Ladies and gentlemen, thank you for standing by, and welcome to The Cheesecake Factory Third Quarter Fiscal 2020 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. [Operator Instructions] I would now like to hand the conference over to your speaker today, Stacy Feit. Thank you, please go ahead, ma’am.

Thank you. Good afternoon, and welcome to our third quarter fiscal 2020 earnings call. 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 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 statement. In addition, throughout this conference call, we will be presenting results on an adjusted basis, which reflects the potential impact of the conversion of the company’s convertible preferred stock into common stock. 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 briefly review our third quarter results and provide a current financial update. With that, I’ll turn the call over to David Overton.

Thank you, Stacy. Sales of Cheesecake Factory restaurants continue to build throughout the third quarter with relatively strong comparable sales performance in light of the mandated capacity restrictions related to the COVID-19 pandemic. Third quarter comparable sales declined approximately 23% that we ended the quarter with comp sales down approximately 10% in September, as we were able to reopen additional dining rooms. Notably, we had 20 Cheesecake Factory locations with positive comparable sales during the quarter, despite only being able to operate on average with 50% indoor dining capacity in those locations. We have been able to achieve this sales recovery given continued strong GAAP demand to return to our restaurants, coupled with sustained strength in our off-premise business. In fact, we were able to maintain the vast majority of our off-premise sales from the second quarter, even with additional restaurants able to partially reopen indoor dining rooms during the third quarter. We believe this underscores the broad consumer appeal and strong guests affinity for the Cheesecake Factory. Our top priority for in-person dining is to provide a safe, comfortable experience for our guests and our staff. We are proud to have been recognized for these efforts in the recent Nation’s Restaurant News Consumer Picks COVID Follow-Up Survey. Our large footprints and flexible seating layouts have continued to be an advantage for us during COVID-19. This is also proven true in areas that now allow capacity in excess of 50%, where we can drive additional sales while also prioritizing social distancing. Operationally, we continue to perform well across several key performance indicators, including year-over-year improvements in food efficiency and labor productivity, while maintaining the integrity of the Cheesecake Factory brand in our competitive differentiators for the long-term. We earned the distinctions of number one for quality, number two for service…

Thank you, David. The increased demand we’ve seen for in-person dining, underscores our guests desire to experience the Cheesecake Factory magic once again, and that the various measures we’ve taken are helping guests feel safe and comfortable in our restaurants. In fact, we’ve recently installed glass partitions at approximately 50 Cheesecake Factory restaurants to increase our capacity where jurisdictions allow, while also prioritizing guests safety and maintaining the upscale look and feel of our restaurants. And we have additional locations lined up to have partitions installed in the coming weeks, which we expect will bring us to about two-thirds of Cheesecake Factory locations in total. Fiscal fourth quarter to-date through October 27, we have recaptured on average, approximately 90% of prior year annualized sales volumes in Cheesecake Factory restaurants with open dining rooms. This would equate to about $9.5 million per unit on average on an annualized basis, despite the mandated capacity restrictions supported by approximately 40% off-premise sales mix. Currently, 187 Cheesecake Factory locations have indoor dining rooms open. On average, these locations are operating at 50% capacity. Our teams have also been able to drive sales and locations, operating patios only. At present, the 17 Cheesecake Factory restaurants in California and Toronto operating with this restriction have done fiscal fourth quarter to-date sales volumes of over 90% on average of Cheesecake Factory restaurants offering in-person dining. I believe this speaks to our operational excellence and creativity, specifically our ability to respond to challenging operating conditions, which will continue to be paramount throughout the pandemic. In aggregate, across restaurant operating models, fiscal fourth quarter to-date through October 27comparable sales at the Cheesecake Factory restaurants are down approximately 7% and are outpacing the quarter to-date Black Box casual dining industry index. As I mentioned, we’ve continued to sustain strong momentum…

Thank you, David. Third quarter comparable sales at the Cheesecake Factory restaurants declined 23.3%. The sales recovery was largely linear throughout the quarter, improving from a decline of 32% in July to down approximately 10% in September. Off-premise represented approximately 45% of total Cheesecake Factory restaurant sales during the third quarter. Revenue contribution from North Italia and FRC totaled $63.9 million. North Italia comparable sales declined 22%. Sales per operating week at FRC, including Flower Child were approximately $61,120. And including $17.8 million in external bakery sales, total revenues were $517.7 million during the third quarter of fiscal 2020. As we would have expected, most of the year-over-year expense variances in the third quarter were due to COVID-related sales deleverage. So I will provide the usual line item detail. Cost of sales increased 10 basis points, primarily reflecting a shift in sales mix. Labor increased 230 basis points, primarily attributable to the cost of maintaining our full restaurant management team and group medical benefits in the reduced sales environment. This was partially offset by lower hourly labor. Other operating expenses increased to 30.7% of sales, due primarily to sales deleverage, increased marketing and costs such as additional cleaning and PPE associated with COVID. We are pleased with the sequential margin improvement we drove in our third quarter versus the second quarter. Based on Cheesecake Factory restaurants, comparable sales performance in aggregate, third quarter restaurant level margins were solid with approximately 35% flow-through year-over-year, inclusive of COVID-related costs and restaurant level management deleverage. This performance was within our expectations, particularly when you consider the changing nature of capacity restrictions that our operators had to contend with. And G&A increased 110 basis points, also reflecting sales deleverage, net of savings initiatives. Pre-opening costs were $2.4 million in the quarter, roughly in line…

[Operator Instructions] And your first question comes from Joshua Long with Piper Sandler.

Great, thank you for taking the question. Encouraged to see the continued improvement in top line trends here into 4Q. And in the context of still having meaningful capacity reductions or maybe meaningful capacity opportunity going forward, could you talk about what you’ve learned in terms of recapturing those same-store sales while still operating in a 50% capacity environment? Any sort of initiatives or areas where you’ve been able to unlock pieces of growth to support that as we go into 4Q and then early next year?

Thanks, Josh. This is David Gordon. Well, certainly I think we’ve learned that there is demand from our guests to come out and dine in Cheesecake Factory. And we’ve seen that in every geography across the country, where we’ve been able to increase capacity, we see guests that want to come out and dine in the safe environment that we’ve created, while at the same time, being able to keep the majority of those off-premise sales. And as I mentioned earlier, I think that our strategic marketing that we put in place around the off-premise business has kept us in guest’s mind. And our ability to execute on that off-premise business, I think is what’s allowing us to see good reorder rates as I mentioned from DoorDash and continued strong off-premise sales. I do think that the safety of our restaurants can’t be overlooked. People today want to continue to feel safe no matter, if it’s a 25% or 50% or even expanded capacity environment. And our operators have done a tremendous job of keeping that at the forefront. And I think that’s allowed guests to come in, dine safely, and then they’ll come back and see us again. So I think our operational expertise and keeping our management teams in place has been key to allow us to do that. And I don’t see why that wouldn’t continue.

Great, thank you for that. And when we think about that improvement from – through the quarter and then here into 4Q as well, any sort of regional performance? It sounds like it’s broadly – the strength is broad based as you mentioned, but curious if there’s any sort of regional performance or maybe other dynamics or qualities that you’d call out there outside of obviously some of the broader disruptions maybe there in California with the recent buyers.

Hey, Josh, this is Matt. I think probably similar to the industry as a whole; capacity is a component of that. And so in those geographies where it’s either opened up faster or more, certainly we are seeing internally year-over-year performance that is higher, some of those areas would be in the Southwest, Texas and the Southeast and the mid-Atlantic. So I think that does play a role. The things that have been consistent have definitely been the off-premise though, as David mentioned, and that’s what we’re seeing across the board. So I think the hallmark of Cheesecake Factory with consistent performance, we’re able to really track when that capacity opens up and predict effectively where we think the sales can be and that has really helped us operate effectively.

Great, thank you.

Your next question comes from Jon Tower with Wells Fargo.

Great, thanks for taking the question. Hopefully, you can hear me okay. Just a couple of questions from me. First, I was wondering if you could talk about, it sounds like these deals particularly on the digital side were pretty strong during the quarter. And I noticed in myself in terms of the frequency, it doesn’t seem like it’s something you’ve done before. So curious to know how the margin structure looked on these deals specifically. And then your thoughts on the frequency of using these deals as we kind of go out over the next several months and even in the 2021.

Hey, Jon, this is Matt. I think a couple of things. We’re not necessarily a marketing company. So every dollar that we spend in marketing has to go through a pretty rigorous process to evaluate an ROI. And I feel very confident that we’re exceeding all of our expectations for the programs that we’ve been running. I think you’ll note that they are focused on the off-premise channels and certainly in some areas that we feel that there’s greater opportunity to rebuild sales over time, thinking about places like the midweek lunch opportunity. And so where you’ve got that capacity and where you have some opportunity to recover, you see greater incrementality. And I think that’s been true for us. And in terms of the frequency before for us, really looking at an environment that’s unprecedented, and we believe that the stickiness of the off-premise investment is definitely worthwhile. And we’re seeing that with guests, we’re seeing that impact or behavior and believe that while it’s not only been beneficial in the short-term that there is a tail to this, and it’s really about brand building as well as just running marketing programs.

Okay. And then I think on the last call, you talked about the idea of seeing some pretty strong store level volumes with margins down – excuse me, with volumes at roughly 90% prior peak. So I’m just kind of curious, AUVs right now look lower than clearly peak, but still quite strong. What should we think about for margins from this point forward?

Yes, I mean, it’s definitely, I would say sort of a tale of two cities in terms of modeling. I can only give you the best guess with where you think the sales environment will be, right. That’s a big driver for us. Certainly, I think we’re proving with the flow through that we’re seeing is that as we get back somewhere between 90% and 100%, we’re going to be at or above prior year margins. And so our goal is to focus on that sales rebuilding because the environment will stabilize over time. So that’s the first, and I think most important driver of where we will be. And certainly, I think it would be fair to think about Q3 and Q4, and probably a 30% to 40% flow through if you’re going to model out an improvement in comp, whatever that modeling leads you to from where we were to where you think we will be in the fourth quarter. That’s probably a good proxy for where margins could end up in the near-term, if that’s helpful.

Okay, thank you. And then just the last one. On the special menu card that you put in right now, can you talk about this being potentially a an LTO or limited time offer versus, say, a permanent menu addition? And how different is it from a price point standpoint versus what you’ve currently got?

Well, as you know, the menu in general has a variety of price points. And I think the menu card has that same variety, to maybe a little bit lower in total, but it provides a great value for guests. And much like the special menu card we put out previously, it will be out there for a while, and then we’ll determine if we want to move some of those menu items into the main menu or not, really based on how well they perform. And then we’ll get into our regular cadence of our updated menu changes once we get back to winter of next year.

Got it. Thank you.

Your next question comes from Mary Hodes with Baird.

Good afternoon. Thanks for taking the question. Could you just talk a little bit about how much outdoor patio has been contributing to comps, maybe in Q3 or in October? And what you think that looks like as you move into the winter months?

Hey, Mary, it’s Matt. I think probably the most important metric I could tell you about that is in aggregate we’re getting about 1.5% extra benefit in the comp in the quarter from extra patio seating, right? So what we said before is you go from summer to winter, you obviously flex in different areas of the country with respect to the patio. And so we would expect places like Florida would actually increase patio utilization in the winter versus in the summer, in places like Phoenix as well. So in aggregate for the company, we’ve been able to increase a little bit, particularly in California, and that’s been again about 1% to 1.5% benefit of our total sales. We normally see patio sales running in the high single digits as a total. And it’s a little bit higher in the summertime and a little bit lower in the winter time as I mentioned. Those geographies that pick up kind of offset each other and so it keeps it pretty stable.

Okay. That’s great. Thank you. And then just lastly, you talked a little bit about accelerating unit growth going forward, including in 2021. Can you just talk a little bit about whether or not you’re still committed to 6% to 7% unit growth over the long-term? And when it might be reasonable to think about getting back to that point?

Sure. I think we definitely have the concepts to accomplish that and I think we have the balance sheet to accomplish that and the teams to accomplish that. I think that the real estate environment will be there with lots of opportunities. Certainly getting back to that complete level, we’ll be a little bit dedicated, but based on what happens with the virus and we want to move forward in a way that we’re taking every opportunity we can, but also making sure we’re positioning ourselves for the long-term. So I think at this point in time, we could do it as early as 2022. If the environment stabilizes enough by next year, we certainly could reopen to that full growth rate by 2022.

Great, thank you very much.

Your next question comes from Jeff Farmer with Gordon Haskett.

Thank you. Matt, I think you just said in an answer to Jon’s question that at roughly 90% of year ago volumes you can get back to a year ago margin. So assuming I heard that right, how do you guys do that from a cost perspective?

Hey, Jeff. I think, look, first of all, just to caveat all else being equal, it’s somewhere between 90% and 95% based on where we sit today and the 35% flow through that we saw going downward because there’s a lot of other variables that will play out that probably are bigger than, than some of the COVID aspects really in the longer term. And a lot of that has to do with things like commodity costs and labor inflation. And certainly of labor inflation, I mean, it’s been running 5.5% to 6%. If that were to come down 1% or 1.5% because the labor environment is better, well, then that certainly changes the environment completely. We essentially on a like-for-like basis most kind of the components are pretty variable. We are getting an efficiency gain from the increase in the off-premise business. And that’s somewhat of the piece that will help us offset any increased costs as well as get a little bit more efficiency, leverage to recap your margin slightly below prior year volumes.

All right. And then just using that as a segue to a follow-up question, in terms of thinking about the off-premise margin, how you want to think about it, meaning the combination of to-go sales as well as delivery. But if you think about the sales that are off-premise, the margin structure sort of collectively for those sales versus the margin structure for the in-restaurant. Can you give us any context there?

Sure. In aggregate, it’s slightly favorable, like I said and that is a blend, where – delivery is slightly unfavorable, but not much, maybe a couple percent when you net everything together for us with the deal that we have and the way it works. And then you’ve got the call in and online ordering, which are equally, slightly favorable. And those are making up about 60% of the total off-premise versus 40% for delivery. So the weighting is just slightly better in totality.

All right. Thank you.

Your next question comes from Jeff Bernstein with Barclays.

Hi, good afternoon. This is Pratik on for Jeff. Thanks for taking the question. In terms of labor and wages, just wanted to ask you guys, how would the removal of a tip credit in a potential new administration affect your business? And how does that affect how you structure labor in your restaurants? I guess what I’m really trying to ask is, is there any material difference between how you manage your California restaurants versus the ones in tip wage state? Thanks.

Sure. Maybe I’ll just kind of focus on the way that the end of the question asked, because a lot of these labor rules come and go over time. There’s regulations in California that are different in aggregate too. It’s not just a wage structure per se. But invariably, we look to provide the best guest experience and focus our operations on being consistent throughout the United States. The biggest difference that obviously happens then is really the pricing structure. And as California really kind of leading the way with this over the past six, seven years, started to increase the minimum wage and there is no tip credit, we started to look at having more of a market-based pricing strategy, and that is designed to offset the wages specifically because most of the other components are pretty much the same. So certainly you have to look at that and it’s based also on where the competition goes. But when the wage structure is equivalent for everybody, then what you see over time is that the pricing structures come out about the same for everybody as well to make the margins work.

Got it. That’s very helpful. And then just a quick one on your to-go sales. As we eventually migrate towards “normal”, how do you see the trajectory over the next 12 months? I know Cheesecake Factory more than most is seen as a experiential concept, and just want to get a sense of how you guys measure stickiness and what you can do to kind of ensure this elevated mix of to-go sales?

Well, I think what we’ve seen thus far, we’re now in month seven, eight here, as we’ve reopened the dining rooms, that we’ve been able to keep that off-premise business. So I think the value of the menu and the breadth of the menu is the reason for that. If you’re, again, a family of four, you can easily order a couple of entrees and appetizer, complimentary bread, and it’s a great value. And you can turn around three days later and try an entirely different type of cuisine, again, from the Cheesecake Factory. So that’s one of the reasons we think that it’s been as sticky as you said as it has been, and we would anticipate that we can keep the majority of that business, even as the restaurants be open.

Great. Very helpful. I appreciate it.

Your next question comes from Brian Vaccaro with Raymond James.

Thanks. Good evening. I had a question on the sales cadence that you saw through the quarter. And with the September comps, I think you sit down around 10%. I would suggest that you saw a pretty meaningful improvement in September sort of compared to July and August. Is that right? And if so, could you walk through how much of that was due to sort of increase capacity maybe versus an acceleration in delivery or another factor that might’ve been in play there?

Yes. Hey, Brian, it’s Matt. I think most of that was really around the capacity. I think that we from the beginning been stressing safety and we’ve always looked to get a week or two of any jurisdiction reopening under our belts. Not just for that, but also then in instances where you could add capacity as David Gordon talked about, I think we’re still in the process of putting in some of the opportunities in the dividers between the booths. And I think all of those things have been building kind of linearly over the course of the quarter. I think that the off-premise has been pretty steady throughout. And so I think that was a bigger percentage. As we noted for the entire quarter, I made up about 45% and a lot for the reopen it’s about 40% for the dining rooms that have some capacity. So I think that that was the biggest component of it for us to make sure that we – you’re maximizing the total opportunity within our footprint.

Okay, great. And on the partitions, could you ballpark how much effective seating on average that will allow you to unlock? And I think you said around two-thirds of the cheesecakes by the end of the year,

It does allow us to meet whatever the capacity restriction is in that particular market. So if it’s moving to 75%, we’ll allow it to get to 75%. There’s been some markets, there’s no restriction in that way, but it’s just six-feet social distancing or a physical barrier will allow us to do that as well. So in a particular market where the capacity, actually it may say 100%, but you must keep the six-feet. In those situations it could allow us obviously to have expanded capacity past that 75%; allow us to see things in our restaurant, if we needed to, when we’re able to.

All right, that’s helpful. And sorry if I missed it, but I think you said off-premise was 45% of sales. What percent of that was delivery within that 45%?

So the, the total mix was 40% delivery, 30% online and 30% call and walk-in of the 45%.

Perfect. Okay. And then just last one. Matt, back to the margins, obviously the sales volumes were quite a bit different as you move through the quarter. Would you be willing to comment sort of where the store margins were exiting the quarter or perhaps what you’ve seen so far in October?

I would just say that the linearity of the sale was corresponding to the margins and that you can pretty much model it out with the consistency of our business based on the 30% to 40% flow through.

Fair enough. Thanks

At this time, there are no further questions. I’ll hand the call back for closing remarks.

Thank you for joining the call today. We will speak to you next quarter.

That concludes today’s conference. Thank you for your participation. You may now disconnect.