Q2 2019 Earnings Call
At this time I would like to welcome everyone to the Cheesecake factory second quarter fiscal 2019 earnings conference 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 would like to ask a question during this time.
Simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question first the pound key. Thank you Ms. Stacy Feit, Vice President of Investor Relations you May begin your conference.
Thank you.
Good afternoon, and welcome to our second quarter fiscal 2019 earnings call.
On the call today are David Gordon, our President and Matt Clark, Our executive Vice President and Chief Financial Officer.
David Overton, our chairman and Chief Executive Officer is traveling internationally, but we'll be on the call for <unk>.
As you've probably seen in addition to our second quarter fiscal 2019 earnings release. We also issued a press release. This afternoon announcing that we have entered into agreements to acquire Fox restaurant concepts, which also includes the remaining interest in flower child and the remaining interest in North Italia to help with the discussion today, we have provided a short presentation summarizing the transactions, which can be downloaded from our investor relations website at investors Dot the Cheesecake factory Dot com in the latest presentation section.
We will begin today's call with some opening remarks regarding the transaction and will provide an operational update we will then review our second quarter financial results provide our outlook for the third quarter and the full year 2019, and then take you through the North Italia and Fox restaurant concepts concepts transactions in more detail.
Before we begin let me quickly remind you that during this call items will be discussed that are not based on historical facts and are considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual results could be materially different from those stated or implied in forward looking statements. As a result of the factors detailed in today's press releases, which are available on our website at investors Dot the Cheesecake factory dotcom and in our filings with the Securities and Exchange Commission.
All forward looking statements made on this call speak only as of today's date and the company undertakes no duty to update any forward looking statements.
In addition throughout this conference call, we will be presenting results on an adjusted basis, 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 with that I will turn the call over to David Gordon.
Thank you Stacy.
Im pleased to announce that we have entered into agreements to bring the cheesecake factory North Italia and all the Fox restaurant concepts together to reinforce our leadership position in experiential dining.
Since making our initial minority investments in north Italian flower child in 2016, we have not only helped fuel the growth of both concepts, but also developed a relationship with Sam Fox and his team at Fox restaurant concepts.
We realize the true potential this relationship as we work through the integration process for our planned acquisition of North Italia.
It became evident that the combination of two of the most experienced people and entrepreneurial restaurant companies to drive even greater value was one organization.
As we've gotten to know Sam and his team we've been very impressed with our concept curation menu innovation commitment to hospitality I for design and importantly business discipline.
In turn we believe Fox restaurant concepts is the ideal incubation engine to develop concepts for the future.
And with regard to north to tell you specifically, we're very excited about the immediate and long term growth potential the concept North Italia turns of modern lens on Italian cooking in the upscale casual dining segment, all dishes or handmade from scratch daily.
Following the completion of the transactions North Italians operations will be located at the Cheesecake factories corporate headquarters to help scale the concept nationally.
Fox restaurant concepts will operate as a wholly owned subsidiary it continues to be led by Sam from their headquarters in Phoenix, Arizona.
This combination will embrace parsees creative spirit, enabling them to innovate concepts, while providing the infrastructure and capital to scale.
With the power of the Cheesecake factory brand infrastructure and growth potential complemented by an additional growth vehicle in the north fatality concept and an incubation engine to develop concept to the future.
We expect to be even better positioned to provide our guests with exceptional dining experiences offer growth opportunities for our respective teams and maximize long term value for our shareholders.
We look forward to welcoming Sam and his entire team.
Adjusted earnings per share was within our expectations supported by solid operational execution during the quarter.
This was despite a soft restaurant industry sales environment in which we continued to outperform.
Our off premise business again supported our comp store sales outperformance as we continue to take share in the channel.
Off premise continues to grow comprising approximately 16% of total sales during the second quarter of 2019.
We believe our differentiated positioning high quality made fresh from scratch menu and value proposition supported by our creative on brand marketing are driving this performance.
More broadly with regards to marketing we continue to see positive results from our various initiatives, we celebrated national Cheesecake day yesterday with the return of our pineapple upside down Cheesecake.
A popular TV show cast was the first to taste, the cheesecake and generated great social media engagement with a number of other celebrities Wayne and joining our guest and their excitement.
In addition.
Our marketing team secured 50 on air segments and National Cheesecake day, It was a trending item on Twitter again this year.
This is an excellent example of how our team ties our marketing to on brand events to generate as much publicity as possible to increase the cheesecake factory is awareness and drive sales.
To complement the publicity we received we are utilizing a number of additional marketing channels, including you around paid search and social advertising influencer marketing and the collaborations to more frequently remind people about the cheesecake factory to attain top of mind status.
And to continue to build on our sales driving capabilities and the ongoing industry environment, we will be taking another step forward with our marketing this summer and fall with a test of the Cheesecake factory TV commercial.
Favorability in the cost structure of our media buy has made this an economically feasible option for our business model.
In turn we are launching a test in 12 markets with a modest but highly targeted media buys to determine at this could be effective sales driver.
There will be no offer associated with the spot rather we will be leveraging the strength of our brand and our more than 250 dishes made fresh from scratch messaging to remind guests about the cheesecake factory to capture more of their dining occasions.
Along with driving comp store sales, we're committed to our objective of maintaining flat restaurant level margins. We had good results on this front during the second quarter.
Labor productivity increased year over year, we continued to reduce overtime hours and maintained industry, leading food efficiencies.
These results underscore the importance of strong staff engagement and retention areas, where we continued to excel with both manager and our other staff retention rates up year over year.
With regard to unit development for 2019, we now expect to open as many as five Cheesecake factory restaurants as one locations has moved into early 2020.
This expectation for the year includes the Oxnard, California locations that opened during the second quarter.
We continue to expect as many as five restaurants to open internationally under licensing agreements in 2019, including the third location in Saudi Arabia that opened during the second quarter.
And with that I'll now turn the call over to Matt for our financial review.
Thank you David.
Second quarter comparable sales at the Cheesecake factory restaurants increased 1%.
Including $12.4 million external bakery sales total revenues were $602.6 million.
Cost of sales was 22.3% of revenues a decrease of about 20 basis points from the second quarter of last year.
Reflecting menu price leverage partially offset by higher produce costs.
Labor was 36.2% of revenues an increase of about 20 basis points from the same period last year.
This is primarily attributable to higher hourly wage rates, partially offset by lower group medical insurance costs year over year.
Other operating costs were 24.7% of revenues up 80 basis points from the same period last year.
This is mainly due to the additional non cash rent associated with the adoption of the new lease accounting standard.
There are a variety of puts and takes in other areas, including planned higher marketing costs offset by the lapping of the final stages of our West coast bakery infrastructure upgrade during the second quarter last year.
Jay was 6.2% of revenues in the second quarter of fiscal 2019 down 90 basis points from the same quarter of the prior year, primarily driven by the lapping of legal expenses incurred in the prior year period.
Pre opening expense was approximately $2.2 million in the second quarter of 2019 versus $1.4 million in the same period last year.
We had one opening in the second quarter of 2019, and we did not have any openings in the same period last year.
And our tax rate this quarter was approximately 8%.
Excluding the loss on our minority investments in North Italian flower tone, which is primarily driven by higher pre opening costs given their unit growth levels as expected adjusted earnings per share was 82 cents.
Cash flow from operations was approximately $50 million during the second quarter.
Net of roughly $16 million of cash used for capital expenditures and $7 million in growth capital provided to north Italian flower child, we generated over $27 million in free cash flow.
We completed approximately $28 million in share repurchases and returned nearly $15 million to shareholders via our dividend during the quarter.
That wraps up our financial review for the second quarter.
Now I'll spend a few minutes on our outlook for the third quarter and full year 2019.
Please note our outlook and Capex range do not reflect the impact from a north Italia and Fox restaurant concepts transactions.
Including any onetime integration costs.
As we've done in the past we continue to provide our best estimate for earnings per share ranges based on realistic comparable sales assumptions and the most current cost information we have at this time.
These assumptions factor in everything we know as of today, which includes quarter to date trends, what we think will happen in the weeks ahead.
Effect of any impacts associated with holidays or weather.
For the third quarter of 2019, we are estimating adjusted diluted earnings per share between 52, and 57 cents based on comparable sales in a range of flat to up 1% at the Cheesecake factory restaurants, reflecting continued softness in the industry sales environment and ongoing pressure in produce costs.
Turning to full year 2019, we now expect comparable sales in a range of 1% to 1.5% at the Cheesecake factory restaurants.
On the cost side, we now expect food inflation for 2019 market basket to be closer to 2% given the recent inflation in produce which we currently expect to have the greatest impact during the third quarter.
We continue to estimate wage inflation of about 6%.
For modeling purposes, we now anticipate a 2019 tax rate of approximately 7% to 8%.
In turn we now estimate adjusted diluted earnings per share between $2.58 and $2.68, which reflects our second quarter actuals and the uncertainty around produce costs.
As a reminder, our anticipated Q3 and full year EPS ranges exclude our portion of any loss from the operations of North Italia and flower child, driven by their high levels of Preopening costs to support their current growth rate.
With regard to capital allocation, we now expect our cash capex in 2019 to be between 85 and $95 million to support our anticipated unit growth and ongoing maintenance needs.
Now turning to the North Italia, and Fox restaurant concepts transactions, we announced this afternoon.
Yes acquisitions will be completed for $308 million in cash at closing.
An additional $45 million will be do ratably over the next four years.
And including the $88 million, we previously invested in North Italian flower child, total consideration will be approximately $440 million.
Equating to approximately 1.1 times run rate revenues.
Yeah foresee transaction also includes an earnout provision based on the financial performance of the FRC brands outside of North Italia and flower tone.
Further detail on both of the individual transactions can be found in the presentation summarizing the acquisitions on our Investor Relations website.
The cash to a closing will be funded by drawing on our Upsized 400 million revolving credit facility.
Which we closed earlier this week and cash on hand.
We've just one turn of projected leverage we will continue to maintain a strong balance sheet and ample financial flexibility following the acquisitions.
Excluding integration expenses the transactions are expected to be approximately neutral to earnings per share in fiscal 2020 and accretive thereafter.
Our board of directors is unanimously approved the transactions, which are expected to close around the end of the third quarter of fiscal 2019 subject to customary closing conditions.
We're making these long term strategic investments to reinforce our position as a leader and experiential dining and complement the continued domestic and international license expansion of the Cheesecake factory.
Specific to North Italia.
We see significant white space for an on trend Italian content and believe North Italia is an ideal fit for the experiential dining occasions, we want to offer.
With the support of our growth capital investments North Italia has expanded nationally and now has 20 restaurants in nine states and Washington, DC, including the Reston, Virginia location, which opened today.
With one more opening planned in the next two months annualized run rate revenues are expected to be approximately $150 million upon close of the transaction.
And there are two more openings planned for the fourth quarter as well as the pipeline for 2020 in place.
North comp store sales increased over 5% and 28 team and they have sustained mid single digit comp store sales performance. This year underscoring the strong underlying fundamentals of the concept.
North Italia has very strong unit economics generating about $7 million in sales on average, which equates to roughly $1200 per square foot.
Target restaurant level margin is 18%, 20% and this typically achieved by year three of operations.
With an average cash capex investment of $3 million to $3.5 million equating to a two to one sales to investment ratio target cash on cash return is 35% plus.
With Italian cuisine, the number one ethnic food category in the United States, coupled with strong national reception of the North hotelier concept to date, we believe there is potential for 200 domestic locations over time.
This supports our plan for 20% plus annual unit growth for the continent.
Fox restaurant concepts as a restaurant group comprising multiple unique concepts, including flower child, Columbia dropout and the Henry.
FRC annualized run rate revenues are anticipated to be approximately $250 million of the close of the transaction.
So we believe there is potential for 20% annual unit growth for their aggregate portfolio.
We've provided some additional metrics to help you with your modeling on slides eight and 10 of the presentation.
The combined company is expected to be in experimental dining category leader.
With nearly $3 billion in pro forma revenues in 2020.
And anticipated, 8% plus revenue growth.
Comprise of targeted comparable sales growth of 1% to 2% and 6% to 7% unit growth.
We believe our aligns cultures and philosophies and close existing relationship that is supported.
A good deal of knowledge sharing already should support a smooth integration.
We expect to capture supply chain real estate and additional synergies overtime, which we believe coupled with the North Italia and FRC unit economics will support our margin recapture objective.
We also expect cash flow generation to accelerate after completing the integration and plan to maintain a balanced capital allocation strategy comprised of investing in new restaurants that are expected to meet our targeted returns.
Repaying borrowings under the credit facility and continuing the dividend and share repurchase program.
To assist with your modeling for next year, we are providing some initial assumptions around the acquisition impact.
These are just estimates at this point and it will depend on a variety of factors, including purchase accounting.
We anticipate the acquisitions to contribute as much as $450 million in aggregate incremental revenue.
In 2020.
For next year, we estimate restaurant level margins for north and FRC combined to be approximately 15.5%, which reflects a 17% level for north.
Both of these margin figures include a significant number of new units that havent achieved steady state margin levels, yet given the high number of openings in 2019.
We are enrolling in north Italia and enforces DNA. We continue to believe that we will be able to accomplish our longer term DNA leverage objective.
We currently estimate DNA for North Italia, and FRC of approximately 4% to 5%, which will ultimately depend on the impact of the new lease accounting standard and purchase accounting.
And finally, we project Preopening costs per unit of roughly 12% of average unit volume for North Italia and the FRC concepts.
In closing.
With diversified concepts.
Meaningful unit growth drivers.
Significant scale.
Robust cash flow generation and a strong balance sheet.
We believe the combined company will be uniquely positioned to drive long term profitable growth and today's restaurant industry.
We believe the North Italia, and Fox restaurant concepts acquisitions are meaningful value creation opportunities to complement the power and potential of the core Cheesecake factory business.
And with that we'll take your questions in order to accommodate as many questions as possible. Please limit yourself to one question and then re queue with any additional questions operator.
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.
And your first question comes from the line of John Glass from Morgan Stanley . Your line is open.
Thanks, very much if I could maybe just to just first on your outlook and your revised outlook for the year. It doesn't seem like your annual outlook change much just given.
We came out in the second quarter and year third quarter objections, and our little bit lower so can you just walk us through what the changes are do you think this produce issue is the primary issue in the third quarter and the comp and that things get better on both fronts in the fourth quarter. How do you kind of look at the year on balance now, particularly given what you've talked about in the third quarter.
Yes, John This is Matt and I think you're right I would just kind of lead with the fact that not much has changed we feel very good about the steady productive nature of our core business. So we're right on track ROI for the EPS objectives.
The few puts and takes as you noted I mean, certainly avocado costs have come up and predominantly hitting in the third quarter, we are 90%.
Contracted for our total basket the small piece out there is produce so I think we feel good about where that that outlook is when we look at the comp for the year, it's pretty close to where we thought maybe a little bit softer for third quarter.
I think that we're seeing some of that in the industry and when we looked at that there seems to be a multi year trend where July has started off a little bit slow across the industry may be some changing patterns with school or other behavior, there, but that doesn't give us cause for concern I think you know pretty steady comp store sales in our projected range.
So very small puts and takes and pretty much in line with where we thought we would be when we started the year.
And when you think about the restaurant level margin projections for the Fox restaurants that you've provided and you've talked about the accretion or the breakeven in 20 have you built in or what to what extent have you built in synergies assumptions about your purchasing being better or were some of the DNA reductions that you can achieve can you talk about what you have or haven't assumed in those.
In those in those ranges for both restaurant margin. Thanks.
I think importantly for everybody the node this opportunity is about growth.
We know we think it.
An excellent opportunity for us to expand and experiential dining and the Fox team does a great job there and I think we see a lot of upside in terms of revenue production and cash flow production over time, it's not really ideal predicated on synergies, we don't expect there to be.
DNA synergies only that we can leverage off of the growth of both companies can produce over time that being said certainly we will have we will have more buying power, we will have greater real estate capabilities. So there will be some but we're not we're not factoring any of that into our current projections that will be something that we work very closely with Sam and his team on to evaluate and.
It could be a benefit in the out years for us.
Okay. Thank you.
Your next question comes from the line of Sharon Zackfia from William Blair. Your line is open.
Hi, good afternoon.
I guess a couple of questions on the acquisition.
I think you gave us enough that we can kind of get to obviously restaurant level profit.
For.
Next in its entirety, but.
From an EBITDA perspective could you kind of break what that might be for the entity that you're buying and then secondarily I'm just wondering from a I guess I'll use the word synergy.
Perspective could you leverage some of your.
Third party delivery relationships with the Fox concepts and I mean, how do you think about foxs kind of a menu incubator as well that could feed back into some of the larger concepts like Cheesecake factory.
I will share at all others, Matt I'll try to tackle the first one so I think if you think about $450 million of revenue above the baseline right. We will record I guess some in the fourth quarter. So we're thinking of the 450 is above what you would have previously modeled absent absent north.
And if you look at around 15.5% margins and then you've got.
You know the depreciation and amortization of 4% to 5% you know I think the DNA will be essentially in line.
Absent any one time integration costs with our DNA.
Target there and then Preopening.
We try to give a metric that we're using 12% of ayubi season. So you know from from that perspective.
With the with the interest cost.
On the revolver Youre basically getting to a breakeven EPS and I think you can kind of work backwards into an EBITDA number for the entity and we'd be happy to help you do that offline as well, but I think that will get everybody pretty close on the on the overall overall financials and then I'll, let David talk about the synergies.
Jordache et cetera.
Hi, Sharon as David Gordon.
Hi, good over the past over two and a half years and working very closely with Sam and his team certainly Sam is quite the entrepreneur and has created some wonderful concepts and all of them based around fresh quality ingredients, taking great care of people.
So there's so many similarities in our two organizations and as Matt said as we evaluate those opportunities whether its door dash to leverage some of the scale of Cheesecake factory and whatever deal where we have today and may have moving forward, we'll look at each one of those individually.
And decide what's best for.
The team in Arizona and also best for the broader Cheesecake factory company and then over time as Sam continues to create if there are concepts that we believe would be great to scale nationally.
We'll talk about those together as a team and if and when that time comes.
We would think about moving.
Having those that fall under Cheesecake factory umbrella and then scale nationally can be done with north.
And would hope to do in the future all goes well with flower show.
I guess I was asking.
Yes, Thank you David Yes.
From a menu standpoint, David over to Tim.
We'll still our team will still be doing cheesecake factory.
And they will be doing their concepts and getting the new ones. So we want to keep their concepts very much the way they are and not not TC guide them in terms of what they're offering guests and we want to keep our thing. So that is our plan for the future as of now.
That's very helpful. Thank you.
Your next question comes from the line of Nicole Miller from Piper Jaffray. Your line is open.
Thank you. Good afternoon. My question for the call is going back to your comment about turning on TV. It sounds very much like you will be having branding our brand equity attribute I'm wondering if you imagine attaching any call to action and then how you would measure the return and then just a quick clarification could you translate your one turn of leverage the approximate total dollar debt amount. Thank you very much.
Yes ill just this is Matt nickel and all of those will probably going to be in the ballpark of about $300 million of debt associated with the transaction and we would imagine that combined entity would have about that much of operating cash flow. So thats, our one turn and on the TV.
It's just a pilot Nicole that we're going to start and test in 12 markets.
And we will be leveraging our made from scratch messaging and all the attributes about.
Our experiential Cheesecake factory is without a call to action without an offer we think that we want to test the aided awareness and see what that does and we will measure it overtime. During the pilot phase and then see what we want to do moving forward.
And in terms of measuring Oh, I guess, you'll just measure the pilot phase I guess, that's the answer there.
Just wondering Mike if you needed a move in something besides I guess audio.
I think you're right you're right synthesis into to pilot and not in every market I think statistically we will be able to build a very valid model that evaluates sort of pre post net on the comp store sales line and that will give us some perspective.
Obviously, when making an investment like that you also hope there is a tail so we'll be watching it carefully over time.
Thank you.
Your next question comes from the line of Gregory Francfort from Bank of America. Your line is open.
Hey, just one clarification then a question is the percentage of these different than <unk> percent of sales I guess, just clarifying maybe what that difference is and then.
Maybe a longer term question.
Does this acquisition change, how you're thinking about allocating growth capital long term between cake and and nascent concepts and.
I guess I asked that the Cheesecake store growth are you thinking about any differently now that you have maybe 16 brands to play with rather than seven.
Thank you.
Greg This is Matt that's the first question. It is sort of one in the same but we're using the present value via because it's because really it's as a percentage of the growth right. So.
If we use percentage of sales of the total base it would be a totally different number but if you think about 20% growth on a $400 million run rate business and 12% of that being the cause of Preopening I think that will get you in the ballpark.
I think with respect initially to capital allocation essentially the acquisitions will be pretty close to self funding by year too. So we don't see a need to really shift any.
Our capital allocation decisions around the cheesecake factory or balanced approach.
We have gotten a very good deal on the financing piece there are high route highly profitable businesses. So we expect to continue to be able to grow the cheesecake factory just as we have been planning to we expect to continue to provide our dividend as we as we did this I'm continuing to grow that.
I think we will balance a little bit in the near term the share repurchase program with.
We're paying down some of the debt and thats kind of a fungible pool, but but otherwise it will be.
Essentially this story that we had before plus.
What we are going to be able to do all of this growth and everything else we were doing before.
Got it thank you very much.
Your next question comes from the line of Jeffrey Bernstein from Barclays. Your line is open.
Great. Thank you.
Two questions maybe first.
For David or David I guess.
As I think kind of bigger picture.
Back in the day was just Cheesecake factory and then it was grand Lux and rock sugar and.
And then we were set up for the North Italia and ultimately the flower child.
Now it seems like we've got another 10 or so more.
I'm just wondering whether there is any concern on your part because it does seem like the the other secondary brands then ultimately maybe become the growth engine you wanted or maybe didn't achieve the synergies you wanted.
No. One is just how you think about the additional brands, whether or not that just complicates the portfolio.
Versus historical just maniacal focus on the Cheesecake factory I'm just wondering if you can lay out how you view the pros over the cons for that acquisition and then I had one follow up.
Thanks, Jeff. This is David I think our maniacal approach to how we operate and run Cheesecake factories is going to continue and we will never change.
As far as Grand Lux and rock sugar as we've stated previously we don't have any plans to open up any new ones. At this time, However, we will statement by NAC.
Just as focused on running those brands as we always have to have to operate perfectly and.
Deliver great memorable guest experiences so we'll continue to do that as well.
And during this integration period with North we've also able than state were squarely focused on Cheesecake factory and as North as you start to operate there is no those north restaurants will continue to be able to do the same thing 90% of our businesses Cheesecake factory today and over time as north continues to grow at a 20% growth rate will leverage all of our expertise in growing a brand to grow north appropriately across the country and as Sam continues to lead his team.
And those other restaurants that are running through Phoenix.
He's going to continue to operate them and stay squarely focused on providing exceptional guest experiences learning from his guests as he's done over years and being a trader for us and that gives us the ability to know that is able to do that well we stay focused on everything it's important and has been important for 40 years at Cheesecake factory.
Got it and then my follow up was just on the.
The operating margin for the portfolio I know in the past.
Slide decks, you talked about kind of.
Ultimately going from 6% range to the 7% range and maybe 25 basis points per year of expansion on the operating margin.
I just was wondering whether there is any change to that strategy or any change to the buckets within that.
In terms of maybe how you see those expanding over the next few years now the layer in this acquisition I didn't see that particular metric in the in the newest slide deck.
Hey, Jeff This is Matt I think Thats a great question and we're currently in the process of evaluating that and we did not include it because it is still something that we're doing the math around our objectives around leveraging DNA is still exist our opportunities to expand our margins with the international in the CPG business still exist and we are we are pursuing those I think we're right on track for this year, but certainly we need to kind of recalibrate around the portfolio component of this.
Nothing has changed though with respect to keeping core to stick factory margins flat. So thats still maintains the objective. So those pieces are still in motion, but given the portfolio component here, we wanted to pull that back and make sure that we would get the math correct certainly nothing about it would be dilutive to any of those targets in the future.
Very helpful. Thank you.
Your next question comes from the line of will Slabaugh from Stephens. Your line is open.
Yeah, Thanks, guys just.
Question about your comments on the consumer you mentioned it was a more challenging consumer environment during the quarter.
Results reflected that someone and you've got into threeq as well.
It seems like this is really somewhat new versus what you had been saying in past quarters. So I'm curious what you've been seeing.
Maybe change within consumer activity and if there's anything to call out either whether it be geographically around daypart, you're around different parts of the menu.
No.
I think that.
A couple of things one the the the holidays shifted Easter was significantly later this year and there was a lot of turbulent whether it's hard to quantify any of those pieces, but certainly that may have been a little bit of the noise and as we referenced earlier in the call July I think if you look at it whether its navtrak or white box or multiples all of those tracking mechanisms seems to year over year July settling a little bit and and I think we're just as an industry is seeing that I think other companies are are reporting that I don't think it's significant I think these are just some of the normal ebbs and flows throughout the year.
Our guidance for comps for the year has barely changed so as vigorous as some of those.
Those components around the edge the same geographies I think are performing very consistently.
No we haven't seen.
Any of the volatility that we've seen historically when there has been more.
Of an anomaly in the sales patter.
Okay. That's helpful. Thank you.
Your next question comes from the line of Andy Barish from Jefferies. Your line is open.
Hey, guys just a couple on the on the acquisition and Ken Congrats.
Buying some really interesting concepts on the pipeline for 2020 can you give us any any color on how much visibility you have been and should we think about sort of unit growth is.
Going forward as the handful of Cheesecakes, maybe a handful of nor its and then sort of eight to 10 other fox concepts per year is that how you're kind of thinking about.
That number to get to sort of the mid to high single digit overall unit growth.
Yes, I mean, I think we we don't have a specific number but I think.
Your math is pretty close.
For for Cheesecake factory, we still think 3%.
And and we feel good that that target is very achievable and are looking at real estate to support that for next year already as referenced we have a good pipeline for north that would be at least a 20% growth if not a little bit more for next year, that's pretty much in place.
And then I would say you know you're right on there is roughly some 45.
Restaurants within the FRC group that includes flower child, and you know we would target that to be about 20% on an annual basis and certainly they get a lot of interesting real estate opportunities given the different concepts. So we feel from a real estate perspective, and the ability to sort of count on the unit growth. This is this only helps us in a variety of ways and gives us further leverage so so pretty pretty good opportunity to hit those targets.
And then just quickly anything we should be thinking about in 2020 on incremental labor cost from a people retention perspective at Fox stem.
As you move through.
The acquisition and into that the kind of first year of ownership to maintain some of the talent there.
Well, Sam and his team are going to still be there they're going to operate the business just as they have been.
I think all the great things that they already do to be a world class talent provider. They will continue to do that.
This is.
As we as we noted this is this is not about a synergy situation, but more about the growth opportunity. So they already do a great job with its already embedded in the run rates that we've put out there. So the philosophies that we share around that will continue and.
I think that the people knowing that we're working together will only benefit each other.
Thank you.
Your next question comes from the line of John Ivankoe from Jpmorgan. Your line is open.
Hi, a couple of things, yes, firstly on labor you mentioned wage inflation at 6%.
What's the outlook, there and I ask that in the context in terms of where your exposure is I mean are you seeing stability or you seeing acceleration in those cost for energy any jobs, whether front of house.
Or back of house are there any markets that are actually experiencing any staffing shortages.
At this point that that you are beginning to become concerned about.
John This is Matt on the rate, it's been pretty predictable.
I would say once we sort of got into the rhythm of the increases mandated by minimum wage tip credit changes et cetera, it's been relatively following a pattern and has not been out outside of our expectations.
In any of the quarters, we would imagine.
Next year would probably be around 5.5% again and the reason it could be slightly different as just a math has.
The wage goes up the minimum wage impact on a percentage basis is as slightly lower.
Certainly with this we get a little bit more diversified as a company in total so we'll evaluate what impact that has but.
From the Cheesecake factory brand perspective, we are employer of choice and number 25 on the best one other places to work and we're continuing to be able to staff. Our restaurants. There is a market or two that are more challenging, but but but not causing us to have a shortfall in any situation.
Great. Thank you and the second question on commodities I, obviously understand that your protein basket is diversified you don't sell lot of pork, but you also sell non commodity chicken could you comment on your kind of view on.
On the on the protein market at this point I mean, do you foresee any challenges and if you could elaborate on the produce side is you know do you view all the condos as you have just the.
A seasonal shortfall and if there's anything else.
On the protein side that actually does it give you concern over a quarter or two.
Sure. Joe This is Matt and approaches for for this year were contracted you know I think that there's still a lot of noise out there around what's going to happen with proteins.
But we have such a flexible kitchen and we've worked around many situations before where you've seen ups and downs and I think the balance does protect us to some degree we don't have an outlook yet for 2020 on that but it but I think you know just historically, we've been able to accommodate.
What we've needed to do so I would imagine it to be in a similar range as it has been for the past couple of years in aggregate for the basket with respect to produce really predominantly around autos I mean, its been a smaller growing season relative to last year I think the demand continues to rise or you have a little bit of that sort of spike associated with what was happening in Mexico around the farms, there and I think it never really subsided. So some of this is a little a little bit make shift, but but I think again very very transitory in nature based on the historical and we've built that expectation into our guidance regardless.
Thank you.
Your next question comes from the line of Dennis Geiger from you. The US your line is open.
Great. Thanks.
Clarification and then a question just first just wondering if your long term.
On your targets remain largely unchanged given the commentary you mentioned on.
On the margins and then the question is about off premise and if you could just share what that online ordering mix of off premise looks like what the delivery mix looks like and then just some thoughts on on where that mix can go over the next few years, perhaps as it relates to cheesecake and if there is anything to add as it relates to off premise in relation to the acquisition. Thanks.
Sure I'll start this is Matt.
We are re reevaluating those long term targets, what I would tell you is that we feel more confident about our long term opportunities to drive profitable growth given these additional growth engines, and just reiterating that our margin targets around the DNA and the incremental ability for international and CPG to contribute haven't changed we just kind of need to reevaluate the math around the portfolio, but but I would say that this just gives us.
A significant boost to two hitting any target that we've put out there before and once we figure out the math again will.
We will be able to provide an update.
And just on the the off premise front Dennis.
Total on premise was 16% of sales in the second quarter.
Which was some nice growth over the second quarter of last year and delivery as about.
35% of that 16%.
And the online ordering is moved up to about 13%. So that's incremental incrementally grown over time since we rolled out online ordering and about 50% of our guests are still are still phoning in.
So we did roll out new packaging actually last quarter.
At the end of the first quarter and that's gone very very well that packaging allows the food to travel at the appropriate attention.
Excuse me appropriate temperature and also allows for the integrity and the look and feel of the food.
To be very close to the Cheesecake factory experience you would get when your dining in so we feel great about the continued growth in off premise. We think that there is still room across the country for many of our restaurants continue to grow off premise sales.
And as far as the acquisition goes.
A lot of the concepts and FRC, our offering off premise today.
We've already talked to in the some of the door dash some of the markets used or Nash today.
And there will be opportunity to continue to grow that business as well.
Thank you.
Your next question comes from the line of Matt Difrisco from Guggenheim Securities. Your line is open.
Thank you just one point I want to clarify and then if I had a question with respect to Easter was that a benefit or a drag in twoq.
So we.
We anticipate it being a benefit I think it was slightly but not as much as we as we thought it seems to be where we obviously get a benefit from the holiday weeks.
And it's a little bit we're a little bit opposite of some of the the other casual diners if you will.
But I think there was so late in the season. This year that maybe it was spread out a little bit between March and April and may be muted a little bit.
And then just to clarify one more point and then my question. The structure here of the deal are you owning 100% of Fox or Sam Fox still have a percentage ownership of.
The entity that will remain in Arizona.
We will have 100% ownership and and Sam will be staying on and they have opportunities to as we've structured the deal there's an earn out over the time period, but it'll be 100%.
Okay and then my question to the David's also I guess with respect to what you're seeing here as far as the off premise growth and the correlation with somewhat of the.
The waning business in the dining room.
Does that call into question, maybe the incrementality that youre getting from delivery and off premise that maybe there could be some greater cannibalization or substitution.
We are led to believe initially.
Well I think we still feel like Theres Incrementality. There I think we said in the past that probably think a 60% incremental and we can still see that as its grown overtime, because Matt stated earlier.
Some of where we ended up with same store sales in Q2, it really feels attributed necessarily to the growth in off premise there could be a small part of that where that is happening as guest continue to look for more convenience not want to come into the restaurant, but we don't see that as being meaningful right now, but we'll certainly continue to evaluate it moving forward.
What was the 16% year ago.
13.
Thank you.
Your next question comes from the line of Jeff Farmer from Gordon Haskett. Your line is open.
Thanks, how the question and then some modeling clarification, Joe first up on the question.
Labor costs have been kept very very well under control over the last two quarters, especially in Twoq when looking at our model I am just curious you gave US a couple of examples but what is driving that and how sustainable is that as we move into 2020.
Well I think it's been the real noise that weve ever had has been around group medical insurance costs I think our operators do a tremendous job our forecasting and labor management tools are best in class and I think as I noted on the wage piece, we have a pretty good read at this point in time. We're also continuously look for opportunities to improve in every area. We're not a step function, we're not going to take it.
No. The Busters out for example, we're just going to look to be incrementally better. So I think that Jeff is absolutely sustainable going into next year and then you know if we have higher insurance costs, we do and Thats, what Weve explained that thats. The right long term business decision for the company, but I feel very good about our ability to manage our labor going forward I would just add that as we said earlier that our retention rates really are industry, leading and our ability to keep our people being on the fortune 100 list as Matt talked about but more importantly, historically the way we care for people that really helps us because we can be more productive. We can cross train train people. There is not much lead time, because it's not as much churn and that's something we feel for sure. It will continue into next year.
And then just just on modeling. So again you know the so you currently just have two revenue lines one for the Cheesecake restaurants, and then in other line for everything else. So I'm, just curious and I know, it's a little bit early.
But will there be a new revenue line for Fox and in terms of thinking about this on the segmentation basis are you going to breakout Fox as a separate segment and again more unsolicited advice that just makes everyone's life far easier in terms of modeling this thing moving forward.
I hear you loud and clear where we're in the process of evaluating all of those with our auditors and we'll make the.
Decisions as we get closer to the actual close of the transaction and probably be able to provide an update on that in the.
In the third quarter call.
Okay. Thank you.
Your next question comes from the line of Peter Silly from BTG. Your line is open.
Great. Thanks.
I just wanted to come back to the.
TV commercials.
Markets.
This increase.
Spending and advertising.
Sure.
And if this is a shift.
Shifting of dollars from.
Of course this.
A small test.
It is it is an increase from from the marketing spend historically.
And we have that in our plan for this year and has been part of our LP and part of what we discussed previously so.
Well, it's going to continue to evaluate the strategy again as I said earlier, we'll see how it goes it is just the pilot and certainly that drive some incrementality and we see that it's making a difference and we'll decide moving forward and next year's plan exactly what that marketing budgets can look like.
Great and then just for clarification on one of the Fox restaurant concepts that you guys are acquiring.
Furstenberg or.
Just acquiring.
Stores and Arizona Macquarie.
The 24 stores that are across the country.
Great Great question, Peter very very very good catch on your part it will be the ones that are based in Phoenix and so that is a concept that Sam successfully launched previously and and did so the development rights, but has retained the ownership of the ones in Phoenix and that will though that's the part that will be part of our company.
Other 18 are.
Worthy.
Hi, Sam.
No no there are no there there those rights were purchased by.
Different company.
Number of quite a number of years ago, and so we will just as Sam will continue to operate those in burgers that he has not only part of part of what we're doing.
But not not the other piece of it.
Great. Thank you very much.
Your next question comes from the line of Mary Hodes from Baird. Your line is open.
Good afternoon. Thanks for taking the question could you just provide the breakdown of traffic and check during Q2, and then you look toward the second half of 2019 and work through your summer menu update are you still anticipating roughly 3% pricing for the second half the year.
So the answer to the second part is yes, I think will we were about a 3% pricing will continue to be at about 3% pricing. The the traffic was negative 2.8, but the mix was a positive 0.7 and as we've noted it's really driven by delivery in the higher check average and so if we were to adjusted and the way that some companies. Do you are you are talking about traffic of about negative two which was a little bit shorter than what we had guided to and I think thats related to the some of the Easter shift in the weather that we discussed.
Thank you very much.
Your next question comes from the line of John Tower from Wells Fargo. Your line is open.
Great. Thanks, a lot of my questions have been answered, but I was just going to follow up on the acquisition.
The landscape that in restaurants regarding acquisitions as that is really a relatively poor track record on companies being able to deliver on the synergies that they projected at the beginning of the acquisition. So I'm curious to hear from you. What gives you confidence on your ability to do that is it. The fact that for three years now you've had the minority investment in those businesses and therefore have a fairly strong line of sight into how they grow how much it's going to cost in people retention. If if you would mind just kind of.
Elaborating on that that'd be great.
John This is Matt I think you answered your own question.
That's exactly right I mean, when you have spent as much time with them and collaborated to the degree that we have with Sam and his team were intimately involved in the growth of North Italia over the past three years as well as flower child and having.
You know witness the abilities.
We have a very deep knowledge of that and a lot of confidence in them and our ability to work together to continue that momentum and I were just end by saying again, it's not about the synergies I think we have taken a very unique approach in the world of restaurant.
M&A that may or may not have gone right. We have data for three years before this marriage and we're also maintaining sams team in Phoenix as a standalone entity. So that we don't disrupt that so I think that we were just as we always do at the Cheesecake factory, taking a slightly different approach that we think is unique in value driving.
Thank you.
Your next question comes from the line of John Glass from Morgan Stanley . Your line is open.
Thanks, I just had one follow up and it's more maybe philosophical in nature.
Why is this a better arrangement to by Fox versus your prior arrangement, where I think you had a good opportunity to invest in the concepts you were most enthusiastic about and let the others sort of incubate and when they were ready you could put more capital into it now you owned.
Portfolio years, putting $270 million or portfolio of some smaller brands that may work some may not.
So one maybe what's the rationale for that in Conversely, I guess is this also maybe just a.
A recognition that the consumer is maybe more interested in smaller brands and that maybe will grow portfolio of smaller 123 offs or perceived independence. How do you see that the trade off for wanting to own the whole business versus just picking and choosing and maybe your view on how the consumer is changing and maybe this is a way to.
To address those changing needs of smaller brands.
John This is Matt I'll take the first part.
Relative to the deal if you think about the amount of money. We may have purchased north Florida in two years flower child, the incremental amount of capital and the way that Sam and his team are willing to work with us on the way that we're financing part of it now and over time.
It's just a great win win financially right. So were virtually giving you another incremental revenue of $150 million, there were sort of able to pay for overtime and to top that off we have a lot of confidence in the ability of the FRC team to do exactly what you're talking about to be an incubation engine to see what the consumer life, they've been exceptionally well received in their different endeavors, they're very profitable business. So economically.
We were just able to structure a win win I think thats unique as we said and different and in this sort of came together as we are working on the integration for North Italia, and we think that the combination of the entities today is more fruitful than waiting over time and the assets that they bring to bear will help with that.
Both in the concept that they haven't and then penetrating consumers as you noted could be could be shifting it certainly gives us a lot of options, while not diluting our focus on the Cheesecake factory and I think we know that experiential dining is what people want today, and certainly millennials and Gen Z and we provide that today at Cheesecake factory and now we will be able to provide that in other forms and other restaurant concepts that will be spread out throughout the country.
Thank you.
Your next question comes from the line of Brian Vaccaro from Raymond James Your line is open.
Thank you good evening, just a quick follow up on the FRC acquisition I think about half the units within FRC, our flower child and Thats right could you just a little more color on that concept, specifically sort of how it's performed edits as it's grown across the country to the east coast, maybe some specifics on comp trend. The these.
Margins for that concept specifically.
So Brian Hey, this is Matt and the the flower child in terms of the revenue production is maybe around 35%, maybe 40% of its not quite.
Over a third.
So not as much weighted potentially because it is a fast casual and they do have some other concepts that do higher volumes and so I think at this point in time, we're providing an aggregate margin because now one of the brands does comprise more than about 35%.
Of the total revenue and I think it will be more helpful to think about it as sort of an aggregate target for the time being certainly we're still in the middle of.
Closing the transaction over the next few months and figuring out as Jeff Farmer noted, how we're going to report on the segments and will provide additional updates as we go forward with respect to the flower child brand, though continues to do very well.
It continues to hit the average unit volumes of produced about $1000 a square foot in sales.
And so thats been a.
Very strong throughout the country and we've been visiting many of those locations with Sam over the past six months and we're very pleased with the progress of the brand.
Okay. That's helpful and could you also just comment on the pipeline that you're acquiring and the specifics on the unit growth outlook into 2020 sounds like five to six cheesecake, how many north versus.
Other FRC locations are you planning on it the 20.
So just get we'll continue with about a 3% unit growth that we projected no change there north will be at least 20%, maybe a little bit more we have a solid pipeline already identified for 2024 north to achieve that target and.
In the FRC side, they are well underway developing.
Pipeline that will also be at least 20% for the balance of the business. So the we've got a lot of tools.
In the shed here to hit that unit growth.
And a lot of real estate expertise between the combined company to find those locations. So we're well on our way and feel good about that.
Okay, Great and then just last one on the interest rate on the debt can you remind us where that settle out on the expanded facility.
Yes, it will obviously depend on where we're at in the bracket and where LIBOR floor sets. You know I think it's going to it will probably end up being somewhere just slightly south of 4%, maybe when when the dust settles and you know if the fed keeps lowering it will be somewhere between three and a half and for for next year I would guess.
All right. Thank you.
And we have now reached the one hour Mark. This concludes the Cheesecake factory second quarter fiscal 2019 earnings Conference call you may now disconnect.