Cheesecake Factory Inc (CAKE) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to The Cheesecake Factory Second Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ms. Stacy Feit, Senior Director of Investor Relations.

Ma'am, you may begin.

Thanks.

Good afternoon, and welcome to our Second Quarter Fiscal 2017 Earnings Call.

On the call today are David Overton, our Chairman and Chief Executive Officer; and Matt Clark, our Executive Vice President and Chief Financial Officer.

David Gordon, our President, is currently traveling and will not be on the call today.

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 call, we will be discussing earnings per share on an adjusted basis, which excludes impairment and lease termination.

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

Matt will then take you through our operating results in detail, and provide our outlook for both the third quarter 2017 as well as our current thoughts on the full fiscal year.

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

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

Thank you, Stacy.

As we communicated in June, the second quarter sales environment was softer than we anticipated.

We saw volatility in week-to-week sales trends, indicative of uncertainty on the part of many consumers.

We were also impacted by unfavorable weather in the East and the Midwest.

However, our best-in-class operators effectively managed the business.

Four-wall labor productivity and food efficiency improved year-over-year and were on plan, in spite of the softer sales.

This enabled us to maintain solid restaurant margins to protect profitability.

Our industry-leading average sales volumes of $10.7 million underscore the Cheesecake Factory's relevance.

Ongoing menu innovation is a significant contributor to these volumes.

To that end, in celebration of National Cheesecake Day this past Sunday and Monday, we introduced our newest dessert, Celebration Cheesecake.

Consumer and media response to the new cheesecake surpassed our expectations.

Our marketing team secured a record 65 broadcast TV segments, achieved over 285 million media impressions and generated tremendous social media engagement, making this our biggest cheesecake launch in the company's history.

And we celebrated even bigger this year by giving our guests the opportunity to enjoy a complementary slice of cheesecake during their next dine-in visit.

Turning to off-premise, we are continuing our national delivery rollout.

At present, delivery via a third-party partner is offered in about 60% of our locations, and we believe we will ultimately get to approximately 90%.

At the same time, we are working on further improvement to our to-go process, including online ordering capability, which could be in pilot by the end of the year.

Given the strong affinity for the Cheesecake Factory, we have discussed the opportunity to further leverage the power of the brand in the consumer packaged goods channel.

We now have the Cheesecake Factory cupcake and cookie mix for sale at Walmart stores nationwide, as well as the Cheesecake mix at Walmart and a number of other grocers.

Initial consumer response has been very strong, and we have additional products slated to launch later this year and into 2018.

Looking ahead to the balance of 2017, we continue to expect to open as many as 8 company-owned restaurants.

This includes our first location in Canada, scheduled to open in Toronto in November, as well as our second RockSugar.

We now expect as many as 4 restaurants to open under licensing agreements internationally in 2017.

This includes our first location in Hong Kong, which opened in May, and has sustained very strong sales volumes as it continues to generate quite a bit of excitement.

With that, I'll now turn the call over to our new CFO, Matt Clark, for our financial review.

Well, thank you, David.

It's good to be here.

Total revenues for the second quarter of 2017 were $569.9 million, reflecting a comparable sales decline of 0.5% at The Cheesecake Factory restaurants.

Half of our regions remained positive during the quarter.

However, we did see more variability in performance from region to region and within markets.

External bakery sales were $13.1 million in the second quarter.

Cost of sales decreased approximately 10 basis points year-over-year in the second quarter of 2017 to 22.6% of revenues.

This was driven by favorability across various categories.

Labor was 33.9% of revenues, an increase of about 70 basis points from the second quarter of last year.

A majority of the increase was attributable to higher hourly wage rates, as expected.

Other operating costs were 24.1% of revenues, up 50 basis points from the prior year, the majority of which was due to higher utilities and repairs expense versus the second quarter of 2016.

G&A was 6.2% of revenues in the second quarter of fiscal 2017, down 20 basis points from the same quarter of the prior year.

This decline was primarily driven by a lower bonus accrual, partially offset by higher legal fees.

Preopening expense was approximately $1.3 million in the second quarter of 2017 versus $2.3 million in the same period last year.

We had one relocation in the second quarter of 2017 compared to one opening in a new market the same quarter of the prior year.

Our tax rate this quarter was just under 22%.

And adjusted earnings per share was $0.78.

Cash flow from operations for the first 6 months of 2017 was approximately $114 million.

Net of roughly $53 million of cash used for capital expenditures and growth capital investments, we generated about $61 million in free cash flow through the second quarter.

That wraps up our business and financial review for the second quarter of 2017.

Now I'll spend a few minutes on our outlook for the third quarter and full year of 2017.

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 that 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 effect of any impacts associated with holidays or weather.

Similar to the broader industry data we have seen thus far, our third quarter has been off to a softer start.

In turn, based on an assumed comparable sales decline of 1% to 2% at the Cheesecake Factory restaurants for the third quarter of 2017, we are estimating adjusted diluted earnings per share between $0.60 and $0.64.

This is based on an assumed tax rate of approximately 24%.

Turning to fiscal 2017.

We are now estimating adjusted diluted earnings per share between $2.62 and $2.70 based on an assumed comparable sales decline of approximately 1% at The Cheesecake Factory restaurants.

On the cost side, while commodities were slightly more favorable than we anticipated during the first half of the year, we continue to expect the back half of the year to be closer to 2% inflation.

In turn, our expectation for commodity inflation remains about 1% to 2% for the full year 2017.

Our guidance range also continues to assume wage rate inflation of approximately 5% in 2017, consistent with we have seen year-to-date.

As David discussed, our operators are managing the business well, in spite of a challenging consumer environment.

Protecting profitability is a key focus.

And while we are controlling the cost that we can, including targeting to hold G&A flat as a percent of sales year-over-year, we expect to continue to experience some deleverage from the assumed comparable sales decline.

In turn, we currently anticipate full year operating margins in the mid-7% range.

Regarding our corporate tax rate, we now expect it to be just under 22% for 2017.

As a reminder, this lower tax rate reflects the adoption of the new accounting rules regarding stock-based compensation.

Our total capital expenditures in 2017 are now expected to be between $125 million and $135 million.

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

In keeping with our practice of consistently returning substantially all of our free cash flow to shareholders, we plan to continue doing so in 2017 in the form of dividends and share repurchases.

To that end, our board approved a 21% increase in the dividend, underscoring the stability of our cash flow generation and our confidence in the long-term prospects of the business.

We also now expect to allocate as much as $125 million toward share repurchases in 2017, which is reflected in our guidance.

Despite the short-term softness we're experiencing, we believe our long-term outlook remains positive.

We continue to carry out our mission of absolute guest satisfaction in the restaurants, while focusing on adapting the business to the current environment as we have done throughout our nearly 40-year history.

Concurrently, we are executing on a diversified set of incremental growth opportunities to continue to position us to achieve our long term objective of mid-teens total return to shareholders.

With that said, we'll take your questions.

(Operator Instructions) Operator?

(Operator Instructions) And our first question comes from John Glass with Morgan Stanley.

I'm not a guesser, David.

With the benefit of time now, last quarter you talked about weather in the consumer, but now you're looking at third quarter with maybe some continued softness.

First, I guess, maybe how would you quantify the shortfall in the second quarter between weather and the consumer?

And do you think now, exiting this weather period, this is just more of a macro issue?

And then related to that, what do you -- historically, you haven't done a promotional brand, you haven't done a lot of short-term things to drive sales.

Are you thinking any differently about how you might drive sales if this is the new normal?

Or this at least is the current normal from an operating environment?

John, I think, let's just cover the comp cadence, if you will, for the quarter.

April was okay.

Obviously, we had the benefit of the Easter shift.

And then May, I think we saw some of the deceleration that the industry did and it was combined with the weather.

But I think June ended up in the middle.

And so if you want to really think about the run rate, to give context, it's probably -- if you factor all those pieces out, somewhere around the minus 1%.

The weather was probably about just 0.5 points for the quarter, but we had the Easter benefit, and so some of those things are combined.

When we look at that environment, definitely, the more economic-focused consumer is probably where the challenge is.

You can see the level of activity in the industry around deals, and that may pertain to your second question.

I think, for us, that people may not realize the true value of The Cheesecake Factory, and not just in the portion sizes but in some of the price points that really are very attractive, if not very competitive even in today's environment, and so I don't know that we need to do deals or promotions.

I think effectively communicating some of the price points that we have on our new special card or the value that's in our Happy Hour would be competitive enough.

And so maybe that's where we need to focus is on some of those communications, but not necessarily in running short-term promotions or limited time offers.

Just to that point, do you plan on -- how do you plan on communicating those lower -- the attractive existing price points on your menus?

Is that an advertising issue?

Is that direct response?

How do you do that?

Yes.

I think it is mostly going to be through social media, through our website, through e-mail.

I think those are the communication vehicles that are effective today.

And I think making sure that we're just adding that piece to, really, what you see a lot of times when people are in social media with The Cheesecake Factory or the amazing shots of all of our great food.

And we just want to make sure that we also get through the message that anybody can come in and enjoy that at a reasonable price.

And so those vehicles, I think, we've always been a word-of-mouth company.

Today, social media is the word-of-mouth, and we think that can be effective.

And so it's probably a combination of that.

And our next question comes from David Tarantino with Baird.

Just a couple of questions on the sales.

Can you maybe talk about what you're seeing regionally or whether the issue is concentrated on certain regions or if it's broad-based?

Or -- and perhaps comment whether it's weekday or weekend or both.

That would be helpful.

Sure.

I think the general slowdown has been broad-based, although it seems like the Southeast, the Midwest and Northeast kind of the upper right quadrant of the country, is a little bit slower.

We still have half of our regions are positive.

California continues to be among the stronger regions.

Texas was very good for us, the Northwest.

So it's a little bit -- the slowdown is a little bit everywhere, but just maybe a little bit more in that Eastern side of the country.

With respect to the dayparts and day of the week, I think, midday week, the lunch part, is probably a little bit softer.

But we're not talking about a significant driver, it's just marginally softer than other areas.

And so, again, I think that speaks more to a consumer-driven reflex than it does anything that we're doing with the brand and we're executing on all the pieces that we want to.

So we still see lines at the door on the weekends and at night, and I think it's just a little bit across-the-board.

Great.

That's helpful.

And then, Matt, does it diagnose the issues here?

Your pointing to a lot of macro factors.

I guess, what's making you comfortable that it's not something specific to the brand?

I know we've seen some weakness elsewhere, but we have also seen some of the metrics be stable.

So how do you diagnose that and how can you be sure that there's not something specific to Cheesecake Factory going on here?

Sure.

I think we have 2 points of reference broadly, internal and external.

So internally, obviously, David, we have a variety of operating metrics that we track to ensure quality and execution.

And our teams are laser-focused on that and really haven't been better.

So we know we're delivering the food, the experience and all of those attributes internally.

We also do research on guest visitation.

And one of the things that we're seeing there is our frequent guests are coming in actually more often.

So everything we're doing is resonating with our core guests and I think speaks to the destination component of Cheesecake Factory.

What it looks like to us, and I think it's really supported by the rapid increase in the deal activity that started -- I think more in the middle of Q2 and is continuing, is that those guests that are a little bit more -- I will just call them economically focused, we can see that that's where some of the traffic pressure has been for us, right.

So I think, again, that goes to the communicating the value piece of it, rather than being something that we're not executing on in the 4 walls.

And our next question comes from Brian Bittner with Oppenheimer & Co.

Just a couple of questions.

On the third quarter EPS guidance, it's down $0.9 to down $0.15 on the down 1% to 2% comp.

Is that a relatively normalized algorithm on that kind of a comp decline going forward?

Or is there anything that changes, assuming sales wouldn't get better, just trying to think about EPS gains going forward?

Is there anything that improves on the cost side going forward after this quarter?

Or is that the right algorithm on that type of comp?

I think you have to take each instance and maybe not generalize in terms of an algorithm.

Obviously, every quarter has their unique components, whether it's preopening or the sales levels in that quarter or the rate of inflation for commodities or anything like that, right?

So what I think the math suggest is that a 1% change in comp store sales is $0.12 to $0.13 annually.

That's a short-term approach, right?

So obviously, we'll work to manage the cost structure appropriately to protect margins going into 2018.

We're doing an excellent job managing our flow-through today, but we're not going to knee-jerk and impact the brand in a negative way.

So when we look into the third quarter, if you kind of look at our prior expectations of 1% to 2% comp and you do the math on that, I think you'll get to about the $0.10 that you're talking about, Brian.

So beyond that, obviously, it will depend on each quarter.

I think, in the fourth quarter, you're looking at lapping the 53rd week.

So each of those is going to have a different perspective, I wouldn't necessarily read into it.

Okay.

And just on the sales again.

I mean, with all the data that you have internally and all the things that you run to understand your sales patterns, I mean, are we at a point -- I know it's early on, but are we at a point here where this retail environment weakness is maybe just sideswiping your guys' business a little bit and there needs to be some understanding of how to protect against that.

Or does your data suggest maybe something else and just the higher end consumer is a little shaky?

No.

I think the higher end consumer is in pretty good shape.

Again, what our research would suggest is those guests that are our core guests, and we skew a little bit higher in the income scale for that, are going to the mall as much or more than they used to.

Again, there maybe some guests that are a little bit more focused on the current environment for them and economics that aren't.

We're not seeing that degree of variability that some -- maybe other concepts are when it comes to performance in mall or out of mall.

I think that the other data we've seen from an industry perspective, whether you're looking at Black Box or KNAPP-TRACK or the credit cards, as you see a deceleration in the quarter of about 3% in total restaurant spending.

So that doesn't suggest, to us, when we look at both from our brands perspective and the broader industry perspective, that there's anything from that mall component to us that is relatable to other concepts of retail traffic.

Our guests are still coming to us as a destination, right.

And if you look at the gap in retail traffic to where we're at, it's not really relatable in our minds.

And our next question comes from Sharon Zackfia with William Blair.

I guess maybe a question for David.

Just as you think about the softer environment, how does that affect your thought process as it relates to development for 2018 and beyond?

Well, we're still being very critical about the sites that we sign up for.

And we're looking -- we still have a lot of possibilities, but we're just, obviously, just being even that much more careful.

Other than that, I think we're still trying to collect as many great sites as we can.

We're working on the cost of The Cheesecake Factories themselves and how to take some cost out, only because construction costs have gone up 3% to 5% and they're even hard to find good contractors, so we're addressing that as well as making sure that the malls are truly A malls and their sales are stable and strong.

So other than that, Sharon, I don't know that I can give you any other changes that we have in mind.

I guess maybe a follow-up.

Are you seeing any better terms with the mall developers at this point?

We're not really.

I think we get some of the best terms out there because we still are attracting people to come to the malls.

Mall owners want entertainment and they want restaurants and they want to bring bodies into their malls, and we're still a prime candidate for that.

And street deals, if you go out of the malls, they're really even harder to make for reasons you might guess, but we're working on those as well.

So I don't think we'll get better deals, we just want to make sure that we get the best sites.

And our next question comes from Gregory Francfort with Bank of America.

Two questions.

Just one on the 2 store closures during the quarter.

What was the reason for those 2?

And then just going back to the question on the regions, if we look at the industry data, I think California is still outperforming the averages, but for the last 2 years has been top, second, third, and now is more middle of the pack.

Is that something that you've seen or has your gap versus the competitors in California widened?

Is California outperforming on a relative basis or is it may be that it slowed, but it's still outperforming?

I'm just -- the question on California versus the rest of the region would be helpful.

Sure.

So I think, Greg, we had one lease that was in Miami that expired.

Yes.

And they are remodeling their whole project.

We didn't really think it was right for us.

We've been on a month-to-month for a while to make sure the landlord could present the project and how it was going to change and take 2 years of construction, which would do us no good.

In the end, we thought we could find a better site for that part of Miami and that's why we gave up our lease because it was just not going to be to our advantage to stay.

The other one was the relocation.

We actually just moved within the Hackensack.

We got a brand-new restaurant in that mall, in Riverside.

We're really excited about it, it's doing phenomenal.

So I think that that's that piece of it.

I think with respect to California, we continue to see it being a stronger market and outperforming.

We don't know how others are doing here, but from an economic standpoint, it's still strong.

I do think it stepped down just a little bit from where it was.

But since every other geography took a little bit of a haircut, California still remains one of our strongest markets.

And our next question comes from Will Slabaugh with Stephens Inc.

I had a question on the cost side, on labor and productivity.

It looks like in the past 2 quarters, despite the mid-single-digit wage inflation, I have your labor dollars per store only up about 1% to 1.5%.

Can you talk about what you're doing there to offset the inflation?

And then as we look to the back half of the year and in next year, how sustainable that type of limited growth in the dollar per store is?

Well, I think what you're seeing is just the excellent management of flow-through within our 4 walls.

The teams, obviously, are focused on that.

And with the variability in the sales, I think, it's even more impressive.

So what the 1 percentage increase reflects is the 5% of wage inflation.

But, obviously, net of the sales pressure, you're going to be a little bit more tight with your scheduling of hours.

And so I don't think there's anything beyond that.

Two, I do think that that's sustainable.

I think we've proven, both from a leverage up and down perspective, that we're able to manage to those targets.

And remember, on average, we're still running $10.7 million locations, so I think we've got a little bit more buffer to make sure that we can manage to that targeted flow-through than maybe some other locations do.

Great.

And if I could follow-up on those commentary.

You've mentioned this in California that this wasn't an issue, but I wanted to double check if you rolled out calorie counts in June across the rest of the country, if there is no impact that.

We have not seen any behavioral impact.

We just celebrated National Cheesecake Day, and I got to tell you our guests were ordering a heck of a lot of cheesecake.

So I'm not sure that they're concerned.

I think David said, and I think we believe this is still true, that when people go out to eat, they want to get everything, all the calories that they're ordering and paying for.

And so we, across the platform, haven't seen any impact from the calorie count.

And our next question comes from Matt DiFrisco with Guggenheim.

I'm sorry if I missed this, but did you guys mention what the price in the traffic was in the quarter as well as the Grand Lux comp?

We didn't.

So you didn't miss it, but the Grand Lux comp was a negative 1.3%.

At Cheesecake Factory, we had 2.2% pricing and traffic was a negative 2.4%, so then mix was just slightly negative as well.

And then how about the outlook for price going forward?

Are you going run sort of 2.3%?

Is that a good proxy for the back half of the year?

Yes.

I think, on a weighted average, 2.3% is a good estimate.

Okay.

And then just looking at that number of licensed store openings.

I guess, it looks like that will come in the back half of the year.

Is there an earnings benefit in one of the quarter sort of an upfront cost with leased stores?

Are they kicking into a realization of an upfront licensing fee that you might have on your deferred revenue or on your balance sheet that's going to now flow through the income statement.

Is there any earnings benefit from having these open more so than just an existing licensing agreement?

No.

The really -- the way that it's going to play out is once they're open and they're generating revenue, we're going to get some benefits.

Any of the upfront licensing fees or the way the accounting works is going to be spread over the life of the agreements in any event, and these are all existing partners.

So we wouldn't think that there would be any unusual up or downs with respect to the international business.

Okay.

And then last bookkeeping question.

Did you say you have $125 million remaining which is still due for 2017?

Or is that your goal for 2017 on share repurchase?

That's the full year.

And our next question comes from Karen Holthouse with Goldman Sachs.

Going back to some of the commentary from earlier on sort of where you're seeing the traffic weakness.

If your current -- or sort of core user, heaviest users, is actually seeing an increased frequency, on sort of the other end, do you think of it more as an issue of decreased frequency or you're actually seeing growing impact from lapsed users?

I think that's a good question, Karen.

I think you'll probably see a little bit of both.

Most of that's research data, so we're not actually tracking those individuals, but I think it's a little bit of an impact from both.

And then on -- just thinking about going into 2018, how much of a headwind are we looking at from a G&A perspective?

Just normalizing for bonus accrual next year.

Well, our objective every year is really to keep G&A as a percentage of sales flat.

So we, obviously, need to look at all of those pieces.

And when we put our plan together, I would envision that would still be our objective.

And our next question comes from Brian Vaccaro with Raymond James.

I just wanted to circle back on some of the guest satisfaction metrics and your comments around sort of the more economically or value-focused consumer.

Just curious, have you seen any degradation in your value perception scores?

One item we've noticed, and continue to see, is your food cost ratio in that 23% range hasn't been down there in a long time.

And do you think you're leaving enough value on the plate for certain consumers?

Yes.

We haven't seen any degradation.

We just know that value is much more top of mind and that the competitive set is just broadcasting that message with a lot of noise, and so we haven't seen that.

On the flip side, we just know that the environment has become increasingly competitive.

With respect to the margin side of it, I think it's more a reflection of our excellent work in managing efficiencies.

As you know, in the first quarter, we rolled out the [auto part], which helps us to predict and manage the pre-work in all of the kitchens to make sure that we don't make too much or too little.

And I think, over the years, our growth and size has enabled us to have more scale and purchasing power.

So I think you're just really seeing the benefits of the work done there.

Rest assured that the portion sizes haven't changed one bit.

The quality of the product hasn't changed one bit.

So I think that the guests see it that way.

Okay.

And then one on the model.

Matt, you mentioned the -- you did highlight that the third quarter, fourth quarter, keep in mind some movements in preopening costs.

Could you provide some help just -- there's always the outside looking in tough number.

What do you expect quarterly or even in an annual basis for preopening this year?

Sure.

I think preopening for the full year is around $12.5 million.

I think, probably $3.5 million for the third quarter and so you can back [end] to the fourth quarter.

And our next question comes from Steve Anderson with Maxim Group.

You answered most of my questions, but I want to ask if you saw -- you mentioned trying to keep some of your SG&A dollars even with some sales.

But I've noticed that you're still running core SG&A higher than you had, let's say, maybe about -- maybe 5 or so years ago.

Do you see any opportunity to maybe look at -- maybe examine the SG&A line and see where we could see some savings opportunities?

Well, we're always looking to be as efficient as possible whether in the 4 walls or the corporate office.

Really the difference from what you would have seen 5 years ago and today is that the extreme growth of our gift card business and the utilization of some of the third parties that help in the retail channels, and so the commissions associated with that go through the SG&A line.

So when we look at true core SG&A, it's basically been flat.

So that's one way of thinking about marketing, but we've managed the rest of it at the same level for as long as I've been here.

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

This concludes today's program.

You may all disconnect.

Everyone, have a great day.