day, ladies and gentlemen, and welcome to The Cheesecake Factory Incorporated First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. And as a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms.
Stacy Feit, Senior Director, Investor Relations. Ma'am, you may begin.
Thanks, Amanda. Good afternoon, and welcome to our Q1 2018 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 fact and are considered forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could be materially different from those stated or implied in forward looking statements as a result of the factors detailed in today's press release, which is available on our website at investors.
Thecheesecakefactory.com and in our filings with the Securities and Exchange Commission. All forward looking statements made on this call speak only as of today's date and the company undertakes no duty to update any forward looking statements. David Overton will begin today's call with some opening remarks. Matt will then take you through our financial results in detail and provide our outlook for the 2nd quarter and the full year 2018. Following that, we'll open the call to questions.
With that, I'll turn the call over to David.
Thank you, Stacy. Comparable sales growth of 2.1% at The Cheesecake Factory Restaurants was very strong, exceeding our guidance range and meaningfully outperforming the casual dining industry. The strength was broad based with nearly all of our geographies posting positive sales and outperforming their respective markets. We believe our initiatives along with a better consumer spending environment contributed to our improved sales performance. Utilizing digital and social media campaigns, we continue to highlight our fresh, high quality ingredients and preparation techniques as well as our new winter menu items.
These are key components of The Cheesecake Factory experience, which also translate well to our off premise business. Delivery with a third party provider is now available in 95% of our restaurants. Sales continue to grow and our operational execution has been solid. In addition, all domestic Cheesecake Factory locations are now live with online ordering. We are seeing good initial reception and receiving great guest feedback confirming the convenience this new platform offers.
Importantly, the rollout was very smooth from an operational perspective. We expect online ordering to support to go sales growth as we make our guests aware of the user friendly option to enjoy Cheesecake Factory. Looking ahead, we continue to expect to open as many as 4 to 6 restaurants, including 1 Grand Lux Cafe. We expect our first opening in the Q3. We now expect as many as 4 restaurants to open internationally under licensing agreements in 2018, including the first location in Beijing, which opened in January and our 2nd international licensed location of the year will open soon in Riyadh, Saudi Arabia.
In closing, we're proud of The Cheesecake Factory was once again named brand of the year in the casual dining category of the Harris Poll Equitrend study, underscoring strong guest affinity for our brand and our continued relevance as a preferred dining destination. We were pleased to see these attributes reflected in our sales trend during the Q1. We are committed to delivering exceptional food quality, service and hospitality, which we believe will continue to differentiate us in the industry and drive profitable sales growth over the long term. In the near term, we believe we can continue to take share in 2018, which will better position us to manage through the cost pressures. With that, I will now turn the call over to Matt for our financial review.
Thank you, David. Total revenues for the Q1 of 2018 were $590,700,000 including $12,400,000 in external bakery sales as compared to total revenues of 500 and $63,400,000 in the prior year period. Notably, we returned to a positive comparable sales trend as we anticipated. With a very strong 2.1% increase, The Cheesecake Factory restaurants outperformed the industry as measured by Reported earnings per share of $0.56 is not representative of our restaurant's operating performance in the quarter. There are 2 specific areas I would like to call to your attention.
First, we experienced about a $0.06 negative impact from higher than expected insurance costs, including group medical and workers' comp. As a reminder, since we are self insured, the costs we report in any given quarter are based on actual claims activity and accruals, so we can experience variability quarter to quarter and year to year. 2nd, we saw about $0.05 of pressure from the timing of some one time costs versus our forecast, including legal settlement expenses. This $0.05 is just a pull forward, so we do not expect it to have an impact on our full year earnings outlook. Absent these two items, our earnings per share would have been within our guidance range.
Now for a review of the balance of our P and L. Cost of sales was 23% of revenues, an increase of about 10 basis points from the Q1 of last year. There were a variety of pushes and pulls during the quarter. However, total inflation was slightly lower than we had anticipated, primarily driven by more favorable produce costs. Labor was 35.7 percent of revenues, an increase of about 130 basis points from the same period last year.
A majority of the year over year increase is attributable to hourly labor, including higher wages, overtime and training costs, as we focused on ensuring the right staffing support for the increased traffic levels and to protect the guest experience. The higher group medical insurance costs I referenced previously also drove some of the labor deleverage year over year. Other operating costs were 25.1 percent of revenues, up 100 basis points from the same period last year. This was primarily driven by higher marketing costs, repairs and maintenance and the additional workers' comp insurance costs I discussed earlier. G and A was 6.6 percent of revenues in the Q1 of fiscal 2018, up 20 basis points from the same quarter of the prior year, primarily attributable to the legal settlement expenses I mentioned.
Pre opening expense was approximately $1,100,000 in the Q1 2018, about in line with the same period last year. And our tax rate this quarter was approximately 13.4%. Cash flow from operations was approximately $75,000,000 Net of roughly $31,000,000 of cash used for capital expenditures, we generated about $44,000,000 in free cash flow during the Q1 and we completed approximately $35,000,000 in share repurchases during the Q1. That wraps up our financial review for the Q1 of 2018. Now I'll spend a few minutes on our outlook for the Q2 and full year 2018.
As we've done in the past, we continue to provide our best estimate for earnings per share ranges based on realistic comparable sales assumptions and the most current cost information we have at this time. These assumptions factor in everything we know as of today, which includes quarter to date trends, what we think will happen in the weeks ahead and the effect of any impacts associated with holidays or weather. For the Q2 of 2018, we are estimating comparable sales in a range of 0.5% to 1.5% at The Cheesecake Factory Restaurants, which is consistent with our strong first quarter trends when adjusting both periods for the spring break calendar shift impact, with diluted earnings per share between $0.78 $0.82 Turning to full year 2018. We expect comparable sales at The Cheesecake Factory Restaurants to run-in the 1 percent to 2% range in the back half of the year, which drives our current estimate for full year comparable sales to a range of 1% to 2%. We are now estimating diluted earnings per share between $2.62 $2.74 which includes the additional $0.06 in insurance costs I discussed.
Further on the cost side, we are seeing our food inflation moderate in some categories, including dairy and produce. In turn, we now expect approximately 2.5% inflation for our 2018 market basket. With regard to labor, we have seen the staffing environment become even more competitive, with hourly wage rate inflation now running closer to 6%. We now expect our cash CapEx in 2018 to be between $80,000,000 $90,000,000 including as many as 4 to 6 planned openings. We currently anticipate growth capital contributions to the 2 Fox Restaurant Concepts to range between $20,000,000 $25,000,000 We plan to balance these growth investments with continued return of capital to shareholders via our dividend and share repurchase program in 2018.
In closing, job number 1 for us was to return The Cheesecake Factory Restaurants to a positive comparable sales trend. We achieved that objective with very strong sales performance in the Q1. As we indicated in our updated guidance for 2018, we believe we can attain our long term target comparable sales range of 1% to 2% this year. Although we are operating in a challenging cost environment, our expectations for continued top line performance should better position us to manage through the cost pressures and recapture margins over time, similar to past business cycles. With that said, we'll take your questions.
In order to accommodate as many questions as possible, please limit yourself to one question and then re queue with any additional questions. Operator?
Our first question is from the line of Joshua Long of Piper Jaffray. Your line is open.
Great. Thank you for taking my question. Wanted to see if we might be able to drive into the comps during the quarter in terms of just the price mix contribution and then also the spring break shift that you mentioned. It sounds that might have helped or kind of impacted the results there, if we could kind of just parse through those pieces, please?
Sure, Josh. So pricing in the Q1 was 2.7% and mix was flat. So that put traffic at down just 0.6%. We estimate that the spring break shift was somewhere 50 to 80 basis points. I think there's a little bit of noise year over year with some of the weather and those things and for us weather was immaterial.
So I'll just kind of give that perspective as well. And then I think it's important to look at it throughout the quarter. I think we saw sales improve both on an absolute basis and versus the industry even when factoring in the spring break shift.
Great. Thank you for that. In terms of just that cadence, were kind of back half loaded? Or did you kind of play out relatively evenly? Anything that you could share on geography?
So when we gave guidance the last time, obviously, we were looking for positive comparable sales. And so you can infer from that that we started out the quarter positive. But as I noted, I think we saw that the trends did strengthen throughout the quarter, again, both on a relative and industry basis. From a geographies perspective, we were positive in every geography, but one. We continue to see very good performance from some of the strongest markets in California, Texas and Florida.
It was a very positive and balanced quarter.
Great. Thank you. I'll re queue.
Thank you. Our next question comes from the line of Jeffrey Bernstein of Barclays. Your line is open.
Hey, guys. This is actually Jeff Prester on for Jeff Bernstein. So just on the labor with it now running at about 6%, is there any more color you can provide on a geographic basis? Are you seeing that across the country? Is it just specific markets?
And then there's is there an opportunity to become more efficient in the restaurant with that labor without impacting the guest experience? And then I have one follow-up. Thanks.
So So geographically, obviously, there's 2 pieces. Minimum wage does drive a piece of the wage inflation. And then I think with the accelerated traffic, our comp store sales were up about 300 basis points quarter over quarter and improved throughout the quarter. And also over time was about 50% of the labor pressure that we saw to ensure the appropriate staffing levels. Obviously, that is manageable to some degree if you can then get staffed up for the higher traffic levels.
I think that the biggest defense in this environment where labor is so important is really around retention. We focus most of our efforts in attracting and then retaining and training our teams. So we continue to look to be efficient as always, but I think that the retention piece is probably the most important, so that if we can get staffed up to the right levels, we can reduce the overtime going forward.
Great. And then longer term, assuming you do acquire North Italian Flower Child, you're about to have 6 brands in this portfolio. So can you kind of give us a sense of what you think maybe can be the 2nd brand longer term out of the 5 other than the core Cheesecake?
I think that's still a year and a half to 2 years out and so we'll definitely provide more color on that as we go forward. We are believers in all of the brands that we are working on and investing in and believe that there is a place with white space for all of them, otherwise we wouldn't be pursuing them and investing in them. So I think it's maybe a little bit early to call out which one we would be working towards. I think at this point, we have several irons in the fire that all have good long term opportunity.
Great. Thanks.
Thank you. Our next question is from the line of Gregory Francfort of Bank of America. Your line is open.
Thanks. It's actually John Michael on for Greg. I was just going to ask on delivery. Just wondering if you can give us sort of an early assessment of what you're seeing and whether or not the results are quantifiable at this point and anything on that?
Yes. Thanks for the question, John. I think that we still feel really great about the delivery program. We're 95% of the restaurants now. We continue to feel like the delivery sales are 60% to 70% incremental for us.
From an operating perspective, our restaurants continue to be able to execute the delivery program relatively seamlessly with the recent integration into our POS system from our main delivery provider. It's helped make that experience within the four walls of the restaurant much smoother for the operators. It also reduced our delivery times by 6 to 8 minutes once we're able to accomplish that. And we continue to see strong guest feedback that's very positive about the experience. So we're going to continue to focus on delivery and off premise execution to ensure that we're able to perform there as well as we perform within the 4 walls of the restaurant.
And at the same time, make sure that, that guest experience within the four walls of the restaurant is executing as well as it possibly can.
Thank you. And our next question comes from the line of Brian Bittner of Oppenheimer and Company. Your line is open.
Great, thanks. This is Mike Tamas on for Brian. Just curious if you could talk a little bit more about the internal initiatives you talked about driving a better same store sales. Maybe what are the top 2 or 3 things that you're focused on? And are those going to continue for the rest of the year?
Is there something new that we can sort of expect to see? Thanks.
I just touched on the delivery and the off premise sales, and we supported some of that with some marketing around that internally in the restaurant along with launching the online ordering, which made the execution from a guest perspective even easier. And we're seeing some nice adoption right out of the gates there. So we believe that, that also can be driving and is driving some incrementality. And then some of the social marketing campaigns that we did in the Q1 that we will continue to do around our fresh made from scratch menu, which we're talking about a bit more with our guests along with some of the Made With Love videos that we had out, the amount of influencers that we engaged with in the Q1 was more than we had before. Last year in 2017, we had over 4,000,000,000 impressions out on social media.
And we have seen traction so far and we do some internal reporting on the impact of those campaigns. And we saw very positive results in the Q1 from our guests when they were asked about their overall awareness, how they felt about the brand, and we saw meaningful uptick in all of our internal research that we did in the Q1.
Got you. Thanks. And then you talked about the labor over time being a sort of an issue. If you're sort of already now planning for same store sales to be a little bit better, is there an opportunity to sort of get past that issue as we move into the back half of the year and sort of schedule a little bit better? Yes.
I think it's less about the scheduling and more about just ensuring that you get to the right staffing levels to accommodate those traffic patterns. And certainly, that's what the teams are working to do. And so when we look forward, I think that there is some opportunity to mitigate the overtime piece. I mean, obviously, the base wage has moved up as well. And so I think it's about fifty-fifty between those two pieces, and we'll continue to work towards ensuring that we have that optimal staffing level.
Perfect. Thanks very much.
Thank you. Our next question is from the line of Will Slabaugh of Stephens. Your line is open.
Yes. Thanks, guys. And this is actually Hugh on for Will today. I was just wondering, just more generally, if you could give any color around kind of what you're seeing from the consumer level, kind of after we've seen consecutive months quarters of positive industry data. It seems like the consumer is getting better.
Is there anything you've noticed on this front? And is any of that being factored into your guidance for kind of continued strength in the top line? Thanks.
Well, I think what we said before, we're starting to see some of it come to fruition on two fronts. First of all, it seems like the environment at least has stabilized. So we've always said that was the first piece and looking at sort of general patterns, it seems to be in a more normalized pattern. And maybe that's lapping over some of last year, which was more of a monopoly. So I think when you have a stable base and you start to have more predictability and then you have the initiatives that David Gordon talked about kicking in, we're able to regrow comp store sales on top of that.
So I guess I would say in general, we see it being more normal. I think that normal is better than last year where you saw a significant pullback in some of the retail metrics and it seems to be incrementally moving forward throughout the year. So I think those are positive signs. When we look at our data, we definitely see tighter bands of performance, whether that's geographical or day to day or day part. Those are also, I think, very positive indicators for us where we see just less of a standard deviation of performance between locations.
So it seems to be going in the right direction from a consumer standpoint.
I appreciate it.
Thank you. Our next question comes from the line of Mary Magnelas of Baird. Your line is open.
Good afternoon. Thanks for taking the question. I want to ask about the comps going for Q2 in 2018. Factoring out the Easter benefit that you saw in Q1, the guidance for Q2 in the second half of the year assumes roughly similar trends as what you saw in Q1, even though the comparisons are a little bit softer. So could you just provide a little bit of perspective on how you're thinking about maybe the comparison for the balance of the year and maybe what that assumes for the industry?
Sure. So I think if you net out the 50 to 80 basis points of the spring break, it was roughly a 1.5% comp in the Q1 and granted that's lapping the toughest for us. So if you look at then second quarter and the back half of the year, we really took the back half up about 1%, whereas the Q1 was up about 0.5% over where we thought it would be. So I think we're So I think we're comfortable taking up incrementally quarter to quarter. And again, thinking about Q2, it's about the same.
So the 0.5 to 1.5, if you add in the 50 to 80 basis points is really a 1% to 2%, which is about 1% up from where we originally had it. So I think we're saying that there's some maybe 0.5% more incrementality than we saw in the Q1 as we go forward and we'll see how much we lap in the 2nd quarter and adjust appropriately.
Thanks for the perspective. And then just one more for me. The 5 year unit growth targets that you've laid out call for a step up in the unit growth rate relative to what you're anticipating for 2018. So I was wondering if you could talk a little bit about how the path to ramping up that pace of unit growth might play out, particularly as it relates to 2019?
I think we'll provide more detail about 2019. We usually do that in the October call. But I think part of it this year, as we've talked about before, is we're being cognizant of the capital costs and some of the construction that's driven really by also some of the labor increases. And so I think we tend to provide annual guidance with respect to unit development. We'll definitely do that for next year.
But I would generally assume it would be a step function if we make one of the acquisitions and then it would be relatively linear increases from there.
Our next question comes from the line of Matthew DiFrisco of Guggenheim Securities. Your line is open.
Hi. This is actually Matt Kirschner on for Matt. Thanks for the I just want to dig in a little further into the off premise opportunity. Do you still forecast roughly 13% to 14% growth in 2018 or actually as
a percentage of sales?
We do. I think that the 4th quarter was right about a 14% and we're seeing the same thing in the Q1. So we would anticipate we would hope for about a 1% growth in that area over the next few years on an annual basis. And that's what we've seen so far and don't see any reason why that can't continue.
Great. And then roughly 3% would be attributed to delivery?
It sort of depends on the market, 2% to 3%. Okay.
And then last, just any noticeable difference on your consumer that gets delivery or to go from your traditional in store diner?
We do see maybe a little bit higher And the check itself tends to be a little bit higher. It's more of a it appears to be a party of 2 in general that's ordering for delivery and a slightly higher dessert incident rate.
Great. Thanks for the color.
Thank you. Our next question is from the line of Jeff Farmer of Wells Fargo. Your line is open.
Great. Thanks. Just wanted to start with a clarification. So does the $2.62 to $2.74 EPS guidance include the $0.06 of insurance cost headwind and $0.05 legal cost headwind or exclude it? I missed that, I'm sorry.
So that's the absolute number now, Jeff. It's a good question just to clarify. And so essentially, we if you think about it at the high end, we took out the $0.06 in the insurance, but left it that will recoup the $0.05 And then really if you think about, we took the comp store sales up a little bit, but adjusting for some of the labor pressures that kind of netted out on the bottom line.
Okay. That's helpful. And then in terms of some of the labor productivity, food cost efficiency efforts you guys have been discussing over the last couple of quarters, when was this technology rolled out across the system? I'm just curious if you're done with the rollout, did the 1Q restaurant level margin see the full benefit of those cost efficiency efforts?
Well, we continue to see gains, particularly within the food efficiencies area from the technology that we rolled out. So I think that that's an ongoing benefit, particularly as we continue to grow. If you're adding comp store sales, it makes it a little bit easier from the food cost side and we continue to be able to leverage that, particularly relative to the commodities inflation that we're seeing. So I think that there's ongoing benefit. We continue to improve there.
On the labor side with respect to scheduling and some of the opportunities that we have, I think as we see the traffic patterns increase, but maybe stabilize, we'll be able to recapture a little bit of that, but we were just making sure that we got back up to the right staffing levels in order to accommodate it.
Okay. And just last unrelated question. Following up on the Fox Restaurant Concepts investment, is there any color that you guys can provide at all in terms of unit growth rates since you've been involved? Is it accelerating top line? Anything like that just in terms of the health of these two concepts as you're watching them closely as a potential future growth vehicles?
We're really happy with the partnership and we think Sam Fox and his team really are great restaurant operators and that's why we made the initial investments and they certainly are continuing to open restaurants in both concepts this year and growing the base there. And I think they're growing each of the concepts, maybe 5 to 6 locations annually at this point in time. And the returns and the overall sales and profitability metrics are strong. And so they support our continued investments and we look forward to continuing to watch it and support them over the next couple of years.
Thank you.
Thank you. Our next question is from the line of Karen Holthouse of Goldman Sachs. Your line is open.
Hi, this is actually Jared on for Karen. I just wanted to step back for a second and talk about pricing. So I know on the last call you guys talked about more of a market based pricing approach where you're seeing labor inflation a bit higher. Is that what was driving up the price this quarter those certain markets or was it more of a broad acceleration price across the portfolio?
Yes, I think that's a great question, Jared. You have to think about pricing today a little bit more bifurcated in those areas that maybe have higher wage inflation, but then also can support it. And so we've talked about California and the minimum wage increase there, but it's also one of our strongest markets. And so that's an average and certainly we are continuing to take a little bit more pricing in those areas and a little bit less pricing than the average in the rest of the country.
Thanks. And if I could just follow-up with one quick housekeeping. Did you guys mention the Grand Luxe comp in the quarter?
It was down 1.5%. We saw a little bit of pressure in Vegas, which as you know can swing that measurably. So pretty much in line with the industry given that movement.
Thank you.
Thank you. Our next question is from the line of Stephen Anderson of Maxim Group. Your line is open.
Yes. Good afternoon. I know in past quarters you've talked about some of the increased competition for a lot of the mall based restaurants and maybe having that pressure comps about 2017. I just want to ask if you've seen any impact from that excuse me, that and if you see like a lot of the maybe independents in some of the smaller chains continue to open restaurants? Because if you look at some of the NPD crust showing that the non chain restaurants actually started to pull back at the 12%.
Just want to see what you're seeing out there?
I think one of the themes that we've talked about over the past couple of years when we say things sort of normalizing and coming to fruition is just on the overall supply side of restaurants. And while probably accelerated too fast in 2015 2016, I think we're finally seeing that in total come more in line and actually starting to see reduction in some closures. And so I think overall, we're getting a little bit more back to equilibrium. And I think if that continues throughout this year, that will also be a benefit potentially to comps.
Thank you.
Thank you. Our next question is from the line of Nick Sutton of Wedbush Securities. Your line is open.
Thank you. Just
a quick question on the insurance costs. Did you clarify to what extent that was in labor and to what extent that was in other OpEx?
It's about fifty-fifty. And we really didn't change the balance of our year. It's just claims driven, as we noted, being self insured. But of the impact, Nick, it's about half in labor and half in other OpEx.
Okay. And in terms of the pricing, 27 was slightly above the mid-2s or 2.5 that at least I was expecting. Is that kind of the right level to think about going forward, maybe the mid to high-2s or could that come off a little bit as the year progresses?
I think that in this environment, particularly with the labor piece, what we've talked about is mid-2s to high-2s. And so I think where we're at today is just a good rough number for you to use going forward at this time.
Thank you very much.
Thank you. Ladies and gentlemen, this does conclude today's question and answer session. Thank you for your participation in today's conference and this does conclude the program.