Cheesecake Factory Inc (CAKE) 2022 Q1 法說會逐字稿

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Cheesecake Factory First Quarter Fiscal 2022 Earnings Conference Call. (Operator Instructions). Thank you.

Mr. Etienne Marcus, Vice President of Finance and Investor Relations, you may begin your conference.

Thank you. Good afternoon, and welcome to our first quarter fiscal 2022 earnings call. On the call today are David Overton, our Chairman and Chief Executive Officer; David Gordon, our President; and Matt Clark, our Executive Vice President and Chief Financial Officer.

Before we begin, let me quickly remind you that during this call, items will be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could be materially different from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available on our website at investors.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission. All forward-looking statements made on 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 excludes impairment of assets and lease terminations and acquisition-related contingent consideration, compensation and amortization expense. 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 briefly review our first quarter results and provide a financial update. With that, I'll turn the call over to David Overton.

Thank you, Etienne. We delivered another solid quarter with total sales in the first quarter of 2022, increasing 27% over the same quarter in 2021, underscoring the strength of the consumer demand for our brands and demonstrating our ability to capture market share. First quarter 2022 comparable sales at the Cheesecake Factory restaurants increased 20.7% relative to the first quarter of 2021 and continued to outperform both in Knapp Track and in Black Box Casual Dining Indices.

Our operators did a great job of managing their restaurants and building sales. They remain focused on fostering an environment where delivering delicious, memorable experiences for our guests is a top priority. And I am proud that we were recently recognized as one of the 100 best companies to work for by Fortune magazine for the ninth year in a row, reinforcing that we continue to be an employer of choice in the restaurant industry.

To that point, our staffing levels have further improved since our last earnings call in February. We now have approximately 1% more staff members than we did just prior to the pandemic. Our first quarter sales momentum has continued to the second quarter with comparable sales of The Cheesecake Factory through April 26 at a positive 8.2% versus the same time period in 2021. Keep in mind, this is a pretty good like-for-like comparison as we are now lapping the reopening of nearly all of our indoor dining rooms.

Turning to development. While all of the sites that we have been working on remain in our pipeline, we are cognizant of the current environment and the effect supply chain governmental and local jurisdictions' permitting approvals are having on the timing of our openings. As such, we now expect to open as many as 15 to 16 new restaurants in fiscal year 2022, including 4 cheesecake factories, 4 to 5 North Italias and 7 other FRC restaurants, including 3 to 4 Flower Child locations. And we are current -- we also currently expect 1 Cheesecake Factory restaurant to open internationally under a licensing agreement.

Despite these challenges, many of which are out of our control, we continue to ramp up unit development towards our 7% annual growth goal. In addition to investing in unit growth, given the sales strength and our confidence in the cash generation ability of our business, we are paying a quarterly dividend and we'll reinstate our stock purchase program. I recognize that the environment is dynamic, and we continue to face substantial challenges with high commodity inflation, a tight labor market and further supply chain disruptions. Despite these headwinds, we remain committed to protecting our firewall margins over time. And as noted during the last call, plan to take the appropriate pricing in the summer to do so. Our brands remain resilient, and I am confident that our best-in-class operators will continue to effectively manage through this volatile operating environment.

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

Thank you, David. We were very pleased with our first quarter sales growth, showcasing our operators' commitment to excellent service and hospitality and their ability to execute at the highest levels to capture incremental sales and manage operating expenses. As David mentioned, our staffing levels continue to improve, both relative to where we began the quarter as well as compared to pre-pandemic levels. In the first quarter, we once again drove sequential improvements to both our Cheesecake Factory manager and hourly staff industry-leading retention rates. We continue to see positive momentum in hourly application flow. In fact, the applicants-to-needs ratios are at the highest levels since the pandemic began for several positions, including cooks, prep cooks and servers. And total hourly staffing levels increased by over 3% from the end of 2021 and are now about 1% above pre-pandemic levels.

The Cheesecake Factory off-premise channel, the trend remains solid and steady with first quarter sales accounting for 28% of total sales, and the annualized first quarter average weekly sales for this channel continued to trend close to twice the 2019 annual levels.

Now turning to North Italia. First quarter comparable sales grew an impressive 32% versus 2021, with improvements in all dayparts and all geographies. The second quarter has also started strong with quarter-to-date through April 26 comparable sales up approximately 18% versus 2021 levels with off-premise comprising approximately 13% of sales at North. Reiterating David's earlier comments, this is a true comparison, as we are now lapping the reopening of nearly all of our indoor dining rooms.

FRC drove similarly strong top line performance during the first quarter, giving us confidence in the developing brands in our portfolio and their ability to contribute to our overall growth. To realize these sales levels, our supply chain team has worked tirelessly throughout the pandemic to ensure our restaurants have the products they need to serve our guests. The strength of our supply chain network, including our long-term vendor partnerships enable us to continue to offer our large, differentiated menu with the minimal product disruptions and equally as important, minimal operational distractions, allowing our operators to be laser focused on delivering exceptional service and hospitality to each of our guests.

Before I turn it over to Matt, I wanted to provide an update on some of our corporate social responsibility efforts. We have an established track record of leading and operating our restaurants in alignment with environmental sustainability and social responsibility. And given the challenges we faced over the past 2 years, our resolve to contribute to the well-being of our staff, local communities and the environment we all share has only increased. Throughout the pandemic, we've undertaken significant efforts to protect the safety of all of our staff and guests. Some of these efforts include encouraging our staff to keep themselves safe by receiving the COVID-19 vaccine and booster shots, providing special vaccine pay, enhancing sick pay benefits and providing access to mental health counseling at no cost.

We have also made substantial progress on many other environmental and social areas. Let me highlight just a few. On the sourcing front, we are now sourcing 100% cage-free eggs for our restaurants and committed to working towards the transition of bakery operations to cage-free eggs by the end of 2022, 3 years ahead of our schedule. On the diversity and inclusion front, we've increased our commitment to fostering an inclusive environment with the formation of our diversity, equity inclusion and belonging steering committee and implementing several new programs, including our leaders of color program, mentoring programs and rolling out de-escalation training for all of our managers in the field.

And lastly, on the environment front, since 2015, we have reduced our restaurant portfolio, greenhouse gas emission intensity per square foot by almost 20% and recently committed to reducing carbon emissions in line with the Paris agreement, an international agreement adopted to address climate change and its negative impacts by limiting global warming to 1.5 degrees Celsius. We are working towards an annual reduction of greenhouse gas emissions with the goal of achieving 1.5-degree aligned net 0 emissions by 2050.

This is the natural evolution of our sustainability strategy and of our more than 40-year legacy of doing the right thing for our guests, our staff and our communities. Many additional efforts are outlined in our corporate social responsibility report. We expect to publish our newest report in the coming weeks. Of course, None of these results would be possible without our best-in-class operational teams. I would like to thank all of our dedicated staff members and managers for their resiliency in navigating through nonstop change while continuing to deliver delicious, memorable experiences for our guests.

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

Thank you, David. Our first quarter results reflected more stability and predictability than we have seen throughout the pandemic, both on the top line and bottom. Specifically, our total sales and key business drivers were mostly in line with our expectations. That said, operating income was negatively impacted compared to our expectations by approximately $3 million in total from slightly higher-than-expected inflation in hourly wage plus COVID-19-related sick time and natural gas costs. However, we generally believe these impacts to be environment-driven.

Now to some specific details around the quarter. First quarter comparable sales at the Cheesecake Factory restaurants increased 20.7% year-over-year. Revenue contribution from North Italia and FRC totaled $137.6 million. North Italia comparable sales increased 32% year-over-year. Sales per operating week at FRC, including Flower Child, were approximately $111,000. And including $15.3 million in external bakery sales, total revenues were $793.7 million during the first quarter of fiscal 2022.

Now moving to expenses. As usual, I'm going to provide year-over-year detail on expenses. But of course, note that there continues to be some disparity in revenues given the impact from COVID over the past 2 years, and with that, some corresponding impact to margins. Cost of sales increased by 200 basis points primarily driven by significantly higher commodity inflation than menu pricing. Labor increased 70 basis points primarily driven by higher wage rates and partially offset by sales leverage.

Other operating expenses declined 270 basis points primarily due to sales leverage relative to the prior year period and partially offset by lapping lower general insurance claim activity. G&A as a percentage of sales declined 90 basis points, also primarily due to sales leverage and a lower bonus accrual related to outperformance in the prior year quarter. Preopening costs were $1.8 million in the quarter compared to $3.9 million in the prior year period. Last year, 3 restaurants opened during the first quarter and a fourth opened the first day of the second quarter versus 0 openings in the first quarter of this year. In the first quarter, we recorded an after-tax $0.8 million charge primarily associated with FRC acquisition-related items. First quarter GAAP diluted net income per common share was $0.45. Adjusted net income per share was $0.47.

Now turning to our cash flow and balance sheet. The company generated approximately $34 million of cash flow from operating activities during the first quarter, with ending total available liquidity of approximately $424 million including a cash balance of about $184 million and $240 million available on a revolving credit facility. Total debt outstanding was $475 million. CapEx totaled approximately $29 million during the first quarter for new unit development and maintenance.

While we will not be providing specific comparable sales and earnings guidance given that the operating environment continues to be very dynamic, we will be providing our updated thoughts on our underlying expectations for the balance of 2022, including some timing nuances similar to our approach last quarter.

Based on first quarter performance, more recent trends and assuming no further material impacts from virus surges, we would continue to anticipate total revenues for the year could be approximately $3.3 billion to $3.4 billion, with Cheesecake Factory AUVs reaching over $12 million. Note that this includes the impact of the 53rd operating week we have this year.

Next, for fiscal year 2022, we now expect commodity inflation of low to mid-double digits on an annual basis, which represents a 1% to 1.5% increase over our prior outlook based on what has happened in the marketplace as a result of the geopolitical turmoil. We continue to model for year-over-year commodities pressure to lessen as we go through the year with mid-teens pressure in the second quarter and ending with high single-digit pressure for the fourth quarter.

On an absolute cost per unit basis, we continue to model commodities to be fairly stable through the year, with the variability inflation driven primarily by the comparison to the different price points in the corresponding quarters in 2021. The labor market also continues to be dynamic with a lot of moving parts. Inclusive of known minimum wage increases, we are now modeling net total labor inflation of about 6% when factoring latest trends in wage rates, channel mix as well as other components of labor. While we still dealt with some volatility in the first quarter, as you might expect, we anticipate some normalization in other operating expenses going forward. We now expect to be around 25.5% of sales for the second quarter. And with the benefit of pricing over time, we would anticipate we could end the year at about 25% of sales. with the third quarter roughly between those points.

As noted last quarter, we remain committed to protecting our longer-term 4-wall margins. However, also, as previously noted, we will likely continue to absorb short-term cost fluctuations driven by the current environment. To that end, we would anticipate taking another menu price increase towards the middle of the third quarter as is our historical norm. We are currently evaluating the level of pricing needed to regain our 2019 4-wall margins in the back half of 2022, which remains our objective. It now seems reasonable to assume it will need to be above the 1.5% to 2% referenced in February, given the increases in commodities and labor inflation versus our prior expectations.

Below the 4 walls, G&A is basically in line with our prior projections, and we continue to anticipate G&A to ramp up to $55 million by the fourth quarter which, as a reminder, includes an extra week this year.

We are now assuming preopening of about $18 million for the year to support our development plans with approximately 3/4 of the expense occurring in the back half of the year. Finally, we expect about $90 million in depreciation for the full year and for modeling purposes, we are using a tax rate of 11% to 12% for the balance of the year.

Now let me provide a little bit more detail to help with the second quarter. First, if we take a similar approach to the full year and extrapolate our current sales trends for the balance of the quarter, assuming no further material disruptions, we would anticipate Q2 to be between $830 million and $850 million in total revenue. As I stated during our last call, with the difference in commodities inflation by quarter, as well as the timing of our pricing actions. We would expect our 4-wall margins to improve relative to 2019 as we move through the year. We now expect the second quarter 4-wall margins to be about 200 basis points below 2019 levels for these reasons.

With regard to development, we plan to open as many as 15 to 16 new restaurants this year, most of them in the second half of the year. We would anticipate approximately $150 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. And as David Overton mentioned, we are paying a quarterly dividend and reinstated our stock repurchase program.

In closing, our sales trends remain solid, underscoring the strength of consumer demand for our brands. And our key business drivers and expenses appear to be returning to more historical levels of predictability. And while current inflation in our industry is unprecedented, we continue to believe the strategic pricing plan we are implementing remains appropriate and can deliver solid earnings per share and help recover profit margins in 2022, while importantly, protecting our brands to enable long-term market share gains.

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

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

Thank you for all the information. I was wondering if you could talk a little bit about -- you talked a lot about the current environment. As go forward as you can, underlying consumer conditions, I know you're not really seeing anything today, but there's kind of a question mark about what it will look like come summer or beyond?

And I just wanted to understand a little bit about the stage-gate process. So if things were to soften a little, would you just go ahead with the store development objectives in particular? Or is there some reason you would like slow up, think about preserving capital? And how could you even do that with the pipeline you have today? Or would you just be in a position to, I mean, essentially just kind of blow through it, especially as it relates to development?

Nicole, it's Matt. I think to start with the first part, I mean, it is tough to predict too far out today, right, in the environment. The one thing that has occurred, which is what we thought would happen is that consumer demand for our brands would exit the Omicron surge even stronger. And so once again, I think we've seen that occur. Certainly, our Q2-to-date sales trends, I think, are very good and would indicate that even at a slightly lower level than that, we would still be in really good shape. So I think that the business strength can absorb a little bit of uncertainty regardless of what happens. And certainly, from a capital planning perspective, while we are confident in reinstating our quarterly dividend in Q2 and our stock repurchase plan, we are maintaining a very healthy level of liquidity and a cushion in our outstanding expectations for cash flow such that we will continue with our growth plans, no matter what.

I think that what we've seen is that, that is the right course of action because the consumer demand will be there. And our new units continue to outperform our expectations. So I think we feel good. I think we have confidence that we can buffer against that given the strength of our trends. And so whatever comes to happen, we'll be prepared.

And just a follow-up. And I mean, I really -- on this one, I'm trying to understand like an unlock around store-level margin when everything is normal, and I don't even know we should be using that terminology anymore. But I was recently in a Blanco, and it got me thinking about what are some of the best practices, right? I didn't realize I think there's like 6 of them now or something. But as you just think about like now a portfolio approach, what do you see for scale or efficiencies or even culture?

And how does that make you feel about store-level margins down the road? Like what triggers that unlock because I believe the whole idea behind the acquisition was something that has an end game higher restaurant-level margin?

Sure. I think that it's, again, sort of related back to the environment over the past 2 years. It's hard to correlate even the last quarter performance to where we think we can go as a business. The underlying margin strategy around the portfolio, whether it's Cheesecake Factory, or North or any of the FRC brands is to return to pre-pandemic levels, right? So it's a very consistent thought pattern. And it may vary slightly by brand depending on the sales levels and depending on the pricing and the inflation that they're seeing. But the overarching strategy is to return to those pre-pandemic levels.

And North Italia and some of the FRC brands had slightly higher margins pre-pandemic than Cheesecake Factory. So we would still be shooting for what those are. That being said, our near-term focus on the margins is to get back to that second half of 2019 levels. I think if we achieve that, that will be a good first step to getting to the longer-term margin target.

Nicole, this is David Gordon. Just to add to that, I think when we think about the larger strategy of leveraging the bigger company for the growth of those concepts and we think about supply chain as an example, and everything that the rest of our industry has gone through recently, our ability at North and more recently, even at Flower Child to leverage the Cheesecake Factory supply chain channel, has really been a good differentiating factor to allow them to operate as well as they are. So some of the learnings and the cross-functional learning and being part of the bigger organization, we'll continue to leverage over time as we bring the other brands under more of the Cheesecake Factory umbrella.

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

I guess 2 questions. And I guess I'd be more curious about either March or April. Where is on-premises now for Cheesecake Factory versus pre-pandemic kind of if you look at however you kind of monitor utilization inside the box? And then secondarily, I don't think I heard you talk about the loyalty program. Is that still on tap for this year?

Do you want to go for it?

Sharon, this is David, and I'll turn it over to Matt. As far as the loyalty program, we're still in the coming months, looking to launch our pilot. So as soon as we get that launched, we'll be happy to share some new news around that. and I'll turn it over to Matt on the capacity.

Sharon, we're roughly on the on-premise side, between 85% and 90% of the traffic that we were pre-pandemic. So certainly, we have the capacity to continue to increase that meaningfully, right? So like, I mean, on a rough perspective, we could probably pick up another, I guess, at the $1.5 million or so annualized from this run rate on premise. And that would just get us back to where we were.

That's very helpful. Are there any particular areas of the country that are lagging there or any dayparts or days of the week where you do see a more meaningful gap versus pre-pandemic?

Well, the 1 area that I would tell you sort of universally is in the more urban and tourist locations. We are starting to see a little bit of improvement in those, but they have still lagged a little bit over time. Otherwise, it's been I would say, pretty consistently strong. As both David Overton and David Gordon mentioned, our staffing is good, but it's not perfect. The only other thing would be in those locations where we might have a pocket of opportunity is where we could have a few more staff numbers, right? But that's not a geographic specific, that's more of a restaurant-specific thing.

And then one last question for me on the [8 comp] that you have at Cake so far in the second quarter. Is that -- does that have positive traffic? I'm also curious if you're seeing kind of a negative average ticket shift to some extent as on-premises grows more quickly than off-prem?

Yes, all those metrics, this is Matt, are a little bit funky, aren't they? So in the most simplistic terms, we have 4.7% pricing and we're at an 8.2%. So year-over-year, you're picking up 3.5% or so of "traffic. " Obviously, now we measure the off-prem, which is just 1 gas per order. So the mix and all of that is just -- it's a little bit funky. Our on-premise average ticket continues to move now with -- roughly with pricing. We did see a bump up. I think as many particularly experiential dining concept saw during the pandemic, and that's been holding pretty steady. Of course, as you would expect, there's a little bit of movement around, maybe a little bit more alcohol, a little bit of settling of dessert. But net-net, we're basically year-over-year getting the price increase on the check average.

Your next question comes from Brian Bittner with Oppenheimer.

Following up on that. Is there a reason to believe traffic inside the box can and will get back to pre-pandemic levels in relatively short order? Basically, like, do you believe there's a traffic recovery still out there as we fully normalize? Or is the current mix of the business kind of the new normal we should expect?

Brian, it's Matt. Again, I'll just reiterate a little bit what I've said, so it's hard to predict what that will be from a consumer standpoint. Certainly, we've seen pretty steady performance, increasing over the past 12 to 15 months with the various stages of reopening. So I don't think there's anything that's happening that's going to be like quick. I just think that the strength of the business puts us in a position where we're going to have really good sales trends. I do think that consumers are in a good spot. We might see an uptick in some casual travel during the spring and summer that could continue to support those areas that I mentioned had opportunities for us. But those are the trends that we're seeing today. And I think it's better than where we were even in the fall. But I don't think anything happens -- it's not going to be a quick jump.

Got it. And follow-up is just on margins. Margins in the first quarter for the most part were pretty in line with what we were all expecting, except there was a delta where expectations in that operating expense line, I believe you expected that line item to come in around 25.5%. So what really specifically surprised you in that line item? Is that where the nat gas incrementality was? And is that what's kind of pressuring that line item potentially moving forward?

Yes. For sure, natural gas was part of the problem. Obviously, it was -- seemed to be on the right trajectory for us in January and then certainly with the geopolitical news, it spiked back up to even worse levels than we saw in the fall. The other area I would say that we saw a little more pressure than we originally anticipated, was in some of the building repairs and maintenance. And that goes hand-in-hand with some of the supply chain and labor constraints that you're seeing, right? I mean just to make sure you can get a plumber or an electrician to come out and fix a piece of equipment or something. It's a little more expensive today, obviously, than I think we expected based on some of the demand. So those are the 2 areas I would expect some of that to continue into the second quarter. Hopefully it begin to normalize after that, but that's where the pressure was.

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

Just looking for some insight into your core customers' behavior with some of the recent macro factors that we've all been contending with, meaning that the jump in gas prices, war in Ukraine and inflation. Have you seen a change in behavior in terms of frequency of your guests or even how your guest spend is impacted?

Jeff, this is Matt. I don't have like the specific data because we're not obviously yet tracking those guests on a site visit-by-visit basis. But just what I would say kind of interesting in our opinion is the first quarter had some noise to it starting with Omicron. And then certainly, the start of the war and the inflation spiked up a little bit more. But as we look at late March into mid-to-late April here, it's been very consistent and very predictable kind of Cheesecake like, I would say. And so that's with all those factors baked into it. And so I guess that's a pretty good sign.

Okay. And then just 1 quick follow-up, similar topics. So gas price is up. I'm curious how that's impacted the supply chain or the distribution costs, it sounds like that's embedded in some of your guidance. And then just as importantly, the third-party delivery fees, have you seen any movement there in terms of those fees moving higher?

Jeff, this is David Gordon. No, we haven't on the delivery piece. We're very stable. I haven't really seen much of a change at all. And historically, gas prices haven't really impacted our core guests. They're shielded from that pretty well. And we -- maybe as Matt said, in those first couple of weeks of the war, we saw a little bit of pressure there. And that also could have been people just go to their television watching what was happening. But things seem to have normalized since then.

And Jeff, this is Matt on the cost side with respect to that. There's a little bit of impact that's embedded in that slight bump up in commodities for distribution, right, for every -- I don't know the math in front of me, but probably dollar of diesel at some $0.01 per stocks or whatever it is that's being delivered. But the other things are also with respect to like -- well, there was the Avian flu. I mean, one more thing thrown at the restaurant business, and that obviously is impacting egg prices. And so there's just kind of, I would call it, the global impact of all these moving parts.

In totality, we're at about 2/3 booked for the next 3 quarters, pretty close to our historical levels. And as David Gordon noted in our prepared remarks, our supply chain team has done an amazing job. What wins today is execution and making sure that you can deliver those experiences and have the products, and they've done a great job. So we feel good about generally speaking, the supply chain side of it.

Your next question comes from the line of John Glass with Morgan Stanley.

Can you first just go back to the sales in April. If you looked on a 3-year basis, and I know we're no longer doing that, but it's a pretty big improvement versus the first quarter and even the last 3 quarters. Do you think it's explained by the industry getting better, so you have a gap in the industry, but the industry has gotten better, you continue? Or do you think this has driven more idiosyncratically by Cheesecake, sort of even further widening that gap? And you talked about there have been holiday shifts or to correspond with reduction in mass mandates, for example. What happened, I guess, in April that did drive a pretty material, at least what I look at as a material uptick in the business versus prior several quarters?

John, this is Matt. It's a topic of a lot of discussion here. And you're right. Etienne and I were literally 5 minutes before the call talking about that metric. And 1 of the things that we are highlighting, and I'm happy to talk about our thoughts on it. And I think that's why we're moving a little bit more towards the year-over-year number because 3 years on, sometimes it's a little bit hard to say why was it so much better in 1 month than the other. Maybe there was something 3 years ago that happened that caused some of that delta. But it is a very strong versus 2019. And I think that some of it is the rising tide, although I think some of it is also a Cheesecake Factory. We've shown the ability to keep the on-premise growing while also keeping the off-premise dollars stable, right? And so that net is just moving the dollars higher. And I think it's kind of also what we've seen throughout every time there's been a surge or some other weirdity, it comes back a little bit stronger, and that might be sort of the pent-up demand. People are sick of it, they're taking off their masks that you're talking about.

So I think that all of those factors, we continue to also see that there are challenges in the industry that some restaurants aren't able to stay open. They're not able to have all the product. And I think we continue to believe that having great staff and great product is going to help us grow the business over time.

And just filling up on an earlier question about sort of the macro environment. Understanding you're not seeing the weakness. In fact, you're probably seeing the opposite right now. But you've been around a long time as a brand. What are the leading indicators in your mind either internally that you see or externally that you see that signal to you the consumer is slowing down? Are there metrics you look at internally? Or are there correlations you look at whether it's stock market or employment. What are the things that you look at to dictate your view on the consumer going forward?

Yes, Joe, that's really interesting. And I would say a couple of things about how we think about our business and managing it. And just to go back to one of my earlier comments, the late March through late April stability, predictability of the sales is one of the things that I really look at from a leading indicator perspective, the tighter the bands of performance, the better we feel going forward about our consumer, right? Because that means their behavior on a day-to-day basis isn't being moved around by some of these other factors anymore, and they're just deciding that this is the way that they're going to go about their life. So I think that, that's a positive indicator for us.

Certainly, we have probably more metrics than anybody in the restaurant industry that we look at in terms of dayparts and days of the week and all of that. But that sort of consistency is a big piece. I think the other external side of things that we watch a lot are sort of the financial health of consumers, right? So wages and balance sheet of consumers. And frankly, they're doing well. Not everybody is keeping up with inflation, but most of the lower-end income is actually ahead of inflation. So that group is at least holding on.

And then if you're a higher-end worker, then your 401(k) and your real estate is probably doing just fine. And I think the latest data that I saw was there's probably $2.5 trillion more of savings in bank accounts today than pre-pandemic. So all of those indicators are good, I think, going forward.

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

My question is on the pricing decision you have coming up. And I just wanted to ask how you're thinking about the brand's pricing power? And what you're looking at, I guess, in relation to the competitive environment or however you want to benchmark it with respect to this decision? Or is it just merely a decision that you need to just take what you need to take in order to protect margins? I guess, how do you balance that with the potential consumer impact that you might see from a more aggressive pricing posture?

Sure, David. This is Matt. I think this might dovetail from John's question even a little bit of what's specific to Cheesecake but I think not only are we executing well, I think that we have a more stable pricing strategy than some of our competitors have implemented over the past 6 months where they've jumped up in 1 step function 6%, 7%, 8% all of a sudden, David Overton's strategy is, over time, we don't want to get behind, but you don't want to take it all at once, right? And so I think that, that continues to be our focus. And maybe that is also helping our sales trends.

We are looking to balance the consumer environment and get back our margins at the same time. If things hold where they are today and don't get worse, that seems very viable, right? I mean we're at not quite 5% pricing. I think the latest industry data I saw was that full service was at 7.5% pricing. And that was before some of these latest upticks. We'll see what happens. I mean you're reading about it every day another company has taken other couple of percent here or there to make up for that. And so we're still 2.5 points behind that. So on a relative basis, as well as from a sales strength basis, I certainly think we're in a good position to accomplish both of our objectives of growing comp sales and protecting margins.

And I would just add, David, that the breadth of the menu continues to help us in every part of the business and it helps us in pricing as well to be able to take pricing across breadth of menu of 250 menu items compared to some of our competitors with a much more limited menu. From a consumer standpoint, our pricing may not be as noticeable, which helps us to continue to drive the traffic without having as much of an impact.

Great. That certainly makes a lot of sense. I guess 1 quick follow-up on that. I guess the magnitude of your average check is likely above I guess, some of the averages that we would typically see in casual dining. So do you carve out a certain subsegment of kind of your peers or however you define it to look at what they're doing on the average check to make sure that, I guess, the absolute value of your check doesn't get too high for your core consumer?

Sure, David. This is Matt. We monitor about 2 dozen competitors that have a national presence in at least 50 markets. And those competitors range from a fast casual $10 to $12 check average to a steakhouse $60, $70 average because, as David Gordon was mentioning the breadth of the menu. We don't have a core consumer per se. We have a lot of different consumer groups that come in. And our objective is kind of to remain competitive with sort of the overall set of restaurants.

That being said, the fast casuals are taking double digits and the steakhouses are taking double digits, even within, I think, casual dining our relative value proposition is improving because most are still taking over the 4.75% that we're at today. So wherever they were at a year or 2 ago, we're improving on our positioning versus that today.

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

So I had a follow-up on quarter-to-date average weekly sales running at 240,000 per week, which is a meaningful step-up from 1Q. Can you just expand on what you saw throughout 1Q and into 2Q and when you saw trends inflect? And then you had talked about the predictability of sales trends, which is a great sign. How are you thinking about the sustainability of these average weekly sales levels taking into account seasonality as we think about extrapolating trends through the rest of '22?

Sure, Lauren, this is Matt. I think as widely noted, the Q1 was impacted with the Omicron surge in early January and actually probably all the way through that first period. And then there was a little, I would say, bumpiness well within our expectations as we came out ahead of them on the total top line. But in March, when some of the turmoil in Europe started, certainly, there's also some seasonality component embedded in the improvement from Q1 to Q2 as well.

I think Q2 and Q4 are historically the 2 higher average weekly sales quarters compared to Q1 and Q3. Q1 and Q3 of January and September, which are the 2 lowest months of the year. So that usually weights them down. So right now, we're running at a 12.5 million AUV, as we noted in our prepared remarks, we're still targeting that $12 million, right, because there is seasonality. We're at a level that's higher necessarily than potentially we would have been in some of those other months. I think that being said, we're probably running a little bit ahead of where we thought we would in April. The trends are a little stronger than we had originally anticipated.

Great. And just on real estate. Can you just talk about what you're seeing from a real estate perspective at this point, just competitiveness of sites and the cost of real estate?

This is David, Laura. Really nothing has changed from the cost for real estate for our brands. We're sought after, whether it's Cheesecake Factory or now in North Italia. So we're still going to maintain a site-based strategy. We still have fantastic sites that are in our pipeline. And as we've talked about moving through the rest of this year and into next year, I don't see any reason why we won't continue to march towards that 7% growth target and be able to achieve it.

Your next question comes from the line of Dennis Geiger with UPS.

Matt, you spoke to the current competitive environment briefly suggesting it's a likely tailwind right now. I'm curious what your thoughts are with respect to sort of the mall traffic dynamic going forward, the competitive set within mall and in general impacting you folks going forward? And just your thoughts on how that might -- how you might benefit from the competitive dynamic going forward or how you might be impacted from that?

Sure, Dennis. This is Matt. I think one of the things, again, to sort of bring back the old story about the malls for us. When things were basically shut down and when we got to 90% of our volumes, it just reiterated our thesis that were a destination. I think as malls are actually coming back and you're seeing the reinvestment take place in the higher properties, and that is the natural cycle, it will only benefit us. And yet at the same time, many of those have seen a little bit of pullback in terms of the restaurants that are in the malls, right? Anything that was interior in a mall during the pandemic had a hard time. And so I think competitively, that provides us a benefit as to sort of the global perspective that there's anywhere from 5% to 10% fewer restaurants, and that's also true within the mall properties.

But I think generally, any improvement that we see is only going to be a further benefit for us at this point in time.

That's helpful. And then just last, as it relates to the digital technology front, kind of just curious if you could provide the latest update on sort of what's working, where you're at and sort of where some of the biggest opportunities are from here that can either enhance sales or enhance margins in subway?

Dennis, this is David. So we continue to really look into uses of technology in the kitchen and where we can increase productivity and remove some of the complexity on our made from scratch kitchens. And that's going to continue to be where we focus the majority of our energy when it comes to technology and technology enhancements. We want to continue in guest-facing positions to be an experiential dining choice and give people the type of service and hospitality that they want. That also means that we'll look to continue to find ways to speed up their experience, that means at the end of their meal, they want to continue to use the QR code that we put in place to pay their bill to take a few minutes off of their dining experience. We'll allow them to do that.

We're still continuing to use text paging for guests versus handing on pagers and those change we made in the middle of pandemic, continuing to use technology to make the off-premise experience as easy as possible and frictionless as possible from texting guests in their car, allowing them to use curbside, not have to walk into the restaurant to make that process faster. So our team is continuing to look at each of those avenues. I think we've said before, we're not likely to be putting tablets on tables and some of those more traditional things that some of our competitors may be doing that may work for them that we feel isn't quite right for us. But that doesn't mean that we're not continuing to evolve our own technology and looking ways to leverage, especially as I said in the kitchen.

Yes. I mean good examples of that are taking the inventory management systems that we've had at Cheesecake Factory and deploying them to North and FRC being able to drive efficiencies in our food costs associated with that, right? So there's benefits of scale and technology that we have that we can also use across the portfolio, not just the Cheesecake Factory.

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

Just 2 on North. One, Matt, I was hoping if you can give us maybe that average weekly sales figure for the second quarter, I know you gave the '18 comp -- but if you could frame the average weekly sales like you did for Cheesecake, that would be helpful. And then a question on the margins at North. It seems like that brand is still somewhat of a drag on the overall restaurant level margin line. You gave some good color in the deck. Is it -- is there something about those new units that really different from the older units? I think there was about a 500 basis point disconnect in the margins for some of those older units. I'm just curious if there's something different or if in fact, it does take 3 to 4 years to those new units to ramp up to full productivity?

Yes. This is Matt. I'll answer the second part. I think Etienne has the data on the first part. It's really about where staffing has been for the newer unit and rebuilding those teams. And we've heard about that from some of the other larger national casual diners and the impact that it's had to have to get staff back up to have to train all the while you're still dealing with attrition, et cetera. What I'm happy to actually see is that we're starting to close that gap between the 2 buckets. And I think that we have a good runway right now that we're working on some of the food efficiencies in North. We took some additional pricing and continuing to close that gap. We'd like it to be closer to 2% to 4% than the 5%. So we're not that far off. So I guess I'm optimistic that we're making progress. And most of that really is just around the ability to be as productive as possible and getting essentially those teams that were brand new a year ago up to speed.

The quarter-to-date sales are at 150,600. That's compared to the first quarter, we were at 139,900.

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

I guess I'll just follow up on the North Italia's subject. Looking at average unit volumes, new unit volumes, same-store sales, you guys really have quite a concept on your hands. I mean, the numbers are pretty amazing. What are you seeing in terms of your experiences in terms of where it's doing extremely well, where it's doing well? Are you beginning to kind of think about potentially different types of sites and maybe different types of customer cohorts and maybe what the concept was designed to achieve but actually is achieving what -- based on some of the results that I would assume at least from a top line perspective, that are in excess of your expectations?

Thanks, John. This is David. That's a great question. And we're happy with those results as well. And I think that what we've seen across geographies is the North has been very stable very similar to Cheesecake as you talk about who the consumer is and what different cohorts, it works very well for many different cohorts. Maybe it skews a little bit younger, but you also see families at a North, which gives us all the reason to believe in every geography where there's a Cheesecake Factory today in every market, there's no reason why that couldn't be in North in each one of those markets as well. We haven't seen a disparity in sales performance as we've grown and we opened restaurants in Florida, which is I think where you are or in -- we'll be moving into Atlanta here towards summer, and we're excited about that as well.

So we think that -- the strength of the brand is that it works everywhere, has a strong consumer base with appeals to a wide variety of people. We know how popular Italian food is generally. And those teams as they continue to execute really well, I think it also offers a little bit different ambience and a different feel than what's out there in traditional Italian "chain restaurants. " And along with the bar program, it's a very strong bar program with a great design. So we don't see any reason why we won't be able to sustain those sales levels and continue the growth, and we're excited to hopefully be able to grow North at that 20% growth rate that we've talked about in the past.

And you're right, I am in Florida and the unit in Brickell is an exceptional one. And I'm sure there's probably something near weight right now at 6:00 at night. So that's -- you've definitely done something very well with that unit and that location and execution. So congratulations. Let me change the subject. Matt, you made the comment that your commodity guidance basically assume that commodities would stay steady from this current level. So the question I'm going to ask, do you have any deeply in-the-money contracts? Like, for example, is your chicken contracted extremely well relative to Spot is there anything else that you have in the basket that's contracted extremely well relative to Spot? And I guess as we look at the grain markets and the potential influence on protein, does that give you any cause for concern or worry as we get later into '22 and possibly into '23, that some of your suppliers as their own costs are being pushed up that they may have to push on higher cost to you and the rest of the industry?

Yes, John, it's a really dynamic time for sure, in terms of contracting over the past 6 months would never see anything like it. I would say it's pretty balanced. I don't feel like we're outsized, positive in any of them, but we're not outsized negative either. I think we've looked -- our strategy and we just met on this again this week. We've increased the frequency of our meetings and reviews and what we're booking when our strategy is stability and predictability. I mean that's what Cheesecake has been built on. If we can do that, we can know what the outlook is. We can take the right pricing. We can give the right perspective to Wall Street. And so we're trying to ladder in more. We're trying to develop win-win relationships with suppliers. We've looked at doing things more like having it tied to the direct input costs like chicken to corn, right, so that you take away some of the other variables. And I think that, that strategy has been working well.

Certainly, the longer-term perspective on grain, I think particularly the wheat side of things, it could be some risk for next year. But as we stand right now, I think that a lot of that has been built into this year already. I mean we're certainly at a higher inflation than we ever anticipated it could be. So I think that most of that has been built into expectations at this point.

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

Great. Shifting from the commodity to the labor front. I think you mentioned now for 2022, you're expecting 6% inflation. I know previously that was maybe closer to 5%. So just wondering, I think you mentioned the shortages are really no longer you're back to where you want to be from a staffing perspective. And clearly, you're an employer of choice. I'm just wondering, is there a conscious focus on increasing pay and benefits to retain your best? How are you thinking about retention from a labor standpoint and maybe that's the driver of the uptick in inflation just in terms of your thoughts from that perspective.

Sure, Jeff, this is David. I think we are happy that our staffing levels are roughly 1% better than pre-pandemic. Obviously, with the sales levels where they are, we want that to continue. As Matt said earlier, there are some markets where -- or some particular restaurants where there's still a little bit of pressure. Most importantly, we want to stay competitive. And wages certainly across the industry are going to -- have gone up and not just our industry, but whether that's retail or others, they continue to pay competently as well.

So we're not going to fall behind. We want to make sure that all of our operators know what the competitive market looks like. We provide them with information on a monthly basis so they can see what the pay rates are and the geographies around them. And proactively taking care of people and the way that we have historically. And so that's probably where some of that pressure is coming from. As Matt said, it seems as though it's flattened out, and we wouldn't anticipate more growth from here. That's how it feels today, I can't predict the future, but we are going to stay competitive, and we need to continue to not just retain those we have, but attract new staff members as sales continue to grow.

Understood. And then just following up on the commodity front, the commodity basket for 2022, now it sounds like it's pushing maybe mid-double digits versus the prior low double. I'm just wondering if you can give us some context. I know you mentioned easing through the year, but maybe what was the basket in the first quarter what you're assuming for the second quarter? And just so we can kind of get a sense for the downward trend through the year.

Yes. I think -- Jeff, this is Matt again. I think I may get us a little bit off, but I think of the total for cost of sales in the first quarter was like 13% to 14%, Etienne jump in, if I get this off here. And I think similar in the second quarter now, and then low double digits in the third and high single digits in the fourth. And so that's about 1% to 5% more than before.

Got you. And just to clarify, Matt, your list. I mean your comment on the call for the second quarter, I think you said restaurant margins 200 basis points below I think you said below 2Q '19, which looking back was 16.8%. I just wanted to make sure I got that right that, that was the reference point you were making for the second quarter of '22.

Yes. We're comparing to -- we were comparing to 2019 2Q on quarter-to-quarter, 3-year, I guess, 3-year lap basis now.

Got it. So you're assuming a high 14% restaurant margin for the second quarter of '22.

Yes. And the math is pretty simple, right? So if I just said 13% to 14% commodities, or 5% pricing. It's an 8% gap times 23% on the P&L, you're almost there, right? It's really driven by that environment and just timing of when we want to recapture that in the pricing and where we think commodities will go.

Your next question comes from the line of Brian Vaccaro with Raymond James.

I was hoping to circle back on the recent sales strength that you're seeing in the quarter-to-date. I'm curious to what degree that's being driven by regional snapbacks in previously lagging regions? Or are you also seeing the likes of the Florida or Texas also hitting new reopening highs? And also, to what degree is the improvement may be being driven by higher effective capacity with staffing improved that might have constrained sales in the last few quarters? Maybe just touch on those 2 dynamics, if you would.

Yes, Brian, this is Matt. I think it's a pretty balanced sales strength. We have seen -- I got to tell you, it's a little bit hard to pinpoint, because we're probably what, 2%, 3% better than we might have expected as we were kind of factoring pricing lapping the year and that's 5%. But because there's so many different variables that have gone on, we have seen at different points in time where markets that actually surged so high a year ago March their comps might not have been as strong in March, and so it's all equaling out. But in order to get to that comp level in those average weekly sales, you got to have a pretty broad-based strength. So we're pretty good. I think it's probably fair to assume we're getting a little help from staffing because we've gotten a little bit better. So that can only help us. And if we can sustain that, that's a benefit. But I think it's probably a little bit of everything.

Okay. Okay. And on the margins, I just wanted to go back to the second quarter of '21. I think back then, you had called out several costs like overtime and bonuses and training costs. I'm just curious, to what degree have those costs started to normalize? And have you embedded those in your Q2 or annual guide?

So we've seen improvement. I don't know it's normal, right? I mean over time it's better than it was, but not as low as pre-pandemic. Training costs are better than they were, but not as low as pre-pandemic. And what's embedded in our outlook is kind of a continuation of what we're doing now.

All right. And sorry if I missed it, but I think earlier in the call, you said that you expect to recover your '19 margins in the second half. And I know it's a dynamic environment. But everything you know today, what level of pricing would you need to take in that third quarter to achieve that margin target?

So that's our objective. We're still evaluating the specifics on the pricing, and we still have a little bit of time. So we kind of want to wait and see. What I will say is last call, in February, we were thinking it was 1.5 to 2. And certainly, the inflation we're talking about is a percent higher than that. So that gives a range that we're contemplating at the moment. But we haven't settled on what that exact number is yet.

Your next question comes from Jon Tower with Citi.

Just real quick. In terms of how you're seeing customers use the brands, particularly The Cheesecake Factory that stores are fully reopened there. Are you seeing customers use both channels at a similar frequency? Or are you seeing -- or are you seeing customers come in at a higher frequency and using 2 channels off-premise and in-store? Are you seeing unique customers come back to the brand in each channel? I'm just curious to see -- to hear from you how customers are actually using the business and what the overlaps are between the off-premise and in-store?

John, this is Matt. I think it's probably a little early to tell, to be honest. Well, we noted that the off-premise dollars are staying steady. So those guests that are using that channel haven't stopped and yet we're still growing average weekly sales, meaning more people are coming into the restaurant. Again, we're not tracking those transactions. We do do annual research. And so normally, that's kind of in the middle of the year. I would anticipate we kind of look into some of those questions at that point in time. But I don't think I have a specific data point that I can point you to other than it feels as though those 2 key attributes, right? Steady off-prem increased utilization again of the on-prem. But I couldn't tell you they're new guests or the mixed yet.

Okay. And then just kind of on the off-prem strength in and of itself, I mean, obviously, very impressive in terms of the absolute numbers and the percent mix. Just curious to know what you're doing as a company to ensure that level of sales sustained into the future, meaning, are you throwing more marketing dollars behind the digital channel specifically targeted towards the off-premise occasion? Are you doing things like placing spending some money on, say, DoorDash, your delivery provider to ensure that you're right at the top of the search engine for the app? I'm just curious how that is -- how do you expect that to persist?

Thanks, Jon. This is David. In Q1, it really wasn't until March that we started doing some off-premise promotion, and it really wasn't much comparatively to what we did during the pandemic. We ran a DoorDash offer that was 20% off of first people had never worked before up to $5 and a small online ordering offer. But our intent moving forward and we've seen thus far when we've done no marketing because of the increased awareness we got during the pandemic is we think we can hold the majority of that off-premise without having to overspend on marketing dollars and continue to use our marketing dollars to just increase brand awareness with paid search and social awareness and some paid social.

The good news is that we know if we do need to pull that lever that we can and that it works and whether that's through a specific time frame that we're trying to drive sales or trying to reach out to acquire new guests. We know that whether it's through DoorDash or online ordering channels, we can achieve that. So we feel good about the money that we didn't have to spend in the quarter. Hopefully, that will continue. And when we do spend, it will be very strategic.

Got it. And then just lastly, on the absolute dollar spend or better the percent spend of marketing, I think in '21, it was like 60 basis points of sales. In terms of thinking about this business into the future. Is that the right range of where you expect marketing to be over time? Or do you expect more dollars and, therefore, more -- excuse me, more percent spend going forward just to keep that awareness high?

I think we can keep it there, Jon, this is Matt. But keep in mind that the other brands like maybe a North or a Flower Child, those actually do have a little bit of a higher percentage. So they get bigger over time. As a company that percentage might creep up a little bit. But I think we're pretty comfortable on the Cheesecake side.

That concludes today's question-and-answer as well as today's conference. Thank you for attending. You may now disconnect.