Cheesecake Factory Inc (CAKE) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2015 The Cheesecake Factory Incorporated earnings conference call.

My name is Steve and I will be your operator for today.

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

We will conduct a question-and-answer session toward the end of this conference.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Jill Peters.

Please proceed.

Thank you.

Good afternoon and welcome to our first-quarter fiscal 2015 earnings conference call.

I am Jill Peters, Vice President of Investor Relations.

Joining me on the call today are David Overton, our Chairman and Chief Executive Officer; David Gordon, our President; and Doug Benn, our President and Chief Financial Officer.

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

Actual results could be materially different from those stated or implied 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 second quarter of 2015 as well as the full year.

Following that, we will open the call to questions.

With that, I will turn the call over to David.

Thank you, Jill.

We had an exceptionally strong first quarter, delivering our best comparable sales increase in the past decade, which we leveraged into earnings per share growth in excess of 25%, making a solid start to 2015.

Our performance was strong across the board with positive comparable sales in all geographies.

We also saw strength across day-parts and stability in weekdays versus weekend as well as mall versus non-mall performance.

Guest traffic return to positive territory and while it's difficult to parcel out the impact from the initiatives that we discussed with you last quarter, directionally we are on track and expect some of our strong sales trend to sustain itself into the second quarter.

As to development, we continue to plan for as many as 11 company-owned restaurants to open this year across the US in a mix of new and existing markets with three openings expected in the second quarter.

We are creating value for shareholders through appropriate capital allocation that is generating returns that meet our objectives.

Internationally, we are now planning for as many as three new restaurants to open this year under licensing agreements, the first of which opened in Mexico City last month.

One of the Middle East openings originally planned for this year moved into early 2016.

In closing, I will note that we were honored to be named to Fortune Magazine's list of the 100 Best Companies to Work For.

This is our second consecutive year and the only restaurant company to make the 2015 list.

This recognition speaks to our culture and our incredible people, and we believe it should continue to support our ability to attract and retain talent.

With that, I will now turn the call over to Doug for the financial review.

Okay, thank you, David.

Total revenues in Cheesecake Factory for the first quarter of 2015 were $518 million.

Revenues reflect an overall comparable sales increase of 4.2% at The Cheesecake Factory restaurants.

External bakery sales were $12.1 million in the first quarter.

Cost of sales decreased 40 basis points year over year in the first quarter of 2015 to 24.4% of revenues.

The favorability was primarily attributable to lower seafood and grocery cost and, secondarily, favorability in a variety of other items.

The benefit was partially offset by expected higher meat and poultry cost.

Labor was 33% of revenues, down 10 basis points as compared to the first quarter of the prior year.

As expected, we had pressure from group medical insurance costs in the first quarter which was more than offset by leverage on the higher level of sales.

We do not begin to lap last year's higher group medical expense until the second quarter.

Other operating costs were 23.8% of revenues, down 20 basis points from the prior year.

The favorability was driven primarily by lower utility costs as we lapped the spike in natural gas prices in the prior-year first quarter.

G&A was 6.4% of revenue for the first quarter, down 10 basis points from the same quarter of the prior year.

The favorability related to lapping a legal settlement in the prior quarter, partially offset by a higher corporate bonus accrual and higher equity compensation costs.

Preopening expense was $1.5 million in the first quarter of 2015 versus $2.2 million in the same period last year.

We had no restaurant openings in the first quarter of this year and one in the year-ago period.

Our tax rate this quarter was 27.4%, within our expected range.

Cash flow from operations for the first quarter of 2015 was approximately $65 million.

Net of roughly $24 million of cash used for capital expenditures, we generated about $41 million in free cash flow for the first quarter of the year.

During the first quarter we repurchased approximately 1.7 million shares of our common stock at a cost of about $80.4 million.

The majority of the shares were repurchased under our previously announced accelerated share repurchase program.

We utilized $25 million of our revolving credit facility to fund a portion of the share repurchases during the quarter.

We expect to repay the debt by the end of the year.

That wraps up our business and financial review for the first quarter of 2015.

Now, I will spend a few minutes on our outlook for the second quarter of 2015 and an update on the full year.

As we have 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 input cost information we have at the 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, the effect of any impact associated with holidays and know weather influences.

For the second quarter of 2015 we estimate diluted earnings per share of between $0.59 and $0.62, based on an assumed range of comparable sales of between 1.5% and 2.5% at The Cheesecake Factory restaurants.

We expect some of the first-quarter sales momentum to continue into the second quarter, driving our comparable sales expectation above our typical quarterly range.

I will note that our earnings per share sensitivity includes higher G&A cost of approximately 60 to 70 basis points above the second quarter of 2014.

For the full-year 2015 we are increasing our diluted earnings per share sensitivity range to a range of $2.18 to $2.27, based on an assumed comparable sales range of between 1.5% and 2.5% at The Cheesecake Factory restaurants.

We continue to plan for the opening of as many as 11 domestic restaurants this year.

Our total capital expenditures are expected to be between $120 million and $130 million.

Internationally we now expect as many as three restaurants to open this year under licensing agreements, as David talked about earlier.

Our 2015 earnings per share range includes the assumption that comp store sales will be between 1% and 2% for the second half of 2015.

For guidance purposes, we believe it's prudent to assume that sales return to these historical levels in the back half of the year.

Mathematically, this results in a 1.5% to 2.5% comparable sales range for the full year.

In terms of food cost inflation, we are seeing some relief in pricing for certain commodities.

As a result, we are now planning for a range between flat and up 1% for the total Company 2015.

While overall costs are down since our last update in February, our food cost inflation does still reflect measurably higher cost for beef and, to a lesser extent, chicken, partially offset by year-over-year favorability in dairy and seafood costs.

In labor, we continue to plan for group medical insurance costs that are approximately flat year over year as a percentage of sales in 2015.

In addition, we continue to plan for overall wage inflation of approximately $12 million including about $4 million in minimum wage, reflecting wage rate inflation of about 3%.

As to our corporate tax rate, we still expect it to be in a range of between 27% and 28% for 2015.

In keeping with our practice of consistently returning our free cash flow to shareholders, we plan to do the same in 2015.

Our earnings per share sensitivity range for the year assumes that we will utilize our free cash flow for share repurchases and dividends.

With that said, we will 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 from Morgan Stanley.

I wonder if we could talk a little about the sales progression during the quarter.

The industry started off strong and faded.

So I wonder if you experienced that or maybe didn't.

It sounds like your comps are remaining strong.

I wonder how much of that you attribute to what you have been doing in your restaurants versus the industry.

I understand you outlined initiatives last quarter, but it seems like you would be pretty soon to expect those to have really impacted traffic.

But maybe you believe differently, if you could explain that?

Sure.

The sales trends for the quarter were positive throughout the quarter with January marking the strongest month of the quarter, similar to industry trends.

Where I do think we differed from the industry is that our February and March were very similar and consistent with each other.

We did not see the same slowdown in March that the industry did.

In fact, our sales in February and March were steady, and actually March was slightly higher than February.

And as far as the sales initiatives that we have been working on, I think it is a little early to have seen a lot.

We continue to work on the things that we outlined.

I don't know if a lot of that has borne fruit yet, but I think that we are making great progress on moving forward on a lot of those things.

Explicitly, what was the traffic during the quarter, if you don't mind me asking?

So the mix for the quarter -- traffic was up 0.9%.

So we had 4.2% comp, 0.9% traffic, about 2% price, and menu mix is very favorable at plus 1.3%.

Okay, great.

Well, thank you.

Jeffrey Bernstein from Barclays.

Just one follow-up on that question and one separate question -- in terms of the commentary on the comp I know, David, you had mentioned that the momentum continued into the second quarter.

Considering the relative strength you saw in February and March, I was surprised that the guidance for the second quarter seems like you are playing on the more conservative side again, looking for the 1.5% to 2.5%.

I am just wondering, is it more of what you anticipate in terms of timing of things going forward or what you have seen thus far in April?

I know in your prepared remarks you talk about everything you know as of today.

But it would just seem like that would be more of a deceleration in the second quarter relative to maybe where you started the second quarter.

Yes, let me talk to where I think we are from a run rate respective coming out of the first quarter.

It's difficult to precisely determine where we are but we think we are at roughly 2.5%.

So in the second quarter we are guiding to the 1.5% to 2.5%.

In the first quarter weather was a significant factor in the first quarter of 2015.

It was a significant factor in the first quarter of 2014.

And when you net all that together, which I don't like to do with weather, but I almost feel like I have to this time, basically the weather impact on the first quarter was very, very small.

It was favorable to the quarterly comp by about 10 basis points.

But there were a couple of other things that impacted the quarter, particularly with respect to holiday shifts that impacted comp store sales very favorably during the quarter.

For instance, the New Year's Eve shifting into the first quarter as well as the timing of New Year's Eve being on a Wednesday -- that was very significant to comp store sales comparisons in the first quarter as well as the Easter holiday and spring break shifting forward into the first quarter from the second quarter.

That was very help full to us.

So if you put those two things together, that's about 1.5% of sales.

If you add another 10 basis points or so of favorability that we got from weather, then you can take that away from the 4.2%.

And that's how we arrive at roughly 2.5% as our run rate.

So we have used that as the high end of our comp store sales guidance for the second quarter.

That makes total sense, thank you.

My other question was just looking back to last quarter there was a lot of talk around labor.

You talked about maybe turnover had picked up and you are going to have to pay more to keep your best people, which is obviously a good thing to do.

I'm wondering if there's any update on that or your -- I think you had mentioned at the time that you might take more aggressive pricing in the second half of 2015 to perhaps offset some of the inflation.

So if there's any update on either the labor side of the pricing for the back half of 2015?

On the labor side, I think that we know that we are going to be managing more wage rate inflation than what we've seen in the past.

In fact we have in our plan now the expectation for 3% wage rate inflation, which includes minimum wage increases.

So that is still what our expectation is for the year.

For four or five years prior to this year we only saw maybe 1% wage rate inflation.

So, we are expecting to see more pressure from that.

We factored that into our guidance for the year that we gave.

What we haven't factored in is any additional menu pricing that we might take.

We are, as we have talked about before, always trying to balance capturing guest traffic and offsetting cost pressures.

We are considering taking more pricing than historical this summer when it comes around and perhaps again next year, in light of the cost headwinds that we have.

And that's particularly related to the ongoing wage rate pressure.

Really also in light of industry conditions -- I think other restaurant operators also appear to be taking a little more pricing than normal in this environment.

I think restaurant companies are going to have to be somewhat more aggressive in pricing.

So we haven't made any decisions yet with specifically what we're going to do with respect to pricing, but we know that that's a part of the solve, if you will, for higher wage rate inflation.

Got it, thank you.

Joseph Buckley from Bank of America.

Doug, maybe just to follow up on the pricing question, is regional pricing being considered as you approach the summer menu shift and typical pricing action?

It's one of many things we are considering, Joe.

Okay.

And Doug, you are the second person in this round of conference calls this week to mention higher pricing becoming more common in casual dining.

And I guess I'm curious because we don't see that yet in the data that we collect.

But are you getting that from some of the industry sales tracking services?

Or is that just observation from the field?

I think we are getting it from a number of sources, just articles that are being written, things that are out there in the press where we've heard pretty clearly that others are being more aggressive on pricing than what they have been in the past.

Chipotle is a good example.

They are more aggressive on pricing than what they had been.

And that maybe was a couple of quarters ago.

But they have been more aggressive.

And just one more quick one, if I can.

Where are you on dairy?

Was dairy a benefit year over year in the first quarter?

I'm not sure if you mentioned that in the commodity rundown.

But maybe just update us where you are in terms of coverage on dairy.

Yes.

It was not a big in a fit for us in the first quarter.

In fact, the real spike in dairy costs didn't start to impact us a lot until the second, third, and fourth quarter of last year.

So we would certainly expect to have lower dairy cost in the second, third, and fourth quarters of the year and for the entire year.

With respect to where we are from a contracting standpoint, what we are trying to do is obviously get the lowest cost that we can but also add more predictability and certainty and therefore trying to be more under contract and using different approaches and thought processes about what we might be willing to do to contract or use dairy butter futures to hedge.

We are currently 55% contracted for dairy for the full year.

And last year we were, at this point in time, roughly 40% contracted.

So more contracted than we were last year at this time, and we would like to get that up closer to the 65% that we are contracted for the whole Company, and we are working diligently to get that done.

Thank you.

David Tarantino from Robert W. Baird.

Congrats on a good start to the year.

I have a couple questions.

One is the same-store sales flipped from underperforming the industry in the fourth quarter to outperforming the industry in the first quarter.

And I was just wondering if you had an explanation of why the big reversal from Q4 to Q1.

I guess if you look at it today, is there something looking back on Q4 that might have been an anomaly, because Q1 looks more like the historical pattern that you've seen?

But any context or color on that reversal in trend would be great.

Thanks.

I just think our sales are more consistent just across the board.

So in an environment where things are -- I think we said this in the fourth quarter as a hypothesis and I think it's proven itself out a little bit -- is that as things are really good, we don't have performed the industry quite as much or we perform with the industry.

And when things are little tougher like February and March as compared to January, I think we outperformed the industry by a further margin.

So that would be what I would say.

Okay, great.

That's helpful.

And then, Doug, from a high-level perspective the guidance for the year assumes much less earnings growth in the last three quarters versus what you just reported for the first quarter.

And I know there's an assumption that same-store sales won't be as strong as what you just reported.

But is there anything else on the cost lines that's worth highlighting that might prevent or limit the growth that you will see in the rest of the year versus what you did in the first quarter?

No, I can't really think of anything.

If you want to -- this may help a little bit.

So we raise the high end our guide by $0.07.

And our first-quarter amount that we were above the high end of our range was $0.06.

But it's really not $0.06 because there's a couple pennies in there of timing.

So we had some legal expenses that we didn't incur in the first quarter that we would expect to incur somewhere in the last part of the year.

We had some marketing that was shifted out of the first quarter and will be -- wasn't in the first quarter and will be incurred sometime during the last half of the year.

So in raising our guidance, we raised it by about $0.04 related to the amount above the high end of guidance that we were in the first quarter and then about $0.04 more from lower expected commodity costs today than what we had when we gave our initial or our last guidance for the year.

So that's another $0.04.

And then there's about $0.01 going the other way related to corporate bonus accrual.

So that's how we arrived at the -- I don't know of anything unusual that's going on really in the second half of the year other than the fact that I think we raised our guidance by a good bit more than just what we beat the first quarter by.

Great, thanks for that explanation.

Matthew DiFrisco from Guggenheim Securities.

I just got a couple of follow-up postings with respect to the mix on the comp composite there.

That 1.3 -- what was that and do you think that can continue?

What was the driver to that?

1.3 is -- that's the menu mix.

Our results -- I'll make another industry comment.

Our menu mix results, I think, are consistent with industry trends, as I think the consumer today is generally willing to spend just a little bit more.

So we are getting a little bit more out of the customers that are coming into our restaurants.

Where we see it is in desserts, definitely our dessert incident rates continue to be up.

That positively impacts that mix, that allows us to retain most if not all of our menu price increases that we take and it helps offset other items where the incident rates are not on the rise, such as nonalcoholic beverages.

So people are going to move around the menu.

They try different things, and that changes the mix.

We believe that mix is going to ebb and flow over time, but we had a very positive mix this quarter, plus 1.3%.

I was wondering if anything in the comps is explained -- if you can quantify how much maybe the spring break coming into the end of March rather than Easter coming on April 20 and spring break shifting in April, did that help your mix in your traffic at all?

That helped about 25 or 30 basis points.

That's very helpful.

Did you say what the inflation was in 1Q in relation to the 0 to 1 for the full year?

2% to 3%.

Lastly, you said something about 60 basis points more in Q2 of G&A.

But then the last question you responded with saying that marketing and legal are going to be second half, second half.

I'm curious what is the 60 basis points in 2Q, if you could tell us?

Thanks.

If I said second half I meant second three quarters.

How's that?

So some of the extra G&A in the second quarter has to do with the legal expenses.

Some of it has to do with bonus accrual expectations being much higher for the second quarter of this year than last year.

Some of it is equity compensation being higher.

And some of it -- frankly, we talked about our gift card sales being so robust over the last couple years, 25% increase in gift card sales in each of the last two years.

And we expensed the cost associated with those gift cards, the commissions we pay, over a three-year period of time.

So there's more costs coming into the second quarter this year related to gift card sales and there were in the second quarter last year.

So that's, in essence, a lot of what that extra G&A is in the second quarter.

Thank you.

Joshua Long from Piper Jaffray.

I wanted to circle back, Doug.

It sounded like you mentioned the entire basket, you were about 65% contracted.

I wanted to confirm that piece.

That's right, 60% to 65%, I would say.

And then on the incremental opportunities for contracting dairy are those toolsets or the teams we had talked about building out in 1Q -- are those more or less set and so now it's just a matter of layering into that incremental contracting target that you had mentioned about maybe getting closer to that 60% to 65%?

Or are there additional items that still need to be rolled out to make that happen?

I would say that this whole process of -- enhanced process we put in place for managing commodity cost is very much of an art and not a science.

So we are, for instance, actively evaluating opportunities for longer-term fixed pricing arrangements on some products where we typically hadn't thought, in the dairy category, that we could contract for before.

So now we've taken the next step.

We've obtained bids.

We are evaluating them.

There's not a slam-dunk answer because you are always -- you are watching the market and you are trying to decide what the best time to contract is.

So I would just say that we are very actively managing dairy costs today and we are also very open to considering other avenues of being more fixed or predictable about what dairy cost would be than we had been in the past.

That's helpful.

And in thinking about your labor outlook and the commentary around wage inflation expectations for the back half of the year -- is that similar to what we had talked about or maybe the same as what we had talked about in 1Q, that 3% or as you had have a little bit more visibility now have you tweaked that kind of expectation on the wage rate and expected wage rate inflation in the back half of the year?

That's the same as what we talked about last quarter at 3%.

That's going to be -- we're going to have to work at managing.

We talked about some labor initiatives that we put in place last quarter and we are really working with them because we're going to have to manage that pretty actively to keep it at 3%.

Understood.

And then the last one for me, on the recent accolade of reaching one of the 100 best companies or places to work -- congratulations on that.

Is it maybe a little too soon to start thinking about how that could positively impact your recruiting practices or opportunities, rather?

I'm sure that you've always had an opportunity to look at some of the best talent.

But does this create an incremental opportunity or maybe incremental visibility into acquiring and retaining some of the best talent in the industry?

It certainly doesn't hurt.

This is our second year in the list.

So whenever we can and wherever we can in our recruiting process, make sure that people are on the list and not only on the list this year but the only restaurant company on the list.

We have been able to leverage that recognition pretty well last year and I think that it certainly will help us again this year.

Great, thank you so much.

John Ivankoe from JPMorgan.

David, I think it was in your prepared remarks you mentioned that comps were balanced between weekend and weekday lunch and dinner, if I heard you correctly.

So that would suggest that you are driving throughput at times of the day that you would not have normally been at capacity.

So is that a true statement?

And how much new capacity have you added to the box, whether it's getting checks to the guest fast or serving them quicker as they sit down and what have you?

So how substantial is that in day-parts?

David Gordon has been really working on that so I'll let him answer.

We certainly did see the consistency across all meal periods.

The initiative that we rollout across the field didn't really rollout until March of this year to be fully rolled out.

However, what we have heard anecdotally throughout March -- and we just had a meeting here with all of our ops team -- is that thus far the focus on the throughput has certainly taken hold in the field.

So, we are hoping to see continued ability to drive traffic or grow traffic on those busiest shifts through the initiatives that we talked about that we are implementing throughout the year.

So, so far we've heard -- it's anecdotal but we feel confident that what we are rolling out is increasing our operators' focus on those Friday, Saturday, Sunday shifts to increase throughput.

And even if it is anecdotal, how much capacity could that have added?

I'm sorry to have cut you off.

I don't really have a solid number I could give you the top of my head.

Secondly, and really just a housekeeping question at this point, and maybe a touch early -- international unit opens for 2016, you did mention that unit in 2015 slipped into 2016.

Could 2016, at least as you currently look at it, be a substantially bigger year than 2015 in terms of units opened?

Yes, I think he could see as many as a couple more.

Thank you.

Will Slabaugh from Stephens Inc.

Just a question on same-store sales growth.

We've seen a lot of the data out that as indicated California and some of the other areas have been considerably stronger than the rest of the country.

So I was just curious if that was the case at The Cheesecake Factory and if there were any other strengths or weaknesses across the country to call out.

I think it's kind of more of the same story.

We certainly saw that.

All of our markets were positive but our strongest markets were California -- I think that was the strongest.

And then there was Texas and the Midwest were also very strong.

And I think we talked on the last call about the Northeast.

The Northeast was one of the weaker markets but still solidly positive for the quarter.

So you always have to have some market that's the weakest market, and that was it.

And that was despite the weather but I guess the weather happened in both years there.

But they were solidly positive, up over 1%.

Great.

And one quick one on labor and the progression throughout the year.

Do you expect to be in a position to hold labor flat as a percent of sales in the back half on the lower forecasted comps?

Or do you think that once you lap over the group medical spike from last year you might actually be able to get some leverage on the labor line?

Our numbers and forecast would show that we are going to get some slightly positive leverage on labor for the year.

Great.

Thanks, Doug.

Robert Derrington from Wunderlich Securities.

Doug, could you help me understand something for a second?

The trend in same-store sales for Cheesecake Factory versus what the average weekly sales have been -- the spread between the two has gone from positive, meaning that average weekly sales actually were stronger than comps through much of last year, in 2014, to now in Q4 and into Q1 average weekly sales are below comps.

They were down, I guess lower by about 110 basis points here in the first quarter.

Is there anything about some of the new stores that are coming on that's different or maybe some markets that aren't performing as well that we should think about in modeling?

Yes, I think you are exactly -- you got the numbers right, obviously.

The average weekly sales for Cheesecake Factory restaurants increased by 3.1% and that's 4.2% comp store sales.

I think the gap is attributable to the fact that we are building smaller restaurants.

We are not building small restaurants, but most of them are smaller than 10,000 square feet.

And what we have commented on about our restaurants is that their performance on the sales metric basis is better than the overall average for the Company.

That means sales per square foot and sales per seat, not total sales.

So if we build an 8,300 square foot restaurant and it does $9.5 million, we are really happy and we have great returns.

But as far as what it does to average weekly sales, that's a decline.

Got you, that's terrific.

I suspected as much but I'd rather hear it from you than just guess on my own.

Secondarily, did you give us what the Grand Lux same-store sales trend was in the quarter.

We didn't but I can, if I can find it here.

I think -- yes, Grand Lux was -- the comp store sales were minus 1.9%.

Terrific.

Thank you, Doug.

Appreciate it.

Joseph Buckley from Bank of America.

I'm sad, someone asked my follow-up question.

So I'm good.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Thank you very much and have a very good day.