The Cheesecake Factory - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered record revenue ($0.956B) and adjusted EPS of $1.16, both modest beats versus S&P Global consensus; revenue +5.7% YoY and operating margin expanded 30 bps YoY to 6.8%. Actuals vs consensus: EPS $1.16 vs $1.06*, revenue $955.8M vs $947.3M*.
• The Cheesecake Factory comp sales rose 1.2% YoY; four-wall margins reached 18.5%, the highest in eight years, driven by commodity cost favorability and retention-led productivity.
• Flower Child continued outsized momentum: comps +4%, annualized AUV >$4.8M, and mature restaurant-level margins 20.4%. North Italia AUVs reached $8M with mature margins 18.2%; comps -1% amid L.A. fire effects and sales transfer from new openings.
• Guidance: Q3 revenues $905–$915M; full-year adjusted net income margin raised to ~4.9% (from ~4.75% in Q1), tax rate to ~11.5%; pre-opening now ~$34M for FY25. Dividend maintained at $0.27 per share.
• Near-term catalysts: operational momentum with Bowls & Bites value mix, continued margin discipline, and accelerating unit development; watch tariff/other OpEx drift and North Italia comp sensitivity to infill openings.

What Went Well and What Went Wrong

What Went Well

• “Record-high revenue, continued margin expansion, and profitability that exceeded our guidance” (CEO Overton). Cheesecake Factory four-wall margin rose to 18.5%, up 80 bps YoY—the highest in eight years.
• Operational execution: cost of sales -70 bps YoY on favorable commodities; labor -20 bps YoY from retention/productivity; adjusted EPS $1.16 vs $1.09 prior year.
• Flower Child strength: comps +4%, AUV >$4.8M, mature margins 20.4%, with catering, KDS, and ops dashboards cited as drivers; returns “mid-30%” on the brand per CFO.

What Went Wrong

• North Italia comps -1% (traffic -4%, price ~4%, mix -1%) due to L.A. fires and sales transfer from new units; comps would be “flat” ex-L.A..
• Other operating expenses +40 bps YoY, driven by facility-related costs; pre-opening costs elevated ($9M vs $7M prior year) due to higher opening cadence.
• Mix headwinds persist as strategy tilts to value (Bowls & Bites) and nonalcoholic attachment; CFO models another ~100 bps negative mix in back half.

Transcript

Operator (participant)

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to The Cheesecake Factory Incorporated Q2 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star and the number one on your telephone keypad. I would now like to turn the call over to Etienne Marcus, Vice President of Finance and Investor Relations. Sir, please go ahead.

Etienne Marcus (VP of Finance and Investor Relations)

Good afternoon, and welcome to our second quarter fiscal 2025 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, we will be presenting results on an adjusted basis, which exclude acquisition-related items and impairment of assets and lease termination expenses. Explanations 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 second quarter financial results and provide commentary on our financial outlook before opening the call up to questions. With that, I'll turn the call over to David Overton.

David Overton (Chairman and CEO)

Thank you, Etienne. Our second quarter results exceeded expectations with consolidated revenues and adjusted earnings per share, setting new milestones for the company. These solid financial results are fueled by operational excellence and sustained demand across our differentiated high-quality concepts. Second quarter comparable sales at The Cheesecake Factory restaurants increased 1.2%, driving record high average weekly sales and further elevating our industry-leading annualized unit volumes to nearly $12.8 million for the quarter. Strategic innovation in our menu has always been a key pillar of our success. Reflecting that ongoing focus, we are now introducing our latest menu, which features 14 new dishes across two innovative categories. Tomorrow, in celebration for National Cheesecake Day, we are launching our newest cheesecake, Peach Perfect with Raspberry Drizzle.

We believe our continued focus on culinary innovation keeps our menu highly relevant without relying on discounting, and combined with the strength of our best-in-class operators, positions us to stand out in a competitive landscape. Thanks to the outstanding execution of our operators, we delivered strong flow-through and meaningful improvement in profitability. In fact, The Cheesecake Factory's four-wall restaurant margin increased to 18.5%, up 80 basis points year over year, and the highest level recorded in eight years. Turning to development, we successfully opened eight restaurants in the second quarter, including two The Cheesecake Factory restaurants, one North Italia, three Flower Child, and two Fox Restaurant Concepts restaurants. Subsequent to quarter end, we opened one Fox Restaurant Concepts restaurant and one international The Cheesecake Factory restaurant in Mexico under a licensing agreement.

We are pleased with the progress we've made on new unit growth so far this year and continue to expect to open as many as 25 new restaurants in 2025. Additionally, we anticipate two The Cheesecake Factory restaurants to open internationally under a licensing agreement. As we look ahead, the strong demand for our distinct dining experiences reaffirms our confidence in the long-term trajectory of our portfolio. Our results clearly demonstrate the strength of our platform and the effectiveness of our strategy to deliver sustainable growth and value. With that, I will now turn the call over to David Gordon to provide an operational update.

David Gordon (President)

Thank you, David. Our performance this quarter reflects the operational strength and disciplined execution of our teams, who continue to manage their restaurants with precision and excellence. Notably, both hourly and management retention increased year over year, driving improvements in labor productivity, food efficiencies, and wage management. As we've noted previously, our success in staffing continues to be a key driver behind the improvement in guest satisfaction scores. Ultimately, it's our team members who make it all possible, bringing our vision to life and delivering exceptional dining experiences every day. To this point, our internal Net Promoter Score metrics improved across nearly all key areas this quarter, including in both dine-in and off-premise channels, with notable gains in pace of experience, staff service, and food quality.

Record The Cheesecake Factory average weekly sales in the second quarter were supported by off-premise sales of 21%, consistent with the average of the prior four quarters. Our newest The Cheesecake Factory restaurant in Naperville, a suburb of Chicago, opened to remarkable demand, underscoring the strong affinity for the brand and the enduring value of our distinctive dining experience. As David mentioned, strategic menu innovation remains core to our success, and we're bringing that to life with the launch of two new menu categories: Bowls and Bites. Our new bowl selection includes six thoughtfully crafted options, such as the Teriyaki Salmon Bowl, Orange Cauliflower Bowl, and the Peruvian Chicken Bowl. We also introduced a lineup of eight new bites, smaller plates offered at an attractive price point.

These are designed to drive interest and offer new ways to enjoy the menu, with items like New Orleans Cajun Shrimp, Chicken and Biscuits, and Meatball Sliders. These new offerings reinforce the relevance of our menu and the strength of our innovation strategy. Together with our best-in-class operational execution, they drive sales and traffic and reinforce our leadership and experiential dining. Moving to Cheesecake Rewards, the program continues to perform well, with strong member growth and high satisfaction. As we evolve the program, we've shifted from large-scale testing to a more targeted, data-driven strategy, delivering personalized offers aligned with member behavior and preferences. This refined approach has driven meaningfully higher engagement and deeper loyalty. Turning to North Italia, second quarter annualized AUVs increased 2%, reaching $8 million.

Comparable sales declined 1%, reflecting some continued impact from the Los Angeles fires, weighing more heavily on performance due to the concept's smaller comp base relative to The Cheesecake Factory, as well as some sales transfer impact from new restaurants. We also successfully opened a new North Italia in Boise, Idaho, during the quarter, marking our entry into another market. Early performance exceeded expectations, with average weekly sales trending approximately 40% above the Q2 system average, reaffirming strong consumer demand for the concept. Restaurant-level profit margin for the adjusted mature North Italia locations improved 290 basis points from the prior year to 18.2%.

The margin expansion was primarily driven by operational improvements, as well as more favorable commodity and labor inflation. Flower Child continues on a strong upward trajectory, with second quarter comparable sales increasing 4%, significantly outperforming the Black Box Fast Casual Dining Index, which was essentially flat for the quarter. The improvement resulted in average weekly sales of $91,400 for an annualized AUV of over $4.8 million, a new milestone for the concept. We also opened three new Flower Child locations during the quarter, including two in new markets. Collectively, these restaurants averaged nearly $82,900 in weekly sales, translating to a solid AUV of approximately $4.3 million annualized. Operational enhancements continue to support strong performance, with restaurant-level profit margins for adjusted mature Flower Child locations reaching 20.4% in the second quarter.

Our strong portfolio performance, fueled by sustained sales momentum, operational excellence, and margin expansion, positions us well to deliver on our long-term growth ambitions. Let me turn the call over to Matt for our financial review.

Matt Clark (EVP and CFO)

Thank you, David. Let me first provide a high-level recap of our second quarter results versus our expectations I outlined last quarter. Total revenues of $956 million and adjusted net income margin of 5.8% both exceeded the high end of the guidance ranges we provided. Now turning to some more specific details around the quarter. Second quarter total sales at The Cheesecake Factory restaurants were $683.3 million, up 1% from the prior year. Comparable sales increased 1.2% versus the prior year. Total sales for North Italia were $90.8 million, up 20% from the prior year period. Other FRC sales totaled $90.2 million, up 22% from the prior year, and sales per operating week were $136,800. Flower Child sales totaled $48.2 million, up 35% from the prior year, and sales per operating week were $91,400. External bakery sales were $12.9 million. Now moving to year-over-year expense variance commentary.

In the second quarter, we continued to realize some year-over-year improvement across several key line items in the P&L. Specifically, cost of sales decreased 70 basis points, primarily driven by favorable commodity costs. Labor as a percent of sales declined 20 basis points, primarily driven by the continued improvement in retention, supporting labor productivity gains and wage leverage, partially offset by higher group medical costs. Other operating expenses increased 40 basis points, primarily driven by higher facility-related costs. G&A increased 10 basis points from the prior year. Depreciation remained relatively flat as a percent of sales. Pre-opening costs were $9 million in the quarter compared to $7 million in the prior year period. We opened eight restaurants during the second quarter versus five restaurants in the second quarter of 2023.

In the second quarter, we recorded a pre-tax net expense of $1.2 million related to FRC acquisition-related items and impairment of assets and lease termination expenses. Second quarter GAAP diluted net income per share was $1.14. Adjusted diluted net income per share was $1.16. Now turning to our balance sheet and capital allocation. The company ended the quarter with total available liquidity of approximately $515.3 million, including a cash balance of $148.8 million and approximately $366.5 million available on a revolving credit facility. Total principal amount of debt outstanding was $644 million, including $69 million in principal amount of convertible notes due 2026 and $575 million in principal amount of convertible notes due 2030. CapEx totaled approximately $42 million during the second quarter for new unit development and maintenance. During the quarter, we completed approximately $0.1 million in share repurchases and returned $14.3 million to shareholders via our dividend.

Now let me turn to our outlook. While we will not be providing specific comparable sales and earnings guidance, we will provide our updated thoughts on our underlying assumptions for Q3 and full year 2025. Our assumptions factor in everything we know as of today, including net restaurant counts, quarter-to-date trends, our expectations for the weeks ahead, and anticipated impacts associated with holiday shifts. Specifically for Q3, we anticipate total revenues to be between $905 million and $915 million. Next, at this time, we expect effective commodity inflation of low single digits for Q3. We are modeling net total labor inflation of low to mid-single digits when factoring in the latest trends in wage rates and minimum wage increases, as well as other components of labor. G&A is estimated to be about $61 million. Depreciation is estimated to be approximately $28 million.

We are estimating pre-opening expenses to be approximately $7 million-$8 million to support the two planned openings in the quarter and early Q4 openings. Based on these assumptions, we would anticipate adjusted net income margin to be about 3.25% at the midpoint of the sales range provided. For modeling purposes, we are assuming a tax rate of approximately 10% and weighted average shares outstanding of 48.5 million. Now for the full year, based on similar assumptions and no material operating or consumer disruptions, we anticipate total revenues for fiscal 2025 to be approximately $3.76 billion at the midpoint of our estimates. We currently estimate total inflation across our commodity basket, labor, and other operating expenses to be in the low to mid-single digit range, inclusive of the currently proposed tariff levels.

We are estimating G&A to be about flat year over year as a percent of sales and depreciation to be about $109 million for the year. Given our unit growth expectations, we are estimating pre-opening expenses to be approximately $34 million. Based on these assumptions, we now expect full year adjusted net income margin to be approximately 4.9% at the sales estimate provided. For modeling purposes, we are assuming an 11.5% tax rate and a weighted average share count approximately 50 basis points lower than 2024. To help with modeling, this implies a Q4 tax rate of 11%-12% and WACO of 49 million. With regard to development, as David stated earlier, we expect to open as many as 25 new restaurants in 2025. This includes as many as four The Cheesecake Factory locations, six North Italia locations, six Flower Childs, and nine Fox Restaurant Concepts restaurants.

We would anticipate approximately $190 million-$200 million in cash CapEx to support unit development, as well as required maintenance on our restaurants. In closing, we delivered another quarter of strong financial and operational performance with record revenue, continued margin expansion, and earnings growth. Our restaurant teams continue to execute at a high level, and our differentiated experiential concepts remain well-positioned to consistently deliver the delicious, memorable dining experiences our guests expect. As always, we remain focused on making steady progress toward our long-term value creation priorities, growing comparable restaurant sales, expanding operating margins, and accelerating accretive unit development. With a stable foundation, a resilient business model, and a clear strategic focus, we believe we are well-positioned to continue generating consistent results and driving meaningful long-term shareholder value. With that said, we'll take your questions.

Operator (participant)

At this time, if you would like to ask a question, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. We kindly ask that questions are limited to one and one follow-up for today's call. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Brian Bittner with Oppenheimer. Please go ahead.

Brian Bittner (Equity Research Analyst and Managing Director)

Thank you. Good afternoon. As it relates to the increase in the net income margin for 2025 from 4.75%-4.9%, is this primarily operationally driven at the store level? Do you have a different assumption for the four-wall restaurant margin expansion in 2025 versus, I think, 15 to 25 basis points of increases is what you had previously assumed?

Matt Clark (EVP and CFO)

Hey, Ryan. It's Matt. Thanks for the question. That's true. I think the four-wall, our expectations now are that it will be better than we had originally expected. I mean, clearly demonstrated by our Q2 results being above our expectations. I think we are committed to continuing to take it one quarter at a time, but our outlook has definitely increased based on operational excellence and overall sales trends.

Brian Bittner (Equity Research Analyst and Managing Director)

Thanks for that. Just lastly, as it relates to the third quarter, the revenue outlook you provided, there's a lot of moving pieces within the model these days. Does it basically assume a base case for The Cheesecake Factory same-store sales that's relatively similar to the second quarter?

Matt Clark (EVP and CFO)

At the high end, that's right. I would say we really didn't, we've seen very, very stable sales, and we continue to have that stable outlook. I still think there's no reason to get out ahead of our skis and try to forecast something greater until we see it happen.

Brian Bittner (Equity Research Analyst and Managing Director)

Great. Thank you.

Operator (participant)

Your next question comes from Drew North with Baird. Please go ahead.

Drew North (Managing Director and Equity Research Analyst)

Thanks. I wanted to follow up on the topic of labor. My question is focused on labor retention, which has continued to be a good topic and positive for your business in the broader industry. I was wondering if you could provide some perspective on where retention levels or turnover levels are, maybe relative to pre-pandemic or prior peaks, to help us understand how much further improvement could be made, or, I guess higher level, how you're thinking about the opportunity to continue to leverage labor across in the back half of the year here.

David Gordon (President)

Sure. Hi, Drew. This is David Gordon. We continue to be very pleased with our progress around staff and management retention. Our staff level retention today is as good as it's been historically in the company, even exceeding pre-pandemic levels. The same thing for management retention and best-in-class across the industry. We continue to believe that's because of the culture, the enduring culture of The Cheesecake Factory, and how we care for our staff and managers, the opportunities for them to continue to promote within the concept, whether that's to be more productive as an hourly staff member and learn new stations, which improves productivity in the long run for us over time. We think we'll continue to see the benefits of this ongoing retention, whether that's in lower overtime, lower training cost. We don't see why that's going to change in the near term, based on the current environment.

Certainly, if things change in the macro environment that we don't have control of, we'll see what happens. On the management side, I think we continue to offer terrific career opportunities for people, for them to progress their career, to work in a company that has really leading unit growth today and giving them lots of opportunities to grow in each level of management, to go as high as they potentially want to go. We continue to be an employer of choice on the selection side because of the stability of the restaurants, the stability of the sales. Hourly staff members know they're going to get their hours. The tip staff members know they're going to get good, consistent tips, that we have best-in-class benefits.

Our challenge to the operators is to keep this up and to ensure that we make it through the second half of the year, maintaining the type of retention that we've seen thus far.

Drew North (Managing Director and Equity Research Analyst)

Thank you. That's very helpful. One on the comp, if I could, on The Cheesecake Factory, can you share the Q2 breakdown related to price and mix and the implied traffic, I guess, and how we should think about the cadence of pricing as we think about the second half?

Matt Clark (EVP and CFO)

Sure, Barrett. Drew, this is Matt. The net effective pricing in Q2 is about 4% for The Cheesecake Factory. Traffic was a -1.1%, and then mix was the balance. Effectively, that's what's encompassed in the guidance for the back half. We do anticipate, with the value that we're putting on the menu, that we might continue to see that level of mix continue, but we're really focused on getting that traffic back to the positive side of the ledger. Very, very stable sales throughout the quarter and predictable. I think that's helped our operators deliver on the margins. That's what we're forecasting at the back half right now.

Drew North (Managing Director and Equity Research Analyst)

Thank you. I'll pass it on.

Operator (participant)

Your next question comes from Jeff Farmer with Gordon Haskett. Please go ahead.

Jeff Farmer (Senior Analyst)

Thanks. You guys touched on it, but with that February menu update, you did shine a brighter marketing light on the new menu items. I guess the question would be, did you guys see a customer response to that in terms of just the innovation aspect of the new menu?

David Gordon (President)

Hey, Jeff. This is David again. Certainly, our approach with this next menu is very similar to the last menu change. We are taking all of the new menu items and putting them on a separate card to ensure that guests see them and they don't get lost in the menu early on in their life. We feel good about the stickiness of the menu items that we put on at the previous menu change that you mentioned in February. As Matt touched on, we think that this new menu, from a price point value perspective and also from flavor profile perspective, should be as successful, if not more successful, than the rollout that we had in February.

Jeff Farmer (Senior Analyst)

Okay. Just as a follow-up to that, as it relates to some of the lower price point menu items you put out there, do you think two things: that the consumer is aware of the lower prices or the lower price points, and are they responding to those lower price points?

David Gordon (President)

Sure. Certainly, again, the fact that they're outside of the menu, if you're a guest that's already coming into the restaurant, you're going to see that lower price point right away. We can see in the order rates from the previous new menu that guests are responding to that. As Matt touched on the mix, we're anticipating that there'll be some impact to the mix that we're planning on. We do think that it will continue to resonate, and it's the right strategy. If people want to come in and add a bite to their meal, just like they did when we rolled out small plates and snacks, we had guests who were actually introduced to a new category. Instead of even cannibalizing from previous sales, they were just adding something that perhaps they weren't planning on ordering. We think this will happen with the bites perhaps as well.

Somebody will add something like chicken and biscuits along with an appetizer and an entree, whereas before, perhaps they were just going to get an appetizer and an entree. It'll be interesting to study here in the next few months.

Jeff Farmer (Senior Analyst)

Okay, thank you.

Operator (participant)

Your next question comes from Sarah Senatori with Bank of America. Please go ahead.

Sara Senatore (Senior Analyst)

Oh, thank you. A quick follow-up and then a question on Flower Child. Just on the follow-up, I just wanted to make sure I understood. I know at the beginning or the end of when you reported last quarter, you would say you did some caution just given the operating environment. It sort of seems like that didn't materialize. I just want to make sure, is that the right read that the operating environment perhaps is a little bit healthier than you might have initially thought given some of the headlines? That's the clarification. Then on Flower Child, is there any kind of color you can give on profitability or unit economics? That certainly seems to be a very successful concept. The comps are very strong. I think you're adding units at a nice clip.

As you think about the return profile of the company as a whole, anything you can say about how that might shift it in one direction or another?

Matt Clark (EVP and CFO)

Sure. Sarah, this is Matt. Just to start with on the environment, I mean, I think certainly for The Cheesecake Factory, Flower Child, all of our concepts, the environment has been very, very steady for us. I don't know that it's better, or that's certainly not true for everybody, but I feel like we're weathering this environment in a very strong way. I think that's a testament to our execution as well as the brands that we have. I think it's prudent just to continue to take a little bit of a cautious approach, but you know, we feel really good about where we're sitting today. With regards to Flower Child and sort of the unit economics, as David Gordon mentioned in the prepared remarks, we're seeing exceptional performance. The mature unit margins, cresting over 20% at 20.4%, is a high mark for our company at the moment.

The AUVs getting up to in the quarter of $4.8 million. We're looking down at $5 million up there, maybe in the near-term future. Certainly the returns that we're getting today are in the mid-30%, and we feel really positive about that and look forward to continuing to grow the concept. It seems to be working everywhere that we've been opening.

Sara Senatore (Senior Analyst)

Okay. I apologize. I missed the prepared remarks on that. As you think about it as potentially a driver, do you see an inflection point in terms of it moving the needle on your results just because you haven't broken it out yet and yet it seems very, very attractive?

Matt Clark (EVP and CFO)

Yeah. It's a little small, you know, from an accounting perspective in terms of segment reporting for sure. Our intention when we started this journey about six months ago was to continue to provide a little bit more information every quarter. We're continuing to add data to the ability for people to see the progress. We would continue to expect to provide even more information. Certainly, the performance has inflected over the past 18 months with all of the work that the team has done, whether it's with the KDS system or the operational dashboards or the catering, right, has all come to fruition. It is on a very strong trajectory. I would suspect that it will play a bigger and bigger role as we go forward.

Sara Senatore (Senior Analyst)

Thank you.

Operator (participant)

Your next question comes from Jim Salera with Stephens. Please go ahead.

Jim Salera (Equity Research Analyst)

Hey, guys. Good afternoon. Thanks for taking our question. I wanted to ask a couple on North Italia, if I could. First, just some housekeeping. If you could give us the comp breakdown there, price, volume, and mix for North Italia for the quarter. If I recall correctly, in Q1, there were some headwinds from the fires in L.A. and some regional weather. I believe the comp was similar, if not maybe down or up a little bit. Any comments on what's continuing to contribute to softness there for North?

Etienne Marcus (VP of Finance and Investor Relations)

Hey, Jim. This is Etienne. I'll just give you the breakdown here. Price was 4% in the second quarter. Mix was -1%. Traffic was -4%.

Matt Clark (EVP and CFO)

Let me just give some extra color there, Jim, because I think it's important for everybody to understand the performance at North is actually very, very strong. You look at the AUVs of $8 million actually outpacing the comps. That's because the new units are coming on that much stronger. We delivered 18.2% on the mature margins, right? The higher sales and the higher margins are making for great returns. What we are seeing is there is a little bit of sales transfer in some markets, and that's really what's weighing on it. If you take Charlotte as a good example, it talks to our ability to penetrate markets at the pace that we expected. We have two Cheesecake Factory locations in Charlotte. They're doing $25 million, $26 million, right, near the system average. We just opened our third North in that market, and this first full quarter was Q2.

It did, on an annualized basis, $10 million, right? As the third one there, in total, the three of them are averaging around $8 million. The mature margins there are in the low 20%. They're great investments. When you open up that strong, you're just moving a little bit of sales from one existing to another, and that's really the major drive towards the comp there. If we net that out, it's performing pretty much in line with The Cheesecake Factory. When we net out the sales transfers, it's probably a 1% comp with a -1 traffic. We're actually really, really pleased. They're just opening faster and bigger than we expected.

Jim Salera (Equity Research Analyst)

Got it. That's super helpful. Maybe if I can just add one quick follow-up there. Just any color that you guys have on North in terms of trends by income bracket, if there's anything that you've noticed in some of the locations with lower-end consumer to the extent that like an aspirational consumer would go to North as kind of an elevated experience?

Matt Clark (EVP and CFO)

Yeah. I mean, I think it's similar to The Cheesecake Factory's, but maybe just a little more narrow. It's probably slightly higher income on average, but certainly aspirational guests can still go to North and use the menu however they see fit, right? I mean, they can get pizza and pasta and salads all in the low $20s. I think that there's opportunity there. In every market that we're going into now, we're seeing really strong demand. We noted the opening in Boise being 40% above the system average, right? That's telling us that guests of all walks of life, of all income brackets, of all demographics are going to North. You don't open up doing $10 million in 6,500 sq ft if that's not the case.

Jim Salera (Equity Research Analyst)

Great. I appreciate all the color. I'll hop back in the queue.

Operator (participant)

Your next question comes from Brian Vaccaro with Raymond James. Please go ahead.

Brian Vaccaro (Managing Director and Senior Equity Research Analyst)

Hi. Thanks, and good evening. I wanted to ask about menu pricing at The Cheesecake Factory. I think you've been running, you said, around 4%, maybe the low 4%. Margins have obviously exceeded your expectations. It still seems to be a pretty intense value environment, just broadly thinking about the consumer. I guess how does that feed into your current thinking on your fall menu rollout? I guess why not let year-on-year pricing roll off a bit, given these tailwinds that you're seeing?

Matt Clark (EVP and CFO)

Yeah, Brian. This is Matt. In fact, it will. We are taking less pricing going into the back half of the year. We're introducing some items that have some inherently lower prices. The effective pricing that we're taking is actually going down quite a bit more. David Gordon mentioned the Bowls and Bites. The Bites are predominantly items that are under $10. The Bowls are in the $15-$16 range with The Cheesecake Factory portions. When we look at what we're doing from a value perspective, on an effective pricing, I think it's going to be well below where the industry is at. We're driving significant value for the consumer.

Brian Vaccaro (Managing Director and Senior Equity Research Analyst)

Okay. Sorry, I might have misunderstood a previous comment on the pricing. What type of year-on-year pricing at The Cheesecake would be reasonable for the second half?

Matt Clark (EVP and CFO)

Three and a half, probably, on a headline basis. I would just reiterate that with the new menu items, there's probably another 100 basis points of negative mix inherently built into that. The real pricing is probably going to be more like 2%-2.5% in terms of what the consumer feels.

Brian Vaccaro (Managing Director and Senior Equity Research Analyst)

Okay. That is, that's super helpful. I wanted to ask about margins as well and maybe dial in on the North Italia margin. Certainly encouraging improvement. I think your segment margin was nearly 15%, if I did the rough math quickly. I guess, can you just elaborate a little bit on what drove that improvement in a slightly negative comp environment? I saw the other OpEx line in particular, maybe 100, 130 basis points year on year. Maybe just some broader comments on those margin dynamics you're seeing at North.

Matt Clark (EVP and CFO)

Sure, Brian. This is Matt. I think generally, it's the stability of the business and operational execution. We did, if you remember, kind of catch up on pricing equivalently to Cheesecake at the end of last year. Some of that is flowing through at this point in time. We've also seen some of the favorable commodities that we've had for the entire company. If you think about the total sales, I mean, $8 million AUV, we're leveraging those sales and driving profitability in the four walls. We're super encouraged by that as well. The teams continue to stay intently focused on driving the sales because we know we can deliver the profitability when we get the sales.

Brian Vaccaro (Managing Director and Senior Equity Research Analyst)

Great. Just last quick clarification on North Italia comps. You mentioned the negative impact on the L.A. units. Is it possible to quantify that and what the comp would have been ex the L.A.?

Matt Clark (EVP and CFO)

It would have been flat without L.A.

Brian Vaccaro (Managing Director and Senior Equity Research Analyst)

Flat.

Matt Clark (EVP and CFO)

Yep.

Brian Vaccaro (Managing Director and Senior Equity Research Analyst)

Okay. Perfect. Thanks very much.

Matt Clark (EVP and CFO)

You're welcome.

Operator (participant)

Your next question comes from Andy Barish with Jefferies. Please go ahead.

Andy Barish (Managing Director and Senior Equity Research Analyst)

Hey, guys. More of a high-level question and thought. I'd love to hear your perspective on it. I mean, casual dining seems to be, you know, kind of having a moment right now, especially experiential. What do you guys kind of think and see is going on and obviously helping the success of your business?

David Gordon (President)

Sure, Andy. Hey, this is David. I think that people want their dollars spent in the most productive way possible. You mentioned experiential dining. We believe that we will continue to be leaders in experiential dining. People want to go out to eat for great, wonderful, delicious food, but also as an experience. They want to be in an environment that has a lot of energy. We think we provide that. It's all of our concepts from The Cheesecake to a higher-end fast casual at Flower Child, which very much is an experience, not just a transaction. As people, maybe especially younger people, move away from transactional purchases, they want to spend time together. Our restaurants are highly designed, high-touch hospitality. Today's consumer appreciates that. I think more than ever, they're more sophisticated than they've ever been about food.

We're making all of our food from scratch every single day in every single concept. We believe we can take market share and have been taking market share because of that sustained quality. I think the sustained level of great operations, and all the way leading back to the retention numbers that we see at The Cheesecake, have led to all-time high NPS numbers, which show consistency. People appreciate that consistency as well.

Andy Barish (Managing Director and Senior Equity Research Analyst)

Got it. If you're willing to share, I guess an early look at the 2026 development pipeline, at least directionally, I'm assuming you're going to open more units. Is that something that you're honing in on as we sit here, you know, with only four or five months to go in 2025?

David Gordon (President)

Yeah. We certainly anticipate opening more units than the 25 that we'll open this year. We feel good about the pipeline. We feel good about the cadence of opening. I think you can anticipate that number of percentage unit growth that we've shared in the past is one that we're going to continue to be able to hit moving forward.

Andy Barish (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Your next question comes from Sharon Zackfia with William Blair. Please go ahead. Sharon Zackfia, your line is open.

Sharon Zackfia (Head of Consumer Equity Research)

Sorry, we have new phones. Can you hear me now?

Matt Clark (EVP and CFO)

Yeah, I can hear you.

Sharon Zackfia (Head of Consumer Equity Research)

Okay, I have to learn to unmute. It's 2025.

Matt Clark (EVP and CFO)

Yeah, yeah.

Sharon Zackfia (Head of Consumer Equity Research)

Sorry if you mentioned this. I was on another call and then hopped on here. I wanted to ask about the rewards program for Cheesecake. I think you mentioned it, but I was hoping to get some more kind of meat on the bone in terms of what you're seeing there, in terms of percentage of transactions that are involving rewards or incremental lifts on spend for rewards members versus non-rewards. If you have any data on frequency, how that customer is visiting Cheesecake before they joined rewards versus now or just versus the overall non-rewards population.

David Gordon (President)

Sure, Sharon. This is David. I think we're going to still continue to keep things at a pretty high level. What I will share is that we continue to see month-over-month acquisition exceeding our internal expectations. That's good to see. People are still enthused about the program and continuing to sign up at a higher level than we anticipate. Members continue to have higher frequency, higher check average, higher NPS scores than non-members. All very, very positive signs. As we've moved from the more broad approach that we took in 2024, which had about a 1% redemption rate across a very large swath of audiences, very broad, reaching everybody with the same type of offer. As you know, this year, we've moved to more personalized offers that are more behavior-based based on the data we have about rewards members and timing-based.

We're seeing those redemption rates of about 4% or higher. Significantly better than the broad-based approach that we were taking before. We now have our internal team fully intact. We brought on board a Director of Rewards who's leading our team to continue to do analysis to make sure we have the right type of data to ensure that the redemption rates moving forward are positive, accretive, and very much in line with the margin profile around what we want to spend with the program overall.

Sharon Zackfia (Head of Consumer Equity Research)

Can I ask a follow-up? When you have the rewards with Flower Child as well, are there similarities or differences that you would point out between how the customer interacts with the Flower Child rewards versus Cheesecake?

David Gordon (President)

Yeah. Flower Child is much more of a traditional rewards program. It's an app-based program that has points for visitation and for spend. We're really not comparing them because they are so different. We're very happy with the program at Flower Child and believe it is driving behavior for guests that are in the program. You can order within the app. You can order ahead, all the typical things that you'd be able to do at a fast casual, and thus far, it's had a pretty positive response from guests, but completely different than the Cheesecake program, which is more of that, you know, published, unpublished, non-points program.

Sharon Zackfia (Head of Consumer Equity Research)

Okay, thank you.

Operator (participant)

Your next question comes from Jim Sanderson with Northcoast Research. Please go ahead.

Jim Sanderson (Managing Director and Senior Equity Research Analyst)

Hey, thanks for the question. I wanted to follow up a little bit more on Flower Child. I was wondering if you could give us a sense of where you think the store capacity could end up given your success on average weekly sales growth. I think you've more or less doubled sales volume over the past seven years. I'm wondering where you think this brand can actually end up given the opportunity for catering and for off-premises.

Matt Clark (EVP and CFO)

Hey, Jim. It's Matt. It's a really interesting question. I don't think we know 100%. The reason I say that is because the operating team just keeps getting better, and they're able to drive more throughput. You mentioned one of those reasons, which is definitely catering. They've figured out a way to squeeze those sales in, you know, early, before the store opens sometimes and, you know, maximize the total throughput. I can tell you we have locations doing between $6.5 million and $7 million. We know that there's a pretty good runway still for the overall brand to continue to grow. It's AUV on an organic basis, right, from traffic and transactions. That's not from pricing. That's just from volume. Hopefully, we'll continue to increase that capacity, but we know we've got a long runway in the overall footprint here to go.

Jim Sanderson (Managing Director and Senior Equity Research Analyst)

You mentioned those locations doing $6.5 million-$7 million. Are those the most mature locations, or anything specific about those sites that might be?

Matt Clark (EVP and CFO)

Yeah. They are some of the more mature locations, and so they've been building business for a longer period of time. Sometimes it can just be the idiosyncratic nature of the site just works particularly well. In general, the business keeps growing. The longer that the sites have been around, typically, the more traffic they have.

Jim Sanderson (Managing Director and Senior Equity Research Analyst)

All right. Just a couple of questions on traffic trends. I think in the past, you'd mentioned sometimes your patio capacity is at risk when you have heat waves, things like that. Is there any change in traffic trends you noticed in the second quarter or in July to date related to weather or something unexpected?

Matt Clark (EVP and CFO)

No, it's been very steady across our company. Certainly, we do watch the weather, and you could have some pockets where it can impact it for a period of time, a week here or there. Really, if you take the bigger picture, it's been very steady and predictable.

Jim Sanderson (Managing Director and Senior Equity Research Analyst)

All right, thank you very much.

Operator (participant)

Your final question comes from Jon Tower with Citi. Please go ahead.

Jon Tower (Managing Director and Senior Analyst)

Great. Thanks for taking the questions. Just curious, I know it sounds like new menus coming now or hitting now. It does sound like the Bowls and Bites, lower price points, $10, $15 or so. It sounds like those kind of would work well, particularly around lunch. Are you doing any sort of social marketing or just marketing in general to kind of hit that day part, particularly during the weekdays when maybe your volumes aren't as robust as your bigger weekends?

David Gordon (President)

Sure, Jim. This is David. I think, as I mentioned earlier on the rewards program, that's the perfect opportunity for us to use the data that we have today to drive behaviors to a specific day part. We've been doing that throughout the first half of this year. We're going to continue to do that. Certainly, as we message the new menu, we actually let members know about the new menu earlier than the rest of the population. If we knew that you were a guest, maybe they hadn't come for lunch, maybe we sent that to you at a particular time, talked about a lunch promotion, and made you aware of those new items all at the same time. Having the data really makes it more impactful for us to be able to do the right type of targeted messaging to drive a specific day part.

We're going to be excited to do that through the rest of the year.

Matt Clark (EVP and CFO)

It's really, John, one of the things too, it's at lunch, but it's also channels, right? We think that the bowl category will work really well for delivery. As you know, we really don't take incremental pricing. If we have a $15 or a $16 Cheesecake portion bowl, we think that stacks up pretty well in this environment to be delivered.

Jon Tower (Managing Director and Senior Analyst)

Yeah. No, that's great. Maybe just pivoting back to the Flower Child brand. Obviously, you guys are, the brand itself sounds like it's hitting on all cylinders today. You're opening at a fairly healthy, I think, mid-20s % growth clip in terms of new stores, and the returns sound like they're justifying this. Is there a threshold at which you won't bump up against in terms of new store opening cadence? You know, are you guys not going to bump above 30% a year given human capital constraints or anything like that?

David Gordon (President)

Sure, John. That's a great question. You've probably heard us talk about that before. Right today, we're comfortable with that 20% number. We could probably be a little bit higher than that. That team is very focused today on manager development and ensuring that we have the right General Managers and Executive Chefs to open those restaurants and open them well, especially because so many of them are opening at such high volumes. We want to make sure that the guest experience is perfect from the get-go. Manager development is a key focus for the team. We're comfortable with where we are today at, you know, 20% or a little bit higher. As we continue to build that pipeline, we certainly have the capacity from a company standpoint to build more and to do it faster.

We're going to be cautious and careful and make sure we can execute as well as we want to.

Jon Tower (Managing Director and Senior Analyst)

Great. Thanks for taking the questions.

Operator (participant)

We have a question from Raul Crow with J.P. Morgan. Please go ahead.

Raul Crow (Analyst)

Good afternoon, guys. Can you help us understand the dynamics around the $500 million converts? It looks like we are not far off from the conversion price here. Should we see this elected ahead, what kind of dilution would you anticipate after expecting to pay a portion through cash? Also, remind us how much of this is hedged through call options.

Matt Clark (EVP and CFO)

Yeah. This is Matt. That's a great question. The price, the start prices are $70, $71, sort of right in that zone. Certainly, with the stub, the $69 million, we would watch and sort of decide to do something on that based on economics. It would have to be around $80 for the sort of cost of carry to net out for us to decide to extinguish those. On the others, really, what I can remember on the $575 million is, at say $80, a $10 increase over the strike price there, you're talking about 1.5% dilution. It's not that meaningful in the bigger picture for us. Certainly, that'd be a high-class problem. I think all investors would be happy if we were at $80 and there was a 1.5% dilution at that point in time.

Raul Crow (Analyst)

Thank you.

Operator (participant)

There are no further questions at this time. Ladies and gentlemen, this concludes today's call. We thank you all for joining. You may now disconnect.