Q3 2019 Earnings Call
Excuse me, ladies and gentlemen. This is your conference operator Your conference call is scheduled to begin momentarily until that time. Your line. So once again be placed on a musical. Thank you for your patience and please do not just connect.
Ladies and gentlemen, thank you for standing by and welcome to the Cheesecake factory third quarter fiscal 2019 earnings conference call.
At this time, all participants Arnie listen only mode. After the speakers presentation. There will be a question and answer session ask a question during the session you on each press star one on your telephone.
Sure Hi, or any further assistance. Please press star zero I'd now like to hand, the conference over to your speaker today Ms. Stacy Feit Ma'am. Please go ahead.
Thanks Conference Good afternoon, and welcome to our third quarter fiscal 2019 earnings call on the call today or David Overton, Our chairman and Chief Executive Officer, David Gordon, Our President and not far our executive Vice President and Chief Financial Officer before we begin let me quickly remind you that during this call.
Wow items will be the Scott 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 forward looking statement as a result of the factors detailed in today's press release, which is available on our website investors sought the cheesecake factory dotcom and in our filings with the Securities and Exchange Commission.
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 throughout this conference call, we won't be productive presenting results on an adjusted basis.
Explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure appear in our press release on our website as previously described.
David Overton will begin today's call with some opening remarks, and David Gordon will provide an operational and acquisition integration update.
Not will then take you through our financial results in detail and provide our outlook for the fourth quarter and the full year 2019 as well some initial assumptions for 2020 with that I'll turn the call over to David. Thank you Stacy we continue to outperform the industry during the third quarters.
Staying positive comparable sales, that's cheesecake factory build comp store sales and operating performance. We're also within our expectations operationally, our teams men's or restaurants as well during the quarter, particularly on the labor from the drove year over year increases in labor productivity and hourly stuff.
And manager retention as well as a decline in overtime hours worked we also saw food efficiency improved year over year.
Subsequent to quarter and on October 2nd we completed the North Italian Fox restaurant concepts acquisitions, reinforcing our leadership position and experience through nine David Gordon and Matt will provide more detail on the integration and financial assumptions.
With regard to development, we continue to expect to open five Cheesecake factory restaurants in fiscal 2019. This includes the Gainesville, Florida location that had a tremendous opening during the third quarter capturing over $1 million in sales in the first three weeks of operations weeks.
Back to open three additional cheesecake factory restaurants during the remainder of the year.
In mid October 24 hour child location opened in Mclean, Virginia, and one additional flower child restaurant is expected to open later in the fourth quarter. We also expect to open one north Italian restaurant during the fourth quarter as well.
Internationally, we now expect six locations to open under licensing agreements, including the second location in Abu Dhabi, which opened during the third quarter and the first location in Macau, which recently opened we expect two additional licensed locations to open during the fourth quarter fiscal 2019.
Looking at the 2020, we expect our unit growth to meaningful we accelerate with the opening up as many as 20, new restaurants, including as many years six Cheesecake factory locations six North Italia restaurants, and eight restaurants within the ever see subsidiary, which includes as many as five flower trial.
Locations. We also expect as many as for Cheesecake factory restaurants to open internationally under licensing agreements with that I'll now turn the call over to David Gordon for an operational update thank you David.
We're pleased to see the Cheesecake factory restaurants increased their comp store sales go up versus the industry during the third quarter.
For off premise business again supported this performance as we continue to take share in the channel.
Our premise continued to grow comprising approximately 16% of total sales during the third quarter of 2018.
We recently renegotiated and extended our delivery agreement with door Dash, which will further improve the economics of the delivery business for us.
We also continue to seek year over year growth in our online ordering platform for pickup orders.
As we discussed on last call. We took another step forward with our marketing during this summer and fall with a test of the Cheesecake factory TV commercial and 12 markets leveraging our more than 250 dishes made fresh from scratch messaging.
We did not expect to see an immediate significant sales lift, giving the brand building rather than an offer focus nature of the spot. However, we perform some initial consumer research following the run to measure the results of the campaign and we're encouraged that our messaging resonated and purchase intent increase.
In turn we're considering additional targeted media buys in the future.
This campaign complemented our digital marketing efforts, including your own paid search and social advertising Influencer marketing and collaborations to make the cheesecake factory top of mind.
In conjunction with bugs, but speed indoor dash, we launched a content series on but speeds Youtube channel pasty piloting our fresh quality ingredients and advanced cooking techniques. The two featured videos captured nearly 700000 views. We will continue to use opportunities like these to get eyes on our brand.
To increase unaided awareness of the Cheesecake factory.
Turning to the North Italia and FRC acquisitions, we closed earlier this month and mobilized immediately to execute our comprehensive integration plan for North Italia.
We are maintaining the integrity of North Italia concept and everything that makes it so specialty gifts, while enhancing the systems and processes to further strengthen operations and support the continued national expansion of the concept.
I visited each location personally I have been so impressed by the caliber caliber the teams in place their passion for the concept and their commitment to delivering a great guest experience.
During my visits we reviewed the opportunities. This acquisition will provide including continued career growth that have benefits programs at an even stronger infrastructure to support operations.
To that end, we began to convert the north Italian restaurants to our point of sale system immediately upon the close of the transaction that are scheduled to complete the final conversions. This week.
We have also negotiated to have our new delivery agreement extended to North Italia and the FRC concepts. Just one example of the benefits that are scaled brings to these brands.
We will continue to pursue more of these opportunities overtime.
My experience working with the North Italia staff members as well as Sam Fox and his team of FRC has reinforced our belief that our two companies can drive greater value is one organization.
For the balance of the year, we're focused on driving performance at the Cheesecake factory restaurants, and our acquired businesses, while continuing to execute a smooth integration with that I'll now turn the call over them out for our financial review.
Thank you David.
Third quarter comparable sales of the Cheesecake factory restaurants increased 0.4%.
Including an approximately 20 basis point negative impact from weather related and other temporary closures, putting us right in the middle of our anticipated range.
Including $13.8 million external bakery sales total revenues were $586.5 million.
Cost of sales was 22.7% of revenues decrease of about 30 basis points from a third quarter of last year.
Higher produce costs were more than offset by overall menu price leverage.
Labor was 36.4% of revenues.
An increase of about 100 basis points from the same period last year.
Only a third of the increase was due to higher hourly wage rates.
The balance of the impact was primarily from non operating factors, including lapping a favorable equity compensation and payroll taxes in the prior year period as expected.
Other operating costs were 25.5% of revenues up 100 basis points from the same period last year. This is mainly due to the additional non cash rent associated with the adoption of the new lease accounting standard.
There are variety of puts and takes and other areas, including planned higher marketing costs, partially offset by favorable workers comp and general liability insurance.
Preopening expense was approximately $2.5 million and the third quarter of 2019 versus $3.3 million in the same period last year.
We had one opening in the third quarter of 2019 versus two openings in the same period last year.
June was 6.8% of revenues in the third quarter fiscal 2019 up 30 basis points from the same quarter of the prior year, primarily due to $3.2 million and acquisition related costs.
The acquisition costs January was 6.2% keeping us on track to meet our DNA leverage objective for the year.
Excluding the acquisition costs third quarter operating profit exceeded our expectations.
This drove adjusted earnings per share excluding the loss on our minority investments and the acquisition costs of 59 cents.
Which exceeded the high end of our guidance range.
The third quarter effective tax rate is not reflective of our actual tax rate given the impact from a loss on our minority investments, which was driven by pre opening costs, Jenna and acquisition and other accounting adjustments.
However, the adjusted EPS calculation presented in today's earning release tax effects the impact at the statutory rate, which is even higher but are normalized rate.
As a result, we believe the 59 cents is representative of our core profitability during the third quarter.
Cash flow from operations was approximately $32 million during the third quarter roughly $17 million of cash was used for capital expenditures 4.5 million in capital is provided to north Italia and flower child before the acquisition closed.
And we returned $27 million to our shareholders via our dividend and share repurchase program during the quarter.
Turning to the balance sheet, we closed on an Upsized 400 million dollar revolving credit facility.
$335 million drawn at the end of the third quarter.
This included $285 million to support the funding of the North Italia and FRC acquisitions, which we closed on October 2nd the first day of the fourth quarter.
That wraps up our financial review for the third quarter.
Now I'll spend a few minutes on our outlook for the fourth quarter and full year 2019.
As we've done on the past we continue to provide our best estimate for earnings per share ranges based on a realistic coverable sales assumptions and the most current cost information we have at this time.
These assumptions factor in everything we know as of today, which includes quarter to date trends, what we think will happen in the weeks ahead and the effect of any impacts associated with holidays or weather.
For the fourth quarter of 2019, we're continuing to estimate adjusted diluted earnings per share between 61, and 66 cents based on comparable sales in a range of 0.5% to 1.5% of the Cheesecake factory restaurants, which reflects an estimated 25 to 50 basis point.
Negative impact from the holiday shift this year.
Note that EPS range excludes an anticipated net 12 to 15 cents negative impact from the note aspects of the acquisitions, including incremental interest expense.
There may be additional impact from purchase accounting, which cannot be estimated at this time.
Turning to full year 2019, we now expect comparable sales were approximately 1% of the Cheesecake factory restaurants.
We are now estimating adjusted diluted earnings per share between $2.65 and $2.70, which assumes an effective 2019 tax rate of approximately 9%.
This EPS range also excludes the aforementioned met to 12 15 cents negative impact from the acquisitions in the fourth quarter as well as any potential purchase accounting impacts.
With regard to capital allocation, we now expect our cash capex in 2019 to be between $80 million to $90 million to support our anticipated Cheesecake factory unit growth and ongoing maintenance needs.
In addition, we now expect $10 million to support the plan North Italia, and therefore see openings during the fourth quarter.
Looking ahead to 2020, we expect our total company cash capex to be between 130 and $140 million to support our objective for accelerated unit growth of 7%.
We will also make an 11.25 million dollar acquisition installment payment on the post close consideration.
We will be providing fully consolidated fiscal 2020 guidance on our February call, but in the meantime, we're providing the following assumptions.
On the cost side based on the visibility we have today, we expect food inflation for 2020 market basket to be approximately 2% and hourly wage rate inflation of about 5.5%.
For modeling purposes, we estimated 2020 tax rate of about 8% to 9%.
We're also reaffirming the initial assumptions around the acquisition impact that we provided on our second quarter call. As a reminder, these are just estimate at this point and we will depend on a variety of factors, including purchase accounting.
While neither north Italia, nor FRC qualify as reportable segments for accounting purposes, we will be providing supplemental information on north Italia anniversary, beginning next quarter to gauge our performance and assist with your modeling.
This will include comp store sales for North Italia.
As well as revenue operating income preopening costs, and depreciation and amortization for North Italia Anda foresee.
We made these long term strategic investments to reinforce our position as a leader in experimental dining and complement the continued domestic and international license expansion of the Cheesecake factory.
We plan to maintain a balanced capital allocation strategy comprised of investing in new restaurants that are expected to meet our targeted returns.
Repaying borrowings under the credit facility.
And continuing the dividend and share repurchase program.
In closing with the strength of which is good record brand, coupled with accelerated and diversified growth drivers and north Italia and the FRC concepts. We believe we are well positioned to provide us with exceptional dining experiences over growth opportunities for our respective teams and maximize long term value for our shareholders.
With that said, we'll take your questions in order to accommodate as many questions as possible. Please limit yourself to one question and then review with any additional questions.
Ladies and gentlemen, just as a reminder, if you'd like to ask a question. Please press star and then the number one on your telephone keypad.
Your first question comes from the line of John Glass with Morgan Stanley .
Thanks, Thanks very much.
If you could just clarify a few things on on how you think about Fox and accretion you talked about excluding interest expense in the fourth quarter. So I wasn't sure. If that was an unusual expense or if thats ongoing and do you think about the earnings neutrality of this is including the incremental interest expense number one and two I think last quarter, you said 15.
5% restaurant margin for these brands and from that today, but you also talked about purchase accounting adjustments is is that 55% is that on a comparable base as best you understand it with your current restaurant margin.
Or did you not GAAP adjust that I'm just trying to understand if you still believes that there is if there's any material adjustments you're going to have to make to that guidance that you provided initially or if there is on the same basis or not.
Sure John just however, fourth quarter first because there's a lot of moving parts. We understand that we thought it was just easier to kind of give a lump sum number right. Some some aspects of the business are making positive contributions are still some ongoing preopening that's heavier weighted theres. The interest. So we just thought in order to understand the core Cheesecake factory business.
As we've been giving guidance, we would just bundle all of those pieces together on a go forward basis. In 2020, we are reaffirming sort of the neutrality aspect of it inclusive of the interest expense. So hopefully that helps kind of define that I think you know with respect to the purchase accounting there or just.
Different pieces to it that are outside of sort of a normal gap that you referenced right. So what component of it would be is attributable to trade names is there going to be any amortization of those we have to kind of work through all of those pieces and we're just not of a point of giving an estimate for that right now of course, there would be non.
On cash right because the consideration is put up now it's just a matter of how that might roll through otherwise roughly speaking we know those estimates were based on our best case assumption, our understanding gap and current operations.
Thank you.
Your next question comes from the line of Sharon.
Yes.
William Blair.
Hi, Good afternoon, I guess, a follow up on John's question would be helpful to know kind of what you anticipate the quarterly interest expense to be post acquisition and then secondarily on the international development for Cheesecake for next year with that step down could you talk about how you're seeing the the news.
Dollar format location perform I think that was something that was done in an effort to try to create a smaller prototype for international if that might open up.
The potential to Reaccelerate in 2021 and beyond.
Sure shared I think just simply right now in the on the interest.
Right now we have 335 on the line, we were sort of estimating around 300 issued by the by the beginning of the year end and net interest rate is about 3.5% and we made pay down a little bit of that as we go but that gives you kind of a run rate.
And share and high it's David Gordon just on the 5500 square foot Cheesecake factory, that's out here in Oxnard, California continues to actually outperformed our expectations sales remain well above cheesecake factory averages its operating really really smoothly. So our international partners. Most specifically in Asia are excited to see.
That because they do believe it will allow them hopefully the funds and real estate sites that are not available today, because the current wallets cheesecake. Prior was around 7000 square feet. So it's all positive on that front.
Joe This is Matt I think importantly, all three of the partner that we have continued to look to open restaurants next year somebody's us as timing I think if I remember right at the beginning of this year, we had one kind of slipping from 2018, and so I think we've always said sort of three to five as the average run rate and I think we're continuing to do that.
Thank you.
Your next question comes from the line of Nicole Miller with Piper Jaffray.
Thank you. Good afternoon are you commented about industry weakness in terms of same store sales I wanted to understand if you could share or devenir casual dining versus fast casual perhaps so just part a wondering if casual dining giving up some comp to limited service and if so why or is that something about customized.
Coming out and then in terms of fast casual and FRC group, specifically, how our comp overall pickup or.
If you can share nice Italia and far Todd. Thank you.
Sure I think it's hard to say for sure nickel as Matt on.
Fast casual taking share I mean, I think we have felt for a while that midweek lunch is an area of opportunity perhaps some of those sales for us are going to people were a little more time starved and things like that a bit and take away. When we look at sort of the overall, whether it's black box or Miller Poles.
Sure Navtrak or the credit card data I do think that maybe QSR took a little bit of share with the value deals in the third quarter, but that but that everybody else's kind of in the same in the same vein and really it was attributable to July and so kind of what's going on with that month than maybe it has to do.
With wallet share in retail spending.
I think group from our end.
Weve came in right, where we saw we would which we were pleased with back as it speaks to the predictability of our business and understanding kind of where things arrive, which is really helpful for managing and providing guidance.
North Italia continues to do well year to date, it's running mid single digit comp store sales and we haven't provided.
Comps for the FRC side of things, but they continue to do well grow Organiser, we're really pleased with a business. The only concept within that group, it's really running through in the fast casual mode. If you will is flower trial than we continue to open locations and obviously that speaks to sort of the bullishness that we have four.
Thank you.
Your next question comes from the line of David Tarantino with Baird.
Hi, good AFE during and Matt Matt could you I think you mentioned the Q4 operating profit over performed or your assumption could you maybe elaborate on what factors drove that upside.
Hi, Dave It's Matt I think during Q3, right and yes. It was generally speaking I think we were pretty much dead on expectations as we have pretty much been all year and continued to maintain when we look across the line items versus our plan.
We're hitting virtually all of them, we had a little bit of a favorable benefit in workers' comp NGL insurance, we've been doing a great job managing that this year and so just provided a little bit I think gionee, if you net out the.
The acquisition costs were slightly favorable to where we're expecting to be too so, but otherwise do is really right on.
Got it and then.
Question on the guidance for Q4 again on on.
The impact of changes that 12 to 15 cents from the acquisition.
What in there is what you would consider onetime in nature.
Versus.
Something that that might be more ongoing as the 12 to 15 cents.
Inclusive of any onetime charges are integrated isn't it is it's an estimate still because as there's definitely just like we had in the in the in the third quarter right. There are some components of the integration as David Gordon mentioned.
We're literally going through and changing out.
They are pausing system. This is for North for example.
In this current month and so there are some direct expenses that are related part of it has to do with slightly higher pre opening them on a run rate basis as a percentage of it. So again I think we'll be able will provide more clarity on the guidance, but I would I would look at sort of next year, we're not anticipate.
Trading significant one time expenses outside of the interest which is bundled into the neutrality estimate for the EPS.
Outside of whatever the purchase accounting pieces.
But just just so we understand what the 12 to 15 cents.
Represents the.
Interest expense the Preopening expense and as they are DNA also in that sure there would be it would be as sort of a net contribution from some onetime expenses the interest expense and all of the components associated with the Preopening Gionee and operations for our first see in north further.
Quarter.
And the and does your guidance.
Uh huh.
Does that include the revenue and profit contribution from all the concept you're acquiring.
So we haven't given specific revenue guidance for I would have provided comp store sales were cheesecake factory, but.
We can certainly get that too.
Great. Thank you very much.
Your next question comes from the line of John Tower with Wells Fargo.
Great. Thanks, just quick housekeeping, most delivery mix and online mix in the period and then specifically for David.
The marketing messaging years is shifting a little bit the brand Cheesecake brand, it's been reliant mostly on word of mouth historically to to grow traffic and.
Clearly with them the television tests and now some of the online tests, you've been doing that's changing and I'm curious to hear your thoughts on why and where you think it can go overtime given that the spend for the brand I think and 2018 was roughly 0.3% of sales versus the the peer set that's close.
For 2.5%.
Thanks, John This is David so off premise was and totaled 16% of total sales delivery made up about 35% of that 16%.
Online ordering is now at 13%, which is up slightly from where it was last quarter and phone in is still about 50%.
Evolve the transaction so continues to be a successful channel for us.
And we're pretty happy with the extension in the renegotiation of our door Dash deal, we feel like they have been great partners and we'll continue to leverage that partnership with marketing as well.
As far as the marketing goes I would say, it's not that we changed I think we're evolving and we're looking at different avenues today than perhaps we have in the past need to think about word of mouth and what it used to mean just use Dominion would tell your friend when you sit in front of them today word of mouth is social media marketing and it is using those channels.
And in every way whether its Twitter Instagram.
Or even the social media influencers to get that word of mouth. So we're in a continued to do that and along with the the paid search and being on all the time. It we've been doing that now throughout all of this year and that's not that different from what we were doing last year and towards the television. It really just to test is just to see if the affinity for the brand to be able.
We continue to increase awareness can make a difference to sales over time and debt without promotion without offer that's still stays true to who we are as a concept and we just want to remind people, especially those that maybe are thinking of us in some of those other markets as frequently as we'd like that we're here.
And so we've said that little bit of research as I said earlier post the TV commercials and.
It really seem to resonate and the more we talk about fresh made from scratch that the more we hear from people that they're talking about us more than they had previously so I'd say that we're evolving and don't have any plans to do that much different than we've done this year, but we'll talk about that in February when we talk more about next year.
Does the evolution include potentially spending a little bit more as a percentage of sales going forward.
I think we'll see and if it does we would certainly let you know when we when we do talk about next year.
Thanks.
Your next question comes from the line of well swap out with Stephens Inc.
Yes, thanks, guys.
And that Pos conversion going on at North I was wondering if you could talk about any other integration initiatives going on whether that personnel technology or otherwise it either north or any other FRC concepts and secondarily, how we should think about the clinical integration period. If you will or however, you would characterize that.
I will this is Matt I think we're as we said before we're going to be careful about how we proceeded and one of the businesses are performing well and and you have to watch out for afford disruption.
We were able to plan ahead for north because we had been contemplating that acquisition really from the beginning of year based on the performance.
And so some of the pieces around FRC or a little a little bit newer and certainly we want to maintain the culture and we're really doing it for growth that being said, we'll look over time to see where are those opportunities makes sense and whether we can buy chicken together cheaper that would be great or if we can have more suited.
Your technology platforms and that are more scalable.
That would be great I think we'll learn a lot from the north integration and many of those facets that we can start to apply.
But.
We continue to provide an update as we get more visibility into that.
Got it thank you.
Your next question comes from the line of credit Gregory Francfort with Bank of America.
Hey, guys. Thanks for the question, maybe if you could just I guess two two quick ones, but can you breakdown what the unconsolidated affiliates loss was and why it stepped up so much in the quarter and then on the other question is maybe a little bit more forward thinking.
Margins have dropped for a few years now from I assume 19% to 20%.
15 to 16, and I guess can you help me understand how you think this is going to play out for casual dining is you guys are not alone in terms of a few hundred few hundred basis points of margin pressure.
Curious what point, we start to see the industry heavy bigger shake out how far away that isn't sort of how cake works through that thank you very much.
Sure Greg as Matt I think on the first we can get some digital is job one but really the there are some components with the unaffiliated loss associated with the transaction.
As we noted some of those were accounting adjustments some of those were retention bonuses keep people to a certain point in time. So it would have worked.
The transactions similar to what it has been driven mostly by the upsize gionee and pre opening as we've discussed before so we're going to gives you a range of magnitude to the onetime event that that was absorbed there.
With regards to the margins I think couple of things are remember one of the impact from lease accounting this year, depending on how you're looking at the margin structure that can look like anywhere up to 100 basis points impact and so no doubt there has been pressure over the past three or four years probably.
Probably a couple of percent I think some of that was the impact from 27 team.
Certainly sales environment, there was not productive for the industry and a little bit of de leverage and give you looked at our results now over the past say five quarters, we've pretty much hit the margin objectives that we set out and stable on a year over year basis for the year based on our guidance and so.
And that's with a 1% comp.
And you know about 3% pricing so I think in this environment.
No we're able to maintain that margin I think it does depend on continuing to have positive comparable sales, even if theres a little bit of traffic pressure.
We said before that we think the labor escalation that has at least Pete you know still running about 5.5%, but but hasn't gotten worse.
Commodities remain sort of in the same range as they have so.
It seems very doable for the next leg of this environment, we continue to manage the business the way that we have over the past year to have.
Thanks, a lot.
Your next question comes from the line of John Avemco with JP Morgan.
Hi, Thank you a couple if I may have yes, firstly in terms of yes some of.
The labor efforts that were successful in the third quarter, reducing hours and reducing paid over time.
How much of that it was easy comparison, driven if you will universe is how much of that may actually have legs as we kind of think about the model through fiscal 2000.
Hey, John It's Matt I don't think there was necessarily an easy comparison I think a big piece for example on the overtime is staffing and we're just doing a great job.
Truly industry, leading on retention efforts and I think when you're able to do that at.
Bears fruit I think we also have a real focus this year on scheduling and forecasting and I think we're doing just slightly better job being tied on that I think all of those.
Continuing into the fourth quarter in the first part of next year you as we've always said, we're sort of about incremental improvements.
And I think that those are paying dividends right now and are continuing.
Our guidance.
Okay, I understood and in terms of food waste I mean, yes as similar question just with what the different cost category.
How significant was it and how much of an opportunity is there when you look at your.
Versus T. I'm sure you have one how much of a margin gap you think does exist on the food waste side that perhaps could be captured.
Well, we run very high efficiencies I've been pleased to see that we continue over the past two years to improve upon that so we rolled out a program to really improve on the prep production forecast, saying. It was up 2.0 is what we call that and we've seen ongoing benefits from that.
Theres some other things where we're looking at right now that we're trialing I think as a sort of combined effort between labor and cost of goods and I think thats a good way to think about it right because there is little bit of trade out with the way that pricing is hitting and you're getting some leverage and cost of sales in some deleverage and labor just based on inflation rate.
But if you think about core costs in total I think our aggregate focus continues about on how can we improve that combination and there are there things we can do quite buying chicken pre pounded right. So we talked about before now we have a pilot running right now to see if that could be something that might be the same prices.
The chicken, we have today, but require less labor hours. So I think when we look at those two we continue to look in combination.
Okay, Great and then the final one I promise you guys mentioned.
Excuse me kind of the rewritten Jordache agreement a few times if delivery is between five and 6% of sales I mean, how significant is it I mean is at five point savings 10 points savings I mean, when we talk about getting a better deal from Gord Ashley and is that something that will notice in the BNL and what and what that in place for the third quarter.
Our objective is always been to keep the margin.
Place that we feel that balances the business out so we've talked about needing to make sure that we get them the margin relatively equal to dine in guess I think that this gives us pretty darn close and as a fair deal I think what the benefit is that as sort of roles in in the middle of this year. So hopefully.
Just one of those initiatives that helps keep us relatively flat core margins going into next year.
Thank you.
Your next question comes from the line of Jeffrey Bernstein with Barclays.
Great. Thank you very much to question just one on the comp trends I know you mentioned last quarter and I think you mentioned it again today that you were off to a slow start in the quarter.
And is in the third quarter Im just wondering if you can provide any context behind.
For that tough start whether you saw a trend.
Get better and Thats ultimately evident in the 0.4% comp for the full quarter and maybe you could provide the components of that comp as well and then add one follow up.
Sure.
So about 3.2% pricing.
Mix was a positive 0.9.
And traffic was negative 3.7, but as we've talked about we serve work at the mix offsetting that so roughly speaking were about 1% off trend.
From the beginning of the year and essentially all of that was attributable to the July period, as we saw sort of the back half of the quarter really be right back on on trend and I think that speaks to the guidance that we're providing so I think there's been a lot of conjecture about why that might be and you know.
Amazon Prime day or in target matching that maybe is pulling in retail sell that.
Nobody really knows I think there's been some analysis of the shown that the July comps over the past four or five years have been somewhat within 1% to 2% lower than the balance of the year and so I think I think thats, what we saw but but I feel like.
From our standpoint, we were in the middle of a consistent run of comps right now.
Got it and then just in terms of I guess clarification on the guidance related to foresee in North Italia.
Thank you mentioned, that's 12 to 15 cents that is being excluded in the fourth quarter. Despite the acquisition having already close. So this is just to try and make a clean year and then therefore, you're going to started fresh including all of those.
Costs, starting in 2020 is that correct.
Perfect Thats exactly right. So we're just trying as we've said we're trying to keep that core guidance would people going to understand you know where where we think we are versus where we said and then we'll have to have a clean year that includes everything.
For 2020.
The fourth quarter, then so you're excluding the revenues also you're including the revenues from these units, but excluding the costs.
So again, we haven't provided specific revenue guidance and we can help you modeled up we're providing the comp store sales guidance for Cheesecake factory. We're just giving you that expense to exclude out as a way to sort of bridge. The gap. So you understand we're contemplating it but it's not in the core guidance.
Understood I just want to show the vessel stripped out the revenue side other ones. It seemed like a mismatch that the revenues are in but we have we have we have not provided the revenue guidance for those as well.
So I think it's comparable.
Okay and the percentage of the 12 to 15, that's ongoing versus one time as we think about applying that going into 2020 can you give a I know you mentioned there are lots of pieces within there but.
The majority onetime was speaking roughly speaking about half of that is the interest expense, which we believe and on a go forward basis will be covered by the operations. I think you have some heavy preopening relative to the base as well and blood say incrementally that's another quarter of it and then you have afforded us.
Onetime expenses.
Got you are very helpful. Thank you.
Your next question comes from the line of Andy Barish with Jefferies.
Hey, guys, Yes, just one more.
North questionnaire North FRC questions, we look out you.
Broadly mentioned that.
Restaurant level margins kind of.
No I equate to where it peace cake is running right now north little bit higher FRC, a little bit lower.
Is that still kind of.
What you're thinking for next year, I guess without getting too specific and then.
Just in terms that then new unit economics that you provided does do you incorporate higher margins going forward in that in that in the north and FRC businesses is there anything we should just be aware there in terms of of what's going on.
So ended as Mel just to tackle that second part one.
The unit economics, contemplate sort of the mature run rate right and that sort of the way that they most people model it out and keeping in mind the extremely high growth rate for both north and FRC. When we look at the same store performance for those different groups of restaurants, that's what we're looking at one or providing you.
The economics and those higher margins, because obviously you if you're opening up six or seven restaurants on the base of 15, you've got some waiting issues with respect to the aggregate margin performance of the concept. So the aggregate margin performance was contemplated for next year and the guidance that we provided previously.
And posted on the website the modeling for the new units looks at sort of comp performance to strip out that heavy growth piece.
Very helpful. Thank you very much and just quickly on that anything different on the on the cost side of equation. There. The two main prime court costs.
Labour ending.
As a good question for modeling I mean relatively speaking, it's it's pretty close on the FRC for Cheesecake.
Maybe a little bit less labor.
For north.
And that's probably the difference a little bit similar to takes a little bit more complicated concept, but otherwise sort of proportionately similar.
Thank you.
Your next question comes from the line of Difrisco with Guggenheim Securities.
Thank you and I apologize in advance for.
Beating a dead horse here as it could take us a little further extends the guidance.
I guess when you say neutral for 2020 are you sort of starting from the and the base along this adjusted to 70 number or is it sort of that the GAAP number so.
So the neutral pieces for so for FRC right. So that's a good questions for north up are seeing interest combined so we'll be looking at it from the adjusted perspective of Cheesecake factory.
That's the core business looking pretty good obviously, it excludes sort of the you know the losses attributable because that business carved out and thats the neutral part.
And you are completely when you say 61 to 65 cents for the fourth quarter. It is completely reflective of all of the cheesecake nothing to do with the acquisition that will be stripped out or bucketed in a different.
When you talk about your guidance here can 65.
Thank you.
And then last question I guess more so on the current trends that you're seeing out there I.
I think you will recall that out but is there anything or the too soon to say sort of with the wildfires going on there.
Anything impairing the business I know you have a large patio business the air quality starting to affect some square footage that might be coming under pressure or.
So far you haven't seen any of that.
Well everything that we do know is in our guidance. So I think that that the rain sort of speaks for itself on.
The only thing a really contemplate that we called out specifically above and beyond those the holiday shift.
Okay. Thank you.
And your last question comes from the line of Dennis Geiger with you.
Great. Thanks for the question just a follow up maybe on the longer term margin question.
Whether or not you were able to share some kind of longer term margin target at this time or maybe how similar.
You are thinking about the targets relative to previous targets.
Maybe if thats difficult, Matt is there anything else to add kind of on the margin recapture maybe whether those four or five pillars that you talked about previously if those are still generally notable opportunities for you if there's anything incremental phys Ed.
Thanks sure sure sure there's that.
So I think that those are all oral so implied right I mean, I think sort of walking through the call today. Another key is.
Comp store sales keeping that in that 1% to 2% range I think we've proven that if thats. The case, we're holding four wall margins flat, that's the sort of the anchor Cheesecake factory is still the majority of the of the business right and I think in addition to that we're delivering on the DNA leverage that we talked about getting that tend to year.
We're continuing to build international restaurants, with our partners and so for next year again right in the middle of the range.
So.
Think that the accretion of the north margins over time, obviously, it's a small piece, but we will build so I think we're executing on all of those right. Now we look forward we have the levers in place with the accelerated growth in the capital returns program to kind of hit our aggregate total returns target without expanding margins.
But of course that does continue to be our goal and I think we're confident that we can manage flat core margins in the 1% to 2% comp store sales range.
Great and then if I could just get one one other within just as it relates to pricing as you kind of look out a little bit.
If you're happy with kind of that 3% level, given what you're seeing from up from a cost perspective.
And then on the other side, the macro environment and how the consumer is.
Thats a good level as we look ahead a little later thanks.
I think it's a realistic level based on the cost pressures I think most restaurant companies again, we think we're right in the middle of the average there based on where labor and cost of sales are going and you look at different geographies will have slightly different pricing levels as warranted based on the economics, it's a little bit are in a little bit science.
And certainly you want to be in a business is to not take as much pricing as you have to but I think we're comfortable being in the middle of the range given the depth of the menu and the ability for us to sort of manage a different than everybody else.
Thanks.
You do have a question from the line of Brian Vaccaro with Raymond James.
Hi, Thanks, just one more quick one on on off premise. It seems that off premise sales mix and also deliveries that has plateaued here a bit for you and others here in third quarter. After just curious what you believe is driving that and net here for Q comp guidance assume sort of a less tailwind of off premise growth offset by and.
Prison in dining trends in it so anything you specific as you point out marketing or other initiatives that might help dining trend if the year end. Thank you.
I think the first the first part of that.
Is that.
Just based on the who does the driving and who does the ordering it does appear that sort of the college seasonality and so overtime seasonality of what people are doing.
Creates a little bit of it up and down in the off premise business and the delivery business. We've seen that now even as it has been growing quite a bit you really can't compare the second quarter to the third quarter as a percentage and get an accurate representation of sort of whether its plateaued or not so we still feel like it's growing we've said all along and we think the if that can grow one.
The 2% to year, we're going to be happy and Thats. So that's what we believed I think other people put bigger numbers out there there may be over shooting. It so that seems to be on track for at least for us and we feel we feel positive about that so you know our fourth quarter guidance just assumes all of the pieces that have been working for us.
In the past invest three quarters.
And there are no further questions at this time.
Great. Thank you for joining today.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.