Cheesecake Factory Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 15 speakers on the call.

Operator

Afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to The Cheesecake Factory Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

Etienne Marcus, Vice President of Finance and Investor Relations, You may begin your conference.

Speaker 1

Good afternoon, and welcome to our Q3 fiscal 2023 earnings call. On the call with me today are David Overton, Chairman and Chief Executive Officer David Gordon, our President and Matt Clark, our Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call, items will be discussed that are not based on historical facts and are considered forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could be materially different from those stated or implied in forward looking statements as a result of the factors detailed in today's press release, which is available on our website at investors. Thecheesecakefactory.com and in our filings with the Securities and Exchange Commission.

Speaker 1

All forward looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward looking statements. In addition, during this conference call, When discussing comparable sales, we will be referring to comparable sales on an operating week basis unless specifically stated otherwise. We will also be presenting results on an adjusted basis, which exclude impairment of assets, lease terminations and acquisition related expenses. Call. An explanation of our use of non GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our press release on our website as previously described.

Speaker 1

David Overton will begin today's call with some opening remarks, and David Gordon will provide an operational update. Matt will then review our Q3 results and provide a financial update. Following that, we'll open the call to questions. With that, I'll turn the call over to David Overton.

Speaker 2

Thank you, Etienne. 3rd quarter consolidated revenues increased 5.9% over the prior year to $830,000,000 led by comparable sales growth at The Cheesecake Factory Restaurants of 2.4% versus the prior year and 12.6% versus 2019, exceeding the NAPTRAK and black box casual dining indices for both time periods. Our strategy will always revolve around what we do best, Delivering exceptional service and hospitality and delicious memorable experiences for our valued guests. We believe our position as an experiential dining leader will continue to differentiate us in the industry and drive profitable sales growth over the long term. And with improved restaurant staffing levels, our best in class operators have been able to increase their focus on consistently executing our strategy.

Speaker 2

We believe this contributed to 3rd quarter comparable sales at The Cheesecake Factory increasing sequentially despite the softening sales environment and importantly traffic at The Cheesecake Factory meaningfully outperformed the broader casual dining industry. On the development front, We opened 2 Cheesecake Factory Restaurants to strong demand during the Q3 and subsequent to quarter end 2 FRC locations. We continue to make progress against our pipeline and construction is ongoing on all of our restaurants we had previously planned to open this year. However, consistent with the trends seen throughout the industry, we continue to experience challenges beyond our control, particularly with permitting delays pushing some of our opening dates to late December. In order to adhere to our proven development process and ensure new restaurants open well positioned to succeed, we have strategically decided to move some of our openings into the Q1 of next year.

Speaker 2

As such, we now expect to open as many as 16 new restaurants in 2023 and 4 to 6 new restaurants in the Q1 of 2024. Thus between 16 openings for this year and 4 to 6 for next quarter, we are effectively at the 20 to 22 new restaurant openings we had previously anticipated earlier this year. The new restaurant openings for 2023 include as many as 5 Cheesecake Factories, 4 North Italias and 7 FRC Restaurants, Including 1 Flower Child location. Last week, our 5th location in Mainland China opened, including this location. We now expect 2 Cheesecake Factory Restaurants TO Open Internationally Under Licensing Agreements in 2023.

Speaker 2

Despite the ongoing permitting challenges, we continue to accelerate our development activity and build our pipeline. At this time, our expectations for 2024 are to take another measurable step towards achieving our objective of 7% annual unit growth. I'm also excited to share that last week we announced plans to develop our 3rd bakery production facility in Charlestown, Indiana. Upon completion, the facility will produce The Cheesecake Factory's Cheesecake and Signature Bakery products for our restaurants and other retailers, in addition to providing anticipated distribution efficiencies. Our vertically integrated bakery is a distinct competitive advantage with our desserts driving the strong affinity for The Cheesecake Factory brand as illustrated by our industry leading dessert sales.

Speaker 2

Looking ahead, we will continue to leverage our competitive strength, including the scale of our business, our differentiated brands, best in class operators and balance sheet to drive shareholder value and market share gains. With that, I will now turn the call over to David Gordon to provide some additional details on our operations and marketing.

Speaker 1

Thank you, David. Since the start of the year, our operating teams, training and development have been firmly centered on the fundamentals of the restaurant industry, great food, great service and great ambiance, as well as on reinforcing the operational standards The Cheesecake Factory has been built on. We believe these to be foundational for running successful restaurants and delivering consistent performance. This year's General Managers Conference content was designed with these same principles and focus in mind. The theme was cultivating excellence and we held several informative programs, panels, speaker led trainings and leadership seminars focused on hospitality, leadership, executing and performance management with the intent that our general managers take these insights and learnings back to their restaurants to improve operational execution, celebrate wins and further develop their people.

Speaker 1

As David alluded to earlier, we believe our increased focus on consistent execution and operational excellence is yielding positive results across multiple key areas. Let me just share a couple. 1st, We have seen measurable improvements in guest satisfaction. Our internally measured net promoter score metrics across both the dine in and off premise are consistently exceeding pre pandemic levels. In addition, our volume of reviews on third party sites has not only increased since the start of the year, but the aggregate rating of these reviews has meaningfully improved and continue to trend incrementally more positive.

Speaker 1

2nd, our enviable staffing position continues to improve. Our industry leading retention rates are now running above pre pandemic levels. Furthermore, our already high staff engagement scores improved As David mentioned earlier, we believe these operational improvements contributed to both comparable sales and traffic outperforming the industry in the latest quarter. Now turning to sales trends. The Cheesecake Factory off premise sales for the Q3 totaled 21% of sales, just below 2nd quarter levels consistent with historical seasonality of lower off premise mix during the summer months, potentially indicating a return to more normal seasonal patterns.

Speaker 1

On premise incident rates remained above 2019 levels with no material change to daypart mix. However, Incident rates continued to normalize on a year over year basis as we lap the heightened spending from the prior year. North Italia 3rd quarter comparable sales increased a solid 8% from the prior year and 28% versus 2019. 4 wall margin for the adjusted mature North Italia locations was 12.5%, down from 15.4% in the previous quarter. North Italia margins were impacted by seasonally lower sales and higher utility costs, which were exacerbated by record high temperatures in the Southwest, where North Italia has a higher level of concentration.

Speaker 1

We just rolled out a 3.7% menu price increase in October in part to support our margin objectives for this concept. We remain excited about the potential growth trajectory of various concepts within FRC's portfolio, including culinary dropout. We just opened our newest culinary dropout in Charlotte, North Carolina to strong demand with average sales of $175,000 over the 1st couple of weeks. We now have 9 locations open averaging over $200,000 per week so far this year. Culinary Dropout's strong cash on cash returns positions this concept as one of the more promising experiential concepts within FRC's portfolio given the attractive unit economics.

Speaker 1

We are testing the geographic portability and currently have plans to open another location this year in Atlanta as well as another 2 to 3 locations year over the next 2 years across the Southeast, Texas and Southern California. Before I turn the call over to Matt, Let me provide a brief update on our rewards program. As a reminder, our overarching objective is to leverage data analytics and insights to engage more effectively with our guests and drive incremental sales while maintaining our restaurant level margins. While we are just now entering our 5th month of the program following the national launch of Cheesecake Rewards on June 1, We continue to be encouraged by the level of member activity and engagement we are seeing. As we have previously stated, We're taking a very deliberate approach as we expand the program and therefore do not anticipate seeing a measurable impact to sales for the 1st year or so.

Speaker 1

That being said, early demand continues to exceed our internal expectations and member satisfaction scores are over indexing, reinforcing our belief that we are on the right path. During the Q4, we will be testing additional acquisition tactics and activation campaigns to better understand the key elements of our various strategies that resonate well with rewards members and are the most effective in increasing membership enrollment and engagement and driving frequency. And with that, let me turn the call over to Matt for our financial review. Thank you, David.

Speaker 3

Let me first provide a high level recap of our Q3 results versus our expectations I outlined last quarter. Total revenues of $830,200,000 increased 5.9% over last year despite finishing just under the low end of the range. Adjusted net income margin of 2.3% was also just short of the guidance we provided predominantly driven by the lower sales. G and A and depreciation combined as a percent of sales were slightly better than expectations. And we returned $27,700,000 to our shareholders in the form of dividends and stock repurchases.

Speaker 3

Over the past 12 months, our financial results have substantially stabilized, forming a foundation we believe we can build from. Over that period, our total revenues were $3,460,000,000 with adjusted net income margin of 3.5 percent and adjusted EPS of $2.44 Now turning to some more specific details around the quarter. 3rd quarter sales at The Cheesecake Factory Restaurants for $628,100,000 Comparable sales increased 2.4% versus the prior year and 12.6% versus 2019. Sales for North Italia were $62,400,000 a 15% increase over prior year, supported by comparable sales growth of 8% versus prior year. Comparable sales versus 2019 increased 28%.

Speaker 3

Other FRC sales totaled $58,600,000 up 12% from the prior year and sales per operating week for $121,900 Flower Child sales totaled $32,200,000 up 11% from the prior year and sales per operating week were $80,000 and external bakery sales were $17,400,000 during the Q3 of fiscal 2023. Now moving to year over year expense variance commentary. With the cumulative menu pricing we have implemented over the past 12 months to help offset inflation. We continue to realize measurable year over year improvement across several key line items in the P and L. Specifically, cost of sales decreased 170 basis points, primarily driven by higher menu pricing than commodity inflation.

Speaker 3

Labor decreased 110 basis points, predominantly driven by pricing leverage, improved staffing levels and slightly lower medical insurance expenses. Other operating expenses decreased 10 basis points, mostly driven by pricing leverage, lapping some elevated utilities and to go costs and partially offset by marketing costs, including the rewards program launch. G and A increased 10 basis points and depreciation decreased 10 basis points as a percent of sales. Preopening costs were $6,700,000 in the quarter compared to $4,300,000 in the prior year period. We opened 2 Cheesecake Factory restaurants during the Q3 versus 3 restaurants in the Q3 of 2022.

Speaker 3

Higher preopening costs for the quarter were mostly driven by delays in opening dates and the mix of concepts. And in the 3rd quarter, we recorded a net expense of $1,500,000 primarily related to FRC acquisition related expenses. 3rd quarter GAAP Diluted net income per share was $0.37 Adjusted diluted net income per share was $0.39 Now turning to our balance sheet and capital allocation. The company ended the quarter with total available liquidity of approximately $300,500,000 including a cash balance of about $64,000,000 and approximately $236,500,000 available on our revolving credit facility. Total debt outstanding was unchanged at $475,000,000 in principal.

Speaker 3

CapEx totaled approximately $37,000,000 during the quarter for new unit development and maintenance. During the quarter, We completed approximately $14,600,000 in share repurchases and returned just over $13,100,000 to shareholders via our dividend. While we will not be providing specific comparable sales and earnings guidance, We will provide our updated thoughts on our underlying assumptions for Q4 2023 and full year 2024 revenue and net income margin. For Q4, based on our quarter to date performance, most recent trends and assuming no material operating or consumer disruptions, we anticipate total revenues to be between $870,000,000 $890,000,000 This essentially assumes a continuation of the trends since the end of September, which notably reflect a meaningful improvement versus 2019 sales levels as compared to our Q3 results. Next, at this time, we expect effective commodity inflation of low single digits for Q4 as our broad market basket continues to stabilize.

Speaker 3

We are modeling net total labor inflation of about mid single digits when factoring in the latest trends in wage rates, which similar to our commodities continue to normalize, as well as channel mix and other components of labor. Based on these assumptions, We anticipate net income margin to be about 4.25 percent at the midpoint of the sales range. This reflects higher preopening expense to support our planned restaurant openings, which we expect to be approximately $10,000,000 in the quarter. With regard to development, as David Overton highlighted earlier, we plan to open as many as 16 new restaurants this year across our portfolio of concepts with as many as 9 openings in the 4th quarter. And we now anticipate Approximately $150,000,000 to $160,000,000 in CapEx to support this year's and some of next year's unit development as well as required maintenance on our restaurants.

Speaker 3

Note the initial cash outlay for the 3rd bakery production facility will be negligible in 2023. Looking ahead to fiscal 2024, As previously mentioned, the macroeconomic backdrop continues to be uncertain. However, we want to provide some initial perspective for next year. Based on our year to date performance, more recent trends and assuming no material operating or consumer disruptions, We anticipate total revenues for fiscal 2024 to be between approximately $3,600,000,000 $3,700,000,000 Total inflation across our commodity baskets and total labor is currently estimated to be in the low to mid single digit range. Based on these assumptions, we anticipate net income margin to be approximately 4% to 4.5%.

Speaker 3

With regard to development, as David stated earlier, Our expectations for 2024 are to take another measurable step towards our objective of 7% annual unit growth. Given the dynamic environment we continue to face, we are planning to provide additional details on our next earnings call in February. And we would anticipate approximately $175,000,000 to $200,000,000 in CapEx, including required maintenance on our restaurants. This assumes an evenly distributed mix of restaurant openings across The Cheesecake Factory, North Italia, Flower Child and FRC Concepts. Additionally, the range includes our preliminary estimate for the initial phase of development for the 3rd bakery production facility.

Speaker 3

As we are still in the early stages of this development, I will discuss our initial thoughts and we will provide additional detail in the coming quarters as the project plans materialize. At this time, we do not expect to incur significant outlays for this project in 2023 or 2024 as we anticipate most of the CapEx to come in 20252026 in preparation of opening the facility and early 2027. To reiterate David's earlier remarks, we are pleased to be moving forward with this differentiated capital investment, which we believe will support the future growth of the bakery and enhance our long term profitability. In closing, We have made significant financial and operational progress over the past 4 quarters coming out of not only the pandemic, but unprecedented supply chain and labor challenges and the highest level of inflation in 50 years. Our efforts have resulted in a solid position from which we can continue our trajectory of sales growth and margin expansion moving forward.

Speaker 3

Specifically, the return of predictability to the core operating model and stabilizing guest traffic, even inclusive of the macro headwinds and some degree of consumers returning to 2019 behaviors of the lofty spending patterns of the past couple of years gives us confidence and our ability to make meaningful additional steps in 2024 towards our longer term goals in the key areas of value creation: growing comparable restaurant sales, expanding restaurant operating margins and accelerating accretive unit growth. And with that said, we'll take your questions.

Operator

We ask today that you limit yourself to one question and one follow-up. Thank you. Your first The question comes from the line of Andy Barish with Jefferies. Your line is open.

Speaker 4

Hey, guys. Good afternoon. Just wanted to clarify some of the commentary on The same store sales improving sequentially. Was that referring to during the quarter, the monthly progress or as you looked at the full 3Q versus 2Q, I was just a little confused there. And then continuing kind of into October as you mentioned with the quarter to date assumptions driving your 4Q estimate.

Speaker 3

Sure, Andy. This is Matt. To be hopefully clear, the 3rd quarter followed roughly the industry trends albeit better in every period than the indices that most people track both in terms of comp and I think meaningfully in terms of traffic. 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 I have seen a measurable improvement relatively.

Speaker 3

So I think that's also relatively consistent with what you may have heard in the industry as well, But again, I think outpacing.

Speaker 4

Got you. Helpful. And then Just one other on wage inflation. I think again just some clarification on noting it's Moving below pre pandemic levels and then your guide, I think incorporates kind of low to mid single digits. How does The move to $20 in California next spring kind of factor into that thinking and Is that right that number is below kind of the 2018, 2019 levels, I guess?

Speaker 3

Yes, Andy, this is Matt again. That is correct. Like the actual inflation in average wages is running below Sort of that whole time period, 3, 4 years leading up to the pandemic, obviously, a lot of that was also driven by government mandated pressures as you alluded to the California coming legislation. And even inclusive of that, I would say The expectations for wages remains relatively stable and probably at or below pandemic. And I think we'll evaluate the market dynamics that play out.

Speaker 3

Obviously, none of our restaurants will be included in that wage mandate, but obviously there could be some ripple effect. Today in the urban areas, we tend to see That many of the QSR locations are already paying in that range, and people are making choices based on that. Certainly more in the deep suburbs. There's probably going to be some increases, but we have fewer restaurants there. So I think we'll look at it holistically And then see what makes sense and if we have to address that as part of our overall inflation basket, We'll certainly have to consider that with respect to pricing decisions.

Speaker 4

Great. Thank you very much.

Operator

Your next question comes from the line of Sharon Zackfia with William Blair. Your line is open.

Speaker 5

Hi, good afternoon. I guess two questions. Just quickly, if you could give us kind of price mix Traffic for the quarter, that would be helpful. And then secondarily on development, I mean, can you give us a it sounds like you want to defer, but I mean, it's a number of what's kind of embedded in that initial look at 24, and I know it's a wide range. But Can you talk about kind of what you're doing internally to kind of, I guess, better buffer The outlook on development that is given versus what we can achieve in kind of this difficult to execute environment where permitting and so many other things seem to be much more challenging than 2019.

Speaker 3

Sure. Sharon, good questions both of them. This is Matt. I'll take the first and then David Gordon can touch on the development side. So Specifically pricing was at 9.5, mix was a negative 6.1 and then traffic was a negative 1.0.

Speaker 3

So the traffic piece represented a pretty good improvement over last quarter and I think about 200 basis points better than what we saw in the industry and pretty table. As I noted in my response to Andy, it was very, very stable throughout the quarter. So that gives us a good baseline. And David Gordon will touch base on the Development.

Speaker 1

Hi, Sharon. This is David. I think as we talked about previously, a lot of the earlier COVID issues On development, we're more around supply chain and getting heavy large pieces of equipment into the restaurants, etcetera. That really has abated. And as you said, most of the issues today are more around permitting and dealing with local municipalities and their pace is not what it Once was a lot of new people in new positions.

Speaker 1

So what we've tried to do is increase our funnel and have more sites in the pipeline to be able to maneuver around that and hit the targets that we are planning to set for next year. I think we feel good about What we said to continue towards that path to the 7% unit growth and we have a good funnel for next year. And hopefully, The municipalities will get a little bit better and we'll see permitting start to increase at a little bit faster pace Because at this point, that's really the only thing that's slowing us down. I think this was a good business decision for us to decide to push some of these to Q1 to ensure that we hit the time line, but also that operationally they're able to open at a good cadence, don't put too much negative pressure on the business And that we're really opening at a cadence that's best for the operators.

Speaker 5

Thank you.

Operator

Your next question comes from the line of Joshua Long with Stephens. Your line is open.

Speaker 6

Great. Thank you for taking the questions. Matt, curious as a follow-up on that pricing comment with 9.5% price in the quarter and then what appears to be some stabilization on the food cost and labor cost side of the equation. Curious if you could talk about your forward pricing plans and kind of how you think about maybe the comp construct from a pricing perspective as we go forward into 4Q and in 1Q?

Speaker 3

Sure, Josh. I think it is relevant. And certainly, as we see inflation stabilizing, our objective Is to return to a more normal sort of level and cadence of the pricing that we take, which is typically 2 times a year, 1.5% to 2% each time. So notably in the Q3 for Cheesecake Factory, We took 2%, but that was lapping over, as in I believe, 4.25%. And so On a run rate basis, we dropped off 2.25 points.

Speaker 3

And then keep in mind for the 4th quarter, We're going to lap the incremental catch up that we did at the beginning of December. So the weighted average for the Q4, Jen, what is 7% to 7 Okay. 7% to 7.5%. And then going into next year, it's going to be more in the range of like 4%, right? And so that and then we'll see How all the pieces come together, but it feels like that's going to be in a more normal range at that point.

Speaker 3

And again, our objective is really only to take enough pricing to offset inflation.

Speaker 6

Got it. That's helpful. I appreciate that. And then as a follow-up, can appreciate the volatility in the underlying industry trends. It seems like that's Normalized to your point and from what we're hearing from peers, which is encouraging.

Speaker 6

But curious, as you think about just the operational muscles and execution capabilities you and your team have, Can you talk a little bit more about just how that kind of how the volatility plays out through the quarter in terms of Or played out through the quarter in terms of restaurant level margins. I mean, that's been an overarching goal of yours as you execute against it. But just curious, What can you adjust or make a point at improving upon despite the volatile operating environment that maybe just gets captured in this consolidated number that we see. I mean, you mentioned traffic was relatively steady. Is that a piece that helps out at all?

Speaker 6

Just looking for some Additional color there.

Speaker 3

Yes. That's an interesting question and I think it's actually really helpful to understand kind of the consistency of the business. I mean, I think I may have alluded to this before, but week to week, the P and L, the pro form a from The Cheesecake Factory and all of our concepts Looks like it's supposed to, right? All of the elements of that are much more predictable. Whether the revenue lines are up or down, the level of flow through from the concept is at or better than we would have expected it to be.

Speaker 3

As noted, the wage inflation continues to run slightly better than planned. The commodities that we've been able to secure with our supply chain continue to run Slightly better than planned. So we monitor all of that week to week and that volatility is significantly decreased, right? So All of those trends point to the ability to manage the business better. We are seeing overtime and training return back to Pre pandemic levels are slightly better.

Speaker 3

So those are underpinnings of financial progress and improvements. And I think sort of notably, If you think about the Q3 and the revenue piece, it was probably 1% to 2% of mix That was the gap. We had anticipated a return to normalization. It was slightly more than anticipated, but not material. And really the difference in the profitability is just a flow through on that.

Speaker 3

We've adjusted our Q4 outlook for that appropriately. And yet if you do the math, we're probably right in line with where we thought we would be from a profitability standpoint.

Speaker 1

So I

Speaker 3

think that really speaks The levers that we're pulling and the ability to execute at these sales levels and still get to the profit margin targets that we're expecting. Q4, we're expecting that our profit margins relative to year over year are going to expand. We would expect Q1 to expand on top of that. So the trajectory reflects that underlying consistency and operational execution quarter to quarter.

Speaker 6

Helpful. Thank you so much.

Operator

Your next question comes from the line of Jon Tower with Citi. Your line is open.

Speaker 7

Great. Thanks for taking the question. And maybe just following up on the mix conversation, curious if you can elaborate a little bit more on what's going on there. I believe it might have to do a little bit with The delivery business relative to the on premise business shifting around a little bit, but if you could elaborate and then I've got a follow-up as well.

Speaker 3

Sure, John. It's Matt. About 2%, I mean give or take is associated with the to go business, which continues to be stable, But down slightly on a mix percentage compared to last year. And the other thing that we're seeing, I think, is very consistent with the others in the industry. Compared to last year, just slightly less alcohol attachment, maybe a little bit less appetizer attachment, but compared to 2019, it's still at or above every one of the categories we look at.

Speaker 3

And I think also from a daypart perspective and a mix of check, it's very consistent, Right. So those attributes are sort of the guest performance looks and feels a lot like 2019 to us.

Speaker 7

Got it. Okay. And then just going back to the discussion earlier regarding loyalty and the plans for I believe there's some plans you have to increase customer acquisition strategies in the Q4 here. Just curious if you could delve a little bit deeper into that. Are you anticipating perhaps getting a little bit more promotional or Giving away more slices of cheesecake to incent people to jump into the program.

Speaker 7

I'm just curious to hear how you're thinking about going about getting folks into the program.

Speaker 1

Sure, John. Hi, this is David Gordon. Well, the good news is when it comes to acquisition, we really have Seeing high level of activity and guests are very encouraged to join the program to begin with. Just as a reminder, it's made up of published offers, Which everybody gets when they join and that would be access to reservations, a slice, as you mentioned, a complimentary slice on their birthday. And originally there was a complementary slice upon signing up.

Speaker 1

We ended that part of the promotion at Labor Day. And then there's unpublished offers. And that's a little bit more about what you're talking about was we look at the Q4 and doing some segmentation and trying to understand if we can drive guest behaviors to certain day parts, certain days of the week with potential promotion. And that might be a slice of cheesecake on a potential order basket of Certain size or it could be a small discount for a lunch offering, those are all the things we're going to test in Q4 And measure their effectiveness to ensure that as we work towards next year, that we're spending our marketing dollars in a very targeted way and getting the ROI in each one of those promotions.

Speaker 7

I know it's early in the program, but can you comment on any sort of changes in frequency for the customers that have jumped into the program so far?

Speaker 1

We haven't talked about any of those numbers yet. I think that we feel good on continuing to expand the program. I think that says something. And we're also very happy. We're able to measure NPS sentiment for rewards members versus non reward members And we see between a 10% to 20% higher score in overall NPS on rewards members.

Speaker 1

So that would Lead to promising results of guests wanting to come back, feeling good about the hospitality and the service they're getting as a rewards member to hopefully drive incrementality there as well.

Speaker 7

Got it. Thanks for taking the questions.

Operator

Your next question comes from the line of Lauren Silverman with Deutsche Bank. Your line is open.

Speaker 8

Thank you very much. I wanted to follow-up on the commentary regarding the improvement in trend exiting September and into October relative to 2019. What do you think is driving the improvement?

Speaker 3

Lauren, this is Matt. I think some of it has to do with seasonality. We touched on that in the script. Others have commented on that. I do think that Sort of the mix of on premise, on premise has shifted slightly, right?

Speaker 3

So you see seasonally The summer is a little bit lower in off prem that comes back in the fall. So I think you get a little bit of a pickup there. I think school calendars Have shifted, right? I mean, we actually saw this trend starting to develop pre pandemic. I mean, this sounds cliche, but everybody My age remember is going back to school the day after Labor Day.

Speaker 3

And today, I think half the country goes back August 1. So I really think a lot of what you're seeing now is with schools back to normal, whatever their schedules are with the off premise, on premise, All of those factors. And frankly, I think too, we're executing at a high level. I mean, I think some of it is just our performance. As David Gordon touched We have very strong NPS.

Speaker 3

Our operators are fully staffed. So I think we're able to turntables. I think we're able to do the things that we need to do. And if it's incrementally, a couple of percent makes a difference, but I think those are the two things that I would call out.

Speaker 8

Thank you. That's helpful. And then just shifting to margins, I want to revisit how you're thinking about recapturing restaurant margins as we think to 2024, What are you embedding for restaurant margin relative to pre COVID and any puts and takes we should consider?

Speaker 3

Yes. As we've said, our objective Just to get Cheesecake Factory back to 2019 to begin with, we obviously have had some headwinds in that journey outside of our 4 walls. And I think we've made very good pragmatic long term decisions to recapture it over time rather than all at once. I feel like the journey that we're on will get us there, right? And our objective is to continue to expand The 4 wall margins, as I said, I think Q4 over Q4 is going to be better.

Speaker 3

I think Q1 over Q1 is better. And so continuing that progression We'll get us there. It's hard to put a specific time frame on it. Obviously, we gave a range of net income, so it implies there's potentially a range a four wall margin performance, but that remains I think a very achievable near term goal for Cheesecake Factory.

Speaker 8

Thank you very much.

Operator

Your next question comes from the line of Brian Mullen with Piper Sandler. Your line is open.

Speaker 6

Hey, thank you. Just another one on restaurant level margins, but just at the North Italia. On the last call, you had talked about plans to drive Seeing an opportunity to drive improvements there. Can you just remind us what some of those initiatives are and where you are in that process? I know in the prepared remarks, I think you just referenced Taking price, but anything on the operations side to consider as well?

Speaker 3

Sure, Brian. This is Matt, I think a couple of things that we're really focused on. I mean, you did note price. For us, that is part of that plan. And we look at being about 1 cycle behind Cheesecake, right?

Speaker 3

So this would probably be the last notable price increase. And certainly, we think that's actually going to close the gap in totality. But aside from that, we remain focused on a couple of key areas operationally, one of those being food efficiencies. So that's an area that Cheesecake Factory best practices and systems Have been deployed over time to North Italia and we see a really good opportunity to lower food costs over time by bringing those standards up to where The Cheesecake Factory is and implementing the systems that we have there. The second one that we're focused on It's really bringing new restaurants up to speed over time a little bit more faster, right?

Speaker 3

So the mature margin is one thing, but if you can bring The early stages of the restaurants are faster. It sets up for success in the longer term as well. And the third one is really doing a lot of side by side restaurant comparisons. Now that the portfolio or the fleet, if you will, is in the low 30s for North, We have a much better idea of looking at sales volumes and geographies and understanding what the appropriate operating metrics can be and comparing those. And our field leadership team is really laser focused on the ability to do that.

Speaker 3

And I think actually a 4th one that I'd mentioned is not direct, It's an indirect margin driver, which is sales. If you look at the North comp store sales, they remain exceptionally strong. We're growing traffic. We're growing our off premise business. So there's really no better way to improve margins into gross sales.

Speaker 3

And that may go without saying, but I just wanted to add it on.

Speaker 1

Brian, this is David. I would just add 2 things to Matt's terrific answer there. One is that we continue to leverage our scalable supply chain and look for opportunities to purchase products that perhaps are in our broader basket that we can also use in North Italia while still keeping it unique and special and that we've had some good gains there. And just back to the sales point, I think the team has done a terrific job in understanding and maximizing reservations for sales. And part of that has been the expertise that Cheesecake has brought over the past 4 years to North and our ability to ensure that We're not just turning tables fast, but we're maximizing the tables that are in the restaurants as much as we can to get the most productivity out of them.

Speaker 3

So I guess, Brian, the answer is we're doing a lot And we have high expectations for the concept going forward.

Speaker 6

Thank you. Thank you both. And maybe a good segue, flower child. Is the plan still to bring this brand under The Cheesecake Factory umbrella by the end of the year? And if yes, can you talk about Some of the benefits of doing that and do you expect that to impact the growth trajectory and maybe over what time period would we start to see that accelerate?

Speaker 1

Sure, Brian. We are on track with Flower Child, bringing it fully under our umbrella for this year. We're looking forward to accelerating the pace of openings Next year, we would anticipate over time that it too would be a 20% grower year over year. The portability of the concept continues to be very promising. It's doing well in new markets, very strong infrastructure and the teams there that very focused on developing management to enable growth.

Speaker 1

And I think we anticipate some of the same scale advantages that we have with the other concepts with Flower Child, whether that's supply chain, some of our HR infrastructure, etcetera. But, thus far, we've seen good availability of sites. Landlords are excited about the concept. We continue to feel it's differentiated in its space. And certainly the guest demand and the traffic has been fantastic.

Speaker 3

Brian, just one piece on that. This is Matt. In addition to a key initiative for us for this year, although we don't carve out the segment yet for Flower Child, We are on track to get to the margin target that we need to be at to make it a growth vehicle, which is in that mid teens level. So we feel really good overall about the trajectory of Flower Childs.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Jeff Farmer with Gordon Haskett. Your line is open.

Speaker 9

Thank you. You guys did touch on it, but when it comes to menu price increases in 2024, which you guys are contemplating. How are you looking at the trade off between either protecting or growing margin and Any potential traffic headwinds that could come with that pricing?

Speaker 3

Jeff, it's Matt. It's always the art and science, right? I mean, I think we're Looking at what the industry is doing, we tend to want to be in the middle of The pack with pricing that's been our historical perspective. Typically, we only price to protect against inflation. If you take the average in the industry, their inflation is similar to ours, so that's going to kind of mean the same answer, right?

Speaker 3

So we're not going to be way off path either way. I think we've seen better than industry traffic. It feels like a relatively normal year. We have great operational execution, right? NPS is typically a leading indicator in our industry of where we're going.

Speaker 3

And I think that's why we launched Rewards, right, as a means to drive incremental visitation. So it's always going to be a balancing act. Certainly, it feels like next year could be more normal with respect to pricing though as we commented before.

Speaker 10

All right.

Speaker 9

Thank you for that. And just a quick bookkeeping. I think you qualitatively called it out or mentioned it, but could you just provide the commodity and wage inflation levels we saw in Q3?

Speaker 3

And Joe, what was the specific commodity? I think wages were around 4% to 5%.

Speaker 1

4% And then we saw 2% to 3% on commodities. All right. Thank you.

Operator

Your next question comes from the line of Jim Sanderson with Northcoast Research. Your line is open.

Speaker 11

Hey, thanks for the question. I wanted to talk about unit growth and if you could provide some more feedback on how to look at store closures to net against the new unit openings for the 7% growth rate you mentioned for 2024 and then the 16 new units for 2023. Thank you.

Speaker 3

Jim, this is Matt. So typically, we evaluate restaurants on an annual basis for Where their cash flow is, the life of the lease, all of the normal attributes. And I think We've probably averaged about one closure a year. So I just don't think that's a significant driver of where we think Aggregate unit growth will be and if we are closing a location, it's going to be net accretive to us In any event and so I think I would just kind of say 7% is going to be gross and net roughly the same give or take a unit a year kind of thing.

Speaker 11

All right. Thank you. Just a quick follow-up. Could you provide a little bit more detail on the

Speaker 3

We haven't done the mix versus traffic versus anything, but we do provide the price at We're sitting on about 8%. Okay. So about 8% and about 8% comp.

Speaker 11

Excellent. Thank you very much.

Operator

Your next question comes from the line of Brian Vaccaro with Raymond James. Your line is open.

Speaker 12

Hi, thanks. So just two quick ones for me. Sorry if I missed it, but what was the off premise sales mix at Cheesecake Factory in the quarter?

Speaker 1

Brian, this is David Gordon. It was 21%, same as it was last quarter.

Speaker 12

Okay, great. Thank you, David. And then Matt, can you just on the menu pricing comment at Cheesecake Factory, did I hear correctly, you plan to take around 2% in February, So you'd be settling into the 4 range basically moving into the early part of 2024? Just wanted to clarify.

Speaker 3

Yes, Brian, this is Nat. We haven't Finalize that number, but we do feel like 1.5 to 2 on a regular basis is kind of where it's heading back to. And the only thing I would say is it depends on geography, right? As we noted, I just to carve out, I think some others have done this. We're going to look at California and what the FAST Act impact is, right?

Speaker 3

So it may not be the same everywhere and it may not add up exactly that way, but we feel like Those are some guardrails for use today.

Speaker 1

All right, great. I'll pass it along. Thank you.

Operator

Your next question comes from the line of David Tarantino with Baird. Your line is open.

Speaker 13

Hi, good afternoon. Matt, I think your guidance for next year as you gave it assumes margin expansion and maybe I missed But could you maybe explain how you're going to deliver that margin expansion? And I think your comments suggested pricing and inflation should be roughly matched. So I guess what is the key driver of the margin expansion in that scenario?

Speaker 3

Yes. So a couple of things. One, I think that it does imply that we think we'll be in positive territory for comps and we think there could be some leverage opportunity. I think in the Q1 specific scenario, certainly, we're lapping really heightened commodity inflation there 2 as well. So I think that there's just some natural progression.

Speaker 3

Right now on a sequential basis, just from a pure operational standpoint, We're driving some incremental profitability in the range of 25 basis points to 50 basis points. So there's some of that's the 4 wall. We target getting a little bit of leverage off of G and A as well. So I think within that range, David, as particularly at the high end of the sales range. You're going to get a little bit more from the 4 wall piece of it than at the low end, which is relatively close to where we are today.

Speaker 3

So it's a combination of those factors.

Speaker 13

Great. And what sort of traffic assumption are you making for next When you set either the revenue or the margin target?

Speaker 3

Well, I think we're kind of looking at a combination Of traffic and mix, right, because they sort of they've been going a little bit hand in hand and I think it's important to accommodate For both of that, looking at some of the industry outlooks that we've gotten from some of our advisors as well as some of the other guidance. I think it feels prudent today to expect that those 2 combined are negative, probably in the low single digit range.

Speaker 13

Got it. Thank you very much.

Operator

Your next question comes from the line of Brian Bittner with Oppenheimer. Your line is open.

Speaker 10

Thanks. I wanted to ask about net income margin guidance specifically for the 4th quarter. I think you said net income margins in the 4.25 percent range. And I'm just wondering the path to get there because I think if you assume a normalized tax rate. It would suggest like 200 basis points of operating margin improvement and that would be against a comp that I think is implied to be like 2% -ish at the midpoint of your revenue range.

Speaker 10

So is that the right way you're thinking about 4Q? Is there A big tax benefit coming in 4Q that we should be modeling?

Speaker 3

No. I think this is where we Brian, this is Matt. This is where the sequential modeling with the year over year pricing, I think always gets a little bit hung up in the modeling, right? Because Think about the components we're talking about. As Etienne noted, the pricing for the quarter is going to be 7% to 7.5 percent and yet the inflation for wages are going to be low to mid single digits And the inflation for commodities are low single digits, right?

Speaker 3

So effective pricing over effective inflation in our key categories creates A pretty significant margin pickup for 4 wall. And remember that's because we were really behind on pricing last year. So we ended up taking that 3% roughly on December 1. And so we're lapping that benefit that we didn't get in the Q4 of last year. And I think that's the big difference.

Speaker 10

And when we think about next year, The 4% to 4.5% net income guidance as David Tarantino said it's probably margin expansion, but can you shed some light on what The tax rate assumption is in that range, so we can think about how we think about core operating margin expansion?

Speaker 3

It will be low double digits, 10% to 12% would be what we would expect. That's what's in our model right now.

Speaker 10

Perfect. Thanks.

Speaker 3

You're welcome.

Operator

Your next question comes from the line of Kathryn Griffin with Bank of America. Your line is open.

Speaker 8

Hi, thank you. I wanted to just follow-up on some of the commentary about kind of normalizing spending pattern normalizing seasonality. Are you seeing anything discernible among higher income cohorts? Since I think we've heard from a couple of players that you're seeing higher income and maybe a little bit more sensitive on alcohol mix and expressing check management that way. So just curious sort of how you can contextualize anything on income cohorts as it relates to hear your comments on normalizing patterns.

Speaker 3

Hi, Gavin. This is Matt and welcome to the call.

Speaker 8

Thank

Speaker 3

We don't track like on a week to week or month to month in terms of the research that we're doing. We do see on an annualized basis That our relative cohort distribution and spending patterns are pretty stable. I mean, we have such a broad demographic appeal that I don't think we have that sort of same approach or thought pattern as I think maybe some other segments that are more narrow in our industry. So we don't look at it quite the same way as the Yes, I was doing that regard.

Speaker 8

Okay. Thank you. And then I wanted to ask a little bit just about some of the other concepts. Given your comments on culinary dropout, I guess I'm curious if you can add a little bit more color on the components of the unit economics that are attractive enough to give you confidence to move forward with growing that brand. And If there's anything unique about customer profile, just given your comments on sort of where you see geographic portability?

Speaker 3

Sure, Kevin. This is Matt. I'll give you a little bit on the numbers and then David Gordon can touch on sort of the attributes of the concept. But We think it can deliver roughly 2 to 1 sales to CapEx. I mean that's been the historical performance and continues to be close to what we're achieving today.

Speaker 3

And the margin profile has been in the mid to upper teens today coming out of the pandemic. So putting those together, you're definitely going to be above 30% and hopefully much better than that on a sort of 4 wall margin returns. So we feel good about the overall economics And it's been pretty consistent also across the portfolio so far. So as he noted, we'll test that portability. But very strong sales And very solid margins, right, which is exactly what you look for.

Speaker 1

Yes. I don't know that much to add. I think the sales are really make it the most promising. And as we have moved into new geographies, We see those same consistent high levels of sales. And again, it's a made from scratch concept.

Speaker 1

It has a bit of a higher bar mix And we would traditionally have A Cheesecake Factory maybe skews to a little bit younger demographic, not as broad as Cheesecake Factory, But we think it has great appeal and is a terrific concept. And thus far, we'll continue to monitor closely as it moves into some of those new markets next year.

Speaker 8

Great. Thank you so much.

Operator

Your last question today comes from the line of Brian Harbour with Morgan Stanley. Your line is open.

Speaker 14

Thanks. Good afternoon. Just on your comments about inflation next year, Do you think that labor inflation is sort of like higher end of that, maybe commodities a bit lower? How would you handicap The prospects for combined inflation to be low single digit if it were in fact to be more favorable within your range.

Speaker 3

Brian, this is Matt. I think there's still some work to be done on the commodity front. I mean, as you know, beef Remains a little bit challenging, some ups and downs recently, but definitely a pressured headwind going into next year. So I think we want to see where we can get with that before being too specific. Certainly, the labor environment is promising today, and I think our brand reputation helps quite a bit with that and our ability to attract and retain employers, employees are getting their hours and Their tips and all of those kinds of things.

Speaker 3

So, but I think we put them together on purpose because there are moving parts and there's still some time before we get there. So, we feel good about that low to mid range and we'll see where it plays out in the next 3 to 4 months.

Speaker 14

Okay. Thanks. And just North Italia, was your comment that the pricing you just took, You think that were you behind on pricing there? And so essentially, you're were you saying that that will put margins at a level that's Somewhat comparable to Cheesecake as we get into 4Q and beyond.

Speaker 3

That's right, Brian. I mean basically they're one cycle behind Cheesecake Factory. And so when we just look at sort of cumulative pricing versus cumulative inflation, We were just 2, 2.5 points behind what we needed to do to catch up. That's correct.

Speaker 6

Okay. Thank you.

Operator

This concludes our Q and A and today's conference call. Thank you for attending. You may now disconnect.

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Earnings Conference Call
Cheesecake Factory Q3 2023
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