Cheesecake Factory Inc (CAKE) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q2 2015 Cheesecake Factory Incorporated earnings conference call.

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

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

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

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Miss Jill Peters.

Please proceed.

Thank you.

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

I'm Jill Peters, Vice President of Investor Relations.

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

Before we begin, let me quickly remind you that during this call, items will be discussed that are not based on historical 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.

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

Doug will then take you through our operating results in detail, and provide our outlook for both the third quarter of 2015 as well as the full year.

Following that, we will open the call to questions.

Before we begin, please note that we plan to announce earnings and hold our conference call for the third quarter of fiscal 2015 after market close on Monday, October 26, 2015.

This is outside of our typical reporting timetable due to a scheduling conflict.

And with that, I will turn the call over to David.

Thank you Jill.

We saw continued sales strength in the second quarter with a healthy comparable sales increase at The Cheesecake Factory that outpaced the casual dining industry and helped to fuel a 17% increase in our earnings per share.

Comparative sales were positive in all geographies, and we continued to see consistent performance with respect to daypart, weekday versus weekends, and mall versus non-mall results.

In addition, dessert sales have steadily grown for the past two years, positively influencing our sales mix.

The vertical integration of our bakery enables us to create innovative, high-quality desserts for our restaurants, and is one of the competitive advantages that help us produce industry-leading AUVs.

We are launching our newest cheesecake next week, salted caramel, in celebration of National Cheesecake Day.

In addition, our new summer menu will roll out beginning August.

We are excited to introduce a new category to our menu called superfoods with new items containing nutrient-rich, high-quality powerhouse ingredients such as kale, blueberries, almonds, salmon and quinoa, to name just a few.

It's our take on what guests want today and an innovative approach to continuing to drive relevance.

We believe it will resonate not only with Millennials but have broad appeal across a wide demographic.

Moving on to development, our plans for this year continue to include the opening of as many as 11 Company-owned restaurants across the US in a mix of new and existing markets.

We expect two restaurants to open in the third quarter, one in Austin, Texas and the other in Memphis, Tennessee, a new market for us.

Internationally, we still expect as many as three restaurants to open this year under licensing agreements.

The first opening took place in Mexico City in March, and two restaurants are scheduled to open in the Middle East in the fourth quarter of this year.

Some of you may have seen the announcement from the Walt Disney Company about the planned opening of The Cheesecake Factory next year at the Shanghai Disney Resort.

This will mark our entry into China under a licensing agreement, and we are excited to be part of this project.

For the third consecutive year, our board approved a significant increase in our quarterly dividend, underscoring confidence in our business and our commitment to both return excess cash to shareholders and increase total shareholder returns.

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

Thank you David.

Total revenues at The Cheesecake Factory for the second quarter of 2015 were $529.1 million.

Revenues reflect the comparable sales increase of 2.8% at The Cheesecake Factory restaurants.

External bakery sales were $12.7 million in the second quarter.

Cost of sales decreased 40 basis points year-over-year in the second quarter of 2015 to 23.9% of revenue.

The expected favorability in seafood and dairy costs as well as lower produce costs more than offset anticipated higher meat and poultry costs.

Labor was 31.8% of revenues, down 60 basis points as compared to the second quarter of the prior year.

The favorability was primarily driven by significantly lower group medical expense resulting from fewer large claims.

This was partially offset by rising wage costs and a higher rate of inflation than we previously expected.

Other operating costs were 23.4% of revenues, down 70 basis points from the prior year.

The favorability was attributable to lower workers compensation expense and a decrease in utility costs stemming from lower natural gas prices.

In addition, we benefited from sales leverage.

G&A was 6.7% of revenue in the second quarter, up 80 basis points from the same quarter of the prior year.

The variance primarily related to an accrual for the settlement of a legal claim and, as expected, a higher corporate bonus accrual.

Preopening expense was $4.1 million in the second quarter of 2015 versus $2.6 million in the same period last year.

We had three restaurant openings in the second quarter of this year and two in the year-ago period.

Our tax rate this quarter was 28.1%, within our expected range.

Cash flow from operations for the first six months of 2015 was approximately $121 million.

Net of roughly $60 million of cash used for capital expenditures, we generated about $61 million in free cash flow through the second quarter of 2015.

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

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

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 input 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.

For the third quarter of 2015, we estimate diluted earnings per share between $0.53 and $0.56, based on an assumed range of comparable sales of between 1.5% and 2.5% at The Cheesecake Factory restaurant.

Sales were strong in the first half of 2015 and we expect this momentum to continue in the current quarter.

As we previously discussed with you, we expect G&A cost to be higher this year.

As it relates to the third quarter, we are planning for G&A costs in a range of approximately 70 to 90 basis points above the third quarter of 2014.

For the full year 2015, we are increasing our diluted earnings per share sensitivity to a range of $2.29 to $2.35, representing earnings per share growth of 16% to 19%.

Our earnings per share sensitivity is based on an assumed comparable sales range, which has a midpoint of approximately 2.5% at The Cheesecake Factory restaurant.

This implies that comparable sales will grow between 1% and 2% for the fourth quarter of 2015.

While we are lapping an easier comparison in the fourth quarter, there are two unfavorable holiday shifts occurring with Halloween falling on a Saturday and Christmas falling on a Friday in 2015.

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

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

Internationally, as David mentioned, we are still planning for as many as three restaurants to open this year under licensing agreements.

In terms of food cost inflation, we continue to plan for a range of between flat and up 1% for the total Company in 2015.

While produce and cheese costs are down relative to our last update, we are expecting to pay more for eggs this year due to the avian flu.

We are achieving one of our key objectives in having greater certainty regarding what our commodity costs will be.

We are about 65% contracted for dairy for the second half of 2015 versus about 10% for the second half of 2014 at this point in time last year.

And we are on track to recapture about 75% of the dairy cost increases that we experienced in 2014, as planned.

In labor, we are now planning for group medical insurance costs to be lower year-over-year as a percentage of sales.

While we did not reduce our forecast for the second half of the year, given the favorability we experienced in the first six months of 2015, mathematically the result is a lower full-year expense.

We are now expecting wage rate inflation of between 3% and 4% for the year, which is roughly 1% higher than we previously planned for.

We are taking an additional 50 basis points of price in the upcoming menu change due in part to continued wage rate headwinds.

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

As David mentioned, we are increasing our quarterly dividend quite significantly, and well above earnings growth for the third year in a row.

Our objective when we initiated the dividend was to increase it meaningfully over time, which we have done, and this increase gets us back to a dividend yield of about 1.5%.

There is no change to our capital allocation plans this year.

In keeping with our practice of consistently returning our free cash flow to shareholders, we plan to continue doing so this year.

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).

Jeffrey Bernstein, Barclays.

Great.

Thank you very much.

Actually, I had two questions.

One was just on the comp, just to clarify.

It seems like maybe you ended the second quarter in maybe the 3% range.

I know you had told us how you started the second quarter.

I'm just wondering to what do you attribute first of all just the outperformance versus the industry?

I know, in the first quarter, you attributed it to holiday and gift card, but now we are seeing some upside sustained versus the industry.

In the past, there was a lot of historic capacity constraint discussions.

I'm just wondering to what you attribute the outperformance, and maybe why if you exit the second quarter running up 3%, maybe it's just conservative your guiding the third quarter to 1.5% to 2.5%.

Thanks.

The month-by-month during the quarter, sales trends were strong throughout the quarter, but June was the best performing month of the quarter, which I think was similar to industry trends.

But June was also our easiest comparison versus last year.

I think one way we differ from the industry is that our May sales performance was pretty consistent with June in that we were up roughly on a 3% range in May.

So we didn't see the small deceleration the industry saw in May.

So I think that I would attribute the better sales than we guided to to just I think a stronger overall economic environment, at least with respect to our customers.

And when we look forward to the third quarter and the guidance that we gave for sales in the third quarter of 1.5% to 2.5%, I think that that is in line with where we ended the third quarter.

And here's why.

First of all, the third quarter is probably our hardest comparison of the year.

I think we were up 2.1% in the third quarter last year.

And if you look at the second quarter on a stacked two-year basis, you would conclude that we have 4.3% stacked two-year comps in the second quarter.

And if you did the same thing and assumed the same stack for the third quarter this year, you would come to the conclusion that comp store sales in the third quarter would be 2.2%.

So that's within the range of the 1.5% to 2.5% that we gave.

Got it.

Then just one follow-up.

I know you guys have talked a little bit about technology and more recently.

Just wondering if you can share any early feedback on the mobile payment test, whether it's usage rates or boost the table turns, or however you examine that would be great.

Sure.

We have our cake pan up now running in just our one location in Thousand Oaks, California, and so far we are happy with the adoption that we have seen.

I don't have any specific rates to share with you today, but I do know that we do have guests that are using them more than once and our initial adoption, I think, as I had maybe said earlier, has been something that we are very pleased about.

We are going to continue to evaluate it here over the next couple of months, make sure it's as seamless as we still want it to be.

We still want to work out some of the technology, and hopefully by the fourth quarter, we will be rolling it out to a larger group of restaurants with the hope to move forward this year.

Great.

Thank you.

John Glass, Morgan Stanley.

Thanks.

First, Doug, could you just give me the details around traffic versus the ticket in the second quarter for The Cheesecake Factory brand?

Sure.

So comps were 2.8%.

Pricing was about 2%.

Menu mix positive, menu mix was about 1%, so traffic was slightly negative at 0.2%.

Okay.

And so how do you view that shift?

It looks like you picked up a little bit on the check this quarter maybe versus prior, or at least sort of held that constant, but maybe you lost a little traffic.

Was that -- is that just comparison issues, so if you build it back, how do you look at that in the context of the industry?

Yes, sure.

From quarter to quarter, I think there's going to be changes to guess traffic levels that can be impacted by a lot of things, weather, shifts associated with holidays.

So in the first quarter, we had some holiday shifts that positively impacted our traffic.

So, while our traffic was positive in the first quarter, if you adjust for the holiday shifts, it was really negative but improved over where we had been last year.

So my comment about traffic really is -- the important thing is we are making progress toward improving our guess traffic levels and we are moving in the right direction.

So we roughly 1% negative last year, and moved to a little less than 1% negative in the first quarter and moved to 0.2% negative in the second quarter.

So that evidences what my statement is, that I think we are making progress on our traffic.

And our traffic results were much better than the industry.

Approximately half of our restaurants had positive traffic in the quarter.

Okay.

Can you just clarify?

On the labor line, there's the medical, the self-insurance benefit versus last year, but you had rate pressure.

How much was the year-over-year delta just on that medical piece if we try to isolate that?

It was more than the 60 basis points.

It may be 70.

So bringing it back down to the 60 basis point decreased that we saw in labor was the fact that we had greater wage rate inflation in the quarter than what we anticipated.

We had anticipated back in February and then reiterated in April that we expected around 3% wage rate inflation for the year.

And now I think we saw greater than that in the quarter, and we would expect to continue to see greater than that for the rest of the year, more in the 3% to 4% range.

So that's part of the reason why we took a bigger than normal menu price increase on the current menu change in August, that's coming out in August, to counteract that.

Got you.

Okay.

Thank you very much.

Sharon Zackfia, William Blair.

Good afternoon.

I guess two quick questions.

First, Doug, you mentioned holidays in the fourth quarter.

Do you have any estimate on what you think Halloween and Christmas will do to the comp?

And then I guess my real question would be just some thoughts about Los Angeles specifically and the minimum wage hikes that are going to be coming up, and what the thought process is, specifically for that market.

Would you take specific price in LA?

Do you think there are productivity opportunities?

Any help on that would be appreciated.

Sure.

I think, on Halloween and Christmas, it's well in excess of 50 basis points, up to 100 basis points of impact from just Halloween shifting to a Saturday, which basically makes Halloween kind of last all weekend and really hurts us, and then at Christmas move into Friday from a Thursday is bad for us.

But it could be -- it is definitely greater than 50 basis points, up to 100 basis points of potential pressure from that.

And then on the LA, we have -- we currently do not take, except in some instances like Hawaii and maybe some other locations, regional pricing.

But that is something we could consider doing in the future.

That's how I would answer that with respect to the LA minimum wage.

Can I just ask a follow-up?

Why have you historically not taken regional pricing?

We do, but not a lot.

It's just worked out for us to have similar pricing.

We seem to be getting it, and a lot of the markets you think you can charge more, you really can't.

So in our estimation, a little bit of pricing difference we do is what we think we can do.

And I think that's why we do so well in even areas that you think we could charge more, but many restaurants don't do well where we do.

So it's just our analysis of how we think the areas we are in will react to price increases.

And at this point, I still think we are right.

Another thing just came to mind.

We definitely take additional menu pricing in a place like San Francisco.

So that --

And a few others.

And a few others.

But that's a good example that might relate more directly to your LA --

Pressure.

Yes, LA (multiple speakers) pressure.

Perfect.

Thank you.

Joseph Buckley, Bank of America.

Thank you.

Just to clarify on the pricing then, are you taking 1.5% with the summer menu, and year-over-year then you'll be running at a 2.5% pricing factor once that's implemented?

Is that correct?

That's right.

So, 1% is rolling off and 1.5% is rolling on.

So we will have -- basically for the last four months of the year, because it will take us almost the whole third quarter to get it completely rolled out, we'll have somewhere between 2.5% and 2.6% of pricing in our menu as opposed to what has historically been roughly 2%.

Okay.

And then Doug, I think you mentioned workers comp also being favorable in the quarter.

Was that a claim issue as well or is there something else going on there?

Was that significant?

Separate from the group health insurance comments?

It's separate, and it's not overly significant.

It's 20 basis points or so, but there is some significance to that.

I think that the favorability did primarily relate to lower claims activity.

But last year, you probably don't remember back to our comments from our conference call last year.

But last year we said that workers comp was higher in the second quarter because of unusually high claims activity.

So we are lapping up against a quarter where the workers comp claims activity last year was higher, and so we have a more normalized quarter and that made it lower.

Okay.

One more, if I could sneak one more in, just on the dessert sales, is there anything that you have been doing differently to prompt the high dessert sales, or would you attribute that to the consumer spending a little bit more freely and maybe feeling a little better about things?

I think we have delicious, compelling desserts and we've come up with some wonderful, new additions to the menu every year for the past three or four menus.

And the guests really receive them well.

And the incident rates continue to grow.

So other than creating some wonderful new desserts for guests, as far as what we're doing within the restaurant, it's the same.

So incident rates, as David said, were up during this quarter and I'm looking at the dessert as a percentage of sales, and it's up about 20 basis points compared to the same quarter last year.

That's helpful.

Thank you.

Karen Holthouse, Goldman Sachs.

I have just a quick clarification first on the pricing comment.

If the new menus start to roll out in August and that's where the incremental 50 basis points is coming from, I'm trying to understand how the lower end of the range for pricing for the quarter would be 2.5%.

Well, we have 1% for the quarter.

I don't think I said that for the quarter.

If I said that for the quarter, I meant it was for [the last quarter of last year.]

It starts to roll -- Okay.

That makes sense.

Once it's fully in, it's the last four months of the year roughly, so September through December, because it will be pretty much fully rolled out by the first week in September, something like that.

All right.

And then on the change in labor inflation, I'm curious if that's something that's coming from a particular region, or even within a store, is it more related to servers that are on tip wages?

Is it related to changing wage regulations in various sort of isolated cities?

On the kitchen side, is it entry-level?

Is it people who are a little bit above minimum wage?

Just trying to think through where that's kind of hitting in a store.

Yes, I hear you.

So the higher inflation that we are now expecting compared to what we were really has nothing to do with minimum-wage increases, which are part of wage rate, because we knew what they were going to be.

But wage rate inflation also includes upward pressure, as you alluded to, Karen, on non-minimum-wage jobs from minimum-wage increases, if you want to look at that way.

And then in this environment, over time, as in the current environment, makes staffing more challenging and more difficult in some of the locations that we have, and that's part of wage rate pressure.

It also includes people that work in the restaurant industry today have more choices than they have had in the past.

Perhaps that's putting pressure on what we think we are having to pay.

So it's all of those things that are contributing, I think.

That actually is a very good segue to my final question, which is given the amount of experience you have operating stores in California, with some of what is now being proposed for national overtime regulations that are very similar to California, is that a particular contributor to outside labor costs or what changes do you make in terms of salaried versus hourly employees or how do you allocate jobs between managers or non-managers to better adapt to that regime?

Are you referring to President Obama's executive order about salaries and the salary threshold for which workers qualify for overtime?

And that's the $50,000 --

Yes.

That's been out for comment from business associations right now on -- yes.

Yes, I think my comment about that right now is we are still in the process of examining that.

We are waiting for clarity on a number of different aspect of that, such as what job duties are included to make someone salaried versus not.

And the threshold -- does the [$50,440] threshold include bonuses or not.

Those are things we don't have clarification on to really know how or what impact it will have.

Great, thank you.

David Tarantino, Robert W. Baird.

Good afternoon.

Doug, my first question is around the Q2 earnings performance.

It was $0.07 above the high end of your guidance.

Yet the comps were just modestly above the high end of the guidance.

So can you talk about the factors that drove the upside during the quarter?

And I have a follow-up related to that.

Sure.

You can basically divide the $0.07 upside into roughly half of it came from favorable group medical and workers compensation and the other half of it came from better comp store sales and more leverage.

We beat the high end of the range comp store sales by a little bit, and we got a little more leverage than we thought we would get.

So those are the two things.

So half of it was insurance-related and half of it was operations-related.

Great, that's very helpful.

Then the follow-up is the full-year guidance increased by a little more than the upside you showed in Q2.

So I guess which of the line items that showed favorability in Q2 are expected to carry over?

I know you raised the sales guidance a little bit.

At least that's one component.

But is there any of the insurance-related costs that you think will continue in the second half or have you assumed that in the guidance?

We haven't really -- with respect to group medical, we are assuming for the second half of the year that we are going to have the same percentage group medical as we had in the first half of the year.

We did much better than that in the second quarter, but I am not smart enough to be able to really predict what group medical is.

It always seems to be a surprise.

But with respect to our guidance, though, we raised our guidance by roughly $0.08 -- or by $0.08 at the high end of the range, and $0.11 at the low end of the range.

And it's basically by the amount that we beat the quarter, plus another $0.01, and the $0.01 is from additional comp store sales that we are assuming we're going to have in the third quarter of the year.

Now, that's the simple explanation, but there's also a number of other pushes and pulls that are in there.

We are expecting to pay a lot more for eggs than what we expected to pay when we were talking to you last in April.

And we are expecting, as we talked about, greater wage rate inflation.

And we are looking at those things to be offset by this menu price increase that we are taking.

So if you took all those things together, we are sort of netting them out to zero.

We increased the guidance by what would beat the second quarter by plus another $0.01.

That's very helpful.

And then last question if I may, it seems like you're expecting a little bit of a moderation in traffic as we move forward.

Is that just comparison and calendar issues, or are you seeing anything that would suggest that the traffic would soften up?

And I guess the impetus of the question is you are going to have a little more pricing in the second half than the first half, and that the guidance for the second half at the midpoint is lower than what you delivered in the first half for traffic.

Yes, we talked about the third quarter and how we basically on a stacked two-year basis that we are roughly assuming the same trends and not a decrease in trends.

In the fourth quarter, the assumption is that we have comp store sales of between 1% and 2%.

And again, we talked about it a little bit.

It's still a very dynamic environment.

We believe it's prudent for a range of the fourth quarter that's more consistent with our historical performance as opposed to our most recent performance.

But we do have those holiday shifts too, and they are impacting the quarter and impacting the quarter potentially significantly at least from a comp store sales perspective.

So we are trying to provide the best estimate that we can based on everything we know and trends to date.

And we've had two quarters in a row of hitting our guidance numbers that we've furnished, so this level of comp store sales expectation for the fourth quarter makes sense to us.

Great, that's helpful.

Thank you very much.

Nicole Miller, Piper Jaffray.

Thank you.

Good afternoon.

When you think about the current cost (technical difficulty) environment, what is the earnings impact for a 1% comp change on an annual basis, approximately?

Or what is the flow through on a comp right now?

What is it, $0.10?

Is it 1% change in comps, is that what you're asking?

Yes.

It's between $0.09 and $0.10 a share.

Okay.

And the guidance for the year, what kind of incremental share repurchase is assumed?

We've done a little over $100 million so far in dividends and share repurchases for the year.

A lot of the answer to that question, I'm going to answer it by saying that we do our share repurchases opportunistically using a 10b5-1 plan.

And so some of the answer to that question has to do with what is the stock price going to do.

So we're going to be opportunistic.

You saw we didn't buy a whole lot of shares in the second quarter of the year, and that had a lot to do with when we put the 10b5-1 plan in, what we said the parameters were for buying stock and the stock price just really got a little ahead of where we had that 10b5-1 plan in place.

But our intent is to invest the majority, if not all, substantially all of our free cash flow in share repurchases, but some depends on what -- the movement of stock price in the second half of the year.

Thank you.

Keith Siegner, UBS.

What a difference a year makes.

Congratulations folks.

That's a great quarter.

Two questions for you.

The first I'll ask about is on the COGS.

Coming into the year, you talked a lot about food waste and some efforts that were in place to help make some improvements there.

You talked a little bit about more contracting.

When you talked about why COGS was down year-over-year, it was all seafood and dairy were lower, lower produce offset a little bit.

Could you give us an update on maybe some of those efforts around food waste, you know, controls, maybe what some of the benefit is of contracting or how we should think about this moving mechanism?

Just some updates on the non-underlying commodity volatility.

Thanks.

Sure.

As far as the initiatives that we talked about early in the year, we have the pilot program that we have talked about around auto production and planning in about 15% of our locations thus far.

And we are seeing a benefit from that.

We are seeing less waste, higher efficiency on higher quality ingredients.

Our goal in the next three to four months is to refine that process, to enable us to roll it out towards the end of the year or again in the beginning of 2016.

So we are seeing a benefit from it.

It's still in a small amount of restaurants.

And I think the rest of our locations, even though they are not part of that program, are doing a very solid job when it comes to controlling waste and improving our efficiency numbers.

And on the other part, with respect to our contract, I think we are making -- and I mentioned this briefly on my prepared remarks, we are making some real progress on the initiative that we outlined for you early in the year.

I think to add more productivity and greater certainty to our cost of sales forecast, we have an enhanced process that we've put in place that we talked to you about that helps us manage commodity costs.

So with the pressure that we saw last year from dairy and shrimp, we are utilizing different approaches to limit our risk, to get the lowest cost we possibly can, but really to have more predictability at the same time.

An example is that we have more price certainty for an extended period of time with one of our existing vendors for manufacturing cream.

And we use a lot of manufacturing cream.

It's what we use for whipped cream in our restaurants.

And this was a product we didn't believe we could contract for in the past, but we worked with our supplier.

We figured out a way to contract for it and it's adding just a lot more certainty to our process.

I mentioned in my prepared remarks that we are 65% contracted for dairy at this point in time versus -- for the remainder of this year as opposed only 10% contracted at this point in time last year.

So that's a big difference.

When we say commodity cost inflation for the last half of the year we expect to be 0% to 1%, we are a lot more sure of that comment than what we were last year at this time.

And one quick one for David if I might.

Thinking about this new superfoods, is this a new entire segment within the menu?

You haven't added a new segment in a couple of years now, I don't think.

Is this going to be another major segment?

Does it replace something?

Is it part of Skinnylicious?

How do you advertise, say, the superfoods?

Thanks.

It is a new section.

It is small right now but we plan to grow it.

We will mix some of what we call superfoods throughout the menu, not just in that section, but right now there is a section.

And we will see how it goes.

And I think it brings attention to the types of foods we think people want today.

If we call it Millennial food, which I sort of say jokingly, but it is, those are the kinds of things we want to -- that are not typically Cheesecake Factory recipes, but recipes that we think are starting -- people are starting to eat and enjoy and like and feel good about.

So the answer is it is a new section, and we will hope that it grows and does as well as at least Skinnylicious.

Jeff Farmer, Wells Fargo.

Coming up on Keith's first question, given your commodity inflation expectations that you outlined for the back half of the year and that slight bump in menu pricing, how should we be thinking about COGS as a percent of revenue in Q3 and Q4 versus that 23.9% number you guys delivered in Q2?

That's a pretty specific question.

Overall, we would assume that with 2.5% menu pricing and only 0% to 1%, that you're going to see some lower cost of sales as a percentage of sales.

Certainly for the year that's going to be true, and I would think for the third and fourth quarter that that would also be true.

Just one quick follow-up, and I'm sorry for making you be so specific on that one.

But I think it was alluded to in an earlier question, but for just a little more color on I would say the nature and timing of some of the throughput efforts that you've talked about recently and which I think began in March, but any color there would be helpful.

If you are talking specifically about the cake payout, I think that's something we are looking to be rolling out by next year.

As far some of the other initiatives that we have talked about, which were more around shift execution and a renewed focus of our management teams on bringing our restaurants as fast as they possibly can be running them at our busiest times to help increase throughput, we did start that rollout in March.

And we do believe that through the second quarter we saw some benefit from that.

I don't have any specific numbers to share with you today.

But we feel confident that those messages are out there with our management teams.

Everything that we put in place as part of that program is now up and running.

And we are hoping to see some continued benefit from it in Q3 and Q4.

Thank you.

John Ivankoe, JPMorgan.

Great.

Thank you.

I was hoping to get a little bit more color on the group medical.

I guess, in checking my notes, 2009, 2011, and 2014 were very high years.

You're obviously having a really good, easy comparison I guess benefit from 2015 to 2014.

So Doug, as you look at the first-half actuals and you look at the second-half guidance, where are we on that spectrum in terms of is this a normal year, is this a low year, or is this actually still a high year but 2014 was just so bad?

2014 was really bad, if you remember that.

So just I think maybe like almost $10 million of pressure, so a really bad 2014.

Continuing into and expected was that it came into the first quarter of 2015.

The second quarter of 2015 was very low.

It was lower, so it was low by comparison to most quarters.

It was certainly low compared to last year, but it was lower than that even.

It was as low as like the year before that.

So I would be very careful about trying to put some kind of trend line together with respect to group medical because I think the fact of the matter is we don't really know, and all you can really do I think is listen to what we have put in the guidance for the third and the fourth quarter, which is that we are assuming group medical expenses will be the same percentage of sales in 2015 in the third and fourth quarter as they were in 2014 when it was really bad.

Right.

So that does, just on the face, does seem to be conservative.

The second half of 2014 was very bad.

You'd have to have another very bad year for that to be flat as a percentage of sales year-over-year.

We would, and we accomplished that almost that bad in the first quarter.

So I would just say yes.

You can say there's an upside to that, but I wouldn't bet much money on it.

Just beyond the tactics of the quarter-to-quarter, has there been a broader change in group medical just in terms of your employees that are participating, or how they are using the plans?

And if so, is there anything you can do to either smooth the costs or moderate the costs going forward?

We are constantly trying to make changes to our medical plan that makes our medical plan still very competitive in the marketplace, that makes people want to work for our Company, but also how to make, tweak some modifications through a medical plan so that we can have less cost associated with it because medical plans, they never go down.

The cost of medical insurance just overall doesn't go down.

So I think we are making -- we've made a number of modifications over time.

We have four plans in place today for instance, and two of them are high deductible plans.

And they both qualify under the Affordable Care Act.

And so we -- one of the things we're trying to do is based on the way that our employee contributions under the plans work is to move people into the high deductible plans, because those are lower cost plans for us.

So that's just an example of one of the things we're trying to do.

Thank you.

Brian Bittner, Oppenheimer and Company.

Hi guys.

Congratulations on the quarter.

Something that struck me in the numbers was the better leverage you get on that other operating expense line.

I think, when you look at the first quarter, that line item was up 2% on a same-store basis when you model it out that way.

In this quarter, those same costs were down 1% on a same-store basis.

I know you talked about utilities being down, but that's a pretty big swing.

So how much of the utilities was a part of that, and how much of it is some other things that are maybe more sustainable and how should we should think about the trend of that line item going forward?

That's a great question.

I would say out of the 70 basis points of decrease that we saw on other operating expenses, workers comp was roughly 20%, 25% and utilities were another 20%, and the rest I would just attribute to the leverage that we get from better sales.

So, another 15% or 20% is of the more sustainable variety as long as sales are at the level that they were at.

That's super helpful.

Thanks for that detail.

Your visibility into workers comp and your utility costs are what exactly?

How much visibility do you have in that?

Utilities I would say last year were very high early in the year and sort of tailed off near the end of the year.

So we saw favorability in the first quarter in utilities versus last year.

We obviously saw favorability in the second quarter.

So I wouldn't think that's very sustainable.

I would think the third quarter as it fell off last year, our year-over-year comparison is not going to be positive necessarily.

And I don't remember if there was anything odd in the last half of the year on workers comp or not.

Do you, Jill?

Okay, so I would just say that I would expect workers comp to be more normalized for the last half of the year.

Okay.

All right.

Thank you.

Matt DiFrisco, Guggenheim.

I have one bookkeeping question and then I have a different topic on the international side.

Can you just tell us what the, within G&A, the non-stock or the stock-based compensation component was in the quarter?

What the increase in it was, or what the (multiple speakers) amount?

Absolute dollars.

I have $2.7 million last year.

We'll have to give to you off-line, because I don't know.

Okay.

How about international?

I'm just looking at this now.

I think -- what are you up to?

Seven stores now internationally with the licensing agreements?

Nine.

Nine?

So two in Mexico and seven in the Middle East.

Okay.

And then if you look at the incrementality since like sort of earnings power you had in 2013 and the margins, I know you're still sort of mingling all the revenue together.

So those nine stores, the license revenue I would assume is near 100% of the margin, so the flow-through of that.

Are we still seeing better than $0.01 on an annualized basis from each store?

I think we were almost close to $0.02 was the assumption in the first couple of stores given how big of volumes they were.

I would say that, of the nine restaurants, if you average and blend it all together, that's greater than $0.01 a share, yes.

So looking forward though, what we put in our forecast and our models is we assume that, since we really don't know, that future restaurants are going to open and provide us about $0.01 a share worth of benefit.

So, I guess my question is then you have about $0.10 of earnings or so annualized, greater than that, coming in from the basis that you made in 2013, and your restaurant margins in 2013 were 19.5%.

Is the internal goal then to easily surpass that?

If you were to continue reporting as you are with the licensing revenue flowing through that, shouldn't we soon be seeing your EBITDA margins break through the 2013 levels, if we sort of maintain this benign commodity cost environment and you are always going to be able to take sort of this 1.5% to 2% price increase?

I mean I just would assume that you're going to eventually get more and more leverage off of the Company-owned stores rather than just getting the leverage off of licensing businesses.

There's a lot of assumptions in there.

One is that commodity costs remain benign, which we wouldn't incorporate that assumption.

But here's what I would say, is that we know that there is wage rate pressures now.

We don't think labor, you know, maybe it will soften a little bit, but labor is going to be a pretty consistent issue for the restaurant business.

And we are looking for initiatives that we do internally to offset cost pressures from everything else.

Something -- it's going to be what is the cost headwind story for this year.

It's always going to be something, so we are looking at either menu pricing and/or initiatives that we do internally to keep those costs in line and keep margins flat.

And then we are looking for international to provide the growth in margins, if that makes sense.

That's sort of how we compartmentalize it internally and the way we look at it.

So over time, the international we would expect to be able to get back EBITDA margins.

I don't -- I usually don't talk about those.

I talk about operating margins, which is after G&A.

And we would expect to be able to get back to peak operating margins over the next few years, but not through efforts we are making internally that are outside of international.

We're just hopeful those efforts result in keeping margins flat and then international gets to cause an increase.

That's great clarity.

I mean that's what I was basically trying to get to, is the opportunity to sort of sold hold margins at the restaurant level and get that expansion from the international side.

What is the threshold that international would have to be producing in order to -- you think that would drive you to segment out that type of revenue?

I was just thinking about that today because I thought somebody might ask about it.

So, I'm thinking that, when we do that, we probably have to like go back and do previous years.

So maybe in like 2017 we can do that.

And we'll show and 2017 and 2016.

Okay.

Thank you.

I appreciate it.

Will Slabaugh, Stephens, Incorporated.

Thanks guys.

I had a question on G&A.

You mentioned the legal and the bonus accrual that led to the number a little bit higher than what you expected.

Can you help us out with how that may look from a year-over-year perspective going forward in 3Q and 4Q?

Yes.

In the third quarter, I talked about 70 to 90 basis points higher in G&A, which is obviously pretty significant.

And the third-quarter G&A is very heavily influenced by a bigger expected bonus accrual than 2015 -- in 2015, excuse me.

In 2014 in the third quarter, we really ramped down the bonus accrual last year when dairy hit that all-time high and our results fell short of our plan.

This year, we are tracking above our plan, so there's a big gap to make up.

I've heard it referred to as the bonus reload.

So the bonus reload in the third quarter is a significant portion of that expected 70 to 90 basis point increase.

And there will be something similar that happens in the fourth quarter because we have -- we expect to have higher G&A for the year that's pretty significantly higher than the previous year, and a big part of it is that.

Got it.

Just a quick follow-up internationally if I could.

Can you give us a quick update on how the new restaurants look in Mexico?

I know just given you have two now, I'm curious on how that's being accepted by the customer.

And then are you anticipating in your models -- I know you kind of mentioned this a minute ago -- that these volumes continue in fiscal 2016 similar to how you've seen them in the past, or are you anticipating them to be back sort of at that $0.01 rate going forward?

I'll answer the modeling question and then David or David can answer what the guest acceptance has been.

I would say that we would look at those restaurants in a similar way that we would look at restaurants that we have, which is there's a honeymoon period, and after the honeymoon period, there is a stabilization of sales at a certain level, and then we would expect them to stay at that level or grow from there.

That's the assumptions we would make with respect to how much royalty we would be expecting looking forward.

We have a list of other potential restaurants that they are thinking of opening in Mexico, so I think that bodes well that they are happy and we are happy and that we will move forward in that part of the world.

Thank you.

Paul Westra, Stifel.

(technical difficulty)

I think we can't hear Paul.

Are you guys there?

Sorry about that.

I don't know what happened here.

So actually just following up on Will's question on G&A, you got deleveraged in the first three quarters, it sounds like in the 50 basis points.

Should we think about that as the new fully loaded number from which we should expect to the leverage going forward, or is there some -- also some -- I know you articulated some of the bonus accruals and also the legal accrual.

Is some of this one-time or is it just the new base from which you would expect to delever from going forward?

The legal accrual is one-time until we have the next legal accrual, so I will say that about that.

I would say that once we reload the bonus in 2015, all else being equal, we shouldn't have any deleveraging from reloading bonuses anymore.

So I would say that we are not expecting to have big G&A deleveraging going forward.

Our intent would be to try to keep G&A in future years as flat as possible and to grow it at less than revenue growth, and maybe be able to leverage it a little bit.

But I wouldn't count on that.

I would just sort of look at it as being flat going forward.

Okay.

And then lastly --

Absent any future legal accruals.

Right.

And then I guess the commentary on maybe the labor tightening situation, obviously maybe comment on is turnover still an issue.

I know you hit some in the fourth quarter.

Talk about the programs you installed to tighten up training and hiring and overtime efforts.

And is the higher wage rate slowing down the increase in turnover if it is heating up?

I guess maybe how -- a more qualitative assessment on how the labor market is looking.

Turnover rates are actually very strong so far this year.

Our management turnover is less than it was last year and comparable to 2013.

And at the staff level, we are holding where we were last year.

So it hasn't increased.

I think a lot of what we're doing is working to keep the people that we need to keep, and some of that may be making sure that those pay rates are the correct pay rates in each of the markets we are in.

But as far as retention goes, it stayed pretty stable this year.

And those sort of the fourth quarter little triage efforts with respect to maybe the overtime scheduling of those programs you installed post fourth quarter, maybe give us an update on -- it sounds like things are sort of settling back down to normalized levels.

I think what we did, just to remind you, is that we enabled all of our ADOs and area kitchen operations managers and now our restaurants, we arm them with reporting that would show them what the market was paying in each one of the surrounding restaurants in each geography.

That's now rolled out everywhere.

So, I think that has enabled us to make sure that we are paying appropriately in those markets, which may be part of the reason that retention is where it is today versus where it was last year.

So that tool and that initiative actually has fully rolled out now, and I think we are seeing some benefit from it.

Great.

Thanks and congrats on a great quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.