DALLAS Chili’s will end its “3 for $20” promotion in the next few days and introduce a reformulated menu in a move that had at least one analyst questioning how the casual-dining chain will build traffic at a time when consumers are shopping for the best deal.
In a conference call with investors on Wednesday, Chili’s president Wyman Roberts said the chain's new menu is set to debut during the next few days and will feature “improved burgers and ribs,” which were introduced in the fall, as well as tacos, soups, sandwiches and salads. He said more than 75 percent of the menu items have a new recipe, new ingredient or have been replaced. Roberts also serves as president of On the Border Mexican Grill. Both chains are owned by Dallas-based Brinker International Inc.
Roberts added that the new Chili’s menu, which was reduced in size from 12 pages to eight pages, also will include the reintroduced Caribbean salad, with enhanced flavors and fresher ingredients.
However, the three-course combo, which included one appetizer, two entrees and one dessert for two guests, is over.
John Glass, an analyst with Morgan Stanley & Co., said in a report Wednesday that the decision to end the popular promotion is “risky and untested.” He noted that the “3 for $20” deal represents more than 20 percent of Chili’s sales mix
“We believe the next debate on the stock will be its ability to back away from aggressive discounting without losing traffic,” Glass said.
He also noted that if competitors such as Applebee’s follow Brinker’s move and start retreating from discounting, it could help the segment in general. But, he warned, Brinker “also risks disappointing guests accustomed to value.”
Chili’s first introduced the “3 for $20” deal in the summer of last year, retooled the promotion's margins during an early fall hiatus, and reintroduced it last October. The deal had followed Applebee’s offer of “2 Courses for $20” that debuted last year and also included a shared appetizer and two entrees, but no dessert. The proliferation of lower-priced deals in casual-dining had many observers asking if the traffic increases were enough to offset profit losses.
In its first fiscal quarter, which ended in September, Brinker had said that the deal, once retooled, indeed drove traffic and also helped margins.
On Wednesday, Roberts reiterated that claim.
“The three-course promotion did drive traffic and our continued focus on improving the program has made each phase of the promotion more profitable, translating into improved bottom line as seen in our second-quarter results,” he said.
Shares in Brinker International Inc. rose nearly 13 percent Wednesday as the company swung to a profit in its December-ended second quarter from a year-ago loss.
Brinker’s net income of $18.3 million, or 18 cents per share, for the Dec. 23-ended quarter, compared with a year-ago loss of $21.8 million, or 21 cents per share. Excluding costs related to its sale of a majority stake in Romano’s Macaroni Grill, Brinker would have earned 29 cents a share in its latest quarter, up from 27 cents a share last year.
Latest-quarter revenue fell 18 percent to $781.9 million. Brinker cited the loss of Macaroni Grill units, 47 restaurants closures and the sale of 21 restaurants to franchisees for the decline.
Systemwide same-store sales fell 3.1 percent, compared with a drop of 4.5 percent in the same prior-year quarter. Same-store sales fell 3.2 percent at Chili’s, 4.7 percent at On The Border Mexican Grill & Cantina and 1.6 percent at Maggiano’s Little Italy.
Cost of sales, as a percent of revenues, increased to 28.9 percent in the second quarter from 28.2 percent in the prior year. The company said its promotions, like the “3 for $20” deal at Chili's, as well as increased prices for commodities such as chicken, produce and dairy impacted costs, but that some of those higher prices were offset by menu changes.
Restaurant expenses, as a percent of revenue, decreased to 56 percent from 58 percent in the prior year, primarily because of reduced labor costs, utility expenses and the receipt of a $3.3 million settlement in a credit card class-action lawsuit.
Brinker International operates or franchises 1,712 restaurants, including 1,504 Chili’s, 163 On The Borders and 45 Maggiano’s.
Contact Ron Ruggless at [email protected].