Q1 2022 Cheesecake Factory Inc Earnings Call
It's mid February we now have approximately 1% more staff members than we did just prior to the pandemic.
Our first quarter sales momentum has continued to the second quarter with comparable sales at the Cheesecake factory through April 26 at a positive eight 2% versus the same time period in 2021.
Keep in mind. This is a pretty good like for like comparison.
We are now lapping the reopening of nearly all of our indoor dining rooms.
Turning to development, while all of the sites that we have been working on remain in our pipeline. We are cognizant of the current of the current environment and the effects supply chain governmental and local jurisdictions permitting approvals are having on the timing of our openings as such we now expect.
Open as many as 15 to 16, new restaurants in fiscal year 2022, including <unk>.
<unk> Cheesecake factory's fortify North Italia.
Seven other FRC restaurants, including $3 four flower child locations.
We are current.
We also currently expect one cheesecake factory restaurants to open internationally under licensing agreement.
Despite these challenges many of which are out of our control we continue to ramp up unit development towards our 7% annual growth goal in.
In addition to investing in unit growth.
Even the sales strength and our confidence in the cash generation ability of our business, we are paying a quarterly dividend and we will re.
And state our stock purchase program.
I recognize that the environment is dynamic and we continue to face substantial challenges with high commodity inflation, a tight labor market and further supply chain disruptions.
Despite these headwinds we remain committed to protecting our four wall margins overtime and have noted during the last call plant to take the appropriate pricing in the summer to do so.
Our brands remain resilient.
Im confident that our best in class operators will continue to effectively manage through this volatile operating environment.
With that I'll now turn the call over to David Gordon.
Thank you David.
So we're very pleased with our first quarter sales growth.
Okay, seeing our operators commitment to excellent service and hospitality and their ability to execute at the highest levels to capture incremental sales and manage operating expenses.
As David mentioned, our staffing levels continue to improve both relative to where we began the quarter as well as compared to pre pandemic levels.
In the first quarter, we once again drove sequential improvements to both our Cheesecake factory manager and hourly staff industry, leading retention rates.
We continue to see positive momentum in hourly application flow.
Correct.
Applicants to needs ratios are at the highest levels since the pandemic began for several positions, including Cook's prep cokes and servers.
And totally hourly staffing levels increased by over 3% from the end of 2021 and are now about 1% above pre pandemic levels.
The Cheesecake factory off premise channel the trends remained solid and steady with first quarter sales accounting for 28% of total sales.
The annualized first quarter average weekly sales for this channel continued to trend close to twice the 2019 annual levels.
Now turning to North Italia first quarter comparable sales grew an impressive 32% versus 2021 with improvements in all day parts and all geographies.
The second quarter has also started strong with quarter to date through April 26, comparable sales up approximately 18% versus 2021 levels with off premise comprising approximately 13% of sales of north.
Reiterating David's earlier comments. This is a true comparison as we are now lapping the reopening of nearly all of our indoor dining rooms.
FRC drove similarly strong topline performance during the first quarter, giving us confidence in the developing brands in our portfolio and their ability to contribute to our overall growth.
To realize these sales levels our supply chain team has worked tirelessly throughout the pandemic to ensure our restaurants have the products they need to serve our guests.
The strength of our supply chain network, including our long term vendor partnerships enable us to continue to offer our large differentiated menu with a minimal product disruptions and equally as important minimal operational distractions, allowing our operators to be laser focused on delivering exceptional service.
And hospitality to each of our guests.
Before I turn it over to Matt I wanted to provide an update on some of our corporate social responsibility efforts.
We have an established track record of leading and operating our restaurants and alignment with environmental sustainability and social responsibility.
And given the challenges we faced over the past two years, our resolve to contribute to the wellbeing of our staff local communities and the environment. We all share has only increased.
Throughout the pandemic, we've undertaken significant efforts to protect the safety of all of our staff and guests.
Some of these efforts include encouraging our staff to keep themselves safe by receiving the COVID-19 vaccine and booster shots providing.
Providing a special vaccine.
Enhancing sick pay benefits and providing access to mental health counseling at no cost.
We have also made substantial progress on many other environmental and social areas. Let me highlight just a few.
On the sourcing front, we are now sourcing, 100% cage free eggs for our restaurants and committed to working towards the transition of bakery operations to cage free eggs by the end of 2022 three years ahead of our schedule.
On the diversity and inclusion front, we've increased our commitment to fostering an inclusive environment with the formation of our diversity equity and inclusion and belonging steering committee and implementing several new programs, including our leaders of color program mentoring programs and rolling out the escalation training.
For all of our managers in the field.
And lastly on the environment front.
Since 2015, we have reduced our restaurant portfolio greenhouse gas emission intensity per square foot by almost 20%.
And recently committed to reducing carbon emissions in line with the Paris agreement and international agreement adopted to address climate change and its negative impacts by limiting global warming to one five degrees Celsius.
We are working towards an annual reduction of greenhouse gas emissions with the goal of achieving one five degree aligned net zero emissions by 2050.
This is a natural evolution of our sustainability strategy and of our more than 40 year legacy of doing the right thing for our guests our staff and our communities.
Many additional efforts are outlined in our corporate social responsibility report, we expect to publish our newest report in the coming weeks.
Of course, none of these results would be possible without our best in class operational teams.
I would like to thank all of our dedicated staff members and managers for their resiliency and navigating through nonstop change, while continuing to deliver delicious memorable experiences for our guests.
With that I will now turn the call over to Matt for our financial review.
Thank you David.
Our first quarter results reflected more stability and predictability than we have seen throughout the pandemic.
On the topline and bottom.
Specifically, our total sales and key business drivers were mostly in line with our expectations.
That said operating income was negatively impacted compared to our expectations by approximately $3 million in total from slightly higher than expected inflation and hourly wage was COVID-19 related sick time and natural gas costs.
However, we generally believe these impacts to be environment driven.
Now to some specific details around the quarter.
First quarter comparable sales at the Cheesecake factory restaurants increased 27% year over year.
Revenue contribution from North Italia, and FRC totaled 137 6 million.
North Italia comparable sales increased 32% year over year.
Sales per operating week at FRC, including flower child or approximately $111000.
And including $15 3 million in external bakery sales.
Total revenues were 793 $7 million during the first quarter of fiscal 2022.
Now moving to expenses.
As usual I'm going to provide year over year detail on expenses, but of course note that there continues to be some disparity in revenues given the impact from COVID-19 over the past two years and with that some corresponding impact to margins.
Cost of sales increased by 200 basis points primarily.
Driven by significantly higher commodity inflation the menu pricing.
Labor increased 70 basis points.
Primarily driven by higher wage rates and partially offset by sales leverage.
Other operating expenses declined 270 basis points, primarily due to sales leverage relative to the prior year period, and partially offset by lapping lower general insurance claim activity.
G&A as a percentage of sales declined 90 basis points also primarily due to sales leverage and a lower bonus accrual related to outperformance in the prior year quarter.
Preopening costs were $1 $8 million in the quarter compared to $3 9 million in the prior year period.
Last year, three restaurants opened during the first quarter and our fourth opened the first day of the second quarter versus zero openings in the first quarter of this year.
In the first quarter, we recorded an after tax zero point $8 million charge, primarily associated with FRC acquisition related items.
First quarter GAAP diluted net income per common share was <unk> 45.
Adjusted net income per share was <unk> 47.
Now turning to our cash flow and balance sheet.
The company generated approximately $34 million of cash flow from operating activities during the first quarter.
With ending total available liquidity of approximately $424 million, including a cash balance of about $184 million and $240 million available on our revolving credit facility.
Total debt outstanding was $475 million.
Capex totaled approximately $29 million during.
During the first quarter for new unit development and maintenance.
While we will not be providing specific comparable sales and earnings guidance given that the operating environment continues to be very dynamic we will be providing our updated thoughts on our underlying expectations for the balance of 2022, including some timing nuances similar.
Two our approach last quarter.
Based on first quarter performance.
More recent trends and assuming no further material impacts from virus surges. We would continue to anticipate total revenues for the year could be approximately three three to $3 4 billion.
With Cheesecake factory <unk>.
Reaching over $12 million.
Note that this includes the impact of the 50 <unk> operating week, we have this year.
Next for fiscal year 2022, we now expect commodity inflation of low to mid double digits on an annual basis, which represents a one to one 5% increase over our prior outlook based on what has happened in the marketplace as a result of the geopolitical.
Critical turmoil.
We continue to model for year over year commodities pressure to lessen as we go through the year.
With mid teens pressure in the second quarter and ending with high single digit pressure for the fourth quarter.
On an absolute cost per unit basis, we continue to model commodities to be fairly stable through the year with the variability of inflation driven primarily by the comparison to the different price points and the corresponding quarters in 2021.
The labor market also continues to be dynamic with a lot of moving parts.
Inclusive of known minimum wage increases we are now modeling net total labor inflation of about 6% when factoring latest trends in wage rates channel mix as well as other components of labor.
While we still dealt with some volatility in the first quarter as you might expect we anticipate some normalization in other operating expenses going forward.
We now expect to be around 25, 5% of sales for the second quarter.
And with the benefit of pricing over time, we would anticipate we could end the year at about 25% of sales with the third quarter roughly between those points.
As noted last quarter, we remain committed to protecting our longer term four wall margins.
However, also as previously noted we will likely continue to absorb short term cost fluctuations driven by the current environment.
To that end, we would anticipate taking another menu price increase towards the middle of the third quarter as is our historical norm.
We are currently evaluating the level of pricing needed to regain our 2019 four wall margins in the back half of 2022, which remains our objective.
It now seems reasonable to assume it will need to be above the one 5% to 2% referenced in February given the increases in commodities and labor inflation versus our prior expectations.
Below the four walls G&A is basically in line with our prior projections and we continue to anticipate G&A to ramp up to $55 million by the fourth quarter, which as a reminder includes an extra week this year.
We are now assuming preopening of about $18 million for the year to support our development plans with approximately three fourths of the expense occurring in the back half of the year.
Finally, we expect about $90 million and depreciation for the full year and for modeling purposes, we are using a tax rate of 11% to 12% for the balance of the year.
Now, let me provide a little bit more detail to help with the second quarter.
First if we take a similar approach to the full year and extrapolate our current sales trends for the balance of the quarter, assuming no further material disruptions, we would anticipate Q2 to be between $830 million and $850 million in total revenue.
As I stated during our last call with the difference in commodities inflation by quarter as well as the timing of our pricing actions. We would expect our four wall margins to improve relative to 2019 as we move through the year.
We now expect the second quarter four wall margins to be about 200 basis points below 2019 levels for these reasons.
With regard to development, we plan to open as many as 15% to 16, new restaurants. This year most of them in the second half of the year.
We would anticipate approximately $150 million in Capex to support this level of unit development as well as required maintenance on our restaurants.
This includes some capex for locations that have shifted into 2023.
And as David Overton mentioned, we are paying a quarterly dividend and reinstated our stock repurchase program.
In closing our sales trends remained solid underscoring the strength of consumer demand for our brands and our key business drivers and expenses appear to be returning to more historical levels of predictability.
And while current inflation in our industry is unprecedented and we continue to believe the strategic pricing plan, we're implementing remains appropriate.
Deliver solid earnings per share and help recover profit margins in 2022.
Importantly, protecting our brands to enable long term market share gains.
And with that said, we'll take your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question today comes from the line of Nicole Miller with Piper Sandler Your line is now open.
Thank you for all the information and.
Good evening.
I was wondering.
If you could talk a little bit about.
You talked a lot about the current environment.
As go forward as you can you know underlying consumer conditions, I know youre, not really seeing anything today, but there's kind of a question mark about.
What it will look like come summer or beyond and I, just wanted to understand a little bit about the stage gate process. So.
We're.
To soften a little would you just go ahead with the store development objectives in particular or is there. Some reason you would like slow up.
Think about preserving capital and how could you even do that with the pipeline you have today or would you just be in a position to you sensually does kind of blow through it, especially as it relates to development.
Hi, Nicole it's Matt.
I think.
To start with the first part I mean, it is tough to predict too far out today and the environment. The one thing that has occurred which is what we thought would happen is that consumer demand for our brands would exit the omicron surge even stronger.
And so once again I think we've seen that occur.
Currently our Q2 to date sales trends.
Are very good.
Would indicate that even at a slightly lower level of them that we would still be in really good shape. So I think that the business strength can absorb a little bit of uncertainty regardless of what happens and certainly from a capital planning perspective, while we are confident in reinstating our quarterly dividend.
In Q2, and our stock repurchase plan, we are maintaining a very healthy level of liquidity and a cushion in our outstanding expectations for cash flow such that we will continue with our growth plans no matter what I think what we've seen is that that is the right course of action because the consumer.
<unk> will be there and our new units continue to outperform our expectations. So I think we feel good I think we have confidence that we can buffer against that given the strength of our trends and so we know whatever comes to happen we'll be prepared.
And then just a follow up and I mean.
I really and this is what I'm trying to.
I understand like an unlock around store level margin when everything is normal and I don't even know we should be using that terminology anymore, but I was recently in a blanco and it got me thinking about what are some of the best practices right I didn't realize I think there is like six of them now or something but if you just think about like now a portfolio approach where do you see for scalar efficiencies are.
Even culture and how does that make you feel about store level margins down the road like what triggers that unlock because I believe the whole idea behind the acquisition was.
Something that has.
And game higher restaurant level margin.
Sure I think that again sort of related back to the environment over the past two years, it's hard to correlate.
Even the last quarter performance to where we think we can go as a business the underlying margins strategy around the portfolio, whether it's cheesecake factory or north or any of the FRC brands is to return to pre pandemic levels right. So it's a <unk>.
Very consistent thought pattern and it may vary slightly by brand depending on the sales levels and depending on the pricing and the inflation that they're seeing but the overarching strategy is to return to those pre pandemic levels in north Italia and some of the FRC brands had slightly higher margins pre pandemic and cheesecake.
Factory, So we would still be shooting for what those are that being said our near term focus on the margins is to get back to that second half of 2019 levels. I think if we achieve that that will be a good first step to getting to the longer term margin target.
Carl This is David Gordon just to add to that I think when we think about the largest strategy of leveraging the bigger company.
For the growth of those concepts and we think about supply chain as an example, and everything that.
The restaurant industry has gone through recently, our ability at north and more recently, even a flower child to leverage at the Cheesecake factory supply chain channel has really been a good differentiating factor to allow them to operate as well as they are so some of the learnings and the cross functional learning and being a part of the bigger organization, we will continue to leverage.
Over time.
As we bring the other brands.
More of the Cheesecake factory umbrella.
Thank you I appreciate it.
Your next question comes from the line of Sharon Zackfia with William Blair. Your line is now open.
Hi, Good afternoon, I guess two questions.
And I guess I'm more curious about either March or April where is on premises now for cheesecake factory versus pre pandemic.
You look at it.
However, you, Matt you kind of monitor utilization inside the box.
Then secondarily I don't think I heard you talk about the loyalty program is that still on tap for this year.
Sure.
Sharon This is David and I'll turn it over to Matt.
As far as the loyalty program, we are still in the coming months looking to launch our pilot. So as soon as we get that launched will be happy to share some new news around that and I'll turn it over to Matt on the capacity.
Sure we're roughly on the on premise side between 85 and 90% of the.
The traffic that we were pre pandemic. So certainly we have the capacity to.
To increase that meaningfully right. So I mean on a rough perspective.
We could probably pick up another I guess, it would be a million and a half or so dollars annualized from this run rate on premise.
And that would just get us back to where we were.
That's very helpful are there any particular areas of the country that are lagging there any day parts or days of the week, where you do see a more.
Meaningful gap versus pre pandemic.
Well the one area that I would tell you sort of universally.
As in the more urban.
And tourist locations.
We are starting to see a little bit of improvement in those but they have still lagged a little bit over time, otherwise, it's been I would say pretty consistently strong.
As both David and David Gordon mentioned, our staffing is good but it's not perfect. The only other thing would be in those locations, where we might have a pocket of opportunities where we could have a few more staff members right, but thats not a geographic specific thats more of a restaurant specific thing.
And then one last question from me on the eight comp that you have a cake.
So far in the second quarter is that does that have positive traffic I'm also curious if youre seeing kind of.
Negative average ticket chefs to stomach that as on premises grows more quickly than off from.
Yes, it's all of those metrics this is Matt.
Little bit Funky arent there Joe.
In the most simplistic terms, we have four 7% pricing and 182, so year over year, you are picking up three 5% or so.
Quote unquote traffic I mean, obviously you know we measure the off Prem, which is just one gas per order. So the mix and all of that is just it's a little bit funky or on premise.
Average ticket continues to move now with roughly with pricing, we did see a bump ups I think as many.
Particularly experiential dining concept saw during the pandemic and that's been holding pretty steady of course as you would expect there's a little bit of movement around maybe a little bit more alcohol little bit of settling a deserved but net net we're basically year over year.
Getting the price increase on the check average.
Okay. Thank you.
Your next question comes from Brian Bittner with Oppenheimer. Your line is now open.
Good afternoon. Thanks for the question following up on that.
Is there a reason to believe traffic inside the box can and will get back to pre pandemic levels in relatively short order.
Basically like do you believe there is a traffic recovery still out there as we fully normalized or is the current mix of the business kind of the new normal we should expect.
Brian It's Matt again, I will just reiterate a little bit one of them. So it is it's hard to predict you know.
What that will be from a consumer standpoint, certainly we've seen pretty steady performance increasing over the past 12 to 15 months with the various stages of reopening. So I don't think theres anything thats happening thats going to be like Rick I, just think that the strength of the business.
Puts us in a position where we're going to have really good sales trends.
I do think that.
Tumors are in a good spot we might see an uptick in some.
Casual travel during the spring and summer that could continue to support those areas that I mentioned, where had opportunities for us but those are the trends that we're seeing today I think it's better than where we were even in the fall, but I don't think anything happens, it's going to be a quick jump.
Got it.
Follow up is just on margins margins in the first quarter for the most part.
Pretty in line with what we're all expecting except there was a delta versus expectations in that operating expense line. I believe you expected that line I didnt come in around 25, 5%. So what really specifically surprise you in that line item is that where the net gas incrementals. He was in.
What's kind of pressuring that line item potentially moving forward.
Yes for sure natural gas was part of the problem and.
Obviously, it was seem to be on the right trajectory for us in January and then certainly with the geopolitical news it spiked back up to even worse levels than we saw in the fall. The other areas I would say that we saw a little more pressure than we originally anticipated.
Was some of the building repairs and maintenance and that goes hand in hand, with some of the supply chain and labor constraints that you're seeing right. I mean, just to make sure you can get a plumber or electrician to come out and fixed piece of equipment or something it's a little more expensive today.
Obviously, then I think we expected based on some of the demand. So those are the two areas I would expect some of that to continue into the second quarter.
Hopefully begin to normalize after that but thats, where the pressure was.
Got it thank you Matt.
Your next question comes from the line of Jeff Farmer with Gordon Haskett. Your line is now open great. Thank you just looking for some insight into your core customers behavior with some of the recent macro factors that we've all been contending with meaning that the jump in gas prices worn Ukraine inflation have you seen.
<unk>.
A change in behavior in terms of frequency of your guests.
How youre your guest spend is impacted.
Jeff This is Matt.
I don't have the specific data because we're not obviously yet tracking those guests on a site visit by visit basis, but.
So what I would say kind of interesting in our opinion is the.
The first quarter had some noise to it starting with Omicron and then certainly the start of the war and the inflation spiked up a little bit more but it was real.
Looked at late March into mid to late April here, it's been very consistent.
And very predictable kind of cheesecake like I would say and so.
So that's what all those factors baked into it and so I guess, that's a pretty good sign.
Okay, and then just one quick follow up.
Similar topic, so gas prices up I am curious, how that's impacted the supply chain or the distribution costs and it sounds like that's embedded in some of your guidance and then just as importantly, the third party delivery fees and delivery.
<unk> have you seen any movement there in terms of those fees moving higher.
Jeff This is David Gordon No we have it on the on the delivery piece, we're very stable haven't.
I haven't really seen much of a change at all.
Historically gas prices haven't really impacted our core guest.
There is shielded from that pretty well.
Maybe it's as Matt said in those first couple of weeks of the war, we saw a little bit of a pressure. There and then also could have been people just glued to their TV watching what was happening the things seem to have normalized since then.
Hey, Jeff This is Matt on the cost side with respect to that Theres a little bit.
Of impact that's embedded in that slight bump up in commodities for distribution right for every I don't know the math in front of me, but the appropriate dollar of diesel at some.
Penny per box or whatever it is that's being delivered but but the other things are also with respect to like the windows. The avian flu I mean, one more thing thrown at the restaurant business that obviously is impacting egg prices and so there is no.
Kind of I would call it the global impact of all these moving parts.
<unk>, we're at about two thirds booked for the next three quarters pretty close to our historical levels and as David Gordon noted in our prepared remarks, our supply chain team has done an amazing job.
<unk> today is execution and making sure that you can deliver those experiences and have our products and they've done a great job. So we feel good about generally speaking the supply chain side of it all right. Thank you.
Okay.
Your next question comes from the line of John Glass with Morgan Stanley . Your line is now open.
Thanks, very much can you first just go back to say.
Sales in April if you looked on a three year basis, and I know, we're no longer doing that but it's a pretty big improvement versus the first quarter and even the last three quarters.
Do you think it is explained by the industry getting better. So you have a gap in the industry, but the industry has gotten better you continue or do you think this is driven more idiosyncratic lead by cheesecake sort of even further widening that gap and you talked about <unk> been holiday shifts or did correspond with production and mass mandates for example, what what happened I guess in April .
It did drive a pretty material at least what I look at it as a material uptick in the business versus prior several quarters.
Jonathan This is Matt and Thats, a topic of a lot of discussion here and Youre right.
Jim and I were literally five minutes before the call talking about that metric.
One of the things that we are highlighting and I'm happy to talk about our thoughts on it and I think thats why were moving a little bit more towards the year over year number because.
Three years on sometimes it's a little bit hard to say why was it so much better in one month than the other maybe there was something three years ago that happened that caused some of that that delta, but it is a very strong versus 2019.
Think that some of it is.
The rising tide, although I think some of it is also cheesecake factory, we've shown the ability to keep the on premise growing while also keeping the off premise dollars stable right and so that net is just moving the dollars higher and I think it is kind of also what we've seen.
Seen throughout every time theres been a surge or some other weird it comes back a little bit stronger and that might be sort of a pent up demand people are sick of it. They are taking off their masks that you were talking about so I think that all of those factors. We continue to also see that there are challenges in the.
<unk>.
Some restaurants are unable to stay open theyre not able to have all the product and I think we continue to believe that having great staff and great product is going to help us grow the business over time.
And just following up on an earlier question about sort of the macro environment understanding you are not seeing this weakness even factor you're probably seeing the opposite right now, but he's been around a long time as a brand what are the leading indicators in your mind either internally that you see or externally that you see the signal to you. The consumer is slowing down are there.
The metrics you look at internally or are there are correlations you look at whether it's stock market or or employment. What are the things that you look at that dictate your view on the consumer going forward.
Yes, that's really interesting and I would say a couple of things about how we think about our business and managing it and just to go back to one of my earlier comments.
The late March through late April stability predictability of the sales is one of the things that I really look at from a leading indicator perspective, the titer of the bands of performance the better we feel going forward about our consumer right because that means their behavior on a day to day basis isn't being moved around.
<unk> by some of these other factors anymore and they are just deciding that this is the way that they're going to go.
<unk> life, So I think that Thats, a positive indicator for us I mean, certainly we have probably more metrics than anybody in the restaurant industry that we look at.
In terms of day parts and days of week, and all of that but that sort of consistency is a big piece I think the other external side of things that we watch a lot.
Sort of the financial health of consumers right, so wages and balance sheets of consumers frankly.
Well not everybody is keeping up with inflation, but most of the lower end income is actually ahead of inflation. So that group is at least holding on and then if you're if you're a higher end worker than Youre four one K and your your real estate is probably doing just fine.
And I think the latest data that I saw was there is probably two five trillion dollars.
More of savings.
And bank accounts today than pre pandemic. So all of those indicators are good.
Going forward.
Thank you.
Your next question comes from the line of David Tarantino with Baird. Your line is now open.
Hi, Good afternoon. My question is on the pricing decision, that's coming up and I just wanted to ask.
How you're thinking about the brand.
Pricing power.
And what you are looking at I guess in relation to.
The competitive environment, or however, you want a bench market with respect to this decision or is it just merely a decision that you need to just take what you need to take in order to protect margin.
I guess, how do you how do you balance that with potential consumer impact that you might see from a more aggressive pricing posture.
Sure David This is Matt I think.
This might dovetail from Jon's question, even a little bit of what's specific to cheesecake complete I think not only are we executing well I think that we have a more stable pricing strategy than some of our competitors have implemented over the past six months, where they've jumped up.
In one step function, 678% all of a sudden.
<unk> origin strategy is over time, we don't want to get behind but you don't want to take it all at once right and so I think that that continues to be our focus and maybe that is also helping our sales trends we are looking to balance the.
Consumer environment and get back our margins at the same time, if things hold where they are today and don't get worse that seems very viable right.
Were at not quite 5% pricing I think the latest industry data I saw was that a full service was up seven 5% pricing and that was before some of these latest upticks, we will see what happens I mean, you are reading about it everyday and other companies take another couple of percent here or there to make up for that.
And so we are still two five points behind that so on a relative basis as well as from a sales strength basis alright.
I certainly think we're in a good position to accomplish both of our objectives of growing comp sales in protecting margins.
David.
And the menu continues to help us in every part of the business and it helps us in pricing as well to be able to take pricing across.
Breadth of the menu of 250 menu items compared to some of our competitors with a much more limited menu from a consumer standpoint, our pricing may not be as noticeable which helps us to continue to drive the traffic without having as much of an impact.
Great.
Certainly makes a lot of sense I.
I guess, one quick follow up on that I guess.
The magnitude of your average check is likely above.
I guess some of the averages that we would typically see in casual dining so do you carve out a certain sub.
Segment of your peers or however, you define that.
What theyre doing on the average check to make sure that that.
The absolute value of your check.
I got too high for your core consumer.
Sure. David This is Matt we monitor about two dozen competitors.
National presence in at least 50 markets and those competitors range from a fast casual 10 to $12 check average to a steakhouse $60 $70 average because as David Gordon was mentioning the breadth of the menu, we don't have a core consumer per se.
We have a lot of different consumer groups that come in and our objective is to remain competitive with sort of the overall set.
Restaurants that being said.
The fast casuals are taking double digits in the state that houses are taking double digits, even within I think casual dining our relative value proposition is improving because most are still taking over the 475% of we're at today. So wherever they were out a year or two ago.
We're improving on our positioning versus that today.
Makes sense, thank you for that perspective.
Your next question comes from the line of Lauren Silberman with Credit Suisse. Your line is now open.
Thank you for the question. So I had a follow up on quarter to date average weekly sales are running at 240000 per week, which is a meaningful step up from one Q can you just expand on what you saw throughout one Q2, Q and when you saw trends in flash.
And then you had talked about the predictability of sales trends great sign how are you thinking about the sustainability of these average weekly sales level taking into account seasonality.
Think about extrapolating trends through the rest of 2002.
Sure Lauren this is Matt I think.
Widely noted Q1 was impacted with the omicron surge in early January and actually probably all the way through that first period and then there was a little I would say bumping is well within our expectations. As we came out ahead of them on the total top line.
But in March when some of the turmoil in Europe started certainly there is also some seasonality component.
Embedded in the improvement from Q1 to Q2 as well I think Q2 and Q4 historically the two higher average weekly sales quarters compared to Q1, and Q3 Q1 and Q3 of January in September which are the two lowest months of the year so that usually.
Wait them down.
Right now we're running at a $12 5 million as we noted in our prepared remarks, we're still targeting that $12 million right. Because there is seasonality where at a level that's higher necessarily then potentially we would have.
In some of those other other months I think that that being said, we're probably running a little bit ahead of where we thought we would.
In April the.
Trends are a little stronger than we originally anticipated.
Great. Thank you and just kind of real estate can you talk about what youre seeing from a real estate perspective at this point just competitiveness at sites in the cost of real estate.
This is David Florida, really nothing's changed from a cost for real estate for our brands were sought after whether it's cheesecake factory are now in North Italia. So we're still going to maintain our site based strategy. We still have fantastic sites that are in our pipeline and as we've talked about and when we do the rest.
This year and into next year I don't see any reason why we won't continue to march towards that 7% growth target and be able to achieve it.
Thank you guys.
Your next question comes from the line of Dennis Geiger with UBS. Your line is now open.
Great. Thanks, Matt you spoke to the current competitive environment briefly, suggesting it's a total unlikely tailwind right now I'm curious what your thoughts are with respect to sort of the mall traffic dynamic going forward the competitive set within malls and a general impact to you folks going forward and just your thoughts on.
How that might how you might benefit from the competitive dynamics going forward or how you might be impacted from that.
Sure. Dennis This is Matt I think you know.
One of the things again to sort of.
Bring back the old story about the malls for us.
When when things were basically shut down when we got to 90% of our volumes.
Just reiterated our thesis that we're a destination I think is as malls.
There are actually coming back and Youre seeing the reinvestment take place in the higher properties and that is the natural cycle. It will only it will only benefit us.
Yet at the same time many of those have.
<unk> seen a little bit of pullback in terms of the restaurants that are in the malls I mean anything that was interior in a mall during the pandemic had a hard time.
And so I think competitively that provides us a benefit as sort of a global perspective that there's anywhere from 5% to 10% fewer restaurants and Thats also true within within the mall properties, but I think generally any improvement that we see is only going to be a further benefit for us at this point in time.
That's helpful. Thank you and then just lastly, as it relates to the digital technology front kind of just curious if you could provide the latest update on sort of what's working where youre at and sort of where some of the biggest opportunities are from here and that can either enhance sales or enhanced margins and subway. Thank you.
Hi, Dennis this is David.
So we continue to really look into.
Uses of technology in the kitchen, and where we can increase productivity and remove some of the complexity.
Our made from scratch kitchen, so thats going to continue to be where we focus the majority of our energy when it comes to technology and technology enhancements, we want to continue and guest facing are positioned to be an experiential dining choice and give people the type of service and hospitality that they want that also means that.
We'll look to continue to find ways to speed up their experience of that means at the end of the only wanted to continue to use a QR code that we put in place to pay their bill to take a few minutes offered their dining experience will allow them to do that we're still continuing to use text paging for guests versus handing out pagers and those change we made in.
In the middle of the pandemic continuing to use technology to make the off premise experience as easy as possible and frictionless as possible from texting guest in their car allowed is allowing them to use curbside not have to walk into the restaurant to make that process faster. So our team is continuing to look at each of those avenues.
I think we've said before we're not likely to be put into tablets on tables and some of those more traditional things that some of our competitors may be doing that may work for them that we feel isn't quite right for us, but that doesn't mean that we're not continuing to evolve our own technology and looking ways to leverage, especially as I said in the kitchen.
Good examples of that are taking the inventory management systems that we've had at cheesecake factory and deploying them to north and FRC being able to drive efficiencies in our food costs associated with that right. So there is benefits of scale and technology that we have that we can also use across the portfolio.
Not just the Cheesecake factory.
Alright, thanks, guys.
Your next question comes from the line of Jared Garber with Goldman Sachs. Your line is now open.
Hi, Thanks for taking the question just two on North one Matt I was hoping you can give us maybe that average weekly sales figure for the second quarter to date.
But if you could frame the average weekly sales for Cheesecake that'd be helpful. And then a question on the margin, but north it seems like that brand is still somewhat of a drag on the overall restaurant level margin lines.
You gave some good color.
In the deck.
In the deck.
Is it.
Is there something about those new units.
Very different from the older units I think there was about a 500 basis point disconnect in the margin for some of those older units I'm. Just curious if there is something different or if in fact, it does take three or four years.
To wrap up to full productivity.
Yes.
Matt I'll answer the second part I think that 10 is the data on the first part.
It's really about where staffing has been for the newer units and rebuilding those those teams and we've heard about that from some of the other.
Larger national casual diners and the impact that has.
So you don't have to get staff back up to have to train all the while you're still dealing with attrition et cetera, what I'm happy to actually see is that we're starting to close that gap between the two buckets and I think that we have a good runway right now that we're working on some of the food efficiency.
Season, nor we took some additional pricing.
Continuing to close that gap, we'd like it to be closer to 2% to 4% on the five so we're not that far off so I guess I'm optimistic that we're making progress and most of that really is just around the ability to be as productive as possible and getting essentially those teams that were brand new a year ago up to.
Speed.
The quarter to date sales are at 150600, that's compared to the first quarter, we were at 139900.
Great. Thanks for the color, Matt and again, thanks, and yeah. The data there I appreciate it.
Your next question comes from the line of John <unk> with Jpmorgan. Your line is now open.
I guess I'll just follow up on the North Italia subject looking at average unit volumes New unit volume same store sales you guys really have quite a concept on your hands I mean, the numbers are pretty amazing.
Are you seeing I guess in terms of your experiences in terms of where it is doing extremely well, where it's doing well I mean are you beginning to kind of think about potentially different types of sites and may be different types of customer cohorts and maybe what the concept was designed designed to.
Achieve but actually is achieving.
Based on some of the results that I would assume at least from a topline perspective that are in excess of your expectations.
Yes. Thanks, John This is David Great question, and we're happy with those results as well and I think that what.
What we've seen across geographies.
<unk> has been very stable very similar to Cheesecake is you talk about the consumer is and what different cohorts work.
Very well for many different cohorts cohorts excuse me, maybe it skews a little bit younger, but you'll also see families at a north.
Which gives us all the reason to believe that every geography, where theres a cheesecake factory today every market. There is no reason why that couldnt be in north in each one of those markets as well we haven't seen a disparity in sales performance as we've grown and we opened restaurants in Florida, which is I think where you are.
Or in we'll be moving into Atlanta here.
Towards the summer and we're excited about that as well. So we think that the strength of the brand is that it works everywhere has a strong consumer base that appeals to a wide variety of people, we know how popular Italian food is generally.
And those teams as they continue to execute really well. They could also offers a little bit different ambiance and different feel that once out there and traditional Italian quote unquote chain restaurants.
Along with the bar program, it's a very strong bar program with a great design.
So we don't see any reason why we won't be able to sustain those sales levels and continue the growth and we're excited to hopefully be able to grow north of that 20% growth rate that we've talked about in the past.
And you're right I am in Florida in the unit and Brickell has an exceptional one I'm sure there's probably something to your weight right now at six o'clock at night, So you've definitely done something very well with that with that unit in that location and execution. So congratulations.
Let me change the subject.
You made the comment that your commodity guidance basically assume that commodities would stay steady from this current level. So the question I'm going to ask do you have any deeply in the money contracts like for example, if your chicken contracted extremely well relative to spot is there anything else.
That you have in the basket that contract did extremely well.
Relative to spot and I guess as we look at the grain markets and the potential influence on protein.
Does that give you I guess any cause for concern or worry as we get later into 'twenty, two and possibly into 'twenty three.
That some of your suppliers as their own costs are being pushed up that they may have to push on higher cost to you and the rest of the industry.
Yes, John it's a really dynamic time for sure in terms of contracting over the past six months, we've never seen anything like it I would say, it's pretty balanced I don't feel like or outsized positive in any of them, but we're not outsize negative either I think we've looked at.
Our strategy.
We just met on this again this week.
The frequency of our meetings and reviews and what we're booking win our strategy is stability and predictability I mean thats what cheesecake has been built on if we can do that we can know what the outlook is we can take the right pricing. We can give the right perspective to wall Street and so we're trying to ladder in more we're trying to develop win win relationships with suppliers.
We've looked at doing things more like having it tied to the direct input costs like chicken to corn right. So that you take away some of the other variables and I think that that strategy has been working well certainly the longer term perspective on green I think particularly the weak side of.
Things it could be some risk for next year, but as we stand right now I think that a lot of that has been built into this year already I mean, we're certainly at a higher inflation than we ever anticipated and it could be so.
I think most of that has been built into expectations at this point.
Thank you.
Your next question comes from the line of Jeffrey Bernstein with Barclays. Your line is now open.
Yeah.
Great. Thank you very much.
From a commodity to Labour front, I think you mentioned for 2022, you're expecting 6% inflation.
Previously that was maybe closer to five so I'm just wondering I think you mentioned the shortages are really no longer youre back to where you want to be from a staffing perspective.
<unk> an employer of choice I'm, just wondering is there a conscious focus on increasing pay and benefits to retain your best and how youre thinking about retention from a labor standpoint, and maybe that's the driver of the uptick in inflation just in terms of your thoughts from that perspective.
Sure. Jeff. This is David I think we are happy that our staffing levels of 1% roughly 1% better than pre pandemic, obviously with the sales levels, where they are and we want that to continue as Matt said earlier, there are some markets, where some particular restaurants, where theres still a little bit of pressure. Most importantly, we wanted to stay competitive and wages.
Certainly across the industry are going to have gone up and not just our industry but.
Whether that's retail or others. They continue to pay competitively well, so we're not going to fall behind.
We want to make sure that all of our operators know what the competitive market looks like we provide them with information on a monthly basis. So they can see what the pay rates are.
The geographies around them.
We are proactively taking care of people and the way that we have historically.
So that's probably where some of that pressure is coming from as Matt said it seems as though it's flattened out and we wouldn't anticipate more growth from here. So that's how it feels today.
Can't predict the future.
We are going to stay competitive and we need to continue to not just to retain those we have.
Attracted new staff members in our sales continue to grow.
Understood and then just following up on the commodity front.
The commodity basket for 2022 now it sounds like it's pushing maybe mid double digits versus the prior low double I'm. Just wondering if you can give us some context I know you mentioned easing through the year, but maybe what was the basket in the first quarter, what youre assuming for the second quarter.
And just so we can kind of get a sense for the the downward trend through the year.
Yes, I think Joe This is Matt again, I think it may give us a little bit off but I think of a total for cost of sales.
In the first quarter was like 13% to 14 percentage and jumping in if I just us off here and I think similar in the second quarter now and then.
Low double digits in the third and high single digits in the fourth and so thats about one 1% one 5% more than before.
Got you and just to clarify Matt your lift.
Can you comment on the call for the second quarter I think you said restaurant margins 200 basis points below.
I think you said below <unk> 19, which looking back with 16, 8% I just wanted to make sure I got that right that that was the reference point you were making.
Two we're comparing to 2019 <unk>.
Quarter to quarter, three year, three or lap basis now.
Got it so you're assuming a high 14% restaurant margin for the second quarter, Yes. The math is pretty simple right. So if I, just said, 13% to 14% commodities were up 5% pricing.
It's an 8% GAAP times, 22%.
You're almost there right, it's really driven by that environment and just timing of when we want to recapture that in the pricing, where we think commodities will go.
Understood. Thank you very much.
Your next question comes from the line of Brian Vaccaro with Raymond James Your line is now open.
Alright, Thanks, and good evening I was hoping to circle back on the recent sales strength that youre seeing in the quarter to date and I'm curious to what degree that's being driven by regional snap backs in previously lagging regions or are you also seeing the likes of the Florida or Texas.
Also hitting new reopening hide and also to what degree is the improvement may be being driven by higher effective capacity with staffing improves that might have constrained sales in the last few quarters, maybe just touch on those two dynamics if you would.
Yes, Brian This is Matt I think it's pretty balanced sales strength, we have seen.
I got to tell you, it's a little bit hard to pinpoint.
Because we're probably 2% to 3% better than we might have expected as well.
We were kind of factoring pricing lapping the year and Thats, 5%.
But because there's so many different variables that have gone on we have seen a different points in time, where markets that that actually Serge So high a year ago March their comps might not have been as strong in March and so it is all equaling out but in order to get to that comp level on those average weekly sales you get to a pretty broad based strength.
We're pretty good I think it's probably fair to assume we've got we're getting a little help from staffing because we've gotten a little bit better.
So that can only help us and.
And if we can sustain that.
That's a benefit but.
I think it's probably a little bit of everything.
Okay, Okay and on the margins I was just wanted to go back to the second quarter in 'twenty. One I think back then you had called out several cost like overtime and bonuses and training costs I'm just curious to what degree have those costs started to normalize and have you embedded those in your Q2 or any.
We will guide.
So we've seen improvement I don't know its normal right I mean overtime is better than it was but not as low as <unk> training costs are better than they were but not as low as it was pre pandemic.
What's embedded in our outlook is kind of a continuation of what we're doing now.
Alright, and sorry, if I missed it but I think earlier in the call. You said that you expect to recover your 19 margins in the second half and I know, it's a dynamic environment, but everything you know today what level of pricing would you need to take in that third quarter to achieve that.
That margin target.
So thats our objective, we're still evaluating the specifics on the pricing and we still have a little bit of time, so I kind of want to wait and see what I, what I will say is last call.
February we were thinking it was one five to two and certainly the inflation, we're talking about as a percent higher than that so that gives a range.
We're contemplating at the moment, but we havent settled on what that exact number is yet.
Understood. Okay. Thanks, I'll pass it along.
Your next question comes from Jon Tower with Citi. Your line is now open.
Great. Thanks for taking the questions just real quick in terms of how you use it seeing customers use the brands, particularly the Cheesecake factory outlet stores are fully reopened or are you seeing customers use both channels are similar frequency or.
Are you seeing or are you seeing customers coming in at a higher frequency and using two channels off premise in in store are you seeing unique customers come back to the brand in each channel I'm, just curious to see or to hear from you how customers are actually using the business and what the overlap between the off premise and in store.
John This is Matt I think.
It's probably a little early to tell to be honest.
We noted that the off premise dollars are staying steady so those guests that are using that channel haven't stopped and we're yet we're still growing average weekly sales meeting more people are coming into the restaurant again, we're not tracking those transactions, we do do annual research and so normally that's kind.
In the middle of the year I would anticipate we'd kind of look into some of those questions at that point in time, but I don't think I have a.
Specific data points that I can point you to other than it feels as though those two key attributes right steady off Prem increased utilization again of the on Prem, but I Couldnt tell you their new guests or the mixed yet.
Okay, and then just kind of on the upfront strength in and of itself, obviously very impressive in terms of the absolute numbers and the percent mix just curious to know what youre doing.
To ensure that level of sales sustained into the future, meaning are you throwing more marketing dollars behind the digital channels, specifically targeted towards the off premise occasion, or you're doing things like placing spending some money on say door dasher your delivery provider to ensure that you are right at the top of the search and.
And for the.
I'm just curious how that is how do you expect that to persist.
Thanks, John This is David.
In Q.
Q1 was it really wasn't until March that we started doing some off premise promotion and it really wasn't much comparatively to what we did during the pandemic. We ran a door dash offer that was 20%.
First people had never heard before up to $5 and a small.
Nine ordering offer but our intent moving forward and we've seen thus far when we've done no marketing because of the increased awareness. We got during the pandemic as we think we can hold the majority of that off premise without having to overspend on marketing dollars and continue to use our marketing dollars to just increased brand awareness with pay.
Search and social awareness and some paid social and the good news is that we know if we do need to pull that lever that we can and so that it works and whether that's through a specific timeframe that we're trying to drive sales or trying to reach out to acquire new guests.
Whether it's through door dash, our online ordering channels, we can achieve that so we feel good about the money that we didn't have to spend in the quarter hopefully that will continue and when we do spend it will be very strategic.
Got it and then just lastly on the absolute.
Dollar spend and are better the percent spend marketing I think in 'twenty. One it was like 60 basis points of sales in terms of thinking about this business into the future is that the right range of where you expect marketing to be over time or do you expect more dollars and therefore more pressure to be more percent.
Spend going forward just to keep that awareness high.
I think we can keep it there.
John This is Matt, but but keep in mind that the other brands like maybe a north of a flower child, those actually do have a little bit of a higher percentage. So they get bigger over time as a company that presented might creep up a little bit, but I think we're pretty comfortable on the cheesecake side.
Thank you for the time.
Okay.
That concludes today's question and answer as well as today's conference. Thank you for attending you may now disconnect.
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