The Cheesecake Factory Incorporated (NASDAQ:CAKE) Q1 2023 Earnings Call Transcript May 10, 2023

The Cheesecake Factory Incorporated beats earnings expectations. Reported EPS is $0.61, expectations were $0.59.

Operator: 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, Inc. First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Etienne Marcus, Vice President of Finance and Investor Relations, you may begin your conference.

Etienne Marcus: Good afternoon. and welcome to our first quarter fiscal 2023 earnings call. On the call with me 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. In addition, during this conference call, when discussing comparable sales, we will be referring to comparable sales on an operating week basis, unless specifically stated otherwise. We will also be presenting results on an adjusted basis, which excludes impairment of assets and lease terminations and acquisition-related expenses. 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 review our first quarter results and provide a financial update. Following that, we’ll open the call to questions. With that, I’ll turn the call over to David Overton.

David Overton: Thank you, Etienne. We entered 2023 with positive momentum and carried forward that trend to deliver a solid first quarter with our top and bottom line performance in line with expectations. First quarter consolidated revenues increased 9.1% over the prior year to $866 million. Despite the record rainfall in California, our largest market, The Cheesecake Factory restaurants comparable sales increased 5.7% and versus prior year and 14.9% versus 2019, and North Italia comparable sales increased 9% versus prior year and 30% versus 2019. Demonstrating the strength and the resilience of our broader portfolio, we delivered positive first quarter comparable sales growth across all of our concepts. The extensive and growing appeal of our differentiated concept supports our belief that we are uniquely well positioned to capitalize on the continued favorable consumer demand for experiential dining.

Execution within the restaurants 4 walls was outstanding with our operators driving solid flow-through to support profitability. This, combined with input costs consistent with our projections resulted in adjusted net income margin of 3.5% for the quarter at the high end of our guidance. On the development front, we opened 2 FRC restaurants during the first quarter, including Flower Child. While we continue to experience some delays in openings due to supply chain challenges and permit approval delays, at this time, we still expect to open as many as 20 to 22 new restaurants in fiscal year 2023, including 5 to 6 Cheesecake factories, 5 to 6 North Italia and 10 FRC restaurants, including 3 to 4 Flower Child locations. Additionally, we anticipate 2 to 3 Cheesecake Factory restaurants to open internationally under licensing agreements.

As we look ahead, we remain intently focused on delivering exceptional food quality, service and hospitality, the hallmarks of our success to drive long-term profitable sales growth. At the center of our execution capability are our people, the driving force of our company who enable us to deliver delicious, memorable experiences for our guests every day. To that end, we are honored to have been named to Fortune Magazine’s 100 Best Companies to Work For list for the tenth consecutive year. This recognition is a testament to our strong culture industry-leading training and commitment to our employees. We believe these attributes will continue to differentiate us as an employer of choice. With that, I’ll now turn the call over to David Gordon to provide some additional details on our operations and marketing.

David Gordon: Thank you, David. Our extensive and innovative menu and unwavering commitment to deliver excellent service and hospitality has made The Cheesecake Factory one of the most differentiated restaurant concepts in the casual dining industry for over 45 years. A key contributor to our success has been our distinct competitive advantage in staffing. Our ability to attract, train and retain highly dedicated staff members and best-in-class operators. We believe maintaining our industry-leading position in staffing is foundational to achieving our longer-term growth objectives. Our staffing levels remained healthy during the quarter. Applicant flow was robust, and our industry-leading attrition rates further improved. In fact, in the first quarter, our hourly attrition declined by nearly 25% versus the prior year.

We believe our retention trends were a key contributor to the sequential and year-over-year improvement in Net Promoter Scores and service and food quality levels for The Cheesecake Factory restaurants. Importantly, North Italia’s attrition levels are nearing Cheesecake industry-leading levels, despite not having the national presence and brand recognition that Cheesecake Factory enjoys, which we believe affirms the effectiveness of the practices and programs we’ve implemented over the past few years. As we think about further accelerating the growth of North Italia, the ability to leverage well-trained tenured managers and staff will facilitate our efforts to scale into new and existing markets. As you heard from David, our sales trends across our portfolio of concepts remain strong, and we continue to see stable guest purchasing behaviors.

To this point, The Cheesecake Factory off-premise sales for the first quarter totaled 23% of sales for the third consecutive quarter. Additionally, we do not see any material changes in on-premise incident rates over the past year, with incident rates remaining above 2019 levels and daypart mix not changing materially. Fox Restaurant Concepts also continued to drive strong results, with annualized AUVs of $7.9 million. We remain confident in the developing concepts in our portfolio and their ability to contribute to our growth. Turning to marketing. As I’ve previously shared, we’ve been developing a rewards program for The Cheesecake Factory. The overarching objective is to leverage data analytics and insights to more effectively engage with our guests on a one-on-one basis and drive incremental sales.

We initially launched a pilot of the rewards program last June in Houston, followed by a second pilot launch in Chicago last November. We’ve had strong operational execution, and as a result, have accomplished our pilot goals, with our acquisitions and member activity rates exceeding our expectations. We purposefully have taken a very measured and deliberate approach in designing Cheesecake Rewards to ensure it is consistent with our marketing strategy while targeting our desired financial objective of driving profitable sales growth. At this time, we’re planning for a midyear national launch of our new rewards program. And with that, I will now turn the call over to Matt for our financial review.

Matthew Clark: Thank you, David. Let me first provide a high-level recap of our Q1 results versus our expectations I outlined last quarter. Total revenues of $866.1 million were at the midpoint of the range. Adjusted net income margin of 3.5% was at the high end of the range. We continued to diligently manage G&A and depreciation, which combined as a percent of sales were flat with prior year. And we returned $25.6 million to our shareholders in the form of dividends and stock repurchases. Now turning to some more specific details around the quarter. First quarter sales at The Cheesecake Factory restaurants were $656 million an 8% increase over the prior year. Comparable sales increased 5.7% versus the prior year and 14.9% versus 2019.

It is worth noting that as a result of fiscal 2022 having 53 weeks, the strong sales week between Christmas and New Year’s Day shifted into the fourth quarter of 2022 from the first quarter of 2023. Due to this calendar shift, that high volume sales week was replaced with an average sales week in the first quarter, negatively impacting our first quarter revenues by approximately $10 million in comparison to the first quarter of fiscal 2022. Sales for North Italia were $63.3 million, a 20% increase over prior year, supported by comparable sales growth of 9% versus prior year. Comparable sales versus 2019 increased 30%. For FRC, excluding Flower Child, sales totaled $68.6 million up 17% from the prior year, and sales per operating week were $152,200.

FRC, including Flower Child, average weekly sales were $118,800 and External bakery sales were $14.9 million during the first quarter of fiscal 2023. Now moving to year-over-year expense variance commentary. Cost of sales increased 10 basis points, driven by slightly higher commodity inflation than menu pricing. Labor decreased 130 basis points, predominantly driven by pricing leverage and slightly lower medical insurance expenses. Other operating expenses increased 50 basis points, mostly driven by deleverage related to the revenue impact from the fiscal calendar shift. G&A remained flat as a percentage of sales. Preopening costs were $3.1 million in the quarter compared to $1.8 million in the prior year period. We opened 2 restaurants during the first quarter versus no new openings in the first quarter of 2022.

And in the first quarter, we reported a pretax charge of $3.4 million related to impairment of assets and lease termination expense and FRC acquisition-related items. First quarter GAAP diluted net income per share was $0.56. Adjusted net income per share was $0.61. Now turning to our balance sheet and capital allocation. The company ended the quarter with total available liquidity of approximately $355 million, including a cash balance of about $116 million and approximately $239 million available on our revolving credit facility. Total debt outstanding was unchanged at $475 million in principal. CapEx totaled approximately $38 million during the first quarter for new unit development and maintenance. During the quarter, we completed approximately $12.4 million in share repurchases and returned just under $13.2 million to shareholders via our dividend.

While we will not be providing specific comparable sales and earnings guidance, given the operating environment continues to be very dynamic, we will provide our updated thoughts on our underlying assumptions for the second quarter and full year 2023. For Q2, based on our quarter-to-date performance, most recent trends and assuming no material operating or consumer disruptions, we anticipate total revenues to be between $870 million and $890 million. Next, at this time, we expect effective commodity inflation of high single digits for Q2. We are modeling net total labor inflation of about mid-single digits when factoring in the latest trends in wage rates, channel mix as well as other components of labor. Based on these assumptions, we anticipate net income margin of approximately 4.75% for the second quarter of fiscal 2023, at the midpoint of the revenue range I previously outlined, and this includes the elevated year-over-year commodities.

Now for the full year. Based on our year-to-date performance, more recent trends and assuming no material operating or consumer disruptions, we continue to anticipate total revenues for fiscal 2023 to be approximately $3.55 billion. We currently estimate total inflation across our commodity baskets, total labor and other operating expenses to be in the mid-single-digit range, moderating throughout the year. And given our unique growth expectations, we are estimating preopening expenses to be approximately $24 million. As we have said earlier, our goal is to effectively offset inflation with menu pricing to support our margin objectives. Assuming we do so and consumer trends remain consistent and there are no other material exogenous factors, we continue to expect full year net income margin of approximately 4% at the revenue level I provided.

With regard to development, as David Overton highlighted earlier, we plan to open as many as 20 to 22 new restaurants this year across our portfolio of concepts, with approximately 80% of openings occurring in the second half of the year. And we continue to anticipate approximately $165 million to $175 million in CapEx to support this year’s and some of next year’s unit development as well as required maintenance on our restaurants. In closing, our first quarter operating performance was the most aligned with our pre-pandemic trends to date, both on the top and bottom line. Specifically, our total sales, most key business drivers and overall profitability were all in line with our expectations. Importantly, our absolute sales trends remain solid and consistent with historical seasonality despite the ongoing noise and volatility impacting year-over-year comparisons still related to the pandemic environment.

And although environment remains dynamic with our solid top line performance, input costs gradually normalizing to more predictable levels and the strategic steps we have taken, we believe we are well positioned to return to generating our historically consistent operational and financial results. We are working hard to build on this momentum despite the macroeconomic uncertainty and believe the strength of our concepts and operating teams will continue to differentiate us through the balance of 2023 and beyond as has been the case for over 4.5 decades. With that said, we’ll take your questions. Operator?

Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of Sharon Zackfia with William Blair.

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Operator: Your final question today comes from the line of Dennis Geiger with UBS.

Operator: This concludes today’s conference call. Thank you very much for attending. You may now disconnect.