The Cheesecake Factory Incorporated (CAKE) Earnings Call Transcript & Summary

Good morning, and thank you for joining us. My name is Jeff Bernstein, and I'm the Restaurant and Food Service Distribution Analyst at Barclays. I did recently pre-announce my plans to retire, which is actually happening at the end of this month. So I guess I'm the official outgoing analyst with the next analyst still to be named, but it's bittersweet, I guess they threw me a party to say goodbye. So this is great. But I want to welcome all to Day 1 of our 19th Annual Global Consumer Conference. And I think even more importantly, this is the first year where we have combined our two consumer conferences. So we've got the Back-to-School Consumer Staples Conference, which has historically held this spot, and we have our Eat, Sleep, Play, Shop Consumer Discretionary Conference. So within my world, we have 14 Restaurant and Food Service Distributors here with us. That's the most we've ever had. I think the combination of Staple and Discretionary is going to work really well. Of those today, we have Cheesecake, BJ's Restaurants and Kurasushi. Tomorrow, we have Bloomin' and Dine Brands and First Watch Restaurant Brands, Sysco, Texas Roadhouse, Wendy's, U.S. Foods, Yum! and Wingstop. And then day 3 all by themselves, we have Performance Food Group. We hope you find the next 3 days a good use of time and we get to chat in the hall between meetings. But at this point, I'd love to introduce our first presenting restaurant company, which is the Cheesecake Factory. So with us on stage this morning from Calabasas Hills, California, we have Matt Clark, to my immediate right. He's the CEO. We have Etienne Marcus, to his right, who's the VP of Finance and IR. By way of background, if it's possible for those not familiar, the Cheesecake Factory U.S. portfolio is led by 220 or so Cheesecake Factory restaurants and 50 North Italia units, along with 40 flower child fast casual units and they have other brands in their portfolio as well. So it is a portfolio company. Looking at 2026, and again, we are moving our way through it quite quickly, but their guidance projects total revenues of approximately $4 billion and an updated net income margin of roughly 5.4%. They're opening up to 26 new units this year. That kind of aligns with management's long-term growth for 7% unit growth. So we want to thank Cheesecake Factory very much for joining us. I will kick it off with some questions. And hopefully, you have a chance to see Cheesecake if not now, but otherwise throughout the whole of today. So, thank you very much for joining us this morning as our first restaurant company here.

Well, thank you for having us, and thank you for being a great partner for many years. We wish you only the best as you move to the next part of your journey.

Thank you. I'll still be visiting Cheesecake. So we'll never be apart.

I guess, for life.

I guess, for life. So I had a couple of broader consumer discretionary questions because I think you have a pretty good look at what's going on with the consumer. And I'd love to just start with that maybe the health of the consumer broadly and maybe by cohort. Just wondering like what do you even look at to assess and whether you see any change in trend, whether it's by age group or by income or by ethnicity, like how you would assess the current environment?

Well, I think for our namesake concept as well as the rest of our portfolio, it's been strong, right? I think that the consumer has money to spend maybe they're a little bit more discerning with where they spend it. And so you've got to execute well. You've got to meet them where they're at with the value proposition for whatever that means for you, right? Obviously, with Cheesecake Factory, part of that is the large portions, for example, you still have to have price points that matter, though. So I think it is a winnable scenario, albeit not easy. We do track a lot of data and we, I think, have a benefit of having multiple types of concepts in many geographies. We do see ourselves continuing to attract, I think, importantly, younger guests. So I know there's been some concern about that cohort, for example, but particularly with the launch of our Apple Cheesecake factory earlier this year as well as some of the social media that we've been doing, we know we're bringing in new younger guests as well as continuing to refill the funnel across the broad demographic. So I think it's steady. I think there's market share to be had, but I think that restaurants in general, are performing as well as any consumer sector and probably casual dining better than most as I think what guests are really looking for is experiences. And we provide great experiential dining opportunities for people to come together and have a little escape from life and our own recent research points directly to that.

That's great and very encouraging, obviously. And as you think about the broader restaurant industry, there's always talk of the battle between food at home and now we're with our Staples brethren right upstairs. So I won't speak too loud, but versus food-away-from-home, we've always said that food-away-from-home is going to continue to take share from food-at-home. But do you think the most recent value focus across the industry has given that upper hand to food-away-from-home or often, we hear the Staple sale, people are trading down into food-at-home at this point.

Yes. I think -- I mean we like to believe that we're more staple like than we've ever been before, right? If you look at the long-term trends of where consumers are spending their share of wallet, that continues to increase for food-away-from-home, we joke about the fact that people don't know how to cook anymore. But they also grew up watching the food channel and all of those attributes about socialization, you even see that in mall traffic today that the younger guests want to go back to the mall to have those social events. So I think there's multiple contributing factors. I think you're right, Jeff, on the value piece, A lot of that is optics, but that first view that a guest might have to say, can I afford to go out to? I feel like the company is respecting my price points, they usually trade up right? But it's about making sure that the choice is -- the consumer has that choice when they come into our restaurants as they can decide, do they want to have a piece of Cheesecake or do they just want to have a salad and the free bread, and that's their choice for that day. So I think value has been important. But I also think there's a huge experiential component that's also continuing to go on and publicly grow.

Yes. right. In terms of -- and you've been in the seat for quite a while, investor misunderstanding, like, what questions do you get, whether it's today or over the past year that surprises you, whether it's or questions that you don't get that you say, you know what, you should be asking about this aspect of our business. Like what surprises you either way?

Well, I think the biggest surprise, if you go back a year or 9 months, when we're in the middle of a government shutdown and traffic was pressured. It was about where is the recovery? Can you get to positive traffic. And now I would say it is surprising in my long tenure here. The question is, well, how much traffic can you get and how sustainable is it, right? And so the dynamic has completely shifted. And I think a lot of that is what we're doing and a little bit of that is some spark from social media. And so they want to understand our investors want to understand how much of it is in your control, where can it be in the future? And all of the attributes around sort of the growth algorithm sort of permanently shifting to the upside, and we certainly see that in some of the investor response to the stock. So I think that's great and it's a different platform. And I think that we're also getting many, many questions around Flower Child, and you brought them up. And certainly a tremendous growth opportunity for the company. And what may be investors, they probably understand but underappreciate is that we're only going to grow at the pace that makes sense for us for Flower Child, whether that's from a site selection perspective, or a labor perspective that we want to have the right management teams in place. And so I think we're continuously reeducating. Wall Street just loves growth, and we want to make sure that it's quality growth.

On the Flower Child results, well, you probably don't get too many -- pretty many questions about it. Were incredible recently. So congratulations. Anything to mention on the GLP-1 topic, I mean, again, we're with staple investors and just more and more people who are on some sort of version of it to help them reduce calorie counts. And I would think that Cheesecake would say, well, probably the most vulnerable considering we have such abundant portions and delicious Cheesecake. Are you getting more questions? Do you think there's more concern ahead? Or how are you positioned?

Well, you would remember, you were around when calorie counts went on the menu in the first place. And everybody, so that was the demise of Cheesecake Factory back then, right? And in fact, all we've seen is the order rate of Cheesecakes go up over time. And again, what our research says and what we read sort of more generically as well, is that guests choose how to allocate not only their money, but their calories. And maybe they're going to skip a couple of snacks, but they're going to save those calories up because when they go out on Thursday night to the Cheesecake Factory, they want to have the full experience. So many of you might know, we have a SkinnyLuscious menu, which is probably as big as many restaurants total menu, and it's all under 590 calories. I think that would be a good indicator. If we thought our guests was skewing more towards low cal smaller portions. But in fact, it's about the same percentage of sales as it always has been. So we don't think that for our occasions, that's a big component of how our guests decide to spend their money and consume the Cheesecake Factory.

All right. Lastly, just from a bigger picture perspective, as we are now in September, I'm sure you guys are thinking about calendar '27. Is there something in particular that you'd say that this is the next big exciting thing going at Cheesecake Factory, whether it's front of house, back of house or AI or just like what's the topic du jour as we look to next year?

Well, I think we have some fun and interesting add-ons to our existing programs, whether it's menu innovation, the rewards program or the app that we feel like will continue to fuel and sustain the comp growth we've seen at Cheesecake Factory. But in our historical approach, we're not going to tell anybody about those. But they're in the pipeline. I think the thing that's exciting, too, is that we will step up Flower Child growth. I think it will be a meaningful step up probably into that 20% to 25% growth range that investors are looking for. We feel great about where that pipeline is. So we've got a real clear road map for continued value creation for our investors.

Got you. Matt, as we think about specifics kind of diving in, I mean, the comp growth, and I think it was past quarter was close to 6% comps, which is incredible for a company that usually can't get into the restaurant to be able to drive that with close to 3 points of traffic, and I think you said trends accelerated into the third quarter when you shared that with us. So not to say you're necessarily going to -- I don't want any comments, but the third quarter, if you can't provide that. But anything you would say are key drivers, whether it's I mean I think you talked about operations and staff retention, culinary, like how would you prioritize what has been the biggest drivers of your most recent acceleration?

Okay. Well, I would say, we believe that we are more in control of our ability to drive traffic and ticket than we have been in quite a while. I think that the overall marketing program, if you dial back 3 years when we launched rewards, it was a tipping point for us to spend and invest more, but also to get the data and to connect with our guests. And so we've continued to move that program forward. We've heightened that with the app this year, which gives us a whole other level. And it also engages the guest more. We're seeing rewards pick up. We're seeing engagement at the 30- and 60- and 90-day critical time marks for a new gas increase. So all of those things are positive. And we've really integrated that with the two foundational components of our company. which is operational excellence and menu innovation. And so we're more willing to talk about the menu today, and we're more willing to engage in social media today and have a more confident and playful tone with the way that we're going about that, we're talking about things like more is more, right, we're embracing the large portions we're showing ginormous pieces of chocolate cake, which are then getting picked up on social media and then we're engaging with them. And so I think that, that third leg of the stool is really kind of a new story for Cheesecake Factory to figure it out, to embrace that and to propel the other two sort of core components. And I think that's what's making the difference.

I know Cheesecake has always kind of taken a slow and steady approach to these new initiatives saying, let's wait and see how they go, and then we don't get a lot of data on them in the early days, which has there been any the concerns you had about any of those things have any of those actually come to fruition? Or thus far, have all of your newer technology initiatives played out the way you would have expected?

Maybe better I think that it's always hard to know going into it. When we did the rewards program, we did a lot of research. I mean, we're big on data. And we wanted to understand what was working and what wasn't working for the guests. And the #1 thing that our guests told us was, well, you should have an app. And we felt like pre-COVID that maybe the casual dining wasn't ready for it, but that coming out of it, that the sort of digital natives really did want that and they would use the space on their phone for an app for some place that they're going to go once a quarter, which is kind of interesting. And so it was about this time last year, we said, okay, we just got the research back and Rewards is going well, but we need that sort of spark and we said we want to have an app in 6 months and the development team went to work, and we launched it. And it was way better than we thought and the adoption and the engagement piece of that. So I think that in addition to sort of our new approach to media combined has been really the spark to the flywheel.

That's great. You haven't shared any metrics specific to app specific or along those lines?

We have not. We have not. Maybe in the future, but my IR team tells me probably not yet, they're shaking their heads.

Yes. Okay. The other big driver of top line, presumably even bigger if you can get 7% unit growth, although your comp growth have been coming close. So that's great to have a race there. But -- so I think you said 26 new units this year, kind of that 7% long-term target. I think you just said you can get into the 25% range for Flower Child that only 40 or so units. But 10 units on 40, that's a lot of unit growth. I'm just wondering where each brand fits. It sounds like Flower Child is the lead horse, but how you think about the positioning of each brand and what it takes to move to the top of the list in terms of how many units they could get?

Well, Flower Child certainly has the best unit economics, right? So in terms of disciplined capital allocation, that's our #1 priority. It's about a 33% cash on cash. It's got the largest TAM. It fits in any geography, smaller cities, bigger cities. We know that when we densify what we've done in Dallas and Phoenix. The performance is actually better because awareness has increased. So that sits at the top. If you really think about sort of Cheesecake Factory, it's going to be 5 or so units, plus or minus a year, sort of as a more mature vehicle, but we'll open as many as we can. There are great sites, we'll go there. And the risk profile of opening a Cheesecake Factory is very, very low, right? So from a returns perspective, we know exactly what we're going to get. North has had a little bit of a bumpier ride with comps. We're reinvesting in that concept. We believe in the long term. The last three openings have been the strongest that we've ever had, and we continue to learn and develop and find space for that. So we'll continue to maybe slow that down a little bit next year as there are some trade-offs. And then we continue to test portability of a couple of the Fox concepts that we really like, the Henry and Culinary Dropout. And so we've got a very good overall runway for the next 2 to 3 years, probably the strongest real estate road map that we've had.

Right for those that aren't as familiar with Flower Child, the 32nd pitch on that is fist-casual (sic) [ fast-casual ], but fully customized for exactly what you want.

Yes, we like to call it the Cheesecake Factory fast-casual, right? So it's not an assembly line. It's a scratch kitchen, and you can see it being made when you go in there. And it's got a huge defensible moat because not only does it have the price point of fast-casual, the breadth of the menu, it's got to vibe in the restaurant. So if you think about the 4 quadrants of business potential, it's pretty evenly split. We're about a little over 40% dinner versus a little under 60% lunch, which for fast-casual is very differentiated. We're just about evenly split off-premise and on-premise, which was also incredibly differentiated. And so we really think that there's the same store as Cheesecake Factory. We compete against everybody and nobody. And so it's a great value proposition. We find that it's also very friendly for families. You can get something healthy for your kids that taste great as well, and you can get it to go or you can go there.

Just to go back to flower Child a little bit on the growth. I think the other area that we've been focused on to make sure that we're ready for the 25% growth is we've been investing in the real estate team, making sure that we have a healthy pipeline, which we feel pretty good about. The other piece is on the operational side, making sure that we have management ready. That's the gating factor for that concept in terms of how fast we can grow. And so we've been ensuring that we have a good pipeline of managers and so that we're ready to execute on that higher level of growth.

If there was ever a downside, I feel like when investors are always pushing for more growth. It's just what's too fast? Do you typically take -- I mean you have a big portfolio now do you take managers from a Cheesecake and move it over or you have to develop a Flower Child manager to then move on? Like how do you assure that units is manageable on?

They're typically grown in from the concept right? It is different -- it is a differentiated concept. And so we've been taking people up from the pipeline inside of the Flower Child.

That's great. And then in terms of the restaurant, you actually just mentioned you said it was a bumpier road for North Italia and you're investing in it. So what's the biggest -- what have you found to be the biggest -- I mean, when you're big brother is Cheesecake Factory, I'm sure North Italia has big shoes to fill. But like what's been the biggest challenge that you see you can overcome in the short and long term?

Well, I think coming out of the hyperinflation post-COVID that we all took pricing and we took pricing at North a little bit later, but in the last couple of years, it was elevated. And I think that, in general, what we've seen is consumers, again, as we talked about what's Cheesecake and Flower you've got to give them options. You've got to put them in control. We probably across some psychological barriers, and we need to sort of broaden those menus to have some anchor price points and make sure that we're bringing in guests of all cohorts. The NPS score importantly, at North is about 7 points higher than Cheesecake. So we know that the guests that are going in are having a great experience. But as an example, we'll roll out a new happy hour program, right? We're we can compete at a price point that isn't discounting because that's not who we are. But in bringing the guests to experience a North Italia at a price that is affordable for anybody. And then if we win them over, maybe they'll come back for one, two dinner in a different time period, right? And so we're going to do some menu architecture. And then we're also just going to widen the funnel of some media. So what we've seen at Cheesecake Factory has really been working. We're going to take some of those and really test two pretty big markets but at a measurable higher spend.

It seems like that was always what Cheesecake, it was never going to be a national advertised brand. Do you ever do any connect the dots for consumers, the Cheesecake-North Italia, same family?

We really don't. Because we really want North to be more believed those to be your local Italian restaurant, right? And so there's a cohort that loves chains because of the consistency and the predictability. And there's a cohort that wants to go to some place that nobody has discovered. And so we try to keep the brands separate.

Got it. shifting from the top line to more of the margin and cost side of things. The restaurant margin at the core Cheesecake, I think it reached a decade high approaching like 20% or so. Flower Child in that 20% range as well. How do you think about your primary margin drivers? I mean I think most would dream of 20%, and they'd say, let's just hold 20%, others say, we could go higher than that. So how do you think about whether it's commodities or labor or leveraging your greater sales? Like what's the biggest opportunity on the margin front either for our brand or for the portfolio?

Well, maybe I'll start off with the commodity side and then you can jump in on some of the initiatives too. But I would frame up, inflation is very manageable at this stage. If I just drill into COGS a little bit more. The reality is Cheesecake Factory benefits from the broad basket that we have. And so none of the categories really move us up or down too much and it gets manageable from that standpoint. That said, we're not immune to beef prices, they've been elevated. The good news for us is dairy has really been favorable. And so that's really offset the inflation that comes from beef. We said low single digit for the back half of the year. I think labor has also been very constructive for us. Very stable. Inflation there has been low to mid-single digit for some period of time. And we anticipate that to be about the same here going forward.

So if you take that backdrop, right, we've taken less price this year than last year. And we've reinvested in the menu with lower price points that bring that actual realized price point down another 1 point, 1.5 point. So we're effectively in the eyes of the consumer under 2%. So we'll continue to reinvest in the menu that way. And we've always said, look, if we get to 18% margins for an annualized basis because Q2 is seasonally high, that we'll just invest to drive traffic. Those margins, I think there's an economic push and pull point. We want to make sure the consumer gets everything they're coming in for. And we have opportunities, right, in our other concepts in North and FRC to bring the aggregate margin up as well as leverage G&A to continue to drive aggregate EBIT margins higher.

Is there a -- like, I think within your long-term guidance is a suggestion for a certain amount of margin expansion every year. In fact, as I think about it, we talk a lot about the restaurant margin, you guys focused a lot on the net income margin. So how do you think about restaurant margin getting to net income margin I guess, presumably from a G&A perspective.

It's about the same, like in totality, if you think about the 4-wall margin improvement of 25 to 36 points a year. that should flow through. Maybe there's a little bit of gain from G&A as well, but then you have a little bit higher tax rate if you're more profitable. So net income margin at the same sort of 25 to 30 basis points.