Good morning, ladies and gentlemen, welcome to the Brinker International Q3 2019 earnings call. At this time, all participants have been placed on a listen-only mode. We will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mika Ware, Vice President of Finance and Investor Relations. Ma'am, the floor is yours.
Thank you, Kate. Good morning, everyone. Welcome to the earnings call for Brinker International's third quarter of fiscal year 2019. With me today on the call are Wyman Roberts, Chief Executive Officer and President, and Joe Taylor, Chief Financial Officer. Results for the quarter were released earlier this morning and are available on our website at brinker.com. As is our practice, Wyman and Joe will first make prepared comments related to our operating performance and strategic initiatives. We will then open the call for your questions. Before beginning our comments, please let me remind everyone of our safe harbor regarding forward-looking statements. During our call, management may discuss certain items which are not based entirely on historical facts. Any such items should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
All such statements are subject to risk and uncertainties, which could cause actual results to differ from those anticipated. Such risk and uncertainties include factors more completely described in this morning's press release and the company's filings with the SEC. Of course, on the call, we may refer to certain non-GAAP financial measures that management uses in its review of the business and believes will provide insight into the company's ongoing operations. With that said, I will turn the call over to Wyman.
All right. Thanks, Mika. Hey, good morning, everyone. As you saw in this morning's press release, third quarter was another solid quarter for Brinker. We delivered adjusted earnings per share of $1.26, an increase of more than 16% over prior year. Total comp sales were up 2.6%. This performance was driven by Chili's comp sales growth of 2.9%, sequential margin improvements, and positive traffic of 3% during the quarter. Our momentum is broad-based across company and franchise restaurants. It spans the country. It's not regionally driven. It's withstood what's been a more challenging winter than normal. We continue to grow sales through traffic and gain share from our competitors. Q3 marked the fifth consecutive quarter of significantly outperforming the category in traffic, the third consecutive quarter with a positive sales gap. Our consumers are in a good place.
Economically, with record low unemployment and income growth now expanding throughout the middle class, more people are choosing to dine out, which is strengthening our whole industry right now, and we see this into the foreseeable future. While this environment does allow some pricing power to help manage costs, we've chosen to maintain a tight pricing strategy, staying in our targeted range of 1.5%-2%, which we did take late this quarter. We believe this discipline further strengthens our value position for the long run versus taking a more aggressive approach to pricing. A little more than a year ago, we transitioned our strategy from being more marketing centric, leaning heavily into traditional marketing to continually bring new news to the consumer, to a more guest centric model focused on the fundamentals of delivering a craveable, quality core menu at a compelling value, executed consistently for our guests.
What matters most to us, is that we create a better guest experience every day. We strengthen the connection with our guests, we inspire them to visit more often with relevant, targeted communication, and we deliver better food and service every time they come in. Our guests are seeing the difference. When we look at our guest metrics compared to last year before we put this model into place, every metric is up significantly and climbing. We're increasing trust with our guests, which supports our business in the short term and increases the longer-term sustainability of our strategy. In terms of our value proposition, what sets us apart is we've devised this flexible platform with the same commitment to quality and the experience our guests expect from us now. We haven't reduced our portions or compromised on quality.
Instead, we've maintained and even improved our products, and we offer it at a price point that's compelling to our guests and works for our business model. Take our $5 margarita program. We didn't go to the lowest possible price point. Instead, we created a program that features premium liquors, and we change the offering every month to keep it fresh and relevant to the changing seasons. For example, our recent value margaritas feature premier brands like Hennessy, St-Germain, Jameson Whiskey, and Grand Marnier. The program generates significant social media buzz, drives traffic, and strengthens the brand. The same goes for our 3 for $10 program. I know there's been a lot of concern about the sustainability of this offering. Could we really deliver quality products at that price point and sustain the volumes it's helping drive? The answer is yes.
3 for $10 has been in place for a year, and our business model has held up. Our cost of sales are in line. We're managing labor and delivering positive cash and flow-through. The value strategy is compelling, it's profitable, and it's a differentiator for us. Like everyone in our category, we continue to be aware and engaged in growing our off-premise business. To-Go was a solid driver again this quarter, with both brands up over 17%. We're starting to wrap on solid results from last year, and we're still seeing double-digit growth. We're getting smarter about execution and delivering the best possible experience to our To-Go guests. More than half our orders come in through digital platforms, which integrates directly into our system and offers a seamless experience for guests and operators, enabling us to efficiently manage this ever-growing part of our business.
At Maggiano's, our delivery business continues to grow, up double digits year to date, primarily through our third-party partnerships. Just like with our value strategy, we're holding true to what works for us, committing to do it right for the guests every time. We've seen a lot of players skin their knees on the bleeding edge of this burgeoning business, frankly, for us, it's been too high a risk, as we've worked hard the past year to build trust with our guests. Now that our foundational business is strong, we're committed to figuring out a delivery program that integrates with our system and delivers a high-quality experience to our guests, just as they're experiencing inside the restaurants and with takeout.
We're close to finding a partner capable of managing our scale, one who's just as committed to our guests, as well as profits for our shareholders. As we wrap on our first year of this foundational shift in our strategy, we're highly encouraged by our momentum, both from a sales and traffic standpoint, but even more importantly, from a consumer perspective. We're strengthening the trust our guests have in us. We've done that with a relentless commitment to operational execution. The momentum builds over time with every experience we create. We'll continue working closely with our operators to understand what they need to run great shifts every day.
Our leadership team is spending more and more time in restaurants with our operators and guests to understand where our opportunities are, what we can do to better support our team, and remove any obstacles to better enable them to connect with our guests and drive traffic. We'll continue to keep our team aligned and focused and eliminate any distractions that may drive a short-term lift but create chaos for our operators and confusion for our guests. That discipline and commitment runs across every part of our business, from our value proposition, to how we execute our food, to what our service model looks like, to how our off-premise business operates, and how we set ourselves up for success in that rapidly growing part of our business.
I'd like to thank our operators at both brands for their continued hard work and dedication to making our guests feel special every day. Now I'll turn the call over to Joe to walk you through the numbers. Joe?
Hey, thanks, Wyman, and good morning to everyone. The third quarter results we reported this morning represent another step forward for both our top-line strategies and our efforts to continue the upward trajectory of our bottom-line earnings. Our third quarter revenues of $839 million, up 3.3% from prior year, were driven by positive comp sales at both Chili's and Maggiano's. The combined Brinker comp sales growth for the quarter was 2.6%. Franchise and other revenue was up $5.7 million year-over-year, effectively due to our adoption of the revenue recognition accounting standard. At the brand level, Maggiano's continued its streak of positive comp sales, reporting a 0.4% gain for the quarter. Chili's reported its fourth consecutive quarter of positive comp sales, up 2.9%, driven by traffic gains of 3%. With our acute focus on traffic-driving strategies, our outperformance of the casual dining sector accelerated in the third quarter.
Chili's outperformed the sector by nearly 5% in traffic, driving a positive gap of more than 2% in comp sales. Chili's has now maintained a positive traffic gap to the casual dining sector for five quarters. These results are also in the context of some tougher weather months, with Chili's comps being negatively impacted by 70 basis points for the quarter, while Maggiano's was impacted by approximately 140 basis points. Overall, the combined Brinker comp sales performance would have increased approximately 80 basis points without the weather impacts throughout the quarter. We reported restaurant operating margin of 14.3% for the third quarter, a meaningful sequential improvement from our last quarter.
While this is a reduction compared to the third quarter of last fiscal year, the change is almost entirely due to our sale-leaseback transaction and our adoption of the revenue recognition accounting standard, moving franchisee marketing contributions out of our ROM calculation. Without these two planned impacts, our third quarter restaurant operating margin would have been flat to the prior year's level. Cost of sales for the quarter increased 50 basis points year-over-year, primarily due to our investment in our successful value platforms. Overall, the commodity environment remains in line with our expectations. We continue to manage price volatility with effective contracting. Restaurant labor was up a modest 20 basis points comparatively for the quarter. Wage rates continued to increase, although staying in our expected range of 3%-3.5%.
We invested incremental hours into the restaurants, particularly in the high-growth area of To-Go sales. Overall operating performance increased our manager bonus payouts by almost 30% year-over-year. These increases were offset by sales leverage efficiencies from our broadening CSL program and improved healthcare experiences. The largest change in our operating margin is in the restaurant expense area, which is where the impact of the revenue recognition accounting change and sale-leaseback rent is recorded. Restaurant expense was negatively impacted by 180 basis points in the quarter from these two items. 70 basis points of that impact was offset by sales leverage and lower marketing costs, driven by our shift to more effective digital marketing. The net result was the 110 basis point increase in restaurant expense margin. Further down the P&L, depreciation expense was down 40 basis points due to the impact of our asset sales.
G&A expense increased 40 basis points due to IT investments and higher performance-based incentive compensation when compared to third quarter of last fiscal year in both cases. Our quarterly adjusted tax rate of 9.6% reflects the true up for three quarters of a slight downward revision in our forecasted annual tax rate. We believe our annual rate will be at the low end of our 10%-11% forecast, primarily due to increased effectiveness of tax credits emanating from top-line performance. The resulting adjusted earnings per share reported this morning for the quarter is $1.26, close to a 17% increase in third quarter earnings. This quarterly result, combined with our expectation of the final fiscal quarter, leads us to believe our annual EPS achievement will be in the upper half of our guidance range. The cash flow generating capability of our business model remains sound.
EBITDA generated during the quarter exceeded $103 million. After capital expenditures of approximately $49 million, our adjusted free cash flow for the quarter was $53 million, bringing our year-to-date adjusted free cash flow total to almost $98 million. Free cash flow from the quarter was primarily used to repay revolver borrowings, maintaining our lease-adjusted leverage at 3.9 x. As we move into the final quarter of this fiscal year, we remain confident in our strategies to sustain the positive growth of our business, whether the guest is dining in our restaurants or getting food to go. Importantly, we're increasingly aligned with meeting their needs for good food, improved service, and everyday value across a varied menu. With our comments now complete, we can move to questions, which will last until the top of the hour.
I would ask we limit individual questions so we can get to as many of you as possible in that time. Kate, let's open the lines for questions.
Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold a moment while we poll for questions. Our first question today is coming from John Ivankoe. Please announce your affiliation, then pose your question.
Hi. Thank you. With JP Morgan. I was wondering, in an environment where you're focused on value and obviously labor costs are higher for everybody, what type of initiatives that you have in test or that you're looking at or that you think have promise to either stabilize or grow your restaurant level margins in 2020 and perhaps 2021?
Hey, John. We're looking at a couple of things on the technology side. Obviously, wherever possible, if we can leverage the technology to make us more efficient and effective. I think, again, one of the keys to being a bigger player in this space is our ability to invest in technology and then bring it to the restaurants in a way that really supports our overall experience for the guest. That's probably the biggest area we see to gain efficiencies.
Yeah, John, the other one I would mention which I referred to in the comments is at the managerial level, the CSL program we are in the process of rolling out. It's probably about three-quarters to 80% of the way rolled, which is a certified shift leader. One, it's creating a great career path for team members that want to move into that part of the business. It's helping to offset some of those labor headwinds and make it a more efficient operation.
And one- Sorry, go ahead.
Let me just add one other thing to the list. As Joe was talking, it reminded me that we're really getting much more effective with our marketing programs. The old model of just using traditional media to kind of throw it out there in mass just hasn't been as effective as we've found our much more targeted programs, whether using digital and obviously using our loyalty databases. Just much more effective, allowing us to kind of reduce some of our traditional marketing spends.
On the technology side, is it front of house? I know pay- at-t able's been for a long time, but we've talked about the handheld ordering. Does Brinker now have the scale where you can start to explore more technology in the back of the house? Is there anything that can be done from an automation perspective there?
I think nearer term, it's still some of the front of the house, although we're bringing even more and more technology into the back. Mainly more from a management perspective, just to help them understand exactly what they need to be doing and how to do that efficiently, not so much the robotic side of it. Believe me, we're looking at everything.
Yeah.
We've got ourselves kind of pushed out on some pretty interesting stuff, just to make sure we're not leaving any stone unturned.
Thank you.
Thanks, John.
Thank you. Our next question today is coming from Jeffrey Bernstein. Please announce your affiliation, then pose your question.
Great. Thank you. From Barclays. Two questions. One, just following up on the labor topic. Joe, I think you mentioned that the third quarter inflation was within, I believe, what you reiterated for full-year, which was at 3%-3.5%. Can you give us any more color. Obviously, you had 3%+ traffic growth. Is that inflation prior to the incremental labor you need for that traffic growth? Maybe any color around just how much is mandated versus market pressure, where your turnover stands. Anything along the labor line would be great.
Yeah, Jeff. Thanks. That is looking at wage rate pressure, which is one of the components. On top of that, as I indicated, we have added labor hours back into the restaurants, both from volume standpoint, and then also making sure that we're effectively staffing an area like To-Go, which, when you have that double digit year-over-year growth, you want to make sure that you're providing a good guest experience. That's probably the highlight area when I think about hours going back into the system. Clearly you have upward expense related to manager bonus, that 30% year-over-year. That's an expense we're glad to see because that's driving off the entire P&L performance of the restaurants. We're pleased to be able to reward our managers for the efforts they're doing, in that regard. Labor headwinds are out there.
We've consistently talked that we expect to see them remain out there. The only particular pressure in addition to where we're investing into our business is in the back of the house, you do see some higher wage pressure around the cook position. It's well within our ability to manage the business, and it's meeting kind of the expectations. We're not seeing anything really coming out of line with our thought processes, for how that would develop.
Got it. My other question was just on the outlook, whether it's the, we have an implied fourth quarter at this point. It seems like the comp range is rather wide considering what your full-year comp guidance is. Is there any help you can give in terms of tightening that range, or whether there's any color on trends quarter to date. In conjunction with that, whether you have any directional thoughts, at least on any specific areas where you have visibility going into fiscal 2020.
We have a guidance policy. The guidance that is in place stands unless we change it. I think I would just reiterate the color I gave you in my comments, which we do expect the upper half of the range as it relates to EPS. Our performance is doing well across the board of our guidance that we provided you for the year. I'm very comfortable with the ranges we've provided and very comfortable how we're performing against those ranges. We'll talk about fourth quarter in August.
Thank you.
Thanks, Jeff.
Thank you. Our next question today is coming from Chris O'Cull. Please state your affiliation, then pose your question.
Thanks, Stifel. Just to follow up on that last question, Wyman, your comments during the presentation indicated the company's pretty bullish on the consumer, but it looks like segment sales may appear weaker here in April, or at least choppy. I take it the company isn't as concerned about consumers maybe receiving less tax benefit year-over-year, and maybe you guys could comment just on whether or not you think the spring break shifts have caused some choppiness in the segment.
Yeah, Chris. It has been a unique, really winter, just with the shift in the holidays and kind of a delay in some of the taxes. I think overall, based on everything we've seen, the tax rebates have been not that significantly out of line once you've gotten through the big push. We don't think that's it. There's obviously a little bit of timing with regard to school calendars and things like that that are making some of the months and weeks a little bit unique to maybe what we were more historically seeing. Overall, we just come back to, hey, the unemployment number is strong. The income growth continues to look positive, and it's broader, and those are good things for the restaurant industry. One month here or there isn't going to probably derail that kind of momentum.
We're still kind of of the belief that it's a pretty good economy right now relative to consumers' willingness to eat out, whether it's in a restaurant or to take it out or to have somebody bring it to their house.
Just one last one. The company, in the past, had been reluctant to adopt individual order delivery, and now it looks like you guys have overcome some hurdles. Maybe talk a little bit about what were those hurdles that you overcame to decide to move forward?
Well, we're still overcoming them, but we're a lot more optimistic, as you've noticed. The biggest one for us was just operational integration. The approach that a lot of the third-party delivery companies were taking, which was, "Hey, we're just going to throw our iPad in your system and good luck" just doesn't work for us. On our weekends and when we're busy, we have to have a better system running, and we've invested a lot of time, money, and resources to making sure we set our operators up for success. To just throw a wrench in the middle of their business, especially during volume, just wasn't going to happen. We have found big players that are now willing to do that with us, to figure out how to get the technology to work, to help better support the operations of the business.
Now then the next thing is just, okay, now let's talk about how we all make money off of this, and we're starting to feel good that there's a model now that allow us to do that. It's not like we've never doubted the potential of delivery. It's just always been, okay, how does this work in our restaurants, and how do we make some money off that as well? We're starting to overcome some of those hurdles. I always say, the Maggiano's business has got a great delivery business. We've had it for really almost a decade, and we just continue to now work those systems out for Chili's.
Great. Thank you.
All right, Chris. Thanks.
Thank you. Our next question today is coming from Will Slabaugh. Please announce your affiliation, and then pose your question.
Stephens, thanks. I had a follow-up on delivery, actually. You mentioned you're close to finding a partner. First, are you looking to partner with only one third-party provider? Second, as you look at the different offerings of some of the delivery providers today, it seems like that's broadening out as well. Could this partnership involve more than just the logistics of delivery, whether it be customer data sharing, maybe integrate that partner with loyalty, your app, or anything else?
Hey, Will. Great questions. Probably not going to give you the answers on this call, because they're all fairly strategic for us. We're not necessarily aligned with one partner, but we are setting parameters for whoever we partner with, again, around the ability to execute at a high level in the restaurant. All of those other issues are absolutely important, and we are integrating those in any conversations we have with potential partners around how do we leverage our significant database? How do we work with their database? What kind of brands do we want to be associated with, and how do they convince us that they can deliver our product in a way that's consistent with what our guests and our brand deserves? All of those are happening as we speak, and we'll continue to push forward and keep you posted.
Understood. Just a quick follow-up on the traffic commentary that you had. Obviously, it's been a nice run here. As you lap over the start of positive traffic from last year, how good do you feel about keeping that streak going?
Well, we feel good about the strategy in general, right? Our value platform and our overall position with regard to value is one of the key drivers of traffic. Obviously, you roll over certain things, our momentum is good, and we think that we've got the ongoing strategy in place to continue to move forward and take share. We've been talking about this now, this is our fifth quarter of taking share from the category from a traffic perspective. It's been growing. We'll start to lap against some of these bigger numbers, at the same time, the fundamental business imperative that's driving it doesn't change. We like where we're at.
Great. Thank you.
Yeah. Will, I would just add that from a traffic acceleration, as it relates to the rest of the industry, while I indicated accelerated, it was a 1% acceleration in the last quarter compared to our gap the prior quarter. That gives us a lot of confidence in the direction of these strategies from a traffic perspective.
Thank you.
Thank you. Our next question today is coming from Steve Anderson. Please announce your affiliation, and then pose your question.
Yes, from Maxim Group. I wanted to get some of your insight with regard to food costs. We've seen some of the proteins have started to move up in the last several weeks, with the Midwest and Great Plains flooding. Just wanted to see where you are with food costs for the next quarter and if you have any potential insights into fiscal 2020.
Yes. Steve, it's Joe. Actually, we're pretty comfortable with the positioning we have right now on our proteins. We're lapping over fairly low points in the markets across proteins, I know that gives some anxiety in the market for the lapse as you move forward. Right now we see our price points relatively under control. There's some inflationary clouds on the horizon around the beef complex. It's important to remember that despite what's going on in the short-term markets, we do some pretty effective contracting. A lot of the exposure that you might be assuming when you see some of those price fluctuations has been mitigated by that contracting. I think for the rest of this year, we're running north of 80% contracting, that really mitigates some of that exposure out there. For example, things like our chicken contract run out a year.
Even when you look at some dislocations that might happen in those markets, the power of a varied menu really comes to play at that point, where we can drive our marketing one direction or the other based on what we're seeing going on in the commodity market. We're very comfortable with the job our supply chain has done and the contracting positions and the ability to take volatility out of the equation for our operators.
Thank you.
Thank you. Our next question today is coming from Nicole Miller. Please announce your affiliation, and then pose your question.
Piper Jaffray. Thank you. Good morning. In terms of delivery, it's been very helpful to hear that you're focusing on using someone in the marketplace that can provide great execution. How are you also prioritizing the geography they can cover? The fees that they charge and the data that they may or may not provide back to you. I really wanted to understand, would delivery through a Chipotle app also be an opportunity?
The answer to those three is yes, and yes. That's all definitely an important piece of the equation. One thing you have seen is a lot of your third-party providers broaden their national scale. I think you are truly starting to get to coverages that can be very meaningful across our restaurant base and where we're located, particularly from a suburban marketplace. That's important. Data is clearly front and center. We've, for a long time now, talked about and been focused on the importance of data and how we utilize data to help drive our business, and that's not going to change as it relates to the delivery options. We have to look at that very closely in that regard.
And then just-
Go ahead, Nicole.
Thinking big picture about the domestic casual dining segment, could you walk us through what you're seeing in terms of the pace of development for the segment at large? What I'm wondering is, has it slowed to the point where it's a benefit to same-store sales? Clearly not to take anything away from your performance, but I'm thinking there's probably a lack of cannibalization that's happening. If that's happening, how does that impact your choice or the way you choose your pace of development? Meaning, do you want to continue to enjoy any comp benefit that you think you might be getting from that? Do you think it's an opportunity to pick up your pace of growth a little bit faster? Thank you.
Nicole, we're comfortable with how we're bringing new restaurants into the space from our perspective. It's measured, and our new restaurant openings are doing well. We are minimizing the cannibalization impact. That said, we're developing in markets where we have a big presence still. All of that just goes to say that we're comfortable with our current strategy of development, and if it were to move, it would move moderately, but not dramatically.
Yeah. I think that development, Nicole, is both new restaurant development, and we have opportunities in our system to relocate, too. We spend a meaningful amount of development time looking at where those trade areas might make sense from a relocation and the incremental growth that they will provide. Then let me circle back to your first question, just to close the loop on your last question, because I think you were asking about ability to delivery through our app. We think that is a significant opportunity. Looking at what we would call white label options, as we think through the progression of where delivery could go, that's definitely in the thought process.
The ability to have one of our guests choose delivery through our app, probably powered by a third party, potentially, is a nice piece of the equation when we look at the delivery horizon.
Thank you.
Thank you. Our next question today is coming from Bob Derrington. Please state your affiliation and then pose your question.
Yeah. Hi. Telsey Advisory. Wyman, it looks as though Chili's menu has continued to, I guess, undergo some evolution. I think you all had tested reducing the number of menu items at several different levels. Has there been another level of reductions within the most recent menu that Chili's has rolled out?
No, Bob. We're always trying things with regard to menu and innovation, we're testing different propositions, if you will. We're pretty comfortable with where we're at right now in terms of the variety that we offer our guests and our ability to deliver that consistently to them day in and day out. We're obviously always looking to find a new item here or there that will add some interest to the menu or to improve an item that we see an opportunity on. Overall, we're pretty comfortable with how the menu is sitting today. Doing a lot of work with our supply chain to help us better understand how to make the products and the ingredients even better every day and to work on how we can help our operators execute at the highest possible level every day.
As a quick follow-up, can you give us some kind of gauge about how the remodeled Chili's are doing? I know you've got a pretty considerable remodel program underway right now. Have they been outperforming the core restaurants within the system?
Yeah. Bob, obviously, we look at that closely. We have control groups against the markets as they are reimaged. Generally speaking, we're seeing positive results. We always evaluate as we go through the process to make sure we can value engineer to be as effective as we can in the amount we're putting into restaurants. We have a variation of investment we make based on the volume and the markets that they're in. We just always want to make sure that those are viable as we go forward. We are seeing that positive result to control as we move forward.
Terrific. Thank you.
Thanks, Bob.
Thank you. Our next question today is coming from Gregory Francfort. Please announce your affiliation and then pose your question.
Hey, it's Bank of America. I had two questions. The first was just on the decision to repay the revolver this quarter. I don't think you bought back any stock during the quarter. Can you explain to us maybe how you're thinking about the debt level from here? Should we think about basically your leverage as perfectly flat and any excess cash from that will go to buy back stock? Or is this maybe a change in the fundamental approach to allocation of capital?
No change at all in the fundamental approach. We always have had the guardrails of our desired leverage level. We're sitting again at that 3.9 x, which is flat on an EBITDAR basis compared to the last couple of quarters. I think that's a great target to utilize in your thinking. One of the dynamics of the calculation is that we work our way through the lapping of the sale-leaseback transaction. You have incremental lease expense that works its way into that calculation for a couple of quarters, and we're going through that period right now. Again, we use the guardrails and balance the debt level by free cash flow as that calculation adjusts.
Once you get into the lap, which starts in the first quarter of the sale-leaseback transaction, that's all normalized and you probably would see a return to a more traditional utilization of free cash at that point.
Thank you. Then maybe just a question going back to John Ivankoe's question. As you look out over the next 12 months, as we try to frame up the algorithm for the business, how are you looking at what you think the comp is necessary to be to hold margins flat? I know you guys have had a lot of changes in how you've approached pricing and value. What do you think is the bar to have flat core restaurant margins over the next 12 months?
Greg, I'm going to defer the specific answer on that till we get into our guidance for next year in the Analyst Day in August. Again, we think it's a combination, obviously, of slightly positive comp sales growth. Again, we think traffic will be a big piece of that equation, maintaining that at a flat to positive level. Again, we think we can price on an ongoing basis in that 1.5%-2% range. Those are all components of how we think about the business. Then you bring some capacity increases into the equation too. We'll flesh that out more specifically for your next 12 months and forward as we get to that appropriate time.
Appreciate that. Thank you very much.
Thank you. Our next question today is coming from John Glass. Please announce your affiliation, then pose your question.
Good morning. It's Morgan Stanley. First, could I just ask about mix this quarter at Chili's? It's bounced around a bit quarter-to-quarter. Is the function of a decline in mix greater than last quarter a function of greater just value preference, maybe what is that? Or was it maybe more specific to a promotion you ran this quarter and that kind of decline in mix doesn't persist?
Yeah. It's more the first, the level of preference, which is still sitting right in that mid-teens, that 15, 16. It was probably a touch higher preference in the prior quarter. That's your biggest driver within the mix. During the quarter, we were also doing a steak promotion as part of the 3 for $10 platform. Primarily it's lap over prior year in those components.
Just related to that, just so we understand the cost of that promotion, is the increase in COGS, is that all or primarily related to the change in the value mix? Is this kind of where it should sit now, 40, 50 basis points of COGS pressure based on the current mix? Or do you think that there's risk that goes higher or maybe it goes lower depending on how you're managing other pieces of the COGS equation?
Yeah, John, if I was going to err in that thought process, it's probably on the lower side of the equation. As you start to lap through the more full use of 3 for $10, both from how we first utilized it from a promotional standpoint, and then how it moved onto the menu, you get that normalized into the base and the impact from the mix from that 3 for $10 will normalize.
Just to be clear, that normalizes later in the first quarter of next year, fiscal year, is that right?
Yeah. You fully wrap at that point. Again, this quarter, we are lapping a relatively aggressive use of 3 for $10 from a promotional standpoint. You start going through it this quarter and then fully as we move into the first quarter.
Okay. Thank you.
Thanks, John .
Thank you. Our next question today is coming from Jeff Farmer. Please announce your affiliation, then pose your question.
Great. Thank you. Gordon Haskett. Just following up on 3 for $10. Are you guys doing anything to support current traffic as you lap the introduction of that offer? Again, this is something that really was a material needle mover over the last four quarters. Just didn't know if there was anything you guys could do on the defensive front to help support traffic as you move through a pretty tough comparison period.
Yeah, Jeff, we're not going to probably get too specific on the marketing plans on the call. Again, we're not going to be doing a lot of things that would create some chaos, if you will, or havoc in the restaurant with kind of limited time promotion kind of work. There's always marketing levers that we can pull to help more aggressively address driving traffic. We're always evaluating whether or not we want to put more emphasis on various aspects of our marketing mix. We'll continue to look at that as we get through the rollovers, and we've kind of given ourselves some flexibility on that front. It's not like we had everything wide open all the way through last year. The beauty of 3 for $10 and having it on the base is it grows on its own as awareness grows over time.
Again, instead of having a six or eight week, got to get them in today, and then it leaves, the awareness continues to grow and the guest acceptance and intent to return based on their experiences is also increasing. You get some momentum just off having that offer out there and building awareness of it over time.
That's helpful. Just one more follow-up on an earlier question. One of your peers did put up an April same-store sales number last night. It's one of their softest monthly numbers in two years. Obviously, they were lapping a pretty tough comparison. Is there anything you are willing to offer in terms of what the broader casual dining segment is seeing right now in terms of trends? Is there something that's slowing it down a little bit? Does it seem like it's the same as what we saw in earlier months? Any color you guys can offer?
Well, Jeff, as you know, we typically don't give specific guidance as it relates to the inter-quarter periods. I can't follow up on that piece of the equation. Again, reiterating the comments we made, we're comfortable with the traffic-driving attribute to the strategies, and we're going to continue to move forward in that regard and look to gain the market share that comes with that. We'll leave it at that, and we'll talk more about it in August.
All right. Thank you.
Thank you. Our next question today is coming from Brian Vaccaro. Please announce your affiliation, then pose your question.
Thank you. Raymond James. Just a few clarifications, if I could. Back to the check, and Wyman, I think you said you took pricing late in fiscal third quarter. How much did you take? Then thinking about check in the fourth quarter, do you still expect that to be up year-on-year as you lap the initiatives to build loyalty membership in the fourth quarter of last year?
Brian, the price increase we took was right at the end of the quarter, not much of an impact in this current quarter. Obviously, it will be supported in the current quarter. It was roughly a 1.3%-1.5% increase. Again, keeping us in that range that we have targeted of 1.5%-2% for the year. We are lapping now through aggressive activity around driving the loyalty database last year, the free chips and salsa. That does have a pricing impact in the fact that we net comp expense change, year-over-year change from price. You will actually have a positive impact to price as we lap through those higher use of comp expense last year.
That expectation is still there. Would you expect a positive average-
Yes.
Check contribution then?
We would expect, yes, to be in that positive range.
The check average as it relates to pricing is going to be in that 1.5%-2%.
Right.
There's the effect of just not being as aggressive with regard to loyalty sign-ups that show up as a comp expense that will be additive to that. Again, our on-menu pricing strategy still holds for 1.5%-2%.
Yep. Okay. Got it. On the guidance, I think, Joe, you said you're comfortable at the upper end of the range. Does that comment apply to both comps and store margin expectations?
I think I was speaking specific to the EPS guidance at that point. Again, we're comfortable across all of our guidance ranges.
That would include your G&A guidance up $8 million-$10 million for the year?
Yeah, we'll be in that ballpark. The delta there is the performance compensation piece, which obviously gets finalized as you move throughout the year, and to the extent that has a larger impact, you could move outside the range a little bit in that regard, but that's not something you really know to the true ups at the end of the year.
Yep. Okay. Understood. Then just last quick one. On the labor line, Joe, you said, I think bonuses were up 30% year-over-year in the third quarter. Just how much was that in dollars or as a margin percent, percent of company sales? Could you convert that for us?
Well, I won't convert it to the dollar side of the equation, but it's about 30 basis points when you look at the company sales side of the equation. That's the manager bonus piece of the equation.
Perfect. Thank you.
Thank you. Our next question today is coming from Sara Senatore. Please announce your affiliation, then pose your question.
Thank you. Bernstein. I just had a question on the comment I think that Wyman made about the consumer being healthy and maybe allowing for some pricing power. I wanted to ask a couple of sort of follow-ups on that. The first is, how do I think about mix versus price? Which is to say, is it possible that if you take price, you see people trading down? I know you didn't have a lot of price on the menu this first quarter, but to the extent that we do see that move around, is that ever a risk just as we think about average check in aggregate? Then, the reason I think it comes a little bit surprising to hear about pricing power is certainly among the QSRs, there's been intense value competition, and I was wondering, is that a different customer? Do you see any trade-down?
It certainly doesn't seem like it based on the traffic, I'm trying to reconcile all those data points. Thanks.
Hey, Sara. Well, first, just with regard to people shifting away from an item based on a pricing, a one-time price change. Again, if we're in the 1%-2% range, that's usually not going to create the impetus for somebody to not order something they came in to eat. When the whole check gets added up, you may have some issues with people saying, "Hey, you just pushed me over the edge." The way we always think about it is there's always somebody who's just, no matter how much they love you, they're just on the edge of their budget. Every time you price, you probably push a couple of people off. We're just very cautious about doing that because we really believe in the power of traffic, and keeping as many people in the restaurants as possible.
We don't see individual pricing actions of the kind of normal magnitude that we take creating major shifts in the menu. Much more merchandising, and as Joe talked about, we create most of our menu shifts through our marketing and merchandising, and oftentimes to either manage margins or move product shifting, and manage the product shift. The relationship between casual dining and fast food has always been an interesting one. We don't see a huge correlation there, or as much as some people may think. Obviously, when the fast fooders, now it's been years now, really got aggressive with some of the value propositions, we did start to feel some impact around, especially the lunch business. Overall, I think the two worlds are still fairly separate.
Most of the data that we have says that trading options really come from more other casual diners, maybe on the fast-casual side, a little bit more there.
Thank you.
Thank you. Our next question is coming from Peter Saleh. Please announce your affiliation, and then pose your question.
BTIG, thanks. I just want to come back to the conversation around delivery. Are you guys seeing better economics on delivery today versus what maybe you would've expected a year or 18 months ago?
Yeah, Peter, I think, as that marketplace becomes more competitive, you're seeing what you would expect to see. People fighting for share, people partnering better, and working better together. That's what we see, and that's what we expect to see. I think we're also going to see scale matter. So, brands that are big, that can partner with third-party aggregators and give them something in the equation, more than just a big percentage of their sales off the top, they're going to be able to negotiate better deals and partnerships. That's what we're looking for. We're really looking for partnerships as much as anything, where we can all kind of get a business model that works. I think that's now happening for some of the reasons I just mentioned.
I think you'll also see some benefits, Peter, as we can lever off the investments we've made both in To-Go, because there's clearly some opportunities to leverage the systems and the capabilities we've developed there over time. Clearly the investment we've made in our digital apps, the ability to, at some point gravitate to a white label, third-party app delivery option is going to really come from the fact we've been able to invest in and develop that capability to date.
Staying with delivery for a second. Is a partner for Chili's, would that be also leveraged for Maggiano's, or would you not utilize it that way? The last question on this would be, when should we expect to hear something more concrete on a partnership?
The comment to the leveraging it for Maggiano's. Maggiano's already has a couple third-party providers that they are working with, and doesn't necessarily have to have that same combination on the Chili's side of the equation. It's not off the table either. Not putting any time frames around any type of announcements related to the delivery, but it's something we're aggressively working on.
Thank you very much.
Thanks, Peter.
Thank you. Our next question is coming from Andrew Strelzik. Please announce your affiliation, then pose your question.
BMO, thanks. I believe you're two quarters now into putting advertising support behind the Chili's To- Go. I was wondering, are you seeing any differences in the usage of the platform with the advertising support, whether it's levels of incrementality, day part, week part, anything like that? Are you able to frame up kind of where the awareness sits today versus where it was prior, and where it ultimately might be?
Hey, Andrew. Wyman. We didn't really put a lot of marketing support behind To- Go in this quarter. It was really a second quarter initiative that we ran for part of the second quarter. This quarter's been more just around our base messaging from a marketing perspective. We always keep a low level of To- Go messaging out there in the digital space, but it wasn't a significant investment, and it's an opportunity we see down the road to continue to drive awareness and push that part of the business. It wasn't something we leveraged this quarter.
Okay. I know one of the levers kind of moving forward last time we spoke was the ability to lean into the direct marketing. I'm wondering, is that something that you've started to lean into at this point? Is that something we'd expect to see in the fourth quarter, or is that more kind of a 2020 story?
Yeah. Still have room there. It didn't change the mix a whole lot in the third quarter from where we've been. Continue to leave our options open on how aggressively we want to use the database and the direct marketings, and the loyalty.
Great. Thank you very much.
All right. Thanks, Andrew.
Thank you. Our next question today is coming from Jon Tower. Please announce your affiliation and then pose your question.
Hey, thanks. It's Wells Fargo. First on the marketing side, sticking with that, can you quantify on a dollar basis the impact, the shift away from traditional media towards kind of the digital and loyalty platforms might have had during the quarter? Switching gears, on the traffic side of the equation, obviously five quarters in a row, good numbers. Can you give us, in this quarter, some idea of where that traffic is coming from, whether it's increased frequency of existing customers, you're drawing in new customers, as well as any commentary around relative performance weekday versus weekend or day parts? Thank you.
Hey, Jon. As it relates to the relative change in advertising, it was obviously a positive offset to some of the restaurant expense numbers. We typically don't quantify the various components of our multi-tiered marketing campaigns, but we have shifted meaningful dollars to digital over really the course of the last 18 months to two years as we kind of moved through this progress. It was a positive year-over-year, and still getting the results we're seeing at the top line. Jon, the second part of your question?
On the traffic side, if you can kind of flesh out whether you're seeing increased frequency of existing customers, you're drawing in new customers, how the relative performance is at workday versus weekend and day parts during the quarter.
Jon, it's been a really broad-based kind of growth from a traffic perspective, both day parts, lunch and dinner. I mentioned earlier in my comments regionally, we're seeing good dispersion. This isn't just a Southeast or a West Coast kind of phenomena. It's pretty broad-based and across both lunch and dinner. With regard to where is it coming from, we are seeing increased frequency against our current user base. As you would expect something like this to have especially a value kind of oriented approach, they're the ones that are going to see it first. They start to change their frequency, and what we're continuing to see now as awareness builds, and you start to see more lighter users.
Overall, when you look at the performance in the category, what we continue to see, and I think you guys track the large players, there's a consistent pattern of over-performance by larger concepts versus smaller concepts. The independents and the smaller concepts, really now for a while, have been losing share to the larger concepts, and we continue to see that as probably something that will play itself out into the future.
Great. Thank you.
All right. Thanks, Jon.
All right. I think that's all the time we have. I want to thank everyone for your participation on the call, and we look forward to speaking with you in August about our fourth quarter results. Thank you.
Thanks, everybody.
Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.