Q3 2021 Cheesecake Factory Inc Earnings Call
As detailed in today's press release, which is available on our website at investors Dot the Cheesecake factory Dot com and in our filings, which 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, during this conference call we will be.
We will be presenting results on an adjusted basis, which excludes noncash acquisition related contingent consideration and amortization expense.
An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures.
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 update.
Matt will then briefly review our third quarter results and provide a financial update.
With that I'll turn the call over to David Overton. Thank you Tien comparable sales at the Cheesecake factory restaurants increased eight 3% relative to the third quarter fiscal 2019 solidly outperforming both the Knapp track and black box casual dining indices.
We believe this performance was particularly strong given the surge in COVID-19 cases from the Delta variant the company was experiencing at the time.
Our teams generated solid profitability.
On the face of higher than anticipated group medical insurance costs and incremental costs associated with the pandemic environment, which Matt will provide more detail later in the call.
Sales across our concepts further strengthened early in the fourth quarter with continued strong contribution from off premise channel fill.
Fiscal 2021 fourth quarter to date through November 2nd comparable sales at the Cheesecake factory restaurants increased approximately 10, 5% versus 2019, and we've seen relative consistency in this metric each week.
On the development front four new restaurants opened during the third quarter, including North Italia and flower child in Gilbert, Arizona, which is a growing suburb in the Phoenix market.
And the second North Italia location in the National area, and frankly, where we continue to see great response to the brand and <unk> in the Chicago area, which is a new market for both that concept and the broader FRC portfolio.
<unk> is a very differentiated offering in this market and has received a very warm welcome from guests so far subs.
Subsequent to quarter end, the Cheesecake factory opened in Huntsville, Alabama to a tremendous demand.
Three openings today, North Italia, and in Orlando, and both Bronco and culinary dropout and Denver, We met our development objective of opening 14, new restaurants across our concepts this year.
This is a marked achievement considering the pandemic environment and the associated challenges, we have been operating with throughout 2021.
On the international front, a third Cheesecake factory location in Shanghai opened this week under a licensing agreement and we are we are seeing all three of our international licensee recapture their pre pandemic sales levels.
Looking ahead, we have a strong pipeline in place, which we believe positions us well to achieve our targeted 7% unit growth next year at the same time, we will continue to focus on driving comparable sales growth and managing through this operating environment should the cost pressures proved not to.
Transitory in nature, we are committed to implementing further cost management initiatives and leveraging the breadth of our menu to take additional pricing to protect margins with that I'll now turn the call over to David Gordon.
Thank you David.
As evident in our third quarter comparable sales growth of the Cheesecake factory restaurants.
Surgery urgent COVID-19 cases had minimal impact on our topline results.
Continued strong performance on the off premise channel supported our sales trends as average weekly sales in that channel, where nearly double 2019 levels throughout the third quarter.
We recently completed our consumer research study that showed that we attracted a significant number of new guests to the cheesecake factory throughout Covid.
Particularly via the off premise channel.
Notably loyalty is a very strong evidenced by a significant number of these new guests already and the frequent cohort.
This data further reinforces our belief that a meaningful increase in off premise sales could be a longer term sales driver for the cheesecake factory as we emerge from the pandemic.
Fiscal 2021 fourth quarter to date through November 2nd average weekly sales are approximately $213000, which is 10, 5% higher than the level seen in the same period in 2019.
Off premise average weekly sales of $60000 continued to be nearly double the levels seen during the same period in fiscal 2019.
Okay.
Grounded in the learnings from our consumer research, we are again utilizing some targeted off premise marketing to further drive our performance in this channel.
For example, just last week, we celebrated Halloween with our guests with our popular treat or treat promotion.
Our cheesecakes are a key differ differentiator.
These creative offers continue to drive meaningful demand.
At the same time.
We continue to more broadly execute brand based messaging to raise the profile of the Cheesecake factory with a focus on social and digital channels.
While our primary focus is our core guests to better reach the Gen Z audience. We recently launched our Tictoc presence and have generated over 31 million views of owned content with each video averaging over 1 million views.
And in September we launched augmented reality cheesecake theme filters on Snapchat with the campaign, reaching over 5 million unique users.
Turning to staffing while we have continued to encounter some pockets of staffing challenges. This has not meaningfully stifled our sales performance at the Cheesecake factory restaurants.
The labor market remains tight however, we believe we may be seeing some green shoots for example, we saw hourly staff turnover of moderate throughout the third quarter and we received solid application flow for our recent Cheesecake factory Huntsville opening enabling the restaurants to be fully staffed in advance of its opening date.
We were recently recognized from the people magazine 100 companies that care list and we were the only restaurant company to make the list.
People magazine identifies the top U S companies supporting their employees and surrounding communities.
Highlighted the over 25000 meals are restaurants donated to health care workers across the country as well as our nurse program, which donated more than 550000 pounds of unused food to over 500 nonprofit and food banks in 2020.
We were also recognized for carrying for our teammates in meaningful ways during the pandemic.
Our unwavering commitment to our values and people first culture contributes to our continued industry leading retention at both the manager and hourly staff levels, which we believe is a key contributor to our positive guest experience.
Turning to North Italia.
Third quarter comparable sales growth of 8% versus 2019 was also solid in the face of the Covid case search and somewhat more labor pressure than we experienced at the Cheesecake factory restaurants, given the smaller nature of the concept.
Sales at North have strengthened further with fourth quarter to date through November 2nd comp store sales up approximately 14, 5% versus 2019 levels.
Off premise has continued to comprise approximately 14% of sales of north.
FRC drove similarly strong topline performance during the third quarter and has also seen sales further strengthen fourth quarter to date with notable performance from the off premise channel with flower child.
We are incredibly proud of the topline performance, we have driven across our concepts and how our teams are navigating the dynamic operating environment.
It is not easy to run a great restaurants today that we continue to be so we're appreciative of our team's dedication to absolute guest satisfaction and maintaining our culture across all of our concepts.
With that I will now turn the call over to Matt for our financial review. Thank you David.
Third quarter comparable sales at the Cheesecake factory restaurants increased 41, 1% year over year.
Relative to the 2019 period comp sales were up eight 3%.
Off premise represented just under 30% of total Cheesecake factory restaurants sales during the third quarter.
Revenue contribution from North Italia, and FRC totaled $112 4 million.
North Italia comparable sales increased 38% year over year and were up 8% versus the 2019 period.
Sales per operating week at FRC, including flower child for approximately $94200.
And including $16 $7 million in external bakery sales total revenues were $754 5 million during the third quarter of fiscal 2021.
As usual im going to provide year over year detail on expenses.
But of course note that the significant disparity in revenues given the impact from Covid in the third quarter last year drove some abnormal year over year variances.
Cost of sales declined 30 basis points, primarily driven by sales mix and pricing leverage.
We exited the third quarter with higher cost of sales inflation as we were buying in the spot market to meet volume needs that exceeded our contracted levels.
The most significant impact of this was up North Italia, where we saw the cost of sales percentage impacted by nearly 200 basis points due to the level of spot buying for that concept.
However, aggregate cost of sales inflation for the quarter of approximately 3% came in line with our expectations given the efficiencies we drove.
Labor declined 160 basis points.
Merrily, reflecting sales leverage partially offset by higher wages and training costs.
Relative to our expectations group medical insurance costs were approximately $3 $3 million higher due to a number of large claims.
We also had approximately $800000 higher than anticipated sick pay largely associated with the Delta Serge.
<unk> training costs or about $900000 higher than expected.
In total these items had approximately 70 basis points impact on margins for the quarter.
We also saw slightly higher than anticipated wage inflation during the quarter by about 1%.
Other operating expenses declined 400 basis points, primarily due to sales leverage relative to the prior year period.
Versus our expectations, we had over $2 million and incremental costs associated with the pandemic environment.
Including higher than budgeted natural gas recruiting and costs associated with supply chain disruption for certain non food products.
This translated to over 25 basis points of impact to margins.
We are seeing similar challenges across our concepts with elevated impacts such as with the North Italia cost of sales that I referenced earlier.
G&A as a percentage of sales decline decline 120 basis points also primarily due to sales leverage as well as tight cost controls.
Pre opening costs were $3 $2 million in the quarter compared to $2 4 million in the prior year period.
North Italia restaurants, one <unk> and one <unk> opened during the third quarter of this year versus two flower child locations in the prior year period.
Yes.
Third quarter GAAP diluted net income per common share was <unk> 64.
Adjusted net income per share was <unk> 65.
Now turning to our cash flow and balance sheet.
The company recorded approximately $11 million of cash flow used from operating activities during the third quarter.
This reflects a $36 $5 million deferred payroll tax repayment.
In turn the tax rate for the quarter reflected a benefit associated with this repayment of approximately $2 million.
Capex totaled approximately $18 million during the third quarter for required maintenance and new unit development.
We ended the quarter with total available liquidity of approximately $371 million.
Including a cash balance of approximately $131 million.
And approximately $240 million available on our revolving credit facility.
Okay.
Looking ahead, the operating environment continues to be very dynamic. So we want to keep you updated on our underlying expectations for the balance of the year.
For the fourth quarter, we are anticipating about a 1% negative comp sales impact from the holiday shift given that our fiscal year will end on December 28, So the balance of the high volume sales week between Christmas and New year's will move into the first quarter of fiscal 2022.
We're anticipating fourth quarter cost of sales inflation to be approximately 3% higher than the third quarter or 6% versus prior year.
As we expect to continue to need to purchase even more ingredients and the elevated spot market to meet volume needs that are expected to exceed our contracted levels.
Similarly, the labor market remains tight and as such we would expect to continue to see elevated training overtime and are anticipating some incremental group medical carryover from the large claims for our provider.
Taking into account our wage rate trends as well as anticipated normal seasonal sales trends and related leverage.
We would expect labor as a percent of sales to be slightly better than in the third quarter and other operating expenses to be favorable to Q3 by as much as 75 basis points.
Note the seasonality of the acquired concepts is factored into these expectations.
We continue to expect G&A of approximately $47 million for the fourth quarter.
Preopening of just under $5 million.
Finally, we now estimate our tax rate for the fourth quarter to be approximately 5%.
Looking ahead to fiscal 2022 due to the disruptions in the supply chain impacting the restaurant industry and the broader economy. Our purchasing team is still in the process of contracting.
As you would expect in these circumstances.
Note that while we currently have 3% pricing in the Cheesecake factory menu and plan to remain at that level for the remainder of this year as David mentioned.
Should the cost pressures proved to not be transitory in nature, we will implement further pricing actions at our menu change during the first quarter of next year to protect margins.
Specifically, if commodities were to remain at current spot pricing levels for the full year of 2022.
Would require us to take an additional one 5% to 2% of menu pricing for a total of four and 5% to 5% of menu pricing to support our margins.
The labor market is also dynamic and inclusive of known minimum wage increases. We are currently anticipating inflation couldnt be around the 5% level, we are experiencing in our restaurants. This year so far.
With regard to development, we plan to open as many as 20, new restaurants next year spread across our portfolio of concepts.
For modeling purposes at this point.
We would expect at least five cheesecake factory restaurants <unk>.
Seven North Italia.
Or flower child locations and four other FRC restaurants.
We would anticipate approximately $150 million in Capex to support this level of unit development as well as required maintenance on our restaurants.
Despite the ongoing cost pressures related to the pandemic environment impacting the restaurant industry and the broader economy.
We believe we are delivering solid EPS. So far this year, while importantly, protecting our brands to enable long term market share gains.
With the breadth of our high quality growth vehicles. We also believe we are poised to achieve our 7% unit growth objective in fiscal 2022.
And with that said, we'll take your questions.
Okay.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press the star one we'll pause for just a moment to compile the Q&A roster.
Okay.
Your first question comes from the line of Joshua long with Piper Sandler Your line is now open.
Great. Thank you for taking the question. The first one I wanted to dig into the consumer research that you've been conducting here lately it sounds very interesting and compelling, especially in regards to bringing new consumers into your brand funnels. I was curious if you might be able to share what you've learned I imagine it's still early in terms of how you are engaging with that.
Those customer cohorts, but what you've learned from them.
Where they've been and maybe how they are using the brands differently from your loyal guests that you've been in conversation with over the prior years.
Thanks, Josh This is David Gordon.
I don't know where they've been but it's good that they have been back to the Cheesecake factory. So I think what we've seen is a significant increase in the frequency of our frequent cohort, which now comprise approximately 20 visits a year versus what was closer to 14 pre COVID-19.
So thats not a great time, certainly some of the marketing that we did throughout Covid has been beneficial to remind guests to come back to Cheesecake factory as you mentioned.
And we have a significant number of new guests to the brand.
Which is great to see.
About a third of our frequency or new guests.
And we've seen them be very loyal.
And us not just the value of the marketing, but have come back even during that time, where we had decreased the marketing throughout the second quarter and in the beginning of the third quarter.
Some of the other research that we found is that the value proposition that we talk about a lot of cheesecake factory around the breadth of the menu on the price points of the menu have come back as a very positive insight from guests that we have talked with.
And we see that particularly with the frequent and the moderate cohorts. So overall, we feel that the.
The recent.
<unk>, what we've been doing throughout the pandemic and we'll continue to engage with those guests.
A number of different marketing channels moving forward.
Great. Thank you for that and one more if I might be able to sneak it in thinking about the performance.
Now what are your broad portfolio of brands in particular, North Italia as you go in and.
Backfill markets and you'd grow brand awareness.
In end markets.
Going forward curious on.
What you learn from the brands and how they perform and maybe how guests engage them in.
How do you think about balancing the portfolio in terms of new market opportunities versus.
Back filling in existing markets as you start planning your pipeline for 2022 and beyond.
Sure well I.
I think that the 20% growth rate that we've talked about for.
For north that we feel really good about very positive that in the new markets. The north has moved into that.
The sales have been as strong as they have been we just opened up today in Orlando, Although we already have the restaurant in Miami and one in Dade land, so relatively new market and we would anticipate that it will do really really well. So I think there are a lot of markets today that we're not in yet Matt mentioned the Blanca.
That had opened in Chicago as an example, or in the northeast I think we will look to continue to fill in the markets that have been successful and then slowly maybe plant in <unk>.
And some of those newer markets and still trying to understand how it's received from a guest perspective, but there is nothing that will slow down that 20% growth rate at this point.
Based on the acceptance that we've seen in every geography that north has moved into thus far.
Great. Thank you.
Your next question comes from the line of Jon Tower from Wells Fargo. Your line is now open.
Awesome great. Thanks for taking the question David over to you had mentioned earlier in the call taking measures to manage costs.
Potentially above and beyond.
Pricing into 'twenty, two so I was hoping you could elaborate on what you mean, there or are you thinking perhaps peeling back on some of the menu options.
Or is there some labor management plans that you would expect to put in the system and just curious.
Okay, and what your thoughts are there.
Hey, John it's Matt.
I think that we have opportunities relative to where we were pre.
Pre COVID-19 as well as opportunities that present themselves from the current environment.
For example, we continue to look at opportunities to improve the supply chain and what can the providers do for us to take out steps in the kitchen right I think it's pretty tough in full service casual dining to replace kitchen boys with robots, but you can improve some.
The steps whether you are pounding chicken are deviating shrimp or things like that I think also just even looking at coming out of this environment.
Productivity has been very strong we've had elevated training and recruiting and overtime types of cost, but when we look at it from a productivity standpoint, we're actually ahead of where we used to be.
Part of that is because we have slightly elevated check averages and we've done a great job designing our workflows around the on premise in the off premise channels. So our approach is typically around continuous improvement and I would expect it would be sort of like that I wouldn't expect to see any menu reduction at all we believe that that.
A key driver of the sales and is important to keeping the sales levels high so that we can recapture the margins.
Makes sense and then just.
Going to the loyalty.
Plans that you had outlined at least on last call I talked about it was there any spend in the third quarter related to that and where are you in the process of rolling it out.
There was only a nominal amount in the third quarter.
I think where we thought we would be I think what we said last time is up it would be next year and we still believe that thats right.
I don't think we have a further update with more specifics you know hopefully by the next call, we'll be able to fill in a little bit more of the timeline.
Great and then just lastly on an average weekly sales you talked about 213000, I believe quarter to date right now correct.
Correct me, if I'm wrong, but October is seasonally the lowest point for average weekly sales during the fourth quarter historically.
And this year.
During the fourth quarter.
That is correct. So we feel good.
About where if you look at the comp basis, the quarter to date 10, 5%.
As a really strong number.
And that includes the Halloween weekend, which has traditionally not that great of a sales period. So.
Okay. Thanks, I'll move on.
Okay.
Your next question comes from the line of Sharon Zackfia with William Blair. Your line is now open.
Hi, good afternoon.
Just one kind of clarification question and then a real question. So given the mix shift and new year's Eve out into fiscal 'twenty. Two should we expect a wider gap between comps and average weekly sales. Okay. Good that is normal.
Then my second question was really on price elasticity of demand.
I think you mentioned that one of the finding value in and breadth of the menu and how much your customers really like that.
I heard what you said about pricing and what you could do I guess, how willing are you to try to fully inoculate your margins.
2022, and do you have any learnings on multichannel customers that might help you.
About that process.
Hey, Sharon it's Matt.
Good questions the first one.
The answer is yes, technically right to the to the new year's Eve the call versus the AWS, because you're obviously lapping that big a couple of days and might there. So I think theres a little bit of differentiation.
On the second piece.
When we look at the overall price elasticity for Cheesecake.
We're pretty confident where we're at given the breadth of menu offerings and the breadth of price points in there I think also one of the things that we always do is look at the competitive environment.
We typically have been right in the middle of where we see the average pricing across the nation.
I would say based on what we're looking at what we would need to cover margins, we would be probably a little bit below what the averages are that we're seeing so I think we feel good about that from a competitive standpoint, as well and certainly we'll always look to make sure that there's enough value on the menu for every guest.
But I think we are in.
<unk> positioned to fully cover the cost of sales and labor as we see it today I mean things can always change, but based on today's trends, we believe that to be the case.
From the Omnichannel perspective, one of the things that is very evident.
We didn't touch on that as that are frequent guests our omnichannel they come to us.
With delivery and pickup and on premise and I think that speaks a lot to the value that they see based on the quality of the food the portions as well as the experience when they come on premise and so we've only seen that that piece as David Gordon mentioned increase so those loyal guests I think view there.
Value proposition has been gotten stronger in this environment overall.
Thank you.
Okay.
Yeah.
Your next question comes from the line of Jeff Farmer with Gordon Haskett. Your line is now open great. Thank you.
You touched on a couple of times, but I'm, just looking for a little bit more color here. So just in terms of the strength of sales improving Q4 to date it looks like pretty much across all your concepts.
A couple of things you could point to that are driving that strength and what are your thoughts on the sustainability of that top line momentum.
Well.
I think it is across all concepts and pretty much in all geographies.
I think execution.
As would always drives outperformance versus the market and we certainly are doing that and I think that the operations teams have been amazing to kind of weather. The storm that everybody saw in the summertime to keep our staffing levels at about the same level. So that we can manage the business is incredibly.
Important I mean, obviously you hear about restaurants that are closing shifts or closing days are limiting service and I think for the most part we've been able to accommodate all of our guests I think that that's a part of it but I think all of the things that we've done to drive the value and to be accessible.
<unk> and all of the channels.
<unk> side as well so I think it's probably a little bit of everything not not one factor in total and.
Impossible to predict I would say that we've probably been the most consistent sales brands in the industry over the past six months.
That's a pretty good estimate.
And then just a quick follow up.
Again, something that you you touched on briefly but you did point to pockets of staffing shortfalls and again, you just referenced that but in terms of the common themes.
And these pockets from a labor sort of supply demand perspective, what is going on in these pockets. What is the common theme in terms of seeing the staffing levels being a little bit lower than you'd like them to be.
I think theyre just relatively Jeff. This is David Gordon, it's relatively not predictable to be honest, it's not like there is a consistent theme. It can be one part of the country. One week and then suddenly it's a different part of the country, but to Matt's point, it's not meaningful enough for us that's really having an impact on sales as you can see from the sales and our team's continued focus.
On retention.
I think has been valuable for us to be able to keep stations open and not be closed any day of the week and to be able to sustain our hours all of that is driving sales. So it seems like it's been a little more stable here in the most recent weeks, which is great I mentioned, the Huntsville opening being fully staffed and ready to open.
And then the other thing I would just add to what Matt said I think our strategic decision to keep all of our managers in place throughout Covid has really helped us as sales pick back up we didn't skip a beat operationally and although it is challenging the operations team I think because of that decision.
The retention of the staff and our tenured staff that we've had have been able to execute at a really high level to be able to maintain the types of sales that we've seen Joe. This is Matt again, I would just add add one more thing just to give a shout out to our supply chain team because another piece of this is you've got to have the staff and you've got to have the product and they have worked tirelessly.
Lee and we have probably the best vendor support in the industry as well the long term partnerships that the Cheesecake factory has.
Certainly things are a bit more expensive and there are more fire drills than usual, but making sure that you can have our full menu or very close to it all the time is also super important.
All right very helpful. Thank you.
Your next question comes from the line of Jared Garber with Goldman Sachs. Your line is now open.
Hi, Thanks, so much for the question.
Wanted to just circle back on the prior question related to staffing issues.
Or lack thereof, but.
Our channel checks would suggest that there are.
Restaurants that continue to be either closed or shut off or whenever sort of the right terminology is so I just wanted to get a sense of and you noted obviously the sales volumes seem pretty healthy and you noted there wasn't much of an impact there I wanted to get a sense of if you think that some consumers that maybe are shifting towards the off premise channel who would have.
Who would have dined in I don't know if there's a way to tease that out from your data.
I'm trying to just get a sense of if if somebody off premise strength.
It is due in part to some sales throttling if you will in the restaurants, and then I have one follow up on margins.
Sure This is Matt.
I think on the fringe, it's pretty difficult to figure that out actually but the thing that we've known most of the time is that the guests are choosing based on what their occasion is not necessarily that they were going to go to the restaurants next to us in our restaurants closed and they got to take out there.
Going to go.
Dine on premise and they're going to wait I mean, we've seen that guests are willing to wait we have Saturday as our wait times are back up to what they were historically so I think it's not so much that I think it's just the occasion based that you are choosing to go to.
Got it that makes sense and are you seeing any shifting and maybe and day parts or or weekend versus weekday usage.
As we move further away from the from the height of the pandemic.
I mean im looking at our Stat Pak right here for the quarter.
It's remarkably consistent.
Nothing moves more than a half a percent related to be honest and so.
I think we've probably seen to be fair on the days of the week, a little bit more strength in the early mid week.
That could be a little bit of a result of other companies closing on a monday or Tuesday, or something like that and obviously, we have the capacity, but in terms of the day parts.
So we're still comping up across all of the days, but maybe a little bit stronger Monday and Tuesday.
Great. Thanks, that's great color and just one more on I think.
The merch margin side. Thank you mentioned earlier that north Italia might be seeing a little bit more of a staffing our labor challenges versus the rest of the business and just wanted to get a sense of maybe why that is.
Is it related to geography isn't related to demographics or something along those lines.
Well I just think it's the two things I mean thats the size of the concept right we're talking about.
Not even 30 locations yet comparing it to the Cheesecake factory, which was best in class. So I. Just think you have got a tall order in comparison.
<unk>.
And I think that.
They're really doing a great job as you can see by their quarter to date sales numbers stabilizing their staffing.
Everybody saw sort of mid summer, a really big Crunch and I, just think that we're comparing to a very tough.
Competitive there and ourselves.
Great. Thanks, so much.
Your next question comes from the line of Jeffrey Bernstein with Barclays. Your line is now open.
Great. Thank you very much two questions.
First one just in terms of the broader restaurant margin outlook, just wondering for 2022.
And the theory is the goal to hold margins flat.
<unk> using pricing as needed beyond the productivity initiatives I'm, just wondering if that's kind of the goalposts in which case specific to pricing.
Willing to take pricing at the risk of traffic or do you prefer to be conservative on that front, maybe take a little bit of margin pressure, but.
The idea being to keep the value proposition strong just kind of trying to measure your youre intense around our intent around pricing to protect the margin.
Hey, Jeff its Matt I think that the definitely the question of the quarter you just nailed it in.
I'd say a couple things as you know pricing is a little bit of art and a little bit science, and we do want to get it right. I think you can see that by sort of the cadence of our actions and that we're keeping our pricing in the fourth quarter, we didnt preemptively put some extra in in December we're looking to see what the commodities market.
Really is going to be kind of a log jam right now I think most people understand that for some of the key proteins as well, but that being said I think when we look at our sales levels.
We certainly can absorb an incremental one or 2%.
I don't think that we're sacrificing really on the top line to be able to protect margins.
And if there was some degree of elasticity and it was a.
A 1% impact of a 10, 5%, but we could protect margins.
I think that we would view that as being a fair trade off but right now we don't think that that would even be the case.
Understood and the follow up is just on the <unk>.
<unk> business. It seems like you are.
Excited by the strength and maybe even the acceleration in it.
People returning to and restaurants I'm just wondering how you think about the unit economics with the increase off premise.
Does that change materially or does that maybe increase the unit growth potential that you have for I guess, presumably the cheesecake will be the one that gets the most attention just trying to assess the impact from the growth in off premise.
Yes.
So it seems like there is maybe two parts to that the first part is that we sort of look at what the total and were talking about growing restaurants.
Total opportunity and certainly are getting it appears to be some stickiness that could increase the suvs.
But I mean, the markets that we're going into we feel pretty confident going into just as we talked about Huntsville, regardless of that right. Now. So I don't know I think it's too early to say if it opens up.
<unk> knew the economics, though in total for the off premise or about the same.
As the on premise the labor is a little bit of a different model.
Really delivery, you've got the commission piece, but it nets out pretty equally so we're agnostic.
And we will only take.
Very low double digit or single digit pricing for delivery, because we want to become competitive as possible and I think that that's worked out for us. So we'll drive omnichannel whichever the guests.
Wants to do.
Understood. Thank you.
Your next question comes from the line of John Glass with Morgan Stanley. Your line is now open.
Thank you very much first Matt if I could just follow up on the last question is it. The goal do you think with the pricing you've contemplated and knowing what you know about inflation.
Keep hold restaurant margins on a full year basis 21 to 22 is that what youre, saying, if you wish to or is it higher I just want to make sure we land in the right place.
Yes, when we look at in totality right. So there is a couple of things there as those restaurant level margins and then the total EBIT.
We are getting leverage on the G&A and the fixed depreciation and so when we look in total.
We are also thinking about getting back to the 2019 level I mean, that's what we've been shooting for obviously theres a lot of noise in the pandemic related issues.
But I.
I think we have.
As things sit today sufficient pricing power to get back to the 2019 levels and so that's what we mean by kind of <unk>.
<unk> right I mean, this year is not really a good comparison because the first quarter was so far off and then you've got some other noise, but we think thats true.
Okay.
EBIT level my model, 5% would be sort of what you shoot for in 'twenty. Two that's right way to think about it not necessary in the restaurants are a bit of EBIT level.
Well I mean, we're still going to be working through some of that math.
I think certainly with the leverage that we're getting.
We might get back to flat four wall margins to it depends on some of the inflationary pressures.
Got it that's very helpful.
So when you think about those John is a good is a good good goalposts to use somebody else's term.
Got it. Thank you very much when you think about the Fox restaurant groups in total I'm talking about North Italia and others.
Have you thought about how do you market those brands, particularly and go into new markets existing brand awareness do you. What do you use to build brand awareness I guess when you entered the market concepts.
So it's much more of a local.
Philosophy, then I think the Cheesecake factory because of obviously the size of the cheesecake and its breadth.
So as we move into a new market, we do a lot of local marketing within within that geography, whether that's boots on the ground marketing to local businesses friends and family marketing some of what you would do in a traditional smaller company.
<unk> even at points in time done things like rented a billboard et cetera. The good news is we haven't had to do much marketing in those new markets that theres been good buzz around the restaurants, we certainly use of social platforms aggressively Instagram.
It is pretty prevalent at all of the FRC concepts and they also have good E mail database of guests that are already.
Within their communication channels, so that's a little bit different strategy, the cheesecake and thus far because of the success we've seen in those markets as it seems to be working.
Great. Thank you.
Your next question comes from the line of Mary Hodes with Baird. Your line is now open.
Good afternoon. Thank you for taking the question on the 2022 outlook. Just one clarification question with the theoretical pricing of four 5% to 5% would be enough to protect margins in 2022.
Given the outlook you have from both commodities and labor I guess I just wasn't clear whether that was what you would need to cover commodities or all of the inflation.
Right. So that's a great point to clarify Mary this is Matt.
So that includes both of the major inputs.
Commodities at the spot market.
And the labor inflation.
This year's level of 5% is contemplated in that pricing level.
Okay. Thank you and then what we'll do.
Verify though too Mary maybe just one thing.
I don't think that we're saying that thats, our commodities outlook, yet, we're saying that the spot market today, we're still in the process of contracting and it remains dynamic. So we're just giving that metric for people to use to understand where things are at.
Yes, understood and then on staffing is there a way to frame up what percent of targeted level. You're currently running at and then if that's not 100%. What do you think is needed to get to 100% is that just the external backdrop, improving or are there. Other internal initiatives that you are planning to deploy to get back to a 100%.
Well versus where our sales are at we are not at 100% I mean, that's been the challenge we're close to it.
But because of the sales level remain at the.
At the 10, 5% level above 2019.
It still remains tight right and so that's why we still run a little bit higher in overtime.
And we're still running a little bit higher in recruiting cost because we need to continue to bring people in.
It seems like we have been very stable we've kept the staffing levels about the same as they were from the busy summer months, So I think thats pretty positive and the fall here.
But I do think there needs to be probably some continuous moderate improvement in the overall environment for all restaurant operators.
So David I would just add that our recruiting team continues to innovate on the attraction side to make sure that people know that there are jobs available in our operations teams continue to make sure that once they have somebody who has been attracted we engage with them really really quickly. It's one of the key today is to get somebody higher just to make sure that leave them out there for a day or two.
So whether that's using text for recruiting or some of the other methodologies, our corporate team and a terrific job of assisting in the restaurants and making sure that job ads are posted everywhere they can be.
And that there is a very active recruiting going on not just passive recruiting.
Okay, great. Thank you Bob I'll leave it there.
Yeah.
Your next question comes from the line of Dennis Geiger with UBS. Your line is now open.
Great Matt I'm wondering if I could come back to the North Italia margin structure, a little bit and just wondering if you could highlight sort of where the more mature margins are versus.
Some of the less mature stores that the margin dynamic recognizing that I think probably more than half of that.
The store the north stores are non mature stores at this point, but just curious anything sort of.
That's versus more mature.
GAAP there on margin if that has gotten any better or if it will going forward the longer that you.
On the brand or if it just takes time to mature.
Sure and grow into those margins.
Hey, guys its Matt good question.
The north mature restaurant level margins for the quarter were 15, 1%, which on the face of it seems like there was a little bit of pressure versus Q2, but we did note in the prepared remarks that the brand versus <unk> had about 200 basis points of incremental <unk>.
Sure on the cost of sales from buying on the spot market. So I think from from an aggregate level. The productivity was good we saw some improvement overall, if you factor in the fact that Theres just major disruption in supply chain. The other components of the P&L were supported very well.
Great and then just one more just wanted to come back to that survey work that you talked about earlier stimulates I understood kind of the insights into the newer or the or the recaptured customers anything more to add sort of on sort of the.
The biggest factors there maybe if some of it was was the value more recently versus other brands that are out there maybe it's the service levels.
Doing a better job on.
Recent months recent quarters versus others or if it's just folks did discover rediscovered you discovered you and everything the brand stands for is resonating I'm just curious if theres anything more there on those factors. Thank you.
Sure Dennis I do think it's everything that the brand stands for our resonated I think the reminding guests.
We are out there and easily available to access through the off premise channels was meaningful in a lot of guests that hadn't been using us for off premise before so I think the omnichannel approach that we have talked about in the marketing to support that was really beneficial but one other thing that I didn't mention was they also scored very high in all of our Covid.
Safety protocols, and we got a lot of positive feedback the guests felt very comfortable with everything that we not only said, where we're doing but they were actually seen once they were in the restaurants and I think that contributed as well.
Great. Thank you.
Your next question comes from the line of Brian Mullan with Deutsche Bank. Your line is now open.
Okay. Thank you a question on restaurant level margins I don't want to beat a dead horse, but wanted to clarify something here.
Putting aside the inflationary environment, which you laid out how you can price for Matt is there a way to think about any headwind or tailwind next year from the north and FRC acquisitions relative to the 2019 result of $15 seven the units you acquired the units you've opened since taking ownership.
For 7% net unit growth next year is there any drag from those units that you anticipate.
At least in the near term.
Sure Brian This is Matt.
It's a fair question I think.
Cause of the growth orientation of those brands, we would expect that their margin structure would be.
Slightly below the cheesecake is because of a weighted perspective of the newer restaurants. So I think that that as a potential but I don't think its too big when we've modeled it out.
But there is a potential for a little bit there and I think when you look at.
<unk>.
One of those brands.
It could be 2% to 4% below cheesecake, depending on how many units have opened in the near term and so I think you can kind of model something like that.
Okay. Thanks, and then follow up just a question on flower child can you just talk about where you are with that brand do you have the model right.
What are some of the key operational metrics, you'll be watching with those with those new openings next year.
And what would it take do you want to take that brand over fully bring it to incorporate the way you did with North Italia.
Some of the benefits if you were to make that move.
Why would you do that Bryan. Thank you great. Great question. This is David So we're sitting at 28 flower channel the restaurants today in 10 different states and again like north they continue to do well in just about every new geography that they've moved into we.
We do have a.
Cheesecake factory leader, that's been now with flower child.
Coming up to two years almost.
And has continued to help work through what we believe are some operational opportunities.
In the short term I would say that flower child was going to going to continue into the <unk>.
With everything that's happening at Cheesecake in the growth of North we have a really solid team not just with the gentleman from Cheesecake factory, but with Sam Fox and the entire team over at FRC operating those flower child today, that's allowing us to stay focused on Cheesecake factory and the growth at north so that will be the near term plan.
But at the same time, we are leveraging supply chain I would say that that's one of the areas. We will continue to focus on for next year to help and within the model to help with food costs to help maybe on some of the contracted pricing some of the stuff. We've already talked about on this call and I think we can do that without sort of taking over operations of flower child.
In the short term.
Thank you.
Your next question comes from the line of John <unk> with Jpmorgan. Your line is now open.
Hi, Thank you out many of your restaurants or I guess all of them.
It will include a fairly similar.
Service style would make traditional service style thats been run for the past couple of decades, I mean does the current cost environment labor availability environment technology availability.
Hershey to rethink the way that customers are served or in any way and do you think that could potentially drive more throughput Andrew or drive more efficiency in Europe in your various full service boxes.
Hi, John Thanks, This is David Gordon.
We are the leaders in experiential dining and we consider ourselves to be high touch high service and we want to provide a level of hospitality.
That.
<unk> shows that we care about guest and I think drive some of the sales that we've talked about today people want to get the value through the hospitality and not just through getting in and out of the restaurant as fast as they can now that doesn't mean that we won't look for ways to use technology as we as Matt talked about earlier in the kitchen or who knows what we might do in the front of the house I think we've talked.
Now for years about not necessarily putting tablets on the table that's not the type of style that we wanted to be in.
High end casual dining, but there may be other ways to evaluate whether that's payment processing.
We're just other ways to improve the guest experience without removing the hospitality that I talked about so we will continue to evaluate.
What we can do in that area, but.
But I would anticipate that we will continue to be leaders in the world of hospitality, which we think helps drive the long term sales there have always been such a big part of Cheesecake factory.
Understood.
Yes.
Yeah.
[laughter].
Your next question comes from the line of Brian Vaccaro with Raymond James Your line is now open.
Hi, Thanks, and good evening can you just clarify the comments you made on the average staffing levels.
Think back in July you were a little over 100% of 19 levels. If my notes are right and are you still in that ballpark or you're just saying you are below what you think you need to sustain the 110, so maybe you're in that 1% to 105% level can you just clarify what you were saying there. Please.
Yes, Brian this is Matt.
It does move a little bit month to month, and I think we're right around the same level of staffing.
We were in late June early July of this year, and maybe slightly below 100% of 2019 so within.
Within a percent or two of both of those metrics, which obviously puts us a little bit below where we'd like to be given the sales levels.
Okay, and then I think you also said you're seeing some green shoots in the labor market can you just elaborate on what Youre seeing there and maybe comment specifically on the differences you might be seeing in new applicant flow versus the turnover rates or any other dynamics you think are worth highlighting.
Well, Brian this is David.
The turnover rates have certainly stabilized over the past few months and that's been beneficial.
The Green shoots are just references to certain markets, where staffing availability has just been a little bit easier than it had been probably for the previous quarter.
So again it is very dynamic it does change, but it feels as though things are stabilizing a little bit more.
And being able to staff a full restaurant in Huntsville, you are talking about over 200 staff members.
Very promising in a market that has 2% unemployment.
So that gives us.
A little bit of hope.
Brian It's Matt I would say two other things on that from an applicant flow perspective, I believe we're seeing the same number of applicants as we did in the middle of summer. So again, that's a positive relative to our slower periods that October is.
The wage rate inflation.
I think people kind of mid summer.
Sort of back to our norm anyway, and so as I think you're just seeing a little bit of moderation back to the mean over the past two months.
Alright, Thats, great and then on flower child.
Looks like the <unk> are running in that kind of mid 3 million dollar range in the last two quarters.
Pretty good run rate, there and David I think you said it was it was strong so far but what is off premise mix for flower child in recent quarters.
Roughly 40%, 45% will it depends on the location, but I'd say on average about 40%.
Brian Youre right, we've seen really good stability.
And the brand with the sales right around the 3536 levels and Thats with the new development in new markets and so certainly Arizona had been strong, but seasonally it could get a little bit slower yes, we hold the same sales level. So we're really impressed with how we're seeing that.
Play out against different geographies and the stability of the sales trends has been noteworthy. So I appreciate you, bringing that up yep Yep and just last one bookkeeping question, Matt I am sorry, if I missed it but what was bakery sales in the third quarter.
$16 7 million.
$16 seven excellent. Thanks, so much.
Hum.
Yeah.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Next question comes from the line of Andy Barish with Jefferies. Your line is now open.
Hey, guys good afternoon.
Hey, Matt can you just sort of give that.
Rank order what.
Capital allocation would look like for next year, just given what looks to be pretty significant increases in free cash flow.
Sure Andy.
And often overlooked with super important part.
Obviously, the Capex piece, we laid out was about $150 million to build those restaurants with the maintenance I would say based on our recent board discussions that we are interested in bringing back the dividend, obviously, we need to be outside of the revolver Amendment.
<unk>.
But with current performance, we believe that that will come to play so that would certainly rank up there.
Could we could choose to also pay off the revolver.
And I think probably those come in ahead of of a repurchase initiation. If we were to get there next year.
Great. Thanks.
That's all I had.
Alright.
There are no further questions at this time, ladies and gentlemen, thank you for attending this concludes today's conference call you may now disconnect.
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