Q2 2022 Cheesecake Factory Inc Earnings Call
We view, our second quarter results and provide a financial update following that we'll open the call to questions.
With that I will turn the call over to David Overton.
Thank you again, and we were pleased with our overall sales performance with second quarter sales, finishing within our expected range. Despite an increase in COVID-19 cases and consumer headwinds.
Apparel sales at the Cheesecake factory restaurants increase.
Increased four 7% in the second quarter of 2022.
Relative to the second quarter of 2021, and 13, 1% versus the second quarter 2019.
And once again outperformed the broader casual dining industry.
Our restaurants remain extremely busy with annualized unit volumes at the Cheesecake factory restaurants, reaching $12 3 million for the quarter.
These industry, leading volumes demonstrate at the Cheesecake factory continues to be one of the most.
<unk> casual dining concepts, our unwavering focus on menu innovation service hospitality and operational excellence enables us to maintain broad demographic appeal relevance on Saturday, we're launching our newest flavor of Cheesecake classic bass Cheesecake.
Our unique Christless cheesecake with a bird top and an ultra creamy customers like center. The Cheesecake Factory's version is a classic recipe covered with fresh berries and whipped cream.
In addition, our new summer menu rollout began this week as we lean into one of our key competitive differentiators are distinctive menu to drive incremental sales.
Turning to development all of the sites, we have been working on remaining active and our pipeline. However.
<unk> continued to be affected by supply chain challenges and permanent approval delays as such we now expect to open as many as 15, new restaurants in fiscal year 2022, including <unk>.
<unk> Cheesecake factory restaurants.
For North Italia, and seven other FRC restaurants, including three flower child locations.
We also currently expect one cheesecake factory restaurants to open internationally under a licensing agreement.
Despite these timing challenges, which are out of our control we remain on track to achieve our annual unit growth goal of 7% next year.
As I stated on our last earnings call I recognize that the environment is dynamic and we continue to face substantial challenges marked by high commodity inflation, a tight labor market and further supply chain disruptions to.
Despite these headwinds we remain committed to protecting our four wall margins overtime and.
And we will adjust pricing to support this objective.
To that point, we are in the process of implementing a four to five price increase with our summer menu change and we will continue to closely monitor the inflationary environment.
And what level of additional pricing may be needed.
With that ill now turn the call over to David Gordon.
Thank you David.
Our solid sales results for the quarter.
Our best in class operators proven capability to execute effectively and to capture incremental sales.
Operationally our teams managed their restaurants well.
And our expectations across key performance indicators, including food efficiency and labor productivity.
Our ability to adequately staff restaurants has been imperative to our operational execution and to capturing those incremental sales.
While we continue to encounter some pockets of staffing challenges our overall staffing levels continue to improve throughout the quarter.
Specifically June hourly applicant flow increased to record levels, well above pre pandemic totals.
<unk> to the highest number of hourly new hires in any single month, so far this year.
Combined with improvement in our industry leading retention.
We now have 3% higher hourly staffing and pre pandemic levels.
And as of July hourly staffing needs are at record lows.
We believe our staffing success is a key contributor to the sequential improvement of our Titan and guest satisfaction scores.
Industry research continues to confirm the importance of service to the guest experience and overall restaurant performance.
The Cheesecake factory off premise channel trend remained solid with second quarter sales accounted for 25% of total sales.
And the annualized second quarter average weekly sales for this channel continue to try and close to twice the 2019 annual levels.
Now turning to North Italia.
Second quarter comparable sales grew 12% versus 2021, and 22% versus 2019 with.
With improvements in all day parts and all geographies.
Annualized unit volumes for North Italia mature locations averaged over $9 million for the quarter.
Despite the impact of high inflation, the second quarter four wall margin improved to 16, 4% for the adjusted mature locations.
Now for the total brand four wall margin is near 13% as.
As we made progress towards our goal as our pricing strategy is effectively one quarter ahead of the cheesecake factories.
FRC drove similarly, strong topline and profitability performance during the second quarter.
And Additionally, two weeks ago. The FRC opened the first brick and mortar location of fly by our newest SaaS casual dining concept offering Detroit enhanced stretch style pizza and crispy chicken.
Slide by started as a pop up ghost kitchen inside one of the existing FRC culinary dropout locations during the early stages of the pandemic.
Sales for the first two weeks are exceeding our expectations and FRC is planning to open one more fly by later this year.
Both locations that are currently open or in the Phoenix market.
We continue to believe differentiated concepts and emerging brands FRC develops we will drive meaningful growth moving forward.
And with that I will now turn the call over to Matt for our financial review. Thank you David <unk>.
During the second quarter, along with the broader restaurant industry, we finished substantially higher inflationary headwinds than we had initially anticipated.
Specifically commodity inflation was 200 basis points higher primarily.
Driven by spot pricing in the dairy and produce categories.
In addition, hourly wage inflation utilities and restaurant repairs and maintenance were higher than expected.
These combined costs totaled approximately $13 million or 24 of EPS in the quarter and account for the majority of the variance to expectations.
Turning to some specific details around the quarter.
Second quarter comparable sales at the Cheesecake factory restaurants increased four 7% year over year.
Revenue contribution from North Italia, and FRC totaled $146 5 million.
Northern Italia comparable sales increased 12% year over year.
Sales per operating week at FRC, including flower child for approximately $116000.
And including $14 $2 million in external bakery sales total revenues were $832 6 million during.
During the second quarter of fiscal 2022.
Now moving to expenses.
Cost of sales increased by 250 basis points, primarily driven by significantly higher commodity inflation and menu pricing.
Labor increased 90 basis points predominantly driven by higher wages compared to the prior year period.
Other operating expenses increased 40 basis points, primarily driven by higher utility costs, which are mostly inflation related and lapping lower general insurance claim activity.
G&A as a percentage of sales declined 30 basis points, primarily due to a lower bonus accrual.
And pre opening costs were $2 $9 million in the quarter compared to $2 8 million in the prior year period.
We opened two restaurants during the second quarter versus three openings in the second quarter last year.
And finally in the second quarter, we reported an after tax.
$8 million charge, primarily associated with FRC acquisition related items.
Second quarter GAAP diluted net income per common share was <unk> 50.
Adjusted net income per share was <unk> 52.
Now turning to our cash flow and balance sheet.
The company generated approximately $54 million of cash flow from operating activities during the second quarter.
With ending total available liquidity of approximately $433 million, including a cash balance of about $195 million.
Over $238 million available on our revolving credit facility.
Total debt outstanding remained at $475 million.
Capex totaled approximately $17 million during the second quarter for new unit development and maintenance.
And we completed approximately $11 million in share repurchases and returned just over $14 million to shareholders via our dividend during the quarter.
Okay.
While we will not be providing specific comparable sales and earnings guidance given the operating environment continues to be very dynamic we will provide our updated thoughts on our underlying assumptions for the balance of 2022, including some timing nuances similar to last quarter.
Based on our second quarter performance more recent trends and including the impact the latest COVID-19 virus resurgence is having we continue to anticipate total revenues for the year to be between approximately 332 billion to $3 37.
Billion.
With Cheesecake factory, <unk>, reaching $12 million.
As a reminder, this includes the impact of the 50 <unk> operating week in fiscal 2022.
Taking a similar approach for the third quarter, we would anticipate total revenue to be between $785 million and $805 million.
Next for the year, we now expect commodity inflation of about 14% to 15% on an annual basis, which represents approximately a 200 to 300 basis point increase over our prior outlook and is directionally in line with headline.
CPI increases we observed during the quarter.
We are now modeling year over year commodities pressure to be around 1% higher than the annual average in the third quarter and around 1% lower than the annual average for the fourth quarter.
The labor market also continues to be dynamic with many complex moving parts.
Inclusive of known minimum wage increases we are modeling net total labor inflation of about 5% for the back half when factoring latest trends in wage rates channel mix as well as other components of labor.
Given the inflationary outlook for energy and services, we now expect other operating expenses to be in the low to mid 26% range for the third quarter.
And with the full benefit of pricing, we still anticipate ending the year at approximately 25% of sales in the fourth quarter.
As David mentioned, we remain committed to protecting our longer term four wall margins.
However, there remains measurable risk associated with cost fluctuations driven by the current environment.
Given the additional inflationary pressures we are experiencing we are in the process of implementing about a $4 two 5% menu price increase.
As previously anticipated is measurably above our current level and the supportive of our margin objectives.
The additional menu price increase we put the year over year pricing close to seven 5% once fully deployed.
Keep in mind, the third quarter will only receive about half of the benefit of the incremental price based on the timing of our menu rollout.
We now anticipate G&A for Q3 to be around $52 million and approximately 55% to $56 million for the fourth quarter.
As a reminder includes an extra week this year.
Our preopening assumption remains unchanged at $18 million for the year to support our development plans with approximately $6 million in the third quarter and $7 million in the fourth quarter.
Finally, we expect about 91 million and depreciation for the full year and for modeling purposes, we are using a tax rate of 9% to 10% for the balance of the year.
With regard to development, we plan to open as many as 15, new restaurants. This year with three currently planned to open in the third quarter.
We would now anticipate approximately $140 million in Capex to support this level of unit development as well as required maintenance on our restaurants.
Note that this includes some capex for locations that have shifted in.
Into 2023.
In addition, keep in mind that we have reinstated our stock buyback program and have declared two dividends.
Yes.
In closing.
Despite the many unprecedented challenges encountered during the first half of this year, we are still progressing towards our primary financial objectives for 2022.
Specifically, we may be starting to see some early signs that inflation has peaked.
Including the lowest level of year over year wage inflation, so far this year.
And our commodities outlook, and which we are more booked now about 75% for the back half and that calls for approximately 250 basis points of declining inflation between now and the end of the year.
If these trends continue.
With our higher menu pricing, we will still be on track to exit this year with four wall margins at 2019 levels.
In addition.
Even including the impact of sales of the latest virus resurgence appears to be having not dissimilar to the earlier omicron and built the waves. The mid point of our total annual sales outlook as it remained unchanged from the beginning of the year at approximately $335 billion.
Thus with the strength of our operations team our brands and our balance sheet. We believe we remain well positioned to take market share and grow shareholder value overtime.
And with that said operator, we will now take questions.
As a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your first question today comes from the line of Nicole Miller with Piper Sandler Your line is now open.
Good afternoon, and thank you so much for the update clearly a lot I guess you could call. It outside of your control. So asking a question in the bucket of inside of your control can you talk about development.
Visiting some past recession period and.
Probably for different reasons at that time it.
With Keith K growth and it did slow in this case now North Italia, that's really the growth engine.
So how do we think about it.
If things were to weaken what you wanted to do in terms of the growth opportunity in the short term there. Please.
Hi, Nicole it's Matt I'll, just start kind of on a financial perspective.
We have $195 million from the bank, we believe in the long term unit economics of these brands.
Building on the margin improvements in all of them and we believe that we're going to move forward with all of our development goals at this point in time, we have.
Sure.
Purposely kept our balance sheet remarkably strong.
And we really believe that if there is a downturn it will be shorter and shallower and that there will be a lot of market opportunity to take and then maybe that will be a good turning point and so all of the sites that we have we continue to move forward with and in aggregate as we look across the next couple of years I don't think I've seen a time.
Where we have more sites in total that we were moving forward with so we really don't have any plans to pull back or see the need to do so at this point.
And then just can you remind us of the cohort I guess.
My income.
Household income profile Im thinking specifically of cake, but if you have it for north Italia as well of course, you know cross sell brands, we're trying to understand how lower income versus higher income.
And then the frequency of those cohorts is there anything you could share on that please.
Sure Nicole it's Matt again, I think the first thing is we definitely skew higher income higher education higher Tech savvy.
We're on average over 100000.
And income.
Obviously for particularly for Cheesecake factory all of the locations are in the best neighborhoods in the entire country.
And so we're surrounded by the best neighborhoods as well as usually business foot traffic and so I think we're probably is insulated as anyone and I would say the same actually for north and FRC. It shares a very similar cohort in that regard we do get some special occasion.
<unk> guests, but what we've seen historically is those guests still want to come in for an anniversary or birthday, regardless right because you still need to treat yourself even in a down time. So I think that we are in a good position and I would just remind everybody we still have tremendous value in the cheesecake factory menu too.
Of items, ranging from five or $6 or $30 in the the large portions make it incredibly shareable and so people can navigate with our menu I think in a very different way and certainly the last thing because I think this question will come up to what we have seen historically, if there is a little bit of a dip as remind.
People that our number one competitor or the white tablecloth independent mom and Pops and I think we'll probably we will be able to take some market share because we're keeping so much value in the prices that those groups that had taken their menu is substantially more than what we're taking and so if anything we're in a better competitive spot them.
Before.
Thank you so much 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, just talking about the consumer demand perspective.
I think you are the first call I've been on has mentioned the new the new.
Variant impacting sales. So can you kind of provide some color on what youre seeing there.
And if there is any <unk> to that.
And then secondarily within the quarter itself.
It seems like you may have seen.
Greater slowdown if you will towards the back half of the quarter than some of US unexpected do you think you are starting to see.
Fallout from lower income consumers is there anything you can look at from an average check perspective.
Fewer appetizers fewer beverage attach.
And then I guess lastly, just to kind of round all of this out.
What are your thoughts right now on kind of price elasticity of demand as you go into this next price round.
Sure Sharon it's Matt.
No.
I think I took enough notes to get to every bank.
No no I think they're all they're all good questions right and I think they are all very relevant and tied together. So so the first thing I would say is we went back and we looked at the last <unk>.
16 months or so of sales and there is a very high correlation.
You can track to the movement of the virus and when.
Do you see more cases, I mean as I think has been documented previously but you keep them on one now cases are probably undercounted by a factor of 10, if you read any of the medical journals, because everybody's testing at home, but when you see the cases move up you see sales come down and then when you see the key.
<unk> go down do you see the sales go up probably higher than what is the sustainable level. We've seen this happen over time, when it's like holidays to get moved a new people will go out on a holiday and then maybe they don't go out as much as the next day or the next week and Thats kind of the same phenomenon. So.
We ran a regression against the trend by weak over the last 16 months and what we see for our businesses that we keep returning to 2019 plus pricing levels. So back when we had our last call I think in April we were running above that and we said that we said we.
We don't anticipate that we can continue to run 3% to 4% above that level because that's just not what the trends are pointing to and then the same thing I think happens on the downside.
In the first quarter in January we ran measurably below where we ended up but it rebounded as we went through the quarter and people were able to get back out. So for example in the quarter in the second quarter in June we pretty much ran at 2019 plus pricing we were right on our plan.
It's just a matter of comparison one of those periods to the other periods, where it might be hot or might be not and when we look at the trends.
I think we're able to see those pockets that are moving up and down based on <unk>, whether it's in California and here in La County, they are talking about going back on the mass mandate. If you can believe it and we can see that the sales performance both in the beginning when it starts to go down but also when it starts up.
To come back up until.
When we see a recession, we see much more broad based but even sort of smaller declines and this has been much more regional pockets of kind of go up and down a little bit based on on that well. We haven't seen is any trade down. The check average is remains right on the year over year trend. The attachments are all right on dessert.
<unk> continued to be a big driver for us I would imagine that would be true of our of our new cheesecake. So I mean, I think that we feel like it reverts to the mean over time, depending on the scenario and that's what we've seen happen.
Each of the last five quarters, I think with price elasticity as I mentioned and the Kohl's question, we have so much flexibility in the menu.
That historically, we were able to capture a price and guests can decide how much they are going to spend and they can share. The other thing importantly, we remain even was removed to the seven 5% pricing that will put us about one 5% below the full surface average in June which I guess.
<unk> will go higher based on everybody needing to catch up a little bit more so I think competitively we remain in a really good spot and again I'll just reiterate as we compete against the independents, who will likely have even more inflation because they don't have the scale of the Cheesecake factory I think will probably be even more.
Competitive.
And be able to fully capture our pricing and keep those guest trends such that we see that 2019 pricing trend.
Okay. Thank you.
Your next question comes from the line of Jared Garber with Goldman Sachs. Your line is now open.
Thank you for taking the question Matt I was wondering if you could just help frame for us the components of the comp just to make sure we have the price and the traffic mix.
Understood for the Cheesecake factory, I know that the traffic and the mix components separately.
We are driving a little bit different just amit at the off premise business normalizes, but was hoping you could give us a little bit more color. There. Just so we can understand maybe if there is some declines in traffic and then I wanted to follow up with some of the commentary from the last couple of quarters about a loyalty program or a CRM program that you guys have been working on and maybe where you are with that and how that might have.
Stan.
Potential future traffic losses.
Environment, where consumer spending is decelerating.
Sure Jared this is Matt and I'll answer the first part of them hand that to David Gordon.
A little bit of a funny math as you pointed out with the whole to go business and the way that we count it.
As one guest per transaction versus in restaurant at its Bud.
Butts in seats that being said for the quarter Cheesecake factory pricing was four 8% and then traffic was actually then reported a positive five seven and the mix is a negative $5. Seven there are direct wash out because essentially our comp was equal to the pricing.
I can tell you that we continue to get a little bit more on premise. So I mean.
Actually it is true we have greater traffic in Q2 of this year than we did last year. So.
But that continues to happen I think also when we've looked at some of the research. There's a good percentage of maybe a third of our lapsed guests are more are still not even comfortable coming back and so when we look at that gap, we talked about that being around 90% give or take what point in time you are looking at it of what the <unk>.
Premise traffic recovery has been if you look at the gap, it's really the lapsed guests that still may not be comfortable so even as we've talked about the movement between on premise and off premise. So long as we track to about $12 million AAV, we're going to be happy we're agnostic and we just want to give great guest experience.
And so.
Overall, we seem to still be tracking to the number that.
Six months ago, we laid out.
Hi, Jared it's David Gordon just on the rewards program, we launched our pilot in mid June . So we're about 30 days into the pilot thus far in the Houston market, which is comprised of five restaurants, and our pilot objectives were really to measure our ability to train the program.
Well to make sure all of the technology was working effectively.
Effectively that guests could redeem and the methodology that we want them to have a great guest experience and most importantly understand the enthusiasm for the program and the good news. There is that we have over 20000 members just in that Houston market, which exceeds our own expectations.
And our plan is to continue to measure the data and the ROI of the program throughout the remainder of this year, whether we decided to do another small better. This year is still to be determined but our plan would still be to move forward at some point next year with a full launch of the program. If all continues to go well.
Yeah.
Great. Thanks for the color.
Okay.
Your next question comes from the line of Brian Bittner with Oppenheimer. Your line is now open.
Hey, good afternoon, thanks for taking the question.
I do just wanted to flush out the trend that youre seeing just given all the uncertainty we all have with where the consumer is headed and whether the consumer could or could not pulled back.
Since your disclosure on on April trends there was.
Pretty marketed slowdown in comps in your revenue came in at the very low end for <unk>. What you expected in your third quarter revenue Guide I think implies trends do continue to slow from the second quarter, you can confirm that if you'd like but.
<unk> are you, saying that this is simply just a.
Reversion to the mean and perhaps a return to normal seasonality as well maybe than you just simply do not believe anything youre seeing in your business relates to more softness economically.
Brian It's Matt.
I mean first of all who knows what really I mean, thats why youre asking the question.
Yes, the trillion dollar question.
What was the consumer going to do an hour how are they behaving.
I don't know that any scarier out there today than it was in March when the war was announced or when gas prices reached an all time high in April .
I mean, certainly those indicators have actually only gotten better over time the job market remains two job openings for every one person looking anybody that wants to work and get a job. So and we're seeing that that lower income cohort is coming back to work based on our so there's other ways that.
The money, we will potentially move around to support the economy I think for US a couple of things. We do believe that if you track over the last five quarters that it reverts to the mean I mean, there have been periods of time that are well documented that.
Last December and January were significantly slower and casual dining noted down double digits for most people, but then it recovered.
Remarkably in just has moved around based on a lot of these factors.
We look back at probably the only good.
Comparison that people might be thinking about for our size of company and the timing, which was the great financial recession or catastrophe or whatever it stands for.
When we saw the data when we looked at that data the trends there were much more moderated over time and broad based across all of our restaurants, you could see a pretty linear movement negative one to negative two to negative three 8% to 10% negative, 20%, but but not.
Not these pockets that we're seeing today that don't seem to indicate when you have a geography that is still running the same level that it was running three months ago.
I wouldn't tell me Thats economics, but this tells me there is another factor and play right otherwise you'd see it in every state of.
The country that being said there could be a little bit of a slowdown I mean, I think the media has fueled that tremendously in the scare factor alone probably is what is creating as much as anything else. Our guide for the third quarter factors in that we are a couple of points below.
Where we were in June and we believe most of that is due to the virus moving through different parts of the geography. The latest week. We had is better than the weeks, we had before that so we're actually seeing it come back up already and so thats. The what tells me it's not so much the consumer pulling back, but what I see.
The latest week better than two weeks ago will that doesn't indicate a downward trend, but our net guide for the quarter is a couple of points down but to accommodate kind of starting point, but if you think about again I will just go back to our perspective, the full year revenue guide is unchanged from us.
And so I think that points to how we think about it right now.
No that's super helpful. Thanks for that and just.
Second question.
As you as you exit 2022 with four four wall margins that matched 2019, which is kind of where where you're leading us if that does indeed occur.
I guess are you, saying that 2023 EBIT margins are.
<unk> would be positioned to nicely exceed 2019, EBIT margins is that kind of where you are where you're going with this.
That's been our objective from the get go if we can get the four wall margins back to 2019 levels. You can see the math I mean, G&A is better and depreciation is better and so the net enterprise EBIT margin should be measurably better and as we noted in the prepared remarks.
If the commodity inflation doesn't get worse again.
And if the labor stays on track to where we've seen it today, we believe that we can accomplish that as David Overton mentioned, we will continue to note inflation and if we have to we will keep up we have I will say, it's really important.
Kind of like the fed we have a dual mandate, we want to grow market share and we want to protect four wall margins, sometimes those are at odds with each other and it's like threading the needle and I think that's what we're trying to accomplish.
Thank you Matt.
Youre welcome.
Your next question comes from the line of Jeffrey Bernstein with Barclays. Your line is now open.
Great. Thank you very much first question just following up on the last one.
Just because I think you did just benchmark.
Third quarter comp assumption relative to June .
If you could maybe just share what the comp trends whereby a month through the second quarter and what they were running in July just to frame. The trend you saw through the second quarter and what Youre, assuming for the third quarter.
Yes, So I don't remember April we could go back and check that but we in June Jeff were basically thinking about 2019 plus pricing.
We're kind of right on our plan, which is sort of that reversion to mean and in July we were running a few points below that at this point our.
Our assumption for the third quarter is that we get back a little bit we've seen the trend improved recently and that we would move back to being close to that level essentially by the end of the quarter. So it's a little bit of a U shape.
Yeah.
Got it okay.
No.
And then just.
Clarify I know you said, you're taking four in a quarter points, maybe with the summer menu and that would get you to seven and a half ultimately.
But I guess consider further increases I'm just wondering.
Wonder if you could just share what you think the pricing will be in the third and fourth quarter, but.
I know you mentioned managing the business for the long term.
I get the sense that means we're not in a rush to necessarily fully offset all of the inflation that wouldn't necessarily be right for the business long term. So how do you think about how much of the inflation you want to offset in that framework of again.
Managing the business for the long term.
Yes, Joe.
It's a good question so I.
It may have had 10 check my math on this so just I just want to clarify the fourth quarter pricing will be seven 5% the third quarter pricing will be around 6% on a weighted basis because of when the menu rolls out it's kind of in the middle Okay. So 6% in the third quarter.
And seven 5% in the fourth quarter.
And our intention is that we're going to fully price for all of inflation. We think our business model is right on all of the other factors productivity et cetera. The guest demand obviously is there and so we're executing the business model. So when you have input costs that are the sole reason.
Their margins are being pressured it's logical to pass that pricing on in an environment, where we're still below full service dining well below grocery. So we still have room to make that happen and I would say keep in mind too from sort of a strategic perspective, we may be a little bit.
Behind but thats kind of traditionally our way or more of a fast follower you can see the progress and the North Italia margins are about one quarter ahead of cheesecake on the pricing and as we noted the goal for that brand was about 14% for the year to get to by the end of the year because it is.
B a couple of points behind cheesecake because of the growth. So it's getting pretty close and so it's working we believe the pricing for Cheesecake will work and we're pricing to these costs. If we see some degree of give back of natural gas can revert back to at least somewhere between and.
All time high which is where it's at where it was.
If some of the commodity stabilize.
If our overtime gets better because we remain fully staffed then we have some some room to grow on top of that.
Understood and just lastly, I know you mentioned.
We're pretty well positioned with a higher income consumer and then pretty.
More affluent neighborhoods I guess.
The fact that you are heavily mall based is there any change for the malls impacted any differently than just the broader well to do neighborhoods.
I guess from a mall traffic perspective.
Back to pre COVID-19 levels or our occupancy levels at the malls back to full strength, just so that being within the mall within those well-to-do neighborhood I don't know if you have any better or worse off than anybody else in that neighborhood. Thank you.
Jeff This is David Gordon I don't know that we've seen any market change for mall based locations versus the rest of our locations they will remain consistent and strong.
The tendency in the malls remains consistent we haven't seen any drop off in <unk>.
Actually retailers as far as occupancy goes and traffic has remained really strong and consistent.
That's great clarity if no big difference between your mall stores and your non mall stores that would.
Like that question. Thank you very much.
Yes.
Your next question comes from the line of John Glass with Morgan Stanley . Your line is now open.
Thanks, very much recognizing.
Recognizing you may not think.
There yet, but if the consumer continues to slow what are the contingency plans.
Remember from a later line. If this is the correct timing small plaids in small bites, which introduced I think that was pretty successful that needs to be around forgive me for not knowing that maybe that gets refreshed how do you think about responding.
Getting there is uncertainty out there and you must have a plan if you needed it.
That looked like this time around.
Hey, John It's Matt I think it's definitely a relevant point.
Rest assured that the management team is constantly evaluating our strategic responses to the environments I think.
Just to remind everybody that.
We came out of that recession with better margins and better sales than we went in and I think the key.
Obviously, there's two sides of the coin one is to ensure that you have value and you remain relevant and we are able to put out menu items on the special card at different price points whenever David wants to do that and so we'll watch the environment and certainly that's that's an easy thing for us to deploy.
Again, if thats, what we wanted to do as David Gordon talked about earlier, we're in the midst of.
Piloting a rewards program that would certainly be a new vehicle for us to be able to deploy that type of activity very surgically. If we wanted to and the third thing I would say on the value side is we were very successful during the <unk>.
Demick running promotions, when we never done that before.
And so it is something where we built up a little bit more muscle and if that were the case, we certainly could pull that as well. So I think we are going to have more at our disposal that we did before we have more learnings than we did before and the ability to reach specific guests. So I feel confident.
That we can respond there on the margin side. The key is that most expenses in the restaurant space.
Our variable over time and so it's the degree and the speed at which you can recover the variability of those margins right. So even with rent for example, we're on percentage rent in every case and so it's going to move with sales there are some moderately fixed components over the medium.
Term, but the most important thing from an operation standpoint is to get alignment around that variability and to recapture that margin. So.
We're shooting for 2019 margins that would be our goal now it depends on how deep and how long any pullback is but our goal would be to maintain that same level of margin over the medium term.
Hi, John Thank you very much David Gordon sorry, I would just add operationally that a good portion of our operations team, especially the field leadership team experienced the 2008 2009 and 2010 recession, they're very nimble we are best in class retention. So our operators if we ever were at a point, where we need to make any structure.
Changes to how we were operating.
Are the best in the business and it will be able to flex appropriately.
If we ever got to that point in time.
Thank you.
Your next question comes from the line of Brian Vaccaro with Raymond James Your line is now open.
Hi, Thanks, and good evening.
Sounds like some of the some of the sales decline or moderation youre seeing youre attributing it to re emerging COVID-19 concerns and I guess looking across regions are there certain regions, where that's less of an issue and if so are you seeing any changes in behavior ordering patterns et cetera, when customers are in your.
Our restaurants, and then also within the off premise channel can you comment on how deliberate versus takeout is performing.
Sure Brian This is Matt.
For example, we saw.
Initially.
More pressure in southern California, and the northeast.
And that is where the greatest number of reported cases have been we've seen less impact initially in places like Florida and Texas.
Moves around.
I was just looking at another geography.
Noted that we had seen this past week, a little bit of pressure and sure enough.
<unk> been in the news and.
This particular city the headline in the local paper was the summer surge is back when they were talking about a whole bunch of cases. So we can we could almost be like a sounding board for the CDC you can track. It I mean, it's people can't go into restaurants, when they're sick or their home taking care of people. While we saw a statistic that there are twice as many people out.
Of work now than at the Omicron surge back in the holidays, there's like 4 million people right. So that's pretty meaningful in those areas, where it's been more stable. We haven't seen any change really in the behavior of the guests with respect to check average et cetera. So that gives us a lot of confidence that nobody is trading down at least in.
And our restaurants, it's really about purely foot traffic at this point in time in those geographies.
The off premise mix of that 25% remains very very consistent delivery comprises 11% phone in and walk up is eight and online ordering of six so almost right in line with the previous couple of quarters.
Alright, great. That's helpful. And then I think on the Labor front I think you said you expect net wage inflation of around 5% in the second half can you remind us how does that compare to the wage inflation you have experienced in the second quarter or the first half.
Yes, we went into the year thinking it would be about 5% it bumped up to around 6% to seven for the first half of the year. So the 5% would represent an improvement of about 1% to 2% net in the back half and as we noted we have seen.
The year over year wage inflation moderate.
And so look.
Looking at that trend and all of the other components combined.
Okay, and then I think Matt.
Over time, an outsized training and other costs had been a pretty significant headwind for you are those costs starting to ease more recently and I guess if not why.
And when do you expect some normalization in those areas.
Yes.
I would tell you kind of comes in waves still no no pun intended with the virus but.
When.
When we hit March and April and even even in May as business really took off again coming out of the winter we had to hire a lot of people. So it's still you're running ads to hire people and Youre training people and then you have newer people and you'll have higher overtime.
So what we've seen is that in an environment, where the labor side is a little bit more stable, which maybe we'll get to in this most recent.
Stage, because our staffing levels are at a better point in it.
Everybody knows that back to school with casual dining the aggregate sales level dip, that's a pretty known seasonal pattern that we might see some of those Brian ease in the late third and fourth quarter.
Alright, Thank you I'll pass it along.
Your next question comes from the line of John Power with Citi.
Your line is now open.
Great a few follow ups.
Yes, I was hoping to run through here.
Hitting on the Covid flare up stuff you had mentioned that certain markets, obviously, it's showing up.
But you didn't call out whether or not that's actually impacting your own staffing levels at the stores. So I'm curious if that is the case and then I got a few more questions. If you don't mind.
Yes, John This is Matt there is no question I don't I don't know that we have I could give you a specific number but what I can tell you is that our sick time is running well above what we anticipated it would and there's only one real driver of that.
That we also on our operations leadership calls I can tell you anecdotally. It's one story after another as it kind of moves through a market and Youll talk about our restaurants in these three managers and staff members.
Call then this weekend. So we are definitely seeing that fortunately.
We're able to be in a slightly better spot to buffer it but but we are seeing that move through the restaurants too.
Okay, and then just kind of following up I think to John's question earlier in terms of your ability to.
Respond to changes in the marketplace with calls to action.
No I think that you had mentioned earlier in the call you are seeing scenarios, where cases move up sales seem to go down. So how do you think thats going forward I mean.
You do have a much bigger media presence social media presence and in the past when you had utilized.
Promotions in the past I think coming out of Covid.
To drive some traffic.
How how quickly can you respond and are you doing any of that yet.
Yeah.
Well I'll tell you I'll tell you there's a couple of things one we just completed some consumer research and so we will be digesting that to understand a little bit more about how consumers are behaving and what they're thinking and particularly around our brands. So we felt the timing was good to get back out and understand because.
Cause right, it's sort of a new paradigm with people. So I think we'll.
We'll learn a little bit more about what we think would be effective I think in egg or get it's about understanding the trends in the individual markets and adjusting operationally to them because at the end of the day, if we hit the $12 million.
We're still believing we are on track to do.
The volumes are there, whether it moves up or down two or 3% in any given month, that's really not going to dictate a big change in strategy for us other than potentially operationally right, we need to get the margins. So if that causes us to be more or less efficient when we have to learn and we have to adjust to.
But in aggregate.
We continued to trend as we believe we are to the 2019 plus pricing levels. Then I think the volumes are there. We just have to navigate around the ups and downs a little bit John I would just add this is David on the promotion front that we meet on a weekly basis and look at the status of where we're at and we can pull the lever on a promotion within too.
Weeks, whether that's something that we want to do off premise toward ash only.
Or something for online ordering so I think all of our learnings as Matt talked about earlier from the pandemic and the flexibility of our current playbook versus what we had prior to the pandemic puts us in a pretty strong place to be able to react pretty quickly to whatever fluctuated fluctuations we see.
Okay and then just.
Lastly, I think you just hit on door Dash I believe you still have a fairly exclusive relationship with them and I believe the economics are pretty favorable to you but given.
How other brands.
<unk> partners in particular <unk> brands have had grown.
You explored the potential to move on to other platforms and or considered taking even more price in the delivery channel I think you said something like 3% or so differential between in store menus.
Delivery menus, but.
Yes.
Competitors are much higher than that so I'm curious why you wouldnt or if you've considered taking pricing there.
Certainly as we continue to take pricing on the menu. It's also a conversation we have around our.
Our competitive advantage for delivery and if we feel like we can hit the margin targets that were set out for in the sales without taking more than that 3%. That's what we would prefer to do if we find that we need to take more than that 3% differential to a differential to protect margins, we'll certainly discuss that and have the ability to do it moving forward.
If we wanted to as far as the relationship with door Dash, we do have an exclusive agreement and we're still very happy with that agreement.
Some of the marketing and our ability to pull the lever on that marketing as quickly as we like because of that relationship.
And their nimbleness in working with us to get promotions launched and then communicated out to the consumer.
So we're still very happy the as you said the economics are very favorable for us and we like the relationship and our continued plan is to stay down that path for now.
Alright, I will pass it along thank you.
Your next question comes from the line of Andy Barish with Jefferies. Your line is now open.
Hey, guys.
I hopped on a little late but I heard.
David <unk> comments just on on.
On food and labor efficiency.
You had obviously some of the margin shortfall can you.
Just kind of match that up and then theres something additional that could be worked on from a productivity perspective or was it was it just the input cost.
Higher than expected with less pricing.
And as Matt It was 100% related to the input costs.
Versus versus the pricing so.
The spa market in dairy and produce kind of went through the roof.
Natural gas and particularly some of the R&M services.
The supply and demand imbalances, so significant right now to get someone to come out and take care of the equipment. This is costing that much more than what we had.
Gotcha and then.
Just following up on the logic beyond you know.
Call outs and the virus surge last year, obviously around this time delta.
Delta with surging, which did cause some sales issues and an increased callouts with less staffing.
Or are you kind of.
Baking the comparison into the projections here I know, there's a lot of noise, obviously from the last couple of years, but just thoughts on that.
Yes, I mean, I think that's why Andy it's Matt again.
It's been a sort of back and forth debate over the past six to nine months of that benchmark.
We have really seen mathematically now as the 2019 is the best benchmark and then adding the pricing to that and so using that as sort of eliminates the up and down last year and this year in those comparisons because youre exactly right I mean, what we saw last year and some of the lapping.
If you think about just purely the year over year comp is that June and July were probably the highest months of the year and they were kind of through the roof and then Delta ahead and it came back it probably dropped from the peak.
Of early July to the trough of late August probably declined five or 6%.
Just in that period of time, and so we see that that is the established kind of trend of how it goes through and so we're really looking at sort of 2019 pricing as being the best way to evaluate it.
Okay. Thanks for the color.
Your last question today comes from the line of Brian Mullan with Deutsche Bank.
Your line is now open.
Hey, Thanks, just a question on capital allocation just wondering if you could speak to the current parameters you're looking at when executing on the share repurchase program anything is different versus perhaps the pre COVID-19.
<unk> just wondering if you wanted to be opportunistic when do you think the stock's undervalued or maybe just more programmatic and consistent.
Hey, Brian It's Matt I mean, I think it's both right.
I think we're.
We're sort of putting our toe in but we also believe it's a.
A very opportunistic time to do it with where equities have traded based on our conviction of the long term for the brand and so.
I'd say, we have your typical type of <unk>, one that we put in place.
It's going to perform where you buy more when the stock is lower but also that we do it a little bit over time, because we cant we cant figure out the market right that's on our jobs.
No.
Don't want to be in one month in the next month, we want to we want to be able to sort of build it over time.
But certainly were.
We're buyers in this market.
Okay. Thanks, and then just as a follow up I'm wondering if you could just give an update on the flower child brand key priorities there over say the next.
Year to what factors are you watching most closely are looking at to see before you might want to accelerate the unit growth there or maybe separate it out like you have for North Italia.
Hi, Brian This is David.
We continue to be.
Very bullish.
Bullish on flower child, the recent openings continue to perform well I'd say that thats. Our priority is to continue to move into some newer markets and see what the guest reception is in different geographies and thus far it's remained very positive.
The team there has done a good job moving their margins in the right direction. We're focused on trying to leverage continued supply chain capability at Cheesecake factory.
And then on the people growth development side, we want to ensure that we have the right leadership in place if and when we decide to pull that lever and grow it a little bit quicker clip, but all signs for now remains very positive and we feel good about the future of the brand.
Thank you.
This concludes today's question and answer session and conference call. Thank you very much for attending you may now disconnect.
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