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

Good afternoon and welcome to our third 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 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 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, 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 third 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.

Thank you, Etienne. Third quarter consolidated revenues increased 5.9% over the prior year to $830 million, led by comparable sales growth The Cheesecake Factory restaurants of 2.4% versus the prior year and 12.6% versus 2019, exceeding the Knapp-Track and Black Box casual dining indices for both time periods. Our strategy will always revolve around what we do best, delivering exceptional service and hospitality and delicious, memorable experiences for our valued guests. We believe our position as an experiential dining leader will continue to differentiate us in the industry and drive profitable sales growth over the long term. And with the improved restaurant staffing levels, our best-in-class operators have been able to increase their focus on consistently executing our strategy. We believe this contributed to third quarter comparable sales at The Cheesecake Factory, increasing sequentially despite the softening sales environment and importantly, traffic at The Cheesecake Factory meaningfully outperformed the broader casual dining industry. On the development front, we opened 2 Cheesecake Factory restaurants to strong demand during the third quarter and subsequent to quarter end 2 FRC locations. We continue to make progress against our pipeline and construction is ongoing on all of our restaurants we had previously planned to open this year. However, consistent with the trends seen throughout the industry, we continue to experience challenges beyond our control, particularly with permitting delays, pushing some of our opening dates to late December. In order to adhere to our proven development process and ensure new restaurants open well positioned to succeed, we have strategically decided to move some of our openings into the first quarter of next year. As such, we now expect to open as many as 16 new restaurants in 2023 and 4 to 6 new restaurants in the first quarter of 2024. Thus, between 16 openings for…

Thank you, David. Since the start of the year, our operating team’s training and development have been firmly centered on the fundamentals of the restaurant industry, great food, great service and great ambience as well as on reinforcing the operational standards that Cheesecake Factory has been built on. We believe these to be foundational for running successful restaurants and delivering consistent performance. This year’s General Managers Conference content was designed with the same principles of focus in mind. The theme was cultivating excellence, and we held several informative programs, panels, speaker-led trainings and leadership seminars focused on hospitality, leadership, executing and performance management with the intent that our general managers take these insights and learnings back to their restaurants to improve operational execution, celebrate wins and further develop their people. As David alluded to earlier, we believe our increased focus on consistent execution and operational excellence is yielding positive results across multiple key areas. Let me just share a couple. First, we have seen measurable improvements in guest satisfaction. Our internally measured net promoter score metrics across both the dine-in and off-premise are consistently exceeding pre-pandemic levels. In addition, our volume of reviews on third-party sites has not only increased since the start of the year, but the aggregate rating of these reviews has meaningfully improved and continued to trend incrementally more positive. Second, our enviable staffing position continues to improve. Our industry-leading retention rates are now running above pre-pandemic levels. Furthermore, our already high staff engagement scores improved significantly from a year ago. These improvements have supported the continued moderation in wage inflation, which is now trending below pre-pandemic levels. As David mentioned earlier, we believe these operational improvements contributed to both comparable sales and traffic outperforming the industry in the latest quarter. Now turning to sales trends. The…

Thank you, David. Let me first provide a high-level recap of our third quarter results versus our expectations I outlined last quarter. Total revenues of $830.2 million increased 5.9% over last year despite finishing just under the low end of the range. Adjusted net income margin of 2.3% was also just short of the guidance we provided, predominantly driven by the lower sales. G&A and depreciation combined as a percent of sales were slightly better than expectations. And we returned $27.7 million to our shareholders in the form of dividends and stock repurchases. Over the past 12 months, our financial results have substantially stabilized, forming a foundation we believe we can build from. Over that period, our total revenues were $3.46 billion, with adjusted net income margin of 3.5% and adjusted EPS of $2.44. Now turning to some more specific details around the quarter. Third quarter sales at the Cheesecake Factory restaurants were $628.1 million. Comparable sales increased 2.4% versus the prior year and 12.6% versus 2019. Sales for North Italia were $62.4 million, a 15% increase over prior year, supported by comparable sales growth of 8% versus prior year. Comparable sales versus 2019 increased 28%. Other FRC sales totaled $58.6 million, up 12% from the prior year, and sales per operating week were $121,900. Flower Child sales totaled $32.2 million, up 11% from the prior year, and sales per operating week were $80,000 and external bakery sales were $17.4 million during the third quarter of fiscal 2023. Now moving to year-over-year expense variance commentary. With the cumulative menu pricing we have implemented over the past 12 months to help offset inflation, we continue to realize measurable year-over-year improvement across several key line items in the P&L. Specifically, cost of sales decreased 170 basis points, primarily driven by higher menu…

[Operator Instructions] Your first question comes from the line of Andy Barish with Jefferies. Your line is open.

Hey, guys. Good afternoon. Just wanted to clarify some of the commentary on the same-store sales improving sequentially. Was that referring to during the quarter, the monthly progress? Or as you looked at the full 3Q versus 2Q, I was just a little confused there. And then continuing kind of into October, as you mentioned, with the quarter-to-date assumptions driving your 4Q estimate?

Sure, Andy. This is Matt. to be hopefully clear, the third quarter followed roughly the industry trends, albeit better in every period than the indices that most people track, both in terms of comp and I think meaningfully in terms of traffic. The traffic was pretty darn stable, but it was sequentially down slightly, right, from July to August to September. And then what we’re referring to is really from sort of the end of September through the current time period, those trends have seen a measurable improvement relatively. So I think that’s also relatively consistent with what you may have heard in the industry as well. But again, I think outpacing.

Got it. Helpful. And then just one other on wage inflation. I think, again, just some clarification on noting it’s moving below pre-pandemic levels and then your guide, I think, incorporates kind of low to mid-single digits. How does the move to $20 in California next spring kind of factor into that thinking? And is that right that number is below kind of the 2018, 2019 levels, I guess?

Yes, Andy, this is Matt again. That is correct. Like the actual inflation in average wages is running below sort of that whole time period, 3, 4 years leading up to the pandemic. Obviously, a lot of that was also driven by government-mandated pressures as you allude to the California coming legislation. And even inclusive of that, I would say the expectations for wages remains relatively stable and probably at or below pandemic. And I think we will evaluate the market dynamics that play out. Obviously, none of our restaurants will be included in that wage mandate. But obviously, there could be some ripple effect. Today, in the urban areas, we tend to see that many of the QSR locations are already paying in that range. and people are making choices based on that. Certainly, more in the deep suburbs, there is probably going to be some increases, but we have fewer restaurants there. So I think we will look at it holistically and then see what makes sense. And if we have to address that as part of our overall inflation basket, we will certainly have to consider that with respect to pricing decisions.

Great. Thank you very much.

Your next question comes from the line of Sharon Zackfia with William Blair. Your line is open.

Hi, good afternoon. I guess two questions. Just quickly, if you could give us kind of price mix traffic for the quarter, that would be helpful. And then secondarily, on development, I mean, it sounds like you want to defer to give us number of what’s kind of embedded in that initial look at ‘24, and I know it’s a wide range, but can you talk about kind of what you’re doing internally to kind of, I guess, better buffer the outlook on development that is given versus what you were going to achieve in kind of this difficult to execute environment where permitting and so many other things seem to be much more challenging than 2019.

Sure, Sharon. Good questions, both of them. This is Matt. I’ll take the first, and then David Gordon can touch on the development side. So specifically, pricing was at 9.5%, mix was a negative 6.1% and then traffic was a negative 1.0%. So the traffic piece represented a pretty good improvement over the last quarter. And I think about 200 basis points better than what we saw in the industry and pretty stable. As I noted in my response to Andy, it was very, very stable throughout the quarter. So that gives us a good baseline. And David Gordon will touch base on the development.

Sharon, this is David. I think as we talked about previously, a lot of the earlier COVID issues on development were more around supply chain and getting heavy large pieces of equipment into the restaurants, etcetera. That really has abated. And as you said, most of the issues today are more around permitting and dealing with local municipalities and their pace is not what it once was, a lot of new people and new positions. So what we try to do is increase our funnel and have more sites in the pipeline to be able to maneuver around that and hit the targets that we are planning to set for next year. I think we feel good about what we said to continue towards that path to 7% unit growth, and we have a good funnel for next year. And hopefully, the municipalities will get a little bit better, and we will see permitting start to increase at a little bit faster pace because at this point, that’s really the only thing that’s slowing us down. I think this was a good business decision for us to decide to push some of these to Q1 to ensure that we hit the time line, but also that operationally, they are able to open at a good cadence, don’t put too much negative pressure on the business and that we’re really opening at a cadence that’s best for the operators.

Thank you.

Your next question comes from the line of Joshua Long with Stephens. Your line is open.

Great. Thank you for taking the questions. Matt, curious as a follow-up on that pricing comment, it was 9.5% price in the quarter and then what appears to be some stabilization on the food cost and labor cost side of the equation. Curious if you could talk about your forward pricing plans and kind of how you think about maybe the comp construct from a pricing perspective as we go forward into 4Q and in 1Q?

Sure, Josh. I think it is relevant. And certainly, as we see inflation stabilizing, our objective is to return to a more normal sort of level and cadence of the pricing that we take, which is typically 2x a year, 1.5% to 2% each time. So notably, in the third quarter for Cheesecake Factory, we took 2%, but that was lapping over a I believe, 4.25%. And so on a run rate basis, we dropped off 2.25 points. And then keep in mind, for the fourth quarter, we’re going to lap the incremental catch-up that we did at the beginning of December. So the weighted average for the fourth quarter, Etienne, what is...

7% to 7.5%.

Okay. 7% to 7.5%. And then going into next year, it’s going to be more in the range of like 4%, right? And then we will see how all the pieces come together, but it feels like that’s going to be in a more normal range at that point. And again, our objective is really only to take enough pricing to offset inflation.

Got it. That’s helpful. I appreciate that. And then as a follow-up, could appreciate the volatility in the underlying industry trends. It seems like that’s normalize to your point and from what we’re hearing from peers, which is encouraging. But curious, as you think about just the operational muscles and execution capabilities you and your team have, can you talk a little bit more about just how the volatility played out through the quarter in terms of restaurant-level margins. I mean, that’s been an overarching goal of yours as you execute against it. But just curious what can you adjust or make a point at improving upon despite the volatile operating environment that maybe just gets captured in the consolidated number that we see. I mean you mentioned traffic was relatively steady. That helps out at all? Just looking for some additional color there.

Yes. That’s an interesting question, and I think it’s actually really helpful to understand kind of the consistency of the business. I mean I think I may have alluded to this before, but week-to-week, the P&L the pro forma from the Cheesecake Factory and all of our concepts looks like it’s supposed to, right? All of the elements of that are much more predictable, whether the revenue lines are up or down, the level of flow-through from the concept is at or better than we would have expected it to be. As noted, the wage inflation continues to run slightly better than planned. The commodities that we’ve been able to secure with our supply chain continue to run slightly better than planned. So we monitor all of that week-to-week. And that volatility has significantly decreased, right? So all of those trends point to the ability to manage the business better. We are seeing overtime and training return back to pre-pandemic levels or slightly better. So those are underpinnings of financial progress and improvements. And I think sort of notably, if you think about the third quarter and the revenue piece, it was probably 1% to 2% of mix that was the gap. We had anticipated a return to normalization. It was slightly more than anticipated, but not material. And really the difference in the profitability is just a flow-through on that. We’ve adjusted our Q4 outlook for that appropriately. And yet if you do the math, we’re probably right in line with where we thought we would be from a profitability standpoint. So I think that really speaks to the levers that we’re pulling and the ability to execute at these sales levels and still get to the profit margin targets that we’re expecting. Q4, we’re expecting that our profit margins relative to year-over-year are going to expand. We would expect Q1 to expand on top of that. So the trajectory reflects that underlying consistency in operational execution quarter-to-quarter.

Helpful. Thank you so much.

Your next question comes from the line of Jon Tower with Citi. Your line is open.

Great. Thanks for taking the question. And maybe just following up on the mix conversation. Curious if you can elaborate a little bit more on what’s going on there. I believe it might have to do a little bit with the delivery business relative to the on-premise business shifting around a little bit. But if you could elaborate and then I’ve got a follow-up as well.

Sure, Jon, it’s Matt. About 2%, I mean, give or take, is associated with the to-go business, which continues to be stable, but down slightly on a mix percentage compared to last year. And the other thing that we’re seeing, I think, is very consistent with the others in the industry. Compared to last year, just slightly less alcohol attachment, maybe a little bit less appetizer attachment but compared to 2019, it’s still at or above every one of the categories we look at. And I think also from a daypart perspective and a mix of check, it’s very consistent, right? So those attributes are sort of the guest performance works and feels a lot like 2019 to us.

Got it. Okay. And then just going back to the discussion earlier regarding loyalty and the plans for, I believe, there is some plans you have to increase customer acquisition strategies in the fourth quarter here. Just curious if you could delve a little bit deeper into that. Are you anticipating perhaps getting a little bit more promotional or giving away more sizes of Cheesecake to incent people to jump into the program. I’m just curious to hear how you’re thinking about going about getting folks into the program.

Sure, Jon. Hi, this is David. This is David Gordon. Well, the good news is when it comes to acquisition, we really have seen a high level of activity and guests are very encouraged to join the program to begin with. Just as a reminder, it’s made up of published offers, which everybody gets when they join and that would be access to reservations, a slice, as you mentioned, a complementary slice on their birthday. And originally, there was a complementary slice upon signing up. We ended that part of the promotion at Labor Day. And then there is unpublished offers, and that’s a little bit more about what you’re talking about as we look at the fourth quarter and doing some segmentation and trying to understand if we can drive guest behaviors to certain dayparts, certain days of the week with potential promotion. And that might be a slice of Cheesecake on a potential order basket of a certain size or it could be a small discount for a lunch offering. Those are all the things we’re going to test in Q4 and measure their effectiveness to ensure that as we work towards next year that we’re spending our marketing dollars in a very targeted way and getting the best ROI in each one of those promotions.

I know it’s early in the program, but can you comment on any sort of changes in frequency for the customers that have jumped into the program so far?

We haven’t talked about any of those numbers yet. I think that we feel good on continuing to expand the program. I think that’s something. And we’re also very happy. We were able to measure NPS sentiment for rewards members versus non-reward members. And we see between a 10% to 20% higher score in overall NPS on rewards members. So that would lead to promising results of guests wanting to come back, feeling good about the hospitality and the service they are getting as a rewards member to hopefully drive incrementality there as well.

Got it. Thanks for taking the questions.

Your next question comes from the line of Lauren Silberman with Deutsche Bank. Your line is open.

Thank you very much. I wanted to follow-up on the commentary regarding the improvement in trend exiting September and into October relative to ‘19. What do you think is driving the improvement?

Lauren, this is Matt. I think some of it has to do with seasonality. We touched on that in the script. Others have commented on that. I do think that sort of the mix of on-premise off-premise has shifted slightly, right? So you see seasonally the summer is a little bit lower in off-prem, that comes back in the fall. So I think you get a little bit of a pickup there. I think school calendars have shifted, right? I mean we actually saw this trend starting to develop pre-pandemic. I mean this sounds cliche, but everybody my age remembers going back to school the day after Labor Day. And today, I think half the country goes back on August 1. So I really think a lot of what you’re seeing now is with schools back to normal, whatever their schedules are with the off-premise on-premise, all of those factors, and frankly, I think too we’re executing at a high level. I mean I think some of it is just our performance. As David Gordon touched on, we have a very strong NPS. Our operators are fully staffed. So I think we’re able to turn tables. I think we’re able to do the things that we need to do. And it’s incrementally a couple of percent makes a difference. But I think those are the two things that I would call out.

Thank you. That’s helpful. And then just shifting to margins, as I always visit how you’re thinking about recapturing restaurant margins as we think to 2024, what are you embedding for restaurant margin relative to pre-COVID and any puts and takes we should consider?

Yes. As we have said, our objective is to get Cheesecake Factory back to 2019 to begin with. We obviously have had some headwinds in that journey outside of our four walls. And I think we have made very good pragmatic long-term decisions to recapture it over time rather than all at once. I feel like the journey that we are on will get us there, right. And our objective is to continue to expand the four-wall margins. As I have said, I think Q4-over-Q4 is going to be better. I think Q1-over-Q1 is better. And so continuing that progression will get us there. It’s hard to put a specific timeframe on it. Obviously, we gave a range of net income. So, it implies there was potentially a range of four-wall margin performance. But that remains I think a very achievable near-term goal for Cheesecake Factory.

Thank you very much.

Your next question comes from the line of Brian Mullan with Piper Sandler. Your line is open.

Hi. Thank you. Just another one on restaurant margins, but just at North Italia, on the last call, you talked about plans to drive – seeing an opportunity to drive improvements there. Can you just remind us what some of those initiatives are and where you are in that process? I know in the prepared remarks, I think you just referenced taking price, but anything on the operations side to consider as well.

Sure, Brian. This is Matt. I think a couple of things that we are really focused on. I mean you did note price for us that is part of that plan. And we look at being about one cycle behind Cheesecake, right. So, this would probably be the last notable price increase. And certainly, we think that’s actually going to close the gap in totality. But aside from that, we remain focused on a couple of key areas operationally. One of those being food efficiencies, so that’s an area that Cheesecake Factory best practices and systems have been deployed over time to North Italia. And we see a really good opportunity to lower food costs over time by bringing those standards up to where the Cheesecake Factory is and implementing the systems that we have there. The second one that we are focused on is really bringing new restaurants up to speed over time, a little bit more faster, right. So, the mature margin is one thing, but if you can bring the early stages of the restaurants up faster, it sets up for success in the longer term as well. And the third one is really doing a lot of side-by-side restaurant comparisons. Now, that the portfolio or the fleet, if you will, is in the low-30s for North, we have a much better idea of looking at sales volumes and geographies and understanding what the appropriate operating metrics can be and comparing those and our field leadership team is really laser-focused on the ability to do that. And I think actually a fourth one that I would mention is not direct, but it’s an indirect margin driver, which is sales. If you look at the North comp store sales, they remain exceptionally strong. We are growing traffic. We are growing our off-premise business. So, there is really no better way to improve margins than to grow sales and that may go without saying, but I just wanted to add it on.

Brian, this is David, I would just add two things to Matt’s terrific answer there. One is that we continue to leverage our scale of supply chain and look for opportunities to purchase products that perhaps are in our broader basket that we can also use in North Italia, while still keeping it unique and special, and we have had some good gains there. And just back to the sales point, I think the team has done a terrific job on understanding and maximizing reservations for sales. And part of that has been the expertise that Cheesecake has brought over the past 4 years to North and our ability to ensure that we are not just turning tables fast, but we are maximizing the tables that are in the restaurants as much as we can to get the most productivity out of them.

So, I guess Brian, the answer is we are doing a lot, and we have high expectations for the concept going forward.

Thank you. Thank you both. And maybe could segue, just Flower Child. Is the plan still to bring this brand under the Cheesecake Factory umbrella by the end of the year? And if yes, can you talk about some of the benefits of doing that? And do you expect that to impact the growth trajectory? And maybe over what time period would we start to see that accelerate?

Sure, Brian. We are on track with Flower Child, bringing that fully under our umbrella for this year. We are looking forward to accelerating the pace of openings next year. We would anticipate over time that it too would be a 20% grower year-over-year. The portability of the concept continues to be very promising. It’s doing well in new markets, very strong infrastructure and the teams there that’s very focused on developing management to enable that growth. And I think we would anticipate some of the same scale advantages that we have with the other concepts with Flower Child, whether that’s supply chain, some of our HR infrastructure, etcetera. But thus far, we have seen good availability of sites. Landlords are excited about the concept. We continue to feel it’s differentiated in its space. And certainly, the guest demand and the traffic has been fantastic.

Brian, just one piece on that, this is Matt. In addition to a key initiative for us for this year, although we don’t carve out the segment yet for Flower Child, we are on track to get to the margin target that we need to be at to make it a growth vehicle, which is in that mid-teens level. So, we feel really good overall about the trajectory of Flower Child.

Thank you.

Your next question comes from the line of Jeff Farmer with Gordon Haskett. Your line is open.

Thank you. You guys did touch on it, but when it comes to menu price increases in 2024, what you guys are contemplating, how are you looking at the trade-off between either protecting or growing margin and any potential traffic headwinds that could come with that pricing?

Jeff, it’s Matt. It’s always the art and science, right. I mean I think we are looking at what the industry is doing. We tend to want to be in the middle of the pack with pricing. That’s been our historical perspective. Typically, we only price to protect against inflation. If you take the average in the industry, their inflation is similar to ours, so that’s going to kind of mean the same answer, right. So, we are not going to be way off path either way. I think we have seen better than industry traffic. It feels like a relatively normal year. We have great operational execution, right. NPS is typically a leading indicator in our industry of where we are going. And I think that’s why we launched rewards, right, as a means to drive incremental visitation. So, it’s always going to be a balancing act. Certainly, it feels like next year could be more normal with respect to pricing though, as we commented before.

Alright. Thank you for that. And just a quick bookkeeping. I think you qualitatively called it out or mentioned it, but could you just provide the commodity and wage inflation levels you saw in Q3?

What was the specific commodity, I think wages were around 4% to 5%. And then we saw 2% to 3% on the commodities.

Alright. Thank you.

Your next question comes from the line of Jim Sanderson with Northcoast Research. Your line is open.

Hey. Thanks for the question. I wanted to talk about unit growth. And if you could provide some more feedback on how to look at store closures to net against the new unit openings for the 7% growth rate you mentioned for 2024 and then the 16 new units for 2023. Thank you.

Jim, this is Matt. So typically, we evaluate restaurants on an annual basis for where their cash flow is, the life of the lease, all of the normal attributes. And I think we have probably averaged about one closure a year. So, I just don’t think that’s a significant driver of where we think aggregate unit growth will be. And if we are closing a location, it’s going to be net accretive to us in any event. And so I think I would just kind of say 7% is going to be gross and net, roughly the same, give or take a unit a year kind of thing.

Alright. Thank you. Just a quick follow-up, could you provide a little bit more detail on the same-store sales trend for North Italia breaking it out by traffic and mix and pricing going into fourth quarter.

We haven’t done the mix versus traffic versus anything, but we do provide the prices Jim. Okay. It’s about 8% and 5% comp.

Excellent. Thank you very much.

Your next question comes from the line of Brian Vaccaro with Raymond James. Your line is open.

Hi. Thanks. So, just two quick ones for me. I am sorry if I missed it, but what was the off-premise sales mix at Cheesecake Factory in the quarter?

Brian, this is David Gordon. It was 21% same as it was…

Okay. Great. Thank you, David. And then, Matt, can you just – on the menu pricing comments at Cheesecake Factory, did I hear correctly, you plan to take around 2% in February, so you would be settling into the 4% range basically moving into the early part of ‘24, just wanted to clarify.

Yes. Brian, this is Matt. We haven’t finalized that number, but we do feel like 1.5 to 2 on a regular basis is kind of where it’s heading back to. And the only thing I would say is it depends on geography, right. As we noted, just to carve out, and I think some others have done this. We are going to look at California and what the FAST Act impact is, right. So, it may not be the same everywhere, and it may not add up exactly that way, but we feel like those are some guardrails for use today.

Alright . Great. I will pass it on. Thank you.

Your next question comes from the line of David Tarantino with Baird. Your line is open.

Hi. Good afternoon. Matt, I think your guidance for next year as you gave it assumes margin expansion and maybe I missed this, but could you maybe explain how you are going to deliver that margin expansion? And I think your comments suggested pricing and inflation should be roughly match, so I guess what is the key driver of the margin expansion in that scenario?

Yes. So, a couple of things. One, I think that it does imply that we think we will be in positive territory for comps, and we think there could be some leverage opportunity. I think in the Q1 specific scenario, certainly, we are lapping really heightened commodity inflation there, too, as well. So, I think that there is just some natural progression. Right now, on a sequential basis, just from a pure operational standpoint, we are driving some incremental profitability in the range of 25 basis points to 50 basis points. So, there is some of that’s the four-wall. We target getting a little bit of leverage off of G&A as well. So, I think within that range, David, particularly at the high end of the sales range, you are going to get a little bit more from the four-wall piece of it than at the low end, which is relatively close to where we are today. So, it’s a combination of those factors.

Great. And what sort of traffic assumption are you making for next year when you set either the revenue or the margin target?

Well, I think we are kind of looking at a combination of traffic and mix, right. Because they sort of, they have been going a little bit of hand-in-hand, and I think it’s important to accommodate for both of that. Looking at some of the industry outlooks that we have gotten from some of our advisors as well as some of the other guidance, I think it feels prudent today to expect that those two combined are negative, probably in the low-single digit range.

Got it. Thank you very much.

Your next question comes from the line of Brian Bittner with Oppenheimer. Your line is open.

Thanks. I wanted to ask about net income margin guidance, specifically for the fourth quarter. I think you said net income margin is in a 4.25% range. And I am just wondering the path to get there because I think if you assume a normalized tax rate, it would suggest like 200 basis points of operating margin improvement, and that would be against a comp that I think is implied to be like 2%-ish at the midpoint of your revenue range. So, is that the right way you are thinking about 4Q, or is there a big tax benefit coming in 4Q that we should be modeling?

I think this is where we – Brian, this is Matt. This is where the sequential modeling with the year-over-year pricing, I think always gets a little bit hung up in the modeling, right. Because think about the components we are talking about. As Etienne noted, the pricing for the quarter is going to be 7% to 7.5%. And yet, the inflation for wages are going to be low to mid-single digits, and the inflation for commodities are low-single digits, right. So, effective pricing over effective inflation in our key categories creates a pretty significant margin pickup for four-wall. And remember that because we were really behind on pricing last year, so we ended up taking that 3% roughly on December 1st. And so we are lapping that benefit that we didn’t get in the fourth quarter of last year. And I think that’s the big difference.

And when we think about next year, the 4% to 4.5% net income guidance, as David Tarantino said it implies margin expansion, but can you shed some light on what the tax rate assumption is in that range so we can think about, how to think about…?

It will be low-double digits. 10% to 12% would be what we would expect. That’s what’s in our model right now.

Perfect. Thanks.

You’re welcome.

Your next question comes from the line of Katherine Griffin with Bank of America. Your line is open.

Hi. Thank you. I wanted to just follow-up on some of the commentary about kind of normalizing spending pattern, normalizing seasonality. Are you seeing anything discernible among higher income cohorts just since I think we have heard from a couple of players that you are seeing higher income and maybe a little bit more sensitive on alcohol mix and expressing check management that way. So, just curious sort of how you can contextualize anything on income cohorts as it relates to your comments on normalizing patterns?

Hi Katherine, this is Matt, and welcome to the call.

Thank you.

We don’t track like on a week-to-week or month-to-month in terms of the research that we are doing. We do see, on an annualized basis, that our relative cohort distribution and spending patterns are pretty stable. I mean we have such a broad demographic appeal that I don’t think we have that sort of same approach or thought pattern as I think maybe some other segments that are more narrow in our industry. So, we don’t look at it quite the same way as the others do in that regard.

Okay. Thank you. And then I wanted to ask a little bit just about some of the other concepts. Given your comments on culinary dropout, I guess I am curious if you can add a little bit more color on the components of the unit economics that are attractive enough to give you confidence to move forward with growing that brand? And if there is anything unique about customer profile on, just given your comments on sort of where you see geographic portability.

Sure. Katherine, this is Matt. I will give you a little bit on the numbers and then David Gordon can touch on sort of the attributes of the concept. But we think it can deliver roughly 2:1 sales to CapEx. I mean that’s been the historical performance and continues to be close to what we are achieving today. And the margin profile has been in the mid to upper-teens today coming out of the pandemic. So, putting those together, you are definitely going to be above 30% and hopefully, much better than that on a sort of four-wall margin returns. So, we feel good about the overall economics, and it’s been pretty consistent also across the portfolio so far. So, as we noted, we will test that portability. But very strong sales and very solid margins, right, what’s exactly what you look for.

Yes. I don’t know much to add. I think the sales really make it the most promising. And as we have moved into new geographies, we see those same consistent high levels of sales. And again, it’s a made from scratch concept. It has a bit of a higher bar mix than we would traditionally have at Cheesecake Factory, maybe skews to a little bit younger demographic, not as broad as Cheesecake Factory, but we think it has great appeal and is a terrific concept. And thus far, we will continue to monitor closely as it moves into some of those new markets next year.

Great. Thank you so much.

Your last question today comes from the line of Brian Harbour with Morgan Stanley. Your line is open.

Thanks. Good afternoon. Just on your comments about inflation next year, do you think that labor inflation is sort of like higher end of that, maybe commodities a bit lower? How would you handicap the prospects for combined inflation to be low-single digit, if it were in fact, to be more favorable within your range?

Brian, this is Matt. I think there is still some work to be done on the commodity front. I mean, as you know beef remains a little bit challenging, some ups and downs recently, but definitely a pressured headwind going into next year. So, I think we want to see where we can get with that before being too specific. Certainly, the labor environment is promising today. And I think our brand reputation helps quite a bit with that and our ability to attract and retain employers – employees. They are getting their hours and their tips and all of those kinds of things. But I think we put them together on purpose because there are moving parts and there is still some time before we get there. So, we feel good about that low to mid range, and we will see where it plays out in the next three months or four months.

Okay. Thanks. And just North Italia, was your comment that the pricing you just took, do you think that – were you behind on pricing there? And so essentially, were you saying that, that will put margins at a level that’s somewhat comparable to Cheesecake as we get into 4Q and beyond?

That’s right, Brian. I mean basically, they are one cycle behind Cheesecake Factory. And so when we just look at sort of cumulative pricing versus cumulative inflation, we were just 2 points, 2.5 points behind what we needed to do to catch up. That’s correct.

Okay. Thank you.

This concludes our Q&A and today’s conference call. Thank you for attending. You may now disconnect.