Cheesecake Factory Inc (CAKE) 2022 Q3 法說會逐字稿

Hello, my name is, Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2022 The Cheesecake Factory Earnings Conference Call. (Operator Instructions) Thank you.

I would now like to turn the call over to Etienne Marcus, Vice President of Finance and Investor Relations. Please go ahead.

Good afternoon, and welcome to our Third Quarter Fiscal 2022 Earnings Call. On the call with me 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 on today's press release, which is available on our website at investors.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission.

All forward-looking statements made on this call speak only as of today's date and the company undertakes no duty to update any forward-looking statements. In addition, during this conference call, we will be presenting results on an adjusted basis, which exclude impairment of assets and lease terminations and acquisition-related expenses.

An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures 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 update. Matt will then review our third quarter results and provide a financial update. Following that, we'll open the call to questions.

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

Thank you, Etienne. We were pleased with our overall sales performance with third quarter revenues finishing within our expected range, despite consumer headwinds and an uncertain macroeconomic backdrop. We are navigating the challenging landscape by continuing our relentless focus on menu innovation, service, hospitality and operational excellence. These are hallmarks that have made The Cheesecake Factory brand, one of the most differentiated restaurant concepts in the casual dining industry for over 4.5 decades and through numerous economic cycles.

Comparable sales at The Cheesecake Factory restaurants for the third quarter of 2022 increased 1.1% and 9.5% from the third quarters of 2021 and 2019, respectively. Sales trends strengthened throughout the quarter and into the fourth quarter. To this point through October 25, fourth quarter to-date comparable sales for The Cheesecake Factory restaurants increased approximately 2.8% year-over-year and 14% as compared to the same period in fiscal 2019.

Average unit volumes at The Cheesecake Factory continue to track to $12 million for the year and our newest location in Katy, Texas opened to tremendous demand, underscoring the strong affinity for The Cheesecake Factory brand and the unique dining experiences we provide for our guests.

Our execution within the 4 walls was solid during the quarter, with the best-in-class operators focused on delivering delicious and memorable guest experiences and effectively managing what is in their control. In fact, labor productivity and food efficiency results for the quarter exceeded our expectations and pre-pandemic levels.

On the development front, we opened 3 new restaurants during the third quarter, including The Cheesecake Factory in Katy, Texas, a suburb of Houston, North Italia, in Dunwoody Georgia, a suburb of Atlanta and the first brick-and-mortar location of Fly Bye in Phoenix. Fly Bye is FRC's newest fast casual dining concept offering Detroit enhanced stretch style pizza and crispy chicken.

Subsequent to quarter end, The Cheesecake Factory Opry Mills in Nashville, Tennessee and the North Italia in The Woodlands, Texas, a suburb of Houston both opened to impressive demand. And today, we opened our third Flower Child in Austin, Texas market. All of the sites we have been working on remain active in our pipeline. However, consistent with the trends seen throughout the industry, opening dates continue to be impacted by supply chain challenges and permit approval delays.

As such, we now expect to open as many as 13 new restaurants in fiscal year 2022, including 3 Cheesecake Factory restaurants, 4 North Italias and 6 other FRC restaurants, including 3 Flower Child locations. Additionally, we still expect 1 Cheesecake Factory restaurant to open internationally under a licensing agreement.

We also recently announced the expansion of one of our international development agreements to include Thailand. And in continuation of our global growth strategy, we are exploring potential opportunities to expand in Europe. Looking ahead to next year, our pipeline continues to build in addition to the carryover sites from this year. Thus, we remain confident in our ability to achieve our unit growth goal of 7% annually.

While our operational performance has been solid, we continue to face a dynamic and challenging inflationary environment, which was reflected in our third quarter profit margins. We remain highly focused on returning restaurant margins to pre-pandemic levels in the near-term. To this point, we're rolling out an additional menu price increase at the start of December, which Matt will provide more details on shortly.

In addition, the Board approved a quarterly dividend of $0.27 per share and expanded our share repurchase authorization by 5 million shares. We remain committed to our capital allocation priorities of investing in the growth of our business to achieve our targeted returns and returning value to our shareholders.

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

Thank you, David. Building on what David said about our solid operational execution, not only do see improvement in labor productivity and food efficiency results, but we also delivered year-over-year improvements across our dine-in guest satisfaction metrics, including pace of experience, staff service and food quality.

On the staffing front, applicant flow remained strong. In fact, we had over 350,000 applicants during the quarter. We're also starting to see our best-in-class attrition rates fall below prior year levels. As we've said before, we believe our staffing success is a key contributor to the improvement of our dining guest satisfaction scores. After all, our people are our greatest resource and enable us to deliver delicious memorable experiences for our guests every day.

Our ability to attract and retain dedicated and experienced employees in a competitive industry amidst the tight labor market is a testament to the strong culture, industry-leading training and tangible career advancement opportunities we provide for our staff members and our managers.

Speaking of our greatest resource, our talent, in September, we held our first General Managers Conference since the start of the pandemic. It wasn't inspiring and productive week of learning and development through informative programs, panels, speaker-led trainings and leadership seminars.

Importantly, we were able to recognize our outstanding field leadership for their unwavering dedication and hard work amid unprecedented challenges, while continuing to uphold our deepest values along the way. The events and activities serve to reenergize and motivate our general managers, who are crucial to our success and provide them with additional insights and tools to take back to their restaurants to improve operations, celebrate wins and develop their people.

Now turning to North Italia, third quarter comparable sales grew a robust 10% versus 2021 and 18% versus 2019 with improvements across all dayparts and all geographies. These positive sales trends have continued into the fourth quarter. In fact, through October 25, fourth quarter to-date comparable sales increased approximately 9% year-over-year and 25% as compared to the same period in fiscal 2019. Additionally, our most recent North Italia opening in the Woodlands, Texas, had one of our strongest North Italia opening week sales.

4-wall margin for the adjusted mature locations declined from 16% in the second quarter to 12.9% for the third quarter, predominantly driven by inflation. We're in the process of implementing a 4.3% menu price increase in accordance with our overall margin strategy to offset inflation and recapture pre-pandemic restaurant-level margins. FRC drove similarly strong top line results. The continued sales performance we've seen across our concept, reinforces our belief that we are well positioned for the future. Given the strength of our brands, best-in-class operators and breadth of high quality growth vehicles, we believe our long-term outlook continues to be bright.

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

Thank you, David. Despite the many unprecedented challenges encountered this year, we are still progressing towards our primary financial objectives for 2022, including total revenue expectations of about $3.3333 billion. The Cheesecake Factory AUVs continue to track towards $12 million, with the additional menu price increase, David Overton mentioned earlier, we continue to plan to exit the year at pre-pandemic 4-wall margins.

We continue to leverage G&A, depreciation and pre-opening to support total enterprise margins and we restarted returning capital to our shareholders through our dividend and stock repurchase programs. For the third quarter, along with the broader restaurant industry, we continue to face higher inflationary headwinds than we had anticipated. Specifically, higher utilities and building maintenance, which totaled approximately $5 million or $0.10 of EPS in the quarter and accounted for the majority of the variance to expectations in other operating costs.

Turning to some more specific details around the quarter. Third quarter comparable sales versus prior year increased 1.1% at The Cheesecake Factory restaurants and increased 10% at North Italia. Revenue contribution from North Italia and FRC totaled $135.4 million. Sales per operating week at FRC, including Flower Child, were approximately $103,000. And including $14.2 million in external bakery sales, total revenues were $784 million during the third quarter of fiscal 2022.

Moving to expenses. Cost of sales increased 270 basis points versus Q3 of the prior year. Principally driven by significantly higher commodity inflation and menu pricing. Labor increased 30 basis points over 2021, primarily driven by higher wages and increased training costs, and partially offset by lower medical insurance expenses.

Other operating expenses increased 100 basis points, largely driven by higher utilities and building costs noted, which are mostly inflation related. G&A as a percentage of sales increased 30 basis points, reflecting travel returning to a more normalized level, including holding our first-in-person General Manager Conference since the pandemic began.

Pre-opening costs were $4.3 million in the quarter compared to $3.2 million in the prior year period. We opened 3 restaurants during the third quarter versus 4 openings in the third quarter last year. However, third quarter 2022 pre-opening costs are higher year-over-year, primarily due to costs related to 2 additional early fourth quarter openings.

In the third quarter, we reported an after-tax $0.8 million charge, primarily associated with FRC acquisition-related items. Third quarter GAAP diluted net loss per common share was $0.05, adjusted net loss per share was $0.03.

Now turning to our balance sheet and capital allocation. The company ended the quarter with total available liquidity of approximately $372 million, including a cash balance of about $133 million and over $239 million available on our revolving credit facility. Total debt outstanding was unchanged at $475 million. Subsequent to the end of the third quarter, we renewed our credit facility agreement to extend the maturity to October 2027 at comparable pricing and favorable terms to provide financial flexibility and ample liquidity to support our long-term growth objectives.

CapEx totaled approximately $32 million during the third quarter for new unit development and maintenance. We completed approximately $27 million in share repurchases and returned just over $14 million to shareholders via our dividend during the quarter. While we will not be providing specific comparable sales and earnings guidance given the operating environment continues to be very dynamic, we will provide our up-to-date thoughts on our underlying assumptions for the fourth quarter of 2022 and full year 2023.

Based on our year-to-date performance and more recent trends, we anticipate total revenues for the year to be about $3.3333 billion, which includes the impact of the 53rd operating week in fiscal 2022. For the fourth quarter, we would anticipate total revenue to be between 900 and $930 million.

Next, we now expect commodity inflation of about 15% on an annual basis as well as for the fourth quarter, which represents about a 2% increase over our prior fourth quarter outlook, and which is directionally in line with headline CPI increases we observed during the quarter. It was about flat to Q3 levels.

We continue to model net total labor inflation of about 5% when factoring latest trends in wage rates, channel mix as well as other components of labor. And given the inflationary outlook for energy and services and assuming they remain similar to Q3, we now expect other operating expenses to be approximately 25.5% of sales in the fourth quarter.

As David mentioned, we remained committed to protecting our longer-term 4-wall margins, while managing through the risks associated with cost fluctuations, driven by the current environment. Given the additional inflationary pressures we are experiencing, we are in the process of implementing about a 2.8% incremental menu price increase, which as anticipated is above our current level and is supportive of our margin objectives.

Turning to margins. Let me walk through some of the math to bridge our Q3 margin results to our stated goal of exiting the year at pre-pandemic level restaurant margins. The Cheesecake Factory restaurants 4-wall margin was 10.1% in Q3. If we add one-half of the Q3 price increase of 4.25% to adjust for the timing of the pricing rollout, plus the 2.8% incremental Q4 price increase. This brings us to an approximately 15% 4-wall margin.

In Q3, our training and recruiting expenses were higher than anticipated by approximately 0.5% of sales due to the strong hiring results David Gordon mentioned, which we would expect to normalize if the labor market continues to stabilize. This would put us about 25 basis points away from the Q3 2019 Cheesecake Factory restaurant-level margin, which we are focused on recovering through operational efficiencies. Keep in mind, that the third quarter sales were about 2% below this year's year-to-date sales performance of 2019 sales plus menu pricing.

Using the Q3 sales trend as our baseline positions us to achieve our margin targets, even with the volatility, we have seen this year or a slight pullback in consumer spending in the future. On a positive note, as David mentioned earlier, fourth quarter to-date sales trends have improved to be in line with 2019 sales plus menu pricing, and our best seasonally-adjusted average weekly sales since April.

I would also note that this margin bridge includes our higher expectations for cost of sales, utilities and building maintenance expenses, which we're carrying into our fourth quarter and beyond expectations. Importantly, based on our latest information, input costs appear to have stabilized at these levels.

Given we are rolling out the incremental price increase at the start of December, the fourth quarter will only receive about 1/3 of the benefit. As such, we do not expect to fully close the margin gap for the entire fourth quarter. However, we do expect this pricing action to be sufficient to close the gap going into 2023 based on current levels of inflation. And going forward, our goal is to offset inflation with menu pricing, as has been our longstanding stated strategy. Of course, there can always be timing differences depending on market movements and lapping of extreme variability as we have experienced this year.

Lastly, it is noteworthy that in September, food away-from-home spending increased to an all-time high of 55.1% as a percentage of total food spending. Exhibiting consumer staple like attributes. Additionally, food at home inflation outpaced restaurant inflation nationally by over 400 basis points, affirming our belief that there continues to be sufficient demand even in the current environment to support pricing power as a means to offset inflation and recapture 4-wall margins as is our strategy.

Now moving on, we still anticipate G&A to be approximately $55 million to $56 million for the fourth quarter, which as a reminder, includes an extra week this year. Our pre-opening assumption remains unchanged at $7 million in the fourth quarter. Finally, we expect about $25 million in depreciation for the fourth quarter and for modeling purposes, we're using a tax rate of about 8%.

With regard to development, we plan to open as many as 13 new restaurants this year and we would now anticipate approximately $130 million in CapEx to support this level of unit development as well as required maintenance on our restaurants. Note that this includes some CapEx for locations that have shifted into 2023. In addition, keep in mind, that we have reinstated our stock buyback program and have now declared 3 dividends this year.

Looking ahead to fiscal 2023, as previously mentioned, the macroeconomic backdrop continues to be uncertain. However, we want to provide some initial perspective for next year. Based on our year-to-date performance, more recent trends and assuming no material operating or consumer disruptions, we anticipate total revenues for fiscal 2023 to be between approximately $3.5 billion to $3.6 billion. Total inflation across our commodity baskets and total labor is currently estimated to be in the mid-single-digit range. And as I said earlier, our goal is to offset inflation with menu pricing.

With regard to development, we plan to open as many as 21 to 24 new restaurants next year, spread across our portfolio of concepts. For modeling purposes, at this point, we would expect 4 to 5 Cheesecake Factory restaurants, 7 to 8 North Italias, 3 to 4 Flower Child locations and 7 other FRC restaurants and we would anticipate approximately $150 million to $170 million in CapEx to support this level of unit development as well as required maintenance on our restaurants.

In closing, as I noted in the beginning of my prepared remarks, despite the persistence of unprecedented headwinds in our industry, our company is still on track, to accomplish the majority of our key financial objectives for 2022. We attribute this primarily to the strength of our brands, our belief that we have the best operators in the business and our strategic approach to effectively balancing the short-term with the long-term. Taking all these considerations together, we believe we're well positioned going into 2023 to take advantage of our increased scale to deliver meaningful earnings growth, generate robust cash flows and drive significant shareholder value going forward.

And with that said, we'll take your questions. Operator, over to you.

(Operator Instructions) Your first question comes from the line of Nicole Miller with Piper Sandler.

Just one question, can you talk about average check in terms of value proposition and affordability. So, the question being at Cheesecake Factory and also the North Italia brands, what is average check or -- and average transaction today? And then, what opportunities does the guest have to come in and spend -- I mean really the least amount available, so they can still access you in terms of affordability.

Sure, Nicole. This is Matt. Thank you for that question. I think it's pretty relevant in today's environment. I think the hallmark of the Cheesecake Factory is the breadth of the menu and we still have items that are $8 to $9 going up to the low-$30s, if you want to get a fillet, which I would note probably compares to about $50 even at the most value focused steakhouses today. So guests can certainly come in and don't forget the portion sizes. You can still get a full size Cheesecake Factory portion on a chicken or pasta dish for the high-teens dollars you can split that and still get out an average check in the low-teens with a drink per person, if you want to.

So I don't think we're -- we're not focused on that, we're always focused on the value, but also believing that we are maintaining, if not expanding our value proposition relative to the rest of the dining industry. If you look at the compounded pricing that the industry has now taken, because it's starting to get a little interesting as we lap around early summer and fall pricing from last year, which we didn't take and others did, it's probably about 14% based on the latest census and that's probably going to go higher going into the fourth quarter. So we remain 3% to 4% below that level.

So I think overall, we have a great value proposition. I think the average, I would have to look at the specifics for The Cheesecake Factory is probably in the high-$20s, but remember there's a split between off-premise and on-premise, it's probably around $27 or $28 for the on-premise guests, which is most likely what we would be benchmarking against.

In general, I think that North Italia follows a very similar approach although the menu obviously not being as broad, but having somewhat of a barbell strategy. You can get a pizza or a pasta still at a very affordable price in North Italia or if you want to go in for a high-end dinner, you can also get a fillet or Branzino that might be in the mid-$30s to close to $40, so it's really looking for that experience that you might want, and I think if you can deliver on that experience, which our operators can that the value proposition remains extremely strong.

Just one additional note to that, as we -- as everybody ask and this may come up in terms of incident rates, we continue to see very strong attachment across, dessert, across alcohol between entrees and appetizers. So, that would also tell me that, when guests are coming in, they're not managing their check or that they don't have any sticker shock because they are actually continuing to order a little bit more than they used to.

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

I guess it would be helpful as we talk about price to hear about kind of what you're seeing in terms of the mid-summer price increase. Did you see any resistance there or management of check? How comfortable are you that the additional 2.8% will be passed along easily, I guess. And if you could give us kind of where transactions versus ticket kind of fell out in the quarter and how much price you will be carrying for the full fourth quarter that would be helpful.

Sure, Sharon. This is Matt. I think -- so the first thing is, when we look at our sales trends today in October, which obviously is about 6 weeks to 8 weeks into having taken the summer menu pricing, they are the best that we've seen pretty much all year, equal to April. So, I would say we've been successful capturing our price. Obviously, there has been ups and downs in sales trends this year, but we don't really think that has anything to do with the different pricing as much as it has to do with external factors such as COVID or gas prices, but certainly the consumer has accepted the pricing and as I just mentioned, the attachment rates actually continue to run above last year and above 2019 actually. So they are coming in for the full experience.

Just as a technical response, for the quarter, pricing was 6%, traffic was essentially flat at 0.1% and the mix was a negative 4.8%. But just for everyone to remember, that's really driven by how we count the on-premise off-premise, right, so the on premises one gas, but obviously the check average is about 2x. So it's a little bit funky for the weighted average for Q4, we would anticipate the menu pricing to be around 8% to 8.5% on a weighted basis, obviously depending on the sales trends throughout the quarter. And when we think about capturing all of that, it would be not until December as noted. So it's about 1/3 of the incremental 2.8% pricing that would be in the fourth quarter.

Okay. And then I just wanted to clarify, you were giving a lot of kind of triangulation around Cheesecake Factory margins. So I just want to, I guess, quantify. Are you basically saying that given the price you're taking this quarter and assuming no further kind of kick-up in inflation, you think you'll be in a 15% plus kind of unit level margin in '24, is that -- I'm sorry, '23 I just skipped a year, is that kind of the takeaway that you're leaving us with?

100% right. So I think if -- just to be crystal clear, the expectation, the commodities is essentially flat from Q3 to Q4. We're also carrying in what I consider to be pretty heightened other operating expenses considering what we've seen and what many others have seen in the utilities and building maintenance and frankly, at a slightly lower sales level than what we're running today also right to accommodate for any of the ups and downs.

So then that would mean we would exit the year at our targeted level and then we would have to assess what the pricing would need to be to offset next year's inflation, right. So one of the things that will continue to try to be transparent about is on a quarter-to-quarter basis, you've gotten a lot of interesting noise this year on the way that commodities have moved. So we're really positioning ourselves to make the whole year 2023 margins at the restaurant level.

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

Just a couple of things on what the variances were to the downside on the food cost area. You said you had been about 75% lock kind of going into 3Q. So what kind of went off there. And then secondly just on the sort of on the productivity and food efficiency measures that you follow, can you give us a little bit of kind of background on what that looks like given it's not exactly tying to near-term restaurant level margins. Is there something maybe that you're looking at to adjust on the productivity or efficiency side, as we look out to kind of '23 and get through this obviously volatile sort of environment?

Yes, Andy. So this is Matt. Just on the commodities, the primary variance was in the dairy category. So, if you go back and look at the third quarter, butter chart, it ballooned from, I'm thinking $2.40 to north of $3 over a span of like 2 weeks and so that was one area that we did have exposure and did experience some incremental inflation in the quarter beyond where we were sitting when we had the call.

I think as noted on the other OpEx, it was predominantly around the utilities and maintenance. And then, just a slight bit on the labor was really from the hiring and training. As you noted, from a productivity standpoint, we measure predominantly sales per labor hour. I think it's sort of the truest financial measure in terms of productivity and then on the cost of sales, it's really actual to theoretical. Historically on that it's run in the 95% range for us, we're probably closer to 96% today.

I think the main component for us is that we are executing at a high level and that's important for financial discipline that's important for us to ensure that we're going to get 100% of the pricing flow through. And at the same time as David Gordon mentioned, maintain extremely high and improving guest satisfaction, right? So you've got to make sure that you're not over productive, but that you are producing at a level that is commensurate with providing excellent guest service, too.

Okay, very helpful color. And then, just following up on Sharon's question on the margin targets for next year. Should we assume that the comment on menu pricing offsetting the mid-single-digit inflation means that that's kind of where things will shape up in sort of that mid-single-digit range as we look at menu price rolling off and not fully replaced and all those kind of things as we move through '23?

Yes. I mean right now, one of the things that's happened certainly in the last 2 years of COVID is that the contracting cycle for commodities has moved a little bit later. I mean 10 years ago, we might have had some significant clarity by now. I think, but similar to most, it's moved into really December quite a bit, but if we're looking at sort of the current spot in conjunction with the forward curves. Based on our cost this year that looks like mid-single digits. In the labor side, we're running about a net 5%. So, I mean, we just if we carry that forward for the year, those add up to be mid-single digits and again our objective would be to take enough pricing that would be equal to that inflation on the annualized basis.

Your next question comes from the line of Jared Garber with Goldman Sachs.

You talked about trends improving throughout the quarter. And here into the fourth quarter if we think about October, can you help frame for us what those trends might look like on a 3-year basis. If we think about sort of removing some of the Omicron -- rather the Delta variant last year. And then, just wanted to get a sense of, if you're seeing any differential in trends in your higher penetrated [California market] versus some of the rest of your state exposure is given some of the stimulus benefits that have hit consumers' pockets out there.

Sure, Jared. It's Matt. I think that the 2019 baseline has proven to be the most consistent. Obviously, you kind of nailed it there. There has been some significant waves of both COVID as well as reopening. And both of those have proved to be relatively transitory and both too high and too low for kind of when the averaging sets out. So if we think about the -- versus 2019, it was mid-single digits in July. And then it moved to be almost double digits in August. And then basically the September run rate was pretty similar to the October run rate. So kind of for the past few months, we've been right back on that 2019 post pricing track.

In terms of geography, it's been pretty balanced. I think we're all trying to figure out seasonality a little bit whether it's going to be exactly like 2019 or prior. But I think when we look at the sort of bigger picture, the Southeast, Southwest and the Northeast, they are all starting to migrate to a tighter, narrower band as we progressed through the year. As we noted on our last call in July, we did see some separation we attributed that to being some of the COVID movement and potentially some of the gas prices are the other options. But I think as we kind of take that average and we see it progressed, particularly in September and October in order to get to the sales levels that we're at, you've really got to have geographies contributing. So I think we feel good about the balance today.

Your next question comes from the line of Brian Harbour with Morgan Stanley.

Maybe just first when you think about kind of the same-store sales performance of North Italia and you benchmark that against kind of Cheesecake, I recognized the one brand as much newer and there's younger stores in the base, but what else do you think might explain some of the differences in kind of current performance of those 2 brands?

Brian, that's interesting. I mean they are different right and so I think I'm not sure that we would make a direct comparison, certainly the newness of the brand would particularly signify that it's still accelerating. I mean prior to COVID, we were comping up positive traffic in North. I think part of that is due to the capacity constraints the Cheesecake Factory typically finds itself in. We opened up that capacity with Cheesecake. We kind of never leave that.

As we've talked about in the past, North begins at a much lower level and ramps up over time and still has some capacity. So I think you put that opportunity on the plate with excellent execution and we're driving incremental result and there are fewer also -- you're not looking at the degree of penetration that Cheesecake has as probably part of it, it's a little bit more unique in those marketplaces. So it is probably a combination of those predominantly.

Okay, great. And then, when you think about just kind of cost inflation next year and you will look to offset that with pricing, but is there anything else that you think can offset some of that, is there anything on the labor side that you think can help fight some of that inflation or more that you can do on kind of productivity on the food side.

I think we're always looking to offset as many costs as we can without passing it along to the guest. I mean, historically that -- the opportunity to offset a component of inflation by improving the performance of your bottom quartile restaurants, for example, was pretty meaningful. I think in a 2% inflationary environment or a 3% inflationary environment, where you are taking 2% or 2.5% pricing and your offsetting 1.5% to 1% is meaningful. I think in an environment like today, if we're talking 5% or 6%, of course, we're going to try to do that. But you've got to get menu pricing pretty close. Right that's a lesson learned from this year for sure. There's just only so much you are going to do at that point in time. So we will always look to do that to pass the least amount of pricing on. But I think in this environment, you're still talking about 90% of it being menu pricing.

Your next question comes from the line of Jeff Farmer with Gordon Haskett.

You guys indicated a couple of times that October saw the strongest I think you said seasonally adjusted average weekly sales performance since April. I'm just curious if there's anything concept specific that you guys were doing to drive that improved performance at the Cheesecake Factory.

Jeff, I think consistent execution over time just returns that trend to the norm. I mean, I attribute it a little bit more to the abnormal summer seasonality. Certainly, we're keeping a good percentage of that to-go. So from a seasonal perspective, September and October absolute to-go sales are higher than they used to be seasonally and maybe that creates a little bit more of a stabilizer compared to the summer time, but nothing more or less than what we always do, I think it's really reverting to the mean that we've seen for the year.

Jeff, this is David. I guess I would just add perhaps a little bit more of an ease in the staffing market has helped a bit, which has helped improve attrition overall, which has helped improve operations overall. So as that continues, we continue to follow that trend. We would anticipate just we already have great operators and consistent operations. But the more stable the staff level environment is in the restaurant, the easier it is for us to be able to execute consistently and drive sales, which is the hallmark of the Cheesecake Factory.

That's helpful. And just one more follow-up on elasticity of demand. So all of your peers have said something largely similar which is that you haven't seen too much demand pushback on the menu price increases. But the question I have is that given the casual dining segments relatively low frequency, do management teams, including yourself truly sort of have a fully informed read on elasticity and with all the pricing that's been taken?

That's a really interesting angle, Jeff, and it doesn't matter. I do think that we get enough frequency from our high visitation guests that we're going to see that by now. I mean, they are coming in at least once a month, right? And so I think that's a pretty good percentage of the total visit. So, I think statistically, I would say yes. We have enough population to measure that elasticity again, the other thing, I mean I just find interesting and I think it's kind of an indicator of where our value proposition sits relative to where other places that people are going, because even if those guests aren't coming in to us maybe the moderates, they come in once a quarter, they're going other places. But when they do come in, they are ordering more than they used to. So, to me that says that our large portion pastas and our great desserts relatively must look like they're well priced compared to where everybody else is going, because they're ordering more than they used to.

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

Two questions. The first one just on unit growth. Matt, I think you said you want to get back to the prior 7% growth target in '23. I know in 2022 you started that you had plans for 20%, which I guess would have been at 7%, but ultimately it was only the, I guess, the 13% you're targeting now. So I'm just wondering if you can size up maybe what the greatest challenges were in '22. Just trying to get a read on the confidence in reaccelerating it back to now you're talking about upwards of 25% next year. I think you mentioned the 7 of them that are rolling into '23 are part of that, but just trying to get a sense for what you think were the greatest challenges in '22 that you think maybe have abated to allow you to assume there's going to be such a big re-acceleration next year. And then one follow-up.

Jeff, this is David. A lot of the challenges were and continue as a much slighter extent around permitting, getting through permits in local jurisdictions and earlier in the year around some major pieces of equipment and so we're trying to be little more proactive there and doing some more proactive purchasing on the CapEx side to be able to ensure we have those big pieces of equipment that are very unique to Cheesecake Factory to be prepared for that 7% next year. So we feel confident in that 21 to 24, 4 or 5 of those being Cheesecake, 7 or 8 being North Italia and then the rest being FRC concepts, including probably 3 to 4 Flower Child. So I think our teams are certainly capable of opening 21 to 25 restaurants we've done it historically in the past just at Cheesecake Factory. And so I think we're poised to meet the supply chain challenges and some of the permitting and approval delays that we had in 2023 head on to be able to meet the targets for next year.

Understood. And then just following up on the restaurant margin commentary. I think you said you're going to exit the fourth quarter at a certain level. Just wondering if you can be more specific in terms of quantifying what you think that exit rate is going to be, I'm assuming you're talking about like 15% plus, but maybe you could talk about what that rate is because I think that's the rate you're kind of anchoring around 2023. And again because you said it's the exit rate of the fourth quarter, any color in terms of what you think the full fourth quarter restaurant margin would be being that you already have the first month complete and you already think the exit rate is going to be in that whatever that defined range is just trying to get a sense in terms of specifics on the numbers for the margin for this quarter and into '23.

Sure. Jeff, it's Matt. So the math would get us in December, back to the fourth quarter of 2019 Cheesecake Factory, which was [15.7%] so that's kind of where we're anchoring on going into next year. And then obviously one of the things I would caveat is that, that doesn't mean each quarter for '23 would mirror the 2019 quarter, because there's a lot of moving parts in the inflation and the pricing timing but that 15.7% is kind of our aggregate anchor that we're looking to trend into 2023. The fourth quarter is only going to get 1/3 of the benefit of the 2.8% pricing. So, 2/3 of that will not happen, right? So roughly speaking there is 2% below that level that we are sort of targeting for the fourth quarter.

Got it. So that's the margin you're saying for the full fourth quarter would be 2 points below that [15.7%].

For the Cheesecake Factory overall, correct.

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

Matt, I just wanted to clarify how you're thinking about your pricing. So sorry to ask this for the third or fourth time here, but on your December price increases, is that a pull forward amount from what you maybe normally would have taken in February or would you contemplate taking more in February when your normal cycle to address the inflation that you're seeing next year. I just want to make sure I understand how you're thinking about it.

David, that's an excellent question. I appreciate that you brought that up for clarification. This is incremental. We will be doing in the first quarter, what we always do, and we don't know what that level of pricing is, because we're still assessing the commodities market and what we can contract for, but it will be a normal level of pricing to offset next year's inflation. This is really this 2.8% is to catch up for this year.

I think one of the things that we saw happen is that we probably had a little better protection last year in the commodities market and our labor was a little more insulated because we were better staff. So a lot of our competitors took pricing last year in the fourth quarter incrementally in about the 3% range. And so that gap we didn't feel as much in the fourth quarter and first quarter, but then it built in the second and third quarters of this year. So that really is to make up for what happened this year and then we'll move forward as normal in February.

Got it. So the way to think about maybe year-over-year pricing as you'll exit the year with about a 10% increase in the menu and you might do something in February that maintains that and that's a similar ballpark or maybe. And then that will carry forward to your August price increase, is that the right way to think about it.

That's correct. That's correct.

Great. And I guess relatedly, I know this has been asked, but because you're kind of lagging what others have done, you could end up in a situation next year or that year-over-year increase is quite a bit higher than what others are running. Are you going to be taking a close look at that when you get to the February price increase or is the February price increase is going to be less about your relative position in the market and more about what you need to do to invest kind of cover the inflation?

Well, I think it's been such kind of a wild ride, David. I think our perspective is, you've got to look a little bit on a compounded level and also the speed at which all of this has happened. I think we feel pretty good as I've mentioned about our value proposition. Even with the incremental pricing, we are going to be below the national average and probably pretty much in line with our peers.

And don't forget the quoted pricing number for a lot of our peers exclude the lack of discounting that they're doing and they all talk about that right? We don't discount any way. It also excludes the reduction in marketing that they may have to pick back up and we don't do that either. So I think competitively, we're actually way below the market and so I think we have some room to run and we know that our volumes are tracking to the $12 million this year, so we can protect the 4-wall margins even if there is a little bit of a consumer pull back like I said, we're going to be good, we're going to be in good shape and we'll grow off of that base with that level of profitability.

Your next question comes from the line of Joshua Long with Stephens, Inc.

I was curious if you could provide an update on the rewards program pilot that you started out in Houston, I think back in June and any sort of early learnings there and if that's the point where you start to build that out into other pilots cities.

Sure, Josh. This is David. Great question. So we did launch the pilot in Houston in June and our acquisition rate continues to be significantly ahead of where we had originally forecasted and about I think 2 days on Thursday, we'll be launching a beta in the Chicago market and we have some new things that we want to test out not just from an acquisition standpoint, but also from a redemption standpoint and some more operational and training opportunities that we want to learn from. So we feel good about where we are today and are hopeful that we'll be launching something nationally at some point next year.

Great. And on that point, I feel like, correct me if I'm wrong, but I feel like the kind of scaling up in the training piece as you just mentioned was kind of something that was initially a focus point for the Houston pilot as you think about that going forward. Can you talk a little bit more about maybe the consumer-facing pieces or some of those items that you'd expect to see or how the guests might experience that a little differently.

I think we want to learn a little bit more about the redemption rates. We'd like to see the redemption rates be a little bit higher than they are today and what other ways that we can remind people once they are in the building that they are members of the program and they may have something sitting in their account that they forgotten about. So we will test a few different ways to remind them and see if we can make an impact on redemption.

Got it. That's helpful. And then one follow-up. It's a smaller piece, but just curious if you could provide some context around what's happening with the bakery sales the third-party or external bakery sales and kind of where we're at with that as we start to lap over some of the kind of moderation in growth from the second half of last year.

Sure, Joshua, I think similar to some other components of COVID, we saw the bakery sales be a little bit spiked and maybe a little bit lumpy in '21. I think, we're generally tracking back to our historical levels. I think our focus also had been to ensure that we had enough for the restaurants or restaurant sales and bakery sales have been much higher than pre-pandemic. So we've been covering some of that I think there is a lot of opportunity where we're looking at going forward, again, off of a base that I would say has kind of normalized at this point in time.

Your next question comes from the line of Brian Mullan with Deutsche Bank.

Just a question on the delivery sales channel. Just looking for your sense of consumer demand for the delivery occasion right now. Have you seen any degradation on a year-over-year basis? I know delivery sales per week are probably much higher than 2019, but just trying to get a sense of consumer sensitivity to pricing right now or demand as we've moved further away from COVID.

Brian, this is David. The total off-premise was roughly 23% for the quarter, only down a couple of percent from Q2 and delivery remains pretty stable. Even if I go back and look full year ago Q3, delivery of that was around roughly 12% and it's 10% today. So continues to be strong demand. We continue to not take as much pricing in the delivery channel as many of our competitors saw the value proposition from a menu perspective continues to remain really strong. So we're happy with the continued total off-premise performance and the delivery as well.

As noted, we're actually running, Brian, about 24% in October off-prem, so we don't feel like there has been any real movement either up or down it's just kind of sideways.

And then just a follow-up, just on G&A, when you look out to 2023 assuming just a normalized year, normalized environment is leveraging it a 10 bps a year, still kind of the goal you talk about that pre-COVID work is there enough in there where maybe there's an opportunity to go a little faster than that even if it's just for a short period of time. Just any early thoughts on G&A for next year.

Yes, I mean I feel good with (inaudible) of this year at this point in time, we haven't gone through our budgeting process yet, so I think I'll stick with that until further notice.

Your next question comes from the line of Lauren Silberman with Credit Suisse.

I actually wanted to ask on on-premise, what you're seeing there, what you saw throughout the quarter and then where on premise traffic is running relative to historical levels?

Lauren, it's Matt. Yes, we're right around 90% of the historical on-premise so that's pretty darn consistent today as it was sort of in April as noted. So that's been pretty stable too. I mean obviously in July, when we did see a little bit of a dip (inaudible) correlated to both on and off in total, but we continue to track for the year to about 90% of the historic levels, which I think gives us an opportunity. I think as we've noted before, when we did our research in the middle of the year, there was a good percentage, I don't think it was 25% to 30% of our guests who said that they had not yet become comfortable enough to dine-in to a restaurant. So I mean I would attribute most of that to that 10% delta from pre-pandemic, offset by some new guests that we picked up, right. So we know we picked up a good number of cohorts. But that's been a pretty steady number in addition to the off-premise being steady as well.

Great. And just a follow-up on the margins. I understand the focus on returning to Cheesecake Factory 4-walls. If we include North Italia and FRC what does that translate to, I guess, on a consolidated basis, or how do we think about that, whether it's 2023 and just going forward?

I think our weighted average basis on the P&L, like if you took our entire P&L, if we could get that optical 4-wall and granted that includes all the brands in the bakery. But just think about it holistically above G&A depreciation, pre-opening if we could get that number to be the same as what the Cheesecake Factory targeted. I think we'd all be happy. That may not happen all at once, but that would be an aggregate goal.

We have reached the allotted time for questions. This concludes our conference for today. You may now disconnect.