Cheesecake Factory Inc (CAKE) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 The Cheesecake Factory Incorporated Earnings Conference Call.

(Operator Instructions)

As a reminder, this call will be recorded.

The webcast is down, but a replay of the call will be released once the technical difficulties have been resolved.

I would now like to introduce your host for today's conference, Ms. Stacy Feit, Senior Director of Investor Relations.

You may begin.

Thank you.

Good afternoon, and welcome to our second quarter fiscal 2018 earnings call.

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

Before we begin, let me quickly remind you that during this call, items will be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results could be materially different from those stated or implied in the 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 of assets and lease terminations.

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

Matt will then take you through our financial results in detail and provide our outlook for the third quarter and the full year 2018.

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

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

Thank you, Stacy.

Second quarter core operating performance, driven by comparable sales growth of 1.4% at The Cheesecake Factory restaurants, was in line with our expectations.

With comparable sales up 1.7% in the first half of 2018, we are tracking to average unit volumes of approximately $10.8 million, underscoring the strong affinity for The Cheesecake Factory brand and the unique dining experiences we provide for our guests.

Our operators diligently managed their restaurants during the quarter, including continuing to maintain industry-leading, and importantly, stable retention at the manager and hourly staff levels, in spite of industry turnover at historic highs.

Tenured teams helped drive key operating metrics, like year-over-year improvement in food efficiency during the quarter.

We also completed the infrastructure upgrade of our West Coast bakery on time and on budget.

With a state-of-the-art baking and refrigeration technology, we expect additional automation and upgrades to drive improved efficiency and throughput in our bakery facility.

We restarted operations in mid-June and ramp-up is on track, including production of our two newest desserts, Very Cherry Ghirardelli chocolate cheesecake and Cinnabon Cinnamon Swirl.

We launched both of these cakes in celebration of National Cheesecake Day, yesterday, and we are excited to partner with these 2 great brands and the media and consumer response has been fantastic.

Our marketing team secured 65 on-air segments and generated tremendous social media engagement, including National Cheesecake Day being a trending item on Twitter.

Our desserts are a key differentiator for both in-restaurant dining and off-premise occasions, driving our industry-leading dessert sales of approximately 16%, and even higher mix contribution on delivery and to-go orders.

Looking ahead, we now expect to open as many as 6 restaurants in 2018, including 1 Grand Lux Café, scheduled to open next week as well as the first location of our new fast-casual concept, Social Monk Asian Kitchen, which is slated to open in the fourth quarter.

On second -- our second location in Saudi Arabia opened in April.

Including this location, we now expect as many as 3 restaurants to open internationally in 2018.

Based on our construction timing, there is another location currently under development and is now expected to open in early 2019.

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

Thank you, David.

Total revenues for the second quarter of 2018 were $593.2 million, reflecting a 1.4% increase in comparable sales at The Cheesecake Factory restaurants, and $12.7 million in external bakery sales.

This compares to total revenues of $569.9 million in the prior-year period.

Our comparable sales growth and operating performance were in line with our expectations.

However, our adjusted earnings per share of $0.65 is not indicative of this performance.

There are 2 specific items I would like to call to your attention.

First, we experienced about a $0.07 negative impact from higher group medical insurance costs.

As a reminder, since we are self-insured, the costs we record in any given quarter are based on actual claims activity and accruals, so we can experience variability quarter-to-quarter and year-to-year.

However, over the long term, we believe being self-insured is still the more cost-effective approach.

Second, increased legal expenses during the quarter drove another approximately $0.07 of pressure.

Absent these 2 items, our adjusted earnings per share would have been around the midpoint of our guidance range.

Now for a review of the balance of our P&L.

Cost of sales was 22.5% of revenues, a decline of about 10 basis points from the second quarter of last year.

This was primarily driven by favorability in seafood and produce, partially offset by higher poultry.

Labor was 35.8% of revenues, an increase of about 190 basis points from the same period last year.

A majority of the year-over-year increase is attributable to hourly labor, including higher wages and overtime as well as $4.6 million in higher group medical insurance costs year-over-year that I referenced.

Other operating costs were 24.2% of revenues, up 10 basis points from the same period last year.

G&A was 7% of revenues in the second quarter of fiscal 2018, up 80 basis points from the same quarter of the prior year.

This is primarily attributable to the $4.5 million in increased legal expenses year-over-year I discussed.

Absent these costs, G&A as a percentage of sales would have been in line with the prior-year period.

Preopening expense was approximately $1.4 million in the second quarter of 2018, about in line with the same period last year.

Finally, during the second quarter of 2018, we recorded a pretax charge of $2.6 million related to the lease termination of 1 Cheesecake Factory restaurant.

And our tax rate this quarter was approximately 10.4%, which was below our anticipated range, primarily due to higher proportion of FICA tip credit.

Cash flow from operations was approximately $66 million during the second quarter.

Net of roughly $21 million of cash used for capital expenditures and $14 million in growth capital investments in the 2 Fox Concepts, we generated over $30 million in free cash flow and we completed approximately $7 million in share repurchases during the second quarter.

The consistency of our cash flow enabled us to increase our dividend for the sixth consecutive year.

Specifically, our board approved a 14% increase in the dividend, underscoring our confidence in the long-term prospects of the business.

That wraps up our financial review for the second quarter.

Now, I'll spend a few minutes on our outlook for the third quarter and full year 2018.

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 effect of any impacts associated with holidays or weather.

For the third quarter of 2018, we now expect comparable sales in a range of 1.5% to 2.5% of The Cheesecake Factory restaurants, with diluted earnings per share between $0.56 and $0.60.

Recall, we will be lapping an approximately 80 basis point negative impact from the hurricane activity in the third quarter of 2017.

Turning to full year 2018, we now anticipate comparable sales in a range of 1.5% to 2%.

We are now estimating diluted earnings per share between $2.40 and $2.48, which reflects the impact of the higher second quarter group medical insurance costs and legal expenses, I discussed, as well as additional wage pressure as the staffing environment has become even more competitive.

Hourly wage rate inflation is now running in the 6% to 7% range.

Further on the cost side, we continue to expect approximately 2.5% inflation for our 2018 market basket and we are now forecasting a tax rate of approximately 12% to 13%.

With regard to capital allocation, we continue to expect our cash CapEx in 2018 to be between $80 million and $90 million, including as many as 6 planned openings.

We continue to anticipate growth capital contributions to the 2 Fox Restaurant Concepts to range between $20 million and $25 million.

We plan to balance these growth investments with continued return of capital to shareholders via our dividend and share repurchase program in 2018.

In closing, our second quarter core operating performance was in line with our expectations, driven by comp store sales within our long-term target range of 1% to 2%.

We expect this underlying sales trend to continue in the back half of the year.

However, the increased group medical and legal expenses experienced during the second quarter as well as increased wage pressure have reduced our earnings expectations for 2018.

Maintaining flat restaurant margins will be critical to our margin rebuilding efforts.

To help address the upward pressure on labor costs, we are deploying enhanced labor-management analytics to provide additional visibility to our restaurant managers on detailed staffing needs by position and market-based wage rates as well as more granularity on overtime levels.

With our history of continuous improvement, we will also seek additional efficiencies in our restaurants to help offset pressure on the labor line, while also continuing to utilize a market-based pricing strategy that concentrates pricing in higher-wage geographies.

Finally, we expect portfolio management and diversification to support restaurant level margins over time.

Longer term, our objective is to recapture our historical-average adjusted operating margin of approximately 7.5% by stabilizing the formal margins and are leveraging our bakery infrastructure, international and consumer packaged goods revenue streams, and G&A over time.

We will couple this with diligent capital allocation to generate the best returns for our shareholders and maintain our midteens corporate level ROIC.

Research continues to confirm that The Cheesecake Factory brand has broad consumer appeal and is as relevant as ever.

This supports our comparable sales outlook, which we believe will enable us to manage through the cost pressures and position The Cheesecake Factory for trajectory of steady profitability growth over time.

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?

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

Just two related, I guess, one is on the top line this quarter, your gap to the -- was in line with your expectation, but I think your gap to the industry narrowed.

I think last quarter you pointed out you were pleased that you were seeing a widening gap.

So why do you think it narrowed again?

Was that only a difference in timing of maybe holidays that impacted you more than the peer set?

Or was there any other factor at work there?

And then just, to be clear on the back half guidance change, it looks like $0.10 down relative to prior at the midpoint, if I back out the impact this quarter had, right.

So is that all labor?

Or can you maybe breakout that into pieces of where those -- that incremental $0.10 falls?

Sure, I think those were 2 important questions.

On the first on the top line, I think it really is more around the timing of the spring break shift.

When we look at it on a year-to-date basis, we are still over 1% gap to the industry and on a rolling basis, it's higher than that as well.

So I don't -- I mean, I think we factor that into our guidance and so as we came in at the high point, that's probably where we expected to be.

With respect to the EPS pressure, it is really around the wage impact and so your estimates there are pretty close to what we have.

And really when we think about 1% to 1.5% higher wage rate increase on the base, that equates to the EPS pressure that you referenced.

And our next question comes from Nicole Miller with Piper Jeffray.

I was curious about something a little different here.

You talked about the Social Monk Asian Kitchen.

And so my big-picture question is, what are the benefits of investing in these, let's call, non-Cheesecake brands?

I'm trying to understand your approach to the leading Cheesecake Factory brand at the core?

And then really what is the portfolio of approach, if you think about owning or investing in these other brands.

So are there value -- is there value perhaps in the human capital opportunities for growth, for your employees?

Or is it a shared set of best practices?

Just want to understand a little bit more behind how you make these decisions.

I think that it's more of the shared best practices that you referenced, but I think it's also when we talk about diversifying the portfolio and looking at where opportunities are.

Part of the Cheesecake brand is that it will always be special, there won't be one on every street corner.

And so as we look to maintain that legacy of the brand and the performance of the brand and continue to leverage the expertise that we have, whether that's in supply chain, or IT, or operational systems, we think that there is some white space in various opportunities in the U.S. and Social Monk happens to be one of those.

And I think you're moving into a fast-casual environment that offers some positive synergies, with respect to, say, real estate planning in a much smaller footprint, it's a smaller labor component.

So really looking at basically leveraging our expertise and diversifying the risk portfolio of the company, while also keeping Cheesecake Factory special.

Yes, Nicole, at some point, we'll get to that 300 number of Cheesecake Factories, and we are trying to ready ourselves so we can continue growth.

And we're doing it ahead of time so it will make an impact on our growth rate when we need it.

And just a quick follow-up and then I'll hop off.

Is there anything you would be willing to share on international performance in terms of sales or same-store sales?

How was the performance for your partners versus expectations in the past opportunities for growth there?

I think the sales remain relatively consistent with where they have been, and our partners continue to be happy.

Thus, the 3 openings that we have happening this year and the 1 that got pushed in the beginning of next year.

But we're certainly meeting our expectations around the international sales thus far.

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

I may have missed this, but if you could break out the composition of the same-store sales, that would be helpful.

And then as we think about healthcare for the back half of the year, did you kind of run rate your current group medical, through the back half?

And then your projection, I wasn't clear in your answer to John, if that was the case?

Sharon, so in Q2 it was about 2.9% pricing.

We had a positive 0.6% mix and then traffic was down 2.1%.

And on the group medical, it is really mostly driven by large claims, and we've looked at this with our actuaries to try to make sure that we're factoring in the appropriate comparisons.

Partly, it looks like we had a favorable year last year, and just trying to get that mapped out quarter-to-quarter can be challenging.

But really the back half pressure is around the hourly wage component, and we haven't materially changed our outlook on the group medical.

Utilizing a longer-term average for any given quarter makes more sense than whatever the experience was in this quarter.

Okay, and then on the legal settlement, my understanding on the first quarter was that, that was a legal settlement that was anticipated later in the year.

That was just the timing.

But it sounds like this legal -- these legal expenses this quarter were incremental.

So can you give us any color on what's going on with the legal side?

And if that's something that trips into the back half of the year?

So it is a litigious environment for sure, and we see a lot of cases across the board in our industry and there's a lot to manage today, I think with the complexity of the regulations that have come on board and just trying to stand top of that.

So without giving more color, there were 2 distinct cases, we do outline the details of that in the queue, which you'll get when it comes out.

And with regards to the future, not associated with these specific cases, but there is an ongoing number of litigations that we continue to work on.

Our next question comes from Jeffrey Bernstein with Barclays.

One follow-up on the earlier discussion around the guidance reduction and then a separate question.

But in terms of what seemingly is a $0.10 reduction in the '18 guidance to back half of the second quarter unusuals, I think you mentioned, it was effectively all labor.

I was just looking back, it seems like you're expecting labor inflation of 6%.

Now you're saying, I guess, 6% to 7%.

Just want to clarify that, that incremental maybe 50 basis points of higher labor is driving the full, I guess -- seemed like that's a lot to drive $0.10 impact, especially when you're now expecting the comp to be on the higher end of that range.

So I'm just wondering, whether that's really -- whether that's the sole driver?

And if so, if you consider more incremental pricing above the high-2s that you're in now?

I'm going to have 1 followup.

Sure, Jeff.

So we've -- I think we've been talking about 5% to 6% initially, and in our models now at 6% to 7%.

So it's somewhere between 1% to 1.5%, depending on where we fall in that range.

So we provide a range of guidance.

If it ends up at the 7% end of things, our labor expense, on a quarterly basis is over $200 million and so 1% on that is roughly $0.04.

Obviously not hourly, but it's -- that gets you pretty close to where that pressure is coming from.

Got it, and you would you consider as there summer menu to come?

Or have you made that decision, where you might consider...?

Yes, we're pushing up slowly, and we've talked about being in the range of 2.5% to 3%.

We're probably going to be close to the 3% by the time that the next menu rolls out.

So obviously, we'll start to incrementally attack that.

But we don't want to do it all at once, I think we'll watch the next couple of quarters to see if that wage rate does indeed stay at that level and continue to address it appropriately.

Got it.

And just -- the other question was just on the comp drivers, I mean, to your point in your prepared remarks, that seems like now in the first half of '18, your back kind of stable in that low-single-digit level, which, I guess was probably a norm prior to the 2017 anomaly, so to speak.

So I'm just wondering, how much of that would you attribute to your own initiatives?

Maybe you can quantify where to go and deliver you're doing versus how much do you think is just the broader consumer, which is seemingly helping the little category?

I think it's a little bit of both still.

I think that it is more stable, though I still-- we still see that in the malls, the traffics are increasing, it's just still stable.

So there's a lot of fight for market share there.

I think that we have increased our off-premise.

So when we look at the aggregate trends, it does look better.

But I would say, kind of where we're versus at 2016, it's probably a 50-50 the environment than us.

Our next question comes from David Tarantino with Baird.

Matt, my question is about some of these legal and medical cost expenses.

And first, on the medical, I guess, can you explain the year-over-year increase again?

Was it higher than the long-term average that you assumed in your guidance?

Or higher versus last year?

Because I think you mentioned it both ways.

So I just trying to understand, how to put that in the context relative to what we should expect longer-term?

So, in the quarter, David, it was higher than both guidance and prior year.

And for the most part, we're using prior year, but also the long-term average combined to try to estimate the upcoming year.

And so the real driver, as we've talked about before, are the big claims and those are over $50,000.

And they just tend to be, I'll call it, bumpy.

So for the quarter, breaking down that piece, the majority of the increase we expected there to be sort of your normal healthcare inflation of 4% to 5%, and above that, we ran over just in claims and the related accrual.

Got it.

So the $4.5 million that you called out, is that relative to what you assumed in your guidance?

Or relative to last year?

Or...

It's sort of the both, right.

Because last year is a guide-post that we would use for guidance.

No pun intended.

All right.

And then, I guess if you think about this being the base year for next year, the $240 million to $248 million, is there any way to sort of strip out what you would consider one-time in nature for this year, so that we can think about kind of the right way to model next year?

Or is that not the way you think about it?

Well, for sure the legal expenses are really anomalous and impossible to predict, but also are not operating performance in the current year.

I think that to some degree, healthcare is as well, though it's a little bit only halfway through the year.

So it's hard to predict exactly how that will ripple through this.

So it's probably somewhere in the middle for that one.

And I think we'll give, continuing through the year, more perspective on that.

But since it's only halfway through, it's a little bit hard -- other than the 2 items that we're talking about specifically right now, and again I would just clarify, the legal for sure, maybe some of the group medical, but it's early to tell.

Got it.

That's helpful.

And then on pricing, just a big-picture question on pricing, it is pushing up towards 3%, you mentioned that's on the high side of what you've done historically.

So can you maybe describe how you approach those decisions?

And what benchmarks you're looking at relative to the competition in order to make sure you don't take too much an impact to traffic terms too negatively?

Sure.

Well, specifically we look at, maybe, several dozen national competitors on a city-by-city basis, because, obviously, as we've talked about geography today is much more important to consider because of the wage component of the cost pressures, in some of those higher-cost states.

We also have geographic data in black box.

So there is a lot of data points to compare against, to make sure that in those areas, we're really not outpacing the competition in any way.

Think it like right now, depending on which source you're referring to, the industry average is about 3%.

We happen to be probably slightly heavily more weighted in the West Coast, which is a little bit more expensive.

So in aggregate, when we look at it, we're slightly behind the average competitor in each of the geographies that we're operating in.

Our next question comes from Gregory Francfort with Bank of America.

Just maybe on the labor cost, I think this year in California, minimum wages stepped up.

I think it was $0.50.

I think they step up $1 next year.

Any early thoughts on what labor would be for next year?

And do you expect it to accelerate?

Or are you expecting some sort of relief at some point next year?

I think it's a little bit early, Greg.

It's -- again, it's a patchwork quilt really, because you do have, even in the middle of the year, whether it's the Los Angeles area taking minimum wage increases, there is changes to paid time-off and other regulations that are putting pressures, kind of trickles in throughout the year.

And obviously, California going from $0.50 to $1 is an impact, but before we can see what all the other states are going to do, and what all the other potential tip ramifications are -- the tip ramifications, it's kind of hard to give a perspective.

Other than, we've continued to believe, sort of in that 5% to 6%.

I think we are seeing a little bit more.

I think the Labor Department just came out this afternoon and said it's the highest employee cost index that they have seen in the decade.

So you're definitely seeing some broader pressure there as well.

But until we get a little bit more of the definitives around those, it's hard to estimate the trickle-up effect.

And maybe just in response to -- or a follow-up to last question, what is -- what are competitors pricing at, in terms of -- in California?

And do you expect that to accelerate, where you can see your gap to the industry because your regional exposure on check maybe pick up?

Or you guys start running 3.5% or 4% check increases, purely because of your geographic dispersion?

Yes, I mean, I think California runs in the 3% to 5% range and the rest of the country is going to run in the 1% to 3% range, or maybe the whole sort of West Coast perspective.

And I think while -- versus some competitors, we have a slightly higher balance.

Across the board, if you're using maybe more of a composite industry metric it balances out because you're going to have the number of restaurants per capita and so I think California gets its fair share of weighting that we have.

So I don't think that we would see too big of a disparity, just it will probably run in line with where the industry is, it probably won't be below what that average is.

Our next question comes from Brian Bittner with Oppenheimer.

Just wanted to take a step back and talk about the long-term framework for value creation that you guys have out there.

And I think moving forward, what you talk about is needing to hold restaurant margins flat from here, over the next many years, because I think that's what you need to get to 25 bps of expansion at the operating margin line.

So question is like, what's going to change either externally or internally within the model, as we exit 2018 and move forward that gives you the confidence that you can hold restaurant margins flat moving forward on this 1% to 2% comp?

Well, I think it's a lot of moving pieces.

Part of this year, I think, absent some of these one-time pressures that we've raised, certainly, it's going to be a different dynamic if labor runs 6% to 7%.

But when we factor in maybe a longer-term commodities outlook, that's been more 1% to 2% versus 2.5% this year, and about a 5% wage inflation.

And then will look at running a 1% to 2% comp on a 2.5% to 3% pricing, those factors really get us to that breakeven point on the margin that we're talking about.

So if labor continues to be an incremental pressure, you have to look holistically at the P&L.

So what would change is, is that the point at which technology in the restaurant becomes affordable relative to the price of labor, that you're dealing with a lot of lower in-cost labor, but as it continues to escalate, that might be a trade-off.

Similarly, if we look at the supply chain and looking for opportunities within our cost of sales to further offset that, would it be something we would have to consider.

So the framework is based on kind of where the trends have been over the past couple of years.

I don't think we're yet ready to call the trends different for maybe a couple of quarters in the middle of this year.

But if they are, certainly, we would have to adjust to that.

Okay.

And just following up on kind of the guidance for 2018 and what implies for the second half, you talked about the labor pressures causing kind of the back half change in the guidance.

When we strip out the medical expense stuff for the second quarter, I think it was about 120 bps of labor deleverage in this quarter.

Is that how we should think about labor in the back half?

Or should we tend to be thinking a little bit more deleverage than we saw in the first half, excluding those medical expenses?

No, I don't think it gets worse because of couple of reasons.

Obviously, last year in the third quarter, comp store sales were negative.

And so there was deleverage that occurred there, which we will be lapping over.

We've also incrementally taken up pricing a little bit and so you're recapturing some of those pieces.

We also had a little bit of that pressure in the quarter from the bakery, a little bit of the labor gets captured in there and we're doing the remodeling here on the West Coast.

So actually, I think that the deleverage moderates a little bit as we go through the year versus staying the same or getting worse.

Our next question comes from Will Slabaugh with Stephens.

This is actually Hugh on for Will.

Just going back a little bit, I wondered if you could give us some more color on comps throughout the quarter?

And you briefly touched on this earlier, but can you talk a little bit more about the performance of your mall-based stores?

And if you'd noticed any changes or improvement in traffic around those mall stores?

The quarter was pretty steady, I don't think any month was more than, like, 0.5% off of the average.

So factoring in any of the shifts for holidays, it was pretty steady.

And I mean, most of our locations are mall are close to mall.

So the aggregate performance is a good indicator of the mall performance.

It looks like things are more stable than last year.

Although, I wouldn't say that there was increasing foot traffic in the malls, maybe just not decreasing like last year.

And from a geography standpoint, pretty stable across the country, no particular geography, not much stronger than another.

Our next question comes from Andy Barish with Jefferies.

On the mix shift, you saw on the quarter ticking up a little bit.

Is that starting to be a function of more of the off-premise and delivery?

And a couple of things, are you willing to share on growth on any of those numbers?

And any updates on sort of incrementality or seasonality of delivery, as you've come through a couple of quarters now with most of the system rolled out?

Sure, Andy.

Well, delivery continues and take-out continues to grow, Q2 was about 13%, which is about 2% more for the same quarter from the previous year.

Delivery business also continues to be strong and very stable.

DoorDash is our main partner and we're actually executing a new agreement with DoorDash to become our exclusive partner.

It will take over the 37 restaurants that currently being operated by our other partner.

And we're doing that primarily because they are great operating partner for us.

We're moving into the second phase of our integration into our POS, which will allow for greater efficiencies and less air rates moving forward.

We're looking forward to that in the second half of the year.

And those 37 restaurants comprise about 14% of total delivery sales.

So we're excited with the marketing power that DoorDash brings to the table as well and we'll continue to leverage that with 3 weeks of delivery, et cetera to execute and continue to grow take-out sales.

And our online ordering platform, which started out probably was about 9% of total to-go sales, is probably about 11% today.

So we're going to continue to try and grow that as well to make it even easier for guests to execute the to-go off-premise business.

And the mix impact, Andy, is mostly attributable to the increase in the business, David just talked about.

Our next question comes from John Ivankoe with JP Morgan.

I was wondering if there are any options that are in consideration, that are open about potentially doing some tip sharing, to help even some of the wages between the front of the house and the back of the house, especially in non tip credit states?

Right now, we're not considering doing any type of different tip sharing than we're doing today.

We're focused on paying the best pay rates we can to retain the staff members that are highly productive that we have today.

I think you heard David mention in his opening remarks that we continue to have industry-leading retention and some of that are the investments that we're making.

And those staff members want to be paid that way, and we're going to continue to make sure that the pay is also market-based.

So we have instituted and sent out analysis to all of our restaurant teams to make sure they can see and understand what the market rates are within their particular geography to allow them to pay appropriately for the work that they're doing at Cheesecake.

So for now, we're not anticipating to do anything around tip sharing differently than we're doing today.

Okay.

And secondly, you -- it reminded us of the 7.5% operating margin target.

I mean, I guess, the question is, does that assume the current growth infrastructure continues?

Or you might -- and if so, I mean, what you might bet realistically be achievable?

And secondly, if you did want to slow down growth and kind of look at preopening and G&A as opportunities, to hit that 7.5% margin, is that something under certain circumstances that you would consider?

I think John, we believe that we should be able to scale the infrastructure, and even if we say continue at a modest growth rate that we're on right now, the objective to get to the 7.5% is at the 20 to 25 basis points a year.

And probably about 50 basis points coming out of the G&A line, so about 10 bps per year for the next 5 years, that we believe that we can scale from the current base.

Our next question comes from Peter Saleh with BTIG.

Just a point of clarification, I think you mentioned a quarter or 2 ago that the delivery was about 2 or 3 percentage points of the overall to-go business.

Is that still the case this quarter?

Or has that changed?

No, it's about 2% or 3% of total sales.

It's about 20% to 25% of the to-go business.

That makes sense?

Okay.

Yes, and then, can you just give us a sense of what the -- I know you talked about the total traffic, but what is the in-store traffic if you exclude the growth in the off-premise business?

How much lower is the in-store traffic?

Probably about 2.5%.

So if you're sort of netting out the growth that we talked about in the to-go business, I mean it's hard to parse it exactly, but that's an estimate.

Okay.

Very helpful.

And then last question is, are you seeing an increase in order frequency on the delivery side?

Are customers starting to come back more frequently?

And if so, can you give us a sense of how often?

We do have a higher than average return rate based on the information that we have from our delivery partner.

So I don't have the exact numbers here in front of me.

We can certainly get those for you.

But it is well above the average of other partners.

Our next question comes from Matthew Kirschner with Guggenheim.

I just had a question on the CapEx outlook for 2019.

Are you willing to give an update on that now?

No.

I think it's a little bit early.

We usually provide perspective in the fall, Matt.

Our next question comes from Karen Holthouse with Goldman Sachs.

This is actually Jared Garber on for Karen today.

Just a quick housekeeping question.

Can you guys break down the comp versus -- for the Cheesecake versus Grand Lux?

And then I have one quick follow-up as well.

So the comps that we recorded are all at Cheesecake, Grand Lux was a negative 3.5%.

Great, thanks.

And then, in terms of the labor line, is there any way you guys can bifurcate for us, kind of where the pressure is being mandated by kind of the faster rates going up versus just general pressure on the labor markets?

That's a very nuanced question in that a lot of it is driven off of the mandates because they also push everybody else up to some degree.

And so I think if you were to go back and just sort of just compare maybe a historical time period, when the minimum wage was relatively stable, the industry was relatively in line with aggregate wage increases, which were more in the 2.5% to 3% range.

And yes, the industry is above that.

So I think it's all related to it and I don't know that we could really separate it out.

If I could just sneak one more in.

Do you guys source any seafood that would potentially be impacted by the tariffs?

We -- it's a very small amount, it's immaterial to the financials.

Our next question comes from Brian Vaccaro with Raymond James.

Just 2 quick ones on model if I could.

Matt, on the other tax line, I noticed that deleverage there was a lot better than in the first quarter.

And the dollars were down sequentially for the first time in the long time.

Could you impact that line for us a little?

And then on G&A, how should we be thinking about that line for the year, just in terms of what's embedded in your guidance?

Sure.

Well, I think we were actively managing the other operating expenses.

It's been a little bit -- probably just a little bit elevated with some of the R&M and workers comp insurance, both of which turned out to be favorable relative to the year-over-year.

So we were essentially absorbing some of the commission costs.

And so as we actively manage that and some of the bumpiness goes away in those categories, we would kind of expect that trend to continue.

G&A for the year is a little bit up.

Two factors there, 1 is around the bonus, which wasn't accrued fully last year and the second really is around the ERP project that we're working on, and some of the -- the cost of implementation for that.

Okay, and then just one more if I could, shifting gears to the Fox Concepts.

I think that to-date investment is approaching $75 million.

I'm just wondering if you can give us an update on how North and Flower Child are performing so far this year?

Well, we're very happy, I would say, to continue to perform pretty right on expectations.

And so from the prior quarter, we just opened, actually Flower Child in Atlanta, so 11 locations in 5 states and both Concepts are doing well.

And North is at 13 locations in 6 states and some recent successful openings.

And our next question comes from Stephen Anderson will Maxim Group.

Most of my question have been answered, but I do have one follow-up regarding location you opened in Toronto.

And I want to ask how things had been there anchored considering other locations in Canada.

Thanks for the question, Stephen.

We're happy to announce that sales have continued to be incredibly strong.

They really have hardly even fallen off from the opening.

And we'll continue to look at it, make that the margin and profitability is where we wanted to be.

And hopefully, continue to be able to grow in Canada.

So we're really happy with the guest response thus far and the demand is still quite large.

Thank you, ladies and gentlemen, for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a great day.