Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to The Cheesecake Factory third quarter fiscal 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you. I will now hand the call over to Mr. Etienne Marcus, Vice President of Finance and Investor Relations. You may begin your conference.
Thank you, Emma. Good afternoon, and welcome to our third quarter fiscal 2021 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 than those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available on our website at investors.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission.
All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements. In addition, during this conference call, we will be presenting results on an adjusted basis, which excludes non-cash acquisition-related contingent consideration and amortization expense. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our press release on our website as previously described. David Overton will begin today's call with some opening remarks, and David Gordon will provide an operational update. Matt will then briefly review our third quarter results and provide a financial update. With that, I'll turn the call over to David Overton.
Thank you, Etienne. Comparable sales at The Cheesecake Factory restaurants increased 8.3% relative to the third quarter of fiscal 2019. Solidly outperforming both the KNAPP-TRACK and Black Box casual dining indices. We believe this performance was particularly strong given the surge in COVID-19 cases from the Delta variant the company was experiencing at the time. Our teams generated solid profitability in the face of higher-than-anticipated group medical insurance costs and incremental costs associated with the pandemic environment, which Matt will provide more detail later in the call. Sales across our concepts further strengthened early in the fourth quarter with continued strong contribution from off-premise channel. Fiscal 2021 fourth quarter- to- date through November 2nd, comparable sales at The Cheesecake Factory restaurants increased approximately 10.5% versus 2019, and we have seen relative consistency in this metric each week.
On the development front, four new restaurants opened during the third quarter, including North Italia and Flower Child in Gilbert, Arizona, which is a growing suburb in the Phoenix market, and the second North Italia location in the Nashville area in Franklin, where we continue to see a great response to the brand. Blanco in the Chicago area, which is a new market for both that concept and the broader FRC portfolio. Blanco is a very differentiated offering in this market and has received a very warm welcome from guests so far. Subsequent to quarter end, The Cheesecake Factory opened in Huntsville, Alabama, to a tremendous demand. With three openings today, North Italia in Orlando and both Blanco and Culinary Dropout in Denver, we met our development objective of opening 14 new restaurants across our concepts this year.
This is a marked achievement, considering the pandemic environment and the associated challenges we have been operating with throughout 2021. On the international front, a third Cheesecake Factory location in Shanghai opened this week under a licensing agreement, and we are seeing all three of our international licensees recapture their pre-pandemic sales levels. Looking ahead, we have a strong pipeline in place, which we believe positions us well to achieve our targeted 7% unit growth next year. At the same time, we will continue to focus on driving comparable sales growth and managing through this operating environment. Should the cost pressures prove not to be transitory in nature, we are committed to implementing further cost management initiatives and leveraging the breadth of our menu to take additional pricing to protect margins. With that, I'll now turn the call over to David Gordon.
Thank you, David. As evident in our third quarter comparable sales growth at The Cheesecake Factory restaurants, the surging COVID-19 cases had minimal impact on our top-line results. Continued strong performance in the off-premise channel supported our sales trends, as average weekly sales in that channel were nearly double 2019 levels throughout the third quarter. We recently completed a consumer research study that showed that we attracted a significant number of new guests to The Cheesecake Factory throughout COVID, particularly via the off-premise channel. Notably, loyalty is very strong, evidenced by a significant number of these new guests already in the frequent cohort. This data further reinforces our belief that a meaningful increase in off-premise sales could be a longer-term sales driver for The Cheesecake Factory as we emerge from the pandemic.
Fiscal 2021 fourth quarter to date through November 2nd, average weekly sales are approximately $213,000, which is 10.5% higher than the level seen in the same period in 2019. Off-premise average weekly sales of $60,000 continue to be nearly double the level seen during the same period in fiscal 2019. Grounded in the learnings from our consumer research, we are again utilizing some targeted off-premise marketing to further drive our performance in this channel. For example, just last week we celebrated Halloween with our guests with our popular Trick or Treat promotion. Our cheesecakes are a key differentiator, and these creative offers continue to drive meaningful demand.
At the same time, we continue to more broadly execute brand-based messaging to raise the profile of The Cheesecake Factory with a focus on social and digital channels. While our primary focus is our core guests, to better reach the Gen Z audience, we recently launched our TikTok presence and have generated over 31 million views of owned content, with each video averaging over 1 million views. In September, we launched augmented reality cheesecake-themed filters on Snapchat, with the campaign reaching over 5 million unique users. Turning to staffing, while we have continued to encounter some pockets of staffing challenges, this has not meaningfully stifled our sales performance at The Cheesecake Factory restaurants. The labor market remains tight. However, we believe we may be seeing some green shoots.
For example, we saw hourly staff turnover moderate throughout the third quarter, and we received solid application flow for our recent Cheesecake Factory Huntsville opening, enabling the restaurant to be fully staffed in advance of its opening date. We were recently recognized on the PEOPLE 100 Companies That Care list, and we were the only restaurant company to make the list. PEOPLE identifies the top U.S. companies supporting their employees and surrounding communities. They highlighted the over 25,000 meals our restaurants donated to healthcare workers across the country, as well as our Nourish program, which donated more than 550,000 pounds of unused food to over 500 non-profit and food banks in 2020. We were also recognized for caring for our teammates in meaningful ways during the pandemic.
Our unwavering commitment to our values and people first culture contributes to our continued industry-leading retention at both the manager and hourly staff levels, which we believe is a key contributor to a positive guest experience. Turning to North Italia, third quarter comparable sales growth of 8% versus 2019 was also solid in the face of the COVID case surge and somewhat more labor pressure than we experienced at the Cheesecake Factory restaurants, given the smaller nature of the concept. Sales at North have strengthened further, with fourth quarter to date through November 2 comp store sales up approximately 14.5% versus 2019 levels. Off-premise has continued to comprise approximately 14% of sales at North.
FRC drove similarly strong top-line performance during the third quarter and has also seen sales further strengthen fourth quarter to date, with notable performance in the off-premise channel with Flower Child. We are incredibly proud of the top-line performance we've driven across our concepts and how our teams are navigating the dynamic operating environment. It is not easy to run a great restaurant today, and we continue to be so appreciative of our team's dedication to absolute guest satisfaction and maintaining our culture across all of our concepts. With that, I will now turn the call over to Matt for our financial review.
Thank you, David. Third quarter comparable sales at The Cheesecake Factory restaurants increased 41.1% year-over-year. Relative to the 2019 period, comp sales were up 8.3%. Off-premise represented just under 30% of total Cheesecake Factory restaurant sales during the third quarter. Revenue contribution from North Italia and FRC totaled $112.4 million. North Italia comparable sales increased 38% year-over-year and were up 8% versus the 2019 period. Sales per operating week at FRC, including Flower Child, were approximately $94,200. Including $16.7 million in external bakery sales, total revenues were $754.5 million during the third quarter of fiscal 2021. As usual, I'm going to provide year-over-year detail on expenses.
Of course, note that the significant disparity in revenues, given the impact from COVID in the third quarter last year, drove some abnormal year-over-year variances. Cost of sales declined 30 basis points, primarily driven by sales mix and pricing leverage. We exited the third quarter with higher cost of sales inflation as we were buying in the spot market to meet volume needs that exceeded our contracted levels. The most significant impact of this was at North Italia, where we saw the cost of sales percentage impacted by nearly 200 basis points due to the level of spot buying for that concept. However, aggregate cost of sales inflation for the quarter of approximately 3% came in line with our expectations given the efficiencies we drove. Labor declined 160 basis points, primarily reflecting sales leverage, partially offset by higher wages and training costs.
Relative to our expectations, group medical insurance costs were approximately $3.3 million higher due to a number of large claims. We also had approximately $800,000 higher than anticipated sick pay, largely associated with the Delta surge, and training costs were about $900,000 higher than expected. In total, these items had approximately 70 basis points impact on margins for the quarter. We also saw slightly higher than anticipated wage inflation during the quarter by about 1%. Other operating expenses declined 400 basis points, primarily due to sales leverage relative to the prior year period. Versus our expectations, we had over $2 million in incremental costs associated with the pandemic environment, including higher than budgeted natural gas, recruiting, and costs associated with supply chain disruption for certain non-food products. This translated to over 25 basis points of impact to margins.
We have seen similar challenges across our concepts with elevated impacts, such as with the North Italia cost of sales that I referenced earlier. G&A as a percentage of sales declined 120 basis points, also primarily due to sales leverage as well as tight cost controls. Pre-opening costs were $3.2 million in the quarter compared to $2.4 million in the prior year period. Two North Italia restaurants, 1 Flower Child, and 1 Blanco opened during the third quarter this year versus two Flower Child locations in the prior year period. Third quarter GAAP diluted net income per common share was $0.64. Adjusted net income per share was $0.65. Now turning to our cash flow and balance sheet. The company recorded approximately $11 million of cash flow used from operating activities during the third quarter.
This reflects a $36.5 million deferred payroll tax repayment. In turn, the tax rate for the quarter reflected a benefit associated with this repayment of approximately $2 million. CapEx totaled approximately $18 million during the third quarter for required maintenance and new unit development. We ended the quarter with total available liquidity of approximately $371 million, including a cash balance of approximately $131 million and approximately $240 million available on our revolving credit facility. Looking ahead, the operating environment continues to be very dynamic, so we want to keep you updated on our underlying expectations for the balance of the year.
For the fourth quarter, we are anticipating about a 1% negative comp sales impact from the holiday shift, given that our fiscal year will end on December 28th, so the balance of the high volume sales week between Christmas and New Year's will move into the first quarter of fiscal 2022. We're anticipating fourth quarter cost of sales inflation to be approximately 3% higher than the third quarter or 6% versus prior year as we expect to continue to need to purchase even more ingredients in the elevated spot market to meet volume needs that are expected to exceed our contracted levels. Similarly, the labor market remains tight, and as such, we would expect to continue to see elevated training and overtime and are anticipating some incremental group medical carryover from the large claims for our provider.
Taking into account our wage rate trends as well as anticipated normal seasonal sales trends and related leverage, we would expect labor as a percent of sales to be slightly better than in the third quarter and other operating expenses to be favorable to Q3 by as much as 75 basis points. Note the seasonality of the acquired concepts is factored into these expectations. We continue to expect G&A of approximately $47 million for the fourth quarter and pre-opening of just under $5 million. Finally, we now estimate our tax rate for the fourth quarter to be approximately 5%. Looking ahead to fiscal 2022, due to the disruptions in the supply chain impacting the restaurant industry and the broader economy, our purchasing team is still in the process of contracting, as you would expect in these circumstances.
Note that while we currently have 3% pricing in The Cheesecake Factory menu and plan to remain at that level for the remainder of this year, as David mentioned, should the cost pressures prove to not be transitory in nature.
We will implement further pricing actions at our menu change during the first quarter of next year to protect margins. Specifically, if commodities were to remain at current spot pricing levels for the full year of 2022, it would require us to take an additional 1.5%-2% of menu pricing, for a total of 4.5%-5% of menu pricing to support our margins. The labor market is also dynamic and inclusive of known minimum wage increases. We are currently anticipating inflation could be around the 5% level we are experiencing at our restaurants this year so far. With regard to development, we plan to open as many as 20 new restaurants next year, spread across our portfolio of concepts.
For modeling purposes, at this point, we would expect at least five Cheesecake Factory restaurants, seven North Italias, 4 Flower Child locations, and four other FRC restaurants. We would anticipate approximately $150 million in CapEx to support this level of unit development, as well as required maintenance on our restaurants. Despite the ongoing cost pressures related to the pandemic environment impacting the restaurant industry and the broader economy, we believe we are delivering solid EPS so far this year, while importantly protecting our brands to enable long-term market share gains. With the breadth of our high-quality growth vehicles, we also believe we're poised to achieve our 7% unit growth objective in fiscal 2022. With that said, we'll take your questions.
If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question again, press the star one. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Joshua Long with Piper Sandler. Your line is now open.
Great. Thank you for taking the question. The first one I wanted to dig into was the consumer research that you've been conducting here lately. Sounds very interesting and compelling, especially in regards to bringing new consumers into your brand funnel. I was curious if you might be able to share what you've learned. I imagine it's still early in terms of how you're engaging with those customer cohorts, but what you've learned from them, where they've been, and maybe how they're using the brands differently from your loyal guests that you've been in conversation with over the prior years.
Thanks, Josh. This is David Gordon. I don't know where they've been, but it's good that they've been back to The Cheesecake Factory. I think what we've seen is a significant increase in the frequency of our frequent cohort, which now comprise approximately 20 visits a year versus what was closer to 14 pre-COVID. That's a great sign. Certainly, some of the marketing that we did throughout COVID has been beneficial to remind guests to come back to The Cheesecake Factory, as you mentioned. We have a significant number of new guests to the brand, which is great to see.
About a third of our frequents are new guests, and we've seen them be very loyal, and use not just the value of the marketing, but have come back even during that time where we had decreased the marketing, throughout the second quarter, and in the beginning of the third quarter. Some of the other research that we found is that the value proposition that we talk about a lot at Cheesecake Factory around the breadth of the menu and the price points of the menu have come back, as a very positive insight, from guests that we have talked with. We see that particularly with the frequent and the moderate cohorts.
Overall, we feel that the research has been enforcing what we've been doing throughout the pandemic, and we'll continue to engage with those guests through our different marketing channels moving forward.
Great. Thank you for that. One more, if I might be able to sneak it in. Was thinking about the performance of your growing portfolio of brands, in particular North Italia, as you go in and backfill markets, and you grow brand awareness in markets going forward. Curious on just what you learned from the brands and how they perform and maybe how guests engage them and you know, how do you think about balancing the portfolio in terms of you know, new market opportunities versus backfilling existing markets as you start planning your pipeline for 2022 and beyond?
Sure. Well, I think that, you know, the 20% growth rate that we've talked about for North is we feel really good about. I'm very positive that in the new markets that North has moved into that the sales have been as strong as they have been. We just opened up today in Orlando, although we already have the restaurant in Miami and one in Dadeland, it's a relatively new market, and we would anticipate that it will do really, really well. I think there are a lot of markets today that we're not in yet. Matt mentioned the Blanco that had opened in Chicago as an example or in the Northeast.
I think we'll look to continue to fill in the markets that have been successful and then slowly maybe plant a North in some of those newer markets and still try and understand how it's received from a guest perspective. There's nothing that will slow down that 20% growth rate at this point based on the acceptance that we've seen in every geography that North has moved into thus far.
Great. Thank you.
Your next question comes from the line of Jon Tower from Wells Fargo. Your line is now open.
Awesome. Great. Thanks for taking the question. David Overton, you had mentioned earlier in the call taking measures to manage costs, potentially above and beyond just pricing into 2022. I was hoping you could elaborate on what you mean there. Are you thinking perhaps peeling back on some of the menu options, or is there some labor management plans that you would expect to put in the system? I'm just curious to what your thoughts are there.
Hey, John, it's Matt. You know, I think that we have opportunities, you know, relative to where we were pre-COVID, as well as opportunities that present themselves from the current environment. You know, for example, we continue to look at opportunities to improve the supply chain and what can our providers do for us to take out steps in the kitchen, right? I think it's pretty tough in full service casual dining to replace kitchen employees with robots, but you can improve some of the steps, you know, whether you're pounding chicken or deveining shrimp or things like that. I think also just even, you know, looking at coming out of this environment, the productivity has been very strong. We've had, you know, elevated training and recruiting and overtime types of costs.
when we look at it from a productivity standpoint, we're actually ahead of where we used to be. Part of that is because we have slightly elevated check averages, and we've done a great job designing our workflows around the on-premise and the off-premise channels. You know, our approach is typically around continuous improvement, and I would expect it would be sort of like that. I wouldn't expect to see any menu reduction at all. We believe that that's a key driver of the sales and is important to keeping the sales levels high so that we can recapture the margins.
Makes sense. Just going to the loyalty plans that you had outlined, at least on last call, or at least talked about it, was there any spend in the third quarter related to that? Where are you in the process of rolling it out?
There was only a nominal amount in the third quarter. You know, I think we're where we thought we would be. I think what we said last time is that it would be next year, and we still think that that's right. I don't think we have a further update with more specifics. You know, hopefully by the next call, we'll be able to fill in a little bit more of the timeline.
Great. Then just lastly, on average weekly sales, you talked about $213,000, I believe, quarter to date right now. Correct me if I'm wrong, but October is seasonally the lowest point for average weekly sales during the fourth quarter historically. This year, obviously, that's noise with Halloween.
Yeah, you know, during the fourth quarter, you know, that is correct. We feel good about where, you know, if you look at the comp basis, the quarter to date, 10.5% is a really strong number. That includes the Halloween weekend, which is traditionally not that great of a sales period.
Great. Thanks. I'll move on.
Your next question comes from the line of Sharon Zackfia with William Blair. Your line is now open.
Hi, good afternoon. I guess just one, kind of clarification question and then a real question. Given the shift in New Year's Eve out into fiscal 2022, should we expect a wider gap between comps and average weekly sales at Cake than is normal? Then my second question was really on price elasticity of demand. I think you mentioned that one of the findings was the value and breadth of the menu and how much your customers really liked that. I heard what you said about pricing and what you could do. I guess, how willing are you to try to fully inoculate your margins into 2022? Do you have any learnings on multi-channel customers that might help you think about that process?
Hey, Sharon, it's Matt. Good questions. The first one, I think the answer is yes, technically, right, to the New Year's Eve, the comp versus the AWS, because you're obviously lapping that big, you know, couple of days and night there. So I think there's a little bit of a differentiation. On the second piece, you know, when we look at the overall price elasticity for Cheesecake, we're pretty confident where we are at, given the breadth of menu offerings and the breadth of price points in there. I think also, you know, one of the things that we always do is look at the competitive environment. You know, we typically have been right in the middle of where we see the average pricing across the nation.
I would say based on what we're looking at, what we would need to cover margins, we would be probably a little bit below what the averages are that we're seeing. I think we feel good about that from a competitive standpoint as well. You know, certainly we'll always look to make sure that there's enough value on the menu for every guest. I think we're in position to fully cover the cost of sales and labor as we see it today. I mean, things can always change, but based on today's trends, we believe that to be the case. I think from the omni-channel perspective, you know, one of the things that is very evident and we didn't touch on that, is that our frequent guests are omni-channel.
They come to us with, you know, delivery and pickup and on-premise. I think that speaks a lot to the value that they see based on the quality of the food, the portions, as well as the experience when they come on-premise. You know, we've only seen that piece, as David Gordon mentioned, increase. Those loyal guests, I think, view the value proposition as having gotten stronger in this environment overall.
Thank you.
Your next question comes from the line of Jeff Farmer with Gordon Haskett. Your line is now open.
Great. Thank you. You touched on it a couple of times, but I'm just looking for a little bit more color here. Just in terms of the strength of sales improving Q4 to date, looks like pretty much across all your concepts. Are there a couple of things you could point to that are driving that strength? What are your thoughts on the sustainability of that top line momentum?
Well, you know, I think it is across all concepts, and pretty much in all geographies. You know, I think execution is what always drives, you know, outperformance versus the market. We certainly are doing that. I think that the operations teams have been amazing to kind of weather the storm that everybody saw in the summertime, to keep our staffing levels at about the same level so that we can manage the business is incredibly important. I mean, obviously, you hear about restaurants that are closing shifts or closing days or limiting service. I think for the most part, we've been able to accommodate all of our guests. I think that that's a part of it.
I think all of the things that we have done to drive the value and to be accessible in all of the channels, you know, supports that as well. I think it's probably a little bit of everything, not one factor in total. You know, it's impossible to predict. I would say that we've probably been the most consistent sales brands in the industry over the past six months. You know, that's a pretty good testament.
Then just a quick follow-up. Again, something that you touched on briefly, but you did point to pockets of staffing shortfalls, and again, you just referenced that. In terms of the common themes in these pockets from a labor sort of supply demand perspective, what is going on in these pockets? What is the common theme in terms of seeing the staffing levels being a little bit lower than you'd like them to be?
I think there's this relatively Jeff, this is David Gordon. That's relatively not predictable, to be honest. It's not like there's a consistent theme. It can be one part of the country one week, and then suddenly it's a different part of the country. To Matt's point, it's not meaningful enough for us that it's really having an impact on sales, as you can see from the sales. Our teams continue to focus on retention, I think has been valuable for us to be able to keep stations open and not be closed any day of the week and to be able to sustain our hours. All of that is driving sales. It seems like it's been a little more stable here in the most recent weeks, which is great.
I mentioned the Huntsville opening being fully staffed and ready to open. You know, the other thing I would just add to what Matt said, I think our strategic decision to keep all of our managers in place throughout COVID has really helped us, as sales pick back up. We didn't skip a beat operationally, and although it's challenging, the operations team, I think because of that decision, and the retention of the staff and our tenured staff that we've had, have been able to execute at a really high level to be able to maintain the type of sales that we've seen.
Jeff, this is Matt again. I would just add one more thing and just give a shout-out to our supply chain team. Because another piece of this is you've got to have the staff, and you've got to have the product, and they have worked tirelessly. We have probably the best vendor support in the industry as well. The long-term partnerships that The Cheesecake Factory has. You know, certainly things are a bit more expensive and there are more fire drills than usual, but making sure that you can have our full menu or very close to it all the time is also super important.
All right. Very helpful. Thank you.
Your next question comes from the line of Jared Garber with Goldman Sachs. Your line is now open.
Hi. Thanks so much for the question. Wanted to just circle back on the prior question related to staffing issues, or lack thereof. Our channel checks would suggest that there are, you know, pockets of restaurants that continue to be either closed or shut off or whatever the right terminology is. Just wanted to get a sense of it. You noted, obviously, I mean, the sales volumes seem pretty healthy. You noted there wasn't much of an impact there. Wanted to get a sense of it if you think that some consumers that maybe, you know, are shifting towards the off-premise channel who would have, you know, who would have dined in.
I don't know if there's a way to tease that out from your data, but I'm trying to just get a sense of if some of the off-premise strength is due in part to some sales, you know, throttling, if you will, in the restaurants. I have one follow-up on margins.
Jared, this is Matt. You know, I think on the fringe, it's pretty difficult to figure that out, actually. You know, the thing that we've known most of the time is that the guests are choosing based on what their occasion is, not necessarily that they were gonna go to the restaurant next to us and that restaurant was closed, so they got takeout. They're gonna go, you know, dine on premise and they're gonna wait. I mean, we've seen that, you know, guests are willing to wait. We have, you know, on Saturdays our wait times are back up to what they were historically. I think it's not so much that. I think it's just the occasion base that you're choosing to go to.
Got it. That makes sense. Are you seeing any shifting in maybe day parts or, you know, weekend versus weekday usage, as we move further away from the, you know, height of the pandemic?
You know, I mean, I'm looking at our stat pack right here for the quarter, and it's remarkably consistent. You know, nothing moves more than 0.5%, really, to be honest. I think it's there on the days of the week, a little bit more strength in the early mid-week, and that could be a little bit the result of other companies closing on a Monday or Tuesday or something like that. Obviously, we have the capacity, but in terms of the day parts, I mean, and we're still comping up across all of the days, but maybe a little bit stronger Monday and Tuesday.
Great. Thanks. That's great color. Just one more on the margin side, I think you mentioned earlier that North Italia might be seeing a little bit more of the staffing or labor challenges versus the rest of the business, and just wanted to get a sense of maybe why that is. Is it related to geography? Is it related to, you know, demographics or something along those lines?
Well, I just think it's the you know two things. I mean, it's the size of the concept, right? We're talking about, you know, not even 30 locations yet. Comparing it to The Cheesecake Factory, which is best in class. I just think, you know, you've got a tall order in comparison. I think that they're really doing a great job, as you can see by their quarter-to-date sales numbers stabilizing their staffing. I think, you know, everybody saw sort of mid-summer a really big crunch, and I just think that we're comparing to a very, you know, tough competitor there in ourselves.
Great. Thanks so much.
Your next question comes from the line of Jeffrey Bernstein with Barclays. Your line is now open.
Great. Thank you very much. Two questions. The first one, just in terms of the broader restaurant margin outlook. Just wondering for 2022, in theory, is the goal to hold margins flat, presumably using pricing as needed beyond the productivity initiatives? Just wondering if that's kind of the goalpost, in which case, you know, specific to pricing, are you willing to take pricing at the risk of traffic, or do you prefer to be conservative on that front? Maybe take a little bit of margin pressure, but with the idea being to keep the value proposition strong. Just trying to measure your intent around pricing to protect the margin.
Hey, Jeff, it's Matt. I think it's definitely the question of the quarter. You just nailed it. You know, I would say a couple of things. You know, pricing is a little bit art and a little bit science and, you know, we do wanna get it right. I think you can see that by sort of the cadence of our actions in that we're keeping our pricing in the fourth quarter. We didn't preemptively put some extra in December. We're looking to see what the commodities market really is going to be. It's kind of at a log jam right now. I think most people understand that for some of the key proteins as well.
That being said, you know, I think when we look at our sales levels that we certainly can absorb an incremental 1 or 2%. I don't think that we're sacrificing really on the top line to be able to protect margins. If there was some degree of elasticity and it was, you know, a 1% impact off of 10.5%, but we could protect margins, you know, I think that we would view that as being a fair trade-off. Right now, we don't think that that would even be the case.
Understood. The follow-up is just on the to-go business. It seems like you're excited by the strength and maybe even the acceleration in it, despite people returning to dine in restaurants. I'm just wondering how you think about the unit economics with the increased off-premise. Does that change materially, or does that maybe increase the unit growth potential that you have for, I guess presumably The Cheesecake would be the one that would get the most attention? Just trying to assess the impact from the growth in off-premise.
Yeah, Jeff, it's Matt. I think it's just two. It seems like there's maybe two parts to that. You know, the first part is that, you know, we sort of look at what the total when we're thinking about growing, you know, restaurants, the total opportunity. You know, certainly you're getting, it appears to be some stickiness that could increase the AUVs. I mean, the markets that we're going into, we feel like pretty confident going into just as we talk about Huntsville regardless of that right now. I mean, I don't know. I think it's too early to say if it opens up anything new. The economics, though, in total for the off-premise are about the same as the on-premise.
You know, the labor is a little bit of a different model, and certainly delivery, you've got the commission piece, but it nets out pretty equally. We're agnostic, and you know we only take very low double digit or single digit pricing for delivery because we wanna be as competitive as possible. I think that that's worked out for us. You know, we'll drive omni-channel, whichever the guest wants to do.
Understood. Thank you.
Your next question comes from the line of John Glass with Morgan Stanley. Your line is now open.
Thank you very much. First, Matt, if I could just follow up on the last question. Is it the goal, do you think with the pricing you contemplated in knowing what you know about inflation, that you could keep hold restaurant margins from on a full year basis, 21%-22%? Is that what you're saying if you wish to, or is it higher? I just wanna make sure we land in the right place.
Yeah. When we look at it in totality, right? There's a couple of things. There's restaurant level margins, and then there's total EBIT. You know, we are getting leverage on the G&A and the fixed depreciation. When we look in total, you know, we're also thinking about getting back to the 2019 level. I mean, that's what we've been shooting for. Obviously, there's a lot of noise in the pandemic-related issues. But I think we have, as things sit today, sufficient pricing power to get back to the 2019 levels. That's what we mean by kind of flat, right? I mean, this year's not really a good comparison because the first quarter was so far off, and then you've got some other noise.
We think that's true.
Okay. An EBIT level, my model, 5% would be sort of what you would shoot for in 2022. Is that the right way to think about it? Not necessarily on the restaurant level, but on the EBIT level.
Well, I mean, we're still gonna be working through some of that math. You know, I think certainly with the leverage that we're getting, I mean, you know, we might get back to flat overall margins too. It depends on some of the inflationary pressures.
Got it. That's very helpful. When you think about the.
We're probably screening those, John, is a good, you know, good goalposts, to use somebody else's term.
Got it. Thank you very much. When you think about the Fox Restaurant Concepts in total, I'm talking about North Italia and others, have you thought about how do you market those brands, particularly when you go into new markets, is there existing brand awareness? Do you what do you use to build brand awareness, I guess, when you enter those new markets for those newer concepts?
It's much more of a local philosophy than I think Cheesecake Factory because of obviously the size of Cheesecake and its breadth. As we move into a new market, we do a lot of local marketing within that geography, whether that's boots on the ground marketing to local businesses, friends and family marketing, some of what you would do in a traditional smaller company. We've even at points in time done things like, you know, rented a billboard, et cetera. The good news is we haven't had to do much marketing in those new markets, that there's been good buzz around the restaurants. We certainly use the social platforms aggressively. Instagram is pretty prevalent at all of the FRC concepts.
They also have good email database of guests that are already within their communication channels. It's a little bit different strategy than Cheesecake, and thus far, because of the success we've seen in those markets, it seems to be working.
Great. Thank you.
Your next question comes from the line of Mary Hodes with Baird. Your line is now open.
Good afternoon. Thank you for taking the question. On the 2022 outlook, just one clarification question. Would the theoretical pricing of 4.5%-5% be enough to protect margins in 2022, given the outlook you have for both commodities and labor? I guess I just wasn't clear whether that was what you would need to cover commodities or all the inflation.
Right. That's a great point to clarify, Mary. This is Matt. That includes both of the major inputs, the commodities at the spot market and the labor inflation that's, you know, about this year's level of 5% is contemplated in that pricing level.
Okay. Thank you. What would commodity inflation-
Just to clarify, though, too, Mary, maybe just one thing.
Mm-hmm.
I don't think that we're saying that that's our commodities outlook yet. We're saying that's at the spot market today. We're still in the process of contracting, and it remains dynamic. We're just giving that metric for people to use to understand where things are at.
Yep. Understood. On staffing, is there a way to frame up what % of targeted levels you're currently running at? If that's not 100%, you know, what do you think is needed to get to 100%? Is that just the external backdrop improving, or are there other internal initiatives that you're planning to deploy to get back to 100%?
Well, versus where our sales are at, we are not at 100%. I mean, and that's been the challenge. We are close to it, but because the sales levels, you know, remain at the 10.5% level above 2019, it still remains tight, right? And so that's why we still run a little bit higher in overtime, and we're still running a little bit higher in recruiting costs because we need to continue to bring people in. You know, it seems like we've been very stable. We've kept the staffing levels about the same as they were from the busy summer months, so I think that's pretty positive in the fall here.
I do think there needs to be probably some continuous moderate improvement in the overall environment for all restaurant operators.
Mary, this is David. I would just add that our recruiting team continues to innovate on the attraction side to make sure that, you know, people know that there are jobs available, and our operations teams continue to make sure that once they have somebody who has been attracted, we engage with them really, really quickly. It's one of the keys today is to get somebody hired just to make sure that you don't leave them out there for a day or two. Whether that's using text for recruiting or some of the other methodologies, our corporate team is doing a terrific job of assisting the restaurants in making sure that job ads are posted everywhere they can be, and that there's very active recruiting going on, not just passive recruiting.
Okay. Great. Thank you both. I'll leave it there.
Your next question comes from the line of Dennis Geiger with UBS. Your line is now open.
Great. Matt, wondering if we could come back to the North Italia margin structure a little bit. Just wondering if you could highlight some sort of where the more mature margins are versus you know some of the less mature stores, the margin dynamic, recognizing that I think probably more than half of the stores, the North stores are non-mature stores at this point. Just curious, anything sort of less versus more mature, the gap there on margin, if that's gotten you know any better or if it will going forward, the longer that you've owned the brand, or if it just takes time to mature and grow into those margins.
Hey, Dennis, it's Matt. Great question. The North Italia restaurant level margins for the quarter were 15.1%, which, you know, on the face of it seems like there was a little bit of pressure versus Q2. We did note in the prepared remarks that the brand versus Cheesecake had about 200 basis points of incremental pressure on the cost of sales from buying on the spot market. I think from, you know, from an aggregate level, the productivity was good. We saw some improvement overall, if you factor in the fact, you know, that there's just major disruption in supply chain. The other components of the P&L were supported very well.
Great. Just one more. Just wanted to come back to that survey work that you talked about earlier. Assuming I understood it kind of the insights into the newer or the recaptured customers. Anything more to add sort of on sort of the biggest factors there, you know, maybe if some of it was the value more recently versus other brands that are out there. Maybe it's the service levels that you're doing a better job on in you know, recent months, recent quarters versus others. Or if it's just folks to discover, you know, rediscovered you, discovered you and everything that the brand stands for is resonating. I'm just curious if there's anything more there on those factors. Thank you.
Sure. Dennis, I do think it's everything that the brand stands for that resonated. I think the reminding guests that we are out there and easily available to access through the off-premise channels was meaningful with a lot of guests that hadn't been using us for off-premise before. I think the omni-channel approach that Matt talked about and the marketing to support that was really beneficial. The one other thing that I didn't mention was they also scored us very high on all of our COVID safety protocols. We got a lot of positive feedback. The guests felt very comfortable with everything that we not only said we were doing, but they were actually seeing once they were in the restaurants, and I think that contributed as well.
Great. Thank you.
Your next question comes from the line of Brian Mullan with Deutsche Bank. Your line is now open.
Thank you. Question on restaurant level margins. I don't wanna beat a dead horse, but wanna clarify something here. Just putting aside the inflationary environment which you laid out how you could price for, Matt, is there a way to think about any headwind or tailwind next year from the North Italia and FRC acquisitions relative to the 2019 result of 15.7%? You know, the units you acquired, the units you've opened since taking ownership, you have plans for 7% net unit growth, you know, next year. Is there any drag from those units that you anticipate, at least in the near term?
Sure, Brian. This is Matt. It's a fair question. I think because of the growth orientation of those brands, you know, we would expect that their margin structure would be slightly below The Cheesecake just because of a weighted perspective of the newer restaurants. You know, I think that has the potential. I don't think it's too big when we've modeled it out, but there is a potential for a little bit there. You know, I think when you look at one of those brands, you know, it could be 2%-4% below Cheesecake, depending on how many units have opened in the near term. I think you could kind of model something like that in.
Okay, thanks. Then just a follow-up, just a question on Flower Child. Can you just talk about where you are with that brand? You know, do you have the model right? You know, what are some of the key operational metrics you'll be watching with those new openings next year? You know, and what would it take to wanna take that brand over, fully bring it to corporate the way you did with North Italia? What, you know, would be some of the benefits if you were to make that move? Why would you do that?
Sure, Brian.
Thank you.
Great question. This is David. We're sitting at 28 Flower Child restaurants today in 10 different states. Again, like North Italia, they continue to do well in just about every new geography that they've moved into. We do have a Cheesecake Factory leader that's been now at Flower Child. It's probably coming up to two years almost, and has continued to help work through what we believe were some operational opportunities. In the short term, I'd say that Flower Child is going to continue under the umbrella it's under.
You know, with everything that's happening at Cheesecake and the growth of North, we have a really solid team, not just with the gentleman from Cheesecake Factory, but with Sam Fox and the entire team over at FRC operating those Flower Child today, that's allowing us to stay focused on Cheesecake Factory and the growth at North. That'll be the near term plan. But at the same time, we are leveraging supply chain. I'd say that that's one of the areas we'll continue to focus on for next year, to help within the model, to help with food costs, to help maybe in some of the contracted pricing, some of the stuff we've already talked about on this call. I think we can do that without sort of taking over operations of Flower Child in the short term.
Thank you.
Your next question comes from the line of John Ivankoe with JP Morgan. Your line is now open.
Hi. Thank you. Many of your restaurants or I guess all of them, you still include, you know, a fairly similar, you know, service style, I mean, traditional service style that's been run for the past couple of decades. I mean, does, you know, the current, you know, I guess, cost environment, labor availability environment, technology availability, you know, encourage you to rethink the way that customers are served or in any way? You know, do you think that could potentially drive more throughput and/or drive more efficiency in your various full service boxes? Thanks.
Hi, John. Thanks. This is David Gordon. We are the leaders in experiential dining and we consider ourselves to be high touch, high service, and we wanna provide a level of hospitality that really shows that we care about guests and I think drives some of the sales that we've talked about today. People wanna get the value through the hospitality, not just through getting in and out of the restaurant as fast as they can. Now, that doesn't mean that we won't look for ways to use technology as Matt talked about earlier in the kitchen, or who knows what we might do in the front of the house. I think we've talked now for years about not necessarily putting tablets on the table. That's not the type of style that we wanna be in high-end casual dining.
There may be other ways to evaluate whether that's payment processing, or just other ways to improve the guest experience without removing the hospitality that I talked about. We'll continue to evaluate what we can do in that area. I would anticipate that we'll continue to be leaders in the world of hospitality, which we think helps drive the long-term sales that have always been such a big part of Cheesecake Factory.
Understood. Thanks.
Your next question comes from the line of Brian Vaccaro with Raymond James. Your line is now open.
Thanks, and good evening. Can you just clarify the comment you made on the average staffing levels? I think back in July you were a little over 100% of 2019 levels, if my notes are right. Are you still in that ballpark or you're just saying you're below what you think you need to sustain the 110, so maybe you're in that 100%-105% level? Can you just clarify what you were saying there, please?
Yeah, Brian, this is Matt. Yeah. It does move a little bit month to month. I think we're right around the same level of staffing that we were in late June, early July of this year, and maybe slightly below 100% of 2019. It's within 1% or 2% of both of those metrics, which obviously puts us a little bit below where we'd like to be given the sales levels.
Yeah. Okay. I think you also said you're seeing some green shoots in the labor market. Can you just elaborate on what you're seeing there and maybe comment specifically on the differences you might be seeing in new applicant flow versus the turnover rates or any other dynamics you think are worth highlighting?
Well, Brian, this is David. The turnover rates have certainly stabilized over the past few months, and that's been beneficial. The green shoots are just references to certain markets where the staffing availability has just been a little bit easier than it had been probably for the previous quarter. Again, it is very dynamic. It does change, but it feels as though things are stabilizing a little bit more. You know, being able to staff a full restaurant in Huntsville, you're talking about over 200 staff members, is very promising in a market that has 2% unemployment. That gives us-
Mm-hmm.
a little bit of hope.
Brian, it's Matt. I would say two other things on that. From an applicant flow perspective, I believe we're seeing the same number of applicants as we did in the middle of summer. Again, that's a positive, you know, relative to a slower period that October is. The wage rate inflation, you know, that I think peaked kind of midsummer is sort of back to our norm anyway. I'd say I think you're just seeing a little bit of moderation back to the mean over the past two months.
All right. That's great. On Flower Child, it looks like the AUVs are running in that kinda mid-$3 million range in the last two quarters. You know, pretty good run rate there. David, I think you said it was strong so far, but where is off-premise mix for Flower Child in recent quarters?
Roughly 40%-45%. Really depends on the location, but I'd say on average about 40%.
Okay, great.
Brian, you're right. We've seen really good stability in the brand with the sales, you know, right around the 3.5, 3.6 levels, and that's with the new development in new markets. You know-
Mm-hmm.
Certainly, you know, Arizona had been strong, but seasonally, you know, could get a little bit slower and yet we held the same sales level. We're really impressed with how we're seeing that play out against different geographies and the stability of the sales trends has been noteworthy. I appreciate you bringing that up.
Yep. Just last one, bookkeeping question. Matt, I'm sorry if I missed it, but what were bakery sales in the third quarter?
$16.7 million.
16.7. Excellent. Thanks so much.
Sure.
As a reminder, if you would like to ask a question, please just press star one on your telephone keypad. Your next question comes from the line of Andy Barish with Jefferies. Your line is now open.
Hey, guys. Good afternoon. Hey, Matt, can you just sort of give us in rank order what you know, capital allocation would look like for next year, just given you know, what looks to be pretty you know, significant increases in free cash flow?
Sure, Andy. Yeah. It's an often overlooked but super important part. Obviously, the CapEx piece we laid out was about $150 million to build those restaurants and with the maintenance. I would say, based on our recent board discussions, that we are interested in bringing back the dividend. Obviously, we need to be outside of the revolver amendment, but with current performance, you know, we believe that that will come to play. So, you know, that would certainly rank up there. We could choose to also pay off the revolver, you know, and I think probably those come in ahead of a repurchase initiation if we were to get there next year.
Great. Thanks. That's all I had.
Great.
There are no further questions at this time. Ladies and gentlemen, thank you for attending. This concludes today's conference call. You may now disconnect.