Greetings, and welcome to the Bloomin' Brands Fiscal Third Quarter 2018 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, Mark Graff, Vice President of Investor Relations. Thank you, Mr.
Graff. You may now begin.
Thank you, and good morning, everyone. With me on today's call are Liz Smith, our CEO and Dave Deno, Executive Vice President and Chief Financial and Administrative Officer. By now, you should have access to our fiscal Q3 2018 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 actual 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 Q3 2018, an overview of company highlights, a discussion regarding progress on key strategic objectives and an update on 2018 guidance.
Once we've completed these remarks, we'll open the call up for questions. With that, I'd now like to turn the call over to Liz Smith. Thanks, Mark, and welcome to everyone listening today. As noted in this morning's earnings release, adjusted Q3 diluted earnings per share
was $0.10 and combined U. S. Comp sales were up 2.9%. This result was in line with our expectation. Q3's performance marked the 7th consecutive quarter of sales outperformance versus the industry.
This reflects a continuation of the momentum we have built from our investments in the core guest experience to restore higher quality traffic over the medium to long term. We continue to develop incremental sales layers to accelerate growth. This includes shifting media spend from mass marketing to digital personalization, the Dine Rewards loyalty program and the rapidly growing off premise business. Our strategic investments are gaining traction and are putting us in a position to capitalize on the change in customer dining behavior. Today's consumer is increasingly seeking more convenience in their dining occasions as well as how they engage and interact with brands.
We believe our investment priorities are appropriately aligned with these evolving customer preferences and that momentum and share gains will continue. In addition, we will leverage our scale, portfolio of brands and data analytics to improve engagement with higher ROIs. Now turning to the brands. Outback comp sales were up 4 point 6% in the 3rd quarter with traffic up 0.9%. This is Outback's 5th consecutive quarter of positive traffic and 7th consecutive quarter of positive comp sales.
It is clear that the investments we have made to elevate the customer experience are driving healthy sales growth. As a reminder, these investments were prioritized towards customer facing improvements across food quality and portion enhancement, service upgrades and improved ambiance. Ensuring our assets are current remain a top priority. We are testing multiple design prototypes for our new interior remodel program. These new remodels will incorporate new design elements to modernize our look and feel while also expanding the off premise room to handle the higher expected order volume.
We anticipate it will deliver approximately 3% traffic lift consistent with prior interior remodels. Once the prototype is finalized, we expect to substantially complete this program over a 3 year period. In addition, we are relocating Outback Restaurants as quickly as quality sites become available. Given the strength of the pipeline, we are on track to relocate 14 restaurants this year. This relocation program continues to deliver impressive results and recent relocations are generating a sales lift well in excess of 30%.
We feel very good about Outback. This is a strong brand with great consumer appeal, the best operators in the business and is well positioned to take further market share. At Bonefish, Q3 comp sales were up 1.8%. Our effort to simplify execution while investing in food and the dining experience has returned the brand to its polished casual roots, known for fresh fish, innovative drinks and superior service. Beginning in October, we rolled out an all new brunch menu and expanded brunch to Saturday.
We continue to migrate our marketing resources away from national towards more impactful local programs. This local philosophy helped define Bonefish as the unchanged chain and is paying off in sales and profitability. At Carrabba's, comp sales were down 60 basis points in the quarter. Carrabba's remains focused on building healthy marketing strategy for more complicated and disruptive LTOs towards excellent execution of the core menu and special occasions. We are also targeting more proprietary programs such as our successful wine dinners and Amore Mondays as well as growing off premise via family bundles and delivery platforms to drive healthier traffic.
We will be patient in rebuilding traffic based on superior food execution and will continue to migrate from discounting, which is down 37% year to date. In Q3, Fleming's comp sales were up 0.5% with negative traffic. We made the conscious decision on Fleming's to move away from legacy value offerings such as our 567 Bar Menu, 29.95 Prime Rib and some non holiday gift card distributions. We anticipated the negative impact on traffic from these actions. However, they have had a positive impact on profitability.
The brand is on track to have record profit. Moving forward, Fleming's will work on differentiating the brand from the traditional high end steakhouse through localized menu selection and customer segmentation. Our successful Dine Rewards loyalty program is performing well and now has over 7,200,000 members. The program is attracting a healthier consumer and driving strong engagement across the portfolio. We will evolve the program to further leverage the customer segmentation opportunities provided by the data.
Our investments in CRM strengthens engagement through more customer centric communications while providing a higher return from marketing spending. For perspective, these investments have enabled us to reduce our advertising spend from 3.8% in 2016 to approximately 3.1% over the last 2 years while improving ROIs. Turning to off premise. In Q2, our 2 40 existing delivery locations began to consistently hit established targets for several metrics, including delivery time and deliveries per location. As a result, in Q3, we resumed the rollout of delivery and expect to add an additional 200 locations across Outback and Carrabba's by the end of the year.
We anticipate all delivery locations will be completed in 2019. We are very excited about our progress and the incremental opportunity it represents as we capitalize on the growing consumer demand for enjoying restaurant meals at home. Moving to international. Brazil comp sales were down 3.3% in the Q3. The country has experienced a difficult environment due to unrest leading up to yesterday's presidential election.
This has led to protests and a lengthy trucker strike that badly hurt the Brazilian economy, causing supply shortages and transportation gridlock that resulted in numerous lost operating days for many businesses, including our restaurants. We believe these dynamics were more event driven rather than a reflection of the improving underlying health indicators of the Brazilian economy. GDP is set to have its strongest performance in 4 years and reduced inflation and interest rates are having a positive impact on consumer demand and disposable income. Therefore, we believe the current situation in Brazil is more temporary. We are already seeing signs of stabilization and experienced stronger trends as the quarter progressed, culminating in positive comp sales as we exited the quarter and an expectation that they will remain positive in Q4.
While the potential for near term volatility remains, we believe consumer confidence will resume the upward trend it has been on for the last few years now that the presidential election has occurred. The demand and love for our restaurants remains high, and we are performing well in a difficult environment. Most importantly, we remain well positioned to continue to grow and take share in an underpenetrated casual dining market. In summary, we feel very good about the quarter and the sales layers we have in place to support continued momentum and earnings growth. We now expect our adjusted earnings per share to be between 1.41 $4 18% to 23% from 2017.
We are on track for a very successful year at Bloomin' Brands. I want to thank our managing partners and JVPs across our concepts for their dedication and support in taking care of our customers and our people every day. These results would not have been possible without you. And with that, I'll turn the call over to Dave Deno to provide more details on Q3. Dave?
Well, thank you, Liz, and good morning, everyone. I'll kick off with discussion around sales and profit performance for the quarter. Before I begin, 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 provide a discussion of the nature of each adjustment. With this in mind, Q3 financial results versus the prior year were as follows. GAAP diluted earnings per share for the quarter was $0.04 versus $0.06 in 2017. Adjusted diluted earnings per share was $0.10 versus $0.14 last year.
The primary difference between our GAAP and adjusted EPS results is related to certain impairment, restaurant closing costs and severance excluded from our 2018 2017 Q3 results. A primary driver of our year over year change in both GAAP and adjusted EPS this quarter was a $7,000,000 change in incentive compensation. As mentioned on our last call, we reduced our Q3 2017 incentive compensation accrual and did not have a similar adjustment in the Q3 of 2018. This change has had a $0.07 negative impact on our Q3 2018 EPS as compared to last year. Total revenues increased 1% to $965,000,000 in the 3rd quarter.
This was primarily driven by a 2.9% increase in U. S. Comp sales as well as the positive impact of net restaurant openings. This increase was partially offset by unfavorable foreign currency translation. Adjusted operating income margin was 2% in Q3 versus 2.6% a year ago.
A primary driver of our year over year margins this quarter was a $7,000,000 change in incentive compensation that I previously mentioned. This change had a 70 basis point negative impact on our Q3 2018 margins as compared to last year. Q3 adjusted operating margins were also negatively impacted by commodity inflation and wage inflation as well as lower comparable sales performance in Brazil. These increases were partially offset by productivity initiatives and increases in average check. It is important to note that the U.
S. Segment adjusted operating margin was up from last year. Our investments in the customer experience are driving higher quality sales, which is improving our margins. Our international segment margins, which are largely driven by Brazil, were lower year over year. The Q3 adjusted tax rate was negative 21%.
This was 0 point discrete tax items as well as legacy stock option exercises within the quarter. Given the unanticipated benefits in Q3, we have updated our tax rate guidance for the year, and I will discuss that more in a moment. Although tax expense is negative for earnings purposes, we do anticipate paying our share of cash taxes for the year. On the development front, we opened 5 system wide locations in the Q3, including 4 international locations and 1 domestic Outback franchise location. We have repurchased $99,000,000 of stock so far this year.
We will continue to opportunistically repurchase stock and return cash to shareholders. As it relates to our capital structure, we currently have $400,000,000 of interest rate swaps. We have used these swaps as a means to fix our interest rates on a portion of our debt. These swaps expire in May of 2019. This past week, we took the opportunity to enter into new $550,000,000 forward starting swaps that will become effective once the existing swaps mature next year.
This transaction will not have an impact on our 2018 results, but puts our fixed float mix in a more balanced position amid a rising interest rate environment. I would now like to take you through some thoughts on our 2018 guidance. First, we now expect U. S. Comp sales to be between 2% and 2.5%.
This is up from our prior guidance of 1.5% to 2.5%. This change is driven by the sustained strength in our Outback business. 2nd, we expect the adjusted tax rate to be approximately 1% and our GAAP tax rate to be approximately negative 4% for the year. The 2018 tax rate is expected to be lower due to the excess tax benefit of certain legacy stock option exercises as well as the discrete items that I mentioned earlier. 3rd, we expect adjusted earnings per share to be between $1.41 1.47 dollars This represents growth of between 18% to 23% from 2017 on a comparable calendar basis.
The new range is an increase from our original guidance of $1.38 to $1.45 The increase in adjusted EPS expectations is driven primarily by the change in the tax rate as well as the ongoing strength in our Outback business. We expect these increases will be partially offset by lower profit in Brazil and the impact of foreign currency translation. Other aspects of our 2018 guidance remain intact. A final note about our 2018 results. We expect significant year over year improvement in Q4 2018 adjusted operating margin driven by a few key factors.
First, we anticipate a $9,000,000 or 90 basis point year over year benefit in incentive compensation. 2017 ended better than anticipated, and we accrued additional expense onto our year end results in 2017. 2nd, we anticipate improved margins in the U. S. Business.
Our investments in the customer experience are paying off. We are seeing healthier traffic and improved flow through that we expect to carry over to the Q4. Finally, as Brazil moves past the recent elections, we expect to capitalize on our leading market position and return to margin growth in our international business. Given the strength of our 4th quarter margins, we anticipate positive operating margin growth in 2018. Please keep these in mind as you assess our 4th quarter.
I would now like to provide a couple of brief thoughts on 2019. First, we expect to have positive U. S. Comp sales continue our momentum for 2018. 2nd, we will have meaningful margin expansion in 2019 as we work to close the gap versus our peer group.
We'll provide more details on these and other items, including EPS on our February call. In addition, we will be hosting an investor meeting shortly after issuing our Q4 results. In summary, Q3 was a very good quarter for Bloomin' Brands. We remain confident that we are making the right necessary investments to support long term growth. Clearly, our investments in the core customer experience are paying off.
We remain disciplined stewards of capital, our improving capital structure provides increased flexibility to return cash to shareholders. And with that, we will now open up the call for questions.
Thank Thank you. Our first question is coming from the line of Michael Gallo with CL King.
Please proceed with your question.
Hi, good morning.
Good morning, Michael.
Just a couple of questions. Obviously, you've had now really strong performance at Outback for really the last couple of years, particularly on the traffic side for the last certainly the last year. I guess as you get into those more difficult laps, you've been able to put forth a healthier level of traffic. It hasn't been driven by discounting. I was wondering if you could give us some thoughts on how you sustain that momentum as you go through 2019 in a casual environment that continues to be fairly choppy?
And then as kind of a follow-up to that, how you plan to kind of do that and as Dave said, materially improve the operating profitability at the same time?
Sure. So I have never felt more confident in the brand health in Outback and where Outback is. And that gives us a lot of confidence that this is not about lapping. And as you said, it's about 7 consecutive quarters of same store sales over performance, pretty significant as well as five consecutive quarters of positive traffic. And we feel very comfortable with where Alk Fact is going to perform in Q4 as well as in the future.
And I think what really gives us those confidence is the brand health and the momentum. We've invested ahead of growth and now we are able to monetize those investments. And we invested in areas of where the consumer wants to go. That's in food quality, portions and service. Our exterior remodels now pivoting to interior remodels driving 4% to 5 percent.
Our CRM and our mass personalization, a lot of time and patience went into adjusting capital dollars ahead of growth to build our data infrastructure capability and now we're monetizing it. Our CRM program and our Dine Rewards program has 7,200,000 customers, and we're kind of only at Hello, everyone. This is the Bloominbrands team rejoining the conference call.
Thank you. Mr. Gammel, please continue with your questions.
Yes, I think I had asked it. I think, I'm not sure we're cut off, but I think, I was asking about continuing the momentum. But I think Liz was kind of halfway through.
Okay. Sorry about that, Michael. All of the lines in our building are down. And I'm particularly disappointed that it got cut off during Outback because I love talking about Outback and Outback's performance. So just to briefly catch us up.
We're not concerned about lapping because we build multilayers that are based on brand health and where the consumer are going. So momentum is going continue to get momentum and I haven't ever felt as confident in Outback's forward momentum. And that's centered around the investments that we've made in the box on quality, service. The vast majority of our strength is our in house traffic and that's directly applicable to the superior execution that we're having in the box. We've got the best operators in the business with Greg Scarlett and the entire team and that's what's driving the in store volume.
The other things are the layers that we've built in terms of the remodel tipping to now to interior. We also spent an awful lot of time investing ahead of growth in the data infrastructure and personalization and now we're seeing the benefits and the fruits of that and we're monetizing that, whether it's in form of Dine Rewards being up to 7,200,000 dollars or moving from mass marketing to data personalization, which has much higher ROIs. And then finally, I would just say off premise continues to really rock for us. It's proving to be highly incremental. And so when you look at the sales layers that are out in front of Outback, it's not a quarterly discussion or a quarterly concern.
It's just feeling like we've really positioned this brand exceptionally well for the future and that volume is going to continue to flow through and drive operating margin expansion. Dave, I don't know if you want to elaborate on that.
Yes, sure. Thanks, Liz. And I'm talking about Q3 like I talked about in my prepared remarks, our operating margin was up year on year when you normalize the incentive comps take down last year, first of all. But you look at the things that we're doing to drive margin, the investments in the business are behind us. We've made them, they're working and we've now time to monetize those for the food and labor investments we've made.
We have terrific tools in our restaurants. If you saw our labor costs this quarter looked good. And then finally, we had a sale leaseback program that was extremely successful economically. It did cost us on margins. And as we begin to anniversary that, that won't be a headwind anymore.
So time to monetize the investments, manage our tools and get a virtue of sale and leaseback program. Like I mentioned, we're going to have a significant margin expansion in Q4 and that will set us up well for 2019.
Okay. Thank you.
Our next question is coming from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.
Great. Thank you very much. Just following up Liz on your confidence around the Outback brand. It does seem like your guidance implies the Q4 for the system would be flat to up 2% comps. But I'm just wondering, with your confidence around Outback and you now start to lap the much more difficult compares without necessarily giving intra quarter comps, but just because the trajectory changes so sharply in terms of compares and you've implied the 4th quarter system, any color around October to demonstrate that confidence or where you think the outback comp would come out in the 4th quarter specifically?
Thanks, Jeff. So as you know, we don't give enter quarter guidance, but I just want to reiterate that everything about the Outback comp makes the year ago comparison less relevant as it relates to our continued momentum. I have complete confidence in the strength of Outback. We look forward to reporting on the 4th quarter trends. I think the trends are I think the guidance is prudent, but we feel terrific about how AppLoc has performed and what we expect it to perform in Q4.
Got it. And then the trends of the non Outback brands and it seemed like comps were below consensus at each brand and the 2 year trends decelerated especially at Carrabba's and Bonefish. I'm just wondering how the actual results compare to your internal expectations whether you're pleased or disappointed with the trajectory of the brand? It seems like maybe there's a divergence now where you're increasingly confident in Outback, but perhaps trends aren't going as well as the other two brands. Any color would be great.
Sure. So our the other 3 brands have all been in the kind of 18 month to 2 year multi journey to taking out discounting out of the base. And so we by the end of this year, we feel really good about the fact that we will have finished for all intents and purposes, the traffic decline that we anticipated from pulling significant discounting out of the base. And then we are going to be to monetize the investments that we've put in those brands and the portfolio has reached the point where we will by the end of the year, we will have lapped the majority of the discount pullback and it will not be the traffic headwinds that it has been over the last 2 years. We certainly anticipate our traffic to then strengthen as we head into.
As it relates to the brand specifically, because of the discounting that we pulled back, we did anticipate traffic declines, and it is showing up in a much higher quality traffic that's coming back. So for example, on Fleming's and Bonefish, we ripped out a lot of discounting. And you see the result is in a healthier traffic and they're both on track to have record profitability. So we feel very good about where those brands are and where they're going. No concerns with that.
Coravin's has been a longer road back for us because frankly we pivoted further away from and further and longer away from its core proposition, which is authentic Italian dining at affordable prices. And so actually the portfolio gives us the strength of the portfolio and how the others are born gives us the ability to be patient as we finish taking those tactics out that were left on strategy. Discounting is down 37% this year. And we continue to see the striking of the benefits of investing in differentiated programs such as wine dinners, such as Amorad on Monday, such as our off premise business. So I think the way we've managed the portfolio with the strength of Outback has given us the ability then to put the Outback playbook in effect on all the others and getting the discounting out.
That will be behind us as we exit Q4. So we're looking for certainly a lot more traffic strength as we enter next year.
Very helpful. Thank you.
Thank you. Our next question comes from the line of John Glass with Morgan Stanley.
Please proceed with your question.
Thanks. Good morning. Could you speak a little bit about your enthusiasm around margins for next year? And maybe in the context, in 2018, are there discrete one time costs? I think you've talked about it over time that won't recur, so we can kind of frame what that opportunity is.
And then when you look at your U. S. Restaurant margin that was flattish this quarter, maybe up ex the incentive comp, it's still a bit lower than the peers. How do you think about where the biggest areas of opportunities within that P and L are then for you to start to close that gap?
Yes, sure. We have opportunities in managing restaurant costs in food and labor. And if you look at our Q3 labor costs, they're in good shape. And we have opportunity to continue to closely manage our overhead. We are very committed to 0 overhead growth in our business and getting leverage on that.
So those 3 or 4 things, John, along with same store sales growth out of the box as we continue to elevate same store sales and traffic in our box, will really help us on the margin side. And like I mentioned, we will see on the delivery excuse me, on the Q4, we will see a pretty significant margin expansion as a result. The things that we are anniversarying is, I mentioned earlier, we coming off sale leaseback program that's pretty much behind us, great economically, but was a bit of a headwind on margin. And the investments in food and labor costs are behind us as well. Now it's time to monetize those things.
So that will be important. And then finally, with Brazil, we have an outstanding business there. The events of the year have happened and they're behind us. And our business continues to be very strong. Liz talked about the brand returning to same store sales growth in Q3.
And those things will all come together to help us expand margins as we go forward.
And just so just to follow-up, the 2019 really just about anniversarying some of the cost headwinds you had this year, not that there were one time discrete or large enough to call it discrete items this year that just won't recur. It's just that you don't they're not unfavorable next year versus this year. Is that what your point was?
John, it's not any discrete items. It's the investments in the business. It's the work we do every day on productivity in the restaurants and the home office and it's growing sales in the box. And we're very bullish about Q4 margin and margins for next year as a result.
Of our comp store sales growth. That's a pretty significant year over year change for us. Brazil has had 20 plus years of great performance. It's back on track and performed actually quite well through a difficult environment in 20 18. But no one sees that continuing at this point, although we certainly don't control that, but it feels very good as we head into that.
Okay. Thank you. Our next question comes from the line of John Ivermholt with JPMorgan. Please proceed with your question.
Hi, thank you. I was just hoping
to get an update on delivery and just your overall confidence in expanding that. If it's possible to talk about maybe by cohort or however by trials, however you want to talk about it, how big of an incremental sales you were seeing in some of your more mature delivery markets? And then secondly, as you have more experience and more time on this project of doing it in house with your own employees versus third party in terms of how that shift may or may not be happening going forward?
Correct. Good morning, John. First of all, we are thrilled with how delivery and off premise is performing. We believe that it will be continued to be a major opportunity for our company off premise in total, getting into 25% -ish plus in sales. So we will we really think that that will be an opportunity for us as we continue to move along.
We took the time. We rolled out 2 40 restaurants. We took the time to really get those absolutely humming and right and delivery times and flow through and everything else, that has happened. And now we are rolling out an additional 200 locations at the back half of this year, and we expect all restaurants that are eligible for delivery to be completed with delivery in 2019. We have off premise is now about 13% of our business and it grew in the low double digits in Q3.
So everything about that business is really coming together. Why is that? Well, we built in house capability to make that happen. And we're very pleased with the adoption by our teams of doing that. And it gives us the data, it gives us better profit flow through, it gives us complete control of the customer experience as we go forward.
We will be testing an omni channel approach. So we are testing with 3rd parties, but clearly, we are very pleased with the internal team that we developed and the adoption by our operators. So for John and wrapping up, we just see the delivery opportunity continue to be a very big opportunity, delivery and off premise be a very big opportunity for our company.
John, the only thing that I would add is that we do have to your point kind of a test market and the different layers that we've rolled out delivery. And in our highest performing restaurants, which are not onesies or twosies, we do see validation for our belief that this will get to 25 percent to 30%. The restaurants that we're rolling out this year because there's so much excitement in an opportunity in the box of being so embraced have started out of the gate extremely strong. So everything about delivery is exactly where we hoped and in many respects on the top quartile of our restaurants. It certainly provides validation for our belief that this is 1, incremental and 2, it's absolutely where the customer is going.
They want to enjoy restaurant quality food many times in the comfort of their own home. So that is what's given us the confidence to continue to roll that in the infrastructure and the operating metrics that we're hitting with the customer demands for delivery.
The next question is coming from the line of Jeff Farmer with Gordon Haskett.
Please proceed with your question.
Good morning. Thanks. Just a couple on Dine Rewards. So what is the visit frequency for your Dine Rewards customers compared to those who are not? Have you guys ever shared any metrics on that?
Jeff, for competitive purposes, we have not broken out that frequency. It's certainly having a positive effect at various levels of the engagement funnel.
Okay. Just and sticking with Dine Rewards, a little bit different topic. I think you mentioned close to 600,000 new Dime Rewards customers per quarter. I think you've been maintaining a run rate close to that over the last several quarters. So the question is, how long do you think you can maintain this pace?
Is it sort of an optimal membership level that you're targeting?
Well, we certainly believe that because of the attractiveness of the program and the success and if you look at the if you look at all the ratings of the loyalty program as well as our app, we certainly believe that we're still in the early innings of our loyalty journey. We are now getting the data and developing very specific data customer profiles for our Dine Rewards program, which enables us then to market directly to the customer and have enhancements that could drive frequency even further. Now I don't want to get further ahead, but certainly there's loyalty we are in loyalty 1.0 with the ability now that we have the customer files to monetize that in a much more efficient and effective way. So this is going to continue to be a significant growth lever as well as differentiator for our portfolio.
All right. Thank you.
Thanks, Jeff.
Our next question comes from the line of Brian Vaccaro with Raymond James.
Please proceed with your question.
Thank you and good morning. Just a quick follow-up and then move to the margins real quick. The follow-up on off premise, you said, I think, 13% of sales and double digit growth year on year. Was that an Outback specific comment? No.
Could you provide that on an Outback specific basis?
We don't, but the numbers aren't materially different.
Okay. A couple on the 3rd quarter margins, if I could. The food cost line was higher than we had expected, at least internally. And you help us understand what drove that 80 basis point increase? Was there a particular item or category that might have caught you by surprise?
And maybe more importantly, how should we think about the commodity outlook in Q4 and into 2019?
Yes. We saw food cost be unique in Q3. We feel very good about Q4 commodities. We feel good about 2019 commodities. We're about making some decisions on some of the buys we're going to make and things.
Q3 was all about just the timing of various contracts for the most part and how they came together within those particular 90 days. The year is fine. Q4 is fine. We did have a little bit of elevated crab in Q3, but nothing really significant. So more Brian, it was just more about how the timing of the contract came together.
Q4 is fine, full year is fine and we expect a good guide in 2019 when we get there.
Okay. That's helpful. And sticking with the Q3, that other OpEx line, some nice to see leverage 30 or 40 bps there. What was the ad spend year on year in the quarter?
That's something we typically
It's basically flat from a dollar standpoint. It's basically flat.
Yes. And that's you're seeing there, Brian, some good productivity initiatives as well, the energy side and everything else.
Okay. And then last one on the G and A side. So dollars around $65,000,000 on an underlying basis. That was kind of flat in dollars year on year despite a $7,000,000 increase in incentive comp that you called out. Was is there any timing shifts that we should be aware of?
Or does that reflect underlying savings in that line? And if so, where? And then could you provide an update on your annual expectation, the 2018 G and A line?
Yes. That is a direct reflection of the very tight cost management. We're trying to do an overhead here, especially when you consider that flat year on year even though we had a $7,000,000 benefit last year from the incentive spend. And so there, we're continuing to push forward on our productivity initiatives and everything else in the headquarters office. I really want to call out, for instance, our accounting and control team and our IT team really working hard to manage cost in that area while getting better and better every day and they're doing a fantastic job.
So I think there, Brian, it's a matter of the efforts that we're doing to manage G and A every day.
Okay. And then just last one for me. On delivery, sorry if I missed it, how many units were covered by delivery at the end of the third quarter?
Well, we had 240, and we've told you that over the back half of the year, we're rolling another 200. So we're not going to give intra quarter numbers, but we will provide that perspective as we roll that 200 out. We expect our delivery locations to be fully rolled out by the end of 2019. Based on everything we're seeing, we're very bullish on that.
Okay. And on that 19, sort of how many units do you envision that, that will include that are sort of you said, I think you used the word eligible. How many units is that?
We're looking at it's a little too early to give a definitive number. I'm guessing 70%, 80% of the Carrabba's at Outback System ish would be that. But as we work through it, Brian, we'll provide more color commentary. That's kind of what I'm what we're guessing.
All right, great. Thank you. Uh-huh.
The next question comes from the line of Gregory Francfort with Bank of America. Please proceed with your question.
Hey, guys. I got 2 questions. The first is just a housekeeping one. So just on the tax rate guidance, what does that imply for the Q4? Is it something like a mid teens positive tax rate or is my math wrong?
And the other question I had was just on average check. I think you've been running kind of in the 3.5 ish range. How much of that is from delivery? And is that maybe something like 2.5 or 3 on sort of an underlying basis? And then where do you expect that to trend over time?
Do you have pricing power where you can keep it at this range? Or is that something you need to pare back a little bit as we go forward?
Well, on the tax rate, we'll expect a more normalized rate in Q4, which would be kind of the low double digits area. We don't really forecast the timing of any kind of legacy option exercises and those kind of things. But that's kind of what it looks like. And I'll turn it over to Liz on the CPA side.
Sure. So just keep in mind, what you're seeing flowing through is our pulling back and discounting, right, versus growth pricing. So our pricing has always been the price kind of moderately in line around that 2%, 2.5%. The average check is benefiting from pulling out the legacy discounting, gosh darn bones if we went from 5 FSIs to 0 this year. Eliminated 5.67 and 2,995 low steep at Fleming.
That's what's driving the versus any gross pricing. As it relates to pricing for next year, we'll give more wholesome guidance, but our philosophy on that has to say.
Got it. And maybe I'll do one follow-up. Just who are you taking share from in this environment? And maybe what is in the biggest drivers of the share gains?
Well, as you know, this is a highly fragmented category, right? So it's a $90,000,000 category. And so you kind of take share from everybody as it relates to it. It's not such a concentrated category that with the sources and uses you can pin it down. So you just look at it overall and you say we're getting increased frequency, new users and new occasions on Outback and that's cycling volume from others that aren't growing.
The good news is that with the layers that we've we are as I've said a couple of times on this call, we're more confident than ever in Outback's ability to continue to take share because the investments we've made, which we're now monetizing across the portfolio, are driven by where the consumer wants to go. And I think that's why we're seeing the success and why we're going to continue to gain share.
Thank you. Appreciate it.
The next question comes from the line of Karen Holthouse with Goldman Sachs.
Please proceed with your question.
Hi, thanks for taking the question. It's pretty encouraging commentary on the pipeline for relocate. And should we think of that as something that actually be more than 14% or that could even accelerate into next year? And how does that sort of tie into an overall framework for unit growth? And is there also sort of similarly positive thoughts on the pipeline for what could be sort of outright new units next year?
Sure. I'll comment and then Dave, we are relocating these as fast as we can get the pipeline because every time we relocate in Outback, we're seeing that 30% to 50%, so an average of 40% and just great things happen. So this is a brand when it's given the right real estate, the AUVs in the box are terrific. So we're doing that as quickly as we can. It took us a while given the competition for sites as you know in this category to build that pipeline.
We would love to go faster on the remodels. The source of our paces is supply because we're looking for those A quality sites. So we're going to do that as quickly as we can. As it relates to Outback, we've talked before about we see an opportunity for 50 incremental Outbacks and that's also the pace at which we're able to do those are also going to be governed by the supply that's out there. You still have a tremendous amount of restaurants new restaurants competing for the same basis while other restaurants are hanging on to A site.
So it's a function of the category, but we'll relocate as quickly as possible. We see an additional 50 Outbacks as a real opportunity, like to get those sites. And then on the Fleming's front, as you know, our last 5 Fleming's have just been terrific and opened well above the system average. And so we're always on the lookout for those. So we feel very good about Outback's opportunity for relos and new incremental units.
We'd love to go faster. It's a function of supply. Great. Thank you. Thanks, Karen.
Our next question is coming from the line of Matthew DiFrisco with Guggenheim Securities. Please proceed with your question.
Thank you. Just had a couple of follow-up questions. I guess with the 70 basis points in the U. S. On related to the compensation, is that all primarily at the Outback brand?
Or is that evenly shared across all the brands?
Yes. That was 70 basis points last year when we took incentive comp down. It has nothing to do with this year and spread across the company.
Okay. So I guess in the commentary you said you're at the record margins for Fleming's, record margins for Bonefish and obviously you had such a strong comp at Outback, I'd have to think they're up year over year. So in the U. S, is it just purely Carrabba's then that would be considered to be down on a brand basis, on a restaurant margin basis year over year?
Yes. We were talking about restaurant profits at those two brands. And we don't get into margin guide by brand. But like I mentioned, Q3 in the U. S.
Was up and Q4, we see very strong performance coming. But we were referencing record profit in those two brands.
Profit. So profit dollars is what you're saying?
Yes, sir.
Okay. So that just then reflects the more stores being open, I guess, or but if you were to say on a margin basis for 14 or for 4Q, are you going back to levels that you saw maybe back in 2016 or are we still a ways away from there?
I'm not going to get in that kind of granularity on the guide, but I think you'll see significant margin expansion year on year and we think we've got a 250 basis point ish opportunity in margin, so we're going to make significant progress on that quickly.
Excellent. Last question, Carrabba's, are there a certain amount of stores? Have you done the analysis on how many of those might be potentially sort of at that level where it could be addition by subtraction and either they would benefit from closing the overall base or are they negative cash flow independently? Are we is that basement sort of looked over and cleaned out or is there some opportunity there maybe to rationalize some of the underperforming
stores? Yes, we do a very robust review of our closures and cash flow of our restaurants and we don't anticipate any significant Carrabba's initiative, but we will look at everything each quarter, all of our brands, we don't anticipate a large Carrabba's closure initiative.
And then does the Brazil problems in the near term, does that influence the growth strategy for the Carrabba's brand down there as well or the Borrachio?
Yes. No, I mean, the good thing about Brazil is I think we've made a pretty compelling case that you should feel comfortable that it was event driven and we're kind of back on track. We exited with positive comps that was across both of the brands and expect positive comps in Q4. And then, so I think you should feel good about the fact that Brazil is continuing to be a terrific investment for us. We have 12 Abbrachios down there performing extremely well.
We have about 92 Outbacks. There's no reason in our mind why Abbrachio shouldn't enjoy the success of the runway of the Outback considering Italian is the number 2 category down there besides next to beef and that Caswell dining is significantly under penetrated. So I think you can never call the international markets, but I think feel like it's a thumbs up for Brazil and feel very good about how Bracu is performing.
Thank you.
Thanks. Our next question is from the line of Sharon Zackfia with William Blair.
Please proceed with your question.
Hi, good morning. So a follow-up question on delivery and then also a question on marketing. On the delivery side, I guess, of that 20% to 30% of Carrabba's and Bonefish I'm sorry Carrabba's and Outback that likely won't get delivery. What are the common dynamics behind those restaurants? And then secondarily, could you break out in your marketing spend what percent is now in digital?
Sure. I'll take the delivery piece and turn it over to Liz. But on the marketing side, it's mainly, Sharon, just rural trade areas or trade areas that don't have enough of households for delivery penetration, but we'll continue to always look at that, see if there's opportunity. That's why we're the range I gave was the range, and we'll refine that further, but that's typically the characteristic.
The only other thing I'd add is that we are going to take an omni channel to us. We always want to be customer centric. So if a customer wants to get our party a product delivery through a 3rd party aggregator and it's available, we're looking at that because people have different ways that they go to market. On the marketing front, we never break out what's as a percent of sales on TV, on digital. But it's a great question.
What I will tell you is that all of our ROI and analytics and the data that we've been building has allowed us to do 2 things. 1 is get much more efficient and effective with our marketing spend. So you saw it go from around 3.8 to 3.1 last 3.2 last year, 3.1 this year. And we have shifted a big portion into digital and to data personalization where we're communicating 1 on 1. For competitive purposes, I don't want to get into specifics, but what I will say is that the investment we made in the IT infrastructure to be able to track that and identify it and monetize it is going to increasingly pay off for us.
Okay. Thank you. Thanks, Sharon.
The next question comes from Andrew Selvig with BMO Capital Markets. Please proceed with your question.
Hey, good morning. Excuse me. The first question I wanted to ask you is about the remodel that you're talking about at Outback. It Sounds like it's a lot more than maybe just the updated look and feel that we might normally see shifting to meet increased demand. So can you talk about the types of things that you're looking to achieve there?
And maybe where your priorities are? Any specifics around what you're trying to do?
Sure. So the remodel program, we have a number of prototypes in market, seeing which one effectively addresses all the revenue opportunity. We will be bumping out our to go room is a reflection of what we are seeing in our top quartile and what we anticipate it becoming. Remember, we said that we believe that will be 25% to 30% over in time and that it will be wholly incremental. So some of the remodels in addition to kind of updating the look and the flow will be about bumping out that to go room to serve as the entry and exit for delivery as well as to go.
I do want to assure you though that we're not looking at a capital expenditure on those interior remodels that is anywhere different from our prior spending on interior remodels. So in that kind of 3 $100,000 to $400,000 range depending on the size of the box. And so for us, it's that's probably the biggest difference in addition to contemporizing the interior flow and where we can adding more seats because we're seeing in house traffic grow and so we'd love to be able to put more seats in the box as well.
That's very helpful. Thanks. And my other question is just on Dine Rewards. Now that you do have the customer files and looking at doing more of the segmentation, is there a strategy in place where that might start to push customers to different brands? And I know before or prior, it's been more across all of the brands that have really seen the benefit.
I mean, is there any desire to do that or as you're segmenting out your customers?
Well, I just want to clarify when you say push to other brands, I'm assuming you mean cross fertilizing across our brands?
Correct. I mean, as you see the types of customers that they have that they might apply to other brands that they don't go to or those types of things?
Yes. We absolutely are seeing a lot of the traffic lift associated with introducing customers of one brand to another brand. And that is why you've seen so much success on a 2 year basis associated with the program is that when we say it's increased frequency, it's not just increased frequency against that customer in many cases within that brand, but it's also introduced them to another brand. And we've really seen that on Fleming's as well. So it's working exactly as we hoped.
And I think it's another example of where you really have this benefit of having a tightly edited portfolio that serves different eating occasions. We're seeing that cross fertilization and that's a big part of what's going to be the plan going forward as well.
Great. Thank you very much.
Thank you.
Thank you. Ladies and gentlemen, we've reached the end of the question and answer session. And I would like to turn the call back to Liz Smith for closing remarks.
Thanks everyone for joining us today. We very much look forward to updating you on our portfolio on our Q4 call where we'll be in a position to talk more about 2019 as well. Thanks all.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.