Thank you everyone for being here. My name is Joshua Long. I'm the restaurant analyst at Stephens, covering restaurants and food service distribution. Really excited here today to start off the restaurant portion of the conference. We've got Cheesecake Factory. We've got David Gordon and Matthew Clark from the company. Very excited to have them here, and as a starting point, I think the team here has some commentary coming out of their recent Q3 earnings to kind of level set the conversation. Then we'll start from there. I've got a bunch of questions. I'd love to work yours in, too, and make this as organic as possible. So feel free to, you know, chime in, raise your hand. Let's get some of those questions going. And then with that, I'll turn it over to Matt.
Sure. Thanks, thank you very much. Just a little big picture perspective. Cheesecake Factory is an iconic brand and a leader in experiential dining. Industry-leading AUVs of about $12 million-$12.5 million, and it's complemented by our 2019 acquisition of Fox Restaurant Concepts, a leader in up-and-coming brands like North Italia and Flower Child, that we are cultivating. And in combination, well, we anticipate it has the potential to produce, industry-leading unit growth of about 7%. Importantly, coming out of, the pandemic and the latest supply chain and labor challenges over the past couple of years, we've seen very good momentum this year, returning to the predictability, stability of the business. We have a long track record of historical success, generating high cash flows throughout good times and bad times.
Right now, we feel like we're heading into a very good momentum. Labor is solid, the supply chain is resilient, cost of goods has stabilized, and I think importantly, experiential dining is still something that the consumers demand, and as we look at the overall demand for our concepts and brands, it remains exceptionally strong and exceptionally steady, and I think we're poised for a very solid 2024 at this point in time across our concepts. So Josh, we'd be happy to answer questions.
Great. Thank you so much, Matt. I feel like, lovely intro. I don't know that your brands necessarily need as much of that. I'm sure everyone is very familiar with them. You touched on a lot of the thematic pieces that we write about and that we, you know, find to be very important and very favorable for The Cheesecake Factory and its various brands. But, you know, David, I was curious if you could start maybe high level. You've built an amazing foundation with The Cheesecake Factory. It's made popularity with consumers, and its financial performance has spanned decades.
Can you talk about that? I mean, that seems something that we've come to, you know, grown accustomed to, but I'm sure it's harder to do year in and year out, both from a brand relevance perspective, but then just an operational perspective. So could you maybe level set the conversation just from a high level in terms of, you know, organizational capabilities, culture, things that have really allowed you to, and your team to succeed going forward?
Sure. So we did celebrate 45-year anniversary today at Cheesecake Factory, and I'd say that the concept is as relevant today and as well-loved today as it was from the first day we opened in Beverly Hills back in 1978 . We just actually opened up a brand-new location in Coconut Creek, Florida, last week, which is 20 minutes from Boca Raton, restaurant we've had there for 30 years. And the pent-up demand in a market that we've already been in for 30 years is just absolutely phenomenal. So sales that are gonna be over $350,000 for the first week.
Wow.
So I think that 45 years of brand affinity and brand love continues today. Every new market we've opened into, whether it's one where we already have a good existing foothold or moving deeper into some suburbs, as we did last year, we see that same type of demand that has led to those record-leading AUVs that Matt touched on. I think our ability to continually execute a very complex menu, that people love, right? There's no veto vote on that menu, is still a hallmark because of the tenure within the company and our ability to attract, develop, and retain, the best management teams in the industry. I think that's been a key to our success over time. We're still able to do that today.
As Matt touched on, the labor force is sort of back to a normal state, whether that's management staffing or hourly staffing, which enables that type of execution, and we're gonna continue to innovate on the menu as well. The menu, I think, is something that nobody else can offer. If anything, most concepts are trying to move away from that type of menu complexity and simplify. We think that menu gives everybody a choice and everybody an option, whether that's on-premise or dine in. We love that the brand is as strong today as it's ever been.
That's very helpful, and the couple points that resonated with me when I think about the breadth of the menu, that's probably one of the more memorable pieces, is being able to go in and you mentioned no veto vote, but everything from, you know, amazing appetizers, crazy entrees, obviously, the cheesecake that you're known for. But talk about that complexity. I mean, it's... You're in there doing in a world where restaurants have had to simplify and reduce just what actually the level of cooking and find ways to optimize. I feel like your brand and your team has really stayed true to what, you know, kind of the foundational principles of what makes restaurants fun for consumers. And so when you think about that, can you talk a little bit more about the human capital piece?
I know that it's a little bit tougher for us because there's never a line in the income statement that just says human capital.
Human capital value.
Human capital value, but that, that's really what I think is, helps the flywheel really get going. And so, I mean, we know a key piece of that is gonna be the tenure of it, but, curious on just the elements there from Cheesecake, how you set that up, and then when we start talking about some of the other brands across the portfolio, whether that's North Italia, some of the Fox Restaurant Concepts, I imagine that that creates some of that opportunity for you to do ... all that you've been doing at Cheesecake, but then extend that into other brands as well.
Sure. Well, the tenure is certainly a linchpin of that success, but it's also the investment in training. So if you're a new manager, the investment we're gonna put into you is going to be a tenured investment, not just in those first three months of your career, but we're gonna give you a strong career continuum to be able to grow your career. So from an attraction standpoint, that helps on the manager side.
We've also developed just to go back to the complexity, every type of operational system and process you can imagine to enable us to execute that menu when there's 320 people sitting in the restaurant on an hour-long wait on a Saturday night, to give us the throughput we want, to give us the consistency of execution and the food quality on a consistent basis. That's all driven through solid forecasting. We're using, you know, analytics and dashboards to give the restaurants the best forecasting possible to make as much fresh food, but not too much fresh food for that particular shift. And again, the tenure, our average general manager has been with us 10-12 years. Our field operations team, been with us 10-15 years.
So a lot of subject matter expertise, but a lot of process behind that to, to drive it over time. And when you think about the other concepts, our goal with, with North, as we continue to grow at about 20% growth rate, there's 34 restaurants as of today. We opened a North today in Fort Lauderdale, about an hour ago, our fourth restaurant in, in Florida. Our goal is to ensure that all of the FRC concepts that we've moved under our umbrella, and will over time, continue to, to live the culture that helped them be as successful as they were before we took them over, right? We, we bought them because we love those concepts.
They do high AUVs, they have their own unique culture, but we've slowly been able to take some of the traditional operational practices and standards of the Cheesecake Factory and put them into a North Italia, as an example. And that might be how they're handling reservations, how they're executing throughput, how they're ensuring that they're having very accurate quotes so guests aren't walking away. But as we incorporate some of what makes Cheesecake special, we want to ensure that we're keeping what has made North, Flower Child, Culinary Dropout, unique and special. So we're not cross-promoting managers across concepts unless we really have to do that because we have a need somewhere. We want that organic growth from within each of those concepts to be able to grow to sustain the type of growth we want moving forward.
No, that's a super helpful point. I mean, I think at the end of the day, there's a lot of ways that you as an organization can leverage that size and scale, and it doesn't necessarily, to your point, doesn't necessarily mean immediate cross-pollinating, but I can imagine that from the human capital perspective, just knowing that there's still great growth in terms of your core Cheesecake Factory brand, a lot of growth in North Italia, just continued opportunities across the portfolio, that's got to get everyone, you know, very excited, especially as we go into, you know... But it's still gonna be a competitive environment for restaurants, as it always is, but perhaps maybe the volatility has been somewhat reduced, we think, kind of compared to the last couple of years.
So that's got to be, you know, at least a helpful starting point. And Matt, I think you mentioned some of that in terms of, you know, for sure there's still gonna be inflation, consumer pressures and opportunities, but can you level set where we are in this environment going into, you know, the end of 2023, maybe 2024? It feels like it's at least steps in the right direction compared to where we've been since 2020. But maybe some sort of, if you could contextualize that a little bit in terms of just the visibility you have across the brands.
Sure, I think that's an important part. We run such a complex business, and having predictability and stability really drives value for our shareholders, in addition to a great execution for the guest, right? And so I think this year what we've seen is that it looks and feels across many of the data points like 2019. We did research in the middle of the year with our guests, and their opinions and their feelings about where they're at personally mirrored that. Their expectations for the economy and for where their dining-out preferences mirrored 2019. It's nice to see week to week when you open up the pro forma P&L, that it looks and feels like it should, right? And that's because what we've seen is on the demand side, very consistent, predictable patterns.
You know, Tuesday lunch today feels like the 40 years that built up to Cheesecake Factory before the pandemic, right? In addition to that, the input costs, whether that's wage inflation, commodities, the resiliency of the supply chain, is all very reminiscent of historical, predictable patterns. And again, I think that's a key driver for us when you're operating $12 million AUVs with 200 staff members, to be able to produce the cash flows that we, that we want to do. And I think it gives us a lot of confidence to continue to grow, right? As we know that the machine that fires and creates all of that opportunity for the rest of the concepts is running on all cylinders today.
It definitely gives us that confidence to go out and find sites and continue to expand all of our concepts, knowing that the patterns are what we would have expected the consumer to kind of return to the norm over a couple of years of craziness.
Yeah, that's a great point, and it's interesting because, you know, we think back to 2020, and we're still, to some extent, talking about comparisons to 2019 and two, three- and five-year stacks and I mean. But the key point there that I heard you talk about and that we've talked about over the last couple of quarters is just that return to normal seasonality, more normal consumer trends. I know this past quarter, everyone across the industry was feeling a little bit of lumpiness, just as that's really starting to settle in, but it feels like you've got great visibility heading into the Q4 and just the overall key pieces of the kind of your business and the brand. Can you talk a little bit about what you've seen? I mean, you mentioned lunch.
Sure.
You know, too, midweek lunch is probably a great example where if you're already back to 2019 levels, that's gotta give you a level of confidence in terms of just that return to normalcy. But could you talk about maybe what you're seeing across the variety of channels, whether that's dine-in, off-premise?
Yeah, it's all very consistent. I mean, you know, we used to measure Cheesecake Factory comps, you know, from the financial crisis to the pandemic and tenths of a percent. You know, for 10 years, nothing really moved. It was kind of like Groundhog Day. And then the world kind of got crazy. I won't say it's gotten all the way back down, but it's pretty close, right? I mean, I think we should all expect a little bit more movement, volatility in the world, but it's an acceptable range to manage to, right? So when we think about all of those attributes, you know, on-premise, off-premise, for example, for the past five quarters, very consistent. We're probably gonna be at about a 22% off-premise mix. It is a little bit seasonal.
I think, Josh, you were talking about kind of what people saw in the summertime. Off-premise is a little bit softer in summer versus winter. It makes sense. When it's cold and dark, people are gonna get food delivered, right?
I think everybody sees that and adapting to that, to the school schedules, things like that. But we saw the normal pattern go kind of from spring to summer and now into fall, and recapturing some of that, off-premise to boost it back up. I think the day parts of the week, the weekends, all of those pieces, I think on a percent of sales basis, reflect historical patterns. You know, we did see a little bit of the, the alcohol and appetizer in the Q3, kind of revert to the norm. I think that was consistent in the industry. 2021, 2022, we saw, I would call it the revenge buying patterns. It was very upsized. We're still at or above 2019 levels, though.
So for us, it appears that the consumer navigating 235 menu items, we don't drive that behavior. It organically happens, and I think that's what we're seeing play out.
Yeah.
All of those attributes make labor forecasting, you know, food ordering much better and therefore more profitable, right? And so I think that gives us as we've moved through this year, we've narrowed down that range of predictability. And I think really the expectations going into next year is that it would continue, and I joke with this, on our planning team and operations team, is we're gonna scrap 2019, and we're just gonna start comparing to 2023. Like, from-
Yeah
God's, you know, lips to my ears.
The other sort of return to normalcy has been the attrition world and staffing. For Cheesecake Factory, we're back to our best-in-class attrition rates, come back to where they were, if not even a little bit better than 2019. That's at the hourly level and at the management level. So that leads to easier, consistent operations, less training costs, less overtime. And on the staffing side, not only is there a larger pool of people to choose from, but there are people coming back into the hospitality workforce that left during COVID. So those that we are hiring are coming back with experience.
During COVID, we were having to hire people that had really never worked in a restaurant before, so that learning curve and that ramp-up took a little bit longer. We're able to get people into the system faster now, cross-train them on different stations, being able to increase their productivity. From an operations perspective, that sense of normalcy is very helpful.
That's a great point. I mean, I think the, you know, hopefully, that trend continues for the industry overall. I mean, there's been, you know, quite some challenges over the last couple of years, but I think, when we compare your just brand awareness, your brand affinity, your status as an employer of choice within the industry, I mean, there's a lot of opportunity that you can probably still capitalize on there.
When you think about kind of just the overall environment, whether that's from wages, labor availability, the training piece, it feels like this is where the size and scale of an organization like, you know, Cheesecake and all of your brands can really, capitalize on that and perhaps drive a bit of a gap between peers that are maybe still kind of recouping and recapturing some of that, upside opportunity.
But how do you... Could you maybe opine on that and just, you know, as you think about, you know, where you've made those investments over time? It's not just about wages, right? I mean, wages are important, but there's a holistic employment opportunity here that's really quite compelling when we think about kind of the tenure numbers that you mentioned. I mean, 10, 12 years, 15 years, I mean, that's very impressive in an industry that's known for relatively high turnover.
People wanna, number one, work for a company that's growing. So, you know, we, we check that box, right? A 7% potential unit growth rate, that means that whether you're gonna get hired at Cheesecake or North or Flower Child, you see potential growth in your career. We're the only restaurant on the Fortune 100 Best Companies to Work For list and have been for 10 years in a row. And, I think that speaks to the long-standing culture of our restaurants and how we treat people, schedule preferences we give them, how we try and balance quality of life, which is more important today to younger managers than it, it ever has been before.
The career continuum opportunities, you can start as a staff member in any of the concepts and move into management. About 50% of our managers today started at that hourly level.
I think there's also a flight to quality. People wanna work for a brand they can be proud of. I think we see that a lot with Gen Z and millennials. And obviously, the quality of product that we're putting out, people have a lot of pride in, along with the benefits and, you know, the company car, if you're working for Cheesecake Factory or the equity program. Those are all strong benefits for attraction. But once somebody comes into the restaurant, it's about how they're treated.
I think on the staff level, the high volumes, the consistency of sales, knowing if I'm a server, that it's going to be busy all the time, and I can rely on my tips, or if I work in the kitchen, I'm gonna get the hours I need to qualify for health insurance, and they're gonna be consistent over time. I'm not gonna have to worry about a really slow week, and all of a sudden, someone's gonna cut half of my schedule. That's a benefit as well.
That's right. I mean, this has never been an issue for your brand necessarily, but I mean, as we think about kind of the 2020 to now period, where there's just a lot of volatility, and it was a matter of getting hours, and the... You know, your hourly wage might have been fine, but you only got 10 or 15 hours a week, and that just wasn't enough to make the kind of ends meet for a lot across the industry. And so when we think about just having that engaged, you know, team member at the store level, obviously, there's a lot of growth, but then also if we have a lot of, you know, lifetime or lifestyle approaches to working in hospitality.
And so you could be. You could spend a long time at the store level and make really great money and have a lot of flexibility in your lifestyle and be able to check a lot of those boxes. So I think that's something that perhaps, from the outside looking in, is at least impressive to me in terms of just your opportunity to continue this, this, you know, growth engine going forward.
Absolutely.
You also touched on one of the pieces in terms of just where consumers' minds are at, but then also your team members within the organization. I mean, working for a company and working with a company that they can be proud of and, help, you know, make changes. Can you talk about the kind of whether how you refer to whether it's ESG, corporate social responsibility? I mean, I know there's a lot that goes on at the organization outside of the great food that you're known for across all your brands, but, I mean, really making a difference and, you know, being, you know, a leader within the industry from that perspective. Could you talk a little bit about that?
Sure. I think for a staff member, it's important to them to be proud of the community they're working in as well, and knowing that the restaurant or broader company they're working for is doing what they can for the planet, doing what they can to give back. You know, at the restaurant level, we have a program that ensures that any potential waste on a daily basis is given to a local food bank, and the restaurants participate in that. They're weighing whether it's bread that's left over from the day before or soup, and that food is getting picked up actually by DoorDash and getting delivered to a local food bank. We talk about that in the restaurant. There's a lot of pride there.
From a company perspective, when we talk about reducing our carbon footprint, those are big things that we talk about, and the staff like to hear that, but it's what they feel and see in the restaurant every day and how we're giving back locally. I think that's most important to them. Our sustainable sourcing program that we've had in place now for multiple years, our staff and managers can go on our website, anyone can, and just read about where we're sourcing product from, what we're doing to ensure that product, the people that are working in those places are treated fairly, they're getting a good wage, that the product itself is sourced in a responsible way.
Yeah, those are... I mean, those are super important, and not only feel good, but also, I mean, really make a difference to food quality, operations, and everything else you're talking about. We had a question in the audience.
Can you share with me about the capital allocation a little bit? Because, really great concepts. I live in Denver, all of your three groups brands are there. So where do you want to see your, your investment dollars go? Are there more such things to acquire given the macro environment we're in, or you'd rather just, you know, go after the leftovers of, of these three brands that are really good?
Great. And the, just for those on the webcast, the question is around capital allocation and the opportunity to both return cash to shareholders via dividends, share repurchase, I imagine, but then also, how do you think about balancing the growth of your core brands and then the opportunity for M&A down the line?
Sure, I'll start, and David, you can jump in. I mean, I think as the margin recovery gets completed, we wanna do it all, right? I think that our perspective is that the company can generate enough capital to grow all of our brands at sustainable rates, at high returns, and in addition to that, return a good amount to shareholders at the same time. So we did reinitiate the dividend about a year and a half ago, and our share repurchase program. We're obviously buyers of our stock at this price, and we believe it's a tremendous value for people today, with the growth potential that we do have.
So in terms of overall allocation, obviously, new restaurants are first, and David can talk a little bit about how we think about the pace of that, but we can open as many restaurants as we can physically do. So there's not a limited supply of capital in that regard, and then obviously, maintenance of the restaurant. So that piece of it, that provides the highest return to shareholders and will continue to be where we focus our efforts, and then, like I said, we'll have the capital returns program.
As far as additional M&A, I think that we have a pretty strong position today with the FRC brands, and we feel good about knowing that whether it's growing North Italia at a 20% growth rate, which is what we've already talked about and we're planning to do moving forward, and then Flower Child behind that, probably also at about a 20% growth rate. Beyond that, we recently talked about Culinary Dropout as another concept that we really like. Hopefully, you've been there as well in Colorado. And there's 10 units today of Culinary Dropouts in multiple states, and they're averaging around $10 million AUVs. They give us a little bit more of a bar-centric type of-
Yeah.
... full-service, you know, experience. Still product, food that's made fresh from scratch, a really experiential type of environment, about a 35% bar mix. So we're gonna continue to study Culinary Dropout and understand when we may decide to take that under our umbrella and grow it nationally as well. Outside of that, there's a whole another cadre of concepts at FRC that we're continuing to evaluate, and if they first meet our financial hurdles, and then we're able to see that they have the portability to move into new states and be very successful and received by guests well there as well, then we would decide to maybe move them under our umbrella and grow them at about that 20% growth rate.
That 20% is really just bounded by, back to human capital, having the right people to open up those restaurants and do it well. That's more important even with the newer concepts, 'cause when you move into a new city, people don't know you very well. If you're opening North Italia in Fort Lauderdale, yes, there's three others in Florida, but a lot of people have never heard of North Italia before. Opening incredibly well and executing for those first three months is gonna be key to the long-term success. So having the right people to open those restaurants and controlling the pace of that development is very important.
We're very excited about the breadth of our concepts, right? Being able to open from 3,500 sq ft to 10,000 or 12,000 sq ft, different price points, different occasions. I think it gives us a lot of opportunity with landlords. We're probably working on four or five different projects, where we have multiple concepts going into the same site, and it gives us a lot of leverage and critical mass. So I think that's very differentiated and not really replicated in the industry today.
May I?
Yeah, of course.
Cynthia, I didn't know that you wanted to Culinary Drop out until last week. I was like, "Oh, simply." So is there a benefit to be had to, like, say, buy Cheesecake Factory thing, or you buy, buy design that you want because you know they're coming?
It's a little bit more by design that, we like them to be their own standalone concepts. If you think about North as an example, North is what we want to feel like a chef-driven independent restaurant.
Okay.
The longer that people have that perception, the better.
Yes.
You know, It's great being part of a chain and being a big company, and that creates consistency and legacy and all of that. But there's also a benefit to being a, what feels like your small, local, independent restaurant. So, our plan is to try and continue that, not by The Cheesecake Factory, but if and when, right, there's enough scale, obviously, and it's pretty obvious we're a chain when there's, you know, 50-100 of them out there, then we can decide. From a, from a human capital attraction standpoint, we do talk about that. We do ensure that the staff know that, "Hey, well, you're part of a bigger company here, so it's great you still have your own independent identity at these other concepts, but you have the comfort of being a, in a bigger organization.
That's great, and you touched on this, but feel free to send questions via email too. It's joshua.long@stephens.com. And one of those came in, touched on kind of a point that you mentioned, which probably doesn't need much more elaboration, but I think it's worth noting, is that there's no financial limitations here in terms of your ability to grow. It's really that human capital piece. And if we think and that's similar across the industry. When we think about growth concepts that have succeeded and/or those that have had trouble over time, it's typically because they've grown too fast and maybe got out over their skis in terms of a human capital perspective. That's not necessarily something we ever really worry about here. You've got a very steady, replicable model.
You've got a great funnel in terms of developing, incentivizing, retaining talent, and so that's, that's something that at least I think leaves me and others, sleeping better at night, just knowing that that growth is really predictable. When you think about that going into the environment where there's a little bit more visibility, Matt, you mentioned kind of the margin profile and that opportunity to kind of continue executing against the goals that you've set forward. I imagine the labor piece is a big driver there, as are food costs. Can you talk about kind of the environment, maybe the pushes and pulls, as you continue to work towards, those margin targets?
Sure. Just going from the top line down, you know, commodities this year have continued to migrate to historical levels. Right now, we're probably running 2%-3% inflation, which is obviously totally manageable. The overall perspective, because of our really broad market basket, I think it gives us a competitive advantage in terms of keeping that inflation stable. So everybody knows there's probably pressure in beef. It represents about 14% of our market basket. There's probably opportunity in chicken. It represents about 14% of our market basket, right? So we have a lot of ways to offset that and keep it more stable and predictable. And going into next year, that's about what we anticipate. In addition, it's just become more resilient.
So we're not seeing the pressures that to source the ingredients that maybe you saw during the pandemic. So that helps with the teams in the restaurants quite a bit. I think on the labor front, as David talked about, we're able to source so many more applicants today relative to the pandemic, back to historical levels, where we might have 60 people looking for a job for every opening that we have. We're seeing wage inflation, stable, predictable, slightly below pre-pandemic levels. So despite the tight overall labor environment, I think for our company's perspective, it's at a level, maybe it's 4%-5%.
Again, with normal levels of pricing, we think that we can accommodate those pieces and kind of get back into a cadence where we're taking 1.5%-2% pricing every six months, and it's 3%-4% instead of the heightened levels that we've been at. We think we've seen consumers accept the current level of pricing, so that gives us a lot of confidence that taking that small, incremental steps, that's sort of normal. If you think about the Fed's dot plot, it's around 3.5%. I think everybody feels like that's going to be an area that we can manage the business to.
That predictability, when you know that if you take an action, you're going to get the result, I think we have line of sight towards our margin targets for Cheesecake Factory for next year.
That's very helpful. You know, we've got about, yeah, about 15 minutes left, so if we have any questions in the room, definitely feel free to chime in. One of the ones that came in via email was, you know, talking about just all of these pieces are the elements that other brands are experiencing as well. But when we think about just where the consumer's at, there's a consistent demand for this experiential component or experiential opportunity that you offer, but it also feels like everyone else in the industry has taken price, but not really been able to... You know, not everyone is being able to execute at the same level.
And I think that at some point, whether that's now or going forward, that starts to become more important in terms of how consumers choose to spend their dollars.
Can you talk about that? I know we've mentioned it in various points here in terms of just the overall model, getting back to a consistent, you know, consistent perspective in terms of operations. But how important is that, and how do you think about balancing the value proposition, the execution, and all these pieces going forward? Because it feels like even if the consumer economy gets a little bit better, there, or stays the same, there's still, you know, pressures on consumer spending, and it feels like the elements that we have outlined today really have a holistic approach to how you kind of position your brands in the marketplace.
I think operations, we're an operating company first. And consumers today, whether they're Gen Z, Gen X, or Boomers, they want those experiential moments in their life, and that may mean that they're gonna save some money in some transaction and not buy another sweater, but wanna get together and go out to eat. I think there's still market share to take when you're able to execute well, when you have a quality product. I think we've taken market share throughout the pandemic when you think about the growth of our off-premise business. I think we can continue to do that because of the execution, the breadth of the menu, the breadth of the concepts. We don't think anybody else is offering what we are offering.
Even if you think it about North Italia at a high-end casual, made fresh from scratch, national chain at some point, there's no one else out there that's really doing that other than the independents, who probably are the biggest competitor to something like North. So quality and a flight to quality, I think, is always gonna win. The younger generations have a more sophisticated palate than ever, right? They grew up watching the Food Network. They think they know what great food is from that, and/or they've been exposed to great food, and they love to go out and eat. So as we've always felt, we're gonna lead with quality. We're gonna lead with fresh-made ingredients, and then balance the pricing equation over time and get back to the type of pricing that Matt talked about earlier.
Yeah.
I think importantly, when we looked at the environment this year, with all of the movement of the people, one of the biggest areas that we focused on was really back to basics. We retrained everybody on our top 25 items. Obviously, drives a lot of guest satisfaction, right? We've been in the restaurants, making sure that all of our best practices and procedures are being followed to a T. That execution has led to NPS scores that are at an all-time high for us. I think that's not only a leading indicator of sales, but it goes to the value proposition for Cheesecake, right? People expect that level of service, that level of food, and we know that we're delivering it because they're telling us.
It's a great point. I mean, I feel like when we talk about or we hear at least, you know, back to basics, everyone maybe feels like it's a little bit of a yawn, or they go, "Ugh, what, what other initiatives do you have?" But, I mean, they're basics for a reason. They're really important, and they're not always easy to do, right? The restaurant industry isn't a hard business or, you know, restaurants aren't a hard business, but they're very complex, and your models in particular. So I feel like the back to basics and that operational execution is something that is maybe underappreciated at first, but when we start to look at the consistency of the results and what they can really do, I mean, that's really where it really comes alive.
Yeah.
And that's certainly important in volatile times, but let alone things where we get a little bit more stability, and you can start to, you know, as you mentioned, take your fair share, or earn that fair share from the consumer. Can you talk a little bit about the unit development pipeline overall? There's still pushes and pulls. You know, maybe supply chain is getting back to normal, but it feels like the permitting side is still somewhat challenging, and that's something everyone is experiencing. And so when you, when you think about just how you line up your calendar and maybe, just where we've come from, could you add a little bit of context there?
Because it, it's, certainly, you know, an added element to the overall story here, and longer-term unit growth is very important. What are you seeing out there, and what can you manage, and what's in your control and what's not?
So I think we've seen some of exactly what you just said. The supply chain issues have been abating. Getting HVAC units or large kitchen equipment or electrical panels, which were a real challenge throughout COVID, that has really subsided. We do still see some permitting issues. Really depends on the jurisdiction or the municipality, and that's really just a lack of workforce in some of those places. A lot of people left those jobs during COVID, and they haven't been backfilled. So there's a backlog of getting into a restaurant to be able to sign off on a permit, or people are working from home, which has made it a challenge to get plans checked.
You know, you just be able to walk into an office really quickly, and you and I can go over the plans, and it's done.
That can now take two or three weeks. So all that being said, that pushed some of our openings for this year to what would have probably been the last couple of weeks of December, and we made the operational choice to say, "There's not a lot of value in doing that. Less disruption if we just move them into Q1." And outside of the permitting issues, we feel really good about the pipeline for next year, moving towards that 7% unit growth. We are set up in a position today where equipment, supply, all that's not going to continue to be an issue. And hopefully, as those municipalities continue to get more staffed up, we won't see some of those permitting issues.
Our funnel has been widened, I think, enough to give us the flexibility to be able to determine which restaurant's gonna have the most successful opening within a calendar year, based on its geography, where it is, and all the other dynamics in that area.
And I also imagine that having a portfolio of brands, like you mentioned, widening that funnel, gives you a lot of optionality, just because there's always gonna be pushes and pulls and things that are outside of your control. But you've got, you know, a nice, steady machine here in terms of coming up with potential sites and then being able to execute them. When you think about kind of the overall construction cost environment, too, that's been a challenge for many. You've done a really great job in terms of keeping those cash-on-cash returns, you know, industry-leading and really supporting kind of what you're underwriting from a new unit development perspective. How have you done that? I mean-
I mean, it seems easier said than done in terms of just managing that, but it's complex and, you know, maybe some high points from what you've been able to either learn or execute over the last couple of years.
Yeah, I mean, there's three key variables, right? I mean, there's the CapEx side, there's the sales side, and there's the margin side. I think CapEx has gone up, but fortunately, our strong sales have kept pace. And effectively, we've seen the cumulative pricing that we've taken over the past three to four years be about what the CapEx level is. It's gone up and down a little bit, but seems to be dovetailing together right now. As David said about the permitting, it's also a little bit different city to city based on the trades. It can be, in some places, harder to get a plumber or an electrician to show up for work. But on average, we've maintained that sales to CapEx ratio that we target. So really, it comes down to accomplishing our objective of getting the margins back into the mid-teens.
We feel like we're on track for that. Obviously, these are long-term investments, and we feel like you know, if you look at the track record of Cheesecake Factory, when we sign a lease for 20 years, you know, we're thinking about that over the long haul, not in a one or two-year period where CapEx might be higher or lower relatively. And we feel great about getting to the 20%+ Cheesecake and 25%-35% cash-on-cash returns for the more nascent concepts.
That's very helpful. We've got a question here in the room.
Just talk strategically a little bit about some of the smaller concepts in Fox, and how much money, how much time, how much, you know, leeway do you give them, and when do you cut bait? What's that thought process?
For those on the webcast, question is around the Fox Restaurant Concepts, how you integrate those, how you let them kind of run their own, maybe their own playbook, and when do you come in and help guide and shepherd them going forward?
Well, first, I think part of your question is also around, you know, would we close one? When do we say that we don't really, if they're making money and they're cash flow positive, which they all are, and we have that FRC ecosystem to support them in Arizona, which we have. Separate management team that's running them, not taking our eye off of Cheesecake Factory and the growth brands, then great, they can sit there and be standalone, very successful units. Once we decide that something can be, because of its financials, and again, the portability into new markets, a national concept, that's when we get a little bit more engaged and involved and say, "Hey, we're gonna bring this under the Cheesecake Factory umbrella.
We're gonna start leveraging more of our scale, supply chain scale, IT, HR infrastructure, et cetera, to prepare a concept for growth. Again, that's what we're doing now with North and with Flower Child, and probably behind that, Culinary Dropout. There are probably three other concepts that we have a lot of interest in, that we think maybe could be national concepts. There's still more work to do there. So we'll partner with the FRC team, talk about trying to get to the margin profile, the four-wall margin that we want.
That's sort of the first stepping stone that they need to hit before we decide, "Okay, now that they've got that, we'll look and see if it's worth moving into some new markets." But I think that's unique, the way we've designed the entire quote, unquote, "merger" to allow that team to stay focused on what they do best and to not distract from Cheesecake Factory. It's 75%-80% of our business, and it's the driver of all that capital to be able to enable that growth. And to have our team stay squarely focused on that is I think, a unique proposition on how we've gone about doing the acquisition.
And just to add one little piece on that, too, in terms of financial control and discipline, we have a real estate committee that has to approve every site. So that goes through David Gordon, myself, David Overton, Sam, and Russell. We're all involved in those pieces. All of those new sites have to pass the pro forma with the financial pieces of it. We approve their annual operating plans. So there is an integration on the financial side, where they're managed very similarly to the other concepts that we have in aggregate.
That's helpful. We had a question come in via email, and it's not something we've talked about, but could you talk about balancing kind of mind share with consumers, very strong across your core Cheesecake Factory brand, and then the opportunities over the last couple of years from what you've learned via maybe some television marketing or driving that awareness piece. And then I think that also dovetails into the loyalty program that you've, you know, we're still early days there, but it seems like you've learned some very interesting, you know, opportunities for the longer term. Just curious, maybe from a high level brand awareness perspective, how you're approaching that, and then just kind of early learnings from the loyalty program.
Yeah. I think the rewards program gives us guest data that we have never had historically. We've never had a traditional CRM, so we haven't really known that much about our guests' behaviors, when they're coming, what they're ordering, what their order patterns are, to enable sort of a one-on-one relationship from a marketing perspective with people. The early days of the rewards program are very promising. We're five months into a national launch. Thus far, we are exceeding our expectations when it comes to people that are subscribing and are signed up, which is really the first hurdle to get over, especially because this isn't a traditional program that's sort of points-based. There's three elements to it. There's published rewards, and those published rewards are access to reservations for Cheesecake Factory.
It's the only way you can get a reservation at Cheesecake Factory, which is, the most coveted thing somebody could have at cheesecake based on our long waits. There's a complimentary slice of cheesecake on your birthday.
Also important.
There's another published reward. People appreciate that, and hopefully will come in with a large party to celebrate that. And then there's unpublished rewards, and those would be surprise and delights over time that we would give people, or promotions. Right now, we happen to have a lunch promotion that we're doing some A/B testing with to about 60% of the folks that have subscribed into the program so far. So as we gather data, again, over probably the next six months, I think it'll allow us to lean in, in a much more precise way with our marketing spend, versus just trying to announce to the world, "Hey, we're out here. Learn about us." It will also give us the opportunity to just increase awareness, maybe about particular day parts.
If I'm studying your behaviors, I know that you've only come to dinner, you might not know about our lunch menu or our lunch pricing. So we can either send you an offer to bring you in for lunch or just increase awareness around lunchtime. So we're really happy to have the data. It's fully integrated into DoorDash as well, which people are able to link their accounts very easily. That's important because our off-premise mix is still about 21%. We want people to be able to join the program through DoorDash and also enable their activation of any type of reward we might give them.
That's exciting. Any last questions here in the room? I've got one, if not. Yeah, go ahead.
Is dining more profitable than DoorDash ordering?
Fortunately for us, because of the deal we have with DoorDash, we're a longtime exclusive partner. We just resigned a multi-year deal with them. We're agnostic to where those sales come from now. We have a great commission rate. We have a marketing deal with DoorDash. So whether it's online ordering or somebody delivering, it's really cost neutral for us.
It's great.
Wait times.
Yeah, it's a great, it's a great point, and, and I think the interesting piece there, too, which you just touched on, is and maybe not everyone's aware of it, but just that, that, that integration opportunity, right? I feel like it- there was concerns or just questions early on for the industry broadly about you know, one is, how sticky is that channel? Turns out it's, you know, convenience is important to consumers, so, and the execution is great in terms of just the food quality being delivered, so probably likely to stay. But then now you, it feels like you solved the other maybe hurdle in terms of just being able to get the data, but then also, tie that into your systems as well. So that seems certainly encouraging from where everyone was maybe concerned about coming into the kind of the rise of third-party delivery.
Sure, sure, yeah, DoorDash has been a terrific partner. If I think back even six or seven years ago, when we first asked them to integrate with the POS, it was a yes right away. "How can we make it happen?" They understand. I think they have a sort of an operational bent originally, that's Tony's DNA. He, you know, grew up in restaurants.
As an operator, yeah.
As an operator. So, they've been a terrific partner and willing to do whatever it is to make the guest experience better.
Great. David, Matt, thank you so much for the time today. I know you'll be around at for the rest of the day doing some meetings, and we'll have an opportunity to also tour some of your you know, North Italia and food cuisine offerings this evening. So really appreciate that. If there's any other questions, either online or in the room, please feel free to shoot them to me at joshua.long@stephens.com, and we'll make sure to get those answered. But thanks so much for being here.
Thank you.
Thanks, everybody.
Our pleasure. Thank you.