Summary of Q3 Public Restaurant Conference Calls

Main Themes

• Commodity Inflation is moderating significantly.

  • Beef prices are expected to continue to increase 4-6%

  • All other commodities are expected to be FLAT to DOWN.

    • Chicken prices declined significantly in the quarter.

  • Higher sales and moderating inflation boosted gross margins

• Labor inflation has moderated, but still expected to be in the 3-5% range in 2024.

  • Lower turnover rates, more applications, improved labor hours management and increased sales have offset a significant portion of the labor costs.

  • California's AB 1228 bill which is the bill that replaced the FAST Act putting pressure on wages. Local price increases trying to offset cost pressure.

  • Kiosks are becoming more common.

• Seasonality has returned to customer traffic patterns.

  • Q3 saw declines in customer traffic, which is typical.

  • October traffic rebounded.

• Unit growth has returned for almost all restaurant chains.

  • Biggest risk to unit growth is permitting and availability of equipment such as HVAC and utility connections.

  • Unit growth rates are in the 3-10% range.

  • Smaller units and adding drive throughs is helping to offset the 20%+ increase in building costs. Cash on Cash returns on new builds is near historical levels.

• Price increases in 2024 will be more in line with historical levels of 2-4%.

• To Go, Catering and Delivery sales continue to remain strong.

• Food innovation and focusing on new flavors is increasing.

• GLP-1 impact has been minimal to date, yet hard to quantify long-term.

• Experiment with virtual brands is ending.

Conference Call Comments/Insights:

Texas Roadhouse

Strong 8.2% comparable sales growth with tough comparison of 8.2% in Q3 ’22.

Significant improvement in traffic YOY.

4.1% increase in traffic Q3 ’23 vs. 0.5% Q3 ’22.

Guided to 8% store week growth in 2024.

Finally, I would like to address increasing external concerns regarding the health of the consumer and the ability of restaurants to navigate uncertain economic times. Whether it is commodity inflation, mandated wage increases, student loan payments, or other potential issues, the restaurant industry has always been full of challenges. However, we have seen the consumer has remained resilient in their desire to dine at restaurants, especially those like ours that offer a quality product with a high level of value, service, and hospitality. Our position remains simple. We focus on what we can control, which is providing a legendary experience to each and every guest that visits our restaurant. We will never take for granted that guests give us two of their most valuable commodities, their time and their money.

And in the past long-term rule of thumb has been that labor hour growth can be about 50% of traffic growth. 

BJ’s Restaurants

For the 10th consecutive quarter, our comp sales results beat the industry as measured by Black Box.

We also rolled out a new menu that has 15% fewer items and is focused on familiar items made Brewhouse fabulous based on our guest research and careful testing in our restaurants.

Our 2022 and 2023 classes of restaurants are doing exceptionally well, with weekly sales average of more than $130,000 or approximately 10% higher than our system average and overall margins in the mid- to upper teens.

We submitted new plans for the majority of our 2024 openings so that we can roll out our new prototype that will save us approximately $1 million per build versus our current prototype ($6M-$7M). Additionally, due to a more efficient layout this prototype should provide an opportunity for labor optimization.

As we've said many times, our goal is to reaccelerate our new restaurant expansion and grow restaurant weeks by 5% or more annually.

Our catering business continues to grow and delivered approximately 50% higher sales than the same quarter last year.

Chipotle Mexican Grill

Digital sales represented 37% of sales.

As we look out to 2024, we anticipate opening between 285 to 315 new restaurants with at least 80% having a Chipotlane.

We anticipate that our timeline will remain extended which is preventing us from reaching the higher end of our 8% to 10% new restaurant opening guidance range in 2024. We continue to see permitting and inspection delays, utility installation delays, along with developers delaying projects due to macro pressures and rising interest rates. Considering our current pipeline and timeline, and assuming conditions do not worsen from here, we believe we can approach 10% new restaurant openings by 2025.

California is only 15% of our restaurants. But that's all by itself. Next year, that's going to add 2.5% to 3% inflation to our overall company, inflation in labor. So I don't know that we'll see 23%.

McDonald’s

In fact, in our top six markets, digital sales represented more than 40% of system-wide sales, or nearly $9 billion for the third quarter. We now have over 57 million 90-day active members across these top markets.

Adjusted year-to-date operating margin is 47.5%, driven by our strong top line growth. For the full year, we now expect adjusted operating margin to be about 47%.

And so, one of the things that we saw industry-wide is that, that low-income consumer, which we would say is $45,000 and under, was negative from an industry standpoint. If you zoom out and you think about our performance relative to that, we continue to have, on the full year basis, traffic growth. We had a slight dip in traffic. We went slightly negative in Q3. We expected that because of what we were lapping.

But if you look at us on a two-year stack in the quarter, our traffic is up strongly. So, I think we're just going to need to continue to keep a close eye on that $45,000 and under consumer, because of the pressure that they're feeling there and make sure that we're offering value, but hopefully, the industry stays disciplined as well on pricing.

Denny’s

Same restaurant traffic levels softened as the quarter progressed. This was similar to the trend experienced across the industry.

Total value mix in the third quarter was approximately 17% up from the 16% mix in the second quarter and 15% mix in the first quarter. With growing concerns around consumer spending, delivering on our promise of everyday value for our guests is even more relevant than before. Understanding this need, we are choosing to double down on value to improve traffic trends.

Even better, most recently, we've started to see an uptick in our off-premise sales, hitting above 20% by the end of quarter three.

But right now -- as we sit here, right now, our servers with their -- with tips are materially above $20 per hour. And our cooks right now are just ever so slightly underneath.

Obviously exciting news about the agreements for a hundred units for Keke's, kind of an amazing start. 

Dine Brands

To start, I'll share some thoughts on what we're seeing with respect to guest behavior and the consumer mindset. During the quarter, we noticed that guests are limiting their discretionary spending and have become more selective with where they choose to spend their money. We're also seeing guest traffic on weekends and key holidays outperform the competition, further indicating that guests prioritize a full-service experience even if it means they'll have to skip out on their next quick service dining occasion. At the same time, we believe the decreased personal budgets are leading guests to ask, where should we go to eat less and should we just cook at home more. This means we're not only competing with other restaurant brands, but also with home-cooked meals.

During the last five months, Applebee's culinary team has tested more than 200 new menu concepts ranging from different cuisines to innovation of current menu items.

We're close to 22% of total sales, of which 11% is from to-go and 11% is from delivery.

However, as we enter the fourth quarter, our franchisees are still experiencing some near-term development headwinds including permitting and construction delays, which could cause some of the openings to slip to 2024.

IHOP, most recently with its new 7 million members in the loyalty program. 

When it comes to the consumer, we didn't see any significant change quarter-over-quarter in terms of income levels. Our core consumer household income for both brands is about $50,000 to $75,000, as we reported in the past. We didn't see a significant change there. What we did see, based upon the multiple sources of data that we get about our consumer at large is we saw that they slightly decreased their spending QSR. And when they came to us, they maintained their average check.

Well, we didn't comment on the traffic part, but traffic is down for both brands, but we didn't quantify it.

Wingstop

Our AUVs now average $1.8 million and we are on track for our 20th consecutive year of same-store sales growth. Wingstop continues to see double-digit transaction growth, a true sign of the underlying health and momentum of our brand.

We believe this was showcased in the third quarter as we lapped the launch of both Uber Eats and our Chicken Sandwich delivering 15.3% same-store sales growth. That was almost driven entirely by transaction.

And as lower-income consumers pullback from those higher frequency QSR occasions or even has higher-income consumers trade down into dining visits, Wingstop is uniquely positioned to gain more new guests and introduce them to that indulgent, high-quality occasion that our core consumers have come to appreciate over the years.

About half of our new chicken sandwich guests, purchase only a Sandwich in their first visit, but we are seeing the majority of them in their second visit navigate the rest of our menu and purchase other proteins.

And there's plenty of runway ahead of us, as we look to gain our fair share of the 2.8 billion servings of chicken sandwiches annually in the US. 

During the third quarter our digital sales mix achieved a new record at 67% and we remain focused on our aspirational goal to digitize every transaction. We took a step three years ago to begin investing $50 million to build our proprietary tech platform.

This investment serves two purposes: protect our digital business that has quickly scaled to $2 billion in system-wide sales and unlock new capabilities that tap into our digital database of more than 35 million users to enable further AUV growth. Our proprietary tech stack will deploy an increased level of hyper-personalization that we believe will improve conversion retention rates and ultimately drive frequency.

We expect to exit 2023 at our highest level of development agreements ever.

As a result of the strength in our same-store sales growth, we are increasing our guidance from 10% to 12% to approximately 16% in 2023.

Our strategy is supported by the progress we are making on increasing our boneless mix now at a record level of 44% for the system. This compares to a low 30% boneless mix just a few years ago.

We believe a boneless mix in excess of 50% could yield a structural change in our food cost target to a low 30% level further enhancing our best-in-class returns for our brand partners, which we believe will continue to fuel record development for new restaurants.

Our fourth quarter guidance implies another quarter of double-digit growth and you seem to be unique among your peers driving your results mostly with transaction growth.

Obviously, we're winning a lot of new occasions with chicken sandwich, as well as delivery. But as we said in our prepared remarks, we're seeing more of those guests come back and navigate the rest of our menu, winning more of their occasions, which is yielding an uptick in frequency for our brand which we're really excited about.

And I think what's really interesting in our business and what we saw in this – in Q3 was we actually saw a slight uptick in frequency with that low-income consumer, which we're pretty excited about. And then at the same time, we're seeing that higher-income consumer potentially pull back on dining out occasions, dining at home more. And we're winning those occasions as well. And so I think all of that's supported by an effective advertising strategy, one that we believe is really working.

I think it plays a little bit into this category of one positioning in that we don't really feel like we have to get out there and maybe compete in that competitive value or promotional landscape, with other national brands because of the uniqueness of our offering and the differentiation of our cook-to-order and high quality. And so for us, we think that consumers are rewarding us for that indulgent occasion that quality the two components that are highest on some of the guest feedback that we hear and what they're looking for and where they want to spend their dining out dollars.

First Watch

We opened 13 systemwide restaurants, surpassing the significant milestone of 500 restaurants, ending the quarter with 505 First Watch restaurants across 29 states. Our same restaurant sales increased 4.8%, once again supported by positive dining room traffic.

As compared to Black Box Intelligence, First Watch bested the industry by nearly 400 basis points, illustrating our ability to grow traffic share. Our share growth is also supported by Placer AI, which showed our consolidated traffic share gaining several hundred basis points against the full-service segment.

Of course, given the macroeconomic backdrop, we remain cautious with respect to the state of the consumer. While we have observed and in fact benefited from the strength and resilience of the consumer throughout the year, there's reason to believe that the weight of the environment is beginning to have an impact, but as we have experienced in prior downturns, consumers are less willing to gamble with their discretionary dollars and would rather seek out more familiar and enjoyable experiences that are consistent and deliver value like First Watch.

Given our longstanding record of exceeding industry traffic trends, we are well positioned to benefit from the consumers flight to quality. In times like these, the best operators are winning. By that, I mean brands that relentlessly lean into the basics for the benefit of their teams and their customers are winning.

To further illustrate our focus here, in the quarter, we completed our annual WHY Tour, short for We Hear You, where our Chief People Officer, Laura Sorensen; and Chief Operating Officer, Dan Jones joined me in speaking with hourly team members from every region in the company. For perspective, that's 22 separate 90-minute tours comprising over 1,900 minutes with more than 300 hourly team members.

We will open 18 to 21 new systemwide restaurants across 16 states in the fourth quarter alone. In total, we have over 100 restaurants in various stages of development and more than 120 promotion-ready managers ready to lead them. We believe we are well positioned to capitalize on the white space in front of us.

We're in a select group within the public restaurant space, opening new restaurants at a low double-digit pace annually.

This year, we've often been asked about our customer check management. We continue to believe our growing dining room traffic reflects our customers preference for meaningful experiences. To borrow from one of Chris' statements made earlier this year, the industry wide shift away from off premises appears to be a new indicator of check management and while declining off-premises occasions remain a headwind to our consolidated traffic growth, our teams drove profitable growth in the third quarter, due in part to the increased in-restaurant visits.

Wendy’s

However, beginning in mid-August, we drove year-over-year customer count growth through quarter end.

We also continue to make progress against our development goal, opening 72 new restaurants across the globe, totaling 152 openings year-to-date date through the third quarter. We continue to expect to reach our 2023 development target as we now have 100% of our current year pipeline open or under construction.

Category traffic was challenged throughout the quarter and this impacted our early results. But following the mid-August launch of several successful innovations and promotions, we deviated from the category trend and achieved positive customer counts in the latter half of the quarter. This led to an acceleration in one and two-year same-restaurant sales growth each month of Q3.

Our digital business accelerated in the third quarter, with global digital sales mix reaching 13% and total digital sales growing 30% year-over-year as our loyalty program continued to gain momentum.

Total US loyalty members reached over 35 million and monthly active users grew almost 40% quarter-over-quarter to over 5 million as we exited the third quarter. This growth was driven by offers that are truly resonating with our customers, like our $0.01 JBC promotion celebrating National Cheeseburger Day and allowing for in-store offer redemptions, which has expanded our loyalty reach. We will continue to lean into impactful offers to drive further loyalty program growth moving forward.

On a year-over-year basis, our almost 30% US digital sales growth was driven by strength across all digital channels, including delivery. Our strong partnerships with third-party delivery providers continue to benefit us as we activated compelling ads and exclusive offers that tied into our college football messaging and new product launches.

Our successes to-date support an increase in our global digital sales expectation to approximately $1.8 billion this year, which represents over 20% growth year-over-year.

We look forward to sharing more news in the coming months as we continue to progress towards our long-term global net unit growth targets of 2% to 3% in 2024 and 3% to 4% in 2025.

As you know, with Next Gen, our building costs, we took about 10% cost out, and we are also operating it more efficiently. As you go through this, if you were to have no incentives, the levered payback of a Next Gen design is about six years.

If you sign up our Build-to-Suit program, which is the most attractive program for franchisees, you get a levered return of about 3.5 years. And then obviously, we have other incentive programs like the Pacesetter that gets you to a return of about four years. And if you choose to do a Groundbreaker, it's about 5.5 years of levered return. 

Yes, if you look at the consumer, it's really the tale of two sides. The over 75,000 consumer continues to be healthy. We continue to see traffic growth in that segment. We're holding our share in that segment. Under 75,000 consumers a little more stressed, especially as you go down the income core, it gets even more stressed. From a trade down perspective, we are seeing some trade down from mid-scale casual and sit down into QSR. But we're also seeing some trade out of the category from the lower-income consumer out of QSR and into food at home. So it was kind of wash each other out along the way.

Potbelly’s

All-in-all, our digital business represented approximately 37% of our total shop sales during the quarter, an increase of approximately 150 basis points relative to the same period last year.

Notably, our traffic growth remained a strong contributor as we continued to take traffic share from the fast casual category each week through the quarter.

Our shop development commitments now totaled 150 shops to date. I'm proud of what our franchising team has accomplished in such a short period of time.

We remain focused on achieving our 10% unit growth in 2024.

We know the category is roughly flat to negative on traffic. I think we like where we are north of that. So, we don't breakdown all the components beyond there, but if you take your 4% to 6% range on the same-store sales and our 4% price increase that should help you get to where you need to go.

Yes, there is a little bit of a size shift that seems to continue from our bigs and originals to our skinnies when you look at the traffic growth that we have and the amount of business that we're driving, especially with the newer Perks consumers. We're not 100% sure that that is actually a change in behavior of existing consumers or is it a change in the profile of our total consumer set.

There's another shift that's happening. If you heard in my prepared remarks how the majority of our digital business is now coming through our own channels, our Perks app and web channels, and that's the first time you've heard us say that.

Q: So as a follow-up question, as we look towards getting to that 15% shop level margin target for FY 2024. Why don't I just understand in terms of the component parts here, your guidance for FY 2023 is 13.4% to 13.9% shop level margin? In terms of which of the line items you expect to generate that kind of 200 to a little bit over 200 basis point improvement in margins next year. Where do you expect the primary contributing factors to come from? Is that still labor and occupancy leverage or what are kind of the factors you expect to drive most of those gains?

A: I think certainly on the labor side, we expect to get more efficient and effective through PDK as well as some additional efforts to continue to optimize labor in the shops as Bob described. That will be a major contributor to it. We frankly, on the sales leverage, they'll flow through the occupancy. That's going to be another kind of a benefit to us. And then when you look at the business and you say, okay, well, there's not one silver bullet for us that's going to push the margin all the way. It's going to be a contribution from a few other things too. So, for example, we expect our catering business to continue to grow that tends to be a healthy margin business for us.

We still have runway yet to go in our CBD portfolio. And that still continues to be a tailwind for us as there are return to work, there's return to work momentum that continues to build.

Papa John’s

To put the current pricing gap into perspective, at Papa John's, if you were looking to feed a family of four and order two large one topping pizzas and a 2 liter of soda for carryout, on average, it would cost you approximately $22. This ticket is well below what it may cost feed that same family of four at many QSR drive throughs where the ticket is likely to run more than $40 on average. 

Our years of leadership in digital give us a competitive advantage over other QSRs entering this space, as more than 85% of our transactions already occur through digital channels.

When it comes to third-party aggregators, Papa John's has been a leader in aggregator integration since 2019.

Currently, approximately 85% of our sales take place in our organic carryout and delivery channels, with carryout mixing slightly higher when compared with the same period last year. The other 15% comes from third-party aggregators.

We are relatively unique in the QSR industry with a vertically-integrated supply chain and distribution network that operates on a fixed operating margin basis, which is currently set at 4%. This business is our largest source of company revenue and as our business continues to scale, we continue to evolve our approach with our franchisees to increase investment in our supply chain infrastructure.

Beginning in 2024, we will increase the fixed operating market that our U.S. domestic commissaries charge by 100 basis points in each of the next four years, moving from 4% today to 8% in 2027.

With that said, we do expect that our 2024 development will be lower than our long-term guide of 5% to 7% system-wide annual growth. This assumes the same challenges we anticipate entering the fourth quarter, continue into 2024.

So, I think folks are starting to, I kind of joked about it a little bit in the script, but pizza is built for delivery. And so the quality that you get when you order a pizza for delivery is going to be significantly greater than a lot of the other things that are being offered through the QSR channel at points. So Pizza is going to continue to grow in that category.

The Cheesecake Factory

Led by comparable sales growth The Cheesecake Factory restaurants of 2.4% versus the prior year and 12.6% versus 2019, exceeding the Knapp-Track and Black Box casual dining indices for both time periods. 

At this time, our expectations for 2024 are to take another measurable step towards achieving our objective of 7% annual unit growth.

The Cheesecake Factory off-premise sales for the third quarter totaled 21% of sales, just below second quarter levels, consistent with historical seasonality of lower off-premise mix during the summer months, potentially indicating a return to more normal seasonal patterns. On-premise incident rates remained above 2019 levels with no material change to daypart mix.

The traffic was pretty darn stable, but it was sequentially down slightly, right, from July to August to September. And then what we’re referring to is really from sort of the end of September through the current time period, those trends have seen a measurable improvement relatively. 

So specifically, pricing was at 9.5%, mix was a negative 6.1% and then traffic was a negative 1.0%. So the traffic piece represented a pretty good improvement over the last quarter. And I think about 200 basis points better than what we saw in the industry and pretty stable.

So, there is really no better way to improve margins than to grow sales.

Brinker International

For the first quarter, we delivered a 6% comp sales growth, which is Chili's fourth consecutive quarter of outperformance versus the casual dining industry.

And importantly, our traffic gap versus the industry narrowed throughout the quarter despite the discontinuation of Maggiano's Italian Classics virtual brand and cycling through the deep discounting on the remaining virtual brand, It's Just Wings. This traffic progress demonstrates the improving strength of our core Chili's business.

As we moved into October, we accelerated traffic growth versus the industry and delivered positive Chili's traffic for the month. 

The average Crisper food cost as a percentage of sales has moved from 23% to 20%, and we are now selling 40% more Crispers. A much bigger business with lower food costs and better margins is a great result.

We've lowered our 12-month manager turnover now to 24%, which is 14 points better than the industry. When you improve manager turnover, you would expect hourly turnover to start to improve too, and I'm pleased to report we are starting to see improvements in hourly turnover, which is now down 44% on an annual basis.

Chili’s reported a comp sales growth of 6.1% for the quarter, driven by price of 8.8% and positive mix of 3.1%, partially offset by negative traffic of 5.8%. To provide a little more insight into the quarterly traffic performance, our strategic decision last year to deemphasize the virtual brands contributed approximately 4% of the overall traffic loss. The remaining negative traffic of less than 2% can be attributed to the base Chili’s business, a level we feel is indicative of the progress we are making in improving traffic for the brand.

So it was 28% off-premise at Chili’s and 25% off-premise at Maggiano.

Values again very stable, it's in that 28% to 30% of total check have a value component to it. The three for me again also remain very stable in that 16%, 17% range.

Bloomin’ Brands

Combined U.S. comp sales were down 50 basis points and traffic was 60 basis points behind the industry.

Following Labor Day, sales trends in the casual dining industry softened. From August to September, there was nearly a 300 basis point decline in comparable sales trends.

We expect U.S. comp sales to improve sequentially in Q4 from Q3. We have already seen an improvement in October, and this is incorporated within our Q4 guidance.

These priorities include: first, driving in-restaurant same-store sales growth, and this is our top priority; second, increasing new restaurant openings while refreshing our existing assets; third, maintaining our off-premises momentum; fourth, becoming a more digitally-driven company; and finally, investing in technology to drive growth while preserving margins. Complementing this strategy is our leading off-premises channel. This business was more than doubled since 2019 and currently represents 25% of our U.S. sales. Off-premises is 34% of Carrabba's sales, which includes a strong contribution from our growing catering business.

But look, anecdotally, outside of beef, things are looking pretty rational across the basket, which I think is a good sign. Beef is a little bit of an unknown. We're still seeing the same information as everyone else out there, overall beef production remains a challenge. But other than that, there isn't too much to say at this point other than we, as a company, have repeatedly shown the ability to navigate these markets as good as anyone else out there. It wouldn't surprise me at all if we're still talking in that low single to mid-single-digit kind of inflation range just sort of into perpetuity.

Portillo’s

In the third quarter, same restaurant sales grew 3.9%, despite an industry-wide transaction sluggishness. The good news is that we've already seen improvements going into the fourth quarter. Comps will fluctuate as they've always done in this industry. What's different for us now is the growing strength of our development engine. Keep in mind that we entered this year with 72 restaurants and we'll end the year with 84 restaurants. So, investors can count on our self-funded development to drive revenue growth in the near term not just in some far flung future.

As a reminder, we will have opened 12 restaurants this year. Nine of those are in the Sunbelt, four in Texas, three in Arizona, and two in Florida, and we're still growing the Midwest with three in our home state of Illinois.

As a reminder, we invest our operating cash flows and available cash into our future by self-funding our new restaurant growth. We currently estimate the CapEx range to be $75 million to $80 million versus the previous range of $70 million to $75 million. We increased this range based on capital being deployed ahead of the 2024 pipeline.

Our average net build cost per restaurant remain in the range we disclosed at Development Day in December

We are seeing strong momentum across the board in October and I think you're 100% right. We're back to what I think is more of a normal rhythm in the restaurant industry going back to 2019 kind of mindset. Third quarter's always a little bit of a sluggish quarter for the restaurant industry and typically we come roaring back in the fourth quarter. So, we're seeing a much more consistent pattern with the past. So, we're happy about that and we feel very optimistic for our fourth quarter.

Thanks. And I guess, I don't want to labor the point, but I hear all the time from investors like, how does Portillo's stack up as a long-term investment if traffic is slightly negative, which has been for a couple of quarters. So, it would be great if you could help contextualize maybe what's happening in traffic and I know you're burdened by this big Chicago base where you got kind of declining population. But if you could help frame kind of why the optimism on the long term when investors look at the near term and they think, well, what's the consumer saying with that traffic number.

But, look, the Midwest and particularly in Chicago, we're in a negative population state, right? So, as population declines, that makes transaction growth very, very challenging. You effectively have to steal share from other people. As I enumerated, the bulk of our growth is Texas, Florida, Arizona, all states with significant population growth. And so, we are putting ourselves in a position where, just from a transaction standpoint, it's almost transaction arbitrage. We are repurposing capital to states with transaction tailwind and we will be a beneficiary of that along with all the other restaurant companies that are in those markets.

What we like to think is that in Chicagoland and in the Midwest, we can fight the negative macro trends with the strength of our brand and steal share where appropriate. But in these growth markets where we're repotting ourselves and putting all of our capital, we can rise with the rest of the tide there. So, that's the play for us. That play is going to have some quarterly fluctuation. We're not frankly too torqued up about that. But over the quarters, the years, we're very confident in Portillo's transaction strength, in Portillo's traffic strength, in Portillo's comp strength, and especially our margin strength.

I'll just jump in for a minute and reiterate our long-term growth algorithm right of that low-single digit comp growth and the revenue growth that we're going to generate from the new units. As we talked about on the call, that's really going to drive that revenue growth as we go forward. And we're definitely not saying, I know how important comp is and as Michael said in his prepared remarks, that will ebb and flow. But that new unit growth and the development that that we see in the pipeline, I think is really going to propel us. And so, I'd say that's definitely the investment thesis for Portillo's.

Our drive-thrus did get a little slowdown in Q3 and that's because of exactly what you're describing, some very aggressive discounting activities by QSR, which, again, we don't discount. 

But it's sort of whatever that military acronym is for SNAFU, Situation Normal All Messed Up. We continue to face delays in all kinds of like last minute things with getting utilities hooked up, etc., etc. We're just -- I think we have reconciled ourselves to this is a new normal.

Chuy’s

We are also pleased with the continued strength of our off-premise channel during the quarter, mixing at approximately 28% of total sales as compared to 26% last year. Similar to last quarter, we enjoyed another solid performance from our -- from the delivery channel, which was mixing at an approximately 11.4% of our third quarter sales, a 300 basis point increase versus last year.

Equally important, our ability to maintain a strong value gap relative to our peers has allowed our traffic performance to exceed our broader casual dining peers as we continue to gain share.

Catering also performed well with mixing increases 80 basis points year-over-year to 3.3% of total sales. 

Due to continued construction and inspection delays, our New Braunfels, Texas restaurant are generally expected to open towards the end of December, will now open in late January.

I guess my question relates to traffic performance. Traffic has been negative in the last couple of quarters and the rate of check growth has started to slow. So I'm just curious, what do you think needs to happen to reverse that traffic decline? And I mean, are there specific company initiatives that can deliver the gains? Or is it going to require just a better consumer spending environment?

Great question, Chris. As we're looking right now, we feel pretty good about where we're going with our food initiatives. And we definitely have seen incremental bumps during our CKOs of roughly 100 to -- 1% to 1.5%. So we think we need to stay the course on that. And then the rest of it is really just operating excellence and staying inside our four walls and just continue to execute out there. And that's what our main, main focus on is really kind of keeping our heads down. But again, I think we have the proper amount of CKOs and the proper amount of really getting our messages out about our defining differences. And I think we'll continue to stay that course.

Yes. So we, right now, obviously, as you know, the build-out cost is probably about 40% higher than it was prior to the pandemic. Now we're also doing development work of the site, land work versus getting the site delivered to curbs in like we were prior to the pandemic. So that's added some costs as well. So you're looking at overall cost in probably that $3.5 million to $4 million range.

What we are doing to combat this is given that our cash situation gives us a little flexibility in our real estate is buying a lot of our properties since we've got to do the land development in any way, buying our properties, doing the land and development. And then in the future, when the cap rates come back down, doing a sales leaseback to recapture some of that cost and increase the overall ROI and get it to those cash-on-cash returns that we're looking at 30%.

I think it's right around 5% to 10% currently. And about half -- I think about half of what we're opening in '24 are purchases.

Yes. I would say the two main drivers are obviously catering. Catering has been and exceeded our expectations kind of each quarter-on-quarter. So we did close to 4% last year in catering. I think we will surpass that this year in the fourth quarter. 

Shake Shack

Sales began the quarter strong in July and moderated a bit through the end of the quarter in September. However, October has reaccelerated with same-Shack sales over 3.5% as we increased various digital and in-Shack marketing initiatives driving October traffic well above September trend.

We're on a path to open approximately 80 Shacks this year system-wide, roughly 18% unit growth, and we are building a robust pipeline of growth in the coming years.

And our 2024 pipeline is solid as we target approximately 40 new openings next year. We're also working through new prototypes for the long-term, with a 2024 target to bring down our net investment costs by about 10% from today's average cost.

Many of our Shacks are proximate to movie theaters, giving us the opportunity to benefit and play a unique role in partnering with films. But I’m going to just roughly guess it’s probably around 10% or so that are pretty close to having some kind of impact there.

Kiosk sales now represent well over half of our in-Shack sales and are up more than 140 basis points year-over-year. Kiosk is our highest margin channel and we remain very pleased with the at least high-single digit checklist we’re seeing with this order mode versus traditional cashier sales in the Shack.

We will have $20 an hour in California in April. That’s a significant part of our business. And we will have, I expect, continued wage increases over time and that’s not going to settle anytime soon. That’ll be part of our pricing structure and how much we choose to offset with that.

Our GMs, we’ve said this before, can generally all in make over six figures, right? Many make a lot more than that. We give stock to every GM every year. This is a significant part of our ability to retain people. 

Restaurant Brands

Our comparable sales this quarter were driven by 8.1% growth at Tim Hortons Canada, 7.6% in Burger King International and 6.6% at Burger King US. In addition, Popeyes US grew 5.6% and Firehouse US was up 3.9%. Our development teams are focused on closing out the year, with Q4, as always expected to be the biggest development quarter of the year.

Looking to 2024, we are confident, we can drive 5% plus net restaurant growth as we stabilize Burger King US ramp up Burger King China and Firehouse US and see Tims, Popeyes and Firehouse International accelerate. We are also focused on driving traffic and franchisee profitability growth at each of our brands, and we're pleased to make progress on both this quarter.

Tim Hortons Canada drove positive traffic, tickets at Burger King International were flat, and while we still have plenty of work to do, we were very pleased to see progress in our Burger King and Popeyes US businesses with traffic improving to flat year-over-year.

This has helped drive over 50% of international sales through digital channels, and that number is closer to 90% in some markets like Korea and China.

We saw flat traffic in Q3 and digital sales growth of over 40% year-over-year, resulting in a record digital sales mix of 14%, including 28% digital mix and our company operated restaurants that have rolled out kiosks.

Newest menu innovation, Ghost Pepper Wings, which also helped the business achieve a record digital sales mix of approximately 25% and its highest levels of chicken QSR traffic share in over two years.

In September, we refinanced $6.5 billion worth of term loans, representing roughly 50% of our debt. For a blended increase in our spread of 30 basis points, while extending the maturities of our $1.3 billion term loan aid to 2028 and our $5.2 billion term loan B to 2030. We also use this opportunity to further improve liquidity by expanding our revolver capacity from 1 billion to $1.25 billion.

On Burger King US I think this is probably the biggest hang up for investors on the stock. And I was wondering if maybe Josh, you and Patrick want to talk about that a little bit. And the brand turnaround, obviously half the assets probably are pretty outdated, maybe very outdated in the US, and that seems like a big disadvantage versus direct peers that have gone through their reimaging cycles already. So obviously that makes people think maybe doubt the sustainability of a brand turnaround into '24. So maybe you could talk about that. And then and then obviously building costs and interest rates are higher. So perhaps you can give a sense, maybe the long term sense about the pace that you think you could affect the turnaround of the assets. Thanks.

And certainly Burger King US is a big focus for us and for Tom and the team. And I think Tom and the team are doing a really great job. We mentioned a little bit earlier, we just had our convention here in Miami, had all the franchisees together, and everybody really feels the progress being made. I think there's been a big change in sentiment and support and confidence across that business. A couple of the things that that are helping me feel more confident about it, you know, one of them, which we mentioned here earlier, is the same store traffic. And if you go back over the last year, you know, we were pretty meaningfully behind where the industry was. And we've systematically narrowed that gap to where we got it back to flat.

And now in the past couple of months, we're actually performing above the industry in terms of same store traffic. So I think you're seeing very clear evidence on some of the most important KPIs that what the team is doing is working. In terms of the assets, we definitely need to get to a more modern asset base. The way I framed it, I think, you know, basically every Burger King that you see across the US, it needs to be modern, convenient and competitive across the country.

What gives me confidence there is that we're seeing good results initially from the remodels. So those uplifts are above where we expected. And that means the returns are starting to work. And I think that's really important for us and for the franchisees. And on top of that, we're seeing a lot of momentum in franchisee profitability. And that has benefits in terms of confidence and where we're going. But it also generates profits that can be reinvested into the system to be able to fund all of those remodels.

As you pointed out, interest rates are higher and that is a higher cost on the margin. But I really look at those unlevered unit economics, the unlevered returns on the remodels. That's what we can control and we can impact. So we are very focused on making sure that those gross returns are good, and we're getting to a place that we feel much better in. The last thing I would just point out, it usually gets less attention, but I think it's perhaps one of the most important is operations. And Tom has brought an incredible focus on the quality of operations and guest experience, everything from product quality and temperature to hours of operations and speed of service. And we're making a lot of progress under the surface there. And I think that's a really important ingredient to what's driven the same store traffic improvements to where we are today. Patrick, I don't know if you want to add anything to that.

In terms of the assets, I guess what I'd say is you're exactly right. You know, we're a little bit under 50% in the image that we want to be in. It's not a great reflection of where we are. And we've got all of those improvements ahead of us. So if we've got assets that don't all look great today and we're already outperforming on a traffic standpoint that tells you we should be pretty confident about what we're going to be able to do once we get those assets where we want to be. The last thing I would say is the comment I made about the alignment with the franchisees, it is pretty remarkable right now. We are going through an awful lot of change, and our great franchisees in the Burger King system are aggressively talking to us about keep going. You're going the right way. This is working. Keep the pressure on to continue improving operations, to continue getting our assets where they need to be. That alignment is what allows us to move fast. Trust levels are building with Tom and his team, and it's what allows forward progress. So I'll tell you, I am awfully confident about our ability to keep this going. This is you know, these are foundational things that are driving this business right now. And that's pretty exciting.

The vast majority of the in-restaurant tickets are all going through these kiosks. So that's a lot of what's driving that 28% number that I mentioned in terms of the digital sales at company restaurants. So I think the US is ready for kiosks now and we're likely to see a faster rollout of those around the world. You know we've seen it in all of our international markets. I mentioned earlier, we're over 50% of our international markets have been converted to kiosks.

We should have all of the order taking done through digital ordering channels over time. We'll have to see exactly what that looks like especially in a drive thru.

Noodles

This growth can primarily be attributed to restaurant-level margin improvement of 200 basis points relative to prior year to 16.4%. Compared to the second quarter of 2023, adjusted EBITDA grew 26% and restaurant-level margin improved 160 basis points.

1.2% in the third quarter versus prior year to $127.9 million, driven by a 3.7% decline in system-wide comparable restaurant sales. Thus far in Q4, sales are trending similarly to Q3 with a modest deceleration in comparable restaurant sales but an acceleration in 2-year growth.

We believe we have an opportunity to address the price of our proteins, which are added to their dish by 80% of our guests. During the third quarter, we began testing pricing strategies to address this opportunity, as well as partnering with third-party research firms to better understand the elasticity of our pricing, both at a dish and trade area level

Digital menu boards have now been installed in over 75% of company restaurants, and we anticipate being fully rolled out by the end of the year. As an example of the benefit of digital menu boards, our primary messaging has been around Chicken Parmesan and Rice Crispy add-on to the digital board restaurants. And in those units, in-restaurant sales of those items were meaningfully higher than those restaurants without digital boards.

We’re excited to announce that NoodlesREWARDS just recently welcomed its 5 millionth member. As an example, we have now introduced nationwide, a product recommendation engine on our website and app, driven by machine learning. This has led to a 45% increase in the likelihood of a digital guest adding a recommended item, and ultimately, an approximate 1% lift in average check on our digital platforms.

Which led to food deflation of 5.7% during the quarter. We continue to expect overall low-single digit food deflation for 2023, led by chicken, which is contracted for the full year.

Included in our full-year guidance is expected adjusted EBITDA for the fourth quarter of $8 million to $12 million. Our adjusted EPS expectations for 2023 are now between negative $0.08 and $0.00. For the fourth quarter, we anticipate adjusted EPS between negative $0.05 and positive $0.03. 

Additionally, during the third quarter, the company retired over 1.7 million shares at an average price of $2.86 per share, effectively completing the $5 million share repurchase authorization that was announced on our prior earnings call.

Carrols Restaurant

We are thrilled with our results for the third quarter as we not only achieved comparable sales growth of 8.1% at our Burger King restaurants, we also saw positive traffic growth earlier than anticipated this year. In addition, we had great traction with recent product launches such as the BK Royal Crispy Wraps, which significantly outperformed expectations.

Our strong top line growth drove a 530 basis point expansion in restaurant level EBITDA margins compared to a prior year period and was the basis for free cash flow generation of over $30 million in the quarter and a reduction in our net leverage ratio to 2.8 times.

Equally important our team members continue to remain focused on providing our new and returning guests with an excellent customer experience as we saw improvements in all KPIs measured by our franchisor including a 33% increase in guest satisfaction.

Our digital business including delivery and mobile has also seen substantial growth and is now approaching 10% of our overall sales, a year-over-year increase of 300 basis points. 

Process of rolling out self-order kiosks at approximately 250 of our restaurants over the next four months with the vast majority of this investment being funded by Burger King's Royal Reset program. While Burger King is still early in the testing and adoption process we're encouraged by the results that they have seen thus far.

In order to accelerate that organic growth, in 2024 we plan to remodel about 45 Burger King Restaurants. While this will increase our overall capital expenditures somewhat from 2023 levels, we will continue to only invest in remodels that we believe cumulatively will meet our mid-teen return hurdle rate threshold.

Finally, based on the Board's confidence in the outlook for our business and strong cash flow profile they have declared an initial $0.02 per share regular quarterly dividend.

Over the past 12 months we've generated free cash flow of over $80 million. This indicates a robust free cash flow yield given our current stock price.

Our overall interest rate on our debt this past quarter was 5.7%, as approximately 90% of our debt remains fixed.

Red Robin Gourmet Burgers

In the third quarter, comparable restaurant revenue declined 3.4%. This result was in line with our range of expectations and it is important to understand it with full context.

In the second half of 2022, Red Robin heavily promoted a combo meal deal significant with national media that offered guests a burger, bottomless side and non-alcoholic beverage for $10, a 30% to 40% discount to retail prices. This promotion drove traffic and sales, but the economics were quite penalizing to profitability.

In 2023, as we upgrade all aspects of the guest experience, we have intentionally shifted away from national deep discount promotions and broad loyalty offers to build a healthier, more sustainable and ultimately more profitable traffic base. However, lapping this 2022 promotion is a headwind we expected for our comparable restaurant revenue and related metrics.

Additionally, we made the decision to discontinue the virtual brands that were added in 2020. While this type of offering had its place during the depths of COVID, multiple brands, products and procedures created unnecessary complexity for our operators and distracted the focus of executing a great Red Robin experience.

Finally, we experienced and we observed industry results for sales and traffic weakened particularly in the back half of the third quarter. We are pleased to see trends improving to start – at the start of the fourth quarter. Through the first four weeks of the fourth quarter, comparable restaurant traffic trends have improved 300 basis points as compared to the final four weeks of the third quarter led by dining traffic.

It has now been two full quarters since we revamped our market partner compensation program for multi-unit operators. They now rightfully see themselves as owners of the restaurants they oversee and are rewarded based on their profits. They’re incentivized to deliver strong financial results like never before and have unlimited upside earnings potential. This helps to recruit and to retain the best talent available. The multi-unit operator rollout has gone exceedingly well and we are currently preparing to launch the single unit operator managing partner program in early 2024.

Finally, we have added more than 250 dedicated kitchen managers and expect to substantially complete our manager complement investments by year end. Speaking of food and food quality, recall that we successfully completed the system-wide rollout of flat top grills during the second quarter. This upgraded platform season, the burger’s juices delivering a thicker juicier and more flavorful burger and will serve as the foundation for future innovation.

In early October, we took our commitment to returning our burgers to true gourmet status to the next level, unveiling new and improved recipes for each one of our more than 20 gourmet burgers now prepared with higher quality and more flavorful ingredients to deliver on our guest promise and a competitive elevated burger experience.

With this launch, we have now upgraded ingredients including mayonnaise, vine-ripened tomatoes, buns, pickles, fresh pineapples, our sauces, and many other items. In total, we have made enhancements to 85% of our menu. The new menu includes the first executions of our strategy to broaden both the offerings of menu items and the price points under our barbell pricing strategy. 

46% agree our food quality has improved. 52% acknowledge that our burgers are better. 48% agreed that our service and hospitality has improved. 

Currently representing only 6% of sales (alcohol) versus a competitive average of over 10%.

We are finalizing preparations for an alpha test group of restaurant renovations I announced last quarter

The final key initiative plan to launch in the fourth quarter is a change from frozen to fresh chicken breast. The move to fresh chicken breast is a tremendous quality, flavor and helpful improvement for our guests, and one we expect to result in approximately 5 million annualized savings on that product itself. This type of change illustrates how we think about cost savings as changes that are both good for our guests and for Red Robin.

And on top of that, we have tackled both technical and content-related search engines optimization, resulting in a notable 30% surge in organic search traffic. These efforts have restored growth to the web traffic trend that had been declining.

Finally, as we continue to invest in our hospitality model and culinary offerings, we are in the process of refining our loyalty program. Our goal is to deliver more relevant messaging to our over 13 million members, transforming the program into a VIP-like experience, then acquiring new members to foster a new generation of Red Robin ambassadors. Our strategy is to shift away from heavy discounting in favor of rewarding our most loyal guests. The formal launch of the revamped loyalty program is scheduled in early 2024.

As a percentage of restaurant sales, dine-in represented 75.6% of sales in the third quarter, up from 72.4% in the same quarter last year. This consumer shift back to dine-in is a broad trend experienced by many in the industry and is accentuated for Red Robin as we discontinued virtual brands that were only available for off-premise consumption. Off-premise sales declined 15.1% as compared to the third quarter of 2022. Approximately half of that decline is due to the elimination of virtual brands. We have launched initiatives to enhance the off-premise guest experience and promote this offering to become more prominent and visible for those guests looking for a pickup or delivery option.

Within off-premise, catering remains a bright spot increasing 27% as compared to the third quarter of 2022. 

Discounts represented 3.7% of revenue, a decline of 230 basis points compared to the third quarter of 2022. 

Also during the third quarter, we marketed a third tranche of owned properties and received positive interest and multiple bids from investors. We continue to engage with our top bidders and may select a winning bid in the fourth quarter. If completed, we expect the net proceeds will be used to repay debt pursuant to the credit agreement. The Sale-Leaseback transaction completed to date have allowed us to repay approximately $25 million of debt, carrying an interest rate that would have exceeded 12% during the third quarter. 

Look, at the end of the day, the California situation there will be some of that affects us. We’re not quite sure how much of that yet. We’ve obviously sized that up. Candidly, we’re going to have to really evaluate that if we need to take additional price in the state of California or not, which we’re not alone in that. But – so we’re watching it very close, and we do expect a little bit of creep.

ONE Group Hospitality

And our company-owned revenue grew 6%, which was driven by our new restaurant openings over the past 12 months.

Despite the softening sales environment, our same-store sales improved sequentially versus the second quarter. Our consolidated comparable sales decreased 2% in the quarter, consisting of an increase of 1.1% of Kona Grill and a decrease of 5.5% at STK. When compared to 2019, our pre-pandemic base year. Consolidated comparable sales increased 41.7%, reflecting an increase of 61% at STK, consisting of a 40% increase in traffic and a 20% increase in average check, and a 23.7% increase at Kona Grill. Clearly, even against a more challenging backdrop in the near term, we have retained our market share increases at both brands.

Number five improve restaurant operating profit and overall profitability without impacting the guest experience, through mainly focusing on purchasing efficiencies for both food and operating supplies, maximizing productivity to smart scattering and evaluating third-party vendor relationships and reducing travel costs. Make no mistake, we understand fully, the need to improve restaurant level margins. And we plan to do so.

Over the long term, we view our addressable market as 200 STK restaurants globally and 200 Kona Grills domestically with best-in-class ROIs of between 40% and 50%. There is clearly a long runway of opportunity ahead of us that we are just beginning to act on.

So we clearly from a P mix perspective, we're seeing the customer trade down the items that they're buying when they come to the restaurants. And then STK, we were down about 5.8 on checks. We had pricing of about 6.5 or so for the quarter. So we also did see a trade down with the STK consumer. 

I think just in general the construction environment that as many people have reported is more complex. In terms of the overall environment, permitting is still challenging. 

Kura Sushi

At the beginning of the year, we mentioned three major goals for fiscal 2023, maintaining excellent operations, continuing to rapidly grow our restaurant base and leveraging our G&A against our increasingly large restaurant base. I'm proud to report our success on all of these fronts as demonstrated by our full year restaurant-level operating profit margins improving 70 basis points year-over-year to 21.9%, a record 10 new unit openings and full year G&A leveraging of 80 basis points over the prior year.

Our AUVs have grown from $3.8 million in fiscal 2022 to $4.3 million in fiscal 2023, reflecting the incredible number of new unit openings we've had in recent years.

Total sales for the fiscal fourth quarter were $54.9 million, representing comparable sales growth of 6.5%, with traffic growth being responsible for 5.6% of our total comp. In spite of ongoing concerns of a deteriorating macro environment, more guests are coming to Kura Sushi than ever before.

Our cost of goods sold as a percentage of sales of 29.5% is a 120 basis point improvement over the prior year quarter and a 50 basis point sequential improvement over the prior quarter.

Restaurant-level operating profit margins reached to an all-time high of 24.4%, representing a 50 basis point improvement over the prior year quarter.

Turning to new initiatives. I'm very happy to announce that we launched our new reward program app in mid-October and guest response through the new app has been uniformly positive.

But what's really exciting is that since launching our new app, the number of weekly new user registrations has more than doubled. To be clear, these are not existing users that are migrating their accounts, but completely new guests that are joining our rewards program due to the improvements that we have made.

Following this pilot, we'll be able to begin the certification process for implementing the robotic dishwashers in the U.S. While we do expect the dishwasher robots to have a meaningful impact on our labor model in future years, as we have stated in past earnings call, we do not expect implementation during this fiscal year.

Comparable restaurant sales performance as compared to the prior year period was positive 6.5% with regional comps of 12.1% in California and 3.3% in Texas.

And lastly, I'd like to provide the following guidance for fiscal year 2024. We expect total sales to be between $238 million and $243 million. We expect to open between 11 and 13 units, with average net capital expenditures per unit of approximately $2.5 million. And we expect general and administrative expenses as a percentage of sales to be approximately 14.5%.

And so as you mentioned before, for us to have lapped that 28% comps with positive traffic, we're very pleased.

But just to discuss labor, in past earnings call, we've been mentioning that we've been seeing about double-digit year-over-year labor inflation. We're very pleased to be able to say that that's moderated down to mid-single-digits, which really is sort of reflected in our pricing decision that we made in July. As you know we lapped 7%, we only took 2% to offset that. And the relatively modest price increase really reflects the bullishness that we have on the overall labor environment.

Anything about 20% is an exceptional restaurant-level operating profit margin.

And lastly, as QSRs need to catch up from the $16 or so they're currently paying out $20 minimum wage, they'll have to aggressively raise prices. And so as the price between a QSR meal and a Kura meal shrinks, the appeal and value of Kura only grows. And so we think this could ultimately be a traffic catalyst for us as well.

Relative Margin Performance