Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to The Cheesecake Factory Third Quarter Fiscal 2021 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. Thank you. I will now hand the call over to Mr. Etienne Marcus, Vice President of Finance and Investor Relations. You may begin your conference.

Thank you, Emma. Good afternoon and welcome to our third quarter fiscal 2021 earnings call. On the call 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. 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 than 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.thecheesecakefactory.com 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, during this conference call, we will be presenting results on an adjusted basis, which excludes non-cash acquisition-related contingent consideration and amortization expense. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appears in our press release on our website, as previously described. David Overton will begin today's call with some opening remarks, and David Gordon will provide an operational update. Matt will then briefly review our third quarter results and provide a financial update. With that, I'll turn the call over to David Overton.

Thank you, Etienne. Comparable sales at The Cheesecake Factory restaurants increased 8.3% relative to the third quarter of fiscal 2019, solidly outperforming both Knapp-Track and Black Box casual dining indices. We believe this performance was particularly strong, given the surge in COVID-19 cases from the Delta variant that the Company was experiencing at the time. Our teams generated solid profitability in the face of higher than anticipated group medical insurance costs and incremental costs associated with the pandemic environment, which Matt will provide more detail about later in the call. Sales across our concepts further strengthened early in the fourth quarter with continued strong contributions from the off-premise channel. Fiscal 2021 fourth quarter-to-date through November 2nd, comparable sales at The Cheesecake Factory restaurants increased approximately 10.5% versus 2019, and we have seen relative consistency in this metric each week. On the development front, four new restaurants opened during the third quarter, including North Italia and Flower Child in Gilbert, Arizona, which is a growing suburb in the Phoenix market; and the second North Italia location in the Nashville area in Franklin, where we continue to see a great response to the brand; and Blanco in the Chicago area, which is a new market for both that concept and the broader FRC portfolio. Blanco is a very differentiated offering in this market and has received a very warm welcome from guests so far. Subsequent to quarter-end, The Cheesecake Factory opened in Huntsville, Alabama to tremendous demand. And with three openings to date, North Italia in Orlando, and both Blanco and Culinary Dropout in Denver, we met our development objective of opening 14 new restaurants across our concepts this year. This is a marked achievement, considering the pandemic environment and the associated challenges we have been operating with throughout 2021. On the international front, a third Cheesecake Factory location in Shanghai opened this week under a licensing agreement. We are seeing all three of our international licensees recapture their pre-pandemic sales levels. Looking ahead, we have a strong pipeline in place, which we believe positions us well to achieve our targeted 7% unit growth next year. At the same time, we will continue to focus on driving comparable sales growth and managing through this operating environment. Should the cost pressures prove not to be transitory in nature, we are committed to implementing further cost management initiatives and leveraging the breadth of our menu to take additional pricing to protect margins. With that, I'll now turn the call over to David Gordon.

Thank you, David. As evident from our third quarter comparable sales growth at The Cheesecake Factory restaurants, the surging COVID-19 cases had minimal impact on our top-line results. Continued strong performance in the off-premise channel supported our sales trends as average weekly sales in that channel were nearly double 2019 levels throughout the third quarter. We recently completed a consumer research study that showed that we attracted a significant number of new guests to The Cheesecake Factory throughout COVID, particularly via the off-premise channel. Notably, loyalty is very strong, evidenced by a significant number of these new guests already being in the frequent cohort. This data further reinforces our belief that a meaningful increase in off-premise sales could be a longer-term sales driver for The Cheesecake Factory as we emerge from the pandemic. Fiscal 2021 fourth quarter-to-date through November 2nd, average weekly sales are approximately $213,000, which is 10.5% higher than the level seen in the same period in 2019. Off-premise average weekly sales of $60,000 continued to be nearly double the level seen during the same period in fiscal 2019. Grounded in the learnings from our consumer research, we are again utilizing some targeted off-premise marketing to further drive our performance in this channel. For example, just last week, we celebrated Halloween with our guests with our popular Treat or Treat promotion. Our cheesecakes are a key differentiator. These creative offers continue to drive meaningful demand. At the same time, we continue to more broadly execute brand-based messaging to raise the profile of The Cheesecake Factory with a focus on social and digital channels. While our primary focus is our core guests, to better reach the Gen Z audience, we recently launched our TikTok presence and have generated over 31 million views of owned content, with each video averaging over 1 million views. In September, we launched augmented reality cheesecake-themed filters on Snapchat, with the campaign reaching over 5 million unique users. Turning to staffing, while we have continued to encounter some pockets of staffing challenges, this has not meaningfully stifled our sales performance at The Cheesecake Factory restaurants. The labor market remains tight. However, we believe we may be seeing some green shoots. For example, we saw hourly staff turnover moderate throughout the third quarter, and we received solid application flow for our recent Cheesecake Factory Huntsville opening, enabling the restaurant to be fully staffed in advance of its opening date. We were recently recognized on the People Magazine 100 Companies That Care list, and we were the only restaurant company to make the list. People Magazine identifies the top U.S. companies supporting their employees and surrounding communities. They highlighted the over 25,000 meals our restaurants donated to healthcare workers across the country, as well as our Nourish Program, which donated more than 550,000 pounds of unused food to over 500 non-profit and food banks in 2020. We were also recognized for caring for our teammates in meaningful ways during the pandemic. Our unwavering commitment to our values and people-first culture contributes to our continued industry-leading retention at both the manager and hourly staff levels, which we believe is a key contributor to a positive guest experience. Turning to North Italia, third quarter comparable sales growth of 8% versus 2019 was also solid in the face of the COVID case surge and somewhat more labor pressure than we experienced at The Cheesecake Factory restaurants, given the smaller nature of the concept. Sales at North have strengthened further with fourth quarter-to-date through November 2nd comp store sales up approximately 14.5% versus 2019 levels. Off-premise has continued to comprise approximately 14% of sales at North. FRC drove similarly strong top-line performance during the third quarter, and has also seen sales further strengthen in the fourth quarter to date, with notable performance in the off-premise channel at Flower Child. We are incredibly proud of the top-line performance we've driven across our concepts and how our teams are navigating the dynamic operating environment. It is not easy to run a great restaurant today, so we continue to be so appreciative of our team's dedication to absolute guest satisfaction and maintaining our culture across all of our concepts. With that, I will now turn the call over to Matt for our financial review.

Thank you, David. Third quarter comparable sales at The Cheesecake Factory restaurants increased 41.1% year-over-year. Relative to the 2019 period, comp sales were up 8.3%. Off-premise represented just under 30% of total Cheesecake Factory restaurant sales during the third quarter. Revenue contributions from North Italia and FRC totaled $112.4 million. North Italia comparable sales increased 38% year-over-year and were up 8% versus the 2019 period. Sales per operating week at FRC, including Flower Child, were approximately $94,200. Including $16.7 million in external bakery sales, total revenues were $754.5 million during the third quarter of fiscal 2021. As usual, I'm going to provide year-over-year detail on expenses. But of course, note that the significant disparity in revenues, given the impact from COVID in the third quarter last year, drove some abnormal year-over-year variances. Cost of sales declined 30 basis points, primarily driven by sales mix and pricing leverage. We exited the third quarter with higher cost of sales inflation as we were buying in the spot market to meet volume needs that exceeded our contracted levels. The most significant impact of this was at North Italia, where we saw the cost of sales percentage impacted by nearly 200 basis points due to the level of spot buying for that concept. However, aggregate cost of sales inflation for the quarter of approximately 3% came in line with our expectations, given the efficiencies we drove. Labor declined 160 basis points, primarily reflecting sales leverage, partially offset by higher wages and training costs. Relative to our expectations, group medical insurance costs were approximately $3.3 million higher due to a number of large claims. We also had approximately $800,000 higher than anticipated sick pay, largely associated with the Delta surge, and training costs were about $900,000 higher than expected. In total, these items had approximately 70 basis points impact on margins for the quarter. We also saw slightly higher than anticipated wage inflation during the quarter by about 1%. Other operating expenses declined 400 basis points, primarily due to sales leverage relative to the prior year period. Versus our expectations, we had over $2 million in incremental costs associated with the pandemic environment, including higher than budgeted natural gas, recruiting and costs associated with supply chain disruption for certain non-food products. This translated to over 25 basis points of impact on margins. We've seen similar challenges across our concepts with elevated impacts, such as with the North Italia cost of sales that I referenced earlier. G&A as a percentage of sales declined 120 basis points, also primarily due to sales leverage, as well as tight cost controls. Pre-opening costs were $3.2 million in the quarter, compared to $2.4 million in the prior year period. Two North Italia restaurants, one Flower Child, and one Blanco opened during the third quarter of this year versus two Flower Child locations in the prior year period. Third quarter GAAP diluted net income per common share was $0.64. Adjusted net income per share was $0.65. Now, turning to our cash flow and balance sheet. The Company recorded approximately $11 million of cash flow used from operating activities during the third quarter. This reflects a $36.5 million deferred payroll tax repayment. In turn, the tax rate for the quarter reflected a benefit associated with this repayment of approximately $2 million. CapEx totaled approximately $18 million during the third quarter for required maintenance and new unit development. We ended the quarter with total available liquidity of approximately $371 million, including a cash balance of approximately $131 million, and approximately $240 million available on our revolving credit facility. Looking ahead, the operating environment continues to be very dynamic. So, we want to keep you updated on our underlying expectations for the fourth quarter. We are anticipating about a 1% negative comp sales impact from the holiday shift, given that our fiscal year will end on December 28th. So, the balance of the high-volume sales leap between Christmas and New Year's will move into the first quarter of fiscal 2022. We're anticipating fourth quarter cost of sales inflation to be approximately 3% higher than the third quarter or 6% versus the prior year, as we expect to continue to need to purchase even more ingredients in the elevated spot market to meet volume needs that are expected to exceed our contracted levels. Similarly, the labor market remains tight. And as such, we would expect to continue to see elevated training and overtime costs, and are anticipating some incremental group medical carryover from the large claims for our provider. Taking into account our wage rate trends, as well as anticipated normal seasonal sales trends and related leverage, we would expect labor as a percent of sales to be slightly better than in the third quarter, and other operating expenses to be favorable to Q3 by as much as 75 basis points. Note that the seasonality of the acquired concepts is factored into these expectations. We continue to expect G&A of approximately $47 million for the fourth quarter, and preopening of just under $5 million. Finally, we now estimate our tax rate for the fourth quarter to be approximately 5%. Looking ahead to fiscal 2022, due to the disruptions in the supply chain impacting the restaurant industry and the broader economy, our purchasing team is still in the process of contracting, as you would expect in these circumstances. Note that while we currently have 3% pricing in The Cheesecake Factory menu, and plans remain at that level for the remainder of this year, as David mentioned, should the cost pressures prove to not be transitory in nature, we will implement further pricing actions at our menu change during the first quarter of next year to protect margins. Specifically, if commodities were to remain at current spot pricing levels for the full year of 2022, it would require us to take an additional 1.5% to 2% of menu pricing for a total of 4.5% to 5% of menu pricing to support our margins. The labor market is also dynamic. Inclusive of known minimum wage increases, we're currently anticipating inflation could be around the 5% level we are experiencing at our restaurants this year so far. With regard to development, we plan to open as many as 20 new restaurants next year, spread across our portfolio concepts. For modeling purposes, at this point, we would expect at least 5 Cheesecake Factory restaurants, 7 North Italias, 4 Flower Child locations, and 4 other FRC restaurants. We would anticipate approximately $150 million in CapEx to support this level of unit development as well as required maintenance on our restaurants. Despite the ongoing cost pressures related to the pandemic environment impacting the restaurant industry and the broader economy, we believe we're delivering solid EPS so far this year, while importantly, protecting our brands to enable long-term market share gains. With the breadth of our high-quality growth vehicles, we also believe we're poised to achieve our 7% unit growth objective in fiscal 2022. And with that said, we'll take your questions.

Your first question comes from the line of Joshua Long with Piper Sandler. Your line is open.

Great. Thank you for taking the question. The first one I wanted to dig into was the consumer research that you've been conducting here lately. Sounds very interesting and compelling, especially in regard to bringing new consumers into your brand funnel. So, I was curious if you might be able to share what you've learned. I imagine, it's still early in terms of how you're engaging with those customer cohorts. But, what you've learned from them, where they've been, and maybe how they're using the brands differently from your loyal guests that you've been in conversation with over the prior years?

Thanks, Josh. This is David Gordon. I don't know where they've been, but it's good that they've been back to The Cheesecake Factory. So, I think what we've seen is a significant increase in the frequency of our frequent cohort, which now comprise approximately 20 visits a year versus what was closer to 14 pre-COVID. So, that's a great sign. Certainly, some of the marketing that we did throughout COVID has been beneficial to remind guests to come back to Cheesecake Factory, as you mentioned. We have a significant number of new guests to the brand, which is great to see. About a third of our frequents are new guests, and we've seen them be very loyal and use not just the value of the marketing but have come back even during that time where we had decreased the marketing throughout the second quarter and in the beginning of the third quarter. Some of that other research that we found is that the value proposition that we talk about a lot at Cheesecake Factory around the breadth of the menu and the price points of the menu have come back as a very positive insight from guests that we have talked with. We see that particularly with the frequent and the moderate cohorts. So, overall, we feel that what we've been doing throughout the pandemic, and we'll continue to engage with those guests through different marketing channels moving forward.

Great. Thank you for that. And one more, if I might be able to sneak it in. Thinking about the performance of your growing portfolio of brands, in particular, North Italia, as you go in and backfill markets and you grow brand awareness in markets going forward. Curious on just what you learned from the brands and how they perform and maybe how guests engage them? How do you think about balancing the portfolio in terms of new market opportunities versus backfilling existing markets as you start planning your pipeline for 2022 and beyond?

Sure. Well, I think that the 20% growth rate that we've talked about for North we feel really good about, very positive. In the new markets that North has moved into, the sales have been as strong as they have been. We just opened up today in Orlando, although we already have the restaurant in Miami and one in Dadeland, so relatively new market, and we would anticipate that it will do really, really well. I think there are a lot of markets today that we’re not in yet. Matt mentioned, the Blanco that has opened in Chicago as an example, or in the Northeast. I think we’ll look to continue to fill in the markets that have been successful and then slowly maybe plant North in some of those newer markets and still try and understand how it's received from a guest perspective. But there is nothing that will slow down that 20% growth rate at this point, based on the acceptance that we've seen in every geography that North has moved into thus far.

Your next question comes from the line of Jon Tower from Wells Fargo. Your line is now open.

Awesome. Great. Thanks for taking the questions. David Overton, you'd mentioned earlier in the call taking measures to manage costs potentially above and beyond just pricing into 2022. So, I was hoping you could elaborate on what you mean there. Are you thinking perhaps appealing back on some of the menu options, or is there some labor management plans that you would expect to put in the system? I'm just curious what your thoughts are there?

Hey, Jon. It’s Matt. I think that we have opportunities relative to where we were pre-COVID, as well as opportunities that present themselves from the current environment. For example, we continue to look at opportunities to improve the supply chain and what our providers can do for us to remove steps in the kitchen, right? I think it's pretty tough, in full-service casual dining to replace kitchen roles with robots, but you can improve some of the steps, whether you're pounding chicken or deveining shrimp or things like that. I think also just even looking at coming out of this environment, the productivity has been very strong. We’ve had elevated training, recruiting, and overtime costs. But when we look at it from a productivity standpoint, we're actually ahead of where we used to be, partially because we have slightly elevated check averages. We’ve done a great job designing our workflows around the on-premise and off-premise channels. So, our approach is typically around continuous improvement. I would expect it would be sort of like that. I wouldn’t expect to see any menu reduction at all. We believe that that's a key driver of sales and is important in keeping sales levels high, so that we can recapture the margins.

Makes sense. And then, just going to the loyalty plans that you outlined, at least on the last call or at least talked about it. Was there any spend in the third quarter related to that? And where are you in the process of rolling it out?

There was only a nominal amount in the third quarter. I think where we thought we would be, what we said last time is that it would be next year. We still think that that's right. I don’t think we have a further update with more specifics. Hopefully, by the next call, we’ll be able to fill in a little bit more of the timeline.

And then, just lastly, on average weekly sales, you talked about $213,000, at least quarter to date right now. Correct me if I'm wrong, but October is seasonally the slowest point for average weekly sales during the fourth quarter, historically, and this year obviously…

Yes. During the fourth quarter, that is correct. We feel good about where we are; if you look at the comparable basis, the quarter-to-date figure of 10.5% is really strong. This also includes the Halloween weekend, which is traditionally not a great sales period.

Your next question comes from the line of Sharon Zackfia with William Blair.

I guess, just one kind of clarification question and a real question. So, given the shift in New Year's Eve out into fiscal '22. Should we expect a wider gap between comps and average weekly sales? I take that as normal. My second question was really on price elasticity of demand. I think you mentioned that one of the findings was the value and breadth of the menu and how much your customers really like that. I heard what you said about pricing and what you could do. I guess, how willing are you to try to fully inoculate your margins into 2022? Do you have any learnings on multichannel customers that might help you think about that process?

Good questions. The first one, I think the answer is yes, technically, right. To the New Year's Eve, the comp versus the AWS because you're obviously lapping that big couple of days and nights there. So, I think there’s a little bit of a differentiation. On the second piece, when we look at the overall price elasticity for Cheesecake, we're pretty confident where we are at, given the breadth of menu offerings and the breadth of price points in there. I think also, one of the things that we always do is look at the competitive environment. We typically have been right in the middle of where we see the average pricing across the nation. Based on what we’re looking at and what we need to cover margins, we would be probably a little bit below what the averages are that we're seeing. We feel good about that from a competitive standpoint as well. We’ll always look to ensure enough value on the menu for every guest. But, we believe we're in position to fully cover the cost of sales and labor as we see it today. I mean, things can always change, but based on today's trends, we believe that to be the case. I think from the omnichannel perspective, one of the things that is evident, and we didn’t touch on that is that our frequent guests are omnichannel. They come to us with delivery, pickup, and on-premise. That speaks a lot to the value that they see, based on the quality of the food, the portions, as well as the experience when they come on-premise. We've seen that piece, as David Gordon mentioned, increase. Those loyal guests view the value proposition as having gotten stronger in this environment overall.

Your next question comes from the line of Jeff Farmer with Gordon Haskett.

You touched on it a couple of times, but I'm just looking for a little bit more color here. So, just in terms of the strength of sales improving Q4-to-date, it looks like pretty much across all your concepts. Are there a couple of things you could point to that are driving that strength? What are your thoughts on the sustainability of that top line momentum?

Well, I think it is across all concepts and pretty much in all geographies. I think execution is what always drives outperformance versus the market, and we certainly are doing that. I think that the operations teams have been amazing to kind of weather the storm that everybody saw in the summertime, to keep our staffing levels at about the same level, so that we could manage the business is incredibly important. You hear about restaurants that are closing shifts, closing days, or limiting service. For the most part, we've accommodated all of our guests. I think that has played a part. I think all of the things that we have done to drive the value and to be accessible in all the channels supports that as well. So, I think it's probably a little bit of everything, not one factor in total. It's impossible to predict. I would say that we've probably been the most consistent sales brand in the industry over the past six months, and that's a testament.

And then, just a quick follow-up, again something that you touched on briefly, but you did point to pockets of staffing shortfalls and again just you, and again, you just referenced that. But in terms of the common themes, in these pockets, from a labor, sort of supply-demand perspective, what is going on in these pockets? What is the common theme in terms of seeing the staffing levels being a little bit lower than you'd like them today?

I think, this is relatively — Jeff, this is David Gordon. It's relatively unpredictable, to be honest. There is no consistent theme. It can be one part of the country one week, and then suddenly, it's a different part of the country. But to Matt's point, it's not meaningful enough for us that it's really having an impact on sales, as you can see from the sales. Our teams continue to focus on retention, which I think has been valuable for us to be able to keep stations open without being closed any day of the week and to sustain our hours— all of that is driving sales. It seems like it's been a little more stable in the most recent weeks, which is great. I mentioned the Huntsville opening being fully staffed and ready to open. The other thing I would add is that our strategic decision to keep all of our managers in place throughout COVID has really helped us as sales pick back up. We didn't skip a beat operationally, and although it's challenging, the operations team, I think because of that decision and the retention of the staff and our tenured staff that we've had, have been able to execute at a really high level to maintain the types of sales that we've seen.

This is Matt again. I would just add one more thing and just give a shoutout to our supply chain team. Another piece of this is you've got to have the staff and the product. They have worked tirelessly. We have probably the best vendor support in the industry as well. The long-term partnerships that The Cheesecake Factory has—certainly things are a bit more expensive and there are more fire drills than usual—but making sure that you can have our full menu or very close to it all the time is also super important.

All right. Very helpful. Thank you.

Your next question comes from the line of Jared Garber with Goldman Sachs. Your line is open.

Hi. Thanks so much for the question. I wanted to circle back on the prior question related to staffing issues or lack thereof. But our contacts would suggest that there are pockets of restaurants that continue to be either closed or shut off or whatever sort of the right terminology is. I wanted to get a sense of—and you noted, obviously, sales volumes seem pretty healthy. You noted that there wasn't much of an impact there. I wanted to get a sense of if you think that some consumers that maybe are shifting towards the off-premise channel who would have dined in. I don't know if there's a way to tease that out from your data, but I'm trying to get a sense of if some of the off-premise strength is due in part to some sales throttling, if you will, in the restaurant. I have one follow-up on margins.

Jared, this is Matt. I think, on the fringe, it's just pretty difficult to figure that out. But the thing that we've known most of the time is that the guests are choosing based on what their occasion is—not necessarily that they are going to go to the restaurant next to us, and that restaurant was closed when they got taken out. They are going to go dine on-premise, and they’re willing to wait. On Saturdays, our wait times are back up to what they were historically. I think it's not so much that. I think it's just the occasion base that you're choosing just to go to.

Got it. That makes sense. And are you seeing any shifts in maybe in day parts or weekend versus weekday usage as we move further away from the height of the pandemic?

I’m looking at our stack pack right here for the quarter, and it's remarkably consistent. Nothing moves more than half a percent, really, to be honest. We've probably seen, to be fair, on the days of the week, a little bit more strength in the early midweek. That could be a little bit of a result of other companies closing on a Monday or Tuesday or something like that. Obviously, we have the capacity, but in terms of the day parts, we’re still coming up across all the days, but I think a little bit stronger Monday and Tuesday.

And just one more on—I think, on the margin side. You mentioned earlier that North Italia might be seeing a little bit more of the staffing or labor challenges versus the rest of the business. I just wanted to get a sense of maybe why that is. Is it related to geography, demographics, or something along those lines?

I just think there are two things. It's the size of the concept, right? We're talking about not even 30 locations yet. We're comparing it to The Cheesecake Factory, which is best-in-class. You've got a tall order in comparison. I think that they're really doing a great job, as you can see by their quarter-to-date sales numbers, stabilizing their staffing. Everybody saw mid-summer a big crunch. I just think that we're comparing to a very tough competitor there and ourselves.

Your next question comes from the line of Jeffrey Bernstein with Barclays.

Two questions. The first one, just in terms of the broader restaurant margin outlook. Just wondering for 2022, in theory, is the goal to hold margins flat, presumably using pricing as needed beyond the productivity initiatives? Just wondering if that's kind of the goalposts. In which case, specific to pricing, are you willing to take pricing at the risk of traffic, or do you prefer to be concerted on that front, maybe take a little bit of margin pressure, but with the idea being to keep the value proposition strong, just trying to measure your intent around pricing to protect the margin.

Hey, Jeff. It's Matt. I think it's definitely the question of the quarter. You just nailed that. I would say a couple of things. Pricing is a little bit art and a little bit science, and we do want to get it right. You can see that by the cadence of our actions and we're keeping our pricing in the fourth quarter. We didn't preemptively put some extra in, in December. We're looking to see what the commodities market really is going to be. It's kind of a logjam right now for some of the key proteins as well. That being said, when we look at our sales levels, we certainly can absorb an incremental 1% or 2%. I don't think that we're sacrificing really on the top line to be able to protect margins. If there was some degree of elasticity and it were a 1% impact off of 10.5%, but we could protect margins, I think that we would view that as being a fair trade-off. Right now, we don’t think that would even be the case.

Understood. The follow-up is just on the to-go business. It seems like you're excited by the strength and maybe even the acceleration in it despite people returning to in-restaurants. I'm just wondering how you think about the unit economics with the increased off-premise? Does that change materially, or does that maybe increase the unit growth potential that you have for, I guess, presumably The Cheesecake would be the one that gets most attention, just trying to assess the impact from the growth in off-premise?

I think there are two parts to that. The first part is that we look at the total—when we think about growing restaurants, the total opportunity. It appears there's some stickiness that could increase the AUVs. But, I mean, the markets we're going into we feel confident going into. So, I don't know; I think it's too early to say if it opens up anything new. The economics though, in total for the off-premise are about the same as on-premise. Labor is a little bit of a different model. Certainly, with delivery, you've got the commission piece, but it nets out pretty equally. So we're agnostic. We only take very low double-digit—or single-digit pricing for delivery, because we want to be as competitive as possible. I think that’s worked out for us. We’ll drive omnichannel, whichever the guest wants to do.

Your next question comes from the line of John Glass with Morgan Stanley.

First, Matt, if I could just follow-up on the last question. Is it the goal—do you think with the pricing you contemplated and you know about inflation, that you can hold restaurant margins flat from a full-year basis in '21 to '22? Is that what you're saying, if you wish to? Or is it higher? I want to make sure we planned in the right place?

Yes. When we look at, in totality, right, so there are a couple of things. There are restaurant-level margins, and there are total EBIT. We are getting leverage on the G&A and the fixed appreciation. When we look at it in total, we're also thinking about getting back to the 2019 level. That’s what we've been shooting for. Obviously, there's a lot of noise in the pandemic-related issues. We have sufficient pricing power to get back to the 2019 levels. What do we mean by kind of flat? This year is not really a good comparison because the first quarter was so far off, and you've got some other noise. But we think that's true.

Okay. And EBIT level, like my model 5% would be sort of what you shoot for in '22? Is that the right way to think about it, not at necessarily the restaurant level, but an EBIT level?

I mean, we're still going to be working through some of that math. I think certainly, with the leverage that we're getting, we might get back to flat four-wall margins too. It depends on some of the inflationary pressures.

Got it. That’s very helpful.

John is a good goalpost to somebody else's term.

Got it. Thank you very much. When you think about the restaurants in total, I’m talking about North Italia and others, have you thought about how you market those brands, particularly going into new markets? Is there existing brand awareness? What do you use to build brand awareness, I guess when you enter the markets for those newer concepts?

So, it's much more of a local philosophy than I think with Cheesecake Factory because of obviously the size of Cheesecake and its breadth. When we move into a new market, we do a lot of local marketing within that geography, whether that's boots-on-the-ground marketing to local businesses, friends and family marketing, some of what you would do in a traditional smaller company. We've even at points in time done things like rented a billboard, et cetera. The good news is we haven't had to do much marketing in those new markets, but there's been good buzz around the restaurants. We certainly use the social platforms aggressively. Instagram is pretty prevalent at all of the FRC concepts. They also have a good email database of guests that are already within their communication channels. So, it's a little bit of a different strategy at Cheesecake, and so far, because of the success we've seen in those markets, it seems to be working.

Your next question comes from the line of Mary Hodes with Baird. Your line is now open.

Good afternoon. Thank you for taking the question. On the 2022 outlook, just one clarification question. Would the theoretical pricing of 4.5% to 5% be enough to protect margins in 2022, given the outlook you have for both commodities and labor? I just wasn't clear whether that was what you would need to cover commodities or all the inflation.

Right. So, that's a great point to clarify, Mary. This is Matt. So that includes both of the major inputs. The commodities at the spot market and the labor inflation to about this year's level of 5% are contemplated in that pricing level.

Okay. And then, on staffing, is there a way to frame up what percent of targeted levels you're currently running at? If that's not 100%, what do you think is needed to get to a 100%? Is that just the external backdrop improving or are there other internal initiatives that you're planning to deploy to get back to a 100%?

Well, versus where our sales are at, we are not at a 100%. That’s been the challenge, but we are close to it. Because the sales level remain at the 10.5% level above 2019, it still remains tight. That’s why we still run a little bit higher in overtime and higher in recruiting costs because we need to continue to bring people in. We've been stable and kept the staffing levels about the same as they were from the busy summer months. That's pretty positive in the fall here. I do think there needs to be probably some continuous moderate improvement in the overall environment for all restaurant operators.

Mary, this is David. I would just add that our recruiting team continues to innovate on the attraction side to ensure that people know there are jobs available. Our operations teams continue to engage with potential employees quickly, which is one of the keys today to hire someone promptly. Whether that's using texts for recruiting or other methods, our corporate team is doing a terrific job of assisting the restaurants and ensuring that job ads are posted everywhere possible, and that there is very active recruitment going on, not just passive.

Okay, great. Thank you, both. I'll leave it there.

Your next question comes from the line of Dennis Geiger with UBS. Your line is now open.

Great. Matt, wondering if you could come back to the North Italia margin structure a little bit. Just wondering if you could highlight sort of where the more mature margins are versus some of the less mature stores recognizing that I think probably more than half of the store—North stores are non-mature stores at this point. But just curious anything sort of less versus more mature, the gap there on margin, if that’s gotten any better or if it will going forward as the longer you've owned the brand or if it just takes time to mature and grow into those margins?

The North mature restaurant level margins for the quarter were 15.1%, which in the face of it seems like there’s a little bit of pressure versus Q2. We did note in the prepared remarks that the brand versus Cheesecake had about 200 basis points of incremental pressure on the cost of sales from buying in the spot market. From an aggregate level, the productivity was good. We saw some improvements overall if you factor in the fact that there’s just major disruption in the supply chain. The other components of the P&L were supported very well.

And then just one more, I just wanted to come back to that survey work that you talked about earlier. I understood it kind of the insights into the newer or the recaptured customers. Could you elaborate on the biggest factors? Maybe if some of it was the value more recently versus other brands that are out there, or maybe it’s the service level that you're doing a better job of in recent months versus others, or if it's just folks rediscovered you and everything the brand stands for is resonating? I'm just curious if there's anything more there on those factors? Thank you.

Great question. This is David. So, I think everything the brand stands for resonated. Reminding guests that we are out there and easily accessible through the off-premise channels was meaningful, with many guests who hadn't been using those for off-premise before. I think our omnichannel approach that Matt talked about in marketing to support that was really beneficial. One other thing I didn't mention was they also scored us very high on all of our COVID safety protocols. We received a lot of positive feedback. The guests felt very comfortable with everything that we not only said we were doing, but they actually saw once they were in the restaurants. I think that contributed as well.

Your next question comes from the line of Brian Mullan with Deutsche Bank.

Question on restaurant level margins. I don't want to beat a dead horse. But I want to clarify something here, just putting aside the inflationary environment, which you laid out how you could price for. Matt, is there a way to think about any headwind or tailwind next year from the North and FRC acquisitions relative to the 2019 result of 15.7? The units you acquired, the units you've opened since the ownership, your plans for 7% unit growth next year? Is there any drag from those units that you anticipate, at least in the near-term?

It's a fair question. Because of the growth orientation of those brands, we would expect that their margin structure would be slightly below that of Cheesecake just because of the weighted perspective of the newer restaurants. I think that has the potential, but I don’t think it's too big when we’ve modeled it out. There is potential for a little bit there. When you look at one of those brands, it could be 2% to 4% below Cheesecake, depending on how many units have opened in the near-term. I think you could kind of model something like that in.

Okay. Thanks. And then follow-up, just a question on Flower Child. Can you just talk about where you are with that brand and do you have the model right? What are some of the key operational metrics that you'll be watching with those new openings next year? What would it take to want to take that brand over fully to corporate the way you did with North Italia? What would be some of the benefits if you were to make that move? Why would you do that?

Great question. We're sitting at 28 Flower Child restaurants today in 10 different states. Again, like North, they continue to do well, just about every new geography that they moved into. We have a Cheesecake Factory leader that's been now at Flower Child coming up to two years, helping work through what we believe are some operational opportunities. In the short term, I'd say Flower Child will continue under the—everything happening at Cheesecake and the close of North. We have a solid team with the gentleman from Cheesecake Factory, but with Sam Fox and the entire team over at FRC operating those Flower Child today, which allows us to stay focused on Cheesecake Factory and the growth at North. That will be the near-term plan. But we are leveraging supply chain, one of the areas we will continue to focus on for next year to help within the model to manage food costs to help maybe with some contracted pricing on some of the stuff we've already talked about on this call. I think we can do that without taking over operations of Flower Child in the short-term.

Your next question comes from the line of John Ivankoe with JP Morgan.

Many of your restaurants, or I guess all of them, still include a fairly similar service style—a traditional service style that has been run for the past couple of decades. Does the current cost environment, labor availability environment, and technology availability encourage you to rethink the way that customers are served in any way, and do you think that could potentially drive more throughput and/or drive more efficiency in your various full-service boxes? Thanks.

Hi, John. Thanks. This is David Gordon. We are the leaders in experiential dining, and we consider ourselves to be high touch and high service. We want to provide a level of hospitality that shows we really care about guests, and I think it drives some of the sales that we've talked about today. People want to get value through hospitality, not just get in and out of the restaurant as fast as they can. That doesn’t mean we won’t look for ways to use technology, as Matt talked about, or who knows what we might do in the front of the house. I think we've talked about not putting tablets on the table. That's not the style we want in high-end casual dining. There may be other ways to evaluate whether that's payment processing or ways to improve the guest experience without removing the hospitality that I talked about. We'll continue to evaluate what we can do in that area, but we anticipate that we'll continue to be leaders in the world of hospitality, which we think helps drive the longstanding sales that have always been good for Cheesecake Factory.

Your next question comes from the line of Brian Vaccaro with Raymond James.

Can you just clarify the comment you made on the average staffing levels? I think back in July, you were a little over 100% of '19 levels, if my notes are right. Are you still in that ballpark, or you're just saying you're below what you think you need to sustain to 110? Maybe you're in that 1% to 105% level? Can you just clarify what you were saying there, please?

It does move a little bit month-to-month, but I think we're right around the same level of staffing that we were in late June, early July of this year—maybe slightly below 100% of 2019. So within a percent or two of both those metrics, which means we're a little below where we’d like to be, given the sales levels.

And I think you also said you're seeing some green shoots in the labor market. Can you just elaborate on what you're seeing there? Maybe comment specifically on the differences you might be seeing in new applicant flow versus the turnover rates or any other dynamics you think are worth highlighting?

The turnover rates have certainly stabilized over the past few months, and that's been beneficial. The green shoots are just references to certain markets where the staffing availability has just been a little bit easier than it had been probably for the previous quarter. Again, it is very dynamic and changes, but it feels like things are stabilizing a little bit more. Being able to staff a full restaurant in Huntsville, you're talking about over 200 staff members, which is very promising in a market that has a 2% unemployment rate. So, that gives us a little bit of hope.

This is Matt. I would say two other things on that. From an applicant flow perspective, I believe we're seeing the same number of applicants as we did in the middle of summer. Again, that’s a positive relative to a slower period that October is. The wage rate inflation that hit peak kind of mid-summer is back to our norm anyway. So, I think you're seeing a little bit of moderation back to the mean over the past two months.

And then, on Flower Child, it looks like the AUVs are running in that kind of mid $3 million range in the last two quarters—pretty good run right there. David, I think you said it was strong so far, but what is the off-premise mix for Flower Child in recent quarters?

Roughly 40% to 45%; it depends on the location, but I'd say on average about 40%.

And Brian, you're right. We've seen really good stability in the brand with the sales right around the $3.5 million to $3.6 million levels. That's with the new development and new markets. Arizona has been strong, but seasonally could get a little bit slower and yet we held the same sales level. We’re really impressed with how we’re seeing that play out against different geographies, and the stability of the sales trends has been noteworthy. So, I appreciate you bringing that up. And just last one—bookkeeping question. Matt, I'm sorry if I missed it, but what were bakery sales in the third quarter? $16.7 million.

Your next question comes from the line of Andy Barish with Jefferies.

Hey, guys. Good afternoon. Hey, Matt, can you just give us in rank order what capital allocation would look like for next year, just given what looks to be pretty significant increases in free cash flow?

Sure, Andy. It’s often overlooked but super important part. Obviously, the CapEx piece we laid out was about $150 million to build those restaurants and the maintenance. I would say, based on our recent Board discussions, we are interested in bringing back the dividend; we need to be outside of the revolver amendment. With current performance, we believe that will come into play. That would certainly rank up there. We could choose to also pay off the revolver. I think those will come in ahead of a repurchase initiation if we were to get there next year.

There are no further questions at this time. Ladies and gentlemen, thank you for attending. This concludes today's conference call. You may now disconnect.