Bloomin' Brands, Inc. (BLMN) Q4 2023 Earnings Call Transcript

Bloomin' Brands, Inc. (NASDAQ:BLMN) Q4 2023 Earnings Conference Call February 23, 2024 8:00 AM ET

Company Participants

Tara Kurian - VP, Corporate Finance and IR
David Deno - CEO
Chris Meyer - EVP and CFO

Conference Call Participants

Jeffrey Bernstein - Barclays
Alex Slagle - Jefferies
John Ivankoe - JP Morgan
Sharon Zackfia - William Blair
Jeff Farmer - Gordon Haskett
Sara Senatore - Bank of America
Brian Harbour - Morgan Stanley
Lauren Silberman - Deutsche Bank
Brian Vaccaro - Raymond James
Brian Mullan - Piper Sandler
Dennis Geiger - UBS
Jon Tower - Citi
Andrew Strelzik - BMO Capital Markets

Operator

Greetings and welcome to the Bloomin' Brands Fiscal Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow management's prepared remarks.

It is now my pleasure to introduce your host, Tara Kurian, Vice President, Corporate Finance and Investor Relations. Thank you, Ms. Kurian. You may begin.

Tara Kurian

Thank you and good morning, everyone. With me on today's call are David Deno, our Chief Executive Officer, and Chris Meyer, Executive Vice President and Chief Financial Officer.

By now, you should have access to our fiscal fourth quarter 2023 earnings release. It can also be found on our website at www.bloominbrands.com in the Investors section. Throughout this conference call, we will be presenting results on an adjusted basis. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our earnings release on our website as previously described.

Before we begin formal remarks, I'd like to remind everyone that part of our discussion today will include forward-looking statements, including a discussion of recent trends. These statements are subject to numerous risks and uncertainties that could cause actual results to differ in a material way from our forward-looking statements. Some of these risks are mentioned in our earnings release. Others are discussed in our SEC filings, which are available at www.sec.gov.

During today's call, we'll provide a brief recap of our financial performance for the fiscal fourth quarter 2023, an overview of Company highlights and current thoughts on fiscal 2024 guidance. Once we've completed these remarks, we'll open the call up for questions.

With that I would like to now turn the call over to David Deno.

David Deno

Well, thank you Tara, and welcome to everyone listening today.

As noted in this morning's earnings release, adjusted Q4 2023 diluted earnings per share was $0.75. This compares to $0.68 in Q4 2022, reflecting a growth of 10% year-over-year, combined U.S. comparable sales were down 20 basis points. Our fourth quarter and 2023 results were largely in line with expectations.

Importantly, we had a sequential U.S. comp sales and traffic improvement from Q3 into Q4, and within Q4, a softer October was offset by progressively improving comp sales, ending with the strong holiday season.

Before we discuss 2024 and more specifically our plans at Outback Steakhouse, I would like to recognize two businesses that had outstanding results in 2023, Carrabba's in Brazil. Carrabba's continues to take share versus the industry. Carrabba's posted comp sales growth of 3.9% and positive traffic growth for the year. In 2023 Carrabba's outperformed the industry in sales by 90 basis points and in traffic growth by 300 basis points. They continue to demonstrate strength, specifically in their off-premises channel and growing catering business.

Carrabba's Bistro, which we launched in 2023 is a lunch focused catering option featuring a wide variety of sandwiches that reflect Carrabba's Italian heritage. I is now offered in our restaurants as a compelling lunch offer, either within the restaurant or to go. Bistro continues to outperform expectations. Brazil had another great year with significant growth in sales and profits. This is especially impressive given the lapping of pent-up demand in 2022.

We continue to expand this business throughout the country and opened 18 new restaurants in 2023. We look forward to capitalizing on our leading position and doubling our restaurant footprint in the coming years. Our 2023 results would not have been possible without our great teams in the restaurants and in our restaurant support port center. Thank you for delivering outstanding hospitality and excellent service to our guests.

As we move forward, we remain focused on the strategic priorities that are making us a stronger and leaner operations centered Company. These priorities include, first, driving in restaurant same store sales growth, which remains our top priority, especially at Outback. 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 improve infrastructure and drive growth while preserving margins.

Our primary focus remains improving in restaurant sales and traffic at Outback. We've done a lot of work to better understand our ever evolving post COVID customer. We believe we have a better idea of who our customer is and as a result, we continue to sharpen our brand's positioning.

The first step of this effort was the launch of Outback's No Rules, Just Right campaign. This is built on our brand equity and heritage and it brings back the adventure and irreverence as expected from Outback. I especially like the just right part of that phrase as it reinforces the food and service promise to our customers.

In addition, we spent more on marketing and advertising in 2023 to improve our share of voice in a highly competitive marketplace. During Q4, we saw positive response to our additional marketing spend. We plan to increase our 2024 spending by approximately $20 million. This investment will improve our share of voice and build traffic, utilizing a blend of television, and high return digital tactics. The advertising highlights Bloomin' innovation, accessible price points and great value.

We also recognize the consumer may be more careful with their discretionary spending. Our current LTO, a 3-course Aussie dinner for $16.99, offers the customer a great value. We will continue to be thoughtful about our approach to overall pricing and discounting. The No Rules, Just Right campaign and the marketing investment are just the start of the work underway at Outback. There'll be more to unveil in our strategy at Outback in the coming quarters.

Since we are going to spend more on marketing in 2024 at Outback, we must make sure our operations are best-in-class. We will continue to focus on delivering a differentiated guest experience, specifically improved service and consistently great food. We are solving this through investments in technologies such as server handheld and new ovens and grills, as well as relentlessly focusing on key operational behaviors.

As a result of this work, our internal customer measures have meaningfully improved. A couple of key leading indicators that we track are steak accuracy and consistency of experience. Over the last year baking accuracy is up 400 basis points and consistency of experiences up 700 basis points. This progress is further validated by casual dining industry metrics, which have continued to improve. Friendly service and food quality are now 300 and 360 basis points ahead of our casual dining peers, respectively.

We are confident in the strategy at Outback, and it is working. In 12 of the last 14 weeks, Outback has beaten the industry in comp sales growth. Based on recent trends, we expect to see Outback perform above the industry and this is reflected in our guidance.

Onto our second priority, new unit development and improving our asset base. We are upgrading our assets through new openings, relocating and remodeling restaurants. We opened six new domestic units in 2023 and are on track to nearly triple that in 2024. And we're upgrading our assets as a big part of improving our traffic trends, especially at Outback.

Our development pipeline for new restaurants and relocations remains very robust. We are opportunistic on relocations and continue to see outsized sales lift on these investments. We successfully completed over 100 green miles in 2023 and we'll continue to work our way through the system in 2024. Our development efforts provide a runway for future growth, offer good returns and are a key part of our strategy.

The last priority I'll discuss today is our leading off-premises channel. The business has more than doubled since 2019 and currently represents 24% of our U.S. sales. We are pioneers in the developed space and we continue to see robust demand in this highly incremental location. In addition, the success of our catering business at all of our brands, but particularly Carrabba's provides a runway for future growth.

Next, let me comment on our restaurant closure initiative. We periodically review our asset base and in our latest review we made the decision to close 41 underperforming locations. The majority of these restaurants were older assets with leases from the 90s and early 2000s. This decision considered a variety of factors, including sales and traffic, trade areas and the investments that would have to be made to improve the restaurants.

Despite this initiative, our confidence in our portfolio remains high, as we plan to open 40 to 45 new restaurants across the system in 2024. These are promising trade areas with great potential. It's critical to add that these closures are not a reflection of the hard work of our team members. As always, we will take care of our people, offering many of the opportunity to transfer to another restaurant and severance for those who do not.

Importantly, the sales growth initiatives I described are supported by a solid foundation with healthy margins, robust cash flow and a strong balance sheet. This strength give us the ability to invest in new unit development, technology enhancements and asset improvements, while meeting our commitments.

We remain dedicated to delivering great food and experience for our guests while building a strong business that will continue to thrive for many years to come.

Before I turn the call over to Chris, I just wanted to comment on the 8-K we sent out this morning, regarding Chris' retirement from Bloomin' Brands. Chris has been a great partner to me the last five years as CFO. He has made many, many contributions to our Company, and he will be missed. The Company is considering various options for his replacement. Chris is expected to continue in his current role until such a time his successor is named and otherwise assist in the transition. Chris, thank you for everything you have done for the Company and for me.

Over to you to discuss our financial performance and 2024 guidance.

Chris Meyer

Thanks, Dave for the kind words. It's been a privilege working with you and serving as our CFO for the last five years. I would like to start by providing a recap of our financial performance for the fiscal fourth quarter of 2023.

Total revenues in Q4 were $1.19 billion, which was up 9% from 2022. This was primarily driven by an additional $83.5 million of revenue from our 53rd week, favorable foreign exchange translation, and the net impact of restaurant openings and closures. U.S. comparable restaurant sales came in just slightly below our expectations at negative 20 basis points. This reflects a comparable 14 week view versus 2022.

Traffic in Q4 was down 3.1%, which represented a 160 basis point improvement in traffic from Q3. Average check was up 2.9% in Q4 versus 2022. As we mentioned in our prior calls, check average benefit decreased steadily throughout the year, as we chose not to replicate the amount of menu pricing that had been taken in 2022.

We remain very cautious about taking additional menu pricing, particularly at Outback. Q4 off-premises was approximately 24% of total U.S. sales. Importantly, the highly incremental third- party delivery business was 13% of total U.S. sales, which was up from 12% in Q3, driven by our growth in catering.

As it relates to other aspects of our Q4 financial performance, GAAP diluted earnings per share for the quarter was $0.45 versus $0.61 of diluted earnings per share in 2022. Adjusted diluted earnings per share was $0.75 versus $0.68 of adjusted diluted earnings per share in 2022. The primary difference between GAAP and adjusted diluted earnings per share is due to restaurant closing and asset impairment costs related to our restaurant closure initiative.

Q4 adjusted restaurant level operating margins were 15.9% versus 16.8% last year. The reduction in restaurant margin from last year was driven by a couple of factors. First, as we mentioned on the last call, in Q4 we were lapping significant beef favorability from 2022. This lapping, coupled with a smaller benefit from average check did not allow us to leverage the COGS line like we had throughout the first three quarters of 2023.

Second, inflation levels remained somewhat elevated in Q4 and drove additional year-over-year margin unfavorability. Labor inflation was up 4.4% in Q4, and restaurant operating expense inflation was up 4.7%.

Total Company adjusted operating income margin was 7.5% in Q4, compared to 8.2% in 2022. Depreciation expense and general and administrative expense were both up in Q4, consistent with our increased levels of capital spending and our investments in infrastructure to support growth.

As it relates to the 53rd week, we estimate that the benefit from the extra week was worth $0.16 of diluted EPS to our 2023 results. The week between Christmas and New Years includes many of our busiest days of the year, and this is reflected in the large EPS amount from this week.

The operating margin for the 53rd week is higher than our normal operating margin, because some of our fixed expenses, such as rent and depreciation are recorded on a monthly basis, and were not allocated to the 53rd week.

Turning to our capital structure, total debt was $786 million at the end of Q4. We have worked very hard coming out of COVID to reduce our debt levels and are pleased that our lease adjusted leverage ratio is solidly below our goal of three times with significant levels of liquidity.

In terms of share repurchases, we repurchased 2.8 million shares of stock in 2023 for $70 million. As indicated in this morning's earnings release, the Board has cancelled the existing $125 million authorization, and approved a new $350 million authorization, expiring in August of 2025. This is a larger authorization than we would normally put in place. The purpose of the authorization is two-fold. First, $150 million of this authorization allows us to continue to repurchase a typical volume of shares over the next 18 months.

Second, our convertible bond matures in May of 2025. The remaining $200 million of this authorization allows for flexibility to retire the convert, sometime between now and next May. There are a number of ways to structure a potential transaction, and these additional dollars give us the flexibility to retire the remaining $105 million of principal on the convert and remove the dilution from the convert that currently exists in our share count.

In our 2024 guidance, we are assuming approximately 4 million shares related to the convert are included in our adjusted EPS calculation. The Board also declared a quarterly dividend of $0.24 a share payable on March 20th.

Before I turn to 2024, I wanted to remind everyone that our full year 2023 adjusted results include the benefits from the Brazil tax legislation in the 53rd week. The Brazil tax legislation benefit was worth approximately $0.26 and the 53rd week was worth approximately $0.16. On a comparative 52-week basis, our 2023 adjusted diluted earnings per share result was $2.51.

Now, turning to our 2024 and Q1 guidance. We expect the full year U.S. comparable restaurant sales to be flat to 2% on a comparable calendar basis. Adjusted diluted earnings per share are expected to be between $2.51 and $2.66.

We expect commodities' inflation to be between 3% and 4%, driven in large part by beef inflation. We expect our full year tax rate assumption to be between 14% and 16%. Capital expenditures are expected to be between $270 million and $290 million. Our level of capital spending accelerated late in 2023, as our new restaurant pipeline has grown.

The 2024 capital plan includes dollars to support approximately 40 to 45 new restaurant openings, including significant Q4 spending for 2025 openings, as well as ongoing funding of remodel, relocation and infrastructure projects. The 53rd week in 2023 creates some complexity in comparing year-over-year results, both for the full year and by quarter. Each fiscal quarter of 2024 will be comparing to a fiscal quarter from 2023, that includes a one week shift. This shift is especially impactful in the first quarter.

Please refer to the fiscal and comparable calendar dates table provided in our earnings release this morning, to help you better understand our 2024 calendar. As it relates to the first quarter, similar to the rest of the industry, we experienced negative impacts from weather in the first few weeks of the year.

This represents a 1.3% comparable sales headwind in to the quarter. We have included this thinking in our comparable sales guidance. As such, we expect U.S. comparable restaurant sales to be down between 50 basis points and 200 basis points on a comparable calendar basis.

The good news is, we've seen continued sales growth ahead of the industry. In addition, our Valentine's Day week represented the strongest week in our Company's history. This trend, including the weather impact from the first three weeks, are included in our guidance.

We expect Q1 adjusted diluted earnings per share to be between $0.70 and $0.75, which includes a negative $0.06 impact due to the calendar shift, and an approximate $0.05 impact from weather at the beginning of the quarter. In addition, the removal of the Brazil tax exemption is a headwind of $0.08 in Q1 versus 2023.

In summary, we successfully navigated a challenging environment in Q4. We will remain disciplined in executing against our strategy in 2024 and will emerge a better, stronger, operations focused Company.

And with that, we will open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.

Jeffrey Bernstein

Great. Thank you very much. My question is on the broader consumer environment. Just curious, obviously, with multiple brands, you have pretty good perspective. Any change in consumer behavior in recent months, impacting traffic or mix? I know you mentioned the risk of a slowing consumer in 2024. So just trying to gauge what you've seen in recent months. And then, Chris, just to clarify, I think you said Valentine's Day very strong or Valentine's week. But more broadly, the trends since the first few weeks of January with the inclement weather, would you say that they're now back to the strength you were seeing to close the fourth quarter, or how would you gauge that more recent momentum? And then I had one follow-up.

Chris Meyer

Yes. Good morning. Yes, we see the consumer hanging in there. Our trends, as I talked about on the call, we had a weak October, but they got stronger as the quarter moved along, and we finished really strong. And then we had the first three weeks of weather, but then the strength that we've seen returned. And I'm really pleased with some of the trends we're seeing in our business, especially at Outback and Carrabba's. 12 of the last 14 weeks, Outback has outperformed the industry. We expect that trend to continue. And we've tried to incorporate all of that in our guidance. So we see the consumer hanging in there and we see our brands doing pretty well versus the trend.

David Deno

Yes. And the only thing I would add to that is, you asked about mix and mixed trends, yes, no, we're still -- and you saw it in the numbers. We're still seeing some negative mixed trends show up in the financials. But at the same time, I think, as we've said in the last couple of calls, a lot of that's engineered the growth in catering at Carrabba's has been significant. The LTO activity has been very successful. So I think that it's been more engineered than anything else. Now, that's not to say that there isn't some check management going on, but I don't think that's the lion's share of what we've been seeing.

Jeffrey Bernstein

Understood. And then my follow-up is just more broadly, Dave in the Board room, I'm just wondering, has anything changed in recent months or quarters? There's activist involvement. I'm just wondering whether there's any change in perspective or priorities or how that investor and kind of the impact that you've seen if any, as you look at your business through 2024. Thank you.

David Deno

Yes, we have a -- they've been a very positive part of our Company, and we welcomed our two new Board members, as you saw. We've had good interaction in the boardroom, good ideas, and they've been a big part of helping us understand how we can move our businesses forward. And we're very optimistic about the year. And I think it's been a good partnership.

Jeffrey Bernstein

Great to hear. Thank you very much.

Operator

Thank you. Our next question comes from the line of Alex Slagle with Jefferies. Please proceed with your question.

Alex Slagle

All right, thanks. Good morning.

Chris Meyer

Good morning.

Alex Slagle

Chris, congrats on great career there, and we'll all miss you for sure. Wanted to ask I guess just as you step back and think about all the efforts you've made, improving, the guest experience at Outback and investing in the food quality and simplification, better service remodels, I mean, how far have you gone along the spectrum of what you think you need to do to position this brand as a share gainer?

And I know we have more that we'll hear about in the quarters to come, but want to sort of think about that. And I don't know if there's even a way to add specific dollar amounts to how much you've invested and how much you think you need to do in the core experience, but any thoughts around that?

David Deno

Sure. I think we've made progress, but we have more to do. I don't know if I should give a football analogy or a scale of 1 to 10. But I think we've made progress. We're seeing it in our trends, which -- especially at the end of last year and in the first quarter this year at Outback. But when you look at the work we've done to understand our consumer and in this post-COVID environment and sharpen our positioning, that's been done.

I think you look at the No Rules, Just Right positioning we've started, that started more work to do there. If you look at the food and service elements that we've invested in, we've invested in some, but we have even more to do, I think, on some of the service elements and some of the food elements. We've talked about the additional spending in marketing. In 2024, we're seeing some return on that.

We've opened up six new restaurants, and we're going to open up 15 to 18 in 2024 and then we're remodeling. So, it's -- Alex, it's started, but we have more to do. And I think we're beginning to see it, the trend change in the business.

Alex Slagle

Got it. And the closures, how many of those effectively would have been relocations? Is the relocation pipeline sort of still the same as it was before? Or how does that look? And I mean maybe any thoughts on like the cash-on-cash return profile of these new units?

Chris Meyer

Yes. So I'll give you some perspective. No, none of these would be considered "relocation opportunities." I think the relocations this year will probably have another five or so. I think that we like the cadence that we have in terms of relocations. Every time we relocate a new Outback, we see significant sales lifts.

And I think that's the -- it's a sort of piggyback on the question to Dave about Outback. I think that the relocation and what we see when we do a relocation is one of the reasons why we really believe in the relevance and the strength of the Outback brand, because every time we do that, we see such positive results.

Now, what I would say is like, from a new unit perspective, obviously we're seeing pretty good cash-on-cash returns. We think about allocation of capital. We get asked a lot, why are you investing so much in new units.

We're getting solid returns on these new units. They're in infill opportunities in strong markets with strong demographics. And obviously -- I mean, I think from a capital allocation perspective, if we were seeing that we weren't getting the returns that we need to justify the investment, then we would use those dollars elsewhere.

So we feel really good about kind of the whole strategy and how we're deploying capital.

Alex Slagle

Thank you.

Operator

Thank you. Our next question comes from the line of John Ivankoe with JP Morgan. Please proceed with your question.

John Ivankoe

Hi. Thank you. The question is around menu simplification. And I guess a couple of things, I mean, one, how far down this journey are you in terms of yet another significant reduction in menu items at Outback? Obviously that would come with reduced complexity in some cases that actually may come with reduced costs. So I just wanted to get your sense of how big of an opportunity you guys see that to be, as kind of the first question.

And secondly, are there any opportunities for kind of longer-term price investments of the Outback brand? I mean, are there some opportunities on the menu where you could sell a lot more certain foods, including foods that are regularly priced on the menu of actually lowering the menu prices, and maybe in some cases bringing them a little bit closer to where peers are?

David Deno

Yes, John. I think on the simplification side, that's something we have always looked at and we are continuing to look at. And I think that's a good point that you make, and it's something that we're looking at in the marketplace. I don't want to get any further than that because of competitive reasons, but I think you've hit on something that we're looking at and that brings improved operations.

And I talked on the call about the progress we're making, if we can make it with the technology and with some of the work we're doing on the menu. If we can make it easier for operators to serve product and easier for our customers to navigate the menu, that could be an opportunity for us. So we're looking at that number one.

Number two is, the way we try to get about this, John is, if you look at our combo pricing, that's something that's very attractive versus competitors. If you look at what we're doing with the Aussie 3-course meal at $16.99, that works very well. And we're also potentially looking at some high quality menu items that may be a little bit lower price that we would introduce on the menu to help offset some of the pricing at Outback -- some of the pricing perceptions at Outback.

So those are the things that we're doing. It's looking at our combo pricing, we're looking at some of the LTOs that we're doing, and advertising against that. We're also looking at some of the menu items that we can bring in place that might be a little lower price point, but offer high value and high quality.

John Ivankoe

Thank you.

Operator

Thank you. Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.

Sharon Zackfia

Hi. Good morning. Can you give us more texture around the closures and what concepts were impacted besides Aussie Grill. I know that they were older locations, but any commonality other than the fact that they were older? And then, how do we think about the impact of those closures on revenue and margins, as we think about '24?

Chris Meyer

Yes, there is split across the portfolio. So there was mostly Outback, but there was a handful in the other concepts as well. There we talked about the revenue impact, sort of about $100 million of actual revenue would come out of related to those closures. But actually, it's profit accretive, right? That's part of the reason why we're making this move. We're probably going to add about $4 million of EBIT to the bottom line results of the Company this year, as a result of the closures.

David Deno

The other thing, Sharon is, we're opening 40 to 45 new restaurants to bring and those restaurants will be far more visible, attractive, higher performing across the portfolio. And so that will really help as well.

Sharon Zackfia

Thanks for that. And I think you alluded to in the CapEx, kind of maybe a further acceleration in development in 2025, if I'm kind of triangulating the commentary there correctly. Is that the case and from 40 to 45 new locations this year, what -- I mean what kind of cadence of growth do you think you can maintain as you get into '25, '26 and beyond?

David Deno

Yes, Sharon. I love our pipeline. Our real estate team has done a great job. You're correct. We would like to improve the cadence and raise the cadence as we go forward. As Chris mentioned, we're always on top of our returns, to make sure that the returns are great. But we have a pipeline building that is very, very strong, especially in our stronghold markets in the Southeast.

Chris Meyer

Yes. And maybe just to give you a little context on the capital guide, and how that comes together a little bit. So one of the dynamics that you are going to have in the 2024 capital spending is that, in 2023 we had about $65 million of restaurant technology. That spend is going to fall off in 2024. But we are then going to have an increase in the number of new units that you're going to see in the numbers. So it's really just a trade between the technology and the restaurants, increasing the number of new units.

Sharon Zackfia

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Farmer with Gordon Haskett. Please proceed with your question.

Jeff Farmer

Thanks and best of luck to Chris with everything you're going to be pursuing in the future. A couple of questions for you. Anything you can offer on the sort of the component assumptions across pricing traffic mix as it relates to that flat to 2% same store sales guidance for 2024?

Chris Meyer

Yes, sure. I'll give you some perspective. So I think if you think about traffic, there's a pretty wide range of possible outcomes here. I'd say anywhere from flat, which I think is certainly doable, but also down to like, maybe down to 2%. A lot of it's going to depend on sort of the external environment. But there's also a couple of things worth calling out on that.

I mean, first, we're going to start out in a little bit of a hole here in Q1 because of the weather from a traffic perspective. And then I would say candidly, the category is measured by Black Box or NAP however you choose to look at the category. Look, it's likely going to have a negative traffic outlook for 2024. And I don't think that's anything new. I mean, I think that outside of a couple of years around COVID, the category has generally speaking been down 2% to 3% pretty much every year that I can remember going back quite aways.

So I think those two things taken in perspective, it is our goal and is our commitment to try to outperform the category in traffic this year, which is why if the category is down 2% to 3%, our traffic is going to be flat to down 2% in that range. We expect to outperform if the category does a little better because consumer seems to be hanging in there. Then of course, we have opportunity to have some upside there. So that's how I would think about traffic.

Now, in terms of average check pricing, et cetera. Start with average check, in the full year guide, it assumes an average check increase of, call it 2% to 3%, and that's going to be comprised of about, I'd say, 3.5% or so of pricing, and then some negative mix. And that negative mix, again, is driven by some of the things I talked about in terms of catering growth, LTO activity, things like that. The pricing assumption is going to have about 2% or so rollover pricing, and then a small amount of incremental pricing over the balance of the year again.

I mean the commodity environment is going to be somewhat benign. But the one area where it's not benign is in the beef market. And so we're going to have significant beef inflation again this year. And so some of that incremental pricing is going to be meant to offset that.

Jeff Farmer

All right. That's helpful. And then just as a follow-up, as it relates to, again, sort of the increased level of media, have you sort of fully implemented that across Q4 into the first part of 1Q or is this going to sort of slowly build,? How should we be thinking about the ongoing effort to sort of get a stronger media share of voice out there?

David Deno

Yes. Jeff. Two ways to think about it. One, it will build, and we will always look at the ideas we have. And I'm pretty excited about couple of the ideas coming up, balance of the year. And so the ideas will -- the funding will follow the ideas. So we see that there, we will build during the year, and then we will fully support our ideas with strong share of voice.

Jeff Farmer

All right. Thank you.

Operator

Thank you. Our next question comes in the line of Sara Senatore with Bank of America. Please proceed with your question.

Sara Senatore

All right. Thank you. I guess I'm trying to understand how you are thinking about capital allocation by which, I mean, the relos obviously have high returns. But is there a scenario where, if you reinvested that money elsewhere, maybe not in capital, but, in OpEx, maybe even more marketing or labor, something like that, where you could get -- you think you could see a return across the system. Just because the relocations obviously help the individual. As I think about, the guidance, it looks a little heavier on CapEx than we had thought. And so wondering how you kind of compare ROI across the different uses of capital within the P&L or in CapEx. And then I just have a quick clarifying question.

David Deno

Sure. We look at that very carefully across the P&L, look at our labor investments, our food investments, and then also CapEx. One of our ways to unlock traffic growth, especially at Outback where we have older assets, is the refreshment of the really strong assets, re-locations and new, and that will uplift the entire trade area. And as we did our relocations -- or excuse me, as we did our remodels in 2023, we tried to concentrate them, for instance, in Florida, and we saw the benefit of that concentration.

So as we look across the P&L, we look at the investments we want to make in labor, we look at the investments we want to make in food and advertising. But then also we look at our capital and we know that the cash on cash return we received is strong. And then what it does for the entire marketplace and then what it does for traffic as we uplift our assets.

Chris Meyer

Yes. And we've made decisions like that in the past. I mean, we certainly have -- whether it's increasing portion sizes at some of our brands or adding a second site, there have been reinvestments back in areas where we think it makes sense. So certainly one of the advantages of having a significant amount of free cash flow, like we have, is that you're able to make these kind of investments and decisions, and still leave yourself in a really good shape from a capital structure standpoint.

Sara Senatore

Got it. Thank you. Just to clarify some of what you're doing has broader implications, as you say, for the trade area. So the perception of the customers in that trade area from relo or remodel may reverberate throughout the trade area, is that fair?

David Deno

Yes. There's nothing like a new Outback or two in a trade -- in a city to attract people and say, wow, look at that. Especially in our new prototypes, which we think are very attractive. So that's part of the traffic building as well for the entire trade area.

Chris Meyer

We factor in, and we'll factor in cannibalization when we come up with the returns for new restaurant investments. So if there is a -- before going and entering a restaurant in a trade area, where we already have a significant presence, we factor in potential cannibalization into our model to make sure that we're making the right decisions.

Sharon Zackfia

Got it. Okay, thank you. And then just a technical question. Am I understanding correctly the repurchase would just offset the dilution from the convert, is it sort of pretty much a wash?

Chris Meyer

Well, yes, and so, the convert gets pretty complicated. But let me -- so let me just try to frame the 300, because it's an important part of what we're trying to do here, the $350 million share repurchase authorization. So you can put aside the $150 million, right? Because the $150 million is just normal course of business. We did $70 million of share repurchases in 2023. We got another $150 million for the next 18 months. That's pretty much normal course of business.

The remaining $200 million, it just gives us optionality. And again, I'm not going to get too much into timing, because timing could be anywhere between now and next May when the convert comes to maturity.

But what I can say about how it would be performed is, at the end of the day, what would likely be the outcome is that you would have -- of that $200 million of share repurchases, you would just have the 4 million shares that are currently sitting in my adjusted earnings per share count. Those shares would come out of the share count, using the funds from the $200 million.

The remainder of it, the $105 million that's the principal on the convert, there's just some options between I can do some share buybacks and issuing shares, et cetera. There's just some arbitrage there, that's really more just a refinancing kind of event. The real impact to share count would be that 4 million shares that are sitting currently in my adjusted share count, if that makes sense.

Sharon Zackfia

Great. Thank you very much. Very helpful.

Operator

Thank you. Our next question comes from the line of Brian Harbour with Morgan Stanley. Please proceed with your question.

Brian Harbour

Thanks. Good morning. Yes, and Chris, best of luck to you. Just a question on, did you spell out what you expect wage inflation to be this year? And I think the broader question about labor, do you feel like there's kind of a need to reinvest in labor or add some to stores as you think about kind of building traffic this year.

David Deno

Yes. I think our labor models are very well established, well run. We've invested behind the technology to enable our servers. We've invested in cooking technology to enable our back of the house. The service model is strong, and we feel very good about it. So the labor spending at the restaurant level, number of hours, et cetera, is in really good shape.

Chris Meyer

And you asked about inflation. Look, yes, I mean, I think that -- yes, I think inflation, call it 4.5%, it just seems like that 4% to 5% range of inflation is just pretty sticky. And I don't see it going anywhere anytime in the future, particularly since we have such a presence in Florida, and Florida is going through this stage of raising their minimum wage.

So, look, I think that just part of how we go to market, that's why the productivity initiatives and things like that become so important, because you need some offsets. You can't just take unlimited amounts of pricing to offset that. And that's why we focus so much on making sure we do the right thing with productivity.

Brian Harbour

Okay. Yes, got it. Thanks. Maybe I'll take the bet on your comment about kind of the work you've done here at customer. What's changed, I guess, or what was some of your key insights from that work you've done?

David Deno

Yes, I don't want to get into too much detail for competitive reasons, but a couple of things. One, our core is loves Outback Steakhouse, and they continue to say that again and again and again. And I think we have some permission from some of our explorers out there that might be looking at some other categories of interest, but the focus is on the core. And if we can pick a few explorers that look at other categories besides steak, I think Outback has the permission to do that.

And the last thing is, the reinforcement of how Outback is such an adventurous steakhouse. And we have a lot of support for our long heritage of No Rules, Just Right, our Aussie heritage, et cetera, all those things came to light, as we continue to do our research.

Operator

Thank you. Our next question comes from the line of Lauren Silberman with Deutsche Bank. Please proceed with your question.

Lauren Silberman

Hi. Thank you. On advertising, so I want to ask a bit more there and your approach to marketing. What type of messaging are you going to lean into 2024? How much more in value do we need to see? And then just in terms of how we think about the step up in advertising spend?

David Deno

Yes, it will move up during the year, but I think more importantly, it'll do -- it'll be with ideas that we have, which I'm -- like I said before, I'm very optimistic about. I think if we can do the combo of products that consumers really love, and I don't want to get into detail here along with a good value, I think that's the magic that we can bring together at Outback, especially to help grow traffic in our advertising and our consumer awareness and excitement. I think that's clearly something that we can do because we have a heritage of that.

The second thing is, like I said, you'll see the step-up of spending during the year, as the ideas come to fruition. And we'll continue to track that return as we go forward. And lastly, I think we have a much better understand, we talked about on other calls on, the way to advertise, be it digital versus network, versus television, those are things that we can also look at and change the mix around as we need to. So those are the things that we're doing with our advertising investment, and we continue to track the returns and what we can do going forward.

Lauren Silberman

Okay, thank you. And then just on restaurant margin, what's embedded in the guide this year? And can you just talk about, how we should be thinking about the cadence of margin throughout the year? Thank you.

Chris Meyer

Yes, I think as you look at -- we'll start with operating margins and we'll talk about restaurant margins at the same time. I think -- but to give perspective, we finished at 7.6% in our op margin line in 2023. 50 basis points of that was driven by the 53rd week and the Brazil tax exemption. So you're not going to have those in 2024. So if you exclude those two and you say your starting point is 7.1%.

Look, with the guide we gave, I'd expect op margin to be slightly up to slightly down, probably flattish, depending on where we land within our guidance range, in and around, call it 7% or so, which is, again, as a reminder, it's 210 basis points above where we were in 2019, despite what continues to be very persistent inflation.

So you think about it from a restaurant margin and a category perspective, I think cost of goods sold and OpEx, just given where the productivity dollars will probably land and some of the inflation that we're seeing in those categories, COGS is a little bit less inflation this year.

Both those categories have a decent chance to be favorable in terms of margin year-over-year. Labor is probably the one category that's most likely to be a little higher year-over-year, given the inflation that I just talked about, that 4% to 5% inflation.

And then the other piece is, when you go further down the P&L, the one G&A, we'd like to keep somewhat flat on a dollar basis, but depreciation is going to be higher obviously with the capital spend. So I would expect depreciation as a percentage of total revenues to be higher as well. So that gives you a little bit of sense of how I think about the pieces part.

Lauren Silberman

Thank you. Very helpful.

Operator

Thank you. Our next question comes from line of Brian Vaccaro with Raymond James. Please proceed with your question.

Brian Vaccaro

Hi, thanks and good morning and congrats, Chris. Best of luck to you. So I'm just circling back on the Outback comps for a second. Could you be a little more specific on the degree of improvement you've seen or how much that spread versus the industry has improved over the last few months? And also just given the unusual swings on weather in January, any way you could level set how your U.S. comps look more recently as the weather has normalized?

David Deno

Yes, I don't want to get into specific percentage points versus the industry, Brian, I hope you understand that. But I think you know me pretty well. We've gone from a place, especially in the fall when Outback was behind the industry in same store sales growth to a point in December, and then into Q1, where we're consistently ahead. And we're very pleased about that. And that's the result of the beginning of the work we're doing. And we can see going forward some of the work we're doing to help that trend continue and hopefully strengthen.

But that is about all I can say right now. I don't want to get into price points per se. After the weather the first three weeks, we've seen the trend resume that we saw in December, and the last few weeks have shown just that. And so we tried to bundle all that into our guidance for the quarter.

Brian Vaccaro

Okay, fair enough. And on that spread, is it fair to say that that spread is positive on both a comp and traffic basis?

David Deno

Yes.

Brian Vaccaro

Okay.

David Deno

Brian, before I get your next question, I just want to mention one thing that hasn't gotten a lot of attention on this call, but I just need to say a couple of things about the Carrabba's team, how great they're doing. And if you look at their trends versus the industry, they're just knocking it out of the park, both in traffic and in sales. And it's a brand we feel very good about and something that has investment opportunities going forward. So excuse me for interrupting you, but I just wanted to mention that.

Brian Vaccaro

No, absolutely, and definitely noted. My other question was just on the fourth quarter store margin dynamics, labor and other OpEx moved a little differently than we were expecting. And I guess on labor, that's little over 100 basis points of pressure I think you saw year-on-year. Could you just give some color on what drove that and to what degree you reinvested in hours or service in the quarter?

Chris Meyer

Yes, well, I wouldn't say so much reinvestment in hours for service. I think the labor dynamic that you see in Q4 was mostly inflation, but we did have some additional compensation expenses relative to last year, specifically related to the 53rd week. As we pay our partners on a percentage of cash flow that 53rd week was just outsized and it's just -- we just lost some leverage on that line. And we were lapping some stuff from a year ago from one time perspective, that wasn't as big, but those are kind of the big buckets.

I mean, I think that, broadly speaking, Brian, the Q4 margin performance, what we really try to tune people into was the fact that the COGS line was going to move the way that it did, because we had been leveraging that restaurant margin pretty favorably up until Q4.

But we talked about the idea that we weren't going to leverage the COGS line just because some of the beef activity that we had a year ago. So that was probably the biggest dynamic. But yes, labor was a little higher but I think it had a lot to do with just kind of the dynamics of the 53rd week and how that came together.

Brian Vaccaro

Okay. Thank you for that. And just on the topic of productivity, if I could last one, what level of savings did you achieve in '23? And could provide a few more specifics on what some of the key drivers of efficiency in 2024 will be?

Chris Meyer

Yes. So we ended up at about $55 million or so of productivity in 2023. And again, I think the buckets that we saw in 2023 are largely going to be the buckets that we would see in 2024. Again, I think we're going after another $50 million of productivity this year. A lot of it is going to be driven by the restaurant technology that we put in place. But another big piece is going to be supply chain related, because there's a lot of opportunities there that we've been looking at, as well as some of the menu work and things that Dave talked about. So it's going to be pretty broadly spread across the P&L between COGS and labor, et cetera, again, maybe a little more weighted to cost of goods sold, but we'll see.

David Deno

I just want to underscore to Brian. The productivity we do will not touch food quality and not touch service levels. It's pure getting our great products and our service to our people in a more efficient manner. So that's extremely important to us.

Brian Vaccaro

All right. Thank you very much. I'll pass it along.

Operator

Thank you. Our next question comes from the line of Brian Mullan with Piper Sandler. Please proceed with your question.

Brian Mullan

Thank you. Just a question on Brazil, can you just touch on the operating environment down there right now? What you expect to see as you put together the guidance for the year? And then just related to that, I know you've been asked this many times in the past, but if you could just give your current thinking on your desire to own those restaurants longer term, and if the current environment is conducive to taking any action on that front for the foreseeable future?

David Deno

Sure, the environment remains good. Inflation has come down. Interest rates are still pretty high down there, but the consumer is in good shape. We had a tremendous sales improvement last year at this time, probably because of the World Cup. So that was a very difficult lap, which we were able to do. And so the new openings are fantastic. Our position is unparalleled, number one. And so the operating environment, we believe, continues to be really, really strong. So that is -- that's important.

The second piece is, we've looked at in the past about potentially having that business to be a franchise business. That still is something that we may or may not consider. We'll just continue to look at the environment and then the value we get from the business, and as we move forward. So we continue to look at optionality down there. But right now, our job is to continue to build a great business.

Brian Mullan

Okay, thank you. And then just as a follow-up, just a question on Bonefish. May be -- can you touch on some of the same store sales trends recently? Maybe what's going on with that brand? What are the key priorities for that brand this year over the next few years? Just what's the team going to be focused on?

David Deno

I think for us, we have to do some more work there. Some of the work that we did at Outback, quite frankly. Get a better understanding of our customer in this post COVID environment. I think that's something that we need to focusing on, we're doing that work right now. Is there menu investment and simplification opportunities that we can do, we're looking at that.

We've invested in operations both in technology, but also focusing on key measures, such as speed of service in our bar and for our food because it's such a bar centered concept. It's our highest mixing beer, liquor, wine business in casual dining. And we continue to refresh our assets at Bonefish, those kind of the four-pronged strategy there. It's not a growth vehicle for us. We'll continue to upgrade the assets, and we'll continue to do the customer and menu work to get that brand trends to improve.

Brian Mullan

Thank you.

Operator

Thank you. Our next question comes from the line of Dennis Geiger with UBS. Please proceed with your question.

Dennis Geiger

Great. Thanks, guys. Encouraging to hear about the progress that you're continuing to see across the Outback operations and the customer satisfaction scores, et cetera. And I can personally attest to some of the positive customer experience benefits from the server handhelds, in some visits recently. So just wondering if there is -- you could talk a little more about the opportunity for operation gains. Where is it consistency of speed, food, where sort of the biggest opportunities that you've identified lie? And I guess, most importantly, sort of how long you think it takes to get to, I think, the best-in-class level that you spoke to as a target?

David Deno

Yes. We're making significant progress in our operating measures, so we'll continue to make progress each and every month. And our goal is certainly as soon as we can I don't want to make a specific prediction, but it's something that we are all over. And I'm very pleased with the operating measures we're seeing, both in the internal progress we're making, but also externally with Technomic and other people that do a lot of work for us externally. So that is really a great thing to see. So that's the first thing.

The second thing is, I think it's more around the trade-off at the restaurant between variety and menu simplification. Can we continue to make progress there as we do our work, so there's more work coming at Outback there.

Number two is, really leveraging our technology. You saw the benefit of the handheld that's clearly happening. The grills have been a big success. If you look at recooks and reorders and steak satisfaction, that's been very, very strong. And then as we continue to do this in casual dining, this customer comes two or three times a year. We've just got to continue to make progress here. That will be a reinforcement in building traffic. And then as we look at our chances to help our managing partners and our team to offer great service, those are the things that we're looking at.

Dennis Geiger

Very helpful. Appreciate that. And then just second question, just as it relates to some of the bunch of the traffic drivers that you've spoken to, bunch of the work that the team has been doing. As we think about maybe some of the biggest drivers for this year, if there are a couple that you think can be most impactful this year, and then if there are some that are kind of most impactful on a multi-year basis, would there be anything that you'd kind of break out there? Thank you.

David Deno

Yes. I love some of our product and marketing ideas coming up. And I like the fact that we're looking at how we're spending our advertising dollars and how we're doing it to support those ideas. So in the near term, that's clearly something that we'll be looking at, and very hopeful for. In longer term some of the menu work we talked about continuing with our positioning is really important.

I think the asset upgrades, if you live in Florida and go into our Outback, most of them remodeled now, and you can see it. Those are the things longer term are going to really help us. So our operations longer term, our asset investment longer term, our menu work, we want to balance some short term gains, which I think are possible, along with some of the strong long term things that we have in place at Outback.

Dennis Geiger

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Jon Tower with Citi. Please proceed with your question.

Jon Tower

Great, thanks. I appreciate it. And Chris, best of luck. Look forward to seeing what you do next. Curious, maybe on the $16.99 Aussie 3-Course Meal. I'm just curious to get your thoughts on how you think about everyday value on your own menu today. And do you feel like that is a decent launch and/or something that you can continue to evolve over time to have an everyday value option for consumers over time?

David Deno

Yes, I think it's the first step and I think it's something we'll continue to look at in our various limited time offer opportunities. We can certainly look at that. But then, as I mentioned earlier on the call, Jon, we're also looking at some products that may have a lower price point. There is still really great products that are good return to the Company, but also offer great value to the customer. So we're doing some of that work on the menu side as well. But we have the opportunity through our combos and through selected LTOs with the right marketing spend to drive value in the brand.

Jon Tower

In the menu items you speak of, do you see those as permanent or LTO?

David Deno

We are thinking that they would be permanent, but they have to earn their right onto the menu.

Jon Tower

Got it. And then I guess just kind of zooming out a little bit and thinking about the business for a few years, you've been aiming toward that 8% or so EBIT margin target and had exceeded it at one point. And now we're taking a bit of a step back. So I'm just curious to get your thoughts on how you see it evolving over the next several years. And I would assume, obviously '24 is going to be a more difficult year for that. But beyond '24 and into '25, how should we think about your ability as a Company to get back to that 8% or so target.

David Deno

Yes. Before I turn over to Chris, I just want to mention, there's a very benign commodity basket peak, one exception, that's beef. And so we don't want to price up to cover that beef cost entirely. So we have to continue looking at our margins to look at that and how it means -- what it means for our customer. But I want to make that broad point first before I turn over to Chris.

Chris Meyer

Yes, well, I think that, look, longer term, I think we still feel good about using 8% as an operating margin target. I think the problem has been and the time period between 2022 and 2024, we've had this massive inflation that's been really tough to leverage, not just for us, but candidly for everyone who's trying to be thoughtful about menu pricing and things and balancing that dynamic.

And look, the good news is, I think that despite the inflation, margins are kind of hanging in there. And so as you think about like what's the path forward, I'd say the key areas we probably need to make progress on in 2024 would be, first and foremost, we need to continue to make traffic progress at Outback, because traffic ultimately is going to be a lever moving forward that you're going to have to leverage in order to continue to make progress on margins.

Second, once you start to see the new restaurants ramp up, you'll begin to leverage depreciation, et cetera, and you'll make more progress on that in 2024. And then I think that the last thing is once the beef situation improves, you'll have the makings of a much better landscape from an inflation standpoint to make progress on margin. So I think the signs are encouraging, and I think that looking ahead to 2025 and beyond, there's some reasons to believe.

Jon Tower

Got it. Thanks for taking the question.

Operator

Thank you. Our final question this morning comes from the line of Andrew Strelzik with BMO Capital Markets. Please proceed with your question.

Andrew Strelzik

Hi, good morning. Thanks for taking my questions. I just had two on the cost side. The first one is back on the marketing spend. You mentioned that it's going to ramp through the year. So is it fair to assume that that would hold at a higher level in 2025 as well? And maybe more importantly, are you going to be exiting this year at a more kind of steady state level. I think if I'm looking at this right, you'd be kind of like 2.5%, maybe a little bit higher than that percent of sales. So still a bit of a gap from where you were pre-COVID, but just curious how we should think about that trending.

Chris Meyer

So I'll start and I'll turn it over to Dave. Yes, I think the way I think about 2024 marketing is, yes, it will be higher. It's probably going to be higher in every quarter, to be honest, even Q1 than it was a year ago. So there's going to be increases in marketing spend. I think we've talked about marketing, we've talked about this for years in terms of -- we used to spend 3.5% of sales on marketing.

We got down to the low 2s. We recognized but we've always talked about, hi, look, even when we laid out that margin framework a couple of years ago, we said, hi, look, we think the sweet spot for marketing is probably in that 2.5% to 3% of sales range. I think that's kind of where we really think it's going to be long term as well.

So I think that, if we land this year sort of in that 2.5% to 3% range, then I would say that that's probably a good thought for us moving forward. But obviously the spending can ramp up as our sales increase. So I think we feel good about it as a percentage of sales.

David Deno

Yes. I'd just like to say in our Company, the money follows the ideas, and good ideas get supported, and we'll continue to have that discipline.

Andrew Strelzik

Okay, that makes sense. And then just my other one was on the commodity outlook. It sounds like really only beef as a problem child there. And you've been able to lock beef on an annual basis the last couple of years. Were you able to do that again this year? I'm just curious on the visibility to that commodity outlook. Thanks.

Chris Meyer

Yes, same thing. We're probably 74% locked on our basket for the year, 74%, 75% somewhere in there. Beef is 100% locked. Obviously, as in prior years, though, we're hopeful that the market continues to make progress. And if it does, hopefully we can take advantage of some of that upside.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Deno, for any final comments.

David Deno

Thank you, everybody, for your time this morning. We look forward to updating you on our Q1 call later this year. And, Chris, thank you for everything you've done for our Company.

Chris Meyer

Thank you. Thanks, everybody.

Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.