Cheesecake Factory Inc Q1 FY2022 Earnings Call

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 First Quarter Fiscal 2022 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. Etienne Marcus, Vice President of Finance and Investor Relations, you may begin your conference.

Thank you, Emma. Good afternoon, and welcome to our first quarter fiscal 2022 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 from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available on our website at investors.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 exclude impairment of assets and lease terminations, acquisition-related contingent consideration, compensation and amortization expense, as well as a reserve for uncertain tax positions. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our press release on our website, as previously described. David Overton will begin today's call with some opening remarks, and David Gordon will provide an operational update. Matt will then briefly review our fourth quarter results and provide a financial update. With that, I'll turn the call over to David Overton.

Thank you, Etienne. We delivered another solid quarter, with total sales in the first quarter of 2022 increasing 27% over the same quarter in 2021, underscoring the strength of the consumer demand for our brands and demonstrating our ability to capture market share. First quarter 2022 comparable sales at the Cheesecake Factory restaurants increased 20.7% relative to the first quarter of 2021 and continue to outperform both in KNAPP-TRACK and Black Box casual dining indices. Our operators did a great job of managing their restaurants and building sales. They remain focused on fostering an environment where delivering delicious memorable experiences for our guests is a top priority. And I am proud that we were recently recognized as one of the 100 Best Companies to Work For by Fortune Magazine for the ninth year in a row, reinforcing that we continue to be an employer of choice in the restaurant industry. To that point, our staffing levels have further improved since our last earnings call; mid-February, we now have approximately 1% more staff members than we did just prior to the pandemic. Our first quarter sales momentum has continued into the second quarter with comparable sales at the Cheesecake Factory through April 26th at a positive 8.2% versus the same time period in 2021. Keep in mind this is a pretty good like-for-like comparison, as we are now laughing the reopening of nearly all of our indoor dining rooms. Turning to development, while all of the sites that we have been working on remain in our pipeline, we are cognizant of the current environment and the effects supply chain, governmental and local jurisdiction permitting approvals are having on the timing of our openings. As such, we now expect to open as many as 15 to 16 new restaurants in fiscal year 2022, including four Cheesecake Factories, four to five North Italias, and seven other FRC restaurants, including three to four Flower Child locations. We currently also expect one Cheesecake Factory restaurant to open internationally under a licensing agreement. Despite these challenges, many of which are out of our control, we continue to ramp up unit development towards our 7% annual growth goal. In addition to investing in unit growth, given the sales strength and our confidence in the cash generation ability of our business, we are paying a quarterly dividend and we will reinstate our stock purchase program. I recognize that the environment is dynamic and we continue to face substantial challenges with high commodity inflation, a tight labor market, and further supply chain disruptions. Despite these headwinds, we remain committed to protecting our four-wall margins over time and as noted during the last call, plan to take the appropriate pricing in the summer to do so. Our brands remain resilient, and I am confident that our best-in-class operators will continue to effectively manage this volatile operating environment. With that, I'll now turn the call over to David Gordon.

Thank you, David. We're very pleased with our first quarter sales growth, showcasing our operators' commitment to excellent service and hospitality, and their ability to execute at the highest levels to capture incremental sales and manage operating expenses. As David mentioned, our staffing levels continue to improve both relative to where we began the quarter as well as compared to pre-pandemic levels. In the first quarter, we once again drove sequential improvements to both our Cheesecake Factory manager and hourly staff industry-leading retention rates. We continue to see positive momentum in hourly application flow. Applicants to neat ratios are at the highest levels since the pandemic began for several positions, including cooks, prep cooks, and servers. Total hourly staffing levels increased by over 3% from the end of 2021 and are now about 1% above pre-pandemic levels. The Cheesecake Factory off-premise channel trend remains solid and steady, with first-quarter sales accounting for 28% of total sales. The annualized first-quarter average weekly sales for this channel continued to trend close to twice the 2019 annual levels. Now, turning to North Italia, first-quarter comparable sales grew an impressive 32% versus 2021 with improvements in all day parts and all geographies. The second quarter has also started strong with quarter-to-date through April 26 comparable sales up approximately 18% versus 2021 levels, with off-premise comprising approximately 13% of sales at North. This is a true comparison as we are now lapping the reopening of nearly all of our indoor dining rooms. FRC drove similarly strong top-line performance during the first quarter, giving us confidence in the developing brands in our portfolio and our ability to contribute to our overall growth. To realize these sales levels, our supply chain team has worked tirelessly throughout the pandemic to ensure our restaurants have the products they need to serve our guests. The strength of our supply chain network, including our long-term vendor partnerships enables us to continue to offer our large differentiated menu with minimal product disruptions and equally important, minimal operational distractions, allowing operators to be laser-focused on delivering exceptional service and hospitality to each of our guests. Before I turn it over to Matt, I wanted to provide an update on some of our corporate social responsibility efforts. We have an established track record of leading and operating our restaurants in alignment with environmental sustainability and social responsibility. Given the challenges we've faced over the past two years, our resolve to contribute to the well-being of our staff, local communities, and the environment we all share has only increased. Throughout the pandemic, we've undertaken significant efforts to protect the safety of all of our staff and guests. Some of these efforts include encouraging our staff to keep themselves safe by receiving the COVID-19 vaccine and booster shots, providing special vaccine pay, enhancing sick pay benefits, and providing access to mental health counseling at no cost. We have also made substantial progress on many other environmental and social areas. Let me highlight just a few: On the sourcing front, we are now sourcing 100% cage-free eggs for our restaurants and committed to working towards the transition of bakery operations to cage-free eggs by the end of 2022, three years ahead of our schedule. On the diversity and inclusion front, we've increased our commitment to fostering an inclusive environment with the formation of our diversity, equity inclusion and belonging steering committee, and implementing several new programs, including our leaders of color program, mentoring programs, and rolling out de-escalation training for all of our managers in the field. Lastly, on the environmental front, since 2015, we have reduced our restaurant portfolio greenhouse gas emissions intensity per square foot by almost 20% and recently committed to reducing carbon emissions in line with the Paris Agreement, an international agreement adopted to address climate change and its negative impacts by limiting global warming to 1.5 degrees Celsius. We are working towards an annual reduction of greenhouse gas emissions with the goal of achieving 1.5-degree-aligned net zero emissions by 2050. This is the natural evolution of our sustainability strategy, and of our more than 40-year legacy of doing the right thing for our guests, our staff, and our communities. Many additional efforts are outlined in our corporate social responsibility report. We expect to publish our newest report in the coming weeks. Of course, none of these results will be possible without our best-in-class operational teams. I would like to thank all of our dedicated staff members and managers for their resiliency in navigating through non-stop change, while continuing to deliver delicious, memorable experiences for our guests. And with that, I will now turn the call over to Matt for our financial review.

Thank you, David. Our first quarter results reflected more stability and predictability than we have seen throughout the pandemic, both on the topline and bottom line. Specifically, our total sales and key business drivers were mostly in line with our expectations. That said, operating income was negatively impacted compared to our expectations by approximately $3 million in total from slightly higher than expected inflation, hourly wage, COVID-19 related sick time, and natural gas costs. However, we generally believe these impacts to be environment-driven. Now, to some specific details around the quarter: First quarter comparable sales at the Cheesecake Factory restaurants increased 20.7% year-over-year. Revenue contribution from North Italia and FRC totaled $137.6 million. North Italia comparable sales increased 32% year-over-year. Sales per operating week at FRC, including Flower Child, were approximately $111,000. Including $15.3 million in external bakery sales, total revenues were $793.7 million during the first quarter of fiscal 2022. Now, moving to expenses: As usual, I'm going to provide year-over-year detail on expenses, but of course, note that there continues to be some disparity in revenues, given the impact from COVID over the past two years, and with that, some corresponding impact to margins. Cost of sales increased by 200 basis points, primarily driven by significantly higher commodity inflation than menu pricing. Labor increased 70 basis points, primarily driven by higher wage rates and partially offset by sales leverage. Other operating expenses declined 270 basis points, primarily due to sales leverage relative to the prior year period and partially offset by lapping lower general insurance claim activity. G&A as a percentage of sales declined 90 basis points, also primarily due to sales leverage and a lower bonus accrual related to outperformance in the prior year quarter. Preopening costs were $1.8 million in the quarter compared to $3.9 million in the prior year period. Last year, three restaurants opened during the first quarter, and a fourth opened the first day of the second quarter versus zero openings in the first quarter of this year. In the first quarter, we recorded an after-tax $0.8 million charge primarily associated with FRC acquisition-related items. First quarter GAAP diluted net income per common share was $0.45, adjusted net income per share was $0.47. Now, turning to our cash flow and balance sheet: The company generated approximately $34 million of cash flow from operating activities during the first quarter, with ending total available liquidity of approximately $424 million, including a cash balance of about $184 million and $240 million available on a revolving credit facility. Total debt outstanding was $475 million. CapEx totaled approximately $29 million during the first quarter for new unit development and maintenance. While we will not be providing specific comparable sales and earnings guidance, given that the operating environment continues to be very dynamic, we will be providing our updated thoughts on our underlying expectations for the balance of 2022, including some timing nuances, similar to our approach last quarter. Based on first quarter performance, more recent trends, and assuming no further material impacts from virus surges, we would continue to anticipate total revenues for the year could be approximately $3.3 billion to $3.4 billion, with Cheesecake Factory AUVs reaching over $12 million. Note that this includes the impact of the 53rd operating week we have this year. Next, for fiscal year 2022, we now expect commodity inflation of low to mid double-digits on an annual basis, which represents a 1% to 1.5% increase over our prior outlook based on what has happened in the marketplace as a result of the geopolitical turmoil. We continue to model for year-over-year commodities pressure to lessen as we go through the year, with mid-teens pressure in the second quarter and ending with high single-digit pressure for the fourth quarter. On an absolute cost per unit basis, we continue to model commodities to be fairly stable through the year, but the volatility inflation is driven primarily by the comparison to the different price points and the corresponding quarters in 2021. The labor market also continues to be dynamic with a lot of moving parts. Inclusive of known minimum wage increases, we're now modeling net total labor inflation of about 6% when factoring latest trends and wage rates, channel mix, as well as other components of labor. While we still dealt with some volatility in the first quarter as you might expect, we anticipate some normalization in other operating expenses going forward. We now expect to be around 25.5% of sales for the second quarter and with the benefit of pricing over time, we would anticipate we could end the year at about 25% of sales with a third quarter roughly between those points. As noted last quarter, we remain committed to protecting our longer-term four-wall margins. However, also as previously noted, we will likely continue to absorb short-term cost fluctuations driven by the current environment. To that end, we would anticipate taking another menu price increase towards the middle of the third quarter as is our historical norm. We are currently evaluating the level of pricing needed to regain our 2019 four-wall margins in the back half of 2022, which remains our objective. It seems reasonable to assume it will need to be above the 1.5% to 2% reference in February, given the increases in commodities and labor inflation versus our prior expectations. Below the four walls, G&A is basically in line with our prior projections and we continue to anticipate G&A to ramp up to $55 million by the fourth quarter, which, as a reminder, includes an extra week this year. We are now assuming preopening costs of about $18 million for the year to support our development plans with approximately three-fourths of the expense occurring in the back half of the year. Finally, we expect about $90 billion in depreciation for the full year, and for modeling purposes, we are using a tax rate of 11% to 12% for the balance of the year. Now, let me provide a little bit more detail to help with the second quarter. First, if we take a similar approach to full year and extrapolate our current sales trends for the balance of the quarter, assuming no further material disruptions, we would anticipate Q2 to be between $830 million and $850 million in total revenue. As I stated during our last call, with the difference in commodities inflation by quarter, as well as the timing of our pricing actions, we would expect our four-wall margins to improve relative to 2019 as we move through the year. We now expect the second quarter four-wall margins to be about 200 basis points below 2019 levels for these reasons. With regard to development, we plan to open as many as 15 to 16 new restaurants this year, most of them in the second half of the year. We would anticipate approximately $150 million in CapEx to support this level of unit development, as well as required maintenance on our restaurants. Note that this includes some CapEx for locations that have shifted into 2023. As David Overton mentioned, we are paying a quarterly dividend and reinstated our stock repurchase program. In closing, our sales trends remain solid, underscoring the strength of consumer demand for our brands while our key business drivers and expenses appear to be returning to more historical levels of predictability. While current inflation in our industry is unprecedented, we continue to believe the strategic pricing plan we're implementing remains appropriate and can deliver solid earnings per share and help recover profit margins in 2022, while importantly protecting our brands to enable long-term market share gains. And with that said, we'll take your questions.

Your first question today comes from the line of Nicole Miller with Piper Sandler. Your line is now open.

Thank you for all the information and good evening. I was wondering if you could discuss the current environment and what you anticipate it might look like come summer or beyond. I understand that you're not seeing any changes today, but there seems to be some uncertainty. I would also like to know more about the stage gate process. If conditions were to soften, would you proceed with your store development objectives, or would you consider slowing down to conserve capital? How would you manage that with the current pipeline? Would you be in a position to continue moving forward, particularly regarding development?

Hi, Nicole, it's Matt. I think, to start with the first part, it is tough to predict too far out today, right in the environment. The one thing that has occurred, which is what we thought would happen, is that consumer demand for our brands would exit the Omicron surge even stronger, and so once again, I think we've seen that occur. Certainly, our Q2 to-date sales trends are very good and would indicate that even at a slightly lower level than that, we would still be in really good shape. So, I think that the business strength can absorb a little bit of uncertainty, regardless of what happens. From a capital planning perspective, while we are confident in reinstating a quarterly dividend in Q2 and our stock repurchase plan, we are maintaining a very healthy level of liquidity and a cushion in our outstanding expectations for cash flow, such that we will continue with our growth plans no matter what. I think that what we're seeing is that that is the right course of action because the consumer demand will be there, and our new units continue to outperform our expectation. So, I think we feel good. I think we have confidence that we can buffer against that given the strength of our trends. And so we know whatever happens, we'll be prepared.

I'm trying to get clarity on store level margins under normal circumstances. Recently, I visited Bronco and it prompted me to consider best practices. I noticed there are about six of them now. When thinking about a portfolio strategy, what potential do you see for scale, efficiencies, or even culture? How does that shape your outlook on store level margins in the future? What factors contribute to that improvement? I believe the acquisition was driven by the goal of achieving higher restaurant level margins.

Sure. I think that it's, again, sort of related back to the environment over the past two years. It's hard to correlate even the last quarter performance to where we think we can go as a business. The underlying margin strategy around the portfolio, whether it's Cheesecake Factory, or North or any of the FRC brands is to return to pre-pandemic levels, right? So, it's a very consistent thought pattern. It may vary slightly by brand, depending on the sales levels and pricing and the inflation that they're seeing, but the overarching strategy is to return to those pre-pandemic levels. North Italia and some of the FRC brands had slightly higher margins pre-pandemic than Cheesecake Factory. So, we would still be shooting for what those are. That being said, our near-term focus on the margins is to get back to that second half of 2019 levels. I think if we achieve that, that'll be a good first step to getting to the longer-term margin target.

And Nicole, this is David Gordon. Just to add to that, I think when we think about the larger strategy of leveraging the bigger company for the growth of those concepts, we think about supply chain as an example. Everything that the restaurant industry has gone through recently, our ability at North and more recently, even at Flower Child to leverage the Cheesecake Factory supply chain channel has really been a good differentiating factor to allow them to operate as well as they are. Some of the learnings and the cross-functional learning being part of the bigger organization will continue to leverage over time as we bring the other brands under more of the Cheesecake Factory umbrella.

Thank you. Appreciate it.

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

Hi, good afternoon. I guess two questions, and I guess I'd be more curious about either March or April. Where is on-premises now for Cheesecake Factory versus pre-pandemic? Kind of if you look at, however, you, Matt, you kind of monitor utilization inside the box?

Sharon, this is Matt, and I'll turn it over to you on the capacity. We're roughly on the on-premise side between 85% and 90% of the traffic that we were pre-pandemic. So, certainly, we have the capacity to continue to increase that meaningfully. Right? So like, I mean, on a rough perspective, we could probably pick up another, I guess it'd be $1.5 million annualized from this run rate on-premise. And that would just get us back to where we were.

That's very helpful. Are there any particular areas of the country that are lagging there or any day parts or days of the week where you do see a more meaningful gap versus pre-pandemic?

Well, the one area that I would tell you sort of universally is in the more urban and tourist locations. We are starting to see a little bit of improvement in those, but they have still lagged a little bit over time. Otherwise, it's been, I would say, pretty consistently strong. As both David Overton and David Gordon mentioned, our staffing is good, but it's not perfect. The only other thing would be in those locations where we might have a pocket of opportunities where we could have a few more staff members, right? But that's not a geographic-specific; that's more of a restaurant-specific thing.

I have one last question about the eighth comp you have for the second quarter. Does that show positive traffic? I'm also interested in whether you're experiencing a negative shift in average ticket size as on-premise dining grows faster than off-premise.

Yes, all those metrics are a bit unusual, aren't they? To put it simply, we have 4.7% pricing and are at 8.2%. Year-over-year, you're seeing an increase of about 3.5% in traffic. We measure off-premise, which accounts for one guest per order, and the overall mix is somewhat unusual. Our on-premise average ticket is continuing to change with pricing. We noticed an increase, especially in experiential dining concepts during the pandemic, and that trend has remained stable. There are minor fluctuations, perhaps a bit more alcohol and slightly more desserts, but overall, we are essentially seeing a price increase in the average check year-over-year.

Thank you.

Your next question comes from Brian Bittner with Oppenheimer. Your line is now open.

Good afternoon. Thanks for the question. Following up on that, is there a reason to believe traffic inside the box can and will get back to pre-pandemic levels in relatively short order? Basically, do you believe there's a traffic recovery still out there as we fully normalize? Or is the current mix of the business kind of the new normal we should expect?

Brian, it's Matt again. I'll just reiterate a little bit what I've said, so it's just it's hard to predict what that will be from a consumer standpoint. Certainly, we've seen pretty steady performance, increasing over the past 12 to 15 months with the various stages of reopening. So, I don't think there's anything that's happening that's going to be quick; I just think that the strength of the business puts us in a position where we're going to have really good sales trends. I do think that consumers are in a good spot; we might see an uptick in some casual travel during the spring and summer that could continue to support those areas that I mentioned or had opportunities for us. But those are the trends that we're seeing today. I think it's better than where we were even in the fall. But I don't think anything happens; it's going to be a quick jump.

Got it. And a follow-up is just on margins. Margins in the first quarter, for the most part, were pretty in line with what we're all expecting, except there was a delta versus expectations in that operating expense line. I believe you expected that line item to come in around 25.5%. So, what really specifically surprised you in that line item, that the natural gas incrementality was in that was kind of pressuring that line item potentially moving forward?

Yes, for sure; natural gas was part of the problem. And obviously, it seemed to be on the right trajectory for us in January. Then certainly with the geopolitical news, it spiked back up to even worse levels than we saw in the fall. The other areas, I would say that we saw a little more pressure than we originally anticipated, was in some of the building repairs and maintenance. That goes hand-in-hand with some of the supply chain and labor constraints that you're seeing, right? To make sure you can get a plumber or an electrician to come out and fix a piece of equipment or something is a little more expensive today, obviously, than I think we expected based on some of the demand. So, those are the two areas. I would expect some of that to continue into the second quarter. Hopefully, begin to normalize after that, but that's where the pressure was.

Got it. Thank you, Matt.

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

Great, thank you. Just looking for some insight into your core customers' behavior with some of the recent macro factors that we've all been contending with, meaning the jump in gas prices, war in Ukraine, inflation. Have you seen a change in behavior in terms of frequency of your guests or even how your guests' spend is impacted?

Jeff, this was Matt. I don't have the specific data because we're not obviously yet tracking those guests on a site visit-by-visit basis. But just what I would say kind of interesting, in our opinion, is the first quarter had some noise to it, starting with Omicron, and then certainly the startup of the war and the inflation spiked up a little bit more. But as we look at late March in the mid to late April here, it's been very consistent and very predictable, kind of cheesecake, like I would say. And so that's with all those factors baked into it. And so I guess that's a pretty good sign.

Okay. And then just one quick follow-up. On a similar topic, so gas prices up, I'm curious how that's impacted the supply chain or the distribution costs. And it sounds like that's embedded in some of your guidance. Just as importantly, the third-party delivery fees, have you seen any movement there in terms of those fees moving higher?

Jeff, this is David Gordon. We haven't seen any changes in delivery fees; they've remained stable. Historically, gas prices don't significantly affect our core customers, who are generally insulated from that fluctuation. As Matt mentioned, there was some slight pressure during the initial weeks of the war, possibly because people were focused on the news, but things seem to have returned to normal since then.

And Jeff, this is Matt. On the cost side, there is a slight impact related to the increase in commodity prices for distribution. For each dollar of diesel, there is a small cost per box for delivery. Additionally, other factors like the avian flu are affecting the restaurant business and consequently impacting prices. There is a global impact from all these factors. Overall, we are about two-thirds booked for the next three quarters, which is close to our historical levels. As David Gordon mentioned in our prepared remarks, our supply chain team has performed excellently. What matters today is execution and ensuring that we can deliver experiences and products, and they have done a fantastic job. Therefore, we feel generally positive about the supply chain aspect.

Thank you.

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

Thanks very much. Can you first just go back to the sales in April, if you looked on a three-year basis, and I know we're no longer doing that, but it’s a pretty big improvement versus the first quarter and even the last three quarters. Do you think it's explained by the industry getting better? So, you have a gap in the industry? But the industry has gotten better, you continue? Or do you think this is driven more idiosyncratically by Cheesecake, sort of even further widening that gap? And you talked about them and holiday shifts or did it correspond with the reduction in mask mandates, for example? What happened, I guess, in April, that did drive a pretty material, at least what I look at as a material uptick in the business versus prior several quarters?

John, this is Matt and it’s a topic of a lot of discussion here. You're right, I was literally five minutes before the call talking about that metric. One of the things that we are highlighting is that we're moving a little more towards the year-over-year number because looking at three years back sometimes makes it hard to understand why one month performed better than another. There may have been events three years ago that influenced some of that change. However, the current performance is very strong compared to 2019. I believe part of this improvement is due to overall industry growth, but also specific to Cheesecake Factory. We have demonstrated our ability to sustain growth in on-premise sales while maintaining stability in off-premise revenue. This combined effect is driving overall revenue higher. It seems that every time there's a surge or a unique event, we see stronger returns afterward, possibly reflecting pent-up demand as people become more comfortable without masks. Additionally, we recognize that challenges persist in the industry, with some restaurants struggling to stay open and keep a full product lineup. We remain confident that having excellent staff and quality products will support our growth over time.

And just following up on an earlier question about sort of the macro environment. Understanding, you're not seeing this weakness. In fact, you're probably seeing the opposite right now. But you've been around a long time as a brand. What are the leading indicators in your mind either internally that you see or externally that you see that signal to you the consumer is slowing down? Are there metrics you look at internally or are there correlations you look at, whether it's stock market or employment? What are the things that you look at that dictate your view on the consumer going forward?

Yes, so that's really interesting. I would say a couple of things about how we think about our business and managing it. To go back to one of my earlier comments, the late March through late April stability, predictability of the sales is one of the things that I really look at from a leading indicator perspective. The tighter the bands of performance, the better we feel going forward about our consumer, right? Because that means their behavior on a day-to-day basis isn't being moved around by some of these other factors anymore, and they're just deciding that this is the way that they're going to go about their life. I think that that's a positive indicator for us. Certainly, we have probably more metrics than anybody in the restaurant industry that we look at in terms of day parts and days of the week and all of that. But that sort of consistency is a big piece. I think the other external side of things that we watch a lot are the financial health of consumers, right? So, wages and balance sheets of consumers, and frankly, they're doing well. Not everybody is keeping up with inflation, but most of the lower-end income is actually ahead of inflation. So, that group is at least holding on. If you're a higher-end worker, then your 401(k) and your real estate is probably doing just fine. I think the latest data that I saw was there's probably $2.5 trillion more of savings in bank accounts today than pre-pandemic. So, all of those indicators are good, I think, going forward.

Thank you.

Your next question comes from the line of David Tarantino with Baird. Your line is now open.

Hi, good afternoon. My question is on the pricing decision you have coming up. I just wanted to ask how you're thinking about the brand's pricing power? And what you're looking at, I guess, in relation to the competitive environment or however you want to benchmark it with respect to this decision? Or is it just merely a decision that you need to just take what you need to take in order to protect margins? I guess, how do you balance that with the potential consumer impact that you might see from a more aggressive pricing posture?

Sure, David, this is Matt. I think this might dovetail from John's question even a little bit of what specific to cheesecake can be. Not only are we executing well, I think that we have a more stable pricing strategy than some of our competitors have implemented over the past six months, where they've jumped up in one step function 6%, 7%, 8% all of a sudden. David Overton's strategy is over time; we don't want to get behind, but you don't want to take it all at once, right? So, I think that that continues to be our focus and maybe that is also helping our sales trends. We are looking to balance the consumer environment and get back on margins at the same time. If things hold where they are today and don't get worse, that seems very viable, right? We're not quite at 5% pricing; I think the latest industry data I saw was that full service was at 7.5% pricing. That was before some of these latest upticks. We'll see what happens. I mean, you're reading about it every day and other companies take another couple percent here or there to make up for that. We're still 2.5 points behind that. On a relative basis, as well as from a sales strength basis, I mean, I certainly think we're in a good position to accomplish both of our objectives of growing comp sales and protecting margins.

I would just add, David, the breadth of the menu continues to help us in every part of the business, and it helps us in pricing as well. We have to be able to take pricing across a breadth of a menu of 250 menu items compared to some of our competitors with a much more limited menu. From a consumer standpoint, our pricing may not be as noticeable, which helps us to continue to drive the traffic without having as much of an impact.

Right. That certainly makes a lot of sense. I guess one quick follow-up on that. The magnitude of your average check is likely above, I guess, some of the averages that we would typically see in casual dining. So, do you carve out a certain sub-segment of kind of your peers or however you define it to look at what they're doing on the average check to make sure that that, I guess, the absolute value of your check doesn't get, I guess, too high for your core consumers?

Sure, David, this is Matt. We monitor about two dozen competitors that have a national presence in at least 50 markets. Those competitors range from a fast casual $10 to $12 check average to a steak house $60, $70 average because, as David Gordon was mentioning the breadth of the menu, we don't have a core consumer per se; we have a lot of different consumer groups that come in. Our objective is kind of to remain competitive with sort of the overall set of restaurants. That being said, the fast casuals are taking double digits, and the steak houses are taking double digits. Even within, I think casual dining, our relative value proposition is improving because most are still taking over the 4.75% that we're at today. So, wherever they were a year or two ago, we're improving on our positioning versus that today.

Your next question comes from the line of Lauren Silberman with Credit Suisse. Your line is now open.

Thank you for the question. So, I had a follow-up on quarter-to-date average weekly sales running at $240,000 per week, which is a meaningful step-up from 1Q. Can you just expand on what you thought about 1Q and into 2Q? And when you saw trends in select? And then you had talked about the predictability of sales trends, which is a great sign. How are you thinking about the sustainability of these average weekly sales levels, taking into account seasonality, as we think about extrapolating trends through the rest of 2022?

Sure, Lauren, this is Matt. It is widely noted that Q1 was impacted with the Omicron surge in early January, and actually, probably all the way through that first period. There was a little, I would say, bumpiness well within our expectations as we came out ahead of them on the total top line, but in March, when some of the turmoil in Europe started. Certainly, there’s also some seasonality component embedded in the improvement from Q1 to Q2. I think Q2 and Q4 are historically the two higher average weekly sales quarters compared to Q1 and Q3. Q1 and Q3 out of January and September, which are the two lowest months of the year usually weighed them down. Right now, we're running at a $12.5 million AUV as we noted in the prepared remarks, we're still targeting that $12 million, because there is seasonality, and we're at a level that's higher than potentially, we would have been in some of those other months. I think that being said, we're probably running a little bit ahead of where we thought we would in April; the trends are a little stronger than we originally anticipated.

Great, thank you. And just on real estate, can you talk about what you're seeing from a real estate perspective at this point, just competitiveness insights and the cost of real estate?

This is David; Lauren. Really nothing's changed from a cost for real estate for our brands. We're sought after whether it's Cheesecake Factory or now in North Italia. So, we're still going to maintain a site-based strategy. We still have fantastic sites that are in our pipeline. As we've talked about moving through the rest of this year and into next year, I don't see any reason why we won't continue to march towards that 7% unit growth target and be able to achieve it.

Thank you, guys.

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

Great. Thanks. Matt, you spoke to the current competitive environment briefly, suggesting it's likely tailwind right now. I'm curious what your thoughts are with respect to sort of the mall traffic dynamic going forward, the competitive set within malls and in general impacting you folks going forward? Just your thoughts on how you might benefit from the competitive dynamic going forward or how you might be impacted from that?

Sure, Dennis. This is Matt. I think one of the things, again, to sort of bring back the old story about the malls for us when things were basically shut down and we got to 90% of our volumes, it just reiterated our thesis that we're a destination. I think as malls are actually coming back and you're seeing reinvestment take place in the higher properties and that is the natural cycle. It will only benefit us. At the same time, many of those have seen a little bit of pullback in terms of the restaurants that are in the malls, right? I mean, anything that was interior in a mall during the pandemic had a hard time. So, I think competitively, that provides us a benefit as sort of the global perspective that there's anywhere from 5% to 10% fewer restaurants, and that's also true within the mall properties. Generally, any improvement that we see is only going to be a further benefit for us at this point in time.

That's helpful, thank you. And then just last, as it relates to the digital technology front, I'm curious if you could provide the latest update on sort of what's working, where you're at, and sort of where some of the biggest opportunities are from here that can either enhance sales or enhance margins in some way? Thank you.

Hi, Dennis, this is David. We continue to really look into uses of technology in the kitchen and where we can increase productivity and remove some of the complexity in our made-from-scratch kitchens. That's going to continue to be where we focus the majority of our energy when it comes to technology and technology enhancements. We want to continue in guest-facing positions to be an experiential dining choice and give people the type of service and hospitality that they want. That also means that we'll look to continue to find ways to speed up their experience; that means at the end of their meal, they want to continue to use the QR code that we put in place to pay their bill to take a few minutes off of their dining experience. We'll allow them to do that. We're still continuing to use text paging for guests versus handing on pagers, and those changes we made in the middle of the pandemic continue to use technology to make the off-premise experience as easy as possible and frictionless as possible, from texting guests in their car, allowing them to use curbside, not have to walk into the restaurant to make that process faster. Our team is continuing to look at each of those avenues. I think we've said before, we're not likely to be putting tablets on tables and some of those more traditional things that some of our competitors may be doing that may work for them, that we feel isn't quite right for us. But that doesn't mean that we're not continuing to evolve our own technology and looking for ways to leverage, especially as I said in the kitchen.

Yes. I mean, good examples of that are taking the inventory management systems that we've had at Cheesecake Factory and deploying them to North and FRC to drive efficiencies in our food costs associated with that, right? So, there's benefits of scale and technology that we have that we can also use across the portfolio, not just Cheesecake Factory.

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

Hi, thank you for taking my question. I have two inquiries regarding North. First, Matt, could you provide the average weekly sales figure for the second quarter to date? I know you mentioned the 2018 comparison, but it would be helpful if you could frame the average weekly sales similarly to how you did for Cheesecake. Second, I have a question about the margins at North. It appears that this brand is still affecting the overall restaurant-level margin negatively. You provided some useful insights in the presentation. Is there something about the new units that differs significantly from the older ones? I noticed there was about a 500 basis point difference in the margins for some of those older units. I'm curious if there's something unique about them, or if it actually takes three to four years for the new units to reach full productivity. Thank you.

Yes, this is Matt. I'll answer the second part. I think Etienne has the data on the first part. It's really about where staffing has been for the newer unit and rebuilding those teams. We've heard about that from some of the other larger national casual diners and the impact that it's had to get staff back up, to have to train all the while you're still dealing with attrition, etc. What I'm happy to actually see is that we're starting to close that gap between the two buckets, and I think that we have a good runway right now that we're working on some of the food efficiencies in North. We took some additional pricing and continuing to close that gap. We'd like it to be closer to 2% to 4% than the 5%. So we're not that far off. So, I guess I'm optimistic that we're making progress. Most of that really is just around the ability to be as productive as possible and getting essentially those teams that were brand new a year ago up to speed.

The quarter-to-date sales are at $150,600. That's compared to the first quarter, we were at $139,900.

Great. Thanks for the color, Matt, and Etienne, thanks for the data there. Appreciate it.

Your next question comes from the line of John Ivankoe with JPMorgan. Your line is now open.

I guess, I'll just follow up on the North Italia subject. Looking at average unit volumes, new unit volume, and same-store sales, you guys really have quite a concept on your hands. I mean, the numbers are pretty amazing. What are you seeing, I guess, in terms of your experiences in terms of where it's doing extremely well, where it's doing well? I mean, are you beginning to think about potentially different types of sites and maybe different types of customer cohorts and maybe what the concept was designed to achieve, but actually is achieving what based on some of the results that I would assume at least from a top-line perspective, are in excess of your expectations?

Yes, thank you, John. This is David. We are pleased with those results as well. What we have observed across different regions is that North has remained very stable, much like Cheesecake, in terms of understanding the consumer base and which demographics resonate well. While it may appeal slightly more to a younger audience, we also see families dining at North, reinforcing our belief that in every location with a Cheesecake Factory, there’s potential for the same success in North as well. We have not noticed any significant differences in sales performance as we’ve expanded, including our new openings in Florida and our upcoming move into Atlanta this summer, which we are eager about. We firmly believe in the strength of our brand, which resonates universally and attracts a broad spectrum of customers. Italian cuisine is universally popular, and our teams have been executing excellently, providing a distinct atmosphere that sets us apart from traditional Italian chain restaurants, complemented by a strong bar program and appealing design. Therefore, we see no reason why we can't maintain these sales levels and continue to grow, and we are hopeful to exceed the 20% growth rate we have previously discussed.

I'm currently in Florida, and the unit in Brickell is exceptional. I'm sure there’s something happening right now at 6:00 in the evening. Clearly, you've achieved great success with that unit, its location, and your execution. Congratulations. Shifting topics, Matt, you mentioned that your commodity guidance assumes that commodities will remain stable from their current level. Do you have any deeply in-the-money contracts? For instance, is your chicken well-contracted compared to the spot market? Is there anything else in your portfolio that is also well-contracted relative to spot? Considering the grain markets and their potential impact on protein, does that raise any concerns for you as we move into late 2022 and possibly 2023? Are you worried that some of your suppliers, facing rising costs, might need to pass those higher costs on to you and the industry?

Yes, John, it’s undoubtedly a dynamic time regarding contracting over the past six months, something we’ve never experienced before. I would say the situation is fairly balanced; I don't think we're significantly positive or negative in any area. We have reviewed our strategy, and we convened on this again this week. We have increased the frequency of our meetings and reviews regarding bookings, focusing on stability and predictability. Achieving this will help us understand the outlook, set the right pricing, and provide accurate insights to Wall Street. We are also aiming to develop mutually beneficial relationships with suppliers. We've explored tying agreements to direct input costs, like chicken to corn, to minimize other variables. This strategy seems to be functioning well; however, there may be some risks on the wheat side for next year. As it stands, much of the risk has already been factored into this year. We are certainly experiencing higher inflation than we initially expected, and I believe this has been incorporated into current expectations.

Thank you.

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

Great, thank you very much. Shifting from a commodity to the labor front, I think you mentioned now for 2022, you're expecting 6% inflation. I know previously that was maybe closer to 5%. So just wondering, I think you mentioned the shortages are really no longer; you're back to where you want to be from a staffing perspective. Clearly, you're an employer of choice. I'm just wondering, is there a conscious focus on increasing pay and benefits to retain your best? I mean, how are you thinking about retention from a labor standpoint, and maybe that's the driver of the uptick in inflation just in terms of your thoughts from that perspective?

Sure, Jeff, this is David. We are pleased that our staffing levels are about 1% better than they were before the pandemic. With our current sales levels, we want to sustain this improvement. As Matt mentioned earlier, there are still some markets and specific restaurants facing some challenges. It’s crucial for us to remain competitive. Wages across the industry have increased, not just in our sector but also in retail and others, which are also offering competitive pay. We will not fall behind in this regard. We ensure our operators are aware of the competitive market by providing them with monthly updates on pay rates in their areas, allowing them to proactively take care of their staff as we have done historically. This might explain some of the pressure we are experiencing. As Matt indicated, it seems like this situation has stabilized, and we do not expect further growth at this point; that’s the current sentiment. While I can’t predict the future, we are committed to staying competitive and need to focus not only on retaining our current staff but also on attracting new team members as our sales grow.

Understood. And then just following up on the commodity front, the commodity basket for 2022, now it sounds like it's pushing maybe mid double digits versus the prior low double. I'm just wondering if you can give us some context. I know you mentioned easing through the year, but maybe what was the basket in the first quarter? What you're assuming for the second quarter? And just so we can kind of get a sense for the downward trend through the year?

Yes, I think the cost of sales in the first quarter was around 13% to 14%. If I'm mistaken, Etienne can correct me. I believe it was similar in the second quarter, then in the third quarter it was in the low double digits and in the fourth quarter, high single digits. This represents an increase of about 1% to 5% compared to before.

Got you. And just to clarify, Matt, your comment on the call for the second quarter mentioned restaurant margins were 200 basis points below the second quarter of 2019, which was 16.8%. I wanted to confirm that was the reference point you were making for 2022?

We're comparing to the second quarter of 2019 on a three-year basis now.

Got it. So you're assuming a high 14% restaurant margin for the second quarter of 2022.

Yes. The math is pretty simple, right? So if I just said 13% to 14% commodities or 5% pricing. It's an 8% gap times 22% on the P&L, you're almost there, right? It's really driven by that environment and just timing of when we want to recapture that in the pricing and where we think commodities will go.

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

Thanks and good evening. I wanted to follow up on the recent sales strength you’re experiencing so far this quarter. How much of that is due to regional rebounds in areas that were previously underperforming? Are states like Florida and Texas also achieving new highs as they reopen? Additionally, to what extent is the improvement related to increased effective capacity resulting from better staffing, which may have limited sales in prior quarters? Could you please address these two factors?

Yes, Brian, this is Matt. I think our sales strength is quite balanced. It's a bit challenging to pinpoint exactly because we're likely performing 2% to 3% better than we initially expected while taking into account the previous year's pricing, which was 5%. There are many variables that have influenced this, and we have observed that different markets, which saw significant growth a year ago in March, might not have had as strong comparable sales this March. Overall, it's all balancing out. To reach that comparable level in average weekly sales, we need broad-based strength, and I think we're in a good position. It's reasonable to assume that we're benefiting slightly from improved staffing, which has made a difference for us. If we can maintain this improvement, it would be advantageous, but I believe it stems from a combination of factors.

Okay. Okay. And on the margins, I just wanted to go back to the second quarter of 2021. I think back then, you had called out several costs like overtime and bonuses and training costs. I'm just curious, to what degree have those costs started to normalize? And have you embedded those in your Q2 or annual guide?

I would say we've seen improvement. I don't know it's normal, right? I mean, over time, it's better than it was, but not as low as pre-pandemic. Training costs are better than they were, but not as low as pre-pandemic. What's embedded in our outlook is kind of a continuation of what we're doing now.

All right. And sorry if I missed it, but I think earlier in the call, you said that you expect to recover your 2019 margins in the second half. And I know it's a dynamic environment. But everything you know today, what level of pricing would you need to take in that third quarter to achieve that margin target?

So that's our objective. We're still evaluating the specifics on the pricing, and we still have a little bit of time. So we kind of want to wait and see. What I will say is last call, in February, we were thinking it was 1.5 to 2. Certainly, the inflation we're talking about is a percent higher than that. That gives a range that we're contemplating at the moment. But we haven't settled on what that exact number is yet.

Understood. Okay, thanks. I'll pass it along.

Your next question comes from the line of Jon Tower with Citi. Your line is now open.

Thank you for taking my question. I wanted to ask about how customers are engaging with the brands, especially the Cheesecake Factory, now that the stores are fully reopened. Are customers utilizing both the in-store and off-premise channels at similar rates, or are you noticing a higher frequency of customers visiting in-store while also using off-premise options? Are there distinct customers returning to the brand through each channel? I'm interested in understanding how customers are interacting with the business and the relationship between the off-premise and in-store activities.

Jon, this is Matt. I think it's probably a little early to tell, to be honest. Well, we noted that the off-premise dollars are staying steady. So those guests that are using that channel haven't stopped, and yet we're still growing average weekly sales, meaning more people are coming into the restaurant. Again, we're not tracking those transactions. We do annual research. So, that's kind of in the middle of the year. I would anticipate we kind of look into some of those questions at that point. But I don't think I have a specific data point that I can point you to other than it feels as though those two key attributes are steady off-prem and increased utilization again of the on-prem. But I couldn't tell you they're new guests or the mix yet.

Okay. Regarding the off-premise strength, it's impressive in terms of both the absolute numbers and the percentage mix. I'm curious about what the company is doing to maintain that sales level in the future. Are you allocating more marketing resources specifically towards the digital channel for off-premise occasions? For example, are you investing in promotions with DoorDash to enhance visibility on their app? I'm interested in how you expect this trend to continue.

Thanks, Jon. This is David. In the first quarter, we only began implementing off-premise promotions in March, and those efforts were minimal compared to what we did during the pandemic. We offered a 20% discount on the first order through DoorDash for first-time users up to $5, along with a minor online ordering promotion. Moving forward, we believe we can maintain most of our off-premise sales without overspending on marketing due to the increased awareness from the pandemic. We plan to focus our marketing spending on enhancing brand awareness through paid search and social media. The positive aspect is that we know we can activate our marketing efforts when necessary to drive sales or attract new customers, whether through DoorDash or online ordering channels. We're pleased that we managed to keep our marketing spending down in the quarter, and we hope this trend continues. When we do invest in marketing, it will be done strategically.

Got it. And then just lastly, on the absolute dollar spend or better the percent spend of marketing, I think in 2021, it was like 60 basis points of sales. In terms of thinking about this business into the future, is that the right range of where you expect marketing to be over time? Or do you expect more dollars and therefore more percent spend going forward just to keep that awareness high?

I think we can keep it there, Jon; this is Matt. But keep in mind that the other brands like maybe a North or a Flower Child, those actually do have a little bit of a higher percentage. So they get bigger over time as a company that percentage might creep up a little bit. But I think we're pretty comfortable on the Cheesecake side.

That concludes today's question-and-answer as well as today's conference. Thank you for attending. You may now disconnect.