Cheesecake Factory Inc (CAKE) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to The Cheesecake Factory Third Quarter Fiscal 2019 Earnings Conference Call.

(Operator Instructions) I'd now like to hand the conference over to your speaker today, Ms. Stacy Feit.

Ma'am, please go ahead.

Thanks, Catherine.

Good afternoon, and welcome to our Third Quarter Fiscal 2019 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 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 the call speak only as of today's date, and the company undertakes no duty to update any forward-looking statement.

In addition, throughout this conference call, we will be presenting results on an adjusted basis.

An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure appear in our press release on our website as previously described.

David Overton will begin today's call with some opening remarks, and David Gordon will provide an operational and acquisition integration update.

Matt will then take you through our financial results in detail and provide our outlook for the fourth quarter and the full year 2019 as well as some initial assumptions for 2020.

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

Thank you, Stacy.

We continued to outperform the industry during the third quarter, sustaining positive comparable sales at The Cheesecake Factory.

Both comp store sales and operating performance were also within our expectations.

Operationally, our teams managed their restaurants well during the quarter, particularly on the labor front.

They drove year-over-year increases in labor productivity and hourly staff and manager retention as well as a decline in overtime hours worked.

We also saw food efficiency improve year-over-year.

Subsequent to quarter end on October 2, we completed the North Italia and Fox Restaurant Concepts acquisitions, reinforcing our leadership position in experiential dining.

David Gordon and Matt will provide more detail on the integration and financial assumptions.

With regard to development, we continue to expect to open 5 Cheesecake Factory restaurants in fiscal 2019.

This includes the Gainesville, Florida location that had a tremendous opening during the third quarter, capturing over $1 million in sales in the first 3 weeks of operations.

We expect to open 3 additional Cheesecake Factory restaurants during the remainder of the year.

In mid-October, a Flower Child location opened in McLean, Virginia, and one additional Flower Child restaurant is expected to open later in the fourth quarter.

We also expect to open one North Italia restaurant during the fourth quarter as well.

Internationally, we now expect 6 locations to open under licensing agreements, including the second location in Abu Dhabi, which opened during the third quarter, and the first location in Macao, which recently opened.

We expect 2 additional licensed locations to open during the fourth quarter of fiscal 2019.

Looking ahead to 2020, we expect our unit growth to meaningfully accelerate with the opening of as many as 20 new restaurants, including as many as 6 Cheesecake Factory locations, 6 North Italia restaurants and 8 restaurants within the FRC subsidiary, which includes as many as 5 Flower Child locations.

We also expect as many as 4 Cheesecake Factory restaurants to open internationally under licensing agreements.

With that, I'll now turn the call over to David Gordon for an operational update.

Thank you, David.

We are pleased to see The Cheesecake Factory restaurants increase their comp store sales gap versus the industry during the third quarter.

Our off-premise business again supported this performance as we continue to take share in the channel.

Off-premise continued to grow, comprising approximately 16% of total sales during the third quarter of 2019.

We recently renegotiated and extended our delivery agreement with DoorDash, which will further improve the economics of the delivery business for us.

We also continue to seek year-over-year growth in our online ordering platform for pickup orders.

As we discussed on our last call, we took another step forward with our marketing during this summer and fall with a test of The Cheesecake Factory TV commercial in 12 markets, leveraging our more than 250 dishes made fresh from scratch messaging.

We did not expect to see an immediate significant sales lift given the brand building rather than offer-focused nature of the spot.

However, we performed some initial consumer research following the run to measure the results of the campaign, and we're encouraged that our messaging resonated and purchase intent increased.

In turn, we are considering additional targeted media buys in the future.

This campaign complemented our digital marketing efforts including year-round paid search and social advertising, influencer marketing and collaborations to make The Cheesecake Factory top of mind.

In conjunction with BuzzFeed and DoorDash, we launched a content series on BuzzFeed's YouTube channel Tasty highlighting our fresh quality ingredients and advanced cooking techniques.

The 2 featured videos captured nearly 700,000 views.

We will continue to use opportunities like these to get eyes on our brand to increase unaided awareness of The Cheesecake Factory.

Turning to the North Italia and FRC acquisitions.

We closed earlier this month and mobilized immediately to execute our comprehensive integration plan for North Italia.

We are maintaining the integrity of North Italia concept and everything that makes it so special to guests, while enhancing the systems and processes to further strengthen operations and support the continued national expansion of the concept.

I visited each location personally and have been so impressed by the caliber of the teams in place, their passion for the concept and their commitment to delivering a great guest experience.

During my visits, we reviewed the opportunities this acquisition will provide including continued career growth, enhanced benefits programs and an even stronger infrastructure to support operations.

To that end, we began to convert the North Italia restaurants to our point-of-sale system immediately upon the close of the transaction and are scheduled to complete the final conversions this week.

We have also negotiated to have our new delivery agreement extended to North Italia and the FRC concepts, just one example of the benefits that our scale brings to these brands.

We will continue to pursue more of these opportunities over time.

My experience working with the North Italia staff members, as well as Sam Fox and his team at FRC, has reinforced belief that our 2 companies can drive greater value as one organization.

For the balance of the year, we're focused on driving performance at The Cheesecake Factory restaurants and our acquired businesses while continuing to execute a smooth integration.

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

Thank you, David.

Third quarter comparable sales at The Cheesecake Factory restaurants increased 0.4% including an approximately 20 basis point negative impact from weather-related and other temporary closures, putting us right in the middle of our anticipated range.

Including $13.8 million in external bakery sales, total revenues were $586.5 million.

Cost of sales was 22.7% of revenues, a decrease of about 30 basis points from the third quarter of last year.

Higher produce costs were more than offset by overall menu price leverage.

Labor was 36.4% of revenues, an increase of about 100 basis points from the same period last year.

Only 1/3 of the increase was due to higher hourly wage rates.

The balance of the impact was primarily from nonoperating factors including lapping a favorable equity compensation and payroll taxes in the prior year period as expected.

Other operating costs were 25.5% of revenues, up 100 basis points from the same period last year.

This is mainly due to the additional noncash rent associated with the adoption of the new lease accounting standard.

There were a variety of puts and takes in other areas, including planned higher marketing costs partially offset by favorable workers' comp and general liability insurance.

Preopening expense was approximately $2.5 million in the third quarter of 2019 versus $3.3 million in the same period last year.

We had 1 opening in the third quarter of 2019 versus 2 openings in the same period last year.

G&A was 6.8% of revenues in the third quarter of fiscal 2019, up 30 basis points from the same quarter of the prior year, primarily due to $3.2 million in acquisition-related costs.

Absent the acquisition costs, G&A was 6.2%, keeping us on track to meet our G&A leverage objective for the year.

Excluding the acquisition costs, third quarter operating profit exceeded our expectations.

This drove adjusted earnings per share excluding the loss on our minority investments and the acquisition costs of $0.59, which exceeded the high end of our guidance range.

The third quarter effective tax rate is not reflective of our actual tax rate given the impact from the loss on our minority investments, which was driven by preopening costs, G&A and acquisition and other accounting adjustments.

However, the adjusted EPS calculation presented in today's earnings release, tax affects the impact at the statutory rate, which is even higher than our normalized rate.

As a result, we believe that $0.59 is representative of our core profitability during the third quarter.

Cash flow from operations was approximately $32 million during the third quarter.

Roughly $17 million of cash was used for capital expenditures, $4.5 million in capital was provided to North Italia and Flower Child before the acquisition closed, and we returned $27 million to our shareholders via our dividend and share repurchase program during the quarter.

Turning to the balance sheet.

We closed on an upsized $400 million revolving credit facility and had $335 million drawn at the end of the third quarter.

This included $285 million to support the funding of the North Italia and FRC acquisitions, which we closed on October 2, the first day of the fourth quarter.

That wraps up our financial review for the third quarter.

Now I'll spend a few minutes on our outlook for the fourth quarter and full year 2019.

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 fourth quarter of 2019, we are continuing to estimate adjusted diluted earnings per share between $0.61 and $0.66 based on comparable sales in a range of 0.5% to 1.5% at The Cheesecake Factory restaurants, which reflects an estimated 25 to 50 basis point negative impact from the holiday shift this year.

Note the EPS range excludes an anticipated net $0.12 to $0.15 negative impact from the known aspects of the acquisitions including incremental interest expense.

There may be additional impact from purchase accounting which cannot be estimated at this time.

Turning to full year 2019.

We now expect comparable sales of approximately 1% at The Cheesecake Factory restaurants.

We are now estimating adjusted diluted earnings per share between $2.65 and $2.70, which assumes an effective 2019 tax rate of approximately 9%.

This EPS range also excludes the aforementioned net $0.12 to $0.15 negative impact from the acquisitions in the fourth quarter as well as any potential purchase accounting impacts.

With regard to capital allocation, we now expect our cash CapEx in 2019 to be between $80 million and $90 million to support our anticipated Cheesecake Factory unit growth and ongoing maintenance needs.

In addition, we now expect $10 million to support the planned North Italia and FRC openings during the fourth quarter.

Looking ahead to 2020, we expect our total company cash CapEx to be between $130 million and $140 million to support our objective for accelerated unit growth of 7%.

We will also make an $11.25 million acquisition installment payment on the post-close consideration.

We will be providing fully consolidated fiscal 2020 guidance on our February call.

But in the meantime, we are providing the following assumptions.

On the cost side, based on the visibility we have today, we expect food inflation for our 2020 market basket to be approximately 2% and hourly wage rate inflation of about 5.5%.

For modeling purposes, we estimate a 2020 tax rate of about 8% to 9%.

We are also reaffirming the initial assumptions around the acquisition impact that we provided on our second quarter call.

As a reminder, these are just estimates at this point and it will depend on a variety of factors including purchase accounting.

While neither North Italia nor FRC qualify as reportable segments for accounting purposes, we will be providing supplemental information on North Italia and FRC beginning next quarter to gauge our performance and assist with your modeling.

This will include comp store sales for North Italia as well as revenue, operating income, preopening costs and depreciation and amortization for North Italia and FRC.

We made these long-term strategic investments to reinforce our position as a leader in experiential dining and complement the continued domestic and international license expansion of The Cheesecake Factory.

We plan to maintain a balanced capital allocation strategy, comprised of investing in new restaurants that are expected to meet our targeted returns, repaying borrowings under the credit facility and continuing the dividend and share repurchase program.

In closing, with the strength of The Cheesecake Factory brand coupled with accelerated and diversified growth drivers in North Italia and the FRC concepts, we believe we are well positioned to provide our guests with exceptional dining experiences, offer growth opportunities for our respective teams and maximize long-term value for our shareholders.

With that said, we'll take your questions.

(Operator Instructions)

(Operator Instructions) Your first question comes from the line of John Glass with Morgan Stanley.

Matt, if you could just clarify a few things on how you think about Fox and accretion.

You talked about excluding interest expense in the fourth quarter.

So I wasn't sure if that was an unusual expense or if that's ongoing.

And do you think about the earnings neutrality of this as including the incremental interest expense?

Number one.

And two, I think last quarter you said 15.5% restaurant margin for these brands and you affirmed that today, but you also talked about purchase accounting adjustments.

Is that 15.5%, is that on a comparable basis as best you understand it with your current restaurant margin?

Or did you not GAAP adjust that?

I'm just trying to understand if you still believe that there's any material adjustments you're going to have to make to that guidance that you provided initially or if there is -- it's on the same basis or not?

Sure, John.

I'll just talk about the fourth quarter first because there's a lot of moving parts, you understand that.

And we thought it was just easier to kind of give a lump sum number, right?

Some aspects of the business are making positive contributions.

There's still some ongoing preopening that's heavier weighted.

There's the interest.

So we just thought in order to understand the core Cheesecake Factory business, as we've been giving guidance, we would just bundle all of those pieces together on a go-forward basis in 2020.

We are reaffirming sort of the neutrality aspect of it, inclusive of the interest expense.

So hopefully that helps kind of define that.

I think with respect to the purchase accounting, there are just some different pieces to it that are outside of sort of the normal GAAP that you referenced, right?

So what component of it would be attributable to trade names?

Is there going to be any amortization of those?

We have to kind of work through all of those pieces, and we're just not at the point of giving an estimate for that right now.

Of course, that would be noncash, right, because the consideration is put up now.

It's just a matter of how that might roll through.

Otherwise, roughly speaking, those estimates were based on our best case assumption, understanding GAAP and current operations.

Your next question comes from the line of Sharon Zackfia with William Blair.

I guess, a follow-up on John's question.

It would be helpful to know kind of what you anticipate the quarterly interest expense to be post acquisition?

And then secondarily, on the international development for Cheesecake for next year, with that step down, could you talk about how you're seeing the new smaller format location perform?

I think that was something that was done in an effort to try to create a smaller prototype for international, if that might open up the potential to reaccelerate in 2021 and beyond?

Sure, Sharon.

I think just simply, right now, on the interest.

Right now, we have $335 million on the line.

We were sort of estimating around $300-ish million by the beginning of the year, and the net interest rate is about 3.5%.

And we may pay down a little bit of that as we go, but that gives you kind of a run rate.

And Sharon, it's David Gordon.

Just on the 5,500 square foot Cheesecake Factory that's out here in Oxnard, California, it continues to actually outperform our expectations.

Sales remain well above Cheesecake Factory averages.

It's operating really, really smoothly.

So our international partners, most specifically in Asia, are excited to see that because they do believe it will allow them, hopefully, to find some real estate sites that are not available today because the current -- well, at Cheesecake prior, it was around 7,000 square feet.

So it's all positive on that front.

And Sharon, this is Matt.

I think importantly, all 3 of the partners that we have continue to look to open restaurants next year.

And sometimes, that's just timing.

I think, if I remember right, at the beginning of this year, we had one kind of slip in from 2018.

And so I think we've always said sort of 3 to 5 is the average run rate.

And I think we're continuing to do that.

Your next question comes from the line of Nicole Miller with Piper Jaffray.

You had commented about industry weakness in terms of same-store sales.

I wanted to understand if you could share or delineate casual dining versus fast casual perhaps.

So just part A, wondering is casual dining giving up some comp to limited service?

And if so, why?

Or is that something about customers not coming out?

And then in terms of fast casual and the FRC group, specifically, how are comps overall at the group?

Or if you can share North Italia and Flower Child?

Sure.

I think it's hard to say for sure, Nicole.

This is Matt.

On fast casual taking share, I mean, I think we have felt for a while that midweek lunch is an area of opportunity and perhaps some of those sales, for us, are going to people who are a little more time starved and things like that.

But I think, when we look at sort of the overall, whether it's Black Box or MillerPulse or KNAPP-TRACK or the credit card data, I do think that maybe QSR took a little bit of share with the value deals in the third quarter, but that -- but then everybody else was kind of in the same vein.

And really, it was attributable to July.

And so kind of what's going on with that month and maybe it has to do with wallet share and the retail spending.

I think from our end, we came in right where we thought we would, which we we're pleased with that because it speaks to the predictability of our business and understanding kind of where things are at, which is really helpful for managing and providing guidance.

North Italia continues to do well.

Year-to-date, it's running mid-single-digit comp store sales.

And we haven't provided comps yet for the FRC side of things, but they continue to do well.

We're -- I can just say, we're really pleased with the business.

The only concept within that group that's really running sort of in the fast casual mode, if you will, is Flower Child, and we continue to open locations.

And obviously, that speaks to sort of the bullishness that we have for it.

Your next question comes from the line of David Tarantino with Baird.

Matt, could you -- I think you mentioned that Q4 operating profit overperformed your assumptions.

Could you maybe elaborate on what factors drove that upside?

David, it's Matt.

I think you mean Q3, right?

And yes, it was -- generally speaking, I think we were pretty much dead on expectations as we have pretty much been all year and continue to maintain.

When we look across the line items versus our plan, we're hitting virtually all of them.

We had a little bit of a favorable benefit in workers' comp and GL insurance.

We've been doing a great job managing that this year.

And so it just provided a little bit.

I think G&A, if you net out the acquisition costs, we were slightly favorable to where we're expecting to be to.

So -- but otherwise, it was just really right on.

Got it.

And then a question on the guidance for Q4 again.

On the impact, I think you said $0.12 to $0.15 from the acquisition.

What in there is what you would consider onetime in nature versus something that might be more ongoing?

Is the $0.12 to $0.15 inclusive of any onetime charges or integration...

It is.

It's an estimate still because there's definitely -- just like we had in the third quarter, right, there are some components of the integration, as David Gordon mentioned, that we're literally going through and changing out their POS systems for North, for example, in this current month.

And so there are some direct expenses that are related.

Part of it has to do with slightly higher preopening than on a run rate basis as a percentage of it.

So again, I think we'll be able to provide more clarity on the guidance.

But I would look at sort of next year.

We're not anticipating significant onetime expenses outside of the interest, which is bundled into the neutrality estimate for the EPS outside of whatever the purchase accounting piece is.

But just so we understand what the $0.12 to $0.15 represents.

It's the interest expense, the preopening expense, and is there G&A also in that number?

Sure.

That would be -- it would be a sort of a net contribution from some onetime expenses, the interest expense and all of the components associated with the preopening, G&A and operations for FRC and North for the quarter.

And does your guidance assume -- does it include the revenue and profit contribution from all the concepts you're acquiring?

So we haven't given specific revenue guidance, right.

We've provided comp store sales for Cheesecake Factory, but we can certainly get that to you.

Your next question comes from the line of Jon Tower with Wells Fargo.

Just quickly housekeeping.

What was delivery mix and online mix in the period?

And then specifically for David, the marketing messaging here is shifting a little bit that the brand -- Cheesecake brand has been reliant mostly on word-of-mouth historically to grow traffic and clearly, with the television tests and now some of the online tests you've been doing, that's changing.

And I'm curious to hear your thoughts on why and where you think it can go over time given that the spend for the brand, I think, in 2018 was roughly 0.3% of sales versus the peer set that's closer to 2.5%?

Thanks, Jon.

This is David.

So off-premise was, in total, 16% of total sales.

Delivery made up about 35% of that 16%.

Online ordering is now at 13%, which is up slightly from where it was last quarter and phone-in is still about 50% of all the transactions.

So it continues to be a successful channel for us.

And we're pretty happy with the extension and the renegotiation of our DoorDash deal.

We feel like they have been great partners, and we'll continue to leverage that partnership with marketing as well.

As far as the marketing goes, I would say it's not that we've changed.

I think we're evolving, and we're looking at different avenues today than perhaps we have in the past.

And if you think about word-of-mouth and what it used to mean, it just used to mean you would tell your friend when you stood in front of them.

Today, word-of-mouth is social media marketing, and it is using those channels in every way, whether it's Twitter or Instagram or even the social media influencers to get that word-of-mouth out.

So we're going to continue to do that along with the paid search and being on all the time.

We've been doing that now throughout all of this year.

And that's not that different from what we were doing last year.

And as far as the television, it really is just a test.

It's just to see if the affinity for the brand to be able to continue to increase awareness could make a difference to sales over time.

And that without promotion, without offer, that still stays true to who we are as a concept.

And we just want to remind people, especially those that maybe aren't thinking of us in some of those other markets as frequently as we'd like that we're here.

And so we did a little bit of research, as I said earlier, post the TV commercials and it really seemed to resonate.

And the more we talk about fresh, made from scratch, the more we hear from people that they're talking about us more than they had previously.

So I'd say that we're evolving and don't have any plans to do that much different than we've done this year, but we'll talk about that in February when we talk more about next year.

Does the evolution include potentially spending a little bit more as a percentage of sales going forward?

I think we'll see.

And if it does, we would certainly let you know when we do talk about next year.

Your next question comes from the line of Will Slabaugh with Stephens Inc.

You mentioned the POS conversion going on at North.

I was wondering if you could talk about any other integration initiatives going on, whether that be personnel, technology or otherwise, at either North or any of the other FRC concepts?

And secondarily, how we should think about the "integration period," if you will, or however you would characterize that?

Well, this is Matt.

I think -- as we said before, we're going to be careful about how we proceed.

And the businesses are performing well.

And you have to watch out for disruption.

We were able to plan ahead for North because we had been contemplating that acquisition really from the beginning of the year based on the performance, and so some of the pieces around FRC are a little bit newer.

And certainly, we want to maintain the culture, and we're really doing it for growth.

That being said, we'll look over time to see where those opportunities make sense and whether we can buy chicken together cheaper, that would be great, or if we can have more secure technology platforms and that are more scalable, that would be great.

I think we'll learn a lot from the North integration and many of those facets that we can start to apply.

But we'll continue to provide an update as we get more visibility into that.

Your next question comes from the line of Gregory Francfort with Bank of America.

Maybe if you could just -- I guess, 2 quick ones.

But can you break down what the unconsolidated affiliates loss was and why it stepped up so much in the quarter?

And then the other question is maybe a little bit more forward-thinking.

Margins have dropped for a few years now from, I guess, 19% to 20% to 15% to 16%.

And I guess, can you help me understand how you think this is going to play out for casual dining because you guys are not alone in terms of a few hundred basis points of margin pressure.

I'm curious, what point will you start to see the industry having a bigger shakeout?

How far away that is and sort of how Cake works through that?

Sure.

Greg, this is Matt.

I think, on the first, we can get some details to you offline.

But really, there were some components with the unaffiliated loss associated with the transaction.

As we noted, some of those are accounting adjustments, some of those were retention bonuses to keep people to a certain point in time.

So it would have looked, ex the transactions, similar to what it has been driven mostly by the upsized G&A and preopening, as we've discussed before.

So that kind of gives you a range of magnitude to the onetime event that was absorbed there.

With regards to the margins, I think a couple things to remember.

One is the impact from lease accounting this year.

And depending on how you're looking at the margin structure, that can look like anywhere up to 100 basis points impact.

And so, no doubt, there has been pressure over the past 3 or 4 years, probably a couple percent.

I think some of that was the impact from 2017.

Certainly, a sales environment that was not productive for the industry and a little bit of deleverage.

I think if you look at our results now over the past, say, 5 quarters, we've pretty much hit the margin objectives that we set out and it's stable on a year-over-year basis for the year based on our guidance.

And so -- and that's with a 1% comp and about 3% pricing.

So I think, in this environment, we're able to maintain that margin.

I think it does depend on continuing to have positive comparable sales even if there's a little bit of traffic pressure.

We said before that we think the labor escalation has at least peaked, it's still running about 5.5% but hasn't gotten worse.

Commodities remain sort of in the same range as they have.

So that seems very doable for the next leg of this environment and if we continue to manage the business the way that we have over the past 1.5 years.

Your next question comes from the line of John Ivankoe with JPMorgan.

A couple, if I may.

Firstly, in terms of some of the labor efforts that were successful in the third quarter, reducing hours and reducing paid overtime.

How much of that was easy comparison driven, if you will, versus how much of that may actually have legs as we kind of think about the model through fiscal '20?

John, it's Matt.

I don't think it was necessarily an easy comparison.

I think a big piece, for example, on the overtime is staffing.

And we're just doing a great job, truly industry-leading on retention efforts.

And I think when you're able to do that, it bears fruit.

I think we also had a real focus this year on scheduling and forecasting.

And I think we're doing just a slightly better job being tight on that.

I think all of those continue into the fourth quarter and the first part of next year.

As we've always said, we're sort of about incremental improvements.

And I think that those are paying dividends right now and are continuing in our guidance.

Okay.

Understood.

And in terms of food waste, I mean, a similar question just with a different cost category.

How significant was it?

And how much of an opportunity is there when you look at your A versus T?

I'm sure you have one.

How much of a margin gap do you think does exist on the food waste side that perhaps could be captured?

Well, we run very high efficiencies.

I've been pleased to see that we continue, over the past 2 years, to improve upon that.

So we rolled out a program to really improve on the prep production forecasting.

It's prep 2.0 is what we called it, and we've seen ongoing benefits from that.

There are some other things that we're looking at right now that we're trialing.

I think it's a sort of combined effort between labor and cost of goods.

And I think that's a good way to think about it, right?

Because there's a little bit of trade-out with the way that pricing is hitting and you're getting some leverage in cost of sales and some deleverage in labor just based on the inflation rates.

But if you think about core costs in total, I think our aggregate focus continues about -- on how can we improve that combination and there -- are there things we can do, like buying chicken pre-pounded, right?

And so we talked about that before, and we have a pilot running right now to see if that could be something that might be the same price as the chicken we have today but require less labor hours.

So I think when we look at those 2, we continue to look in combination.

Okay, great.

And then the final one, I promise.

You guys mentioned kind of the rewritten DoorDash agreement a few times.

If delivery is between 5% and 6% of sales, I mean, how significant is it?

I mean, is it 5-point savings, 10-point savings?

I mean when we talk about getting a better deal from DoorDash, I mean, is that something that we'll notice in the P&L?

And was that in place for the third quarter?

Our objective has always been to keep the margin in a place that we feel that it balances the business out.

So we've talked about needing to make sure that we get them -- the margin relatively equal to a dine-in guest.

I think that this gets us pretty darn close and is a fair deal.

I think what the benefit is that it sort of rolls in in the middle of this year.

So hopefully, it's just one of those initiatives that helps keep us relatively flat core margins going into next year.

Your next question comes from the line of Jeffrey Bernstein with Barclays.

Two questions.

Just one on the comp trends, I know you mentioned last quarter, and I think you mentioned it again today that you were off to a slow start in the quarter, that is in the third quarter.

I'm just wondering if you can provide any context behind, after that tough start, whether you saw trends get better and that's ultimately evident in the 0.4% comp for the full quarter?

And maybe you could provide the components of that comp as well?

And then I had one follow-up.

Sure.

So about 3.2% pricing, mix was a positive 0.9% and traffic was negative 3.7%.

But as we've talked about, we sort of look at the mix offsetting that.

So roughly speaking, we're about 1% off trend from the beginning of the year.

And essentially, all of that was attributable to the July period as we saw sort of the back half of the quarter really be right back on trend.

And I think that speaks to the guidance that we're providing.

So I think there's been a lot of conjecture about why that might be and Amazon Prime Day or Target matching that, maybe just pulling in retail sales.

I think nobody really knows.

I think there's been some analysis that has shown that the July comps, over the past 4 or 5 years, have been somewhere between 1% to 2% lower than the balance of the year.

And so I think that's what we saw.

But I feel like, from our standpoint, we're in the middle of a consistent run of comps right now.

Got it.

And then just in terms of, I guess, clarification on the guidance related to FRC and North Italia.

I think you mentioned it's $0.12 to $0.15 that is being excluded in the fourth quarter despite the acquisition having already closed.

So this is just to try and make a clean year.

And then, therefore, you're going to start it fresh including all those costs starting in 2020.

Is that correct?

Perfect.

That's exactly right.

And so we're just trying -- as we've said, we're trying to keep that core guidance so people can understand where we think we are versus where we said.

And then we'll have a clean year that includes everything for 2020.

But the fourth quarter then, so you're excluding the revenues also or you're including the revenues from these units, but excluding the costs?

So again, we haven't provided specific revenue guidance, and we can help you model that, but we're providing the comp store sales guidance for Cheesecake Factory.

We're just giving you that expense to exclude out as a way to sort of bridge the gap so you understand.

We're contemplating it, but it's not in the core guidance.

Understood.

No, I just wasn't sure whether you've also stripped out the revenue side.

Otherwise, it would seem like a mismatch that the revenues are in, but the...

Correct.

We have not provided the revenue guidance for those as well.

So I think it's comparable.

Okay.

And the percentage of the $0.12 to $0.15 that's ongoing versus onetime as we think about applying that going into 2020.

Can you give -- I know you mentioned there are lots of pieces within there, but is the majority onetime?

Yes.

I mean, I think, roughly speaking, about half of that is the interest expense, which we believe in -- on a go-forward basis will be covered by the operations.

I think you have some heavy preopening relative to the base as well.

And let's say, incrementally, that's another quarter of it and then you have a quarter of it is onetime expenses.

Your next question comes from the line of Andy Barish with Jefferies.

Just one more North question -- or North, FRC question as we look out.

You've broadly mentioned that restaurant level margins kind of equate to where Cheesecake is running right now, North a little bit higher, FRC a little bit lower.

Is that still kind of what you're thinking for next year, I guess, without getting too specific?

And then just in terms of the new unit economics that you provided, those do incorporate higher margins going forward in the North and FRC businesses.

Is there anything we should just be aware of there in terms of what's going on?

So Andy, this is Matt.

Just to tackle that second part first.

The unit economics contemplate sort of the mature run rate, right?

And that's sort of the way that I think most people model it out and keeping in mind the extremely high-growth rate for both North and FRC.

When we look at the same-store performance for those different groups of restaurants, that's what we're looking at when we're providing unit economics and those higher margins.

Because obviously, if you're opening up 6 or 7 restaurants on a base of 15, you've got some weighting issues with respect to the aggregate margin performance of the concept.

So the aggregate margin performance is contemplated for next year in the guidance that we provided previously and posted on the website.

The modeling for the new units looks at sort of comp performance to strip out that heavy growth piece.

Very helpful.

And just quickly on that, anything different on the cost side of the equations there, the 2 main prime costs, labor and...

No.

It's a good question for modeling.

I mean, relatively speaking, it's pretty close on the FRC for Cheesecake, maybe a little bit less labor for North, and that's probably the difference, a little bit simpler.

Cheesecake is a little bit more complicated concept, but otherwise sort of proportionately similar.

Your next question comes from the line of Matt DiFrisco with Guggenheim Securities.

And I apologize in advance for beating a dead horse here.

But just to take this a little further as far as the guidance, I guess, when you say neutral for 2020, are you sort of starting from the base of this adjusted $270 million number?

Or is it sort of the GAAP number or so?

So the neutral piece is for FRC, right?

So it's a good question.

It's for North, FRC and the interest combined, so we'll be looking at it from the adjusted perspective of Cheesecake Factory.

That's the core business we were looking to because obviously it excludes sort of the losses attributable because that piece is carved out and that's the neutral part.

And you are completely -- when you say $0.61 to $0.65 for the fourth quarter, it is completely reflective of all of the Cheesecake, nothing to do with the acquisition that will be stripped out or bucketed in a different -- when you talk about your guidance here for the $0.61 to $0.65?

Yes, yes.

And then last question, I guess, more so on the current trends that you're seeing out there, I think you would've called it out, but is there anything or is it too soon to say, sort of with the wildfires going on there anything impairing the business?

I know you have a large patio business.

Is the air quality starting to affect some square footage that might be coming under pressure?

Or this is so far you haven't seen any of that?

Well, everything that we do know is in our guidance.

So I think that the range sort of speaks for itself.

And the only thing it really contemplate so we called out specifically above and beyond was the holiday shift.

And your last question comes from the line of Dennis Geiger with UBS.

Just a follow-up maybe on the longer-term margin question.

And whether or not you're able to share some kind of longer-term margin target at this time?

Or maybe how similar you're thinking about the targets relative to previous targets?

And then maybe if that's difficult, Matt, is there anything else to add kind of on the margin recapture, maybe whether those 4 or 5 pillars that you've talked about previously, if those are still generally notable opportunities for you and if there's anything incremental to add?

Sure.

Sure, sure.

This is Matt.

So I think that those are all still in play, right?

I mean, I think, sort of walking through the call today, the key is comp store sales, keeping that in that 1% to 2% range.

I think we have proven that if that's the case, we're holding 4-wall margins flat.

That's the sort of the anchor.

Cheesecake Factory is still the majority of the business, right?

And I think, in addition to that, we're delivering on the G&A leverage that we talked about, getting that [1/10] a year.

We're continuing to build international restaurants with our partners.

And so for next year, again, right in the middle of the range.

So I think that the accretion of the North margins over time.

Obviously, it's a small piece but will build.

So I think we're executing on all of those.

Right now, if we look forward, we have the levers in place with the accelerated growth and the capital returns program to kind of hit our aggregate total returns target without expanding margins.

But of course, that does continue to be our goal.

And I think we're confident that we can manage flat core margins in the 1% to 2% comp store sales range.

Great.

And then if I could just get one other one in.

Just as it relates to pricing, as you kind of look out a little bit.

If you're happy with kind of that 3% level given what you're seeing from a cost perspective?

And then on the other side, the macro environment and how the consumer is, if that's a good level as we look ahead a little ways?

Well, I think it's a realistic level based on the cost pressures.

I think most restaurant companies, again, we think we're right in the middle of the average there based on where labor and cost of sales are again.

And you look at different geographies will have slightly different pricing levels as warranted based on the economics.

It's a little bit art and a little bit science.

And certainly, you want to be in a position to not take as much pricing as you have to.

But I think we're comfortable being in the middle of the range given the depth of the menu and the ability for us to sort of manage it different than everybody else.

You do have a question from the line of Brian Vaccaro with Raymond James.

Just one more quick one on off-premise.

It seems that off-premise sales mix and also deliveries, that has plateaued here a bit for you and others here in the third quarter.

Just curious on what you believe is driving that?

And Matt, does your Q4 comp guidance assume sort of a less tailwind of off-premise growth that's offset by an improvement in dine-in trends?

And if so, anything you -- specific that you'd point out, marketing or other initiatives that might help dine-in trends at the year-end?

I think the first part of that is that, just based on the -- who does the driving and who does the ordering.

It does appear that sort of the college seasonality and summer time seasonality of what people are doing creates a little bit of an up and down in the off-premise business and the delivery business.

We've seen that now.

Even as it's been growing quite a bit, you really can't compare the second quarter to the third quarter as a percentage and get an accurate representation of sort of whether it's plateaued or not.

So we still feel like it's growing.

We've said all along that we think that if that can grow 1% to 2% a year, we're going to be happy.

And that's what we believe.

I think other people have put bigger numbers out there, maybe overshooting it.

So that seems to be on track for at least for us, and we feel positive about that.

So our fourth quarter guidance just assumes all of the pieces that have been working for us in the past 3 quarters.

And there are no further questions at this time.

Great.

Thank you for joining today.

Ladies and gentlemen, this concludes today's conference call.

Thank you for your participation.

You may now disconnect.