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 25, 2024 and September 27, 2023, 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 own, develop, operate, and franchise the Chili’s ® Grill & Bar (“Chili’s”) and Maggiano’s Little Italy ® (“Maggiano’s”) restaurant brands. As of September 25, 2024 we owned, operated or franchised 1,625 restaurants, consisting of 1,170 Company-owned restaurants and 455 franchised restaurants, located in the United States, 28 other countries and two United States territories. Our restaurant brands, Chili’s and Maggiano’s, are both operating segments and reporting units. Operating Environment During the recent years, our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and food and beverage costs. Geopolitical and other macroeconomic events have led, and in the future may lead to, wage inflation, staffing challenges, product cost inflation and/or disruptions in the supply chain that impact our restaurants’ ability to obtain the products needed to support their operation. Such events could also negatively affect consumer spending potentially reducing guest traffic and/or reducing the average amount guests spend in our restaurants. 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 allows guests to enjoy a non-alcoholic drink, an appetizer and certain entrées starting at just $10.99. We believe our value offerings will continue to be an important traffic driver in the current economic circumstances and we will continue to highlight this value in our marketing efforts. We have increased menu pricing in other areas in light of the inflationary challenges and we have also improved menu offerings and merchandising to incentivize our guests to purchase higher priced items. In addition, Chili’s has focused on a seamless digital experience as our guests’ preferences and expectations around dining convenience have evolved in recent years. Investments in our technology and off-premise options have enabled us to provide a faster, more convenient dine-in experience and to offer more To-Go and delivery options for our guests. Our To-Go menu is available through the Chili’s mobile app, chilis.com, our delivery partners DoorDash, Uber Eats and Grubhub, Google Food Ordering or by calling the restaurant directly. Our It’s Just 18 Table of Contents Wings ® offering is available through the website, itsjustwings.com. The operating results for this virtual brand are included in the results of our Chili’s brand, based on the restaurants that prepared and processed the food orders. In dining rooms, we use tabletop devices with functionality for guests to pay at the table, 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 and allows us to communicate and advertise to our guests through email and text. 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. Maggiano’s - At Maggiano’s, we are focused on 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 also offer carry-out and delivery options through partnerships with delivery service providers that have made our restaurants more accessible to guests. Our restaurants also have banquet rooms to host large party events and we have 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 - During the thirteen week period ended September 25, 2024, there were 14 new franchise restaurant openings. 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 25, 2024 and September 27, 2023, respectively, total full year projected openings in fiscal 2025 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 25, 2024 September 27, 2023 Fiscal 2025 September 25, 2024 September 27, 2023 Company-owned restaurants Chili’s domestic 1 — 7 1,116 1,126 Chili’s international — — — 4 5 Maggiano’s domestic — — — 50 50 Total Company-owned 1 — 7 1,170 1,181 Franchise restaurants Chili’s domestic 2 — 2-4 99 100 Chili’s international 12 3 19-24 354 368 Maggiano’s domestic — — 1 2 2 Total franchise 14 3 22-29 455 470 Total restaurants Chili’s domestic 3 — 9-11 1,215 1,226 Chili’s international 12 3 19-24 358 373 Maggiano’s domestic — — 1 52 52 Total 15 3 29-36 1,625 1,651 At September 25, 2024, we own property for 50 of the 1,170 Company-owned restaurants and one closed restaurant. The net book values associated with these restaurants included land of $41.7 million and buildings of $13.5 million. Revenues Thirteen Week Period Ended September 25, 2024 compared to September 27, 2023 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: 19 Table of Contents • 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. • 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 27, 2023 $ 908.1 $ 104.4 $ 1,012.5 Change from: Comparable restaurant sales 123.9 4.4 128.3 Restaurant openings 8.4 — 8.4 Gift card discounts 0.1 — 0.1 Maggiano's banquet income — (0.2) (0.2) Gift card breakage (0.1) — (0.1) Digital entertainment revenues 0.3 — 0.3 Restaurant closures (11.5) — (11.5) Company sales 121.1 4.2 125.3 Franchise revenues (1) 1.2 — 1.2 Thirteen Week Period Ended September 25, 2024 $ 1,030.4 $ 108.6 $ 1,139.0 (1) Franchise revenues increased in the thirteen week periods ended September 25, 2024 compared to September 27, 2023 primarily due to higher royalties and franchise advertising revenues. Our Chili’s and Maggiano’s franchisees generated sales of approximately $225.7 million and $3.2 million respectively, for the thirteen week period ended September 25, 2024 compared to $202.8 million and $2.4 million respectively, for the thirteen week period ended September 27, 2023. The table below presents the percentage change in comparable restaurant sales and restaurant capacity for the thirteen week period ended September 25, 2024 compared to September 27, 2023: Percentage Change in the Thirteen Week Period Ended September 25, 2024 versus September 27, 2023 Comparable Restaurant Sales (1) Price Impact Mix-Shift Impact (2) Traffic Impact Restaurant Capacity (3) Company-owned 13.0 % 7.2 % 0.9 % 4.9 % (1.5) % Chili’s 14.1 % 6.8 % 0.8 % 6.5 % (1.6) % Maggiano’s 4.2 % 10.8 % 2.1 % (8.7) % — % Franchise (4) 6.8 % U.S. 12.3 % International 3.7 % Chili’s domestic (5) 13.9 % System-wide (6) 12.0 % (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. 20 Table of Contents (3) Restaurant Capacity is measured by sales weeks and is calculated based on comparable periods year-over-year. (4) 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 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 25, 2024 compared to September 27, 2023 The following is a summary of the changes in Costs and Expenses: Thirteen Week Periods Ended Favorable (Unfavorable) Variance September 25, 2024 September 27, 2023 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 284.3 25.2 % $ 258.8 25.8 % $ (25.5) 0.6 % Restaurant labor 377.4 33.5 % 348.1 34.8 % (29.3) 1.3 % Restaurant expenses 313.9 27.8 % 290.8 29.0 % (23.1) 1.2 % Depreciation and amortization 46.3 41.9 (4.4) General and administrative 51.8 42.4 (9.4) Other (gains) and charges 8.9 6.3 (2.6) Interest expenses 14.3 17.0 2.7 Other income, net (0.2) — 0.2 As a percentage of Company sales: • Food and beverage costs were favorable 0.6% due to 1.7% from menu pricing, partially offset by 0.6% of unfavorable commodity costs primarily driven by poultry and produce and 0.5% of unfavorable menu item mix. • Restaurant labor was favorable 1.3% due to 2.4% of sales leverage and 0.1% of lower other labor expenses, partially offset by 0.8% of higher hourly labor expenses driven by increased wage rates and staffing levels and 0.4% of higher manager salaries. • Restaurant expenses were favorable 1.2% due to 2.5% of sales leverage and 0.3% of lower delivery fees, partially offset by 1.3% of higher repairs and maintenance and 0.3% of higher other restaurant expenses. 21 Table of Contents Depreciation and amortization increased $4.4 million as follows: Depreciation and Amortization Thirteen Week Period Ended September 27, 2023 $ 41.9 Change from: Additions for new and existing restaurant assets 7.5 Finance leases 2.4 Corporate assets 0.8 Retirements and fully depreciated restaurant assets (6.1) Other (0.2) Thirteen Week Period Ended September 25, 2024 $ 46.3 General and administrative expenses increased $9.4 million as follows: General and Administrative Thirteen Week Period Ended September 27, 2023 $ 42.4 Change from: Performance-based compensation (1) 3.2 Payroll expenses 1.9 Stock-based compensation 1.4 Professional fees 1.4 Other 1.5 Thirteen Week Period Ended September 25, 2024 $ 51.8 (1) Performance-based compensation increased due to higher expected performance compared to target in the current year. Other (gains) and charges consisted of the following (for further details, refer to Note 11 - Other Gains and Charges): Thirteen Week Periods Ended September 25, 2024 September 27, 2023 Enterprise system implementation costs $ 4.4 $ 2.0 Litigation & claims, net 2.5 2.2 Restaurant closure asset write-offs and charges 0.7 0.6 Lease contingencies — 0.5 Other 1.3 1.0 $ 8.9 $ 6.3 Interest expenses decreased $2.7 million primarily due to a lower average revolver balance during the current year. 22 Table of Contents Income Taxes Thirteen Week Periods Ended September 25, 2024 September 27, 2023 Effective income tax rate 9.0 % — % The federal statutory tax rate was 21.0% for the thirteen week periods ended September 25, 2024 and September 27, 2023. The change in the effective income tax rate in the thirteen week period ended September 25, 2024 to the thirteen week period ended September 27, 2023 is primarily due to higher Income before income taxes and the resulting deleverage of the FICA tip tax credit. Segment Results Chili’s Segment Thirteen Week Period Ended September 25, 2024 compared to September 27, 2023 Thirteen Week Periods Ended Favorable (Unfavorable) Variance Variance as percentage September 25, 2024 September 27, 2023 Company sales $ 1,018.9 $ 897.8 $ 121.1 13.5 % Franchise revenues 11.5 10.3 1.2 11.7 % Total revenues $ 1,030.4 $ 908.1 $ 122.3 13.5 % Chili’s Total revenues increased by 13.5% primarily due to favorable comparable restaurant sales driven by menu pricing, higher traffic, and favorable menu item mix. 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 25, 2024 September 27, 2023 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 259.1 25.4 % $ 233.1 26.0 % $ (26.0) 0.6 % Restaurant labor 341.6 33.5 % 311.0 34.6 % (30.6) 1.1 % Restaurant expenses 280.6 27.6 % 258.5 28.8 % (22.1) 1.2 % Depreciation and amortization 40.5 36.2 (4.3) General and administrative 11.8 10.0 (1.8) Other (gains) and charges 2.9 3.7 0.8 As a percentage of Company sales: • Chili’s Food and beverage costs were favorable 0.6% due to 1.8% from menu pricing partially offset by 0.6% of unfavorable commodity costs primarily driven by poultry and produce and 0.6% of unfavorable menu item mix. • Chili’s Restaurant labor was favorable 1.1% due to 2.6% of sales leverage, partially offset by 1.1% of higher hourly labor driven by increased wage rates and staffing levels and 0.4% of increased manager salary. • Chili’s Restaurant expenses were favorable 1.2% due to 2.7% of sales leverage and 0.4% lower delivery fees, partially offset by 1.5% of higher repairs and maintenance and 0.4% of higher other restaurant expenses. 23 Table of Contents Chili’s Depreciation and amortization increased $4.3 million as follows: Depreciation and Amortization Thirteen Week Period Ended September 27, 2023 $ 36.2 Change from: Additions for new and existing restaurant assets 6.8 Finance leases 2.4 Retirements and fully depreciated restaurant assets (4.7) Other (0.2) Thirteen Week Period Ended September 25, 2024 $ 40.5 Chili’s General and administrative increased $1.8 million as follows: General and Administrative Thirteen Week Period Ended September 27, 2023 $ 10.0 Change from: Performance-based compensation 0.8 Stock-based compensation 0.6 Payroll expenses 0.5 Other (0.1) Thirteen Week Period Ended September 25, 2024 $ 11.8 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 25, 2024 September 27, 2023 Litigation & claims, net $ 1.2 $ 2.2 Restaurant closure asset write-offs and charges 0.7 0.6 Other 1.0 0.9 $ 2.9 $ 3.7 24 Table of Contents Maggiano’s Segment Thirteen Week Period Ended September 25, 2024 compared to September 27, 2023 Thirteen Week Periods Ended Favorable (Unfavorable) Variance Variance as a percentage September 25, 2024 September 27, 2023 Company sales $ 108.4 $ 104.2 $ 4.2 4.0 % Franchise revenues 0.2 0.2 — — % Total revenues $ 108.6 $ 104.4 $ 4.2 4.0 % Maggiano’s Total revenues increased 4.0% primarily due to favorable comparable restaurant sales driven by menu pricing and favorable menu item mix, partially offset by lower 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 September 25, 2024 September 27, 2023 Dollars % of Company Sales Dollars % of Company Sales Dollars % of Company Sales Food and beverage costs $ 25.2 23.3 % $ 25.7 24.7 % $ 0.5 1.4 % Restaurant labor 35.8 33.0 % 37.1 35.6 % 1.3 2.6 % Restaurant expenses 33.0 30.4 % 32.2 30.9 % (0.8) 0.5 % Depreciation and amortization 3.4 3.2 (0.2) General and administrative 3.0 2.4 (0.6) Other (gains) and charges 0.4 0.2 (0.2) As a percentage of Company sales: • Maggiano’s Food and beverage costs were favorable 1.4% due to 1.9% from menu pricing and 0.2% of favorable menu item mix, partially offset by 0.7% of unfavorable commodity costs primarily driven by dairy and poultry. • Maggiano’s Restaurant labor was favorable 2.6% due to 1.7% of lower hourly labor, 0.8% of sales leverage, and 0.1% of lower other labor expenses. • Maggiano’s Restaurant expenses were favorable 0.5% due to 0.9% of sales leverage and 0.5% of lower supervision, partially offset by 0.4% of higher repairs and maintenance and 0.5% of higher other restaurant expenses. 25 Table of Contents Liquidity and Capital Resources Cash Flows Cash Flows from Operating Activities Thirteen Week Periods Ended Favorable (Unfavorable) Variance September 25, 2024 September 27, 2023 Net cash provided by operating activities $ 62.8 $ 59.1 $ 3.7 Net cash provided by operating activities increased due to an increase in operating income, partially offset by an increase in payments of performance-based compensation and interest on the 8.250% notes in the current year, and the timing of other operational receipts and payments. Cash Flows from Investing Activities Thirteen Week Periods Ended Favorable (Unfavorable) Variance September 25, 2024 September 27, 2023 Net cash used in investing activities $ (56.5) $ (45.6) $ (10.9) Net cash used in investing activities increased compared to the prior year. Increased spend on Chili’s capital maintenance and equipment were partially offset by decreased spend on new restaurant construction. Cash Flows from Financing Activities Thirteen Week Periods Ended Favorable (Unfavorable) Variance September 25, 2024 September 27, 2023 Net cash used in financing activities $ (54.7) $ (14.2) $ (40.5) Net cash used in financing activities increased primarily due to an increase in share repurchase activity in fiscal 2025 of $50.1 million, partially offset by an increase of $11.0 million in net borrowing activity on the revolving credit facility. Debt During the thirteen week period ended September 25, 2024, net borrowings of $25.0 million were drawn on the revolving credit facility. As of September 25, 2024, $875.0 million of credit was available under the revolving credit facility. Our $900.0 million revolving credit facility, as amended, matures on August 18, 2026 and bears interest at a rate of SOFR plus an applicable margin of 1.60% to 2.35% 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 25, 2024, our interest rate was 6.46% consisting of SOFR of 4.86% plus the applicable margin and spread adjustment of 1.60%. As of September 25, 2024, 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. Subsequent to the end of the first quarter, on October 1, 2024, our $350.0 million of 5.000% senior notes matured and were repaid using available capacity under our existing revolving credit facility. Refer to Note 6 - Debt for further information about our notes and revolving credit facility. 26 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 25, 2024, we repurchased 1.1 million shares of our common stock for $74.8 million, including 0.9 million shares purchased for $66.0 million as part of our share repurchase program and 0.2 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 25, 2024, approximately $117.0 million of share repurchase authorization remains under the current share repurchase program. Cash Flow Outlook As a result of uncertainties in the near-term macro environment, including supply chain challenges, and commodity and labor inflation, we continue to focus on cash flow generation and maintaining a solid and flexible financial position to execute our long-term strategy of investing in our business. 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. 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, including the repayment of the $350.0 million senior notes which occurred on October 1, 2024. 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 26, 2024. 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.