The Cheesecake Factory Incorporated (NASDAQ:CAKE) Q1 2024 Earnings Call Transcript

The Cheesecake Factory Incorporated (NASDAQ:CAKE) Q1 2024 Earnings Call Transcript May 8, 2024

The Cheesecake Factory Incorporated beats earnings expectations. Reported EPS is $0.73, expectations were $0.63. CAKE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Brianna and I will be your conference operator today. At this time, I would like to welcome everyone to The Cheesecake Factory Incorporated First Quarter 2024 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions] I would now like to turn the call over to Etienne Marcus, Vice President of Finance and Investor Relations. Please go ahead.

Etienne Marcus: Good afternoon and welcome to our first quarter fiscal 2024 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, we will be presenting results on an adjusted basis which exclude 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 financial results and finish up with some commentary on our outlook for the second quarter and full year 2024 before opening the call up to questions.

With that, I’ll turn the call over to David Overton.

David Overton: Thank you, Etienne. We were pleased with our first quarter results with revenues finishing near the high end of our expected range and superior operational execution contributing to better than projected profitability, resulting in 20% year-over-year growth in adjusted earnings per share. The Cheesecake Factory restaurants’ comparable sales and traffic once again meaningfully outperformed the industry, underscoring the strength of consumer demand for our brand and demonstrating our ability to capture market share. Execution within the restaurant 4 walls was outstanding, with our operators delivering better than planned results across several key areas. This performance, combined with slightly better than expected input costs, resulted in consolidated 4-wall margins of 15% and adjusted net income margin of 4% for the quarter, both exceeding expectations.

On the development front, we successfully opened 5 restaurants in the first quarter, including 2 North Italian restaurants, 2 FRC restaurants and 1 Flower Child location and 1 Cheesecake Factory restaurant opened in Mexico. Additionally, subsequent to quarter end, another Cheesecake Factory opened in Asia. With the 5 restaurant openings in the first quarter, we remain on-track to open as many as 22 new restaurants in 2024, including as many as 3 to 4 Cheesecake Factories, 6 to 7 North Italias, 6 to 7 Flower Childs and 6 to 7 FRC restaurants. Before I turn the call over to David Gordon, I’m proud to share that The Cheesecake Factory has been named one of Fortune Magazine’s 100 Best Companies to Work For, for the 11th consecutive year. This recognition speaks to our culture and our incredible people and we believe it should continue to support our ability to attract and retain talent as an employer of choice in our industry.

With that, I will now turn the call over to David Gordon to provide an operational update.

David Gordon: Thank you, David. Our solid performance for the quarter showcases our operations team’s proven ability to execute at the highest levels and effectively manage their restaurants. To this point, our operators exceeded our expectations in labor productivity, food efficiencies, wage management and perhaps most importantly, in both hourly and management retention rates which were already industry leading and for the quarter, finished at the highest levels in the past 5 years. As we’ve said before, we believe our staffing success is a key contributor to the improvement in our guest satisfaction scores. After all, our people are our greatest resource and enable us to deliver delicious, memorable experiences for our guests each and every day.

Supporting this viewpoint, our internally measured Net Promoter Score metrics during the quarter remained near record highs across both dine-in and off-premise channels, including pace of experience, staff service and food quality. These positive guest satisfaction trends further support The Cheesecake Factory’s continued outperformance relative to the industry with comparable sales and traffic exceeding the Black Box Casual Dining Index by 330 basis points and 440 basis points, respectively. Now, turning to sales trends. Cheesecake Factory off-premise sales remains steady at 22% of sales for the first quarter, in line with the 2023 average percentage of sales. North Italia first quarter comparable sales increased 3% from the prior year, resulting in annualized AUVs of $7.7 million.

Restaurant level profit margin for the adjusted mature North Italia locations was 14.2%, up 120 basis points from Q1 of 2023. Other Fox Restaurant Concept’s annualized AUVs were $7.3 million. Next, I’d like to provide an update on Flower Child. We remain as enthusiastic as ever about Flower Child’s potential, with sales continuing to grow nicely across the concept. In fact, Q1 comparable sales for Flower Child were the highest of any of our core concepts and sales demand and the newer locations continue to trend well. Over the past 18 months, we have successfully implemented several operational and supply chain improvements to enhance the guest experience and drive cost efficiencies. For example, we implemented a kitchen display system across all restaurants resulting in improved order throughput and operational efficiencies.

The loyalty platform was replaced with a more robust and scalable solution. Our new restaurant opening training teams were expanded to be able to support our accelerated new unit growth objectives. We are now leveraging The Cheesecake Factory operational reporting platform and deploying operational dashboards to provide improved planning and performance visibility. The Flower Child’s purchasing is now integrated into the broader Cheesecake supply chain operation to take advantage of our scale and purchasing capabilities. In summary, with strong consumer demand, a robust operations team and support infrastructure now in place and an attractive unit economic profile, we believe Flower Child is well positioned for accelerated growth. And lastly, we remain pleased with our Cheesecake Rewards program advancement.

As I said previously, we’re taking a very deliberate approach as we expand the program and therefore do not anticipate seeing a measurable impact to sales for at least the first year or so. That said, demand continues to exceed our internal expectations and we remain encouraged by the level of member activity and engagement that we are now seeing. We’re continuing to test acquisition tactics and activation campaigns to better understand the key elements that are resonating with rewards members and most effectively increasing membership enrollment, engagement and driving frequency. And with that, let me turn the call over to Matt for our financial review.

Matt Clark: Thank you, David. Let me first provide a high-level recap of our first quarter results versus our expectations I outlined last quarter. Total revenues of $891 million finished towards the high end of the range we provided. Adjusted net income margin of 4% exceeded the 3.5% guidance we provided. And we returned $25.3 million to our shareholders in the form of dividend and stock repurchases. Now turning to some more specific details around the quarter. First quarter total sales at The Cheesecake Factory restaurants were $668 million, up 2% from the prior year. Comparable sales declined 0.6% versus the prior year. In line with the industry, our Q1 sales were negatively impacted by inclement weather, predominantly in January, with trends improving thereafter through the end of the quarter.

Total sales for North Italia were $70.9 million, up 12% from the prior year period. Other FRC sales totaled $74.2 million, up 8% from the prior year and sales per operating week were $140,600. Flower Child sales totaled $34.5 million, up 10% from the prior year and sales per operating week were $83,700. And external bakery sales were $14.9 million, flat from the prior year. Now moving to year-over-year expense variance commentary. In the first quarter, we continued to realize some year-over-year improvement across several key line items in the P&L. Specifically, cost of sales decreased 100 basis points, primarily driven by higher menu pricing than commodity inflation. Labor as a percent of sales was essentially flat year-over-year. Other operating expenses decreased 40 basis points, primarily driven by reduced costs in areas such as utilities and to-go related expenses.

G&A increased 60 basis points, mostly driven by higher staffing and legal costs. Depreciation increased 10 basis points as a percent of sales. Pre-opening costs were $5.9 million in the quarter compared to $3.1 million in the prior year period. We opened 5 restaurants during the first quarter versus 2 restaurants in the first quarter of 2023. And in the first quarter, we recorded a net expense of $3.2 million, primarily related to impairment of assets and lease terminations expenses and FRC acquisition-related expenses. First quarter of GAAP diluted net income per share was $0.68. Adjusted diluted net income per share was $0.73. Now, turning to our balance sheet and capital allocation. The company ended the quarter with total available liquidity of approximately $297 million, including a cash balance of about $60 million and approximately $237 million available on revolving credit facility.

Total debt outstanding was unchanged at $475 million in principal, CapEx totaled approximately $37 million during the first quarter for new unit development and maintenance. During the quarter, we completed approximately $12.5 million in share repurchases and returned $12.8 million to shareholders via our dividend. Now let me turn to our outlook. While we will not be providing specific comparable sales and earnings guidance, we will provide our updated thoughts on our underlying assumptions for Q2 and full year 2024. For Q2, assuming no material operating or consumer disruptions, we anticipate total revenues to be between $890 million and $910 million. This essentially assumes a continuation of February and March trends. Next, at this time, we expect effective commodity inflation of low single digits for Q2, as our broad market basket remains very stable.

We are modeling net total labor inflation of mid-single digits when factoring in the latest trends in wage rates and minimum wage increases, as well as other components of labor. G&A is estimated to be about $58 million and depreciation is estimated to be approximately $25 million. Based on these assumptions, we would anticipate net income margin to be about 5.25% at the midpoint of the sales range. Now for the full year, based on similar assumptions and no material operating or consumer disruptions, we would anticipate total revenues for fiscal 2024 to be approximately $3.6 billion. For sensitivity purposes, we are using a range of plus or minus 1%. We currently estimate total inflation across our commodity baskets, labor and other operating expenses to be in the low to mid-single-digit range and fairly consistent across the quarters.

We are estimating G&A to be about 10 basis points higher year-over-year as a percent of sales and depreciation to be about $100 million for the year. And given our unit growth expectations, we are estimating pre-opening expenses to be approximately $28 million which includes support for some early 2025 openings. Based on these assumptions and assuming consumer trends remain consistent and there are no other material exogenous factors, we would expect full year net income margin of approximately 4.25% at the revenue level I provided. With regard to development, as David Overton highlighted earlier, we plan to open as many as 22 new restaurants this year across our portfolio of concepts. With 5 openings in the first quarter and as many as 5 openings slated for the second quarter, we anticipate our development pipeline of new openings to be relatively balanced across the quarters.

And we would anticipate approximately $180 million to $200 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, we were pleased with our financial performance for the first quarter, with top line trends stabilizing, profit margins expanding, infra cost normalizing and solid operational execution. With these positive results, we believe we are well positioned to once again generate our historically consistent operational and financial results and to continue making progress towards our longer-term goals in the key areas of value creation, growing restaurant comparable sales, expanding restaurant operating margins and accelerating accretive unit growth.

And with that said, we’ll take your questions.

See also Latest Insider Trading Activity: 11 Stocks Executives and Directors are Buying and 13 Best Ethical Companies to Invest in 2024.

Q&A Session

Operator: We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from David Tarantino with Baird.

David Tarantino: Matt, just first a quick clarification question related to your assumptions. You mentioned that you’re assuming that the trends you saw in February and March would be the kind of run rate you’re assuming in the guidance. So could you just elaborate on what you saw in February and March? And then I have a follow-up.

Matt Clark: Sure. So, David, it’s Matt. So if you think about the quarter and Cheesecake Factory comps were the negative 0.6. And what we had said on the last call was the impact from those 2, 2.5 weeks of weather in January was about 1.5% to 2% for the entire quarter, right? So the net of those 2 things being kind of what we saw in the back half of the quarter. So low single-digits, positive.

David Tarantino: Got it. Okay. And that is what you would be embedding in your second quarter guidance?

Matt Clark: Correct.

David Tarantino: Got it. Okay. And then I guess a lot of companies recently have been talking about consumer softness and I just wanted to get your thoughts on what you’re seeing from a consumer perspective? I know you saw improved trends at the end of the quarter but as you kind of step back and look at where you are year-to-date and what you’re seeing on the transaction side, or however you want to look at it, can you talk about kind of the strength of the consumer spending environment and any observations on that front would be helpful.

Matt Clark: Sure. And I’ll just pre-emptively answer the next question around the specifics on pricing, traffic and mix, because it’s part of, I think, that answer, right. So pricing leveled down for us because we dropped off that one-time incremental pricing from December ’22. So pricing was at 5.2. The mix was a negative 4.3 which showed a slight improvement over the fourth quarter but as we predicted, was still a piece of the equation. And so that left traffic at a negative 1.5. All of that traffic piece was related to the January weather. So effectively, we’ve been running flat traffic now for 2 quarters. And so, to answer, I think the question we see the consumer that’s coming in our restaurants being very steady. We haven’t veered off of that trajectory for a while. And week to week, it’s been predictable. So, wherever that is, it’s not a bad place at all for us.

Operator: Your next question comes from Katherine Griffin with Bank of America.

Katherine Griffin: I wanted to ask first about the 4-wall margin, a little bit better than expected, as you said. So I was wondering if you could just further clarify. I think you mentioned input cost but sort of where the upside came from? And then second part of the question is just, is this kind of the right level we should be thinking about for the remainder of the year?

Matt Clark: Sure, Kathy. It’s Matt. So, I think just going back to the last answer for David on the sales trends, I mean, I think having that steady, predictable, historical Cheesecake pattern, our operators just did a fantastic job delivering flow-through on the sales. So a lot of it just goes to the ability to execute in a normalized environment. You know, we saw commodities were, as in what like roughly flattish but within the predicted range, utilities were slightly better. I mean, natural gas obviously is low but I think the most important part of that is just execution and being able to manage the business with a very predictable sales pattern. So that helped a lot. If you think about the rest of the year, every quarter is a little bit different, right?

There’s seasonality and things. So those numbers might not be the absolute same quarter-to-quarter. Typically, you do see a little bit of a tick up and the absolute number for Q2 and then it comes back down in Q3 and goes back up a little bit in Q4. So it moves around. But I think on a full year basis, it’s probably close to it somewhere in that ballpark.

Katherine Griffin: And then I was curious about the Flower Child purchasing and being integrated with the Cheesecake supply chain. Can you quantify or just maybe frame what the margin savings from that are?

Matt Clark: You know, it’s meaningful. I don’t know that we are going to give a specific answer but we’ve done a lot of work in the protein area which is high cost and we feel really good that the contributions from that, it’s a little bit of a tricky answer because we’ve done so many other things, like David talked about putting in the kitchen system, some of the other efficiencies, they’re kind of all blended together but certainly the margins have moved measurably higher and we feel very good about accelerating that growth based on the results that we’re seeing.

Operator: Our next question comes from Brian Mullan with Piper Sandler.

Brian Mullan: Just I actually wanted to follow-up on Flower Child. It’s some encouraging stuff you just mentioned. Could you just remind us what kind of AUVs and maybe lower-level margins you’re targeting there on the new development, if you could incorporate some of the good work you’ve done and just reference? And then is there a long-term target you’d be willing to discuss in terms of the long-term opportunity? Can this be a national brand one day if things break right?

David Gordon: Sure Brian. This is David Gordon. I think I’ll answer your last question first. And that is, yes, we believe that it can be a national concept. Part of the reason that we’ve taken it more fully under our umbrella and leveraged things like the supply chain team is because we have a very strong belief in the concept. You know, Q1 AUVs, the run rate of those are $4.4 million, average unit volume. So they’ve been very, very strong. The new markets have been very strong. Just opened a new Flower Child in Plano in Texas which is an existing market but very happy with the sales there thus far. So we think it’s very promising. We’re excited to open up 6 to 7 more this year and that continued growth moving into next year and the years beyond.

Brian Mullan: And then just a question on California with the implementation of the new legislation on April 1. I know it’s a different segment of the industry but just wondering if you’ve observed anything worth calling out at all on the labor side whatsoever, or if you’d expect to?

David Gordon: This is David. I think it’s still early but we haven’t seen anything thus far. But we continue to remain an employer of choice, are able to continue to pay the wages and see the same wage trends in Q1 that we saw at the end of last year which is a very stable staffing environment. We think that our employee value proposition is very strong. So we’re going to monitor it as we have been and we’ll see what comes throughout the next quarter. But more likely it’s going to have an impact on QSR and not so much on, certainly, Cheesecake Factory and even the fast casual like Flower Child at this point.

Operator: Our next question comes from Brian Vaccaro with Raymond James.