BRINKER INTERNATIONAL, INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand our Company, our operations, and our current operating environment. For an understanding of the significant factors that influenced our performance during the thirteen and twenty-six week periods ended December 29, 2021 and December 23, 2020, the MD&A should be read in conjunction with the Consolidated Financial Statements (Unaudited) and related Notes to Consolidated Financial Statements (Unaudited) included in this quarterly report. All amounts within the MD&A are presented in millions unless otherwise specified. Overview We are principally engaged in the ownership, operation, development and franchising of the Chili’s ® Grill & Bar (“Chili’s”) and Maggiano’s Little Italy ® (“Maggiano’s”) restaurant brands, as well as virtual brands including It’s Just Wings ® and Maggiano’s Italian Classics™. At December 29, 2021, we owned, operated or franchised 1,653 restaurants, consisting of 1,182 Company-owned restaurants and 471 franchised restaurants, located in the United States, 28 countries and two United States territories. Our restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units. Impact of COVID-19 Pandemic In March 2020, a novel strain of coronavirus (“COVID-19”) was declared a global pandemic and a National Public Health Emergency. The spread of COVID-19 has prompted changes in consumer behavior and social distancing preferences as well as dining room closures and dining room capacity restrictions mandated or encouraged by federal, state and local governments. The number of open dining rooms and the dining room capacity restrictions have fluctuated over the course of the pandemic based on state and local mandates, which has resulted in significant impacts to our guest traffic and sales primarily in fiscal 2021. Chili’s and Maggiano’s ability to continue serving guests during the COVID-19 pandemic is the result of our strategic decision to invest in technology, virtual brands, and off-premise capabilities including online ordering, mobile app ordering, curbside service and third-party delivery. We have experienced limited material shortages and service disruptions in our supply chain and in the availability of labor to operate our restaurants. We also experienced an increase in employee turnover in the first two quarters of fiscal 2022. We recognize there is significant demand for talent and are actively working to safeguard, engage, attract and retain our employees. It is possible that shortages or disruptions could increase during fiscal 2022 as demand for goods, transportation and labor increases. Impact on Financial Outlook The ultimate impact of the COVID-19 pandemic cannot be reasonably estimated due to the uncertainty about the extent and duration of the spread of the virus, the availability, acceptance and efficacy of preventative vaccines, the emergence and impact of new COVID-19 variants and changing government restrictions. Additional impacts to the business may arise that we are not aware of currently. We will continue to closely monitor and adapt to the evolving situation. Operations Strategy We are committed to strategies and a Company culture that we believe will improve guest traffic, grow sales and profits, and engage team members. Our strategies and culture are intended to differentiate our brands from the competition and to focus on the guest experience. We are effectively and efficiently managing our restaurants to establish a lasting presence for our brands in key markets around the world. Our primary strategy is to make our guests feel special through great food and quality service so that they return to our restaurants. 23 Table of Contents Guest Engagement Through Technology - We have invested in our technology and off-premise options as more guests are opting for To-Go and delivery. Chili’s partnership with DoorDash has been instrumental in growing off-premise business and offering our guests continued service during the COVID-19 pandemic. We leveraged technology so that DoorDash orders are sent directly into our point of sale system, creating efficiencies and a system that allows us to better serve our guests. We believe that guests will continue to prefer convenience and off-premise options. We plan to continue investments in our technology systems to support our To-Go and delivery capabilities. In dining rooms, we use tabletop devices to engage our guests at the table. These devices allow guests to pay at the table, reordering, digital entertainment, guest feedback and interaction with our My Chili’s Rewards program. Our My Chili’s Rewards loyalty program offers free chips and salsa or a non-alcoholic beverage to members based on their visit frequency. We customize offerings for these guests based on their purchase behavior, and we continue to shift more of our overall marketing spend to these customized channels and promotions. We believe this strategy gives us a sustained competitive advantage over independent restaurants and the majority of our competitors. Chili’s - Chili’s strategy is to differentiate from our competitors with a flexible platform of value offerings at both lunch and dinner and to connect with our guests through our My Chili’s Rewards loyalty program. We are committed to offering consistent, quality products at a price point that is compelling to our guests. Our value platforms allow guests to mix and match select menu items at a discounted price as part of the every-day base menu. Additionally, we have continued our Margarita of the Month promotion that features a premium-liquor margarita every month at an every-day value price of $5.00. Most of our value propositions are available for guests to enjoy in our dining rooms or off-premise. Chili’s off-premise dining options, including our virtual brands It’s Just Wings and Maggiano’s Italian Classics, are also a critical part of our strategy. In the twenty-six week period ended December 29, 2021, Chili’s off-premise sales, including both to-go and delivery, were approximately 35% of Company sales, with approximately 53% coming from To-Go and 47% from delivery. We regularly evaluate our processes and menu at Chili’s to identify opportunities where we can improve our service quality and food. We continue to focus on our core equities and improving guest satisfaction with our food and service by improving execution of our operations standards. Maggiano’s - At Maggiano’s, we believe our focus on operating fundamentals and technology provide the foundation for future efficiencies and growth. For example, Maggiano’s delivery partnership with DoorDash makes third party delivery more sustainable and efficient for the brand to operate. In addition to the DoorDash platform, our guests have the ability to order delivery directly through the Maggiano’s website. During the pandemic, Maggiano’s has leveraged off-premise dining options, including It’s Just Wings, to sustain revenues. Maggiano’s historically hosts a significant portion of its banquets in the holiday season during the second and third quarters of the fiscal year. Virtual Brands - We are investing in virtual brands, restaurant-like menu offerings that are only available for purchase digitally, to drive restaurant traffic and sales growth. We expect that our virtual brands will enable us to capitalize on the growth in off-premise dining and to leverage excess kitchen capacity in our existing restaurant infrastructure, while adding minimal complexity in our restaurants’ kitchens. It’s Just Wings, launched on June 23, 2020, is an offering consisting of chicken wings available in a variety of different sauces and rubs, curly fries, ranch dressing, fried Oreos and hand pies for a value price. Maggiano’s Italian Classics offers a select group of items from the full menu of Maggiano’s Little Italy including several appetizers, salads, pastas, entrées, mac & cheese and hand pies. They are available for purchase through DoorDash, Google Food Ordering and their respective websites - itsjustwings.com and maggianosclassics.com. The operating results for the virtual brands are included in the results of our Chili’s and Maggiano’s brands, based on the restaurants that prepared and processed the food orders. We plan to continue to test and strategically launch additional virtual brands in the future to further drive our growth. Franchise Partnerships - Our franchisees continue to grow our brands around the world, opening nine restaurants and entering into two new development agreement for the twenty-six week period ended December 29, 2021. We plan to strategically pursue expansion of Chili’s internationally through development agreements with new and 24 Table of Contents existing franchise partners. We are also supporting our franchise partners with opportunities to expand sales through our virtual brand offerings. Company Development - The following table details the number of restaurant openings during the thirteen and twenty-six week periods ended December 29, 2021 and December 23, 2020, respectively, total full year projected openings in fiscal 2022, and the total restaurants open at each period end: Openings During the Openings During the Full Year Projected Openings Thirteen Week Periods Ended Twenty-Six Week Periods Ended Total Open Restaurants at December 29, 2021 December 23, 2020 December 29, 2021 December 23, 2020 Fiscal 2022 December 29, 2021 December 23, 2020 Company-owned restaurants Chili’s domestic 1 1 2 4 4 1,125 1,061 Chili’s international — — — — — 5 5 Maggiano’s domestic — — — — — 52 52 Total Company-owned 1 1 2 4 4 1,182 1,118 Franchise restaurants Chili’s domestic 1 — 1 1 3 109 171 Chili’s international 5 1 8 4 10-13 360 364 Maggiano’s domestic — 1 — 1 — 2 2 Total franchise 6 2 9 6 13-16 471 537 Total restaurants Chili’s domestic 2 1 3 5 7 1,234 1,232 Chili’s international 5 1 8 4 10-13 365 369 Maggiano’s domestic — 1 — 1 — 54 54 Total 7 3 11 10 17-20 1,653 1,655 During the twenty-six week period ended December 29, 2021, we acquired 60 Chili’s restaurants previously owned by two former franchisees. The acquisition of these restaurants is not reflected in Openings during the twenty-six week period ended December 29, 2021 or Full Year Projected Openings total as they are existing restaurant locations transitioning ownership. These acquired restaurants are included in Total Open Restaurants at December 29, 2021 within the total for Company-owned restaurants Chili’s domestic. At December 29, 2021, we own property for 53 of the 1,182 Company-owned restaurants. The net book values associated with these restaurants included land of $43.4 million and buildings of $19.1 million. Revenues Thirteen and Twenty-Six Week Periods Ended December 29, 2021 compared to December 23, 2020 Revenues are presented in two separate captions in the Consolidated Statements of Comprehensive Income (Unaudited) to provide more clarity around Company-owned restaurant revenues and operating expenses trends: • Company sales include revenues generated by the operation of Company-owned restaurants including gift card redemptions and revenues from our It’s Just Wings and Maggiano’s Italian Classics virtual brands. • Franchise and other revenues include royalties, gift card breakage, Maggiano’s banquet service charge income, delivery income, digital entertainment revenue, franchise advertising fees, franchise and development fees, gift card equalization and gift card discount costs from third-party gift card sales. 25 Table of Contents The following is a summary of the change in Total revenues: Total Revenues Chili’s Maggiano’s Total Revenues Thirteen Week Period Ended December 23, 2020 $ 696.4 $ 64.3 $ 760.7 Change from: Comparable restaurant sales 78.5 49.4 127.9 Restaurant openings 3.2 — 3.2 Restaurant acquisitions (1) 27.0 — 27.0 Restaurant closures (2) 0.2 — 0.2 Company sales 108.9 49.4 158.3 Royalties (3) 1.0 — 1.0 Franchise fees and other revenues 1.9 3.9 5.8 Franchise and other revenues 2.9 3.9 6.8 Thirteen Week Period Ended December 29, 2021 $ 808.2 $ 117.6 $ 925.8 Total Revenues Chili’s Maggiano’s Total Revenues Twenty-Six Week Period Ended December 23, 2020 $ 1,382.9 $ 117.9 $ 1,500.8 Change from: Comparable restaurant sales 166.2 82.5 248.7 Restaurant openings 8.6 — 8.6 Restaurant acquisitions (1) 31.1 — 31.1 Restaurant closures (2) 0.8 — 0.8 Restaurant relocations 0.5 — 0.5 Company sales 207.2 82.5 289.7 Royalties (3) 3.4 0.1 3.5 Franchise fees and other revenues 2.3 5.9 8.2 Franchise and other revenues 5.7 6.0 11.7 Twenty-Six Week Period Ended December 29, 2021 $ 1,595.8 $ 206.4 $ 1,802.2 (1) We acquired 23 Chili’s restaurants on September 2, 2021 and 37 Chili’s restaurants on October 31, 2021 from two franchisees. The revenues generated by these restaurants since the date of the acquisitions are included in Company sales for the thirteen and twenty-six week periods ended December 29, 2021. (2) Restaurant closures include the change in Company sales resulting from temporary closures longer than 14 consecutive days that occurred in the previous 18 months, partially offset by permanently closed locations. (3) Our franchisees generated sales of approximately $204.0 million and $419.3 million for the thirteen and twenty-six week periods ended December 29, 2021 compared to $187.7 million and $353.2 million in sales for the thirteen and twenty-six week periods ended December 23, 2020. 26 Table of Contents The table below presents the percentage change in comparable restaurant sales and restaurant capacity for the thirteen and twenty-six week periods ended December 29, 2021 compared to December 23, 2020: Percentage Change in the Thirteen Week Period Ended December 29, 2021 versus December 23, 2020 Comparable Restaurant Sales (1) Price Impact Mix-Shift Impact (2) Traffic Impact Restaurant Capacity (3) Company-owned 17.7 % 2.1 % 6.8 % 8.8 % 4.6 % Chili’s 12.1 % 2.4 % 3.4 % 6.3 % 4.9 % Maggiano’s 78.1 % (0.1) % 24.9 % 53.3 % 0.0 % Chili’s Franchise (4) 17.0 % U.S. 4.8 % International 27.7 % Chili’s Domestic (5) 11.5 % System-wide (6) 17.6 % Percentage Change in the Twenty-Six Week Period Ended December 29, 2021 versus December 23, 2020 Comparable Restaurant Sales (1) Price Impact Mix-Shift Impact (2) Traffic Impact Restaurant Capacity (3) Company-owned 17.4 % 1.5 % 6.1 % 9.8 % 3.0 % Chili’s 12.7 % 1.7 % 3.2 % 7.8 % 3.2 % Maggiano’s 71.0 % (0.2) % 24.6 % 46.6 % 0.0 % Chili’s Franchise (4) 20.2 % U.S. 12.5 % International 29.6 % Chili’s Domestic (5) 12.7 % System-wide (6) 17.7 % (1) Comparable Restaurant Sales include all restaurants that have been in operation for more than 18 months except acquired restaurants which are included after 12 months of ownership. Restaurants temporarily closed 14 days or more are excluded from Comparable Restaurant Sales. Percentage amounts are calculated based on the comparable periods year-over-year. (2) Mix-Shift is calculated as the year-over-year percentage change in Company sales resulting from the change in menu items ordered by guests. (3) Restaurant Capacity is measured by sales weeks and is calculated based on comparable periods year-over-year, including the effect of the acquisition of 23 Chili’s restaurants in the first quarter of fiscal 2022 and 37 Chili’s restaurants in the second quarter of fiscal 2022. (4) Chili’s franchise sales generated by franchisees are not included in Total revenues in the Consolidated Statements of Comprehensive Income (Unaudited); however, we generate royalty revenues and advertising fees based on franchisee revenues, where applicable. We believe presenting Chili’s franchise comparable restaurant sales provides investors relevant information regarding total brand performance. (5) Chili’s domestic Comparable Restaurant Sales percentages are derived from sales generated by Company-owned and franchise-operated Chili’s restaurants in the United States. (6) System-wide Comparable Restaurant Sales are derived from sales generated by Company-owned Chili’s and Maggiano’s restaurants and sales generated at franchise-operated Chili’s restaurants. 27 Table of Contents Costs and Expenses Thirteen Week Period Ended December 29, 2021 compared to December 23, 2020 The following is a summary of the changes in Costs and Expenses: Thirteen Week Periods Ended Favorable (Unfavorable) Variance December 29, 2021 December 23, 2020 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 252.8 27.9 % $ 198.9 26.7 % $ (53.9) (1.2) % Restaurant labor 315.4 34.9 % 255.8 34.3 % (59.6) (0.6) % Restaurant expenses 236.7 26.2 % 211.3 28.3 % (25.4) 2.1 % Depreciation and amortization 41.6 37.2 (4.4) General and administrative 33.1 30.0 (3.1) Other (gains) and charges 6.4 5.4 (1.0) Interest expenses 11.2 14.4 3.2 Other income, net (0.5) (0.5) — As a percentage of Company sales: • Food and beverage costs increased 1.2%, including 1.8% of higher meat, poultry and other commodity costs due to supply chain constraints and inflationary pressures, and 0.1% of unfavorable menu item mix, partially offset by 0.7% of increased menu pricing. • Restaurant labor increased 0.6%, including 1.7% of higher hourly labor expenses due to increased wage rates, training and overtime, 0.8% of higher manager expenses due to merit increases and manager training due to greater than normal manager turnover, partially offset by 1.8% of sales leverage and 0.1% of lower other labor expenses. • Restaurant expenses decreased 2.1%, including 2.9% of sales leverage and 0.6% of lower expenses related to delivery fees driven by the decline in off-premise sales, partially offset by 0.4% of higher utilities, 0.3% of higher workers’ compensation and general liability expenses resulting from unfavorable claims experience, 0.2% of higher supervision costs and 0.5% of higher other restaurant expenses. Depreciation and amortization increased $4.4 million as follows: Depreciation and Amortization Thirteen Week Period Ended December 23, 2020 $ 37.2 Change from: Additions for new and existing restaurant assets 5.0 Finance leases 1.8 Acquisition of Chili’s restaurants (1) 1.5 Corporate assets 0.4 Retirements and fully depreciated restaurant assets (4.5) Other 0.2 Thirteen Week Period Ended December 29, 2021 $ 41.6 (1) Represents the incremental depreciation and amortization of the assets and finance leases of the 60 Chili’s restaurants acquired in the first two quarters of fiscal 2022. 28 Table of Contents General and administrative expen ses increased $3.1 million as follows: General and Administrative Thirteen Week Period Ended December 23, 2020 $ 30.0 Change from: Performance-based compensation (1) (5.2) Defined contribution plan employer expenses (2) 2.7 Stock-based compensation 2.2 Payroll-related expenses 1.0 Professional fees 0.8 Travel and entertainment expenses 0.4 Other 1.2 Thirteen Week Period Ended December 29, 2021 $ 33.1 (1) Performance-based compensation decreased due to adjustment in the expected bonus payout for fiscal 2022 resulting from lower business performance metrics compared to the targets. (2) Defined contribution plan employer expenses increased due to the temporary suspension of employer matching contributions related to the Company’s 401(k) plan from May 2020 through December 2020. Employer matching contributions were reinstated beginning January 1, 2021. Other (gains) and charges consisted of the following (for further details, refer to Note 4 - Other Gains and Charges): Thirteen Week Periods Ended December 29, 2021 December 23, 2020 Lease contingencies $ 2.9 $ — Remodel-related costs 1.6 0.7 Acquisition-related costs, net 0.9 — Enterprise system implementation costs 0.3 — Restaurant closure charges 0.3 0.4 COVID-19 related charges (0.8) 1.0 Restaurant impairment charges — 2.5 Other 1.2 0.8 $ 6.4 $ 5.4 Interest expenses decreased $3.2 million due to lower interest rates and average borrowing balances on our revolving credit facility in fiscal 2022. 29 Table of Contents Twenty-Six Week Period Ended December 29, 2021 compared to December 23, 2020 The following is a summary of the changes in Costs and Expenses: Twenty-Six Week Periods Ended Favorable (Unfavorable) Variance December 29, 2021 December 23, 2020 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 487.1 27.6 % $ 392.4 26.6 % $ (94.7) (1.0) % Restaurant labor 620.3 35.2 % 503.8 34.2 % (116.5) (1.0) % Restaurant expenses 468.0 26.5 % 413.8 28.0 % (54.2) 1.5 % Depreciation and amortization 80.9 74.6 (6.3) General and administrative 69.6 60.5 (9.1) Other (gains) and charges 10.9 9.2 (1.7) Interest expenses 23.7 29.0 5.3 Other income, net (0.8) (0.9) (0.1) As a percentage of Company sales: • Food and beverage costs increased 1.0%, including 1.4% of higher poultry, meat and other commodity costs due to supply chain constraints and inflationary pressures and 0.1% of unfavorable menu item mix, partially offset by 0.5% of favorable menu pricing. • Restaurant labor increased 1.0%, including 2.0% of higher hourly restaurant labor costs primarily including wage rates, training and overtime and 0.9% of higher manager salaries and training resulting from merit increases and greater than normal manager turnover, partially offset by 1.9% of sales leverage. • Restaurant expenses decreased 1.5%, driven by 3.1% of sales leverage and 0.7% of lower delivery fees, partially offset by 0.8% of higher repairs and maintenance expenses, 0.4% of higher utilities expenses, 0.4% of higher advertising expenses, 0.2% of higher supervision costs and 0.5% of higher other restaurant expenses. Depreciation and amortization increased $6.3 million as follows: Depreciation and Amortization Twenty-Six Week Period Ended December 23, 2020 $ 74.6 Change from: Additions for existing and new restaurant assets 8.9 Finance leases 3.3 Acquisition of Chili’s restaurants (1) 1.7 Corporate assets 0.8 Retirements and fully depreciated restaurant assets (8.6) Other 0.2 Twenty-Six Week Period Ended December 29, 2021 $ 80.9 (1) Represents the incremental depreciation and amortization of the assets and finance leases of the 60 Chili’s restaurants acquired in the first two quarters of fiscal 2022. 30 Table of Contents General and administrative expe nses increased $9.1 million as follows: General and Administrative Twenty-Six Week Period Ended December 23, 2020 $ 60.5 Change from: Defined contribution plan employer expenses (1) 5.6 Stock-based compensation 2.4 Professional fees 2.3 Payroll-related expenses 2.0 Travel and entertainment expenses 0.8 Performance-based compensation (2) (6.2) Other 2.2 Twenty-Six Week Period Ended December 29, 2021 $ 69.6 (1) Defined contribution plan employer expenses increased due to the temporary suspension of employer matching contributions related to the Company’s 401(k) plan from May 2020 through December 2020. Employer matching contributions were reinstated beginning January 1, 2021. (2) Performance-based compensation decreased due to adjustment in the expected bonus payout for fiscal 2022 resulting from lower business performance metrics compared to the targets. Other (gains) and charges consisted of the following (for further details, refer to Note 4 - Other Gains and Charges): Twenty-Six Week Periods Ended December 29, 2021 December 23, 2020 Remodel-related costs $ 3.1 $ 0.9 Lease contingencies 2.9 — Acquisition-related costs, net 0.9 — Enterprise system implementation costs 0.9 — Restaurant closure charges 0.5 1.9 COVID-19 related charges (0.5) 2.2 Restaurant impairment charges — 2.5 Other 3.1 1.7 $ 10.9 $ 9.2 Interest expenses decreased $5.3 million due to lower interest rates and average borrowing balances on our revolving credit facility in fiscal 2022. Income Taxes Thirteen Week Periods Ended Twenty-Six Week Periods Ended December 29, 2021 December 23, 2020 Favorable / (Unfavorable) December 29, 2021 December 23, 2020 Favorable / (Unfavorable) Variance Effective income tax rate 5.2 % (46.3) % (51.5) % 4.0 % (23.4) % (27.4) % The federal statutory tax rate was 21.0% for the thirteen and twenty-six week periods ended December 29, 2021 and December 23, 2020. The effective income tax rate in the thirteen and twenty-six week periods ended December 29, 2021 increased compared to the thirteen and twenty-six week periods ended December 23, 2020 primarily due to a reduced 31 Table of Contents favorable impact from the FICA tip tax credit and the excess tax benefits associated with stock-based compensation in the first quarter of fiscal 2022. Segment Results Chili’s Segment Thirteen Week Period Ended December 29, 2021 compared to December 23, 2020 Thirteen Week Periods Ended Favorable (Unfavorable) Variance Variance as percentage December 29, 2021 December 23, 2020 Company sales $ 791.9 $ 683.0 $ 108.9 15.9 % Royalties 8.6 7.6 1.0 13.2 % Franchise fees and other revenues 7.7 5.8 1.9 32.8 % Franchise and other revenues 16.3 13.4 2.9 21.6 % Total revenues $ 808.2 $ 696.4 $ 111.8 16.1 % Chili’s Total revenues increased by 16.1% primarily due to higher dining room guest sales and traffic, the acquisition of 60 Chili’s restaurants from two former franchisees and six new restaurant openings, partially offset by decreased off-premise sales. Refer to “Revenues” section above for further details about Chili’s revenues changes. The following is a summary of the changes in Chili’s operating costs and expenses: Thirteen Week Periods Ended Favorable (Unfavorable) Variance December 29, 2021 December 23, 2020 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 224.8 28.4 % $ 183.7 26.9 % $ (41.1) (1.5) % Restaurant labor 277.6 35.0 % 233.4 34.2 % (44.2) (0.8) % Restaurant expenses 205.0 25.9 % 188.7 27.6 % (16.3) 1.7 % Depreciation and amortization 35.4 30.8 (4.6) General and administrative 7.2 5.4 (1.8) Other (gains) and charges 2.2 4.4 2.2 As a percentage of Company sales • Chili’s Food and beverage costs increased 1.5%, including 1.9% of higher meat, poultry and other commodity costs due to supply chain constraints and inflationary pressures and 0.3% of unfavorable menu item mix, partially offset by 0.7% of increased menu pricing. • Chili’s Restaurant labor increased 0.8%, including 1.5% of restaurant labor costs including wage rates, training and overtime, 1.2% of higher manager salaries and training due to merit increases and greater than normal manager turnover, partially offset by 1.3% of sales leverage, 0.4% of lower manager bonus expenses due to lower operational performance metrics and 0.2% of lower other labor expenses. • Chili’s Restaurant expenses decreased 1.7%, including 2.7% of sales leverage and 0.6% of lower delivery fee expenses, partially offset by 0.6% of higher utilities expenses, 0.3% of higher workers’ compensation and general liability expenses resulting from unfavorable claims experience, 0.2% of higher rent expenses and 0.5% of higher other restaurant expenses. 32 Table of Contents Chili’s Depreciation and amortization increased $4.6 million as follows: Depreciation and Amortization Thirteen Week Period Ended December 23, 2020 $ 30.8 Change from: Additions for new and existing restaurant assets 4.8 Finance leases 1.7 Acquisition of Chili’s restaurants (1) 1.5 Retirements and fully depreciated restaurant assets (3.5) Other 0.1 Thirteen Week Period Ended December 29, 2021 $ 35.4 (1) Represents the incremental depreciation and amortization of the assets and finance leases of the 60 Chili’s restaurants acquired in the first two quarters of fiscal 2022. Chili’s General and administrative increased $1.8 million as follows: General and Administrative Thirteen Week Period Ended December 23, 2020 $ 5.4 Change from: Defined contribution plan employer expenses (1) 2.2 Stock-based compensation 0.2 Payroll-related expenses 0.1 Performance-based compensation (2) (1.4) Other 0.7 Thirteen Week Period Ended December 29, 2021 $ 7.2 (1) Defined contribution plan employer expenses increased due to the temporary suspension of employer matching contributions related to the Company’s 401(k) plan from May 2020 through December 2020. Employer matching contributions were reinstated beginning January 1, 2021. (2) Performance-based compensation decreased due to adjustment in the expected bonus payout for fiscal 2022 resulting from lower business performance metrics compared to the targets. Chili’s Other (gains) and charges consisted of the following (for further details, refer to Note 4 - Other Gains and Charges): Thirteen Week Periods Ended December 29, 2021 December 23, 2020 Remodel-related costs $ 1.6 $ 0.7 Acquisition of franchise restaurants-related costs 0.9 — Restaurant closure charges 0.3 0.3 Loss from natural disasters, net of (insurance recoveries) 0.2 0.2 COVID-19 related charges (0.8) 1.0 Restaurant impairment charges — 2.1 Other — 0.1 $ 2.2 $ 4.4 33 Table of Contents Twenty-Six Week Period Ended December 29, 2021 compared to December 23, 2020 Twenty-Six Week Periods Ended Favorable (Unfavorable) Variance Variance as percentage December 29, 2021 December 23, 2020 Company sales $ 1,565.2 $ 1,358.0 $ 207.2 15.3 % Royalties 17.6 14.2 3.4 23.9 % Franchise fees and other revenues 13.0 10.7 2.3 21.5 % Franchise and other revenues 30.6 24.9 5.7 22.9 % Total revenues $ 1,595.8 $ 1,382.9 $ 212.9 15.4 % Chili’s Total revenues increased 15.4% primarily due to higher dining room guest sales and traffic, the acquisition of 60 Chili’s restaurants from two former franchisees and six new restaurant openings, partially offset by decreased off-premise sales. Refer to “Revenues” section above for further details about Chili’s revenues changes. The following is a summary of the changes in Chili’s operating costs and expenses: Twenty-Six Week Periods Ended Favorable (Unfavorable) Variance December 29, 2021 December 23, 2020 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 438.2 28.0 % $ 364.5 26.8 % $ (73.7) (1.2) % Restaurant labor 551.1 35.2 % 461.6 34.0 % (89.5) (1.2) % Restaurant expenses 409.6 26.2 % 370.1 27.3 % (39.5) 1.1 % Depreciation and amortization 68.4 61.4 (7.0) General and administrative 15.2 10.8 (4.4) Other (gains) and charges 5.0 8.0 3.0 As a percentage of Company sales: • Chili’s Food and beverage costs increased 1.2%, including 1.5% of higher poultry, meat and other commodity costs resulting from supply chain constraints and inflationary pressures and 0.2% of unfavorable menu item mix, partially offset by 0.5% of increased menu pricing. • Chili’s Restaurant labor increased 1.2%, including 2.0% of higher restaurant hourly labor costs primarily including wage rates, training and overtime and 0.8% of higher manager salaries and training due to merit increases and greater than normal manager turnover, partially offset by 1.4% of sales leverage and 0.2% of lower manager bonus expenses due to lower operational performance metrics. • Chili’s Restaurant expenses decreased 1.1%, including 2.4% of sales leverage and 0.6% of lower delivery fee expenses, partially offset by 0.8% of higher repairs and maintenance expenses, 0.4% of higher utilities expenses, 0.3% of higher workers’ compensation and general liability expenses resulting from unfavorable claims experience and 0.4% of higher other restaurant expenses. 34 Table of Contents Chili’s Depreciation and amortization increased $7.0 million as follows: Depreciation and Amortization Twenty-Six Week Period Ended December 23, 2020 $ 61.4 Change from: Additions for existing and new restaurant assets 8.6 Finance leases 3.1 Acquisition of Chili’s restaurants (1) 1.7 Retirements and fully depreciated restaurant assets (6.5) Other 0.1 Twenty-Six Week Period Ended December 29, 2021 $ 68.4 (1) Represents the incremental depreciation and amortization of the assets and finance leases of the 60 Chili’s restaurants acquired in the first two quarters of fiscal 2022. Chili’s General and administrative increased $4.4 million as follows: General and Administrative Twenty-Six Week Period Ended December 23, 2020 $ 10.8 Change from: Defined contribution plan employer expenses (1) 4.3 Stock-based compensation 0.5 Travel and entertainment expenses 0.4 Professional fees 0.2 Payroll-related expenses 0.1 Performance-based compensation (2) (1.7) Other 0.6 Twenty-Six Week Period Ended December 29, 2021 $ 15.2 (1) Defined contribution plan employer expenses increased due to the temporary suspension of employer matching contributions related to the Company’s 401(k) plan from May 2020 through December 2020. Employer matching contributions were reinstated beginning January 1, 2021. (2) Performance-based compensation decreased due to adjustment in the expected bonus payout for fiscal 2022 resulting from lower business performance metrics compared to the targets. 35 Table of Contents Maggiano’s Segment Thirteen Week Period Ended December 29, 2021 compared to December 23, 2020 Thirteen Week Periods Ended Favorable (Unfavorable) Variance Variance as a percentage December 29, 2021 December 23, 2020 Company sales $ 112.6 $ 63.2 $ 49.4 78.2 % Royalties 0.1 0.1 0.0 — % Franchise fees and other revenues 4.9 1.0 3.9 390.0 % Franchise and other revenues 5.0 1.1 3.9 354.5 % Total revenues $ 117.6 $ 64.3 $ 53.3 82.9 % Maggiano’s Total revenues increased 82.9% primarily due to higher dining and banquet room sales and traffic. Refer to “Revenues” section above for further details about Maggiano’s revenues changes. The following is a summary of the changes in Maggiano’s operating costs and expenses: Thirteen Week Periods Ended Favorable (Unfavorable) Variance December 29, 2021 December 23, 2020 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 28.0 24.9 % $ 15.2 24.1 % $ (12.8) (0.8) % Restaurant labor 37.8 33.5 % 22.4 35.4 % (15.4) 1.9 % Restaurant expenses 31.5 28.0 % 22.1 35.0 % (9.4) 7.0 % Depreciation and amortization 3.4 3.4 — General and administrative 1.9 1.3 (0.6) Other (gains) and charges — 0.8 0.8 As a percentage of Company sales: • Maggiano’s Food and beverage costs increased 0.8%, including 1.1% of higher seafood, meat and produce commodity costs resulting from supply chain constraints and inflationary pressures, partially offset by 0.2% of favorable menu item mix and 0.1% of increased menu pricing. • Maggiano’s Restaurant labor decreased 1.9%, including 6.9% of sales leverage and 0.7% of lower other labor expense, partially offset by 2.3% of higher restaurant hourly labor costs primarily including wage rates, training and overtime, 1.9% of higher manager bonus expenses and 1.5% of higher manager salaries and training. • Maggiano’s Restaurant expenses decreased 7.0%, driven by 12.9% of sales leverage, partially offset by higher expenses including 1.6% of supervision expenses, 1.3% of repairs and maintenance expenses, 1.2% of advertising expenses, 0.8% of utilities, 0.5% of delivery fees and supplies and 0.5% of other restaurant expenses. 36 Table of Contents Twenty-Six Week Period Ended December 29, 2021 compared to December 23, 2020 Twenty-Six Week Periods Ended Favorable (Unfavorable) Variance Variance as a percentage December 29, 2021 December 23, 2020 Company sales $ 198.9 $ 116.4 $ 82.5 70.9 % Royalties 0.2 0.1 0.1 100.0 % Franchise fees and other revenues 7.3 1.4 5.9 421.4 % Franchise and other revenues 7.5 1.5 6.0 400.0 % Total revenues $ 206.4 $ 117.9 $ 88.5 75.1 % Maggiano’s Total revenues increased 75.1% primarily due to higher dining and banquet room sales and traffic. Refer to “Revenues” section above for further details about Maggiano’s revenues changes. The following is a summary of the changes in Maggiano’s operating costs and expenses: Twenty-Six Week Periods Ended Favorable (Unfavorable) Variance December 29, 2021 December 23, 2020 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 48.9 24.6 % $ 27.9 24.0 % $ (21.0) (0.6) % Restaurant labor 69.2 34.8 % 42.2 36.2 % (27.0) 1.4 % Restaurant expenses 58.1 29.2 % 42.9 36.9 % (15.2) 7.7 % Depreciation and amortization 6.8 7.0 0.2 General and administrative 3.9 2.6 (1.3) Other (gains) and charges 0.2 0.9 0.7 As a percentage of Company sales: • Maggiano’s Food and beverage costs increased 0.6%, including 0.7% of higher seafood and other commodity costs resulting from supply chain constraints and inflationary pressures, partially offset by 0.1% of increased menu pricing. • Maggiano’s Restaurant labor decreased 1.4%, including 6.7% of sales leverage and 0.3% of lower other labor expenses, partially offset by 2.8% of higher restaurant hourly labor costs primarily including wage rates, training and overtime, 1.5% of higher manager bonus expenses and 1.3% of higher manager salaries and training. • Maggiano’s Restaurant expenses decreased 7.7%, driven by 12.8% of sales leverage, partially offset by higher expenses including 1.7% of repairs and maintenance expenses, 1.4% of supervision expenses, 1.2% of higher advertising expenses and 0.8% of other restaurant expenses. Liquidity and Capital Resources COVID-19 Impact on Liquidity Cash flows generated from operating activities are our principal source of liquidity, which we use to finance capital expenditures, such as remodels, maintaining existing restaurants and constructing new restaurants, to pay dividends and to repurchase shares of our common stock when authorized. Our strategic decision to enhance our off-premise business has enabled us to conveniently serve a significantly higher volume of off-premise guests during this pandemic compared to other industry competitors. At the outset of the COVID-19 pandemic in fiscal 2020 and into early fiscal 2021, we took proactive precautionary measures to preserve liquidity, reduce costs and pause non-critical projects that did not significantly impact our current operations. In the second half of fiscal 2021, our operational results and liquidity returned to pre-pandemic levels. Beginning in the first quarter of fiscal 2022, we took or plan to take the following actions: 37 Table of Contents • Revised our revolving credit facility during the first quarter of fiscal 2022 to extend the maturity date and provide additional flexibility; • Resumed the Chili’s and Maggiano’s remodel program and construction of new restaurants; • Selectively increased marketing spend; • Reinstated the share repurchase program; and • Repaid the first installment of $27.2 million of payroll taxes deferred in accordance with the CARES Act in the second quarter of fiscal 2022 and will repay the remaining $27.2 million that is due on December 31, 2022. Cash Flows Cash Flows from Operating Activities Twenty-Six Week Periods Ended Favorable (Unfavorable) Variance December 29, 2021 December 23, 2020 Net cash provided by operating activities $ 107.4 $ 130.0 $ (22.6) Net cash provided by operating activities decreased primarily due to the repayment of the first installment of $27.2 million of payroll taxes that were previously deferred under the CARES Act, as well as an increase in payments of performance based compensation and bonuses in the current year, partially offset by improved operating performance in the first two quarters of fiscal 2022 compared to the prior year and the timing of operational receipts and payments. Cash Flows from Investing Activities Twenty-Six Week Periods Ended Favorable (Unfavorable) Variance December 29, 2021 December 23, 2020 Cash flows from investing activities Payments for property and equipment $ (74.1) $ (37.1) $ (37.0) Payments for franchise restaurant acquisitions (104.5) — (104.5) Proceeds from sale leaseback transactions, net of related expenses 20.5 — 20.5 Proceeds from sale of assets 0.0 1.3 (1.3) Proceeds from note receivable — 1.3 (1.3) Net cash used in investing activities $ (158.1) $ (34.5) $ (123.6) Net cash used in investing activities increased primarily due to $104.5 million of cash consideration paid for the purchase of 60 Chili’s restaurants from two franchisees, partially offset by proceeds of $20.5 million received from the sale leaseback transactions on six of the acquired restaurants. Additionally, capital expenditures increased in fiscal 2022 primarily for equipment purchases and an increase in the pace of the Chili’s remodel initiative. 38 Table of Contents Cash Flows from Financing Activities Twenty-Six Week Periods Ended Favorable (Unfavorable) Variance December 29, 2021 December 23, 2020 Cash flows from financing activities Borrowings on revolving credit facility $ 487.5 $ 28.4 $ 459.1 Payments on revolving credit facility (355.0) (95.0) (260.0) Purchases of treasury stock (74.7) (3.9) (70.8) Payments on long-term debt (11.7) (9.8) (1.9) Payments for debt issuance costs (3.1) (2.2) (0.9) Payments of dividends (1.0) (1.3) 0.3 Proceeds from issuance of treasury stock 0.4 8.5 (8.1) Net cash provided by (used in) financing activities $ 42.4 $ (75.3) $ 117.7 Net cash provided by financing activities increased primarily due to $132.5 million of net borrowing activity in fiscal 2022 compared to $66.6 million of net repayment activity in fiscal 2021 on the revolving credit facility, partially offset by an increase in share repurchases following the reinstatement of the share repurchase program in August 2021. Revolving Credit Facility On August 18, 2021, we revised our existing $1.0 billion revolving credit facility to an $800.0 million revolving credit facility. Net borrowings of $132.5 million were drawn during the twenty-six week period ended December 29, 2021 on the revolving credit facility. As of December 29, 2021, $496.2 million of credit was available under the new revolving credit facility. The $800.0 million revolving credit facility matures on August 18, 2026 and bears interest of LIBOR plus an applicable margin of 1.500% to 2.250% and an undrawn commitment fee of 0.250% to 0.350%, both based on a function of our debt-to-cash-flow ratio. As of December 29, 2021, our interest rate was 1.875% consisting of LIBOR of 0.125% plus the applicable margin of 1.750%. In the twenty-six week period ended December 29, 2021, we incurred and capitalized $3.1 million of debt issuance costs associated with the new revolver, which are included in Other assets in the Consolidated Balance Sheets (Unaudited). As of December 29, 2021, we were in compliance with our covenants pursuant to the $800.0 million revolving credit facility and under the terms of the indentures governing our 3.875% notes and 5.000% notes. Refer to Note 10 - Debt for further information about our notes and revolving credit facility. Share Repurchase Program Our share repurchase program is used to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. We evaluate potential share repurchases under our plan based on several factors, including our cash position, share price, operational liquidity, proceeds from divestitures, borrowings and planned investment and financing needs. Repurchased shares are reflected as an increase in Treasury stock within Shareholders’ deficit in the Consolidated Balance Sheets (Unaudited). In the fourth quarter of fiscal 2020, our share repurchase program was suspended in response to the business downturn caused by the COVID-19 pandemic. In August 2021, our Board of Directors reinstated the share repurchase program, allowing for a total available repurchase authority of $300.0 million. In the twenty-six week period ended December 29, 2021, we repurchased 1.6 million shares of our common stock for $74.7 million, including 1.5 million shares purchased as part of our share repurchase program and 0.1 million shares purchased from team members to satisfy tax withholding obligations on the vesting of restricted shares. As of December 29, 2021, approximately $230.0 million was available under our share repurchase authorizations. 39 Table of Contents Dividend Program In the fourth quarter of fiscal 2020, our Board of Directors voted to suspend the quarterly cash dividend in response to the liquidity needs created by the COVID-19 pandemic. In the twenty-six week periods ended December 29, 2021 and December 23, 2020, dividends paid were solely related to the previously accrued dividends for restricted share awards that were granted prior to the suspension and vested in the period. Restricted share award dividends are accrued in Other accrued liabilities for the current portion to vest within 12 months, and Other liabilities for the portion that will vest after one year. Cash Flow Outlook We believe that our various sources of capital, including future cash flow from operating activities and availability under our existing credit facility are adequate to finance operations as well as the repayment of current debt obligations within the next year. We continue to serve guests at all of our locations through our dining rooms and off-premise offerings, and have resumed normal business operations in accordance with state and local mandates. We are not aware of any other event or trend that would potentially materially affect our liquidity. In the event such a trend develops, we believe that there are sufficient funds available under our credit facility and from our internal cash generating capabilities to adequately manage our ongoing business. Off-Balance Sheet Arrangements An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which the Company has: (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us. We have entered into certain pre-commencement leases as disclosed in Note 9 - Leases and have obligations for guarantees on certain lease agreements and letters of credit as disclosed in Note 14 - Contingencies, in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I, Item 1 of this Form 10-Q report. Other than these items, we do not have any off-balance sheet arrangements. Recent Accounting Pronouncements The impact of recent accounting pronouncements can be found at Note 1 - Basis of Presentation in the Notes to Consolidated Financial Statements (Unaudited) set forth in Part I, Item 1 of this Form 10-Q report. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in our quantitative and qualitative market risks set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021.