera, that you don't 100% lock in. But it's got to be 90% is the number.
Okay. All right.
Thank you. And then on the other OpEx line, that line has been moving around in recent quarters. It was up this quarter year on year versus down last quarter pretty nicely. And I know there's a lease accounting impact in there. But can you walk through some of the puts and takes in that line?
Yes, happy to. So to your point, if you exclude the 30 basis point impact from the change in lease accounting, restaurant operating expense was flat year over year. We have some favorability from average unit volumes and productivity. There was also general liability favorability, which wasn't rollout expenses tied to our delivery programs. And I think the one category that we always get asked about is marketing.
There was minimal year over year change in actual marketing expense in the quarter. But I think on the delivery piece, it's important to note that we added 145 new delivery locations over the past several months and the rollout costs year over year did have a negative impact on that line. So as we move forward, we would expect some of that to mitigate. Okay. And last one for me, just
the bookkeeping. At Outback, how many units offered delivery at the end of second quarter? Yes. Offered delivery at the end of Q2?
4.94.
Perfect. Thank you.
Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.
Good morning. So a couple of more questions on delivery. I guess, in your test, could you talk about incrementality there and what you saw? And then in tandem with the margin recovery that you've been expecting, I mean, obviously, 3rd party delivery does come at a cost. I think you said the terms are becoming more favorable.
How do we think about the margin impact of that rollouts, particularly in the second half and into 2020?
Yes. The test itself, we really were pleased with the incrementality. It did not steal owned traffic. And we are very pleased with the providers we've been working with. And we see incrementality happening because just as a reminder, what we talked about, it's a different customer.
And we also are looking to some pretty good marketing and advertising support out of that delivery provider. So it's a different customer with some marketing opportunity. We don't want to get into the terms of the deal, but I think when you look at the power of our brands, when you look at the delivery network we have built, we're in a very attractive company for a 3rd party provider. We've got the culture, we've got the infrastructure, we've got the systems and we've got the processes to really maximize this opportunity. So Sharon, looking at our margins, the balance of the year and into next year based on the terms as we see them, do not see an impact on the margins going forward.
Can I ask just one follow-up? Because I know you were testing with 4 different third party providers. When you go national with this entity, are you dropping the rest? Or will the rest still remain in different forms of tests?
We are sorting that out as we speak. More to follow.
All right. Thank you.
Our next question comes from the line of Gregory Francfort with Bank of America. Please proceed with your question.
Hey, guys. Just one housekeeping and then a question. I think getting back to John's question on Brazil, what's the lap for the month of June from a year ago? And then maybe the longer term question is, Dave, you had a few months in the CEO role. Can you talk about maybe major strategy changes you've put in place so far that have differed from the prior strategy and just frame up kind of what you've tackled so far and maybe what you're focused on now going forward?
Thanks. Sure. Last June, we were down 10. So it's much more than just the lap of the trucker strike, the 27% up. I was part working very closely with Liz Smith, part of the strategy that we're now implementing, which I believe in very, very much.
It's a very sound strategy. It's playing out well. Got the sales the good traffic gains. We've got the sales improvements. We've got margin expansion.
I think all those things are coming together. I mean, I think what I bring to the CEO role is a long experience in the restaurant industry, deep focus on restaurant operations, building restaurant capability, looking at how we can continue to improve operations, looking at some cost opportunities in the company, those kind of things as we augment the strategy. So a very, very operating focused approach, a cost opportunity approach, building on the strategy that we already have. The other thing that I bring is a deep experience in international restaurant operations. I've got a long career in that part of the world, in that part of the business, and I think I can continue to bring value to the company in that arena.
That's what makes me so thrilled about what we're seeing in Brazil and other places as we go forward. We think we can accelerate and continue to improve on the number of franchise openings, but more to follow on that in future calls internationally. But I really want to stress our international business as well.
Our next question comes from the line of Jon Tower with Wells Fargo. Please proceed with your question.
Hey, great. Just a couple. While not specifically asking about your current plans for the business in the Q3 or Q4, can you discuss your approach to how you might be discounting in the future relative to the past or doing promotions? Meaning, are you guys pulling different levers like say the Dine Rewards channel or perhaps even using free delivery as a tactic to get traffic back to the stores where you didn't have it in the past? And then another one after that please.
Yes. John, just as a reminder, again traffic beat the industry across all of our brands and we took share. So just stepping back, this when you build sales and healthy traffic, you really have to take a holistic approach. You have to look at pretty much everything. You got to look at the PPA discounting trade off.
You got to look at different channels. That's why we're enthusiastic about the 3rd party delivery opportunity while expanding our existing channel. You got to look at service and food elements in the restaurant. You got to look at the PPA discounting trade off. And I'm not going to get into detail as far as what we're going to do there, but I think the company has done a really good job having the discipline to walk away from unprofitable discounting and build healthy traffic.
That's where we're going to be going. So as you look at the sales story within the company, you've got to look at the various levers, dying rewards, capital investments and remodels, delivery, building back, improving sales and in our restaurants via food investments and service investments. All those things coming together in the U. S. Really, really, really will help us.
And then John, just going back again, obviously, we'll take those same efforts internationally as we grow our business over there. Yes. And I'd say just to add that I think one of the guiding principles that we keep coming back to though as it relates to check average that
sort of thing is lower levels of absolute menu pricing as the year progresses is a kind of a guiding principle to provide value to the consumer.
Okay. And then just on the unit count side, I think the gross or closures year over year and actually gross openings too, Gross closures were higher year over year, year to date and openings were lower. So can you just discuss what's going on particularly with the closures across some of the markets?
Yes, I agree. It was an unusually high number of closures, but it's not reflective of a trend or cause any concerns related to our guidance sales or profits. A lot of these closures were franchise locations both in the U. S. And internationally.
In the U. S. For example, we had a few routine closures with our West Coast franchisee. And then we were also doing some experimenting with some small box operations internationally that we decided not to continue. Again, very low impact to sales or profit, but it does have an impact to unit counts.
Nothing to be concerned about long term. Thank you.
Our next question comes from the line of Andrew Strelzik with BMO Capital Markets. Please proceed with your question.
Hey, good morning. First one for me. I wanted to ask you a question on Carrabba's. Could you talk about the state of the turnaround of the business there? What was the driver of the negative price mix?
And I guess I was a little surprised that given that you didn't see better traffic response. So just how do you think about how the business is trending there with respect to the turnaround?
Yes, sure. I mean one of the benefits of a portfolio is to look at some of our businesses and have them grow and recover where we want them to be at a more natural place. And in the past, we relied too heavily on some of the promotion activity there at Carrabba's. So we're really trying to build back healthy, sustainable traffic, improve operations, improve our food quality, capture the off premise opportunity and give that business the time to make the right long term decision. So what you'll see from us is moving from mass marketing to more personalization through our digital efforts.
You'll see improved product offerings at Carrabba's. You'll see service elements coming together. You'll see the delivery business coming together for them off premise. But we're not going to take a short term approach to this business as we build it back to the level that we want to take. And that's the benefit of having something in a portfolio that we can improve and grow.
And specific to 2Q on the price mix side, the drivers there?
On the PPA side, you're saying? Yes. Yes. I think that we talked specifically on absolute menu levels of menu pricing coming down over the course of the year. So that certainly was lower than it had been particularly in the Q1.
Menu mix was a big driver as well and that was a little bit of a shift as well from Q1. So menu mix was bringing it down. We focused a little more on value oriented LTOs price points in the quarter. And like I said, the off set to that slightly is the reduction in discounting, which did boost check average a little, but not nearly enough to offset the other two pieces. But like I said, I think that again, our focus is going to be when you look at absolute levels of menu pricing to ratchet that down over the course of the year and use that as a guiding principle.
The other thing about Carrabba is this, what we're seeing is a real
and that's a nice opportunity for us. So that's something else that the brand brings for us.
Very helpful. And if I
could just ask one on the commodity side, you seem pretty optimistic about the ability to navigate through any potential inflationary issues. Have you gotten a head start on 2020 in terms of locking in some of the commodities there?
We are. At this time of year, we're pretty far along in our 2020 planning. I won't get into details on locking yet because we still have a ways to go. But given what I've seen from supply chain team and their capabilities, we really, really feel good about where we stand for next year. So I think some of the concerns regarding African flu or fever was a little elevated Andrew and something that I just wanted to kind of set the record straight on that.
Great. Thank you very much.
Since there are no further questions left in the queue, I would like to turn the call back over to management for any closing remarks.
Well, we appreciate everyone joining us today. We hope you have a chance to get into our restaurants and enjoy our great food and service. And we look forward to updating you on the portfolio on our next earnings call in at the end of the Q3. Thanks everyone.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.