Q2 2023 Cheesecake Factory Inc Earnings Call
[music].
Thank you for standing by my name is Sidney and I'll be your conference operator today at.
At this time I would like to welcome everyone to the Cheesecake factory Twenty-twenty three quarter two earnings call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question again press the star and one.
Yeah.
I will now turn the call over to attend Marquez, Vice President of Finance and Investor Relations.
Good afternoon, and welcome to our second quarter fiscal 2023 earnings call on.
On the call with me today are David Overton, our chairman and Chief Executive Officer, David Gordon, Our President and Matt Clark, Our executive Vice President and Chief Financial Officer.
And again, let me quickly remind you that during this call items will be discussed that are not based on historical fact are considered forward looking statements within the meaning of the private Securities Litigation Reform Act.
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Actual results could be materially different from those stated or implied in forward looking statements. As a result of the factors detailed in today's press release, which is available on our website at investors not the Cheesecake factory Dot com and in our filings with the Securities and Exchange Commission.
Forward looking statements made on this call speak only as of today's date and the company undertakes no duty to update any forward looking statements. In addition, during this conference call when discussing comparable sales, we will be referring to comparable sales operating week basis, unless specifically stated otherwise.
We will also be presenting results on an adjusted basis, which excludes impairment of assets and lease termination and acquisition related expenses.
An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our press release on our website as previously described.
David Overton will begin today's call with some opening remarks, and David Gordon will provide an operational update.
Matt will then review our second quarter results and provide a financial update.
Knowing that we will open the call to questions.
With that I'll turn the call over to David Overton.
Thank you Tien during the second quarter, we made measurable progress.
Towards our stated objective of returning our profit margins back to pre pandemic levels.
Combined with our increased scale, we were able to deliver our highest adjusted net income dollars and adjusted earnings per share generated in any one quarter in the company's history. We believe this is indicative of the opportunity we have to enhance shareholder value.
Through continued growth of both our top and bottom line.
Despite a slightly softer sales environment. The cheesecake factory restaurants continue to generate industry, leading annualized unit volumes, averaging $12 4 million for the quarter comparable sales for the second quarter increased one 5% from the prior year and 14, 1%.
Versus 2019.
Comparable sales versus 2019 continued to outperform the casual dining segment, demonstrating the strength and resilience of our namesake brand our focus on menu innovation remains a key point of differentiation contributing to a broad consumer appeal and high degree of relevancy.
To that end this past Sunday, we commemorated national Cheesecake day by introducing our newest cheesecake flavor cookie dough levers cheesecake with pecans and are in the midst of rolling out our latest cheesecake factory menu across the country.
Execution within the restaurants, four walls was outstanding with our operators delivering better than planned results across several key performance indicators, including labor productivity and wage management driving solid flow through.
<unk> profitability.
This combined with favorable input costs resulted in adjusted net income margin of 5% for the quarter exceeding our expectations on the development front, we opened a cheesecake factory and to FRC restaurants during the second quarter, while all of our sites in the pipeline.
We remain active we continue to experience some delays in opening dates due to various challenges primarily beyond our control.
Typically reconstruction and permit approval delays as a result, the company now expects to open as many as 20, new restaurants in fiscal 2023, including as many as six cheesecake factories, five north Italia, and nine FRC restaurants, including three flowers.
Child locations, we continue to anticipate two to three cheesecake factory restaurants to open internationally under licensing agreements.
As we look ahead, we remain intently focused on delivering exceptional food quality service and hospitality the hallmarks of our success to drive long term profitable sales growth.
We will continue to leverage our competitive strengths, including the scale of our business our differentiated brands best in class operators and balance sheet to drive shareholder value and market share gains.
With that I'll now turn the call over to David Gordon to provide some additional details on operations and marketing. Thank.
Thank you David.
Our people are our greatest resource and enable us to deliver excellent service and hospitality and delicious memorable dining experiences for our guests.
We believe we are uniquely well positioned to attract train and retain high quality staff members and our best in class operators and we've remained sharply focused on maintaining our competitive edge by investing in our people to support ongoing improvements across all three facets of SaaS.
Last October .
We resumed our in person restaurant management development program health of our Southern California Corporate support Center.
Over the last 10 months, we have hosted over nine training conferences attended by over 800 managers.
And our trading investments are paying off with our second quarter guest satisfaction scores at the Cheesecake factory, improving both sequentially and year over year.
In fact, all key dine in and takeout guests satisfaction metrics have surpassed the second quarter 2019 levels.
We also had another quarter of strong staff retention with the restaurant management and hourly staff attrition rates effectively returning back to our industry, leading pre pandemic levels and lastly on the staff recruitment front.
Following our recent recognition for having made fortune magazine's 100 best companies to work for list for the 10th consecutive year. We were also just named to Fortune's best workplaces for Millennials list for 2023.
We believe these accolades support our position as an employer of choice in the restaurant industry.
And our relentless focus on staffing will drive improvements in service.
<unk> experience and ultimately overall restaurant performance.
Moving to sales trends.
Apparel sales across our portfolio of concepts remained positive with predominantly stable guests purchasing behaviors.
Cheesecake factory off premise sales for the second quarter totaled 22% of sales just below first quarter levels.
Additionally, on premise incident rates remained above 2019 levels with no material change to day part mix.
North Italia second quarter comparable sales increased a solid 8% from the prior year and 30% versus 2019, resulting in annualized <unk> of $8 million.
Four wall margin for the adjusted mature North Italia locations improved to 15, 4% in the quarter from 13% in the first quarter with planned actions for further improvement.
Other Fox restaurant concepts also continued to drive strong results with annualized <unk> of $7 4 million.
Turning to marketing as David mentioned on Sunday, we celebrated National Cheesecake day, and our marketing team generated a significant amount of publicity and social media attention surrounding the exciting new flavor announcements.
Today Dot Com broke the news, which was followed by more than 90 media placements totaling $2 5 billion PR impressions, including notable features on <unk> dot com matched the daily meal and MSN dot com to name a few.
Building on this PR momentum last Friday, our founder David Overton was featured on the today show and recognition of our 40, <unk> anniversary and National Cheesecake day.
These are prime examples of our marketing strategy to tie our creative marketing campaigns to on brand events to generate publicity and increase consumer engagement to raise the cheesecake factory brand awareness and drive sales.
On June 1st we launched our Cheesecake rewards program nationally.
We are in the very early stages. The program is off to a promising start with member enrollments, surpassing our expectations.
In celebration of National Cheesecake day, and as an exclusive offer for our Cheesecake reward members. We offered a special any slides have price promotion for our dining guests on July 31 and August one.
And as a reminder, our overarching objective is to leverage the data analytics and insights to engage more effectively with our guests and drive incremental sales, while maintaining our restaurant level margins.
And with that I will now turn the call over to Matt for our financial review.
Thank you David.
Let me first provide a high level recap of our second quarter results versus our expectations I outlined last quarter.
Total revenues of $866 $2 million were just under the low end of the range, although with sequential improvement on a year over year basis throughout the quarter.
Adjusted net income margin of 5% was above our expectations relative to ourselves.
G&A and depreciation combined as a percent of sales were in line with our expectations.
And we returned $23 $1 million to our shareholders in the form of dividends and stock repurchases.
Yes.
Now turning to some more specific details around the quarter.
Second quarter sales at the Cheesecake factory restaurants were $652 $5 million.
Comparable sales increased one 5% versus the prior year and 14, 1% versus 2019.
Sales for North Italia, or $65 9 million.
A 17% increase over prior year supported by comparable sales growth of 8% versus prior year.
Comparable sales versus 2019 increased 30%.
FRC, including flower child average weekly sales were $114 $7000.
Other FRC sales totaled $65 7 million up.
Up 10% from the prior year and sales per operating week, where $142 $3000.
And external bakery sales were $15 4 million during the second quarter of fiscal 2023.
Now moving to year over year expense variance commentary.
As we have seen our cumulative pricing catch up with inflation, we realized measurable year over year improvement across several key line items in the P&L.
Specifically cost of sales decreased 130 basis points, driven by higher menu pricing and commodity inflation. Despite.
Despite lapping favorable dairy contracts in the second quarter of 2022.
Labor decreased 130 basis points predominantly driven by pricing leverage.
We offset by higher management labor driven by higher staffing levels.
Other operating expenses decreased 10 basis points.
Driven by pricing leverage partially offset by marketing costs related to launching the rewards program.
G&A increased 40 basis points, mostly related to higher staffing levels.
Depreciation as a percent of sales remained flat to prior year.
Preopening costs were $6 million in the quarter compared to $2 9 million in the prior year period.
We opened three restaurants during the second quarter versus two restaurants in the second quarter of 2022.
Delays in opening dates contributed to higher than expected preopening costs for the quarter.
And in the second quarter, we recorded a net expense of <unk> 6 million related to impairment of assets and lease termination income and FRC acquisition related expenses.
Second quarter GAAP diluted net income per share was <unk> 87.
Adjusted net income per share was <unk> 88.
Now turning to our balance sheet and capital allocation.
The company ended the quarter with total available liquidity of approximately $331 million, including a cash balance of about $91 $6 million and approximately $238 $5 million available on our revolving credit facility.
Total debt outstanding was unchanged at $475 million and.
Paul.
Capex totaled approximately $25 million during the second quarter for new unit development and maintenance.
During the quarter, we completed approximately $9 $3 million in share repurchases.
And returned just over $13 $8 million to shareholders via our dividend.
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 Q3.
And full year 2023 for revenue and net income margin.
For Q3 based on our quarter to date performance, most recent trends and assuming no material operating or consumer disruptions.
Anticipate total revenues to be between 835 and $855 million.
This essentially assumes a continuation of the trends from the second half of Q2.
Which on a year over year basis sequentially improved as we lapped more favorable comparisons.
Next at this time, we expect the effective commodity inflation of low single digits for Q3, as our broad market basket continues to stabilize.
We are modeling net total labor inflation of about mid single digits when factoring in the latest trends and wage rates, which similar to our commodities continue to normalize.
As well as channel mix and other components of labor.
Based on these assumptions we.
We anticipate net income margin of approximately 275% for Q3 at the midpoint of the revenue range I previously outlined.
Which also reflects planned higher than average G&A of about $2 million.
Mostly related to our annual General manager Conference, which takes place in September .
And the pre opening expense, we expect of approximately $9 million in the quarter.
Now for the full year base.
Based on our year to date performance more recent trends and assuming no material operating or consumer disruptions. We are now anticipating total revenues for fiscal 2023 to be approximately $3 5 billion.
This reflects our second quarter results, our perspective on seasonality post pandemic.
As well as the impact related to timing delays in new restaurant opening dates and.
And any impact from the launch of the rewards program.
For the back half of the year, we now estimate year over year inflation for commodities to be in the low single digit range and labor in the mid single digit range.
Given our unit growth expectations, we are estimating preopening expenses to be approximately $26 million.
As we have said earlier, our goal is to effectively offset inflation with menu pricing to support our margin objectives.
Assuming we do so and consumer trends remain consistent.
And there are no other material exogenous factors, we continue to expect full year net income margin of approximately 4% at the revenue level I provided.
With regard to development as David Overton highlighted earlier, we plan to open as many as 20, new restaurants this year.
Across our portfolio of concepts with 4% to five openings in the third quarter and the remainder in the fourth quarter.
And we now anticipate approximately $160 million to $170 million in Capex to support this year's.
Some of next year's unit development as well as required maintenance on our restaurants.
In closing as David stated earlier in the second quarter, we took another step towards recovery, our four wall and enterprise wide operating profit margins.
While comparisons continue to be inconclusive due to lapping of various stages of the pandemic and the environment remains somewhat uncertain due to potential shifts in consumer sentiment and behavior.
We are pleased with the stability and predictability of our overall financial performance. So far this year.
As we have previously noted our key objectives. This year are to rebuild our profitability and to ensure we have the appropriate levers in place to drive future sales growth.
As we look ahead with cost input normalizing.
And the macro environment starting to stabilize we believe we are well positioned to once again generate our historically consistent operational and financial results.
That said, we'll take your questions.
Thanks.
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.
These also follow limit of one question and one follow up question.
Your first question comes from the line of Brian <unk> from Piper Sandler.
Hey, Thank you just a question on the same store sales result at the core Cheesecake, Brian could you just take us through the traffic the menu price in the mixed sweets.
And then on the menu <unk>, how do you expect.
The rest of the year the progress strategically youre going to continue to solve for margin recapture or Conversely, some of the industry traffic trends, maybe give you any pause about taking more price just any thoughts would be great.
Sure Brian This is Matt.
Good question, probably top of mind for most investors just on the actual data pricing.
Was about 10, 5% roughly for the quarter.
The mix was a negative $5 four.
And then the traffic was a negative $3 seven so.
So as we've talked about before the mix has something to do with the.
The change year over year in the off premise, while being very stable and it's still a little bit heightened in Q2 of last year and the way that we count guests causes some of that negative mix impact and the other part really was the higher purchasing behavior in Q2 of 2022.
Still running above pre pandemic levels of what we call incident rates was how much.
I'll call disorder, appetizers guest or buying but obviously last year.
So-called Rubin revenge buying was in place and we saw heightened levels.
The remainder of the year.
We're contemplating lapping our summer menu pricing with a 2% level.
Is the 4.25% we had so we will see it diminish from the 10 five I think it will go to.
<unk> nine ish in the third quarter, and then 75 or so.
<unk> in the fourth quarter, because remember we did the catch up at the beginning of December so the balance of that will go into next year.
With <unk>.
More like five because we will lap over some of that catch up pricing that we had in the fourth quarter and exit I think importantly, too.
To your question, Brian and maybe this is the most pertinent part of it and how we're thinking about it certainly there was just a very.
Difficult optical lap in the second quarter for Cheesecake, and when we had exceptional sales volumes in the second quarter of last year, driven by some of that post COVID-19 surge.
As we look at the quarter kind of how we came out versus our expectations.
Really may was a little bit softer maybe a couple of percent in terms of the timing and trying to figure out the seasonality of the new normal and then we had a couple of delayed openings, obviously that contributed to it but really June looked good as we think about how we performed we exited the quarter closer to mid single digit.
Comps most of the difference there being in traffic. So we actually think our traffic is in pretty good shape going forward and Thats what were expecting to see as we go through the third and fourth quarter. So we are taking less pricing than we have been.
And I think that will support it but I think the underlying business trends going into the third quarter are very strong and we're pleased with that and we're going to keep doing what we're doing.
Okay. Thank you very helpful. And then just to follow up on the development outlook.
<unk> mentioned, some construction challenges permit approval delays I know that.
Need to you, but I'm just wondering is one of those two dynamics are bigger factor versus the other or one might.
Would you expect one of them to improve more quickly than the other antenna has seen in the context of understanding this year has been impacted.
Do you want investors thinking that next year, you could potentially get to that six to seven.
Net growth in 2024 or will these issues be with you.
Longer.
Hi, Brian This is David Gordon.
Great question and as David Overton mentioned to up to 20 for this year puts us I think at about six 3% to six 5% unit growth for this year. So we still feel confident in that 7% number for next year. When we look at our pipeline for next year.
Most of the delays are not really on the construction sites for us a little bit more on the permitting whether that's a local permit in a city or something more broad based as far as equipment. As we've stated in the past I think we've done a terrific job of ensuring that we have what we need for the opening of <unk>. After the pipeline next year. So it's more about cities being a little bit slower.
Sure more new people and jobs than previous.
And then just being a little a little less quick to be able to do what we need but overtime.
Continue to hope that thats, only going to get better and Theres nothing internally that will keep us from hitting those targets.
Thank you.
Your next question comes from John <unk> from Wells Fargo.
Hey, good afternoon, guys just to get the restaurant margins by bad and it looks like Cheesecake.
We outperformed in terms of the recovery this quarter I guess.
Jamie Thanks, and can you kind of help us think about how much do with Italian other FRC are kind of being dragged down by the growth.
You are seeing.
Sure. Yes, we were pleased really pleased with the Cheesecake factory margin recovery.
About the timing of the pricing versus inflation, we took that extra 3% at the end of last year and we're seeing that flow through I think year over year <unk> was up 330 basis points, so a pretty much 100% flow through on the pricing. So I think thats great to see.
Part of the difference between the concepts is growth.
As you noted usually thats about a 2% or so delta.
Depending on how many openings, but thats a good sort of rule of thumb I think the other component of that for North was that we did some of the catch our pricing actually in the second quarter. So we didn't even get the full benefit of that yet so there's even another probably 1% lag I think just on the pricing front. So we think all of our concepts.
Are really well positioned on the recovery front.
We're still building on that it's not like we're declaring victory because we want to continue to increase it but we think that we're making the right decisions and we've made a lot of progress.
Got it.
Remind us what pricing was that most players.
And then what would do about 4%.
Okay. Thank you.
Your next question comes from Dennis Geiger from UBS.
Great. Thank you first question, if I could I wanted to ask a little bit about delivery and sort of what what you've seen there from a mix perspective, how thats changed at any any change with demand.
Any other opportunities that you've identified within that channel.
Thanks, Dennis This is David Gordon.
We continue to see very stable activity.
Mrs at 22% in Q2, just a percent below where we were in Q1.
Deliveries still makes up about 90% to 10% of that mix.
7% of it is following a walk up and then the remainder is made up of online ordering and so as.
As we said I think we May have said last quarter, we did extend our exclusive agreement with door dash.
Which continues to give us but really preferential.
Marketing position as well as a very strong commission rates.
It means that all of our off premise sales, including the door dash sales.
Are not in any way margin dilutive. So we feel good about the fact that they're able to hold onto those sales would continue to see that remain the summer tends to be the slowest time for delivery sales overall, so that 1% down from where we were last quarter is the same type of behavior would have seen last year, but.
But we feel really good about the ongoing partnership.
And also the integration we have with door dash on the rewards side, which has allowed guests to go ahead and use the incentives to rewards also on door dash.
Yeah.
I appreciate that David one more if I may.
Just wanted to follow up on the on the mid single June exit you spoke to.
Definitely a solid number and it seems like that's maybe a good run rate that youre thinking about going forward just as you talked about some seasonality in earlier months.
Just curious I guess, maybe I don't know on a multiyear basis. If you guys still think about that anymore.
Or just how to think about that over the coming months and if just kind of that that June exit.
On a one year basis is a good way to think about the go forward as we as we think about those.
Those trends thank you.
This is Matt yes.
I have said in the prepared remarks, I mean, it is still a little bit inconclusive right with any one data point and so we always I think of caution again, we continue to try to triangulate against 2019.
In prior year absolute run rates, but the but there is some variability rights, where there has been changes in holidays.
Five day differential now and you're comparing operating weeks in so it's a little it is a little bit tricky.
And I think that that.
Reinforces the need to be to be agile and the great job that our operators did managing with our forecasting of sales and driving flow through.
Exceptional I think that the beginning of this stability started last year kind of in the August September timeframe, if I remember correctly and so we feel like that.
And that mid single digit run rate as appropriate.
That's what that's what we've been seeing in it.
That's what I think our outlook.
Kind of encompasses if you will.
That's great I appreciate that thanks, Matt.
Your next question comes from Joshua Long from Stephens, Inc.
Great. Thank you for taking my question I'm curious if we go back to your comments, Matt on the predictability of the financial performance. It sounds like as you kind of get away from maybe some choppy year periods, whether that was really in the quarter or maybe fourth of July as some of your peers have talked about.
The traffic tends to be.
Relatively falling in line with your expectations and then to your point, even though you might've had some onetime items in there that maybe lowered the absolute revenue it feels like the actual store level performance is kind of falling in line is that am I understanding that point right in terms of just how youre thinking about the predictability of the model.
I think thats right.
Again, there continues to be some potential abnormalities and lapping numbers right. So I think that exists but in the absolute terms I think the last quarter was the most predictable that we've seen in the cake business in three and a half years.
And that goes for both I think the top and the bottom line. The input costs are not as volatile as they have been thinking, particularly about the cogs and the labor inflation and the moderation that we've seen in the fact that that gives us some confidence that continued improvement in core costs.
With the stability of the topline is very achievable.
So I think that that's the variability has narrowed dramatically over the course of off six months and I think thats a re.
Real Testament again to our teams benefiting from the environment.
Just hopefully that continues.
That's helpful. Thank you and when we think about trends by geography day, part or kind of maybe from a mix basis. It sounds like those are also pretty consistent as well anything to call out there that either surprising or maybe that you've noticed within the context of the.
The overall results.
Yes, I mean, when we look at things like.
Dave Bar mix, it's within like <unk>, 1% each of them versus 2018 for example, right. It's really close we continue to see sort of that.
Movement back to consistent historical trends.
I don't know if its possible that some of the heat has been a negative in some areas I know I've heard some other commentary around that that's kind of unique and challenging obviously there is no patio usage in about half the country right now so.
Our results.
Those factors I think we feel even better.
Thank you.
Your next question comes from Brian Vaccaro from Raymond James.
Hi, Thanks, and good evening I just wanted to circle back on the Cheesecake factory comps and I think you said you saw a little softness in May curious, what you'd attribute that to and then I. Appreciate the mid single digit comp comment exiting the quarter I am curious what that looks like on a comp versus 19 basis.
Is that an improvement versus the fourth.
2014 versus what you saw in the first half of the year.
Yes, So I think Brian this is Matt the first point really.
In may it was around our expectations I mean trying to sort of model like we were saying year over year. There was a certain cadence last year, there was a certain cadence there before and the reporting enrollment different so I think mostly that was around our internal expectations about how do you figure out this new <unk>.
Second quarter pattern.
I don't know that on absolute terms, it was better or worse, because it's just hard to say, but I think versus our expectations. We improved as we went through the quarter and I think roughly.
14% to 15% versus 2019 is kind of our thinking still right I mean, I think it's the stability of that.
Is sort of back in line and I think it just represents mid single digits as compared to prior year.
Alright. Thank you that's helpful and then on the margin front.
You expressed confidence in recovering sort of you're in recapturing pre COVID-19 margins certainly good to see some of the improvement at North Italia, but and I Hope My quick math is right on this but it looks like Cheesecakes segment margins, maybe still down about 90 basis points versus 19 I guess the question is what are you.
Some of the key drivers from here that would allow cheesecake segment margins to fully recapture pre COVID-19 levels in your view.
Well, Brian first of all I think your math is correct. So that I think that is true in the second quarter I think that there are a couple of.
Areas that we believe will help us continue to close the gap, maybe not as fast as we've seen in the last quarter or two with that level of incremental pricing, but as we continue to carry.
Taking 2% in the summer is a probably a little bit more than we might have historically that might've been one and a half where we're seeing also wage and freight inflation rates that are below pre pandemic levels. So again, I think we see the opportunity to be able to re leverage a little bit in the labor in the Cogs line item.
As we move forward. The other comparison piece here is in the marketing and rewards there is a little bit of expense there associated with the launch that we incurred both incurred in the second quarter and we anticipate that that will also be the case in the third and fourth I think longer term as Dave.
Gordon mentioned, we believe that it will be margin neutral, but obviously the initiation.
The customer acquisition costs and Thats, probably in the 30 to 35 basis point range.
For the second quarter on the back half of the year.
Alright, Thats, great color and then Matt I just wanted to ask about the labor line specifically.
Sales were a little light, but labor came in in line and it looks like it was quite a bit below versus the first quarter are there any onetime items or nonrecurring adjustments that are worth highlighting and just more color kind of fundamentally on what drove that favorability or are you seeing guessing youre seeing improved.
And over time, the improvements in hiring hiring costs and training costs et cetera, but any color you can provide there would be great. Thanks very much.
Brian first of all you did a better job selling it then we possibly could because it took all of those improvements that you noted, but really the predictability of the sales component.
<unk> of that we did have better productivity year over year, one of the things we've been really focused on upgrading wise is on the forecasting and templating of labor and the team has done an exceptional job improving upon that in this environment and so we've seen a lot of efficiencies I can tell you there are no one time Ben.
<unk> that we have in there our group medical was basically on plan.
All items were pretty much normal I think that we were just in an opportunity to take advantage of the better staffing in execution, David Gordon talked about yes, Hi, Brian This is David Gordon.
Our continued improvement in our retention is certainly part of that and it's paying off.
So we look at Q2 of 2023 versus last year, and we continue to have improvements.
And we're really are back to sort of our pre pandemic best in class at staff and most importantly, I think at the management level.
That leads only to better operations over time, which leads to improved productivity and our applicant flow continues to get better quarter after quarter.
I think last reporting period, we had about 29 applicants for every hiring need that's up to about 34 for every hiring need today and the quality of applicants continues to be people that have previously been in the industry versus at this time last year. When we were probably still hiring people, who didnt have experience so the longer those staff state.
With us gives us the ability to continue to cross train them make them more productive in the restaurants and you take that combined with a more predictive sales environment and allows our operators to really maximize productivity and maximize labor and as you pointed out reduce overtime.
Thank you very much.
Your next question comes from Sharon Zackfia from William Blair.
Hi, good afternoon.
I wanted to circle back to the rewards program and I know, it's early but can you kind of give us your game plan on how you expect that to evolve.
This year in.
Clearly I am assuming the goal is to incent frequency.
Given their experience with with other kinds of programs. When do you think that would start to become manifest.
Sure Sharon Hi, it's David Gordon.
As you probably recall that the programs design.
It's really around published offers unpublished offers and then marketable offers.
Our longer term goal is to be able to leverage the data and the insights to engage with guests and really drive incremental sales, while maintaining those restaurant level margins and since we only launched the full program in June .
I would say that we're taking time now to really analyze that data it will be doing that all throughout Q3.
And then we'll look at where we might want to starts and pinpointed marketing to drive some incremental visits in the fourth quarter, but more likely it's really next year that we would start leveraging it completely and have enough data that we think it would be very meaningful.
To be able to drive the right type of offers into the right channels at the right time to drive some interim mentality, whether thats day part occasion.
Or is it an occasion, so we're looking forward to be able to do that fully next year.
And does it kind of an omnichannel model where.
Somebody can get recognize if they order through door dash or is it just.
Oh man or get to go in the brick and mortar.
No. It's also through door Dash I was one of the early.
Things that we put together with door dash with the ability for somebody to be able to participate.
And drive value through door dash, so its omnichannel anyway guests that want to use it.
Okay.
Then patio utilization was actually going to be one of my questions given how wacky. The weather has been over the spring and summer I mean is there any metric you can provide on kind.
Hello, Patio utilization has have looked more broadly.
Cheesecake factory this year versus last year.
I don't have it right in front of me, we've been talking about how to measure that in the heat and sort of that side of things right because it's a little trickier I mean, we're better at measuring it when it's raining because thats a clear closure.
I mean, we know.
And sort of the absolute perspective that.
<unk>.
Those locations that typically drive greater patio sales have been impacted I don't have a specific number I think friday to quote on that.
Okay. Thank you.
Yes.
Your next question comes from Brian Harper from Morgan Stanley .
Yes. Thank you good afternoon, Matt.
Some of the mix drivers that you explained earlier do you think those will kind of start to even out in the second half of the year or do you see those continuing.
Yes, the planning team and I were talking about that quite a bit.
To make sure that we have good perspective, because obviously thats.
Ponant of revenue that is historically extremely stable.
I think.
Whatever variability there is in off premise will continue to be a funny thing for us because of the way we counted the other components of it as we look at the last year sequentially continue to.
Move together to sort of historical levels. So I think that piece was around 3% in the second quarter based on the current trend that was about 4% in the first quarter. So we think it will be probably two and one in the third and fourth quarters sort of variance versus historical patterns and then.
Kind of be back to a more normal perspective next year.
Okay sounds good maybe just on North Italia too.
You had strong same store sales or could you comment just on some of the newer units how theyre doing from a revenue ramp perspective also maybe just from kind of a margin perspective, and then you alluded to other actions to address North Italia margins, which it sounds like part of that is just price but was there any.
Else there that youre doing.
Hi, Brian This is David Gordon.
I think that what we see at North is more typical of the rest of the industry versus what we see at Cheesecake. When we opened up a new market, it's more of a gradual ramp up.
And really look to be at our full sales potential probably by the third year.
North Italia, whereas Cheesecake factory opens up generally some of its highest volumes and then over time settles into where it would be in the long term on the margin side as Matt mentioned, we have another price increase in October right at the end of October for North Italia, but more importantly, I think the margin progress we've made thus far is.
Come through fit through supply chain and we have more work to continue to do there to leverage the scale of Cheesecake factory supply chain and distribution in North Italia. We've also started incorporating at north a lot of the analytics that we use the cheesecake factory and dashboards for operational trends to allow them to increase productivity.
<unk> and also seating capacity to make sure that they're leveraging they take a lot more reservations at North Italia, then the cheesecake, but to ensure that they are balanced in.
There are reservations percentage versus walk in guests.
I think that's going to continue to help over time.
Brian just to add on one thing to what David was talking about what the sales one of the things we see too is when we go into our market may be open two or three it really helps that in three years later kind of all of it starts to coalesce and when we were doing our business review recently, we were looking at some of those just pre COVID-19 openings in the Washington D C.
And Virginia area, we have three restaurants, there that two years ago, we were saying boy, we need to do some work.
Because we are used to cheesecake factory, we look at that now.
They are practically the same unit volumes as the rest of the north system and their margins are great and so it really is I guess tracking to that pattern that David talked to write in and I think thats, what gives us confidence to keep opening as we've seen kind of market to market those growth opportunities really start to pan out as we stay.
Realized post pandemic.
Okay. Thank you.
Your next question comes from Andy Barish from Jefferies.
Hey, guys.
Just circling.
Adding on to that actually it sounds like flower child is kind of by year end is going to come in.
House as well I know, it's not as big as north but the.
We expect that to.
Kind of.
Some noticeable benefit since you worked your way through 'twenty four.
Hey, Andy This is David we do and we've been working this year on incorporating more aspects of the flower child under the Cheesecake factory umbrella made some really.
Strong improvements there on supply chain integration as well.
We're actually building the next two flower child and designing the next two that will open. This year. So we feel very positive that by the end of the year would be fully under our umbrella.
Our development teams and new restaurant opening teams will be leading the charge as we continue to grow flower child, and we continue to think it has great potential.
As a high end SaaS casual concept.
Thats very uniquely positioned out there in the marketplace.
Thanks, and then.
Just testing on on.
On the labor side again, I know, there's been a couple of questions on it but in terms of.
The mid single digit.
Guide for.
For for labor increases into <unk> is that.
All wage or are there still some hours being added or is their productivity that's kind of.
Netting out some improvements against.
Any of those factors, just just a little bit more color on that would be helpful.
And as Matt, we're really talking about.
Wages, I mean that makes up the preponderance of inflationary impact.
And I think.
There is always opportunities to offset some of that with productivity, but just from a pure inflationary environment.
We're saying wage inflation is mid single digits.
And is there a component of that Matt that you have off the top of your head on.
State mandates coming up in July .
July September those kinds of things.
Yes, it incorporates a in California, I think that there are some jurisdictions here that have some of that maybe la county.
Okay.
I think one of the promising things on the wage inflation, though because.
I mean, obviously, we've sort of said mid single from the beginning of this year as it has ticked down right. So I would say that it went from more higher mid single to now a lower mid single based on the actual realized wage inflation that we're seeing so it is improving A&D.
That is important to note, but it's still kind of sits within that that mid range.
Very helpful. Thank you.
Your next question comes from David Tarantino from Baird.
Okay.
Hi, Good afternoon first I wanted to clarify that.
Traffic trends.
Youre seeing exiting I guess, you saw exiting the second quarter and in the early part of this quarter.
In response with the I guess the closer to mid single digit comment that you made Matt.
Alright, as traffic still negative or I guess, how would you frame up what you're seeing more more recently over the last month and a half or so.
Well I'm only going to comment on June , but you can extrapolate Arthur our guide is kind of based on these theories even though we don't we don't talk about the intra quarter by in June .
We were at a mid single digit comp and really that just the difference between the rest of the quarter was predominantly driven by traffic. So a driver it was negative $3 seven for the quarter on a one five comp and so it's getting pretty close.
The weak there can be differences based on holidays are that we're going to run national Cheesecake day promotions or things like that but.
You know what.
We'll see where we get to but it's getting pretty close to breakeven.
Okay, Great and then I guess my question is on your decision on pricing.
Your pricing levels currently are among the highest in the industry year over year and I know you.
We're kind of late to <unk>.
That's up to the industry, so understandable, but I guess the decision to take more.
And in August and even more than you've done historically, I guess I guess why do that.
In a market that seems like traffic is pretty fragile I guess, what's the what's the objective. There is it mainly just to recover margins and I guess, how do you think about the rest of the traffic in doing that.
Yes, I think it goes David part and parcel with what I, just said I mean, when we look at sort of the underlying traffic, it's pretty stable in our business. The underlying purchase behavior is very stable and in line or better than historical rates and so.
I feel like sort of our objective this year is to rebuild our profitability and to develop the sales levers to grow off of this base and really if you think about the rewards program and the operational execution.
We are going to accomplish those things we are still in our math, probably 2% below the cumulative pricing of the industry since 2019, and so year over year as you noted its a little bit funny because of the timing of when we did pricing but.
I still feel like the inflationary impacts over the course of those four years has outpaced what we have done so.
This helps us just get that last leg back in and in a situation and during a time period, where we feel like the business is very stable.
Great. Thank you.
Your next question comes from John <unk> of Jpmorgan.
Hi, Thank you I think I calculated something like 25, new units next year and I wanted to get a sense of how you felt about the client pipeline, what youre seeing in terms of location quality of needs.
More competitive to get some of the best sites are you actually getting access to some of the best sites that were challenging.
From some time ago and I am curious for the types of landlords that you have as your balance sheet, even more confident at this point in other words.
If you take that to add money are you actually getting it back to the other end.
<unk> been better overall lease terms.
Hey, John I'll, let Matt touch on the balance sheet, but as far as the site potential we feel good about the pipeline as I said earlier for 2020 for the types of sites the type of projects to high end projects. If it's a mall being in a malls still we're going to let the best sites.
ASI, it's drive our decisions and I would just say our portfolio of concepts really allows us landlords to come to us and say hey, we have these opportunities what would be the best fit for this particular project and between Cheesecake factory North now.
<unk> thousand 500 square foot flower child, or even eight to 10000 square foot culinary dropouts, we have a lot of options. So I think we're sitting in a really comfortable place to be able to hit that 7% data growth share and then as we look forward.
I think John this is Matt on the balance sheet I mean, certainly it helps Brian I think that the named Cheesecake factory is even more important.
And so I think it's all of those attributes of move we're bringing two centers the types of activities the entertainment sort of quality that the landlords want.
I would say that generally the leasing environment is similar to what we may have expected historically, though in terms of terms.
Everybody asked a question for a property that's basically around the same as we got before we're just still best in class, but it's not like it's uniquely better than it ever was for further top properties.
Thank you.
Your next question comes from Jeffrey Bernstein from Barclays.
Yeah.
Great. Thank you.
Definitely encouraging to hear that the traffic trend it sounds like are approaching flattish to demonstrate that the brand is still driving.
The same consumer frequency I'm, just wondering whether you.
Just because you are running we're running that north of 10% price.
I'm wondering if you measure the value scores on a regular basis I know you talked about guest satisfaction, but just wondering how you think about that.
The value scores of how you measure them what your most recent learnings have been just to make sure that the price hasnt.
Tim It is the consumer and then I had one follow up.
Thanks, Jeff This is David actually be doing annual attitude usage and awareness study and we just actually completed that with our guest and I would say that our value scores are pretty stable.
We also know that there is still a portion of guests that haven't come back yet.
Covid I know, we've talked about that before and.
In this study we saw that about 60% of our lapsed guests have stated that they have interest in coming within the next six months. So we are hoping to build upon some of those guests that still love us and maybe werent comfortable come back to come back and dine yet.
And we feel good about that but we haven't really seen as Matt said when you look at incident rates or our desserts as a percentage of sales continued to be 17%.
We don't really see anything in scores or behavior.
That would give us pause and I would just remind remind you too that the breadth of the menu is just so strong and the breadth of price points continues to be so strong that it allows guests to really navigate that menu and use it in a way that makes sense for them from a consumer choice of menu items, but also just from a pricing standpoint, and how they want to use the menu as well.
Yeah.
Understood and that was actually my follow up question, just because youre now operate such a broad portfolio are involved with such a broad portfolio of brands that you're servicing such a broad demographic I'm.
Just wondering if you've seen any signs of change in behavior and it actually sounds like you believe trends have actually strengthened to close the second quarter, but I'm. Just wondering a question portfolio have there been noticed any leading indicators to demonstrate.
Any sign of a slowdown across the portfolio or are you really just not seeing anything to demonstrate that across the portfolio just yet.
No I think generally all of the concepts kind of trade slightly higher end, but.
Broad array of locations and.
Occasions.
And so what I think we've seen for <unk> has been consistent across all of all of it Jeff So really looking at flower child as David Gordon mentioned, the sales continue to improve quarter over quarter. So thats a.
Primarily to go business right and fast casual, but we're seeing sort of the same resiliency and positive guest reception. So I mean, I just think that generally the consumer is in pretty good shape.
Stingley enough right.
You sort of talk in the news is switched in the past month as well away from Doomsday to maybe a soft landing and you look at the Michigan Survey and it's up significantly over the past couple of months and so I do think generally consumers are feeling better and it's showing up.
Great. Thank you.
Yeah.
Final question comes from Jim Sanderson from Northcoast research.
Hey, Thanks for the question I'm wondering if you could walk through for North Italia, the breakout between traffic and check and what type of price do you expect to carry through into the back half of 'twenty three.
Okay.
Yes.
Traffic was positive 2% price was 8% and the mix was negative 2%.
I think we would expect probably to carry about 8% pricing throughout the rest of the year.
Any feedback on any change in <unk>.
Alcohol mix that you would want to call out indication that the consumer might be trading down.
Jim This is David no, we really haven't seen that at any of the concept cheesecake or north or the other.
<unk> concepts that had a heavier <unk> mix to begin with we haven't really seen any trade down law.
As your alcohol mix on average just to cross.
Well, that's a very broad question because it can be very different.
I think cheesecake historically is around that 13 ish range, but it can run all the way up a culinary dropout might be in the low thirty's or so so it runs the gamut I would say probably flower child has the lowest that's in the low single digits, because its really just some sangria and things like that so.
It's all it depends on the concept.
Alright, thank you.
There are no further questions at this time. This concludes today's conference call and you may now disconnect.
Yeah.
There are no further questions at this time. This concludes today's conference call and you may now disconnect.