Stacy Shaw Feit - Senior Director, Investor Relations, The Cheesecake Factory David M. Overton - Chairman & Chief Executive Officer W. Douglas Benn - Chief Financial Officer & Executive Vice President David M. Gordon - President.

John Glass - Morgan Stanley & Co. LLC Jeffrey Bernstein - Barclays Capital, Inc. David E. Tarantino - Robert W. Baird & Co., Inc. (Broker) Sharon M. Zackfia - William Blair & Co. LLC Joseph Terrence Buckley - BofA Merrill Lynch Will Slabaugh - Stephens, Inc. Karen Holthouse - Goldman Sachs & Co.

John William Ivankoe - JPMorgan Securities LLC Matthew DiFrisco - Guggenheim Securities LLC Peter Saleh - BTIG LLC Stephen Anderson - Maxim Group LLC Paul Westra - Stifel, Nicolaus & Co., Inc. Joshua C. Long - Piper Jaffray & Co. (Broker) Bob M. Derrington - Telsey Advisory Group LLC.

Good day, ladies and gentlemen, and welcome to The Cheesecake Factory Incorporated Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference may be recorded.

I would now like to introduce your host for today's conference, Ms. Stacy Feit. Ma'am, please go ahead..

Thank you. Good afternoon and welcome to our second quarter fiscal 2016 earnings call. I'm Stacy Feit, Senior Director of Investor Relations. On the call today are David Overton, our Chairman and Chief Executive Officer; David Gordon, our President and Doug Benn, 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 fact 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. David Overton will begin today's call with some opening remarks.

Doug will then take you through our operating results in detail and provide our outlook for both the third quarter of 2016, as well as our thoughts on the full fiscal year. Following that, we'll open the call to questions. With that, I'll turn the call over to David..

Thank you, Stacy. We outperformed casual dining industry in the second quarter of 2016, delivering our 26th consecutive quarter of positive comparable sales. We also generated another quarter of strong bottom-line performance with earnings-per-share exceeding your guidance and up 13%.

The Cheesecake Factory continues to be one of the most differentiated casual dining concepts. Our relentless focus on menu innovation, service, hospitality and operational excellence enables us to maintain broad demographic appeal and relevance in an increasingly competitive landscape.

We completed the rollout of our enhanced new server training program in the second quarter and the early results are positive. One of our key differentiators is our excellence in service and hospitality where we always strive to do better.

We are seeing a measurable lift in guest satisfaction scores and we believe the program will positively impact our guests' intent to return. We also rolled out our mobile payment app, CakePay, nationally in the second quarter. We are early in the adoption cycle, but encouraged by the initial results.

The feedback on the convenience of the app has been positive for both guests and servers alike. We are very excited to have been chosen by MasterCard to be featured in an upcoming national advertising campaign for their Masterpass digital wallet solution. This campaign will garner significant awareness for both CakePay and our restaurants.

We are also piloting a delivery service with a third-party partner in a select group of restaurants. To-Go already comprises about 10% of our sales and delivery is another way to provide the convenience our guests are looking for.

We have expanded the pilot to most of California and will continue to monitor the performance as we evaluate the possibilities of a national delivery rollout. On the development front for 2016, we still expect to open as many as eight company-owned restaurants including one Grand Lux Cafe.

We opened our second restaurant of the year in Greenville, South Carolina, another new market for us where we had a very strong opening.

In fact, we sold over 14,000 slices of cheesecake during the first week alone, providing evidence of the pent-up demand that exists for our concept and we will be introducing our newest cheesecake, Chocolate Hazelnut Crunch in celebration of National Cheesecake Day this weekend.

On the International front, the second quarter marked our entry into China under a licensing agreement. Including China, we continue to expect as many as four to five restaurants to open this year based on the information we currently have. For the first time each of our three licensees has at least one opening planned.

In closing, we delivered another quarter of consistent and competitively strong results. We remain confident that we are well positioned for 2016 and beyond. Underscoring this confidence, for the fourth consecutive year, the board approved a significant increase in quarterly dividend to $0.24 per share.

With this increase, we will have doubled the amount of our dividend since first initiating one in fiscal 2012. We are also expanding our share repurchase authorization. We remain committed to investing in growth and returning capital to achieve our targeted returns and increase shareholder value.

With that, I'll now turn the call over to Doug for our financial review..

Thank you, David. Total revenues at the Cheesecake Factory for the second quarter of 2016 were $558.9 million. Revenues reflect a comparable sales increase of 0.3% at the Cheesecake Factory restaurant. External bakery sales were $11.8 million in the second quarter.

Cost of sales decreased approximately 120 basis points year-over-year in the second quarter of 2016 to 22.7% of revenues. Key ingredients driving the favorability included seafood, groceries and poultry. We also saw some benefit due to a higher mix of restaurant sales as compared to bakery sales.

Versus our forecast, we captured additional food efficiency and the commodity environment was modestly more favorable than we had expected. Labor was 33.2% of revenues, an increase of about 140 basis points from the second quarter of last year. A majority of the increase was attributable to higher hourly wages.

Wage rate inflation was in line with our expectations, however we did experience some incremental impact from overtime. Other operating costs were 23.6% of revenues, up 20 basis points from the prior year. G&A was 6.4% of revenues in the second quarter of fiscal 2016, down 30 basis points from the same quarter of the prior year.

This reduction was primarily driven by reduced legal costs as we lapped an accrual for a settlement of a legal claim in the same period last year. Pre-opening expense was $2.3 million in the second quarter of 2016 versus $4.1 million in the same period last year.

We had one new restaurant opening in the second quarter of 2016 compared to three openings in the same quarter of the prior year. Overall, operating efficiencies coupled with a more benign commodity environment enabled us to offset wage inflation, driving strong margins, which were up 50 basis points versus the prior year.

Our tax rate this quarter was approximately 27%, within our expected range. Cash flow from operations for the first six months of 2016 was approximately $152 million. Net of roughly $40 million of cash used for capital expenditures, we generated about $112 million in free cash flow through the second quarter of 2016.

That wraps up our business and financial review for the second quarter. Now I'll spend a few minutes on our outlook for the third quarter and full year of 2016.

As we've done in the past, we continue to provide our best estimate for earnings per share ranges based on realistic comparable sales assumptions and the most current cost information we have at this time.

These assumptions factor in everything we know as of today, which includes quarter to-date trends, what we think will happen in the weeks ahead, and the effects of any impacts associated with holidays or weather.

For the third quarter of 2016, we are estimating diluted earnings per share between $0.59 and $0.62 based on an assumed range of comparable sales of between 0.5% and 1.5% at the Cheesecake Factory restaurants.

With respect to the full year of 2016, we now expect comparable sales to be about 1%, and we are increasing our diluted earnings per share sensitivity to a range of $2.70 to $2.76. This earnings range is up from our prior guidance by $0.07 to $0.08 at the midpoint, reflecting our strong bottom-line performance in the second quarter.

Ongoing expense management and the favorable cost of sales environment are helping us maintain our earnings expectations for the second half of the year. In total, we're expecting our overall operating margins to expand nicely for the full year.

Note that fiscal 2016 is a 53-week year for us and our estimates include the impact from the additional week. Regarding our corporate tax rate, we continue to expect it to be about 27% to 28% for 2016.

Total capital expenditures this year are expected to be between $100 million and $110 million for as many as eight planned 2016 domestic openings, as well as potential openings in early 2017.

Our restaurants generate a substantial amount of cash and we continue to effectively allocate our capital to achieve our targeted returns and maximize shareholder value. The dividend is an important component of our capital return strategy and our objective when we initiated the dividend was to increase it meaningfully over time, which we have done.

In keeping with our practice of consistently returning our free cash flow to shareholders, we plan to continue doing so this year in the form of dividend and share repurchases. With that said, we'll take your questions.

In order to accommodate as many questions as possible please limit yourself to one question and then re-queue with any additional questions..

Thank you. Our first question comes from the line of John Glass with Morgan Stanley. Your line is open. Please go ahead..

Thanks very much. I guess, Doug or David, just a question on the sales environment, right. I guess it does surprise us at this point that sales in the industry have decelerated and you are sort of reflecting that in your third quarter guidance.

Can you give us a sense of what you see that's changed, geographically, malls, does the change in consumer behavior within the check? What's your observation about what's happening to the environment in the last few months?.

I think you have to look, John, at both the supply and the demand side, consumer confidence or the way that consumers are feeling and their related spending is not super-vibrant, certainly GDP growth has certainly been modest. So it's a so-so economic growth environment. But that really just addresses the demand side.

Overall, casual dining occasions are growing though, so it's not that dour. But they're not growing fast. So it's all about taking share, and it has been about taking share for a while. For restaurants, I think it's more about the supply side, there's simply more competition there than there was, and I think that that's increasing.

And the competition is coming from all over, including non-restaurants such as grocery stores. But we've all seen this before too, it's happened four, or five times in just my career in the restaurant business.

The restaurant world gets a little ahead of itself and overbuilt, it's considered a safe place to invest capital, and when that gets to be too much, then the expansion slows and the bifurcation begins and there's winners and losers. So, I think that's where we are.

I think there's a lot of restaurants out there, it's not something that couldn't be solved with a little more vibrant economy, though, in the short-term..

Great. Thank you..

You're welcome..

Thank you. And our next question comes from the line Jeffrey Bernstein with Barclays. Your line is open. Please go ahead..

Great. Thank you very much. Two questions, one is a follow-up on that one in terms of some of the details within the comp, perhaps. I know you'll often offer the components, maybe the sequential trends of the regionality of it, any kind of color on that front just to further enhance that list, it would be great? And then I had one follow-up..

Sure. So comp store sales were up 0.3% for the quarter as we talked about. The components of that were menu pricing was roughly 2.9%. The menu mix shift was positive 0.2%, and traffic was down 2.7%.

Just commenting on the traffic, our traffic was impacted this quarter, in part, at least, by somewhat slower traffic versus the first quarter in Texas and in the Florida markets.

It was particularly the Houston market where the regional economy is challenged, and also we have some major site-specific construction that's impacting one of our restaurants there. And then in Florida, for us, that includes Puerto Rico and the Puerto Rico economy is very soft.

And so is the economy in South America, which has slowed tourism into Florida some. So that's sort of a little bit of color on the traffic. As far as what happened sort of sequentially in the quarter, April was soft, as we indicated on our first quarter earnings call. It was our softest month of the quarter.

Some of that was the Easter spring break shift. Our trends improved versus the industry in May and in June, and our gap versus the industry widened, we didn't see the degree of deceleration that a lot of people saw in June, in fact June was not our lowest comp store sales month. We were about flat in the month of June.

And then geographically, I pretty much already addressed that, our strongest – we saw a fairly consistent performance across all of our geographies. We obviously have stronger markets and weaker markets, and our stronger markets are the mid-Atlantic in the Northeast, and then the Southwest and Texas and Florida are right now our weaker markets..

Got it.

And then just looking up the cost side, it's interesting that you've got commodity or cost of sales leverage of over 100 basis points and labor up over 100 basis points, I'm just wondering as you look out to the back half and maybe into 2017, just how you think that battle plays out, which is likely to ease relative to the extremes that they are both facing right now?.

Well, I think it's a little early to say for 2017 with respect to cost of sales.

I think there's going to be – we're going to have to continue to work on the labor environment and the way that we have because there's going to be additional labor pressure next year, and we're able to offset that as you're referring to this year by a flat commodity cost environment. And so, we'll just have to look at that.

I think that commodities, though, are – there's not anything putting a lot of big upward pressure that I see on commodities, and so we even feel for the last half of this year, we're able to keep our earnings guidance intact despite taking down our comp store sales thoughts at least from where we previously were because of even better commodity environment than what we anticipated when we talked three months ago.

Just a little bit better, but it was better..

Very helpful. Thank you..

Thank you. And our next question comes from the line of David Tarantino with Robert W. Baird. Your line is open. Please go ahead..

Hi, good afternoon. Doug, just a clarification question on the guidance, you are assuming a little bit better trends in the third quarter than you had in the second quarter. So, is that a function of the comparison you are facing, are you starting to see or expect better business momentum even though it's a little -- just a little bit better.

But any clarification you can offer there would be helpful?.

Yeah. There is a lot of pushes and pulls. But we are lapping a little bit easier comp, not a lot easier comp, but a little bit easier. And I would say we're encouraged by the early results from those initiatives that David outlined in his prepared remarks, including our enhanced server training program, the CakePay mobile app, delivery.

I think that – and there's a lot of other noise in the quarter, it has to do with Olympics and Presidential Debates and all that stuff that we've factored in as well.

But, we basically have taken down – really factored in the softer environment in the second half of the year and basically moved our guidance for comp store sales down about 1% from where we were before and we're not seeing anything that would lead us to believe it should be different than that..

Got it. That's helpful. And then, my follow-up question was on the CakePay.

Is there any metrics you can share in terms of adoption rates for what that impact might be in the early days related to throughput, or anything you're willing to share at this point?.

I think David it's early to still do that. We didn't nationally rollout till about mid-second quarter. Obviously, the adoption cycle was positive and so that's why we did rollout nationally and we feel about that and we're still continuing to get really good feedback from our guest and the servers, on the ease of the app and the use of the app.

So it's still a little bit early to be able to tell. But we know that people are enjoying using it and that's our number one goal and we would expect that because of that we will see some increased adoption over time..

Go ahead..

I was also just going to touch on that the partnership with Masterpass and the MasterCard certainly will be a way for us to continue to communicate about CakePay with guests.

The national promotion will be happening and the broadcast campaign that will be from September through December of this year will increase awareness and we feel positive about that too..

Great. That's helpful.

And just to clarify on the MasterCard, are they going to be advertising your brand on television for those months, is that?.

There will be a TV spot. We're not sure when it will ad and it was actually filmed in our restaurant and it will be obvious that it's Cheesecake Factory and CakePay in the app is introduced in the end..

Great. That's helpful. Thank you very much..

Thank you. And our next question comes from the line of Sharon Zackfia with William Blair. Your line is open. Please go ahead..

Hi. Good afternoon. I'm going to break the one question rule since everyone else is. Doug, on labor, I think originally you had expected labor to be up around 50 basis points this year.

Could you update us on your thought process there given the new comp guidance? And then secondarily, obviously the revenue missed but the comp didn't really miss that much from what we were all expecting on the outside.

I don't know if you've had a chance to look into the models, but it looks like to me that productivity might have been a little bit light. Maybe if you could address that..

So revenue miss was about $3 million from consensus.

Is that what you have, Sharon?.

Yeah..

Yeah. So I think consensus comp store sales were 0.6%, and we had 0.3%. So a $3 million miss is about 0.5%. So a lot of it was just comp store sales. And then I think the bakery sales year-over-year were down a little bit. So I think that makes up most of the revenue..

Okay. So nothing on new unit productivity that concerns you..

No. Nothing. That continues to be strong.

For the other question was about labor, when you look at the full year and where we're going to come out, I would say that we would expect labor to be somewhere in the up, say, 70 to 80 basis points and we expect cost of sales to be down a little bit more than that and really to get some other leverage on other line items such that our overall operating margins for the year are going to grow.

We said nicely. And we have to, I guess, if we define nicely, we would say that that's somewhere between, say, 30 and 50 basis points..

Okay. Thank you so much..

Welcome..

Thank you. And our next question comes from the line of Joe Buckley with Bank of America Merrill Lynch. Your line is open. Please go ahead..

Thank you. I want to ask for a little clarification, Doug, on the comments on the supply side and unit expansion. Are you seeing statistics that show that picking up? And I'd be curious at what rate of unit expansion you're seeing in the industry..

I don't have any numbers here in front of me. But we know that if you just go the whole way across the board from pizza players to fast casual, it's more I guess anecdotal, that I would say but there is definitely more competition out there. Just grocery stores are now much more involved in competing for dining dollars.

So, I think that there's definitely a lot of restaurants and a lot of options out there that just make taking share from others just a little bit more difficult..

Okay. And then one more on the server training. I guess I'm curious what the primary goals were.

I mean, it sounds like it's been well received by the customers but as you guys designed it and rolled it out, what were you trying to accomplish?.

Well overall, our hope was to increase the service and hospitality for guests and just make those dining experiences more compelling. That was goal number one. Around other metrics and benefits we've seen, we've already seen higher retention in servers that actually have gone through this new server training.

We've seen higher guest satisfaction scores for the servers that have actually gone through the new server training. Those are two of our biggest goals. We've also seen a reduction in errors that these servers make generally in the first three months when they are working for us, as you know a big complex menu, there's a lot to learn.

We've seen the reduction in the amount of errors that they are making. So all three areas that benefit the guest experience and that really was the overarching goal of enhancing the training. We hadn't really changed our server training in quite a few years.

Along with leveraging technology and the way that we were teaching the training so that they were able to adopt, learning much faster than they had previously. So we are excited about it, and continue as every new server has come onboard, they are all going through the new training.

We currently have some classes that are going to the restaurants right now where we are educating our current staff that are not new servers on many of the same teachings that we have in the new server class. So that our current base of servers are also learning from the new training..

Okay, thank you..

Thank you. And our next question comes from the line of Will Slabaugh with Stephens. Your line is open. Please go ahead..

Thanks guys. I wanted ask you about labor, again, if I could. I was wondering could you go into a little bit more detail on what's going on there with the wage inflation versus the overtime that you mentioned as we look into sort of on a store-by-store basis from what we saw this quarter.

Should we expect a similar sort of rate that we saw -- growth rate that we saw this quarter in the back half versus what we just experienced? And then kind of on the back of that if I could, wondering about you willing to take even more price to offset assuming that the wage inflation rate keeps growing?.

I think what I would say Will is that the wage rate – as far as wage rate inflation we're pretty much what we expected them to be. So that was we talked about 5% wage rate inflation.

But we did see more overtime than what we had been seeing, we're – that's certainly going to be a focus area for us as we look forward working on getting overtime down by better management of schedules or in and out times or just hiring, getting fully staffed faster so that will definitely be a focus for us in the second half of the year..

And as far as the pricing to potentially offset any additional wage rate inflation?.

Yeah. We are going to take our – we're going to do our summer menu price or change like we always do. It's going to be between 1.1% and 1.2% of price increase which is going to replace pricing from last summer of 1.5%, so we're actually bringing down the pricing in the menu.

We had about 2.9%, roughly pricing for the first half of the year and we will have roughly 2.5% in the second half of the year, so a little bit lighter. So we're not trying to price to that.

We're taking – we are going through that art and not a science of trying to balance our desire to continue to protect our margins, but also to grow guest traffic..

Got it. Thank you..

Thank you. And our next question comes from the line of Karen Holthouse with Goldman Sachs. Your line is open. Please go ahead..

Hi. Thank you for taking a question. Just a quick clarification on the COGS side of things.

What was the change in the inflation outlook that was baked into the change in guidance?.

It was – basically what we've been saying was that we felt that cost of sales would be about flat with the prior year cost of sales inflation and actually there is a slight amount of deflation, so it's basically just that..

And then also on that test of delivery in California. I'm just curious as you've gotten further along the way, how you've been thinking about – are there particular obstacles you had to overcome, particular challenges.

Just sort of what have been the learnings from day one to where you stand today?.

I think the popularity of Cheesecake Factory is pretty evident in some of the delivery numbers that we've seen.

So in some of the restaurants where we had a large amount of orders we've had to just make sure that operationally we can execute that as well as possible and that's one of the reasons we wanted to develop a partnership with a somebody hopefully nationally because it gives us the transparency into every single order to understand how well not only we're executing, but on the second end of it how well the drivers and the delivery company is executing.

So that's been a bit of learning for us and to be able to control the amount of orders coming into the restaurant in any given time. But as you know we already have about 10% of our business that's To-Go business, and our original pilot restaurants, our five pilot restaurants we saw lift in those To-Go sales, which is great.

And some of the early metrics from our partners show that some of our net promoter scores are higher than their other partners are, and our ability to actually execute and make less mistakes is better than some of our other partners. So we think that as you know we're operationally focused all the time.

We're going to have that same level of intense operational focus on delivery because it has to be done incredibly well to ensure that when somebody get something to their house it's at the same quality that they would expect at the Cheesecake Factory..

Okay. Thank you..

Thank you. And our next question comes from the line of John Ivankoe with JPMorgan. Your line is open. Please go ahead..

Hi, thank you. I think a little bit of a follow-up to the question on pricing and then a question on COGS.

Firstly on pricing, how has your trade area pricing gone, and do you have more opportunity to take more pricing in some of your more expensive labor or just high cost markets in general?.

I'd say our trade area pricing has gone pretty well. In fact, in markets where we've taken more geographical pricing such as in California where the minimum wage has gone up as everyone knows a substantial for a couple of years. We've seen traffic levels that are consistent with other regions where we've taken less pricing.

So I think that the pricing has gone well. Again, it's an art and not a science but that seems to have been going well.

I don't – anything else to add to that, David?.

No. I think that our goal would be to take our normal pricing when we can, and not to have to take more pricing anywhere that we have to. And that's always been our philosophy and that will continue to be our philosophy moving forward..

And it does look like from the outside that maybe you'd be taking more pricing in California in the second half of the year, and perhaps you have other markets where you're taking nearly no pricing.

I mean, is that a fair characterization?.

No, we're taking our normal pricing as we have across the country, and perhaps a little bit more on those markets that I've touched on earlier. And we did that in the first half the year and we would do that in the second half of the year..

Okay. Understood. And then the next question on COGS. I mean, you're at a very low percent level, I think you're about as low as you've ever been.

How sensitive are you to that, maybe cost of goods sold maybe being too good, like it's too high of a gross margin where you guys want to be sensitive if not allowing that to expand further to maybe make the offering in some way maybe not as price competitive as it was in the past..

I think we are very focused on making sure that we, like David said, that we don't take any more price than we needed to. We are just happening to really benefit with these low cost of sales this year because the commodity environment has really fallen off a lot more sharply maybe than some people expected it to.

So, I would say that we are just going to continue to be cautious about pricing, and if we don't need to take as much pricing, we won't. And that would cause the cost of sales to more normalize..

And on the operational side, I'll just add, we're going to continue as we have done over the past year to run as efficiently as we can and continue to reduce waste, which is another way we're going to improve those costs..

Thank you..

Thank you. And our next question comes from the line of Matthew DiFrisco with Guggenheim Securities. Your line is open. Please go ahead..

Thank you. Just a couple of bookkeeping questions here.

On the To-Go sales, can you just remind us what that 10% looked like last year?.

That's been our average probably going on 38 years. So we've always had high To-Go sales. We haven't broken out what To-Go sales are in those delivery restaurants and shared that number in any way. We just did see some positive lift which was encouraging. We've always had that right around that strong 10% number..

That's where I'm getting a little confused with the positive lift in. I was wondering is that a contributor to check or were you growing it, but it seems like 10% was comparable to last year. So, it's growing in line with comp sales..

What I'm talking about would be in the test pilot restaurants where we are doing delivery, we saw an increase over that 10% into go sales..

Okay.

And then also I'm just curious as far as in the past you've obviously tried to develop your – develop a couple of alternative brands and you've also been questioned about with your cash flow may be looking at it towards acquisitions, and certainly now we are in an environment where there seems to be an accelerated amount of growth or expansion by quick casuals as well as some differentiated casual concepts.

What is your appetite, I guess, at this stage right now and in the current environment for potential acquisitions or to add on into the portfolio?.

I'd say we are still actively looking at other external concepts, and there are even in, I talked about, winners and losers before. There are still going to be opportunities for us to increase our growth runway into the future, and as a complement to the Cheesecake Factory growth in finding the right other opportunity.

And we're very selective about the way that we go about that. We've done exactly zero of that investing so far. But we are seriously evaluating and continue to seriously evaluate other potential investments that we can make..

Understood. Okay. And then last question, with respect to the color you gave on the regions, both Texas and Florida. It seemed like you cited a little bit of the macro as well as slower tourism.

One of your peers also suggested that they saw somewhat of a correlation between some of the civil unrest and the domestic terrorism that we've seen in those unfortunate states.

Have you seen a similar slowdown around those sales in the end of June and early July as far as in Texas and in Florida, in particular, or is it really more so of a stream of things like the macro side..

It's more of a stream of things like the macro side. Those things are certainly unfortunate. But we haven't really seen them impact our sales in the way that maybe some competitors have talked about..

Okay. Thank you..

Thank you. And our next question comes from the line of Peter Saleh with BTIG. Your line is open. Please go ahead..

Great. Thank you. So I just wanted to come back to Masterpass.

Are you guys contributing dollars from your ad fund to this partnership or what kind of financial, I guess, contribution are you making to the partnership?.

We are contributing nothing other than our wonderful brand..

Excellent..

So no monetary contribution..

Okay. Got it. All right.

And then on comps, at least just maybe in the month of call it July, do you have a sense if the kind of excessive heat that we've been seeing across the country, has that been limiting their use of patios? Do you think that's been kind of dragging comps a little bit in the month of July?.

Certainly in California, on days where it's a hundred and something degrees or over humidly days on the East Coast or the Mid-Atlantic, maybe a little bit. Not that much necessarily more than last year when you have those days they just trade off on which day or which week it is of the particular summer quarter..

And Peter, we would have factored anything that happened before today into the guidance that we gave..

Got it. Understood. All right.

And then just my last question on the delivery pilot test, I know it sounds like the To-Go sales maybe have ticked up above the 10% in those restaurants, but any sense on is this all incremental sales or is this cannibalizing some of the in-dining room sales?.

I think thus far we've seen it be relatively incremental. We don't feel like its cannibalized. Obviously, people want delivery food on the busiest times, just like they want to come in the restaurant. So you see it during the weekends, you see it at our busiest times when the restaurants are already full. So it's incremental in that way..

Excellent, thank you very much..

Thank you. And our next question comes from the line of Stephen Anderson with Maxim Group. Your line is open. Please go ahead..

Okay, thank you. Last quarter you broke out the comp for Grand Lux Cafes.

I just wanted to see if you'd able to do that again for this quarter?.

Sure. Grand Lux Cafe comps were up 2.2%..

All right. Thank you..

Thank you. And our next question comes from the line of Paul Westra with Stifel. Your line is open. Please go ahead..

Great. Thanks, good afternoon..

Good afternoon..

You guys obviously had mainline comp or so and were able to beat the quarter by $0.07 or so of your guidance. I know you commented on the slightly better commodities and might be some legal costs.

But could you sort of maybe rank list how you see the beat happen here in the second quarter and then maybe conversely you obviously cut your second half comp guidance by about 1 point and maybe where the margin offsets going forward are coming from if they are different from the 2Q beat?.

Yes. I would say in the second quarter our core business performance was what we expected it to be. We did have greater operating efficiencies than expected with cost of sales but as well as benefits from cost of sales pricing that helped us more than offset the labor pressure.

So cost of sales favorability I would say of that difference between what guidance we gave and what we actually made was maybe $0.04 or $0.05 of that difference. And then we had lower than anticipated G&A that made up the difference. So I think that's pretty much what caused the beat above what we had thought before.

And then your other question was, I already forgot..

On a go-forward basis, obviously with the lower comp outlook of about 100 basis points for Q3 and Q4, yet it implied roughly comparable earnings outlook for the second half, where is the source of margin to offset the lower comp?.

Yes. It's coming in from the same place, a little more favorable cost of sales environment than what we originally expected..

Okay.

And then lastly, just a reminder on the 53rd week, how much do you think – do you ever quantify what the impact is going to be?.

Yes, what is it?.

$0.05 to $0.08..

$0.05 to $0.08 a share..

Okay. Great. Thanks very much..

Thank you. And our next question comes from the line of Joshua Long with Piper Jaffray. Your line is open. Please go ahead..

Great. Thank you for taking the questions.

Was curious on how much of your COGS basket is locked and given the better than expected favorability on those prices that that causes you to rethink about how much you might have contracted at this time of the year?.

Well, we're at 75% contracted, it doesn't – for overall, and we're 65% contracted with respect to dairy, which if you remember back a couple years that was something that really hurt us. And so, last year, I think, for the second, third and fourth quarter of the year, we were probably like 40% contracted with dairy.

I certainly wouldn't second-guess in any way the fact that we're fully contracted, and maybe we could be paying less.

Our objective really with respect to commodity cost management is to try to put predictability into our COGS model, and that would mean that we're already looking at whether we should do booking for next year, and one of the criteria for booking for next year is not necessarily, let's get the absolute lowest price, but if we can get a lower price than we had this year, then that's pretty darn good.

So that's sort of the way we look at it. We look at predictability and control on volatility in the pricing of the commodities, and that's worked out really well for us this year. Could we've gotten a little bit lower pricing if we were less contracted? Maybe, I'm not sure. But certainly it's worked out well for us this year..

In deed.

And if we think back to those periods of time where you weren't in a position to contract a lot of that basket like you are now, curious on how much has been kind of rolled out, if there's still more learnings that you're going through in terms of getting better at that process for not having done it for much of your history, or if once you get the system in place as it is now, it's kind of set and ready to go?.

Well, we've always contracted for most of our products, and we've always been between 60% and 70% contracted, which we thought was fully contracted for us back at that time.

What we've been more aggressive with is contracting for the dairy, because we – the learnings we had were that we really let that get away one year because we thought we could get a lower price. So, I would say that we – we're still learning, but we're much more diligent about the process.

And very purposeful about the way that we go about looking at what should be contracted when. And I would say that's what we're doing a much better job at..

That makes sense.

And as we think about the external bakery sales, it seems like we're getting to that point where we might be lapping over some of the changes you had in that channel in 3Q of last year? Would you expect revenue trends for that segment to be kind of flattish or is there still more adjustments that needs to be made?.

The bakery is still in the process, I would think that we are going to lap around like you're saying. Basically, the bakery's external business -- they are having less club sales and we're sort of weaning ourselves, if you will, off of some of what were large club sales. But our other sales are growing.

Our international sales are growing, our retail sales are growing and they are at much higher profit margin. So we like the transformation that's going on in the bakery and the fact that they are selling now products that we're able to be much more profitable with, albeit, in the near term that results in the lower sales than the previous year..

Understood. Thank you..

Thank you. And our next question comes from the line of Bob Derrington with Telsey Group. Your line is open. Please go ahead..

Yeah. Thanks Doug. You usually are pretty good at giving us a little bit of color about the timing of the calendar and how the holidays shakeout and the impact on your business. As we look at the fourth quarter this year, last year the fourth quarter ended on December 29th, which means that it excluded the major, I guess, New Year's holiday.

How does it shakeout this year and what should we expect from things like Halloween and the timing of Christmas and New Year's?.

Well, let's talk about Christmas and New Year's, because first of all our year ends this year in the year 2017. What's our year end, do you know? It's like January 3, 2017..

Right..

So we have the rare treat this year of enjoying two New Year's eves in the same year, one at the beginning of the year and one at the end of the year. So that's going to be very helpful. And that's part of that $0.05 to $0.08 from the additional week, because it's not only an additional week, it's a very good additional week..

Sure..

Halloween, the Halloween comparison has to do better this year than it was last year. I think it was on Friday..

On Monday..

Monday this year? Well, that's got to be good. I'm not ready to quantify that, Bob. That's got – we love Halloween on Monday. Just if we can get Valentine's Day on Monday too..

It's not a good holiday for us..

Got you. All right. Super, that's helpful. Thank you..

Thank you. And that does conclude today's Q&A session. That also does conclude today's program. Ladies and gentlemen, thank you for participating in today's conference. You all may disconnect. Have a great day..