Cheesecake Factory Inc (CAKE) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to The Cheesecake Factory Incorporated second-quarter 2016 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions).

As a reminder, today's conference may be recorded.

I would like introduce your host for today's conference, the Stacy Feit.

Ma'am, please go ahead.

Thank you.

Good afternoon and welcome to our second-quarter fiscal 2016 earnings call.

I'm Stacy Feit, Senior Director of Investor Relations.

On the call today are David Overton, our Chairman and Chief Executive Officer, David Gordon, our President, and Doug Benn, 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.

David Overton will begin today's call with some opening remarks.

Doug will then take you through our operating results in detail and provide our outlook for both the third quarter of 2016 as well as our thoughts on the full fiscal year.

Following that, we'll open the call to questions.

With that, I'll turn the call over to David.

Thank you Stacy.

We outperformed the casual dining industry in the second quarter of 2016, delivering our 26th consecutive quarter of positive comparable sales.

We also generated another quarter of strong bottom-line performance with earnings per share exceeding our guidance and up 13%.

The Cheesecake Factory continues to be one of the most differentiated casual dining concepts.

Our relentless focus on menu innovation, service, hospitality and operational excellence enables us to maintain broad demographic appeal and relevance in an increasingly competitive landscape.

We completed the rollout of our enhanced new server training program in the second quarter and the early results are positive.

One of our key differentiators is our excellence in service and hospitality, but we always strive to do better.

We are seeing a measurable lift in guest satisfaction scores and we believe the program will positively impact our guests' intent to return.

We also rolled out our mobile payment app, CakePay, nationally in the second quarter.

We are early in the adoption cycle, but encouraged by the initial results.

Feedback on the convenience of the app has been positive for both guests and servers alike.

We are very excited to have been chosen by MasterCard to be featured in an upcoming national advertising campaign for their MasterPass digital wallet solution.

This campaign will garner significant awareness for both CakePay and our restaurants.

We are also piloting a delivery service with a third-party partner in a select group of restaurants.

To-go already comprises about 10% of our sales, and delivery is another way to provide the convenience our guests are looking for.

We have expanded the pilot to most of California and will continue to monitor the performance as we evaluate the possibilities of a national delivery rollout.

On the development front, for 2016, we still expect to open as many as eight Company-owned restaurants, including one Grand Lux Cafe.

We opened our second restaurant of the year in Greenville, South Carolina, another new market for us, where we had a very strong opening.

In fact, we sold over 14,000 slices of cheesecake during the first week alone, providing evidence of the pent-up demand that exists for our concept.

And we will be introducing our newest cheesecake, chocolate hazelnut crunch, in celebration of National Cheesecake Day this weekend.

On the international front, the second quarter marked our entry into China under a licensing agreement.

Including China, we continue to expect as many as four to five restaurants to open this year based on the information we currently have.

For the first time, each of our three licensees has at least one opening planned.

In closing, we delivered another quarter of consistent and competitively strong results.

We remain confident that we are well-positioned for 2016 and beyond.

Underscoring this confidence for the fourth consecutive year, the Board approved a significant increase in quarterly dividends to $0.24 per share.

With this increase, we will have doubled the amount of our dividends since first initiating one in fiscal 2012.

We are also expanding our share repurchase authorization.

We remain committed to investing in growth and returning capital to achieving our targeted returns and increase shareholder value.

With that, I'll now turn the call over to Doug for our financial review.

Thank you David.

Total revenues at The Cheesecake Factory for the second quarter of 2016 were $558.9 million.

Revenues reflect the comparable sales increase of 0.3% at The Cheesecake Factory restaurants.

External bakery sales were $11.8 million in the second quarter.

Cost of sales decreased approximately 120 basis points year-over-year in the second quarter of 2016 to 22.7% of revenues.

Key ingredients driving the favorability included seafood, groceries and poultry.

We also saw some benefit due to a higher mix of restaurant sales as compared to bakery sales.

Versus our forecast, we captured additional food efficiency and the commodity environment was modestly more favorable than we had expected.

Labor was 33.2% of revenues, an increase of about 140 basis points from the second quarter of last year.

A majority of the increase was attributable to higher hourly wages.

Wage rate inflation was in line with our expectations.

However, we did experience some incremental impact from overtime.

Other operating costs were 23.6% of revenues, up 20 basis points from the prior year.

G&A was 6.1% of revenues in the second quarter of fiscal 2016, down 30 basis points from the same quarter of the prior year.

This reduction was primarily driven by reduced legal costs as we lapped an accrual for a settlement of a legal claim in the same period last year.

Preopening expense was $2.3 million in the second quarter of 2016 versus $4.1 million in the same period last year.

We had one new restaurant openings in the second quarter of 2016 compared to three openings in the same quarter of the prior year.

Overall, operating efficiencies, coupled with a more benign commodity environment, enabled us to offset wage inflation, driving strong margins, which were up 50 basis points versus the prior year.

Our tax rate this quarter was approximately 27%, within our expected range.

Cash flow from operations for the first six months of 2016 was approximately $152 million.

Net of roughly $40 million of cash used for capital expenditures, we generated about $112 million in free cash flow through the second quarter of 2016.

That wraps up our business and financial review for the second quarter.

Now I'll spend a few minutes on our outlook for the third quarter and full year of 2016.

As we've done in the past, we continue to provide our best estimate for earnings per share ranges based on realistic comparable sales assumptions and the most current cost information we have at this time.

These assumptions factor in everything we know as of today, which includes quarter-to-date trends, what we think will happen in the weeks ahead, and the effects of any impacts associated with holidays or weather.

For the third quarter of 2016, we are estimating diluted earnings per share between $0.59 and $0.62 based on an assumed range of comparable sales of between 0.5% and 1.5% at Cheesecake Factory restaurants.

With respect to the full year of 2016, we now expect comparable sales to be about 1%, and we are increasing our diluted earnings per share sensitivity to a range of $2.70 to $2.76.

This earnings range is up from our prior guidance by $0.07 to $0.08 at the midpoint, reflecting our strong bottom-line performance in the second quarter.

Ongoing expense management and the favorable cost of sales environment are helping us maintain our earnings expectations for the second half of the year.

In total, we are expecting our overall operating margins to expand nicely for the full year.

Note that fiscal 2016 is a 53-week year for us and our estimates include the impact from the additional week.

Regarding our corporate tax rate, we continue to expect it to be about 27% to 28% for 2016.

Total capital expenditures this year are expected to be between $100 million and $110 million for as many as eight planned 2016 domestic openings, as well as potential openings in early 2017.

Our restaurants generate a substantial amount of cash and we continue to effectively allocate our capital to achieve our targeted returns and maximize shareholder value.

The dividend is an important component of our capital return strategy, and our objective when we initiated the dividend was to increase it meaningfully over time, which we have done.

In keeping with our practice of consistently returning our free cash flow to shareholders, we plan to continue doing so this year in the form of dividends and share repurchases.

With that said, we'll take your questions.

In order to accommodate as many questions as possible, please limit yourself to one question and then re-queue with any additional questions.

(Operator Instructions).

John Glass, Morgan Stanley.

Thanks very much.

I guess, Doug or David, just a question on the sales environment right.

I guess it's not a surprise at this point that sales in the industry have decelerated, and you are sort of reflecting that in your third-quarter guidance.

Can you give us a sense of what you see that's changed, either geographically, malls, is it change in consumer behavior within the check?

What's your observation about what's happening to the environment in the last few months?

I think you have to look, John, at both the supply and the demand side.

Consumer confidence or the way the consumers are feeling and their related spending is not super-vibrant.

Certainly GDP growth has certainly been modest.

So it's a so-so economic growth environment.

But that's really just addresses the demand-side.

Overall, casual dining occasions are growing, though, so it's not that dour.

But they are not growing fast.

So it's all about taking share, and it has been about taking share for a while.

For restaurants, I think it's more about the supply side.

There is simply more competition there than there was, and I think that's increasing.

And the competition is coming from all over, including non-restaurants such as grocery stores.

But we've all seen this before too.

It's happened four or five times in just my career in the restaurant business.

The restaurant world gets a little ahead of itself and overbuilt, and it's considered a safe place to invest capital, and when that gets to be too much, then the expansion slows and the bifurcation begins and there's winners and losers.

So, I think that's where we are.

I think there's a lot of restaurants out there.

It's not something that couldn't be solved with a little more vibrant economy, though, in the short-term.

Great.

Thank you.

Jeffrey Bernstein, Barclays.

Great.

Thank you very much.

I have two questions.

One is a follow-up on that one in terms of some of the details within the comp perhaps.

I know you often offer the components, maybe the sequential trends or the regionality of it.

Any kind of color on that front just to further enhance that last one would be great, and I had one follow-up.

Sure.

So, comp store sales were up 0.3% for the quarter, as we talked about.

The components of that were menu pricing was roughly 2.9%.

The menu mix shift was positive 0.2%, and traffic was down 2.7%.

Just commenting on the traffic, the traffic, our traffic, was impacted this quarter in part at least somewhat slower traffic versus the first quarter in Texas and in the Florida markets.

It was particularly the Houston market where the regional economy is challenged, and also we have some major site-specific construction that's impacting one of our restaurants there.

And then in Florida, for us, that includes Puerto Rico, and the Puerto Rico economy is very soft and so is the economy in South America, which has slowed tourism in the Florida zone.

So that's sort of a little bit of color on the traffic.

As far as what happened sort of sequentially in the quarter, April was soft.

As we indicated on our first-quarter of earnings call, it was our softest month for the quarter.

Some of that was the Easter Spring Break shift.

Our trends improved versus the industry in May and in June, and our gap versus the industry widened.

We didn't see the degree of deceleration that a lot of people saw in June.

In fact, June was not our lowest comp store sales month.

We were about flat in the month of June.

And then, geographically, I pretty much already addressed that.

Our strongest -- we still have fairly consistent performance across all of our geographies.

We obviously have stronger markets and weaker markets, and our stronger markets are the mid-Atlantic and the Northeast, and then the Southwest and Texas and Florida are right now our weaker markets.

Got it.

And then just looking at the cost side, it's interesting that you've got commodity or cost of sales leverage over 100 basis points and labor up over 100 basis points.

I'm just wondering, as you look out to the back half and maybe into 2017, just how you think that battle plays out, which is likely to use relative to the extremes that they are both facing right now.

I think it's a little early to say for 2017 with respect to cost of sales.

I think there's going to be -- we're going to have to continue to work on the labor environment in the way that we have because there's going to be additional labor pressure next year, and we are able to offset that, as you are referring to this year, by a flat commodity cost environment.

And so we will just have to look at that.

I think that commodities, though, are -- there's not anything putting a lot of big upward pressure that I see on commodities.

And so we even feel, for the last half of this year, we are able to keep our earnings guidance intact despite taking down our comp store sale thoughts at least from where we previously were because of even better commodity environment than what we anticipated when we talked three months ago.

Just a little bit better, but it was better.

All right, helpful.

Thank you.

David Tarantino, Robert W. Baird.

Hi, good afternoon.

Doug, just a clarification question on the guidance.

You are assuming a little bit better trend in the third quarter than you had in the second quarter.

So is that a function of the comparison you're facing or are you starting to see or expect better business momentum even though it's just a little bit better?

But any clarification you can offer there would be helpful.

Yes, there's a lot of pushes and pulls, but we are lapping a little bit easier comp, not a lot easier comp, but a little bit easier.

And I would say we are encouraged by the early results from those initiatives that David outlined in his prepared remarks, including our enhanced server training program, the CakePay mobile app, delivery.

I think there's a lot of other noise in the quarter that has to do with Olympics and presidential debates and all that stuff that we factored in as well.

But we basically have taken down, really factored in the softer environment in the second half of the year and basically moved our guidance for comp store sales down about 1% from where we were before, and we are not seeing anything that would lead us to believe it should be different than that.

Got it.

That's helpful.

Then my follow-up question was on the CakePay.

Are there any metrics you can share in terms of adoption rates or what the impact might be in the early days related to throughput or anything you are willing to share at this point?

I think it's early to still do that.

We didn't nationally roll out until about mid-second quarter.

Obviously, the adoption cycle was positive so that's why we did roll out nationally, and we feel good about that.

And we are still continuing to get really good feedback from our guests and the servers on the ease of the app and the use of the app.

So it's still a little bit early to be able to tell, but we know the people are enjoying using it, and that's our number one goal.

And we would expect that, because of that, we will see some increased adoption over time.

I was also going to touch on that the partnership with MasterPass and the MasterCard certainly will be a way for us to continue to communicate about CakePay with guests.

The national promotion will be happening.

And the broadcast campaign that will be from September through December of this year will increase awareness.

And we feel positive about that too.

Great, that's helpful.

And just to clarify on the MasterCard, are they going to be advertising their brand on television for those (multiple speakers)

There will be a TV spot.

We are not sure when it will ad, and it was actually filmed in our restaurant and it will be obvious that it's Cheesecake Factory and CakePay and the app is introduced in the ad.

Great, that's helpful.

Thank you very much.

Sharon Zackfia, William Blair.

Good afternoon.

I'm going to break the one question rule since everyone else is.

Doug, on labor, I think, originally, you had expected labor to be up around 50 basis points this year.

Could you update us on your thought process there, given the new comp guidance?

And then secondarily, obviously the revenue missed but the comp didn't really miss that much from what we were all expecting on the outside.

I don't know if you've had a chance to look into the models, but it looks like new unit productivity might have been a little bit light.

Maybe if you could address that.

So, revenue miss was from about $3 million from consensus.

Is that what you have, Sharon?

Yes.

Yes, so I think consensus comp store sales were 0.6%, and we had 0.3%.

So a $3 million miss is about 0.5%, so a lot of it was just comp store sales.

Then I think the bakery sales year-over-year were down a little bit.

So, I think that makes up most of the revenue.

So nothing on new unit productivity that concerns you?

No.

Nothing -- that continues to be strong.

The other question was about labor.

It's -- when you look at the full year and where we're going to come out, I would say that we would expect labor to be somewhere in the up, say, 70 to 80 basis points, and we expect cost of sales to be down a little bit more than that, and really to get some other leverage on other line items such that our overall operating margins for the year are going to grow.

We said nicely.

I guess if we define nicely, we would say that that's somewhere between, say, 30 and 50 basis points.

Okay.

Thank you so much.

Joe Buckley, Bank of America Merrill Lynch.

Thank you.

I wanted to ask for a little clarification, Doug, on the supply side on unit expansion.

Are you seeing statistics that show that picking up?

And I've been curious what rate of unit expansion you are seeing in the industry.

I don't have any numbers here in front of me, but we know that, if you just go the whole way across the board from pizza players to fast casual to -- it's more I guess anecdotal that I would say but there is definitely more competition out there.

Just grocery stores are now much more involved in competing for dining dollars, so I think there's definitely a lot of restaurants and a lot of options out there that just make taking share from others just a little bit more difficult.

Okay.

And then one more.

On the server training, I guess I'm curious what the primary goals were.

It sounds like it has been well received by the customers, but as you guys designed it and rolled it out, what were you trying to accomplish?

Overall, our hope was to increase the service and hospitality for guests and just make those dining experiences more compelling.

That was goal number one.

Around other metrics and benefits we've seen, we've already seen higher retention in servers that actually have come through this new server training.

We've seen higher guest satisfaction scores for the servers that have actually gone through the new server training.

Those are two of our biggest goals.

We've also seen a reduction in errors that these servers make generally in the first three months when they are working for us.

It's, as you know, a big, complex menu.

There's a lot to learn.

We've seen a reduction in the amount of errors that they are making.

So all three areas benefit the guest experience and that really was the overarching goal of enhancing the training.

We hadn't really changed our server training in quite a few years -- along with leveraging technology and the way we were teaching the training, so that they were able to adopt learning much faster than they had previously.

So we are excited about it and continue.

As every new server has come on board, they are all going through the new training.

We currently have some classes that are going through the restaurants right now where we are educating our current staff that are not new servers on many of the same teachings that we have in the new server class so that our current base of servers are also learning from the new training.

Okay, thank you.

Will Slabaugh, Stephens.

Thanks guys.

I wanted ask you about labor again if I could.

I'm just wondering if you could go into a little bit more detail on what's going on there with the wage inflation versus the overtime that you mentioned as we look into -- sort of on a store-by-store basis from what we saw this quarter.

Should we expect a similar sort of rate that we saw -- growth rate that we saw this quarter in the back half versus what we just experienced?

And then kind of on the back of that if I could, wondering about your willingness to take even more price to offset, assuming that the wage inflation rate keeps growing.

I think what I would say is the wage rate, as far as wage rate inflation, were pretty much what we expected them to be.

So that was -- we talked about 5% wage rate inflation.

But we did see more over time than what we had been seeing, and that is definitely going to be a focus area for us as we look forward working on getting overtime down by better management of schedules or in and out times, or just hiring, getting fully staffed faster.

So that will definitely be a focus for us in the second half of the year.

And as far as the pricing to potentially offset any additional wage rate inflation?

We are going to take -- we're going to do our summer menu price or change like we always do.

It's going to be between 1.1% and 1.2% price increase, which is going to replace pricing from last summer of 1.5%.

So we are actually bringing down the pricing in the menu.

We had about 2.9% roughly pricing for the first half of the year and we will have roughly 2.5% in the second half of the year, so a little bit lighter.

So we are not trying to price to that.

We are taking -- we're going through that art and not a science of trying to balance our desire to continue to protect our margins, but also to grow against traffic.

Got it.

Thank you.

Karen Holthouse, Goldman Sachs.

Thank you for taking the question.

Just a quick clarification on the COGS side of things.

What was the change in the inflation outlook that was baked into the change in guidance?

It was -- basically what we had been saying was that we felt that cost of sales would be about flat with the prior-year cost of sales inflation, and actually there's a slight amount of deflation.

So it's basically just that.

And then also on the test of delivery in California, I'm just curious, as you've gotten farther along the way, how you've been thinking about are there particular obstacles you've had to overcome, particular challenges?

Just sort of what have been the learnings from day one to where you stand today?

I think the popularity of Cheesecake Factory is pretty evident in some of the delivery numbers that we've seen.

So in some of the restaurants where we've had a large amount of orders, we've had to just make sure that operationally we can execute that as well as possible.

And that's one of the reasons we wanted to develop a partnership with somebody hopefully nationally, because it gives us the transparency into every single order to understand how well not only we are executing, but on the second end of it how well the drivers and the delivery company is executing it.

So that's been a bit of learning for us, to be able to control the amount of orders coming into the restaurant in any given time.

But as you know, we already have about 10% of our business that's to-go business.

In our original pilot restaurants, our five pilot restaurants, we saw lift in those to-go sales, which is great.

Some of the early metrics from our partners show that some of our net promoter scores are higher than their other partners are, and our ability to actually execute and make less mistakes is better than some of our other partners.

So we think that, as you know, we are operationally focused all of the time.

We are going to have that same level of intense operational focus on delivery, because it has to be done incredibly well to ensure that, when somebody gets something to their house, it's at the same quality that they would expect at The Cheesecake Factory.

Thank you.

John Ivankoe, JPMorgan.

Thank you.

I think a little bit of a follow-up for the question on pricing and then a question on COGS.

Firstly, on pricing, how has your trade area pricing gone, and do you have more opportunity to take more pricing in some of your more expensive labor or just high cost markets in general?

I'd say our trade area pricing has gone pretty well.

In fact, in markets where we have taken more geographical pricing such as in California where the minimum wage has gone up, as everyone knows, substantial for a couple of years, we've seen traffic levels that are consistent with other regions where we have taken less pricing.

So, I think that the pricing is going well.

Again, it's an art and not a science, but that seems to have been going well.

I don't -- anything else to add to that to that, David?

No.

I think that our goal would be to take our normal pricing when we can, and not to have to take more pricing anywhere that we have to.

That's always been our philosophy and that will continue to be our philosophy moving forward.

And it does look like from the outside that maybe you would be taking more pricing in California in the second half of the year, and perhaps you have other markets where you are taking nearly no pricing.

Is that a fair characterization?

No.

We're taking our normal pricing as we have across the country, and perhaps a little bit more on those markets that I touched on earlier.

And we did that in the first half the year and we would do that in the second half of the year.

Okay, understood.

The next question on COGS.

You are at a very low percent level.

I think you are about as low as you've ever been.

How sensitive are you to that?

Maybe cost of goods sold maybe being too good, like it's too high of a gross margin where you guys want to be sensitive of not allowing that to expand further to maybe make the offering in some way maybe not as price competitive as it was in the past.

I think we are very focused on making sure that we, like David said, that we don't take any more price than we need to.

We are just happening to really benefit with these low cost of sales this year because the commodity environment has really fallen off a lot more sharply maybe than some people expected it to.

So, I would say we are just going to continue to be cautious about pricing, and if we don't need to take as much pricing, we won't.

And that would cause the cost of sales to more normalize.

And on the operational side, I'll just add, we're going to continue as we have done over the past year to run as efficiently as we can and continue to reduce waste, which is another way we're going to improve those costs.

Thank you.

Matthew DiFrisco, Guggenheim Securities.

Thank you.

Just a couple of bookkeeping questions here.

On the to-go sales, can you remind us what that 10% looked like last year?

That's been our average probably going on 38 years.

So we've always had high to-go sales.

We haven't broken out what to-go sales are in those delivery restaurants and shared that number in any way.

We just did see some positive lift, which was encouraging.

We've always had right around that strong 10% number.

That's where I'm getting a little confused with the positive lift then.

I was wondering.

Was that a contributor to check or were you growing it?

But it seems like 10% was comparable to last year, so it's growing in line with comp sales.

What I'm talking about would be, in the test pilot restaurants where we were redoing delivery, we saw an increase over that 10% in to-go sales.

Okay.

And then also I'm just curious as far as, in the past you've obviously tried to develop your -- develop a couple of alternative brands, and you've also been questioned about with your cash flow maybe looking out towards acquisitions.

And certainly now we are in an environment where there seems to be an accelerated amount of growth or expansion by quick casuals as well as some differentiated casual concepts.

What is your appetite I guess at this stage right now and in the current environment for potential acquisitions or to add on into the portfolio?

I'd say we are still actively looking at other external concepts.

And there are even in -- I talked about winners and losers before.

There are still going to be opportunities for us to increase our growth runway into the future, and as a complement to The Cheesecake Factory growth in finding the right other opportunity.

And we are very selective about the way that we go about that.

We've done exactly zero of that investing so far.

But we are seriously evaluating and continue to seriously evaluate other potential investments that we can make.

Understood.

Okay.

And then last question, with respect to the color you gave on the regions, both Texas and Florida, it seemed like you cited a little bit of the macro as well as slower tourism.

One of your peers also suggested that they source somewhat of a correlation between some of the civil unrest and the domestic terrorism that we've seen in those unfortunate states.

Have you seen a similar slowdown around those sales in the end of June and early July as far as in Texas and in Florida in particular, or is it really more so of a stream of things like the macro side?

It's more of a stream of things like the macro side.

Those things are certainly unfortunate, but we haven't really seen them impact our sales in the way that maybe some competitors have talked about.

Okay, thank you.

Peter Saleh, BTIG.

Great, thank you.

I just wanted to come back to MasterPass.

Are you guys contributing dollars from your ad fund to this partnership, or what kind of financial I guess contribution are you making to this partnership?

We are contributing nothing other than our wonderful brand.

(multiple speakers)

Excellent, okay.

Got it.

And then on the comps, at least just maybe in the month of call it July, do you have a sense of kind of the excessive heat that we've been seeing across the country?

Has that been limiting your use of patios?

Do you think that's been kind of dragging comps a little bit in the month of July?

Certainly, in California on days where it's 100-something degrees or those overly humid days on the East Coast and the mid-Atlantic, maybe a little bit, not that much necessarily more than last year when you have those days.

It may just trade-off on which day or which week it is of the particular summer quarter.

Peter, we would have factored anything that happened before today into the guidance that we gave.

Got it.

Understood.

And my last question on the delivery pilot test.

I know it sounds like the to-go sales maybe have ticked up above the 10% in those restaurants, but any sense on is this all incremental sales or is this cannibalizing some of the in-dining room sales?

I think, thus far, we've seen it be relatively incremental.

We don't feel like it's cannibalized.

Obviously, people want delivery food on the busiest times, just like they want to come into the restaurant.

So you see it during the weekends; you see it at our busiest times when the restaurants are already full.

So it's incremental in that way.

Excellent.

Thank you very much.

Stephen Anderson, Maxim Group.

Thank you.

Last quarter, you broke out the account for Grand Lux Cafe.

I just wanted to see if you are able to do that again for this quarter.

Sure.

Grand Lux Cafe comps were up 2.2%.

Thank you.

Paul Westra, Stifel.

Thanks.

Good afternoon.

You guys obviously had mainline comp or so and were able to beat the quarter by $0.07 or so of your guidance.

I know you commented on slightly better commodities and lapping some labor costs, but could you sort of maybe rank-list how you see the beat happen here in the second quarter?

And then maybe conversely, you obviously cut your second-half comp guidance by about 1 point and maybe where the margin offsets going forward are coming from if they are different from the 2Q beat.

Yes, I would say, in the second quarter, our core business performance was what we expected it to be.

We did have greater operating efficiencies than expected with cost of sales, but as well as benefits from cost of sales, pricing that helped us more than offset the labor pressure.

So, cost of sales favorability I would say of that difference between what guidance we gave and what we actually made was maybe $0.04 or $0.05 of that difference.

And then we had lower than anticipated G&A that made up the difference.

So, I think that's pretty much what caused the beat above what we had thought before.

And then your other question was -- I already forgot.

On a go-forward basis, obviously with the lower comp outlook of about 100 basis points for Q3 and Q4, you had an implied roughly comparable earnings outlook for the second half.

Where is the source of margin to offset the lower comp?

Yes, it's coming from the same place, a little more favorable cost of sales environment than what we originally expected.

Okay.

And then lastly, just a reminder on the 53rd week, how much -- did you ever quantify what that impact is going to be?

Yes, it's -- what is it?

$0.05 to $0.08.

$0.05 to $0.08 a share.

Okay, great.

Thanks very much.

Joshua Long, Piper Jaffray.

Thank you for taking my questions.

I was curious on how much of your COGS basket is locked in, given the better than expected favorability on those prices, if that causes you to rethink about how much you might have contracted at this time of the year.

Well, we are at 75% contracted.

It doesn't -- for overall.

And we are 65% contracted with respect to dairy, which if you remember back a couple of years, that was something that really hurt us.

And so last year, I think, for the second, third and fourth quarter of the year, we were probably only 40% contracted with dairy.

I certainly wouldn't second-guess in any way the fact that we are fully contracted, and maybe we could be paying less.

Our objective, though, really with respect to commodity cost management is to try to put predictability into our COGS model, and that would mean that we are already looking at whether we should -- booking for next year.

And one of the criteria for booking for next year is not necessarily let's get the absolute lowest price, but if we can get a lower price than we had this year, then that's pretty darn good.

So that's sort of the way we look at it.

We look at predictability and control and volatility in the pricing of the commodities, and that's worked out really well for us this year.

Could we have got a little bit lower pricing if we were less contracted?

Maybe, I'm not sure.

But certainly it's worked out well for us this year.

Indeed.

And if we think back to those periods of time where you weren't in a position to contract a lot of that basket like you are now, curious on how much has been kind rolled out, if there is still more learnings that you are going through in terms of getting better at that process for not having done it for much of your history, or if, once you get the system in place.

As it is now, it's kind of set and ready to go.

We've always contracted for most of our products, and we've always been between 60% and 70% contracted, which we thought was fully contracted for us back at that time.

What we've been more aggressive with is contracting for the dairy, because the learnings we had were we really let that get away one year because we thought we could get a lower price.

So, I would say that we are still learning, but we are much more diligent about the process and very purposeful about the way that we go about looking at what should be contracted when.

And I would say that's what we're doing a much better job at.

That makes sense.

As we think about the external bakery sales, it seems like we're getting to that point where we might be lapping over some of the changes you had in the channel in 3Q of last year.

Would you expect revenue trends for that segment to be kind of flattish, or is there still more adjustment that needs to be made?

The bakery is still in the process.

I would think that we are going to lap around like you are saying.

Basically, the bakery external business, they are having less club sales and we are sort of weaning ourselves, if you will, off of some of what were large club sales, but our other sales are growing.

Our international sales are growing, our retail sales are growing, and they are at much higher profit margins.

So we like the transformation that's going on in the bakery and the fact that they are selling now products that we're able to do much more profitable with, albeit in the near term that results in lower sales in the previous year.

Understood.

Thank you.

Bob Derrington, Telsey Group.

Thanks Doug.

You usually are pretty good at giving us a little bit of color about the timing of the calendar and how the holidays shake out and the impact on your business.

As you look at the fourth quarter this year, last year the fourth quarter ended on December 29, which means that it excluded the major I guess New Year's holiday.

How does it shake out this year and what should we expect from things like Halloween and the timing of Christmas and New Year's?

Let's talk about Christmas and New Year's because, first of all, our year ends this year in the year 2017.

What is our year end, do you know?

January 3.

January 3, 2017.

So we have the rare treat this year of enjoying two New Year's Eves in the same year, one at the beginning of the year and one at the end of the year.

So, that's going to be very helpful, and that's part of the $0.05 to $0.08 from the additional week because it's not only an additional week, it's a very good additional week.

Halloween, Halloween comparisons have to be better this year than it was last year.

I think it was on Monday, right?

So on Monday this year?

That's got to be good.

I'm not ready to quantify that.

We love Halloween on Monday.

Just if we could get Valentine's Day on Monday too, that --

That's not a good holiday for us.

Got you.

Super.

That's helpful.

Thank you.

That does conclude today's Q&A session.

That also does conclude today's program.

Ladies and gentlemen, thank you for participating in today's conference.

You all may disconnect.

Have a great day.