Hello, everyone. I'm Brian Mullan, restaurant analyst at Piper Sandler. We're pleased to have David Gordon and Matt Clark from The Cheesecake Factory team. Thanks for being here today.
Good morning.
It's great to have the opportunity to tour North Italia with you both yesterday and a group of investors. You know, this being kind of a growth frontiers conference, maybe we could start there. Some of the brands with smaller today, but growth brands. So just starting with North Italia, top line growth has been fantastic. The same store sales are up 30% since 2019. AUVs, I think, annualizing at about $8 million. You know, on the margin side, you showed some nice leverage in the second quarter. You talked about having some planned actions for further improvement in the margins of that brand. So could you maybe, just to start, elaborate on what those actions are and where you are in the process on the North Italia side?
So North is now really fully integrated under Cheesecake's umbrella. We're gonna continue to leverage our scale and supply chain as much as we possibly can to improve margins. We've done that thus far in North. That's been a good part of our gains, being able to leverage the scale of Cheesecake Factory, trying to find like products to purchase that still work for the North brand, but we can get it at better rates than when North was an independent concept by itself. So also made incremental improvements just in labor productivity, trying to take some of the operational expertise at Cheesecake Factory, some of the systems and processes, put them into North Italia from an operational standpoint. Throughput's better than it was previously.
I think some of the sales you're talking about, those sales increases, have come from some of the focus around taking reservations, not taking reservations, how to get the fast throughput that we've historically been known for at Cheesecake. So we'll continue to leverage all of that moving forward as well.
Thank you. So to follow up, sticking with the brand, you know, can you maybe at North, talk about how you want investors thinking about the target unit economics for North as things stand today, you know, after taking into account great AUVs, but also the margin work you just discussed and, and some of the construction cost inflation? So, you know, from here, how do you want investors thinking about that?
Yeah, it's definitely accretive to the business. I mean, that's one of the reasons that we made the purchase overall and why we're directing capital towards that growth vehicle. You think about the profile of sales to investment, about 2:1, and then margins, you know, in the mid- to upper-teens, ultimately, as things stabilize in a mature level, and that puts you into the low- to mid-thirties on a cash-on-cash basis. We think in full service today, that's basically best in class. We feel like, particularly in the Italian space, number one cuisine in the United States, still growing, outperforming, that there is a lot of white space to operate with. A little bit more contemporary and benefit from the scale, but still have people believe it's their local Italian concept.
The margin profile looks very strong. The alcohol is 25%-30%. You know, that definitely supports it. But at the same time, that margin includes making all the pasta fresh in-house every day and all of the culinary aspects that we bring. So it's a pretty good balance.
Okay, thanks. I'm gonna pivot to another brand. Oh, there we go. Flower Child. You've said you believe... I think it's gonna be under the Cheesecake Factory umbrella by the end of the year. You know, I'm hopeful that this decision, maybe investors will pay even more attention to it. But maybe to start, can you talk about how many Flower Child units there are now? How do you think it's positioned in the marketplace? Maybe remind everyone what the AUVs are, because I think maybe that part gets missed.
Sure. There's about 33 Flower Child today. We have a couple more that we, we wanna open up before the end of the year, this year. We will be fully integrated into Cheesecake by the end of the year, if not early next quarter, in the first quarter. We would anticipate to be able to leverage the same scale of Cheesecake. Flower Child was a concept we think is very unique. It's a high-end, fast casual, is what we like to call it, more of a lifestyle brand. It has sort of a healthy halo, but there's something there for everybody. It's not- doesn't skew particularly only female, as an example. You can go to Flower Child and get macaroni and cheese and steak, and all the things that everybody loves to eat, loves to eat.
But it's higher end because the hospitality's a little bit greater than you're gonna get at a typical fast casual. You're gonna order at the counter. Everything is made from scratch. It's not an assembly line, where you're just building a bowl type of experience. The food's gonna be brought to you. It's gonna be on china, real plateware. You're not gonna have to clear your own plates. So, we think that it's unique in that way. Has very highly designed, beautiful interiors. Does about 55%-60% off-premise sales today, so that's really grown throughout the pandemic. AUV is around $4 million as of today, and about a 60/40 lunch to dinner mix.
That's great, and the design is a good segue. And so I was gonna ask you about the format, the physical format of the store. Do you have a standardized format that you feel good about, or is that gonna maybe differ by market? And does bringing this brand under the umbrella... We talked about the scale benefits, but does this potentially lead to maybe accelerating growth for that brand?
Well, we would anticipate once we bring it under our umbrella, we'd wanna grow it about a 20% growth rate-
Yeah
... same as we're doing for North Italia. I think that Sam Fox and the team there have done a good job of refining the concept over the past 12 months. Just finished rolling out a kitchen management system to make the throughput even faster, to ensure that as that off-premise grows, that the in-restaurant dining experience is fast. We want guests to be able to get their food within 8 minutes. And as the off-premise grew, it was a challenge getting the throughput that we needed. So putting in the kitchen management system, I think, has smoothed out operations.
... there's also the ability for a guest to order off a kiosk, if they'd like to do that, and make that even faster, or order off an app, through our loyalty program. Okay.
Right. Just to kind of touch on your point about the AUVs and the model, you know, at 4+ million AUV and about 3,500 sq ft, it's about $1,200 sales per sq ft. I think that is very unique in this space, and continues to be a focal point. In addition, over the past couple of years, we've been really focused on refining the business model to get the margin structure right. So keep in mind that while North Italia has been around for over two decades, it hasn't been quite one decade for Flower Child, so it's still an emerging brand in that respect. But overall, we would expect the return profile to look very similar. About a 2-to-1 sales to CapEx.
It's about a mid-teens margin profile, which puts it into the low thirties from a cash-on-cash perspective. So both brands, highly accretive to the core business.
Okay. And then on, you know, on development, just sticking with development, when we put it all together, North, Flower Child, plus The Cheesecake Factory, some smaller FRC brands as well, current guidance for the year is to at least up to 20 openings. Maybe can you just help us with a degree of confidence to get into the full 20 this year, and then maybe anything on the cadence between 3Q and 4Q, since we've heard from you?
The majority, I think, are gonna probably fall into Q4. We have 13 more, I think, to get open this year. You know, some of the standard pressures you've probably been hearing about for the past couple of days are still out there. Permitting is still can be a challenge, but overall, things are as stable as they were six months ago. We're just trying to fill our pipeline as much as we possibly can as we look to, to next year to ensure that that, you know, roughly 7% unit growth target that we've set out there is something that we can continue to achieve, next year and moving forward. The breadth of concepts gives us, gives us the flexibility, I think, to do that.
Some of the supply chain issues, you know, it can still be a challenge, but they're not like they were 12 months ago. You know, getting big pieces of equipment, we've done a good job of ensuring that we have backup equipment if something doesn't show up. But the things that are out of our control, you know, whether a new, you know, a new person is in a role in a city, there's not much we can do about that. There's a lot of new people out there, which can slow down permitting, but other than that, we feel, we feel good about where we are right now. And when we do open, we just opened a couple of Cheesecake Factories just recently, one outside of Charlotte and one on the west side of Florida. Business is booming.
You know, so the demand is there, and so it gives us a lot of confidence that, you know, the real estate selections we're making, we're gonna hit the returns that we're targeting.
Okay, thanks. I'm gonna pivot to the core Cheesecake Factory brand. Maybe try to frame this in terms of the industry. You know, I think right now, for the industry, on a year-over-year basis, maybe traffic's running slightly negative for the industry, just in recent months. I know on a multi-year basis, it's better, but there's menu pricing that's running through for much of the industry that's above what it would have been historically. I think most people understand you've had to, the industry's had to, you know, account for the expense inflation. But how do you think the industry will approach this early next year? Do you think... Can we get back to a world where it's up one to two, or is there still some sticky inflation?
I know we all want to get back there, but maybe it's gonna take a little longer. Then how do you see Cheesecake Factory operating within that industry framework?
Sure. I mean, I think, look, everybody is going to, in the industry, need to take pricing to offset their inflation. Generally, inflation in the industry looks pretty homogenous, depending on geography, but, you know, take nationwide concepts, it's, it's pretty similar. It feels like the entire industry has been able to catch up. Part of that has been a much more stable cost side this year, right? Wage inflation, below historical levels for the industry right now. Commodities seem to be returning to kind of that more normal, low single digit level going into next year. So those things remain. I feel like the industry is, is positioned to be in a much more predictable and manageable situation, get back to that 2%-3% annual average pricing, to, to offset inflation.
You know, some of those things that did occur, whether it's in building maintenance or other areas, I think that that cost was sticky, but that was built into the pricing that everybody's taken. So I think we're just now at a different level, and hopefully now we can move forward kind of in a more consistent pattern to historical behavior.
Okay, and then this is more of a consumer, kind of on the consumer, but specific at your brands. I think on the call last quarter, you know, there was some... Mix was down, but I think you articulated the point that the incident rates at your brand was actually above 19 incident rates. It could be dessert, it could be alcohol. I think the underlying message was, or if I understood it right, the consumer is actually holding up quite well, that might be indicative of that. So despite all the recession fears that are very prevalent. So, you know, do we have that right? And then how are you just feeling about the consumer as we sit here in early September and through the balance of the year?
I think you framed it exactly right. That if you look at what happened in 2021 and 2022, it was the revenge spending. Everybody knows that. People were, you know, going out and ordering an extra drink, an extra dessert. That really happened, right? And we saw that where incident rates, you know, that's the aggregation of the market basket that a consumer would purchase in Cheesecake Factory or any of our restaurants, was materially elevated from historical patterns. And look, we've been around for 45 years. So before the pandemic, we had 40 years of trends. People pretty much consume the same way year after year. What we're seeing is a reversion to the norm, right? I think it's a good thing.
I think what we're seeing is a reversion to the norm in terms of how the consumers are going out to eat on a weekday versus a weekend basis, a day part, and, and, and what their attachment rate is, right? So if you look at our dessert rate of 17%, it's still above 2019.
... And so we feel good that people coming in are getting great experiences, they're buying what they want to buy. And yeah, it's a reset versus sort of the post-COVID waves, but it gives us the ability to say, "Look, if we go forward in a fashion that's similar to the pre-pandemic, the cost inputs are stable." You know, that's a pretty good setup.
Okay. I wanted to talk about a new initiative, Cheesecake Factory brand around loyalty. I believe you launched a national program in June. You shared some pretty encouraging loyalty stats on the 2Q call. It's early. Anything you'd be able to elaborate on today, you know, at a high level, what are you trying to accomplish with the program? Are you still thinking you'll be able to do some targeted marketing later this year around loyalty, maybe in the fourth quarter? And then could this be a tailwind as early as next year, or should we be thinking a little longer out?
So it's been about three months now since we launched nationally. We've never had a traditional CRM, so our overarching goal is to get as much data about our guests as we can possibly get. Start having more of a one-to-one relationship with them so that we can do some targeted marketing, whether that's promotion or not through promotion, to drive incremental traffic, maybe drive some check. We haven't really shared yet where we are, other than the acquisition numbers are greater than we had anticipated at this point, so there's a lot of demand. It's not a typical points-based program, so when it came to acquisition, we weren't sure how people were gonna feel about not knowing how many points they would need to get something. When we asked our guests what was most important to them, reservations was first and foremost.
Access to getting a table with Cheesecake. So that's really the primary driver of why people are joining, is because they get access. That's the only way to get a reservation, is through the program. And then the other reward is they get a complimentary slice of cheesecake on their birthday. But we're happy so far with acquisition, and the activity, people actually using the program thus far has been greater than we would have expected. So yes, we'll do some small targeted stuff in Q4, see how it goes, and then really launch fully with more enhanced marketing programs throughout next year.
Okay, great. Then I wanted to touch on off-premise. You know, very consistent at Cheesecake Factory, you know, we're several years removed from the pandemic now. I think it was 23% of sales in Q2, similar to Q1. I think delivery makes up 9%-10% of that. You know, what are you seeing out of that delivery consumer? And then, you know, related but separate, I think you shared it's a high single digit coming through the phone. You know, what do you think happens to that over time? Can you shift that? Is loyalty something you can use to shift that to you? Does that go to delivery? Any plans to capturing that? Just, you know, any thoughts on all that.
Sure. That's a great question. You know, we are fully integrated with DoorDash on the rewards program, so you can actually redeem through DoorDash if you want to, which is a real good benefit. I think those people that still wanna use the phone, I don't know if that's a demographic age situation. We'd love for people to stop using the phone. It makes it a lot easier. We just re-skinned our website. We have a new website. You can order directly through the website for online ordering. We'd love to continue to try and push that, and this program gives us the opportunity to provide incentive if you do want to order through the website and maybe do promotion that way to get people from... But to be honest, we're agnostic.
If they wanna call, they can call. From a margin perspective, it doesn't really matter. It's just operationally, it'd be great if we didn't have to have somebody there answering the phone. On the overarching 22%-23% off-premise, we still feel very strongly that Cheesecake Factory is a great off-premise option for people. Because of the variety of the menu, the variety of the price points, we think that's why we've been able to stick in those- that low 20% number, and why delivery continues. You know, we have an exclusive relationship with DoorDash. We re-signed that relationship with them. They've given us great marketing support, and they're a great operating partner. They do a terrific job, which is why we've been able to maintain the delivery numbers that we have.
So I think your annual GM conference takes place in September. I'm not sure if that happened or not yet. But what are kind of, just operationally inside your company, what are some of the key topics, you know, for that conference? You know, maybe what are you, as the manager, is the most pleased with, and then what's most pressing for the GMs to focus on in terms of areas to improve?
It was actually just last week.
Oh, beautiful.
Got back on Saturday, and I flew right here to talk to you.
Thank you.
You know, this year we did a few things. We celebrated our 45th anniversary in The Cheesecake Factory, and we also celebrated 10 years on the Fortune 100 Best Companies to Work For. So the goal of that conference is to inspire, motivate, and educate the general managers. A lot of the education this year was a little bit around getting back to basics. There's a lot of new staff members in all the restaurants, at the hourly level and at the management level. So we had workshops really focused around service, hospitality, food excellence, I guess is how I would frame that. We did bring the North GMs. This is the second time that North came to the GM conference.
We had separate breakouts for them, where we focused a little bit more on them understanding some of the analytical tools that we use at Cheesecake Factory. How to use dashboards, how to apply whatever they're learning to the shift, to be able to execute better. So it was a huge success. I'd say it was probably the best conference that we've ever had. We had some external speakers come as well, and we're getting really raving, raving feedback so far from the teams. And we need the GMs to be squarely focused on people right now. Our ability to attract, develop, and retain hourly and management-level people has always been probably the cornerstone of our concept, especially at Cheesecake Factory. Our retention numbers are now back to where they were pre-COVID. The labor market has stabilized.
So being able to take the staff members and managers that are currently in place and continue to develop them for future growth, as we continue to be a growth company, is key to their role, along with executing financial excellence, but really being able to develop people for growth.
Great. And then switching over to margins, I know there's commentary, guidance-type commentary, talking about an exit rate at the end of the year, which is always helpful, but I was hoping to kind of use this to ask, you know, just how do you want investors to think about the restaurant level margins, the all-in blended restaurant level margins at the company over the next two to three years, you know, compared to 2019? Do you—if I were to look at consensus, maybe they're not the consensus has to be right, but maybe they're 150 basis points below where you were in 2024 and 2025. And so internally, are you driving for all the way back to 16%? Or is this just a new world and maybe the math is a little different and consensus isn't?
No, I think it's a super important point, Brian. I think number, number one, our objective is to get all the way back, and that would be for a total company perspective, right? So if you think about the full blended FRC North, everything, get back into to that range. The core model should produce restaurant-level margins in a stable world between 16%-18%. We don't see any reason that that's not achievable to get back into to that range. It goes up and down based on cyclical events, commodity pricing, things like that, but that's certainly achievable. And look, I think where the consensus is today is based a little bit upon the fact that we haven't fully been there, you know? Right, we're still in a little bit of a prove-it situation.
I think we've had three very consistent quarters. I think we're hitting the targets that we have set internally to make those benchmarks. I think we've as we continue to do that, it will prove out, and the story will prove out, and, and I'm perfectly fine, you know, catching up to those, you know, those numbers and, and having people be a little bit conservative in the meantime.
Okay. And then question on labor, maybe this would have followed the GM question a little more naturally, but on labor, I think hourly staff retention, you're back to pre-COVID levels, which is a big accomplishment. You have industry-leading metrics there. You always have. You know, as you look forward, do you see the opportunity to continue? Can you improve those? Could you ever exceed pre-COVID? I know it's a high bar that you set. And then what's the hourly staff focused on right now? You mentioned people is what the GMs need to focus on. It's a new world, are there new things that are important to the staff or maybe not?
Yeah, I think one of the speakers we had at the conference this year actually spent a lot of time talking about Gen Z. About 40% of our workforce today is Gen Z. So a lot of that focus is how do you, number one, attract them? How do you get them to show up on day two? Which is big. And then how do you constantly retrain people and give them new skills? I think the younger generation of staff member today wants to be learning something new all of the time. So that may be that I started as a host, I can quickly become a server, I can learn how to do something different in the kitchen, I can work all the different jobs.
So the GMs are very focused on making sure that that generation of person is very engaged with us. They want to stay. They don't wanna hop to a new job to learn something new, but there's enough opportunity within the restaurant itself to learn new skills and attain new skills. And yes, can we achieve even greater rates of retention than we have historically? I would challenge us all the time to say if we should be able to do that. And if that's another 1 or 2%, which is still 30, 40% better than the industry, we should be striving to do that, because that allows us to execute such a complex operation as smoothly as possible.
Okay. So we earlier... I'm gonna pivot back. We talked about North, we talked about Flower Child. This is a growth frontiers conference. Is there another brand or two you'd highlight in the portfolio, where you feel optimistic about, the most optimistic about the growth over, you know, even 15, 20 years, just a long period of time, that you would highlight?
Yeah, we like all the concepts. Certainly, Culinary Dropout has proven probably to be the next sort of horse in the race. Doing very strong AUVs, moved into some new states that they hadn't been in previously, and the guest acceptance of the concept seems to be going very, very well. There's some smaller concepts with only three or four restaurants. Too soon to tell. We just opened up a Henry. There's four Henrys now. We opened one in Miami, doing really well. So, most importantly is that we have a plethora to choose from, I think. And, they're all ones that, from a consumer standpoint, there seems to be, you know, no matter where we've gone, a lot of excitement around.
So we'll continue to refine them, make sure that the financial model's in the right place if we want to pull the trigger on one of them, and grow it as a growth vehicle domestically.
Okay. Is there anyone in the audience who has a question for David or Matt before we- have you guys assessed the fact that GLP-1 portfolio where products
I would say we haven't. I don't think we feel like there's a need for us to do that, to be perfectly frank. I think it's a finite group of people that have access to begin with, to the product. People still want to go out to eat. Are there gonna be a group of people that are working on personally, whatever they're doing, to take care of themselves? Yes. But, you know, we had to put calories on the menu, list the amount of calories on the menu starting 10 years ago, and people would ask the same question: Do we think people's behaviors are gonna change? Well, desserts are now 17% of sales versus 14% back then. So people are still gonna wanna get together. They're still gonna wanna go out to restaurants.
I don't think that it's anything meaningful for us today.
All right. Well, David, Matt, thank you so much for doing this.
Thank you.
Thanks for being at the conference, and that's all.
Thanks, everyone.
Thank you very much. Great to be here.