Good day, and thank you for standing by. Welcome to The Cheesecake Factory Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now turn the call over to your first speaker, Ms. Stacy Feit, Vice President of Investor Relations. You may begin your conference.

Thanks Moriah. Good afternoon and welcome to our second quarter fiscal 2021 earnings calls. 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 facts, 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 Web site 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 noncash acquisition related contingent consideration and amortization expense and the cost to terminate the company's interest rate swaps and reflects the then potential impact of the conversion of the company's convertible preferred stock into common stock for the period that it was outstanding during the quarter prior to the repurchase and conversion on June 15th. 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 Web site, 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 second quarter results and provide a financial update. With that, I'll turn the call over to David Overton.

Thank you, Stacy. Comparable sales at the Cheesecake Factory restaurants increased 7.8% relative to the second quarter of fiscal 2019. This performance helped us achieve record revenues that generates $109 million in cash flow from operations in the second quarter. Al of our locations, except Toronto, had some level of indoor dining capacity and we continue to see significant pent-up demand to dine at our restaurants across the country. Notably, we generated stronger sales at the Cheesecake Factory restaurants on Mother's Day and Father's Day this year versus 2019 in spite of indoor capacity restrictions. In fact, we had one location that did 100,000 in sales on Mother's Day with just 50% indoor dining capacity, underscoring the tremendous brand affinity for the Cheesecake Factory. Continued strength in the off premise channel again supported our strong sales performance during the second quarter.

Thank you, David. When we reflect on where we were a year ago during the depths of COVID-19, we are so grateful for our teams who enabled us to deliver the tremendous second quarter results to sustain the sales strength in the July to date period. Based on average weekly sales quarter to date of approximately $230,000 at the Cheesecake Factory restaurants, this equates to nearly $12 million on average per unit on an annualized basis. Off promise has comprised approximately 27% of sales with average weekly sales quarter to date of approximately $61,000, equating to nearly $3.2 million of off-premise sales per unit on an annualized basis at the Cheesecake Factory restaurants. As a reminder, summer is generally a seasonally softer period for the restaurant industry off-premise channel and third-party delivery providers. So for additional context, this off-premise average weekly sales level is about double the level that we saw during the same period in 2018. With the strength of our sales performance, we've shifted our marketing for the Cheesecake Factory restaurants, primarily back to brand based messaging to raise the profile of the Cheesecake Factory brand. Pre-COVID, we were evaluating upgrades and enhancements to our marketing and technology platform, including the potential launch of a rewards program to drive our next generation marketing strategy. The success we had driving sales and frequency through targeted campaigns during COVID reinforced our view that now is the right time to move forward with these initiatives. We completed a significant amount of consumer research to develop a program that is on brand for the Cheesecake Factory and our guests, and we are targeting a launch next year. plan to migrate our email database to a more robust CRM system to work hand in hand with the rewards program as well. In the interim, we are also revamping our website to transition to a more commerce forward platform to deliver a better guest experience with the goal of driving lifts in conversion rates and average order value for online orders. The new site is expected to launch by the end of this year.

Thank you, David. Second quarter comparable sales at the Cheesecake Factory restaurants increased 150% year-over-year. Relative to the 2019 period, comp sales were up 7.8%. Off premise represented approximately 31% of total Cheesecake Factory restaurant sales during the second quarter. Revenue contribution from North Italia and FRC totaled $114.4 million. North Italia comparable sales increased 182% year-over-year and were up 10% versus the 2019 period. Sales per operating weeks at FRC, including Flower Child, were approximately $103,000. And including $15.4 million in external bakery sales, total revenues were a record $769 million during the second quarter of fiscal 2021.

And your first question comes from the line of Nicole Miller from Piper Sandler.

Just the first question, it's great to see net-net things up above 2019 with some off-premise kicking in, maybe you're not quite made whole on the in-person in-dining room component or channel. So how do you think about reaching that equilibrium and how you get back to capacity in the dining room given the behaviors that you're seeing today?

It's interesting when we look at the current run rate in Q3 from a sales basis. We're almost back to the sales that we had on-premise in 2019 with the orders really coming from that off-premise piece that you mentioned. So I think we still actually have capacity to go because as similar to everybody else in the industry, those sales are driven on-premise by a little bit more check average than historical. So I think we still have room to grow both components, frankly. And so at an equilibrium, if you will, there's opportunity to drive both channels still as we go forward.

And then just one last clarifying point on the store level margin for the back half. I get the piece is like 3% COGS inflation, wages might be up -- you might delever 25 basis points, that's modest. Operating might be up percentage-wise. But then you made the comment, 3% in the cake menu is sufficient to cover store level margin. I guess I'm just going to ask, so does that mean store level margin net-net can look like 2Q? Are we -- still with that price, are we will need to modify a little bit for a step down just so we get that modeling right?

I think I wouldn't say it's a step down. I think we're trying to make sure that everybody remembers since last year wasn't a good guidepost and it's been so many ups and downs that there is some modest seasonality to the business. So Q2 has never looked like Q3 margins. And so looking at Q2 historically has been a peak margin for the Cheesecake Factory brand every year. So there's just going to be movements off of Q2. You could also look at it on a year over year basis, that might be more applicable for the inflation commentary but less applicable because last year was so different, and so we’re just trying to hone in. I think when you look at the totality of it for the back half of the year, we’re still looking at some solid margin improvement as a company over 2019, but it may just not be a smooth pace because of seasonality.

And your next question comes from the line of Jon Tower from Wells Fargo.

Just following up for that last point, just to clarify, you mentioned you have the company margin better versus 2019. Are you referring specifically to EBIT margins on that, Matt?

Yes, correct.

And so just taking a little bit into some of the investment here for some of the comments. You had mentioned that some of the new stores are acting as a bit of a drag on the aggregate store level margins, mostly because they're not up to maturity. Is there a way that you can potentially quantify that for us so that we can kind of blend it into our expectations going forward? That's point one. And then second, you'd also mentioned the idea that in the back half of this year, other OpEx is going to see some investments in that line, which will move it up relative to the second quarter tied to the rewards program and investment in technology. Will those be ongoing spend or is that something that's purely onetime back half '21 investment only?

So on the first one, specifically referencing North Italia and referencing North Italia, and we did provide some context in that the mature margins there are pretty much right in line with The Cheesecake Factory margins, right? So the difference is just the timing of the buildup of the newer restaurants. So in totality that brand has seen pretty much the equivalent margin. And that's what we would expect to see as all of the stores ramp up over time. With respect to the investment, it's really specific to the back half of this year. There's some upfront costs that we have to incur to get the program going. But then on an ongoing basis, we would expect it to be accretive. It's going to provide the revenues but that doesn't happen until we launch it. So it's really specific for the back half of this year.

And then just kind of following up on that point. How should we think about this program itself? Is it going to be similar to like other programs where it's spend based and you guys plan on focusing it solely on the Cheesecake Factory brand, or is this something that's going to utilize across the portfolio?

As you might anticipate, it won't be necessarily similar to what's happening across the industry, it will definitely be on brand for The Cheesecake Factory. And certainly, as we have more details to share as we get towards next year, we will. And it will only be for Cheesecake Factory at this point in time, that's our current strategy.

And your next question comes from Jeff Farmer from Gordon Haskett.

It looks like we're several months into the return of indoor dining on what's almost a national basis. So I'm just curious what your thinking is right now in terms of the updated numbers you're seeing on the sustainability and incrementality of those off-premise sales?

Well, I think, as we said, looking at where we are so far quarter-to-date is off-premise at 27% of sales, they continue to remain very, very solid. At the end of Q2, they were 31%. And as we look at the restaurants that have been open longer in those more mature states have had 100% seating capacity, Georgia, Florida, et cetera, they too have maintained that mid to high 20s percent. So we still feel pretty bullish that our ability to execute off-premise very well along with the value of the menu and the offerings of the menu that we will continue to hold a good portion of the off-premise growth.

The other way to think about it, Jeff, it's just that we're up almost double where we were in 2019. And so one of the things we've always talked about is the percentages will move a little bit as we continue to regrow the on-premise, which is great. I mean, we're tracking right now at $12 million AUV level and we're still at $1.6 million on off-premise. So I think that's an important piece also. We've always talked about if we could even keep $1 million of it and yet with fully reopened dining rooms for the past month, we're still keeping $1.6 million of it.

And one unrelated question. So a little bit premature here, but just in terms of markets that have seen some pretty material jumps in COVID case counts, it looks like Florida, Missouri, Oklahoma where Cheesecake dose have restaurants. Any sort of early read on how consumer behavior has changed or has it not?

I think to your point, Jeff, it's early. It's too early to say. Certainly, here in LA where no mask mandates went back into effect in the Lake County, it didn't really seem to have much of an impact or effect who knows long term, what will happen across the country, I think it's a little too soon to tell. People certainly right now appear to still want to get out there.

And your next question comes from the line of Brian Vaccaro from Raymond James.

I appreciate the quarter-to-date comments and the $230,000 a week at the Cheesecake Factory brand. Matt, can you remind us what the seasonality looks like in 2019 moving through the third quarter kind of comparing July or maybe towards August and September, just to have a good base there on seasonality?

And it's not just 2019, I would say, it was every one of the years that I've been here prior to COVID, the seasonality is very predictable. So August looks a lot like July. And then when you hit the back-to-school month of September, there is a pretty meaningful drop in average weekly sales. It's pretty similar to January. I'm going to say it's in the 15% to 20% range. So what you end up with is the quarter sales on an average weekly basis are pretty equivalent across each of the four quarters. Q3 is just slightly lower than Q2 because of that September movement.

And on North Italia, I think you said North is in the quarter-to-date period running up 10%. Just to make sure we're all on the same page since we don't have sort of the historical context back to '19. Can you provide where AWS are at North in the quarter to date period?

We are running approximately $6.8 million in AUV. So I'm looking for that on my weekly sales level here. I have to do the math. But it's virtually the same as it was in the third quarter, which was $6.9 million AUV, so it's about $100,000 change. And that's a little bit of the seasonality we're referencing to because of the focus that historically, some of those restaurants have been in Arizona. So if you take the 28 divide by 52, you'll get that.

And then lastly, I just wanted to ask about the cash flow on the balance sheet for a second. I think you were expecting to get a tax refund at some point under the CARES Act in 2021. Was that reflected in that cash from ops balance or cash from ops performance in Q2? I think you said $108 spot A if memory serves?

It has not been reflected yet. We've adjusted the timing of filing some of our tax returns to reflect some of the changes in the business and some of the decisions. And so we've pushed that out a little bit, obviously, not needing it at this point in time and are reflecting on the best way to approach that. And then also, there's a little bit of the repayment of some of the cash benefits from the payroll tax deferrals that will come up also. So none of that is yet reflected in our current cash balances.

And just on the posture on the balance sheet, Matt, $160 million of cash and the $475 million, I think, of total debt. Historically, the company has not had much in the way of any debt. What's the sort of longer term view exiting COVID? Is there a targeted leverage ratio you're thinking about internally or just how are you prioritizing capital allocation beyond new unit growth and obviously investing in the core and technology, et cetera?

I would say, our intention would obviously be to, with the great cash flow that we're generating, pay down the revolver as we go. I don't see any reason that we would obviously do anything with the new convert, which is unbelievably effective capital. So once we clear through the revolver, I'm sure that the Board will be very interested in restarting some of the capital return programs, including the dividend and some form of share repurchase, because I would foresee that we will have excess capital. That would probably be in the early parts of next year. We're still in an amendment for the revolver and that will go through this year, assuming we clear all the hurdles, which I think we already have through the second quarter. So that won't be a problem. So I would imagine we would be there early part of next year towards that balanced allocation again.

And your next question comes from the line of Drew North from Baird.

I wanted to follow up on the unit development pipeline. You've discussed the target of 7% unit growth in 2022, and now you're about 18 months out from that period. So I wanted to get a sense of how the development pipeline is shaping up. I guess is there any color you could provide in terms of the pipeline for Cheesecake or the other brands, and the visibility to hitting that 7% unit growth target for next year? And then just as a follow-up, as you rebuild this pipeline, has there been any change in the thinking or the process around the company's real estate strategy going forward?

I think we feel good about that 7% unit development growth, the pipeline looks strong and across Cheesecake Factory North and as well as some of the other FRC brands. The good news is our real estate strategy continues to be just looking for great A sites, and we see some good availability out there whether that is in a traditional mall location or for some of the other brands in the lifestyle center or even smaller centers when it comes to a Flower Child, as an example. So we really are pretty bullish on that 7% number and 2022 appears to be looking thus far.

Just from where we've said that split may come out, I think we're pretty much tracking to how we've described it. Cheesecake Factory is sort of in the 2% to 3% total growth from a unit build and then pretty equally distributed between FRC and North. And I think that we're probably further ahead in the pipeline than we were pre-COVID in terms of being able to meet it because we have the diversification and obviously, there's more opportunities that are coming up.

And your next question comes from the line of Michael Rothstein from Goldman Sachs.

Just had a quick one on June and labor. Did you guys have -- what does the cadence look like in terms of adding labor back to the stores when something like California reopened in June? And could you talk a little bit about the average weekly sales progression coming from your update at the end of May going through June and then obviously running pretty well quarter-to-date?

For the cadence perspective, I mean, I think it played out almost exactly like we would have predicted in describing the reopening scenario associated particularly with California, as you mentioned. So our business update when we did the refinancing, we were at 7% versus 2019 comp and we ended the quarter at 7.8% and we're running at 10%. And so we had talked about the delta between 50% to 75% and no restrictions in California being about they're 20% to 25% of our business. And so if you do the math, it actually played out exactly with the consistency that we would have anticipated. I think from a labor perspective, our approach is to try to add it commensurate with the reopening. As David Gordon mentioned, our staffing levels are now above where they were pre-COVID. Certainly, with the sales strength, we want to continue to be able to support that, but we have slightly fewer needs now than we did at the time of our last call. So we've done a good job. It's just that we're so dang popular we have to keep up.

And one other quick one. On those 100% capacity states like the Floridas, Missouris, and Georgias, where you're still seeing that mid to high 20% off-premise mix. What do the on-premise AWS look like there, is that more in line with history or are those also running a little bit high?

So if you break down just you using the average, we're running $12 million on average. And our geographies tend to work out in total pretty close to the averages. If you group them big enough Florida versus California, it's not that different. And so if we're doing now, we're doing $3.2 million on an off-premise basis and I think you can back into kind of where the on-premise would be. And like we said, it's running pretty much in line with the pre-COVID on-premise, just maybe a little bit below that.

And your next question comes from the line of James Rutherford from Stephen.

I wanted to start with Flower Child, if I could. It looks like sales have rebounded very nicely with that business, up over about 108% year-over-year. I'm just curious your latest thoughts about the long term potential of that brand and your priorities at scaling that nationally.

I think we still feel really great about Flower Child, and we're sitting in 27 restaurants today in 10 states. It continues to perform well in just about every state, every different type of geography that it's going into. So we feel good about it. It did perform well and has performed well through COVID. I think they do a great job with off-premise execution. They do a great job with speed and throughput, and it's just very high quality food. So we're just as bullish maybe more than we were pre-COVID this point. And we'll continue to have our team members involved in Flower Child, what Sam and his team continue to grow it here in the short term, and we'll evaluate as we move into next year when we might completely take over all operational aspects.

And then I wanted to ask another one on margins, I know you've talked about it several times here, but just from a different angle. If I look at your restaurants in total, you're running here in the quarter at sales levels higher than 2019, yet total restaurant margins are down about 50 basis points from that 2019 level in 2Q. I think most of the variance is in other operating costs. I'm just curious if you can talk about the puts and takes there on other operating and how we should think about kind of the go forward on that?

I think there's also -- of course, there's some movements, right, because the 2019 was pre-acquisition. So there's just some reorganization a little bit maybe in there. I think the other operating expense piece, obviously includes also increased marketing and/or commissions around delivery. So there's been a significant move up in that side of things. And so when we look at that on a go-forward basis, like we said for the back half of the year, we would expect it to be slightly higher as a percentage of sales just for the third and fourth quarter as we invest in a rewards program. And by that, we mean 10 to 20 basis points sort of in that line. But I think in general, if you look across the other line items, obviously, cost of sales and labor, both leveraging on the sales piece. And I think it's just the dynamic of the acquisition and the investment in the delivery channel.

Your next question comes from the line of Lauren Silberman from Credit Suisse.

On the average weekly sales at $230,000 with on-premise nearly fully recovered off-premise 2 times pre-COVID. What's your confidence in being able to maintain the $230,000 average weekly sales volumes going forward? Is there any reason we should expect to see these volumes come down as we move through the rest of the year, I guess, with the exception of seasonality that you pointed out just in the context of perhaps on-premise transactions aren't fully recovered and then off premise has come down a bit just on seasonality? So is there opportunity even above the $230,000?

I think it's still the wildcard question. It's a good one. I mean I think that we feel very good about the stability of the comp trend. And so that will play out, as you know, across September and October might be a little bit different on the average weekly sales. And then typically, in December, and you can have really, really high average weekly sales. But I think we feel like the business as it's progressed really from the middle of March until now has taken on the characteristics that are hallmarks of the Cheesecake Factory, which are really predictability and dependability. And as I noted earlier, we still have plenty of capacity. So I still think that there are opportunities in both of those channels to continue to drive sales going forward. So we'll see where it goes but we're happy with the trajectory as it stands today.

And then just a bigger picture question on Cheesecake Factory brand. I believe historically, you talked about 300-unit potential. Over the last 18 months or so, has that changed anything and how you're thinking about the unit potential for the brand?

I’d say it has not changed. I think that our flexibility and ability to have different sizes of Cheesecake Factories gives us probably even a little more confidence that we can hit that 300 number. We have the new Cheesecake Factory built here in Oxnard that's close to 6,000 square feet that's performing very, very well with some great margins, all the way up to the large size cheesecake. So we think that 300 target is still very realistic for us over time.

Your next question comes from the line of Jon Tower from Wells Fargo.

Just wanted to circle back on the margin thing again, I hate to be the dead horse, but I am curious. I think previously, we’ve talked about the idea of potentially seeing 30% or so incremental margins on volumes roughly above 2019 levels. Clearly, this quarter wasn't necessarily the case. It didn't tie up, I think that level nor -- I mean, obviously, with the investment in the third and fourth quarter around the rewards program doesn't sound like that's going to be the case either. So I'm curious if that can hold again into 2022 and beyond or other inputs like labor inflation going to impede that incremental flow through level …

…a lot of movement between them. I think when we look at sort of the run rate of the company at 5% EBIT level in the back half of 2019. Certainly, everything we're doing right now is going to be exceeding that at that 30% for the three quarters, second, third and fourth quarter combined for this year. So I still think in totality that it does make sense. I think it's always tough when you look at one quarter and some of the pieces within that versus looking at it over maybe a little bit more of an extended period of time.

Your next question comes from from JPMorgan.

This is Rahul on for John Ivankoe. Two part question on the marketing strategy and the G&A here. Can you expand a bit more on the next-generation marketing strategy, you just touched upon in the initial comments? And specifically, if you have a strategy around off-premise marketing, given this is a layer you would want to be sticky over time? And the second part, what would this mean for the G&A expectations long term? I know you guys talked about the 6.5% for this year and 6.4% next year. Is there any long term target and how this could change in the context of this new spend?

This is David. I'll turn it over to Matt on the G&A front. I think on the longer term rewards, while we won't go into any details again today, there's no reason why we won't be able to use rewards in a targeted way. And if we make a decision that we want to target off-premise opportunities as we did throughout COVID, we'll have the flexibility to do that as we learn more about those guests, which will be a key component of the overall strategy is to understand a little bit more about our guests generally, whether that's our ordering preferences or their spend habits and how we can continue to grow that spend over time and that could be done through off-premise channel and also, hopefully, will be done by driving traffic back into the restaurants.

It doesn’t impact our G&A expectations at all, so no change with those.

And that's our last question. Speakers, do you have any closing remarks?

No, thank you for joining the call. We look forward to connecting with you next quarter.

And this concludes today's conference call. Thank you for participating. You may now disconnect.