Cheesecake Factory Inc (CAKE) 2023 Q2 法說會逐字稿

Thank you for standing by. My name is Sidney, and I will be your conference operator today. At this time, I would like to welcome everyone to The Cheesecake Factory Incorporated 2023 Quarter 2 Earnings Call. (Operator Instructions)

I will now turn the call over to Etienne Marcus, Vice President of Finance and Investor Relations.

Good afternoon, and welcome to our second quarter fiscal 2023 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 fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could be materially different from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available on our website at investors.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission. All forward-looking statements made on this call speak only as of today's date and the company undertakes no duty to update any forward-looking statements.

In addition, during this conference call, when discussing comparable sales, we will be referring to comparable sales on an operating week basis unless specifically stated otherwise. We will also 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 second 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. During the second quarter, we made measurable progress towards our stated objective of returning our profit margins back to pre-pandemic levels. Combined with our increased scale, we were able to deliver our highest adjusted net income dollars and adjusted earnings per share generated in any one quarter in the company's history. We believe this is indicative of the opportunity we have to enhance shareholder value through continued growth of both our top and bottom line.

Despite a slightly softer sales environment, the Cheesecake Factory restaurants continue to generate industry-leading annualized unit volumes averaging $12.4 million for the quarter. Comparable sales for the second quarter increased 1.5% from the prior year and 14.1% versus 2019. Comparable sales versus 2019 continued to outperform the casual dining segment, demonstrating the strength and resilience of our namesake brand. Our focus on menu innovation remains a key point of differentiation contributing to our broad consumer appeal and high degree of relevancy. To that end, this past Sunday, we commemorated National Cheesecake Day by introducing our newest Cheesecake flavor, Cookie Dough Lover's Cheesecake with Pecans and are in the midst of rolling out our latest Cheesecake Factory menu across the country.

Execution within the restaurant 4 walls was outstanding with our operators delivering better-than-planned results across several key performance indicators, including labor productivity and wage management, driving solid flow-through for improved profitability. This, combined with favorable input costs resulted in adjusted net income margin of 5% for the quarter, exceeding our expectations.

On the development front, we opened a Cheesecake Factory and 2 FRC restaurants during the second quarter. While all of our sites in the pipeline remained active, we continue to experience some delays in opening dates due to various challenges primarily beyond our control, particularly construction and permit approval delays. As a result, the company now expects to open as many as 20 new restaurants in fiscal 2023, including as many as 6 Cheesecake Factories, 5 North Italias and 9 FRC restaurants, including 3 Flower Child locations. We continue to anticipate 2 to 3 Cheesecake Factory restaurants to open internationally under licensing agreements.

As we look ahead, we remain intently focused on delivering exceptional food quality, service and hospitality, the hallmarks of our success to drive long-term profitable sales growth. We will continue to leverage our competitive strengths, including the scale of our business, our differentiated brands, best-in-class operators and balance sheet to drive shareholder value and market share gains.

With that, I'll now turn the call over to David Gordon to provide some additional details on operations and marketing.

Thank you, David. Our people are our greatest resource and enable us to deliver excellent service and hospitality and delicious memorable dining experiences for our guests. We believe we are uniquely well-positioned to attract, train and retain high-quality staff members and our best-in-class operators and we remain sharply focused on maintaining our competitive edge by investing in our people to support ongoing improvements across all 3 facets of staffing.

Last October, we resumed our in-person restaurant management development program called at our Southern California Corporate Support Center. Over the last 10 months, we have hosted over 9 training conferences attended by over 800 managers. And our trading investments are paying off with our second quarter guest satisfaction scores at The Cheesecake Factory, improving both sequentially and year-over-year. In fact, all key dine-in and take-out guest satisfaction metrics have surpassed the second quarter 2019 levels.

We also had another quarter of strong staff retention with restaurant management and hourly staff attrition rates effectively returning back to our industry-leading pre-pandemic levels. And lastly, on the staff recruitment front, following our recent recognition for having made Fortune Magazine's 100 Best Companies to Work For list for the 10th consecutive year, we were also just named the Fortune's Best Workplaces for Millennials List for 2023. We believe these accolades support our position as an Employer of Choice in the restaurant industry and our relentless focus on staffing will drive improvements in service, the guest experience and ultimately, overall restaurant performance.

Moving to sales trends. Comparable sales across our portfolio of concepts remain positive with predominantly stable guest purchasing behaviors. Cheesecake Factory off-premise sales for the second quarter totaled 22% of sales, just below first quarter levels. Additionally, on-premise incident rates remained above 2019 levels with no material change to daypart mix. North Italia's second quarter comparable sales increased a solid 8% from the prior year and 30% versus 2019, resulting in annualized AUVs of $8 million. 4-wall margin for the adjusted mature North Italia locations improved to 15.4% in the quarter from 13% in the first quarter, with planned actions for further improvement. Other Fox Restaurant Concepts also continued to drive strong results with annualized AUVs of $7.4 million.

Turning to marketing. As David mentioned, on Sunday, we celebrated National Cheesecake Day and our marketing team generated a significant amount of publicity and social media attention surrounding the exciting new flavor announcements. TODAY.com broke the news, which was followed by more than 90 media placements, totaling 2.5 billion PR impressions, including notable features on Parade.com, Mast, The Daily Meal and msn.com to name a few. Building on this PR momentum, last Friday, our founder, David Overton, was featured on the TODAY's show in recognition of our 45th anniversary and National Cheesecake Day. These are prime examples of our marketing strategy to tie our creative marketing campaigns to on-brand events to generate publicity and increase consumer engagement to raise The Cheesecake Factory brand's awareness and drive sales.

On June 1, we launched our Cheesecake Rewards program nationally. And while we are in the very early stages, the program is off to a promising start with member enrollment surpassing our expectations. In celebration of National Cheesecake Day and as an exclusive offer for our Cheesecake Reward members, we offered a special any slice, half price promotion for our dining guests on July 31 and August 1. And as a reminder, our overarching objective is to leverage the data analytics and insights to engage more effectively with our guests and drive incremental sales, while maintaining our restaurant level margins.

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

Thank you, David. Let me first provide a high-level recap of our second quarter results versus our expectations I outlined last quarter. Total revenues of $866.2 million were just under the low-end of the range, although with sequential improvement on a year-over-year basis throughout the quarter. Adjusted net income margin of 5% was above our expectations relative to our sales. G&A and depreciation combined as a percent of sales were in line with expectations. And we returned $23.1 million to our shareholders in the form of dividends and stock repurchases.

Now, turning to some more specific details around the quarter. Second quarter sales at The Cheesecake Factory restaurants were $652.5 million. Comparable sales increased 1.5% versus the prior year and 14.1% versus 2019. Sales for North Italia were $65.9 million, a 17% increase over prior year, supported by comparable sales growth of 8% versus prior year. Comparable sales versus 2019 increased 30%. FRC, including Flower Child, average weekly sales were [$114,700]. Other FRC sales totaled $65.7 million, up 10% from the prior year and sales per operating week were [$142,300] and external bakery sales were $15.4 million during the second quarter of fiscal 2023.

Now, moving to year-over-year expense variance commentary. As we have seen, our cumulative pricing catch up with inflation, we realized measurable year-over-year improvement across several key line items in the P&L. Specifically, cost of sales decreased 130 basis points, driven by higher menu pricing than commodity inflation despite lapping favorable dairy contracts in the second quarter of 2022. Labor decreased 130 basis points, predominantly driven by pricing leverage, partially offset by higher management labor, driven by higher staffing levels. Other operating expenses decreased 10 basis points, mostly driven by pricing leverage, partially offset by marketing costs related to launching the Rewards program.

G&A increased 40 basis points, mostly related to higher staffing levels. Depreciation as a percent of sales remained flat to prior year. Preopening costs were $6 million in the quarter compared to $2.9 million in the prior year period. We opened 3 restaurants during the second quarter versus 2 restaurants in the second quarter of 2022. Delays in opening dates contributed to higher-than-expected preopening costs for the quarter. And in the second quarter, we recorded a net expense of $0.6 million related to impairment of assets and lease termination income and FRC acquisition-related expenses. Second quarter GAAP diluted net income per share was $0.87. Adjusted net income per share was $0.88.

Now, turning to our balance sheet and capital allocation. The company ended the quarter with total available liquidity of approximately $330.1 million, including a cash balance of about $91.6 million and approximately $238.5 million available on our revolving credit facility. Total debt outstanding was unchanged at $475 million in principal. CapEx totaled approximately $25 million during the second quarter for new unit development and maintenance. During the quarter, we completed approximately $9.3 million in share repurchases and returned just over $13.8 million to shareholders via our dividend.

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 updated thoughts on our underlying assumptions for Q3 and full-year 2023 for revenue and net income margin. For Q3, based on our quarter-to-date performance, most recent trends and assuming no material operating or consumer disruptions, we anticipate total revenues to be between $835 million and $855 million. This essentially assumes a continuation of the trends from the second half of Q2, which on a year-over-year basis, sequentially improved as we lapped more favorable comparisons.

Next, at this time, we expect effective commodity inflation of low single-digits for Q3, as our broad market basket continues to stabilize. We are modeling net total labor inflation of about mid-single digits when factoring in the latest trends in wage rates, which, similar to our commodities continue to normalize as well as channel mix and other components of labor. Based on these assumptions, we anticipate net income margin of approximately 2.75% for Q3 at the midpoint of the revenue range I previously outlined, which also reflects planned higher-than-average G&A of about $2 million, mostly related to our Annual General Manager Conference, which takes place in September and the preopening expense we expect of approximately $9 million in the quarter.

Now, for the full year. Based on our year-to-date performance, more recent trends and assuming no material operating or consumer disruptions, we are now anticipating total revenues for fiscal 2023 to be approximately $3.5 billion. This reflects our second quarter results, our perspective on seasonality post pandemic as well as the impact related to timing delays in new restaurant opening dates and any impact from the launch of the rewards program. For the back half of the year, we now estimate year-over-year inflation for commodities to be in the low single-digit range and labor in the mid-single-digit range. Given our unit growth expectations, we are estimating preopening expenses to be approximately $26 million.

As we have said earlier, our goal is to effectively offset inflation with menu pricing to support our margin objectives. Assuming we do so and consumer trends remain consistent and there are no other material exogenous factors, we continue to expect full year net income margin of approximately 4% at the revenue level I provided. With regard to development, as David Overton highlighted earlier, we plan to open as many as 20 new restaurants this year across our portfolio of concepts, with 4 to 5 openings in the third quarter and the remainder in the fourth quarter. And we now anticipate approximately $160 million to $170 million in CapEx to support this year's and some of next year's unit development as well as required maintenance on our restaurants.

In closing, as David stated earlier, in the second quarter, we took another step towards recovering our 4-wall and enterprise-wide operating profit margins. While comparisons continue to be inconclusive due to lapping of various stages of the pandemic and the environment remains somewhat uncertain due to potential shifts in consumer sentiment and behavior, we are pleased with the stability and predictability of our overall financial performance so far this year. As we have previously noted, our key objectives this year are to rebuild our profitability and to ensure we have the appropriate levers in place to drive future sales growth. As we look ahead with cost inputs normalizing and the macro environment starting to stabilize, we believe we are well positioned to once again generate our historically consistent operational and financial results.

And with that said, we'll take your questions.

(Operator Instructions) Your first question comes from the line of Brian Mullan from Piper Sandler.

Just a question on the same-store sales result at the core Cheesecake brand. Can you just take us through the traffic, the menu price and the mix, please, for the quarter? And then on the menu price piece, how do you expect the rest of the year to progress? Strategically, you're going to continue to solve for margin recapture? Or conversely, do some of the industry traffic trends, maybe give you any pause about taking more price? Just any thoughts would be great.

Brian, this is Matt. It's a good question, probably top of mind for most investors just on the actual data. The pricing was about 10.5% roughly for the quarter. The mix was a negative 5.4% and then the traffic was a negative 3.7%. As we talked about before, the mix has some to do with the change year-over-year in the off-premise, while being very stable and still a little bit heightened in Q2 of last year and the way that we count guests causes some of that negative mix impact. And the other part really was the higher purchasing behavior in Q2 of 2022. We're still running above pre-pandemic levels of what we call incident rates, was how much alcohol, dessert, appetizers guests are buying. But obviously, last year, the so-called Revenge buying was in place and we saw heightened levels.

For the remainder of the year, we're contemplating lapping our summer menu pricing with a 2% level versus the 4.25% we had. So, we'll see it diminish from the 10.5%. I think it will go to, I don't know, [at 9-ish] in the third quarter and then 7.5% or so weighted in the fourth quarter because remember, we did the catch-up at the beginning of December. So the balance of that will go into next year with more like 5% because we'll lap over some of that catch-up pricing that we had in the fourth quarter and exit.

I think though importantly, to your question, Brian, and maybe this is the most pertinent part of it and how we're thinking about it. Certainly, there was just a very difficult optical lap in the second quarter for Cheesecake. I mean we had exceptional sales volumes in the second quarter of last year, driven by some of that post-COVID surge. As we look at the quarter, kind of how we came out versus our expectations really, May was a little bit softer, maybe a couple of percent in terms of the timing and trying to figure out the seasonality of the new normal. And then we had a couple of delayed openings, obviously, that contributed to it. But really, June looked good.

As we think about how we perform, we exited the quarter closer to mid-single-digit comps, most of the difference there being in traffic. So, we actually think our traffic is in pretty good shape going forward and that's what we're expecting to see as we go through the third and fourth quarter. So, we are taking less pricing than we have been and I think that will support it. But I think the underlying business trends going into the third quarter are very strong and we're pleased with that and we're going to keep doing what we're doing.

And then just a follow-up on the development outlook. Your release mentioned some construction challenges, some permit approval delays. I know that's not unique to you, but I'm just wondering, is one of those 2 dynamics a bigger factor versus the other or one might expect? Would you expect one of them to improve more quickly than the other? I'm kind of asking in the context of understanding this year has been impacted. Do you want investors thinking that next year you could potentially get to that 6% to 7% net growth in 2024? Or will these issues be with you a bit longer?

Brian, this is David Gordon. Great question. And as David Overton mentioned, the up to 20% for this year puts us, I think, at about 6.3% to 6.5% unit growth for this year. So, we still feel confident in that 7% number for next year when we look at our pipeline for next year. Most of the delays are not really on the construction side for us, a little bit more on the permitting, whether that's a local permit in a city or something more broad. And as far as equipment, as we've stated in the past, I think we've done a terrific job of ensuring that we have what we need for the openings and for the pipeline next year. So, it's more about cities being a little bit slower, more new people in jobs than previous. And then just being a little less quick to be able to do what we need. But over time, we would continue to hope that, that's only going to get better. And there's nothing internally that will keep us remitting those targets.

Your next question comes from John Parke from Wells Fargo.

Just look at the restaurant margins by banner, it looks like Cheesecake mainly outperformed in terms of the recovery this quarter. I guess, what's kind of driving that outsized growth? And can you kind of help us think about how much North Italian, other FRC are kind of being dragged down by the growth that you're seeing?

Yes, we're pleased -- really pleased with the Cheesecake Factory margin recovery. If you think about the timing of the pricing versus inflation, we took that extra 3% at the end of last year and we're seeing that flow through. I think year-over-year, CAKE up 330 basis points. So, pretty much 100% flow through on the pricing. So, I think that's great to see. Part of the difference between the concepts is growth, as you noted. Usually, that's about a 2% or so delta depending on how many openings, but that's a good sort of rule of thumb.

I think the other component of that for North was that we did some of the catch-up pricing actually in the second quarter. So, we didn't even get the full benefit of that yet. So, there's even another probably 1% lag, I think, just on the pricing front. So, we think all of our concepts are really well positioned on the recovery front. We're still building on that. It's not like we're declaring victory because we want to continue to increase it. But we think that we're making the right decisions and we've made a lot of progress.

Can you just remind us what pricing was (inaudible) this quarter?

As in, what we do about 4%.

Your next question comes from Dennis Geiger from UBS.

First question, if I could, I wanted to ask a little bit about delivery and sort of what you've seen there from a mix perspective, how that's changed? Any change with demand? And any other opportunities that you've identified within that channel?

Dennis, this is David Gordon. We continue to see very stable activity. The off-premise at 22% in Q2, just 1% below where we were in Q1. Delivery still makes up about 9% to 10% of that mix. 7% of it is phone or walk up and then the remainder is made up of online ordering. So, as we said, I think we may have said last quarter, we did extend our exclusive agreement with DoorDash, which continues to give us a really preferential marketing position as well as a very strong commission rate. That means that all of our off-premise sales, including the DoorDash sales are not, in any way, margin dilutive.

So, we feel good about the fact that we've been able to hold a lot of those sales. We'd continue to see that remain. The summer tends to be the slowest time for delivery sales overall. So that 1% down from where we were last quarter. It was the same type of behavior we would have seen last year. But we feel really good about the ongoing partnership and also the integration we have with DoorDash on the rewards side, which has allowed guests to go ahead and use the incentives to reward also on DoorDash.

One more, if I may. Matt, just I wanted to follow-up on the mid-single June exit that you spoke to. Definitely, a solid number. And it seems like that's maybe a good run rate that you're thinking about going forward. Just as you talked about some seasonality in earlier months, just curious, I guess, maybe on -- I don't know, on a multiyear basis, if you guys still think about that anymore. Just how to think about that over the coming months and if just kind of that June exit on a 1-year basis is a good way to think about the go-forward as we think about those trends?

Yes, this is Matt. Yes, as I said in the prepared remarks, I mean, it is still a little bit inconclusive, right, with any one data point. And so we always, I think, have cautioned against that. We continue to try to triangulate against 2019 and prior year absolute run rate, but there is some variability, right? So, there's been changes in holidays, you have 5-day differential now when you're comparing operating weeks. And so it is a little bit tricky. And I think that, that reinforces the need to be agile and the great job that our operators did managing with their forecasting of sales and driving flow-through was exceptional. I think that the beginning of the stability started last year kind of in the August-September time frame, if I remember correctly. And so we feel like that mid-single-digit run rate is appropriate. That's what we've been seeing. And that's what I think our outlook kind of encompasses, if you will.

Your next question comes from Joshua Long from Stephens Inc.

Curious, if we go back to your comments, Matt, on the predictability of the financial performance, it sounds like as you kind of get away from maybe some choppier periods, whether that was early in the quarter or maybe 4th of July as some of your peers have talked about, the traffic sounds to be relatively calling in line with your expectations. And then to your point, even though you might have had some one-time items in there that maybe lowered the absolute revenue, it feels like the actual store level performance is kind of falling in line. Is that -- am I understanding that point right in terms of just how you're thinking about the predictability of the model?

I think that's right. I mean, again, there continues to be some potential abnormalities in lapping numbers, right? So, I think that exists. But in the absolute terms, I think the last quarter was the most predictable that we've seen in the CAKE business in 3.5 years. And that goes for both, I think, the top and the bottom line. The input costs are not as volatile as they have been, thinking particularly about the COGS and the labor inflation and the moderation that we've seen and the fact that, that gives us some confidence that continued improvement in core costs with the stability of the top line is very achievable. So, I think that that's -- the variability has narrowed dramatically over the course of the last 6 months. And I think that's a real testament again to our teams benefiting from the environment and we're just hopeful that, that continues.

When we think about trends by geography, daypart or kind of maybe from a mix basis, it sounds like those are also pretty consistent as well. Anything to call out there that's either surprising or maybe that you've noticed within the context of the overall results?

Yes. I mean when we look at things like daypart mix, it's within like 0.1% each of them versus 2019, for example, right? So, it's really close. We continue to see sort of that movement back to consistent historical trends. I don't know, it's possible that some of the heat has been a negative in some areas. I know I've heard some other commentary around that that's kind of unique and challenging. Obviously, there's no patio usage in about half the country right now. So, given our results and those factors, I think we feel even better.

Your next question comes from Brian Vaccaro from Raymond James.

I just wanted to circle back on The Cheesecake Factory comps. And I think you said you saw a little softness in May. Curious what you attribute that to. And then I appreciate the mid-single-digit comp comment exiting the quarter. I'm curious what that looks like on a comp versus '19 basis? Is that an improvement versus the up 14s versus what you saw in the first half of the year?

Yes. So I think, Brian, this is Matt. The first point really in May, it was around our expectations. I mean, trying to sort of model like we were saying year-over-year, there was a certain cadence last year. There was a certain cadence the year before and the year before and they've all been different. So, I think mostly that was around our internal expectations about how do you figure out this new second quarter pattern. I don't know that in absolute terms, it was better or worse because that's just hard to say. But I think versus our expectations, we improved as we went through the quarter. And I think roughly the sort of 14% to 15% versus 2019 is kind of our thinking still, right? I mean I think it's the stability of that is sort of back in line and I think it just represents mid-single-digits as compared to prior year.

And then on the margin front, you expect confidence in recovering sort of your and recapturing pre-COVID margins and certainly good to see some of the improvement in North Italia, but -- and I hope my quick math is right on this, but it looks like Cheesecake segment margins may be still down about 90 basis points versus '19. I guess the question is, what are some of the key drivers from here that would allow Cheesecake segment margins to fully recapture pre-COVID levels in your view?

Well, Brian, first of all, I think your math is correct, right? So, I think that is true in the second quarter. I think that there are a couple of areas that we believe will help us continue to close the gap, maybe not as fast as we've seen in the last quarter or 2 with that level of incremental pricing. But as we continue to carry -- I mean, taking 2% in the summer is probably a little bit more than we might have historically that might have been 1.5%, but we're seeing also wage inflation rates that are below pre-pandemic levels. So again, I think we see the opportunity to be able to re-leverage a little bit in the labor and the COGS line items as we move forward.

The other comparison piece here is in the marketing and rewards. There is a little bit of expense there associated with the launch that we incurred both it incurred in the second quarter and we anticipate that, that will also be the case in the third and fourth. I think longer term, as David Gordon mentioned, we believe that it will be margin neutral, but obviously, the initiation and the customer acquisition costs. And that's probably in the 30 basis point, 35 basis point range for the second quarter and the back half of the year.

And then, Matt, I just wanted to ask about the labor line specifically. And sales were a little light, but labor sort of came in, in line and looked like it was quite a bit below versus the first quarter. Are there any one-time items or nonrecurring adjustments that are worth highlighting? And just more color kind of fundamentally on what drove that favorability? Or are you seeing -- guessing you're seeing improvements in overtime improvements in hiring costs and training costs, et cetera. But any color you can provide there would be great.

Well, Brian, first of all, you did a better job selling it than we possibly could because it took all of those improvements that you noted. But really, the predictability of the sales component, the stability of that, we did have better productivity year-over-year. One of the things we've been really focused on operating-wise is on the forecasting and templating of labor. And the team has done an exceptional job improving upon that in this environment. And so we've seen a lot of efficiencies. I can tell you there are no one-time benefits that we have in there. Our group medical was basically on plan. All items were pretty much normal. I think that we were just in an opportunity to take advantage of the better staffing and execution that David Gordon talked about.

Brian, this is David Gordon. Our continued improvement in retention is certainly part of that, and it's paying off. As we look at Q2 of 2023 versus last year, we continue to have improvements. And we really are back to sort of our pre-pandemic best-in-class at staff. And most importantly, I think at the management level. That leads only to better operations over time, which leads to improved productivity. And our applicant flow continues to get better quarter after quarter.

I think last reporting period, we had about 29 applicants for every hiring need. That's up to about 34 for every hiring need today and the quality of applicant continues to be people that have previously been in the industry versus at this time last year when we were probably still hiring people who didn't have experience. So, the longer those staff stay with us, gives us the ability to continue to cross-train them, make them more productive in the restaurants. And you take that combined with a more predictive sales environment and allows our operators to really maximize productivity and maximize labor and as you pointed out, reduce over time.

Your next question comes from Sharon Zackfia from William Blair.

I wanted to circle back to the rewards program, and I know it's early, but can you kind of give us your game plan on how you expect that to evolve over this year? And clearly, I'm assuming the goal is to incent frequency. I mean, given others experience with other kinds of programs, when do you think that would start to become manifest?

Sharon, it's David Gordon. As you probably recall that the program's design is really around published offers, unpublished offers and then marketable offers. And our longer-term goal is to be able to leverage the data and the insights to engage with guests and really drive incremental sales, while maintaining those restaurant level margins. And since we only launched the full program in June, I would say that we're taking time now to really analyze that data and we'll be doing that all throughout Q3. And then we'll look at where we might want to start some pinpointed marketing to drive some incremental visits in the fourth quarter.

But more likely, it's really next year that we would start leveraging it completely and have enough data that we think it would be very meaningful to be able to drive the right type of offers into the right channels at the right time to drive some incrementality, whether that's daypart occasion or incident occasion. So, we're looking forward to be able to do that fully next year.

And is it kind of an omnichannel model where somebody can get recognized if they order through DoorDash? Or is it just if they come in or get-to-go in the brick-and-mortar?

No, it's also through DoorDash. It was one of the early things that we put together with DoorDash with the ability for somebody to be able to participate and drive value through DoorDash. So, it's omnichannel and anyway guests who would want to use it.

And then patio utilization was actually going to be one of my questions given how wacky the weather has been over the spring and summer. I mean is there any metric you can provide on kind of how patio utilization has looked more broadly for Cheesecake Factory this year versus last year?

I don't have it right in front of me. We've been talking about how to measure that in the heat and sort of that side of things, right, because it's a little trickier. I mean, we're better at measuring it when it's raining because that's a clear closure. I mean we know in sort of the absolute perspective that the those locations that typically drive greater patio sales have been impacted. I don't have a specific number that I think is ready to quote on that.

Your next question comes from Brian Harbour from Morgan Stanley.

Matt, some of the mix drivers that you explained earlier, do you think those will kind of start to even out in the second half of the year? Or do you see those continuing?

Yes, the planning team and I were talking about that quite a bit to make sure that we have a good perspective because obviously, that's a component of revenue that is historically extremely stable. I think whatever variability there is in off-premise will continue to be a funny thing for us because of the way we count it. The other components of it, as we look at the last year, sequentially continue to move together to sort of historical levels. So, I think that piece was around 3% in the second quarter based on the current trend, it was about 4% in the first quarter. So, we think it will be probably 2% and 1% in the third and fourth quarters, sort of variance versus historical patterns and then kind of be back to a more normal perspective next year.

Maybe just on North Italia too, you had strong same-store sales there. Could you comment just on some of the newer units, how they're doing from a revenue ramp perspective. Also, maybe just from kind of a margin perspective. And then you alluded to other actions to address North Italia margins, which it sounds like part of that is just price, but was there anything else there that you're doing?

Brian, this is David Gordon again. I think that what we see at North is more typical of the rest of the industry versus what we see at Cheesecake when we open up in a new market. It's more of a gradual ramp-up and we really look to be at our full sales potential probably by the third year in North Italia, whereas Cheesecake Factory opens up generally, some of its highest volumes and then over time, settles into where it would be in the long term.

On the margin side, as Matt mentioned, we have another price increase in October, right, at the end of October for North Italia. But more importantly, I think the margin progress we've made thus far has come through supply chain and we have more work to continue to do there to leverage the scale of Cheesecake Factory supply chain and distribution in North Italia. We've also started incorporating at North. A lot of the analytics that we use at Cheesecake Factory and dashboards for operational trends to allow them to increase productivity and also seeding capacity to make sure that they're leveraging. They take a lot more reservations at North Italia than Cheesecake to ensure that they're balanced in their reservations percentage versus walking guests. And I think that's going to continue to help over time.

Brian, just to add on one thing to what David was talking about with the sales. One of the things we see too, is when we go into a market, maybe open 2 or 3, it really helps that in 3 years later, kind of all of it starts to coalesce. And when we were doing a business review recently, we were looking at some of those just pre-COVID openings in the Washington, D.C. and Virginia area, and we have 3 restaurants there that 2 years ago, we were saying, boy, we need to do some work. And because we're used to Cheesecake Factory, we look at that now, and they're practically at the same unit volumes as the rest of the North system and their margins are great. And so it really is, I guess, tracking to that pattern that David talked to, right? And I think that's what gives us confidence to keep opening as we've seen kind of market to market those growth opportunities really start to pan out as we stabilize post-pandemic.

Your next question comes from Andy Barish from Jefferies.

Just circling or adding on to that actually. It sounds like Flower Child is kind of by year-end, going to come in-house as well. I know it's not as big as North, but do you expect that to kind of have some noticeable benefits as you work your way through '24?

Andy, this is David. We do. And we've been working this year on incorporating more aspects of Flower Child under The Cheesecake Factory umbrella, made some really strong improvements there on supply chain integration as well. We are actually building the next 2 Flower Child and designing the next 2 that will open this year. So, we feel very positive that by the end of the year, it would be fully under our umbrella and our development teams and new restaurant opening teams will be leading the charge as we continue to grow Flower Child and we continue to think it has great potential as a high-end fast-casual concept that's very uniquely positioned out there in the marketplace.

And then just touching on the labor side, again, I know there's been a couple questions on it. But in terms of the mid-single-digit guide for labor increases in the 3Q. Is that all wage? Or are there still some hours being added? Or is there a productivity that's kind of netting out some improvements against any of those factors? Just a little bit more color on that would be helpful.

Andy, it's Matt. We're really talking about wages. I mean that makes up the preponderance of the inflationary impact. And I think there's always opportunities to offset some of that with productivity. But just from a pure inflationary environment, we're saying wage inflation is mid-single digits.

And is there a component of that Matt that you have off the top of your head on state mandates coming up in July-September, those kind of things?

Yes, it incorporates in California. I think that there's some jurisdictions here that have some of that maybe LA County. I think one of the promising things on the wage inflation, though, because, I mean, obviously, we've sort of said mid-single from the beginning of this year is it has ticked down, right? So, I would say that it went from more higher mid-single to now, lower mid-single based on the actual realized wage inflation that we're seeing. So, it is improving, Andy. I think that is important to note, but it still kind of sits within that mid-range.

Your next question comes from David Tarantino from Baird.

First, I wanted to clarify just the traffic trend that you're seeing exiting, I guess, you saw exiting the second quarter and in the early part of this quarter, that corresponds with the, I guess, the closer to mid-single-digit comment that you made, Matt. I guess is traffic still negative? Or I guess, how would you frame up what you're seeing more recently over the last 1.5 months or so?

We're only going to comment on June, but you can extrapolate. Our sort of guide is kind of based on these theories. We don't talk about the inter-quarter. But in June, we were at a mid-single-digit comp. And really just the difference between the rest of the quarter was predominantly driven by traffic. So, traffic was negative 3.7% for the quarter on a 1.5% comp. And so it's getting pretty close. I mean week-to-week, there can be differences based on holidays or if we're going to run national Cheesecake Day promotions or things like that. But we'll see where we get to, but it's getting pretty close to breakeven.

And then I guess my question is on your decision on pricing. I mean your pricing levels currently are among the highest in the industry year-over-year. And I know you were kind of late to catch up to the industry, so understandable. But I guess the decision to take more in August and even more than you've done historically? I guess, why do that in a market that seems like traffic is pretty fragile. I guess, what's the objective there? Is it mainly just to recover margins? And I guess, how do you think about the risk of traffic in doing that?

Yes. I think it goes, David, part and parcel with what I just said. I mean when we look at sort of the underlying traffic, it's pretty stable in our business. The underlying purchase behavior is very stable and in line or better than historical rates. And so I feel like sort of our objective this year is to rebuild our profitability and to develop the sales levers to grow off of this base. And really, if you think about the rewards program and the operational execution, we're going to accomplish those things. We're still in our math, probably 2% below the cumulative pricing of the industry since 2019.

And so year-over-year, as you noted, it's a little bit funny because of the timing of when we did pricing. But I still feel like the inflationary impacts over the course of those 4 years has outpaced what we've done. And so I think this helps us just get that last leg back in a situation and during a time period where we feel like the business is very stable.

Next question comes from John Ivankoe from JPMorgan.

I think I calculated something like 25 new units next year. And I wanted to get a sense of how you felt about the current pipeline. I mean what you're seeing in terms of location quality. I mean is it more competitive to get some of the best sites? Are you actually getting access to some of the best sites that were challenging from some time ago? And I'm curious for the types of landlords that you have, is your balance sheet even more coveted at this point? In other words, if you take less [TI] money are you actually getting it back to the other end, embedding a better overall lease terms?

John, I'll let Matt touch on the balance sheet. But as far as the site potential, we feel good about the pipeline, as I said earlier, for 2024. The types of sites, the type of projects, the high-end projects, if it's a mall being in an A mall, still, we're going to let the best sites, A sites drive our decisions. And I would just say our portfolio of concepts really allows landlords to come to us and say, hey, we have these opportunities, what would be the best fit for this particular project? And between Cheesecake Factory, North and now at 3,500 square foot Flower Child or even 8,000 square foot to 10,000 square foot culinary dropout, we have a lot of options. So, I think we're sitting in a really comfortable place to be able to hit that 7% into growth for next year and as we look forward.

I think, John, this is Matt. On the balance sheet, I mean, certainly, it helps, right? I think that the name Cheesecake Factory is even more important. And so I think it's all of those attributes and we're bringing to centers, the types of activities, the entertainment sort of quality that the landlords want. I would say that generally, the leasing environment is similar to what we may have expected historically though, in terms of terms. Everybody asked that question. For A properties, it's basically around the same as we got before, which is still best-in-class, but it's not like it's uniquely better than it ever was for the top properties.

Your next question comes from Jeffrey Bernstein from Barclays.

Definitely encouraging to hear that the traffic trend, it sounds like are approaching flattish to demonstrate that the brand is still driving the same consumer frequency. I'm just wondering whether you -- just because you are running -- we're running that north of 10% price. Just wondering, you measure the value scores on a regular basis. I know you talked about guest satisfaction, but just wondering how you think about the value scores and how you measure them, what your most recent learnings have been, just to make sure that the price hasn't intimidated the consumer? And then I had one follow-up.

This is David. Actually, we do an annual attitude usage and awareness study, and we just actually completed that with our guests. And I'd say that our value scores are pretty stable. We also know that there's still a portion of guests that haven't come back yet, post-COVID. I know we've talked about that before. And in the study, we saw that about 60% of our lapsed guests have stated that they have interest in coming within the next 6 months. So, we're hoping to build upon. Some of those guests that still love us and maybe weren't comfortable to come back [and not yet] and we feel good about that. But we haven't really seen, as Matt said, when you look at incident rates, our desserts as a percentage of sales continue to be 17%. We don't really see anything in scores or behavior that would give us pause.

And I would just remind you too that the breadth of the menu is just so strong and the breadth of price points continues to be so strong that it allows guests to really navigate that menu and use it in a way that makes sense for them from a consumer choice menu item, but also just from a pricing standpoint and how they want to use the menu as well. And that was actually my follow-up question, just because you now operate such a broad portfolio or involve such broad portfolio of brands and you're servicing such a broader demographic, just wondering if you've seen any signs of change in behavior? I mean, it actually sounds like you believe trends have actually strengthened to close the second quarter. But I'm just wondering, across your portfolio, have there been -- have you noticed any leading indicators to demonstrate any sign of a slowdown across the portfolio? Or are you really just not seeing anything to demonstrate that across the portfolio just yet?

No. I think generally, all of the concepts kind of trade slightly higher end, but a broad array of locations and occasions and so what I think we've seen for take has been consistent across all of it, Jeff. So like really looking at Flower Child, as David Gordon mentioned, the sales continue to improve quarter-over-quarter. And so that's primarily to go business, right, and fast casual, but we're seeing sort of the same resiliency and positive guest reception. So, I mean I just think that generally, the consumer is in pretty good shape. Interestingly enough, right, the sort of talk and the news has switched in the past month as well away from Doomsday to maybe soft landing. And you look at the Michigan survey, and it's up significantly over the past couple of months. And so I do think, generally, consumers are feeling better and it's showing up.

The final question comes from Jim Sanderson from Northcoast Research.

Wondering if you could walk through for North Italia the breakout between traffic and check and what type of price do you expect to carry through into the back half of '23?

The traffic was positive 2%, price was 8% and the mix was negative 2%. And I think we would expect probably to carry about 8% pricing throughout the rest of the year.

Any feedback on any change in alcohol mix that you would want to call out? Indication that the consumer might be trading down.

Jim, this is David. No, we really haven't seen that in any of the concept, Cheesecake or North or the other FRC concepts that have a heavier bar mix to begin with, we haven't really seen any trade down [long].

And what is your alcohol mix on average just across?

Well, that's a pretty broad question because it can be very different. And so I think Cheesecake historically is around the 13-ish range, but it can run all the way up, (inaudible) dropout might be in the low-30s or so. So, it runs the game. I would say probably Flower Child is the lowest, that's in the low single-digits because it's really just some [red sangria] and things like that. So, it's a -- it depends on the concept, Jim.

There are no further questions at this time. This concludes today's conference call, and you may now disconnect.