Cheesecake Factory Inc Q1 FY2023 Earnings Call

Good afternoon. My name is Emma, and I will be your conference operator today. I would like to welcome everyone to The Cheesecake Factory, Inc. First Quarter 2023 Earnings Conference Call. Etienne Marcus, Vice President of Finance and Investor Relations, you may begin your conference.

Good afternoon, and welcome to our first quarter fiscal 2023 earnings call. On the call with me today are David Overton, our Chairman and Chief Executive Officer; David Gordon, our President; and Matt Clark, our Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call, items will be discussed that are not based on historical fact 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, when discussing comparable sales, we will be referring to comparable sales on an operating week basis, unless specifically stated otherwise. We will also be presenting results on an adjusted basis, which excludes impairment of assets and lease terminations and acquisition-related expenses. 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 review our first quarter results and provide a financial update. Following that, we'll open the call to questions. With that, I'll turn the call over to David Overton.

Thank you, Etienne. We entered 2023 with positive momentum and carried forward that trend to deliver a solid first quarter with our top and bottom line performance in line with expectations. First quarter consolidated revenues increased 9.1% over the prior year to $866 million. Despite the record rainfall in California, our largest market, The Cheesecake Factory restaurants’ comparable sales increased 5.7% versus the prior year and 14.9% versus 2019, and North Italia comparable sales increased 9% versus the prior year and 30% versus 2019. Demonstrating the strength and resilience of our broader portfolio, we delivered positive first quarter comparable sales growth across all our concepts. The extensive and growing appeal of our differentiated concept supports our belief that we are uniquely well positioned to capitalize on the continued favorable consumer demand for experiential dining. Execution within the restaurant's four walls was outstanding with our operators driving solid flow-through to support profitability. This, combined with input costs consistent with our projections, resulted in an adjusted net income margin of 3.5% for the quarter at the high end of our guidance. On the development front, we opened two FRC restaurants during the first quarter, including Flower Child. While we continue to experience some delays in openings due to supply chain challenges and permit approval delays, at this time, we still expect to open as many as 20 to 22 new restaurants in fiscal year 2023, including 5 to 6 Cheesecake Factories, 5 to 6 North Italia, and 10 FRC restaurants, including 3 to 4 Flower Child locations. Additionally, we anticipate 2 to 3 Cheesecake Factory restaurants to open internationally under licensing agreements. As we look ahead, we remain intently focused on delivering exceptional food quality, service, and hospitality, the hallmarks of our success to drive long-term profitable sales growth. At the center of our execution capability are our people, the driving force of our company who enable us to deliver delicious, memorable experiences for our guests every day. To that end, we are honored to have been named to Fortune Magazine's 100 Best Companies to Work For list for the tenth consecutive year. This recognition is a testament to our strong culture, industry-leading training, and commitment to our employees. We believe these attributes will continue to differentiate us as an employer of choice. With that, I'll now turn the call over to David Gordon to provide some additional details on our operations and marketing.

Thank you, David. Our extensive and innovative menu and unwavering commitment to delivering excellent service and hospitality has made The Cheesecake Factory one of the most differentiated restaurant concepts in the casual dining industry for over 45 years. A key contributor to our success has been our distinct competitive advantage in staffing. Our ability to attract, train, and retain highly dedicated staff members and best-in-class operators. We believe maintaining our industry-leading position in staffing is foundational to achieving our longer-term growth objectives. Our staffing levels remained healthy during the quarter. Applicant flow was robust, and our industry-leading attrition rates further improved. In fact, in the first quarter, our hourly attrition declined by nearly 25% versus the prior year. We believe our retention trends were a key contributor to the sequential and year-over-year improvement in Net Promoter Scores and service and food quality levels for The Cheesecake Factory restaurants. Importantly, North Italia's attrition levels are nearing Cheesecake’s industry-leading levels despite not having the national presence and brand recognition that Cheesecake Factory enjoys, which we believe affirms the effectiveness of the practices and programs we've implemented over the past few years. As we think about further accelerating the growth of North Italia, our ability to leverage well-trained tenured managers and staff will facilitate our efforts to scale into new and existing markets. As you heard from David, our sales trends across our portfolio of concepts remain strong, and we continue to see stable guest purchasing behaviors. To this point, The Cheesecake Factory's off-premise sales for the first quarter totaled 23% of sales for the third consecutive quarter. Additionally, we do not see any material changes in on-premise incident rates over the past year, with incident rates remaining above 2019 levels and daypart mix not changing materially. Fox Restaurant Concepts also continued to drive strong results, with annualized AUVs of $7.9 million. We remain confident in the developing concepts in our portfolio and their ability to contribute to our growth. Turning to marketing. As I've previously shared, we've been developing a rewards program for The Cheesecake Factory. The overarching objective is to leverage data analytics and insights to more effectively engage with our guests on a one-on-one basis and drive incremental sales. We initially launched a pilot of the rewards program last June in Houston, followed by a second pilot launch in Chicago last November. We've had strong operational execution, and as a result, have accomplished our pilot goals, with our acquisitions and member activity rates exceeding our expectations. We purposefully have taken a very measured and deliberate approach in designing Cheesecake Rewards to ensure it is consistent with our marketing strategy while targeting our desired financial objective of driving profitable sales growth. At this time, we're planning for a midyear national launch of our new rewards program. And with that, I will now turn the call over to Matt for our financial review.

Thank you, David. Let me first provide a high-level recap of our Q1 results versus our expectations I outlined last quarter. Total revenues of $866.1 million were at the midpoint of the range. Adjusted net income margin of 3.5% was at the high end of the range. We continued to diligently manage G&A and depreciation, which combined as a percent of sales were flat with the prior year. And we returned $25.6 million to our shareholders in the form of dividends and stock repurchases. Now turning to some more specific details around the quarter. First quarter sales at The Cheesecake Factory restaurants were $656 million, an 8% increase over the prior year. Comparable sales increased 5.7% versus the prior year and 14.9% versus 2019. It is worth noting that as a result of fiscal 2022 having 53 weeks, the strong sales week between Christmas and New Year's Day shifted into the fourth quarter of 2022 from the first quarter of 2023. Due to this calendar shift, that high volume sales week was replaced with an average sales week in the first quarter, negatively impacting our first quarter revenues by approximately $10 million in comparison to the first quarter of fiscal 2022. Sales for North Italia were $63.3 million, a 20% increase over the prior year, supported by comparable sales growth of 9% versus the prior year. Comparable sales versus 2019 increased 30%. For FRC, excluding Flower Child, sales totaled $68.6 million, up 17% from the prior year, and sales per operating week were $152,200. FRC, including Flower Child, average weekly sales were $118,800 and external bakery sales were $14.9 million during the first quarter of fiscal 2023. Now moving to year-over-year expense variance commentary. Cost of sales increased 10 basis points, driven by slightly higher commodity inflation than menu pricing. Labor decreased 130 basis points, predominantly driven by pricing leverage and slightly lower medical insurance expenses. Other operating expenses increased 50 basis points, mostly driven by deleverage related to the revenue impact from the fiscal calendar shift. G&A remained flat as a percentage of sales. Preopening costs were $3.1 million in the quarter compared to $1.8 million in the prior year period. We opened 2 restaurants during the first quarter versus no new openings in the first quarter of 2022. In the first quarter, we reported a pretax charge of $3.4 million related to impairment of assets and lease termination expense and FRC acquisition-related items. First quarter GAAP diluted net income per share was $0.56. Adjusted net income per share was $0.61. Now turning to our balance sheet and capital allocation. The company ended the quarter with total available liquidity of approximately $355 million, including a cash balance of about $116 million and approximately $239 million available on our revolving credit facility. Total debt outstanding was unchanged at $475 million in principal. CapEx totaled approximately $38 million during the first quarter for new unit development and maintenance. During the quarter, we completed approximately $12.4 million in share repurchases and returned just under $13.2 million to shareholders via our dividend. While we will not be providing specific comparable sales and earnings guidance, given the operating environment continues to be very dynamic, we will provide our updated thoughts on our underlying assumptions for the second quarter and full year 2023. For Q2, based on our quarter-to-date performance, most recent trends, and assuming no material operating or consumer disruptions, we anticipate total revenues to be between $870 million and $890 million. Next, at this time, we expect effective commodity inflation of high single digits for Q2. We are modeling net total labor inflation of about mid-single digits when factoring in the latest trends in wage rates, channel mix as well as other components of labor. Based on these assumptions, we anticipate net income margin of approximately 4.75% for the second quarter of fiscal 2023, at the midpoint of the revenue range I previously outlined, and this includes the elevated year-over-year commodities. Now for the full year. Based on our year-to-date performance, more recent trends, and assuming no material operating or consumer disruptions, we continue to anticipate total revenues for fiscal 2023 to be approximately $3.55 billion. We currently estimate total inflation across our commodity baskets, total labor and other operating expenses to be in the mid-single-digit range, moderating throughout the year. And given our unique growth expectations, we are estimating preopening expenses to be approximately $24 million. As we have said earlier, our goal is to effectively offset inflation with menu pricing to support our margin objectives. Assuming we do so and consumer trends remain consistent and there are no other material exogenous factors, we continue to expect full-year net income margin of approximately 4% at the revenue level I provided. With regard to development, as David Overton highlighted earlier, we plan to open as many as 20 to 22 new restaurants this year across our portfolio of concepts, with approximately 80% of openings occurring in the second half of the year. And we continue to anticipate approximately $165 million to $175 million in CapEx to support this year's and some of next year's unit development as well as required maintenance on our restaurants. In closing, our first quarter operating performance was the most aligned with our pre-pandemic trends to date, both on the top and bottom line. Specifically, our total sales, most key business drivers, and overall profitability were all in line with our expectations. Importantly, our absolute sales trends remain solid and consistent with historical seasonality despite the ongoing noise and volatility impacting year-over-year comparisons still related to the pandemic environment. And although the environment remains dynamic with our solid top-line performance, input costs gradually normalizing to more predictable levels and the strategic steps we have taken, we believe we are well positioned to return to generating our historically consistent operational and financial results. We are working hard to build on this momentum despite the macroeconomic uncertainty and believe the strength of our concepts and operating teams will continue to differentiate us through the balance of 2023 and beyond as has been the case for over 4.5 decades. With that said, we'll take your questions.

Your first question comes from Sharon Zackfia with William Blair.

I guess I'm curious, you did mention weather in the quarter. I don't know if it's possible to kind of quantify what you saw at Cheesecake Factory because if I do the math correctly, it seems like comps might have been more in the low single-digit range in the second half of the quarter. And I'm just curious if that's a weather-impacted dynamic and if you think underlying trends are healthier than that.

Sharon, it's Matt. I would say, just taking a step back, maybe more 20,000 feet, just the year-over-year comp, what you said is factually true. However, we saw significant variability last year in sales. Sometimes with the reopening trends, they moved to levels that we, at that time, said were not sustainable given that there had been some pent-up demand, and I think increased buying per capita in the restaurants. And at other times, like in June and July, where the industry saw it really received down because there was significant case counts. So I think it is factually true, but it's a little bit of a, I think, narrow lens. When we look at performance versus historical seasonality, kind of pre-pandemic levels, 2018, 2019, the quarter was pretty consistent. And so on an absolute basis, we felt really good about the predictability. We came in slightly above the midpoint of expectations for us. What I would say about the weather is that's probably what kept us maybe from being a little bit more towards the high end of our own expectations, right? Because a lot of that weather came in California, and it came in the second half of the quarter after our call, which obviously at that point in time had not been considered at all. So I think we feel good about the stability and predictability that we did see.

And then on loyalty, when you launch that, is there going to be any kind of concerted marketing behind the launch of loyalty? And you mentioned it exceeded expectations. I'm wondering were the expectations sign-ups? Or was it also some sort of increased frequency or spend post sign-ups?

Sharon, this is David Gordon. In response to the second part of your question, we have heightened our expectations regarding both acquisitions and sales penetration. We are pleased with the progress we've made in acquisitions and, just as importantly, the engagement with the program, whether it was through the reservation feature or the various offers we introduced during the pilot phase, both of which surpassed our expectations. This gives us confidence about a national launch that we hope to have in June. Regarding marketing, we will implement national search engine optimization, marketing for awareness, and in-restaurant promotions for the launch.

Your next question comes from the line of Joshua Long with Stephens.

Encouraged to hear the consistency in the model. You mentioned many times in your prepared comments about no real changes to consumer trends, consistent traffic, utilization across daypart, all very encouraging given the challenging macro backdrop. But just curious, as you think about that and take into consideration your outlook for commodity inflation, labor inflation, how does that inform your outlook for pricing over the course of the year? You had started taking up prices in the back half of last year. I think you were running about 10% for this quarter. And so just curious if your philosophy or outlook has changed as you've got a little bit more visibility into 2023?

Josh, this is Matt. It's obviously a very pertinent question, an area of focus, and continues to be. We'll be reading the tea leaves, so to speak, and all of the data, I think, on a real-time basis. I think that was one of the big learnings actually from last year is that you need to be a little bit more nimble and agile, and things happen. So it depends, right, I guess, is my point, if it stays the same or if it changes. So it's not, I think, a static answer. It's more of a dynamic one. I think our perspective is that with the incremental pricing we took in December, we got close to the inflation over the sort of pandemic cycle, if you will, still left us maybe 1% or 2% behind the industry, which is where we strive to be for competitive reasons. Certainly, the cost environment, I think, has been a favorable outcome so far this year, and some of the underlying trends could continue to support improved performance in the back half of the year. And as always, we'd rather take less pricing. So that would inform us if it continues to be that way. Our goal this year is to offset this year's inflation with this year's pricing. And so that math will continue to be a guiding factor as we go throughout the back half of the year.

Very helpful. I appreciate that. And one follow-up, if I can. In terms of the development outlook for the year, encouraged to see that. Can you talk about just the timing, cadence and the ability to get stores opened up in the current environment? And within that, is the plan still to work towards bringing Flower Child into the fold? I think in prior calls, we've talked about just kind of the progression of that relationship and probably bringing them in the brand into default from an infrastructure, logistics development perspective and kind of what that can do for the brand going forward?

Thanks, Josh. This is David Gordon. And we feel good, confident about those 20 to 22 openings throughout the year. The cadence will probably be that we'll open a few in Q2, a few more in Q3, and then the bulk of them will be in the fourth quarter, sort of typical for the industry. But some of the supply chain challenges that were more pertinent last year have subsided for the most part. We feel very prepared for that amount of openings. The permitting is getting a little bit easier over time. So we're pretty confident in that number. And at Flower Child, we continue down the integration path this year. Our teams here at the office, along with all the FRC teams, are working through the plan that we constructed early on in the year, and we're on target to really be fully integrated by the end of the year, which was our goal at the onset, and we would be operating and opening all those restaurants utilizing the power of Cheesecake Factory and also all the supply chain components, IT components, all fully integrated along with most of the HR, which already has been. We did a lot of that work throughout the pandemic.

And Josh, this is Matt. Just one follow-up to the Flower Child point. I think it dovetails well with the financial performance. All along, our objective had been to prepare the brand for enhanced growth in conjunction with hitting the return hurdles on a consistent basis. And the team at Flower Child has done an amazing job utilizing some of the scale benefits David was talking about, improving some of the costs in the supply chain, making some investments to improve the efficiencies of the restaurants. And we look at that, and it really marries well with the initiative that we have to enable that growth.

Your next question comes from the line of Brian Harbour with Morgan Stanley.

Yes, maybe just first, could you comment on the delivery business lately. And you're one of the few that, of course, still just has one delivery partner. Would it make sense at any point to consider adding other delivery partners?

Brian, this is David Gordon. Thanks for the question. Our total off-premise still remains very stable and strong at 23%, as we stated earlier for 3 quarters in a row now. And delivery has maintained 10% of that sales all throughout those quarters and remained incredibly consistent. We believe that we continue to execute incredibly well with DoorDash. They give us all the data analytics that we could possibly want. We have an ongoing relationship where we're meeting quarterly and going over performance metrics. And of course, we feel we have just a very strong deal structure when it comes to our commission and marketing support. So we also would prefer to have just for ease of execution and consistency of execution, one partner; the complexities of having 2, 3, 4 partners in managing the incoming orders, which I know some others have moved to, is not somewhere that we need to go because of the consistent sales and allows us to execute at a very high level, which I think allows us again to take market share because the operators can do such a good job and part of the reason that we're still maintaining that 23% overall off-premise sales.

Okay. I have a question about the cost side. Operating expenses are still relatively high on a year-over-year basis. Matt, I know you mentioned the impact of the calendar shift. Is there anything else you believe might be affecting this, such as repairs and maintenance? Or do you think it could be a source of leverage as we progress through the rest of the year?

Brian, this is Matt. That's a good question. And Etienne and I have been talking about that line specifically because it does stand out as having a little bit more pressure on us. And really, it comes down to 2 areas that I do think based on the absolute dollar trends we're seeing start to moderate. The first one is utilities. So I know that we saw the natural gas market capitulate here, but the way that it rolls through all of the bills and the electric system, et cetera, it does take a couple of months. So compared to last year and even on our sort of quarter-to-quarter, in the first quarter did remain elevated, although we are starting to see that move, and I do think that that will be a tailwind for us on a relative basis. And as you said, repairs and maintenance is the other one. It will be a sort of a dynamic year, as I said earlier, doing all of the comparisons because of the changes in the rate of inflation in different categories last year was so unprecedented, and really that piece of it didn't start until the second quarter. So I think, again, on a comparable basis, we're going to see some moderation of those expenses. But trailing into the first quarter of the year definitely will be the highest inflationary component for us compared to the rest of the year.

Your next question comes from the line of Brian Bittner with Oppenheimer.

Matt, a question on the guidance. Is the same-store sales growth outlook still roughly 7% for the full year as kind of a building block within your '23 revenue guidance? And I ask that because it appears like you slightly tweaked the full year AUV targets, they were $13 million. Now they're $12.5 million to $13 million. So I'm not sure if that implies a minor tweak to the same-store sales outlook as well.

Brian, it's Matt. No, it's really the same. I mean, I think we used the words nearly $13 million before. So $12.5 million to $13 million, I mean I think it's more vernacular. Just on the outlook, because at least in our perspective, and I think the facts speak to this, the comps are so funny on a year-over-year basis. I think a better way to think about our expectations is in taking on looking at a little bit more of a long-term historical seasonal perspective and applying that going forward, right? And so we obviously model out a variety of different ways. We do the bottom-up by restaurant, where we're looking at the individual restaurants and their local conditions. We do a top-down. But in aggregate, it's really looking at the current conditions and saying, if things continue on a normalized basis, that gets us to the guide that we're providing.

Okay. And just my follow-up is on the margins. Last call, I think you pointed out that you anticipated second half commodity inflation to be in that roughly 4% range. I'm curious if that stays the same today? Have you seen any movements there? And you also said that you anticipated restaurant margins to be somewhere in kind of the low 14% range to get you to that 4% net profit margin. Is that still a consistent way you're thinking about the margins?

Yes, Brian. So in the second half, I think that's right. It's kind of the mid-14s for the year. It will move a little bit up and down, right? So if you did that same math, Q2 is going to be a higher restaurant margin, it always is, Q3 lower again, and Q4 a little bit higher. On the commodities front, our outlook really hasn't changed, right? So if you think about we kept the net income at the same level, it does feel and look a little bit like things were getting better. But I think it's just too early to make a definitive call. So you're seeing some progress in categories like eggs; obviously, chicken remains decent, but do you have some risk, I think, still in categories like ground beef, right? So to us, I would just keep it there. And if things get better, that will be good, and maybe we'll take a little bit less pricing too, right? So it kind of nets out against each other. So I think the big picture message here is we executed to our plan in the first quarter, right? The environment has returned after really three black swan events in three years to where you can have a little bit more predictability. We have the best operators in the business, and we think that the environment will enable us to execute in the back half of the year as well.

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

Matt, on The Cheesecake Factory comps, could you just run us through the traffic, price, and mix reflected in Q1?

I will. First, we mentioned three Brians in a row, which seems like a statistical coincidence. Regarding Cheesecake Factory, pricing was slightly above 10%. Traffic increased by 1%, while the mix decreased by 5.7%. It's important to note that about half of the mix change is due to how we account for the to-go business. Overall, traffic showed little change year-over-year on an aggregate basis.

Okay. That's great. And I was going to ask you about mix specifically. Is it possible to help parse that out between like set aside the channel mix dynamics and try to isolate dine-in mix? And if you're seeing any changes specifically within the dine-in mix?

Sure. So of that, about half of it is the whole channel deal. The other piece, I would say, is attributable to the dine-in and predominantly because in last year's February and March, consumer behaviors, we just saw some outsized purchasing behavior. So this is right in line with our expectations. And I think as David Gordon noted earlier, all of our incident rates and purchasing behaviors per person remain measurably above the 2019 levels, but we do expect to see some bumpiness during the year, depending on what was happening in sort of the COVID trend. So it's about 50-50 in the first quarter with respect to those two components.

All right. And then I wanted to shift back to labor, if we could. And I think you said lower medical benefits. I think that's what you called out in Q1. Could you quantify that for us? And also, maybe more importantly, I heard your comments about improved staffing and lower attrition. I know last year, there was a lot of pressure from outside hiring, training and overtime costs. Any way to ballpark how much lower those costs were here in the first quarter?

Yes. So the Group Medical was better. I would tell you, it wasn't a huge driver of the labor piece. I mean it may be $1 million. I think that the biggest factors are around getting the attrition levels back to pre-pandemic or close to it. I mean it was a significant move from the teams that did measurably help to lower training over time and just general productivity. I don't have a specific number, but really the entire difference, I would attribute to sort of the efficiency of labor net of just that $1 million of Group Medical.

Okay. And then my last question, regarding The Cheesecake Factory segment margins, Matt, I did some quick calculations for Q1. It seems that the segment was still down about 90 basis points compared to the first quarter of 2019. I know you raised prices in February, but has that helped Cheesecake margins return to pre-COVID levels in recent months? If not, could you remind us what the steps are to fully recover those margins in 2023?

Yes. And your math is correct. That's correct. We took a little bit higher-than-average pricing again in the first quarter. And keep in mind that as we noted, not just with the other OpEx, but the commodity inflation ran in the low double digits, right? So we expect it to not quite be there in the first quarter. I think where we're at now with all of these pieces will enable us to be in the ballpark of where we want to be. There are a lot of variables that can change during that, right? Sales levels, commodities can change, et cetera. But I think we're enabled to at least to be within striking distance for the past 3 quarters of the year.

Your next question comes from the line of Drew North with Baird.

Great. A lot of my questions have been asked already, but I'll follow up on unit development. It seems as though construction and permitting continue to be a challenge. So I guess my question is just your level of confidence of getting those 20 to 22 openings this year? And while recognizing you may not be looking to give specific guidance, wondering if you could just speak directionally about how the development pipeline is shaping up for next year? And if there's anything you're seeing from a build cost or real estate availability perspective that would make you look at the year differently than your longer-term algorithm?

Drew, this is David Gordon. We feel very confident about that 20 to 22 number for this year. And as we stated previously, a 7% overall unit growth is still something that we have great confidence in as we look towards next year and would still remain confident that, that 7% unit growth number is attainable and a target that we'll be working towards. We, as I said a little bit earlier, have not seen the same type of pressures on the supply chain and the permitting side. Things seem to be continuing to be a little bit easier as every month goes by, which is why we have that confidence in this year.

And Drew, this is Matt. Just one on the financial piece. We, as along with everybody else, have definitely seen CapEx inflation. For the most part, it's been kind of paralleled by the unit volume expansion with the pricing. I think that in aggregate, it really depends on the geography, but in aggregate, we are hitting the return levels that we need to keep pace with our long-term expectations of 7% unit growth.

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

I understand there have been many comments regarding comparisons and the challenges of accurately assessing year-over-year data. I was hoping that for the second quarter of 2023, it would be relatively in line with the second quarter of 2022. I wanted to clarify what your expectations are for the comp guidance for the second quarter of 2023. It appears to us that it might be flat or possibly show low single-digit growth. Based on that, it seems that traffic is still significantly down year-over-year in the second quarter of 2023 compared to 2022. If this is accurate, could you highlight where you are seeing customer weaknesses? Which customer groups are visiting less frequently compared to last year? Is it related to specific regions, store types, or times of day? Any additional details would be appreciated.

Sure, John. This is Matt. To clarify, we're not providing specific year-over-year comparisons; instead, we're offering an overall revenue outlook that reflects our performance in the first quarter, especially considering past seasonal trends as we approach the second quarter and the full year. The reason for this approach is that the comparisons for Q2 last year were quite distorted. In April, for example, there was about a 10% difference in comparisons when looking at April versus July, which is significant. As we’ve seen with Black Box and KNAPP-TRACK, we typically outperform but follow the general trend. Based on our specific performance, we expect to see some fluctuations that aren't typical on a year-over-year basis. Looking at the first quarter, our traffic was nearly flat, which is encouraging overall. Mathematically, we anticipate a slight decline in traffic for the second quarter, which aligns with the reports I’ve observed. This isn't necessarily a specific issue but more of a challenge with comparisons rather than an absolute sales trend. It's important to note, as we've mentioned before, that urban locations still present the biggest opportunities. Overall, we see steady performance across various dayparts and geographical areas.

We used to talk about years ago of kind of when weakness would ever show up in a comp, it would be on the shoulders middle of the afternoon, late at night, Monday through Wednesday, that type of thing. Are those types of historical patterns coming back and maybe that's what's making '23 versus '22 still look unusual?

No, I don't think so. I mean I was just looking at our stat pack today and I mean all of the stat pack line up pretty consistently, within 0.5% of the mix of the total for each category. I really think if we go back and we look at the percentage movements by month last year, there was a lot of variability. It is a very big change between February to March, March to April and then through to July. It was just a very big movement.

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

Great. Two questions. The first one, just on the outlook as we think about a potentially slowing macro. I'm just wondering where you'd say your confidence is greater, whether it be maintaining the sales momentum with the leverage you potentially have or perhaps the margin gains that you've recaptured? I'm just wondering where you feel like you'd be better positioned to hold onto if trends were to slow as we move through the year? And then I had one follow-up.

Yes, Jeff, that's a really good question. I think it's very pertinent. This is Matt. I mean ultimately, our objective is always twofold, right? You want to try to protect or in our case, recapture margins and you want to protect traffic. I think, big picture, if we can have a more normalized situation this year, whether we $3.5 billion or $3.6 billion if we accomplish the margin objective and then we grow off of that base, we're going to be in a really good spot, right? I mean it will be a strong earnings and cash flow position. And so to that end, based on what we're seeing today with the underlying labor market and the commodities piece, it certainly feels like the margin profile lines up a little bit better than what we saw kind of coming out of the financial crisis, compared to the sales piece, right? And the ability for strong operating companies like ourselves to execute on that and to produce the bottom line that we're targeting feels like the environment has set up a little bit better for that side of the equation.

Understood. And then just following up on that margin comment. I think earlier you said you guys are kind of keen to get back to a certain restaurant margin. I think you said the mid-14s for the portfolio in '23. And it seems like your strategy would be to price to do so. So whatever would be necessary to get there. Like you just said, I guess, you're keen to get back to a certain margin. But is there any concern that new pricing with the limitation being the food at home now falling below food away from home and maybe a slowing macro that you'd be hesitant to take that incremental price and therefore, let the margin be below to hopefully preserve some traffic? Or is that really the bottom line that you are keen to price to hit a certain margin?

I believe it's important to balance both aspects. At this stage, we've implemented the necessary pricing to achieve that balance. Our focus now is on ensuring complete guest satisfaction and ensuring that our offerings are valuable. Given the significant inflation we've experienced, comparing year-over-year figures can be challenging, so we tend to look at performance on a quarter-by-quarter basis. While we may be seeing some late-stage inflation in grocery prices, those prices haven't decreased; they've simply become less inflationary. Historically, we've priced our products lower than grocery stores, and that remains true today. I feel confident about our position and believe we can continue to work towards meeting our margin goals. If commodity prices decrease, it may allow us to reduce pricing slightly, but I think we're managing the situation effectively at the moment.

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

Could you provide more details about the loyalty program? Specifically, how is it structured? Is it based on spending or frequency? What kinds of rewards can consumers anticipate? Additionally, besides increasing frequency and some additional spending, what other objectives do you have for this program?

Thank you for the question, Jon. There are three main components to the program. First, we will have published offers such as access to reservations and complimentary cheesecake slices on members' birthdays to support acquisition and ongoing engagement. Then, there will be unpublished offers throughout the year aimed at driving incremental visits. Additionally, we will have key marketable moments, like our traditional Halloween Treat or Treat Promotion and National Cheesecake Day. The program will be unique, focusing on surprise and delight rather than a points or spend-based approach. Access to reservations is crucial for our customers, as we are known for long wait times, and we believe this will help with acquisition. So far, the response to offering reservations has been positive without impacting our restaurant-level margins. We're committed to maintaining this approach in a distinct Cheesecake Factory style. We also aim to gather data to market specifically to guests, enticing them to visit during different times. If someone typically comes for lunch, we can engage them with offers for dinner. We're excited to launch in June and utilize the data effectively, especially since we haven’t had a traditional CRM program before.

Got it. So to think about it from a high level in terms of spend, it doesn't sound like it will be super costly, but would this be additive to the current marketing spend that you have, which is fairly low relative to the peer set?

Our goal would be able to keep it within the marketing spend and continue to be relatively low compared to the peer set, yes.

Got it. Okay. And then just shifting to development. Just thinking about this year, it seems pretty back half weighted. I think you said 80% of growth coming in the second half of the year. When looking beyond this year, and I'm not asking for guidance per se on numbers, but are we going to get back to a more normalized cadence of openings in 2024 and '25, to the extent you guys can shed some light on that?

I believe we can always hope that will be the case. However, for the past 25 years, the typical trend has been in the latter half of the year. So I wouldn't anticipate it being much different this time. Who knows. Our pipeline appears to be strong, and we'd love to move some things forward. As we gain more insight into that, we will definitely keep you updated.

Your next question comes from the line of Jim Sanderson with Northcoast Research.

Just wanted to review briefly store count and unit growth goals. I think that compared to fourth quarter, I didn't see a lot of real net unit growth. I wanted to make sure I understood how the stores will flow into actual net growth by quarter.

Yes, Jim, this is Matt. It's a good question. We actually had two closures in the first quarter. So that's why it would look like it didn't net. We obviously, on an annual basis, review of the portfolio and base decisions like that on timing of leases and cash flow outlook. And so it was just sort of a normal trimming and it usually happens at that time of year. So we're targeting the new openings, but we did have the two closures that would, on a total basis, net against that. I think as David Gordon noted, it's a couple in the second quarter, 2% to 3% in the third, something like that is what we're thinking. And then the balance would be in the fourth quarter.

Okay. So the bulk of that will still be incremental to the fiscal year?

Yes.

Very good. Second question, if I could. I just wanted to make sure I understood the commentary on the flattish percentage of sales for G&A. Is that expectation baked into your second quarter guidance? Meaning, I think there was a dip down in G&A as a percentage of sales last year. Is that going to take place in the second quarter? Is that typical?

Yes, it's primarily about leveraging sales. The second quarter usually peaks in average weekly sales. The dollar spend doesn’t change significantly, but we expect to gain some leverage. Therefore, the flow should remain consistent with that.

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

I understand there's noise across channels that was looking at on-premise traffic, can you talk about where you're running relative to 2019? And presumably on-premise traffic is not fully back to pre-COVID so any color in terms of which dayparts or days might be running below or back to pre-COVID?

Sure, Lauren, this is Matt. It's been really consistent. So that again, that is true. We've sort of been in that 85% to 87% level of on-premise traffic for a while. It's almost identical to where we were in the fourth quarter as where we were in the first quarter. It's really not differentiated much based on the day of week or stat pack. So it just seems to be kind of peanut buttered across that for lack of a more technical term.

Okay. And then I just have another one on loyalty. It seems like the loyalty is targeted at dining occasions. Is that fair? Is there any component to drive and potentially reward both on-premise and off-premise?

Sure, Lauren, this is David Gordon. It's actually both. We'd love to continue to drive dine-in traffic. But throughout the pilot period, we did test some marketing and promotions, specifically around online ordering, and we've been working with DoorDash to be able to integrate rewards members into the DoorDash platform which will allow us to make offers available to DoorDash members as well.

Great. I have one final question as a follow-up on the mix trends you mentioned. Do you have any insights on when we might see normalization in that area? I'm trying to better understand the timing of when attachment rates began to peak.

Well, we've had 3 quarters in a row, Lauren, and this is Matt, of 23% off-premise. So as a percentage, it seems like it's kind of been consistently in that range. And the average weekly sales seem to be growing at the same pace as pricing. So I think plus or minus percent based on seasonality. We do tend to see that the middle of the year months are a little bit less as a percentage. I think that's just based on consumer behavior and something that the whole industry sees. But sort of in that ballpark seems to be the stride that we've been in for almost a year now.

Your final question today comes from the line of Dennis Geiger with UBS.

I wanted to ask one more on underlying sales trends. I know you mentioned some choppiness in the year-ago period. But could you speak at all to sort of the recent months 2Q to-date sales if you compared it versus '19, presumably, that could take out some of the 2022 noise, if that's a fair way to think about it?

Sure. Again, I think for us, the way that we built up our forecast is based on looking at that sort of 2018 and 2019 seasonality perspective and applying that to the Q2 and balance of the year outlook. We've seen very steady sales in the first quarter of the year. And we feel good that the predictability of the business has enabled us to give a good perspective on the second quarter.

This concludes today's conference call. Thank you very much for attending. You may now disconnect.