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 week periods ended September 27, 2023 and September 28, 2022, 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 The Company is 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 of September 27, 2023, we owned, operated or franchised 1,651 restaurants, consisting of 1,181 Company-owned restaurants and 470 franchised restaurants, located in the United States, 29 other countries and two United States territories. Our restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units. External Impacts to Our Operating Environment Our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and food and beverage costs during fiscal 2023 and to a lesser extent during the first quarter of fiscal 2024. Operations Strategy We are committed to strategies and a Company culture that we believe will grow sales, increase profits, bring back guests and engage team members. Our strategies and culture are intended to strengthen our position in casual dining and grow our core business over time. Our primary brand strategy is to make our guests feel special through great food and quality service so that they return to our restaurants. Chili’s - Our strategy is to make everyone feel special through a fun atmosphere, delicious food and drinks and our Chili’s hospitality. We are making work at Chili’s easier, more fun and more rewarding for our team members so that they are more engaged and provide a better experience for our guests. One way we have done this is by eliminating tasks that were unnecessary and did not add value to our guests. We have also simplified our menu to focus on core equities we believe can help grow sales—burgers, fajitas, Chicken Crispers ® , and margaritas, as well as other classic favorites. Our team members can make our core menu items better and more consistently because we have fewer menu items that need to be perfected. We have a flexible platform of value offerings at both lunch and dinner that we believe is compelling to our guests. Our “3 for Me” platform, a flexible value bundle provides our guests an unbeatable everyday value, while allowing us to be more flexible in terms of pricing, in light of the inflationary challenges. Additionally, we have continued our Margarita of the Month promotion that features a premium-liquor margarita every month at an every-day value price. Most of our value propositions are available for guests to enjoy in our dining rooms or off-premise. In dining rooms, we use tabletop devices to engage our guests at the table. These devices provide functionality for guests to pay at the table, order or re-order, engage in digital entertainment, to provide guest feedback and interact 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. Our servers use handheld tablets to place orders for our guests, increasing the efficiency of our team members and allowing orders to reach our kitchen quicker for better service to our guests. Third-party delivery orders for our restaurants are sent directly into our point of sale system, creating efficiencies and a system that allows us to better serve our guests. The operating results for our virtual brand, It’s Just Wings ® , are included in the results of our Chili’s brand, based on the restaurants that prepared and processed the food orders. 17 Table of Contents Maggiano’s - At Maggiano’s, we are focused making our guests feel special. This warm and generous hospitality creates an environment where guests come together to celebrate birthdays, weddings and many more special occasions. While our dining rooms support the majority of our business, we have focused on increasing our carry-out and delivery business in recent years, including through partnerships with delivery service providers that have made our restaurants more accessible to guests and helped create an additional significant revenue channel. Our restaurants also have banquet rooms to host large party events and we have a begun to renovate these banquet rooms in certain restaurants to provide a better experience for this profitable revenue channel, particularly during the holiday season in the second and third quarters of the fiscal year. Franchise Partnerships - Our franchisees continue to grow our brands around the world, opening 3 restaurants for the thirteen week period ended September 27, 2023. We plan to strategically pursue expansion of Chili’s internationally through development agreements with new and existing franchise partners. Company Development - The following table details the number of restaurant openings during the thirteen week periods ended September 27, 2023 and September 28, 2022, respectively, total full year projected openings in fiscal 2024 and the total restaurants open at each period end: Openings During the Full Year Projected Openings Thirteen Week Periods Ended Total Open Restaurants at September 27, 2023 September 28, 2022 Fiscal 2024 September 27, 2023 September 28, 2022 Company-owned restaurants Chili’s domestic — — 11 1,126 1,126 Chili’s international — — — 5 5 Maggiano’s domestic — — — 50 51 Total Company-owned — — 11 1,181 1,182 Franchise restaurants Chili’s domestic — 1 0-1 100 102 Chili’s international 3 2 19-24 368 359 Maggiano’s domestic — — — 2 2 Total franchise 3 3 19-25 470 463 Total restaurants Chili’s domestic — 1 11-12 1,226 1,228 Chili’s international 3 2 19-24 373 364 Maggiano’s domestic — — — 52 53 Total 3 3 30-36 1,651 1,645 At September 27, 2023, we own property for 49 of the 1,181 Company-owned restaurants and one closed restaurant and one future restaurant. The net book values associated with these restaurants included land of $42.4 million and buildings of $12.1 million. Revenues Thirteen Week Period Ended September 27, 2023 compared to September 28, 2022 Revenues are presented in two separate captions in the Consolidated Statements of Comprehensive Income (Loss) (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 food and beverage sales, net of discounts, Maggiano’s banquet service charge income, gift card breakage, delivery, digital entertainment revenues, merchandise income and are net of gift card discounts from third-party gift card sales. 18 Table of Contents • Franchise revenues include royalties, franchise advertising fees, franchise and development fees and gift card equalization. The following is a summary of the change in Total revenues: Total Revenues Chili’s Maggiano’s Total Revenues Thirteen Week Period Ended September 28, 2022 $ 849.9 $ 105.6 $ 955.5 Change from: Comparable restaurant sales 50.7 2.6 53.3 Restaurant acquisitions 0.6 — 0.6 Restaurant openings 13.1 — 13.1 Gift card discounts (0.1) — (0.1) Gift card breakage 0.2 — 0.2 Digital entertainment revenues 0.1 — 0.1 Delivery service fee income (0.3) — (0.3) Restaurant closures (7.1) (3.9) (11.0) Company sales 57.2 (1.3) 55.9 Franchise revenues (1) 1.0 0.1 1.1 Thirteen Week Period Ended September 27, 2023 $ 908.1 $ 104.4 $ 1,012.5 (1) Franchise revenues increased in the thirteen week period ended September 27, 2023 compared to September 28, 2022 primarily because of higher franchise advertising fees. Our Chili’s and Maggiano’s franchisees generated sales of approximately $202.8 million and $2.4 million respectively for the thirteen week period ended September 27, 2023 compared to $203.3 million and $2.4 million respectively in sales for the thirteen week period ended September 28, 2022. The table below presents the percentage change in comparable restaurant sales and restaurant capacity for the thirteen week period ended September 27, 2023 compared to September 28, 2022: Percentage Change in the Thirteen Week Period Ended September 27, 2023 versus September 28, 2022 Comparable Restaurant Sales (1) Price Impact Mix-Shift Impact (2) Traffic Impact Restaurant Capacity (3) Company-owned 5.8 % 8.9 % 2.7 % (5.8) % (0.3) % Chili’s 6.1 % 8.8 % 3.1 % (5.8) % (0.2) % Maggiano’s 2.6 % 9.5 % (1.2) % (5.7) % (3.8) % Franchise (4) 4.0 % U.S. 5.0 % International 3.4 % Chili’s domestic (5) 6.0 % System-wide (6) 5.5 % (1) Comparable Restaurant Sales include all restaurants that have been in operation for more than 18 full months. 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. 19 Table of Contents (4) Chili’s and Maggiano’s franchise sales generated by franchisees are not included in Total revenues in the Consolidated Statements of Comprehensive Income (Loss) (Unaudited); however, we generate royalty revenues and advertising fees based on franchisee revenues, where applicable. We believe presenting 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 Chili’s and Maggiano’s Company-owned and franchise-operated restaurants. Costs and Expenses Thirteen Week Period Ended September 27, 2023 compared to September 28, 2022 The following is a summary of the changes in Costs and Expenses: Thirteen Week Periods Ended Favorable (Unfavorable) Variance September 27, 2023 September 28, 2022 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 258.8 25.8 % $ 289.5 30.7 % $ 30.7 4.9 % Restaurant labor 348.1 34.8 % 330.6 34.9 % (17.5) 0.1 % Restaurant expenses 290.8 29.0 % 268.8 28.4 % (22.0) (0.6) % Depreciation and amortization 41.9 41.9 — General and administrative 42.4 39.5 (2.9) Other (gains) and charges 6.3 5.0 (1.3) Interest expenses 17.0 12.3 (4.7) Other income, net — (0.4) (0.4) As a percentage of Company sales: • Food and beverage costs were favorable 4.9%, due to 2.5% from increased menu pricing, 1.4% of favorable menu item mix, and 1.0% of favorable commodity costs driven primarily by lower poultry costs, partially offset by higher beverages costs. • Restaurant labor was favorable 0.1%, due to 1.8% of sales leverage and 0.2% of lower manager training, partially offset by 1.2% of higher hourly labor expenses due to increased staffing levels and wage rates, 0.5% of higher manager salaries, and 0.2% of higher manager bonus. • Restaurant expenses were unfavorable 0.6%, due to 2.0% of higher advertising, 0.5% of higher repairs and maintenance, 0.4% of higher workers’ compensation and general liability insurance, and 0.2% of higher other restaurant expenses, partially offset by 1.3% of sales leverage and 1.2% of lower delivery fees and to-go supplies. 20 Table of Contents Depreciation and amortization remained unchanged as follows: Depreciation and Amortization Thirteen Week Period Ended September 28, 2022 $ 41.9 Change from: Additions for new and existing restaurant assets 6.5 Corporate assets 0.6 Finance leases (1.9) Retirements and fully depreciated restaurant assets (5.1) Other (0.1) Thirteen Week Period Ended September 27, 2023 $ 41.9 General and administrative expen ses increased $2.9 million as follows: General and Administrative Thirteen Week Period Ended September 28, 2022 $ 39.5 Change from: Performance-based compensation 1.3 Stock-based compensation 0.9 Defined contribution plan employer expenses and other benefits 0.3 Other 0.4 Thirteen Week Period Ended September 27, 2023 $ 42.4 Other (gains) and charges consisted of the following (for further details, refer to Note 11 - Other Gains and Charges): Thirteen Week Periods Ended September 27, 2023 September 28, 2022 Litigation & claims, net $ 2.2 $ 0.5 Enterprise system implementation costs 2.0 1.0 Restaurant closure asset write-offs and charges 0.6 1.5 Lease contingencies 0.5 — Remodel-related asset write-offs 0.2 0.8 Other 0.8 1.2 $ 6.3 $ 5.0 Interest expenses increased $4.7 million due to higher interest rates on the 8.250% notes and revolving credit facility slightly offset by lower long-term debt outstanding. Income Taxes Thirteen Week Periods Ended September 27, 2023 September 28, 2022 Effective income tax rate — % 4.7 % The federal statutory tax rate was 21.0% for the thirteen week periods ended September 27, 2023 and September 28, 2022. 21 Table of Contents The effective income tax rate in the thirteen week period ended September 27, 2023 decreased compared to the thirteen week period ended September 28, 2022. The decrease is primarily due to a less favorable impact from the FICA tip tax credit against higher Income before income taxes. Segment Results Chili’s Segment Thirteen Week Period Ended September 27, 2023 compared to September 28, 2022 Thirteen Week Periods Ended Favorable (Unfavorable) Variance Variance as percentage September 27, 2023 September 28, 2022 Company sales $ 897.8 $ 840.6 $ 57.2 6.8 % Franchise revenues 10.3 9.3 1.0 10.8 % Total revenues $ 908.1 $ 849.9 $ 58.2 6.8 % Chili’s Total revenues increased by 6.8% primarily due to menu price increases and favorable menu item mix, partially offset by lower traffic. 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 September 27, 2023 September 28, 2022 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 233.1 26.0 % $ 260.9 31.0 % $ 27.8 5.0 % Restaurant labor 311.0 34.6 % 294.4 35.0 % (16.6) 0.4 % Restaurant expenses 258.5 28.8 % 236.9 28.2 % (21.6) (0.6) % Depreciation and amortization 36.2 36.0 (0.2) General and administrative 10.0 9.5 (0.5) Other (gains) and charges 3.7 3.0 (0.7) As a percentage of Company sales: • Chili’s Food and beverage costs were favorable 5.0%, due to 2.7% from increased menu pricing, 1.3% of favorable menu item mix, and 1.0% of favorable commodity costs driven primarily by lower poultry costs, partially offset by higher beverages costs. • Chili’s Restaurant labor was favorable 0.4%, due to 2.0% of sales leverage and 0.2% of lower manager training, partially offset by 1.3% of higher hourly labor driven by both increased staffing levels and wage rates and 0.5% of increased manager salary. • Chili’s Restaurant expenses were unfavorable 0.6%, due to 2.2% of higher advertising, 0.5% of higher repairs and maintenance, 0.4% of higher workers’ compensation and general liability insurance, 0.3% of higher rent, and 0.1% of higher other restaurant expenses, partially offset by 1.5% of sales leverage and 1.4% lower delivery fees and to-go supplies. 22 Table of Contents Chili’s Depreciation and amortization increased $0.2 million as follows: Depreciation and Amortization Thirteen Week Period Ended September 28, 2022 $ 36.0 Change from: Additions for new and existing restaurant assets 5.8 Finance leases (1.8) Retirements and fully depreciated restaurant assets (3.9) Other 0.1 Thirteen Week Period Ended September 27, 2023 $ 36.2 Chili’s General and administrative increased $0.5 million as follows: General and Administrative Thirteen Week Period Ended September 28, 2022 $ 9.5 Change from: Defined contribution plan employer expenses and other benefits 0.5 Performance-based compensation 0.3 Recruiting (0.3) Thirteen Week Period Ended September 27, 2023 $ 10.0 Chili’s Other (gains) and charges consisted of the following (for further details, refer to Note 11 - Other Gains and Charges): Thirteen Week Periods Ended September 27, 2023 September 28, 2022 Litigation & claims, net $ 2.2 $ 0.3 Restaurant closure asset write-offs and charges 0.6 1.1 Remodel-related asset write-offs — 0.8 Other 0.9 0.8 $ 3.7 $ 3.0 23 Table of Contents Maggiano’s Segment Thirteen Week Period Ended September 27, 2023 compared to September 28, 2022 Thirteen Week Periods Ended Favorable (Unfavorable) Variance Variance as a percentage September 27, 2023 September 28, 2022 Company sales $ 104.2 $ 105.5 $ (1.3) (1.2) % Franchise revenues 0.2 0.1 0.1 100.0 % Total revenues $ 104.4 $ 105.6 $ (1.2) (1.1) % Maggiano’s Total revenues decreased 1.1% primarily due to restaurant closures in fiscal 2023, offset slightly by favorable comparable restaurant sales due to increased menu pricing, partially offset by lower traffic and unfavorable menu item mix. 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 September 27, 2023 September 28, 2022 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 25.7 24.7 % $ 28.6 27.1 % $ 2.9 2.4 % Restaurant labor 37.1 35.6 % 36.2 34.3 % (0.9) (1.3) % Restaurant expenses 32.2 30.9 % 31.7 30.1 % (0.5) (0.8) % Depreciation and amortization 3.2 3.2 — General and administrative 2.4 2.5 0.1 Other (gains) and charges 0.2 0.5 0.3 As a percentage of Company sales: • Maggiano’s Food and beverage costs were favorable 2.4%, due to 1.9% from increased menu pricing and 1.1% of favorable commodity costs driven primarily by lower poultry and dairy costs, partially offset by higher bread and beverages costs, and 0.6% of unfavorable menu item mix. • Maggiano’s Restaurant labor was unfavorable 1.3%, due to 0.4% of sales deleverage, 0.4% of higher hourly labor costs, 0.3% of higher manager bonus, and 0.2% of higher manager salaries. • Maggiano’s Restaurant expenses were unfavorable 0.8%, due to 0.7% higher supervision, 0.6% of higher repairs and maintenance, 0.3% of sales deleverage, 0.3% of higher workers’ compensation and general liability insurance, partially offset by 0.3% of lower delivery fees and to-go supplies, 0.3% of lower utilities, and 0.5% of lower other restaurant expenses. 24 Table of Contents Liquidity and Capital Resources Cash Flows Cash Flows from Operating Activities Thirteen Week Periods Ended Favorable (Unfavorable) Variance September 27, 2023 September 28, 2022 Net cash provided by operating activities $ 59.1 $ 24.6 $ 34.5 Net cash provided by operating activities increased due to an increase in operating income and the timing of operational receipts and payments, partially offset by an increase in payments of performance-based compensation in the current year. Cash Flows from Investing Activities Thirteen Week Periods Ended Favorable (Unfavorable) Variance September 27, 2023 September 28, 2022 Net cash used in investing activities $ (45.6) $ (45.6) $ — Net cash used in investing activities was flat compared to the prior year. Increased Chili’s capital maintenance and spend on Maggiano’s remodels were offset by decreased spend on Chili’s remodels and new restaurant construction. Cash Flows from Financing Activities Thirteen Week Periods Ended Favorable (Unfavorable) Variance September 27, 2023 September 28, 2022 Net cash (used in) provided by financing activities $ (14.2) $ 27.0 $ (41.2) Net cash (used in) provided by financing activities increased primarily due to an increase in share repurchases in fiscal 2024 of $22.7 million and a decrease of $21.0 million in net borrowing activity on the revolving credit facility in fiscal 2024 compared to fiscal 2023. Debt Net borrowings of $14.0 million were drawn during the thirteen week period ended September 27, 2023 on the revolving credit facility. As of September 27, 2023, $724.7 million of credit was available under the revolving credit facility. The $900.0 million revolving credit facility matures on August 18, 2026 and bears interest of SOFR plus an applicable margin of 1.50% to 2.25% and an undrawn commitment fee of 0.25% to 0.35%, both based on a function of our debt-to-cash-flow ratio. As of September 27, 2023, our interest rate was 7.17% consisting of SOFR of 5.32% plus the applicable margin and spread adjustment of 1.85%. As of September 27, 2023, we were in compliance with our covenants pursuant to the $900.0 million revolving credit facility and under the terms of the indentures governing our 5.000% and 8.250% notes. We expect to remain in compliance with our covenants during the remainder of fiscal 2024. We intend to refinance our 5.000% notes, which will mature in October 2024, through our existing revolving credit facility. Refer to Note 6 - Debt for further information about our notes and revolving credit facility. 25 Table of Contents Share Repurchase Program Our Board of Directors approved a $300.0 million share repurchase program during fiscal 2022. 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. In the thirteen week period ended September 27, 2023, we repurchased 0.8 million shares of our common stock for $24.7 million, including 0.7 million shares purchased for $21.0 million 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. These withheld shares of common stock are not considered common stock repurchases under our authorized common stock repurchase plan. As of September 27, 2023, approximately $183.0 million of share repurchase authorization remains under the current share repurchase program. Cash Flow Outlook Cash flow from operations typically provides the company with a significant source of liquidity. Additionally, during fiscal 2023, we increased the capacity under our revolving credit facility by $100.0 million and issued new $350.0 million senior notes that mature in 2030. Based on the current level of operations, we believe that our current cash and cash equivalents, coupled with cash generated from operations and availability under our existing revolving credit facility will be adequate to meet our capital expenditure and working capital needs for at least the next twelve months. We continue to monitor the macro environment and will adjust our overall approach to capital allocation, including share repurchases, as events and macroeconomic trends unfold. Critical Accounting Estimates The preparation of the financial statements in conformity with GAAP requires us to make estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ from these estimates. Our critical accounting estimates have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended June 28, 2023. 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.