Good afternoon. My name is Rod, and I will be your conference operator today. At this time, I would like to welcome everyone to The Cheesecake Factory Second Quarter Fiscal 2019 Earnings Conference Call. (Operator Instructions) Thank you. Ms. Stacy Feit, Vice President of Investor Relations, you may begin your conference..

Thank you. Good afternoon, and welcome to our second quarter fiscal 2019 earnings call. On the call today are David Gordon, our President; and Matt Clark, our Executive Vice President and Chief Financial Officer. David Overton, our Chairman and Chief Executive Officer, is traveling internationally but will be on the call for Q&A.

As you have probably seen, in addition to our second quarter fiscal 2019 earnings release, we also issued a press release this afternoon announcing that we have entered into agreements to acquire Fox Restaurant Concepts, which also included the remaining interest in Flower Child and the remaining interest in North Italia.To help with the discussion today, we have provided a short presentation, summarizing the transactions, which can be downloaded from our Investor Relations website at investors.thecheesecakefactory.com in the Latest Presentations section.

We will begin today's call with some opening remarks regarding the transaction and will provide an operational update.

We will then review our second quarter financial results, provide our outlook for the third quarter and the full year 2019 and then take you through the North Italia and Fox Restaurant Concepts transactions in more detail.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 releases, which are 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, throughout this conference call, we will be presenting results on an adjusted basis.

An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our press release on our website as previously described.With that, I'll turn the call over to David Gordon..

Thank you, Stacy. I am pleased to announce that we have entered into agreements to bring The Cheesecake Factory, North Italia and all of the Fox Restaurant Concepts together to reinforce our leadership position in experiential dining.

Since making our initial minority investments in North Italia and Flower Child in 2016, we have not only helped fuel the growth of both concepts but also developed a relationship with Sam Fox and his team at Fox Restaurant Concepts.We realized the true potential of this relationship as we worked through the integration process for our planned acquisition of North Italia.

It became evident that the combination of 2 of the most experiential and entrepreneurial restaurant companies could drive even greater value as 1 organization. As we've got to know Sam and his team, we've been very impressed with our concept curation, menu innovation, commitment to hospitality, eye for design and importantly, business discipline.

In turn, we believe Fox Restaurant Concepts is the ideal incubation engine to develop concepts of the future. And with regard to North Italia specifically, we're very excited about the immediate and long-term growth potential of the concept.North Italia turns a modern lens on Italian cooking and the upscale casual dining segment.

All dishes are handmade from scratch daily. We believe the unique structure of these transactions will accelerate our growth potential while enabling us and FRC to maintain our focus on our core businesses.

Following the completion of the transactions, North Italia's operations will be located at The Cheesecake Factory's corporate headquarters to help scale the concept naturally. Fox Restaurant Concepts will operate as a wholly owned subsidiary and continue to be led by Sam from the headquarters in Phoenix, Arizona.

This combination will embrace FRC's creative spirit, enabling them to innovate concepts, while providing the infrastructure and capital to scale.With the power of The Cheesecake Factory brand, infrastructure and growth potential, complemented by an additional growth vehicle in the North Italia concept and in incubation engines to develop concepts of the future, we expect to be even better positioned to provide our guests with exceptional dining experiences, offer growth and opportunities for our respective teams and maximize long-term value for our shareholders.

We look forward to welcoming Sam and his entire team. Now turning to our second quarter results. Adjusted earnings per share was within our expectations, supported by solid operational execution during the quarter. This was despite a soft restaurant industry sales environment in which we continue to outperform.

Our off-premise business, again, supported our comp store sales outperformance as we continue to take share in the channel. Off-premise continues to grow, comprising approximately 16% of total sales during the second quarter of 2019.

We believe our differentiated positioning, high quality, made-fresh-from-scratch menu and value proposition supported by our creative on-brand marketing are driving this performance.More broadly, with regards to marketing, we continue to see positive results from our various initiatives.

We celebrated National Cheesecake Day yesterday with the return of our Pineapple Upside-Down Cheesecake. A popular TV show cast was the first to taste the Cheesecake and generated great social media engagement, with a number of other celebrities weighing in and joining our guests in their excitement.

In addition, our marketing team secured 50 on-air segments and National Cheesecake Day was a trending item on Twitter again this year. This is an excellent example of how our team ties our marketing into on-brand events to generate as much publicity as possible to increase The Cheesecake Factory's awareness and drive sales.

To complement the publicity we received, we are utilizing a number of additional marketing channels, including year-round paid search and social advertising, influencer marketing and the collaborations to more frequently remind people about The Cheesecake Factory to attain top-of-mind status.

And to continue to build on our sales-driving capabilities in the ongoing industry environment, we will be taking another step forward with our marketing this summer and fall, with a test of a Cheesecake Factory TV commercial.Favorability and the cost structure of our media buy has made this an economically feasible option for our business model.

In turn, we are launching a test in 12 markets with a modest but highly targeted media buy to determine that this could be effective sales driver. There will be no offer associated with the spot.

Rather, we will be leveraging the strength of our brand and our more than 250 dishes made-fresh-from-scratch messaging to remind guests about The Cheesecake Factory to capture more of their dining occasions. Along with driving comp store sales, we are committed to our objective of maintaining flat restaurant-level margins.

We had good results on this front during the second quarter. Labor productivity increased year-over-year. We continue to reduce overtime hours and maintain industry-leading food efficiencies.

These results underscore the importance of strong staff engagement and retention, areas where we continue to excel with both manager and hourly staff retention rates up year-over-year.With regard to unit development for 2019, we now expect to open as many as 5 Cheesecake Factory restaurants as 1 locations has moved into early 2020.

This expectation for the year includes the Oxnard, California location that opened during the second quarter.

We continue to expect as many as 5 restaurants to open internationally under licensing agreements in 2019, including the third location in Saudi Arabia that opened during the second quarter.And with that, I'll now turn the call over to Matt for our financial review..

Thank you, David. Second quarter comparable sales at The Cheesecake Factory restaurants increased 1%, including $12.4 million in external bakery sales, total revenues were $602.6 million.

Cost of sales was 22.3% of revenues, a decrease of about 20 basis points from the second quarter of last year, reflecting menu price leverage, partially offset by higher produce costs.Labor was 36.2% of revenues, an increase of about 20 basis points from the same period last year.

This is primarily attributable to higher hourly wage rates, partially offset by lower group medical insurance costs year-over-year. Other operating costs were 24.7% of revenues, up 80 basis points from the same period last year. This is mainly due to the additional noncash rent associated with the adoption of the new lease accounting standard.

There were a variety of puts and takes in other areas, including planned higher marketing costs, offset by the lapping of the final stages of our West Coast bakery infrastructure upgrade during the second quarter last year.

G&A was 6.2% of revenues in the second quarter of fiscal 2019, down 90 basis points from the same quarter of the prior year, primarily driven by the lapping of legal expenses incurred in the prior year period. Preopening expense was approximately $2.2 million in the second quarter of 2019 versus $1.4 million in the same period last year.

We had 1 opening in the second quarter of 2019, and we do not have any openings in the same period last year.And our tax rate this quarter was approximately 8%.

Excluding the loss on our minority investments in North Italia and Flower Child, which is primarily driven by high preopening costs given their unit growth levels as expected, adjusted earnings per share was $0.82. Cash flow from operations was approximately $50 million during the second quarter.

Net of roughly $16 million of cash used for capital expenditures and $7 million in growth capital provided to North Italia and Flower Child. We generated over $27 million in free cash flow. We completed approximately $28 million in share repurchases and returned nearly $15 million to shareholders via our dividend during the quarter.

That wraps up our financial review for the second quarter.Now I'll spend a few minutes on our outlook for the third quarter and full year 2019. Please note our outlook and CapEx range do not reflect the impact from the North Italia and Fox Restaurant Concepts transactions, including any onetime integration costs.

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 effect of any impacts associated with holidays or weather.For the third quarter of 2019, we are estimating adjusted diluted earnings per share between $0.52 and $0.57 based on comparable sales in a range of flat to up 1% at The Cheesecake Factory restaurants, reflecting continued softness in the industry sales environment and ongoing pressure in produce costs.

Turning to full year 2019, we now expect comparable sales in a range of 1% to 1.5% at The Cheesecake Factory restaurants.On the cost side, we now expect food inflation for our 2019 market basket to be closer to 2%, given the recent inflation in produce, which we currently expect to have the greatest impact during the third quarter.

We continue to estimate wage inflation of about 6%. For modeling purposes, we now anticipate a 2019 tax rate of approximately 7% to 8%. In turn, we now estimate adjusted diluted earnings per share between $2.58 and $2.68, which reflects our second quarter actuals and the uncertainty around produce costs.

As a reminder, our anticipated Q3 and full year EPS ranges exclude our portion of any loss from the operations of North Italia and Flower Child, driven by their high levels of preopening costs to support their current growth rate.With regard to capital allocation, we now expect our cash CapEx from 2019 to be between $85 million and $95 million to support our anticipated unit growth and ongoing maintenance needs.

Now turning to the North Italia and Fox Restaurant Concepts transactions we announced this afternoon. The acquisitions will be completed for $308 million in cash at closing.

An additional $45 million will be due ratably over the next 4 years and including the $88 million we've previously invested in North Italia and Flower Child, total consideration will be approximately $440 million, equating to approximately 1.1x run rate revenues.The FRC transaction also includes an earnout provision based on the financial performance of the FRC brands outside of North Italia and Flower Child.

Further detail on both of the individual transactions can be found in the presentation summarizing the acquisitions on our Investor Relations website. The cash to a closing will be funded by drawing on our upsized $400 million revolving credit facility, which we closed earlier this week and cash on hand.

With just 1 term of projected leverage, we will continue to maintain a strong balance sheet and ample financial flexibility, following the acquisitions.Excluding integration expenses, the transactions are expected to be approximately neutral to earnings per share in fiscal 2020 and accretive thereafter.

Our Board of Directors has unanimously approved the transactions, which are expected to close around the end of the third quarter of fiscal 2019, subject to customary closing conditions.

We are making these long-term strategic investments to reinforce our position as the leader in experiential dining and complement the continued domestic and international license expansion ofThe Cheesecake Factory.

Specific to North Italia, we see significant whitespace from an on-trend Italian concept, and believe North Italia is an ideal fit for the experiential dining occasions we want to offer.

With the support of our growth capital investments, North Italia has expanded nationally and now has 20 restaurants in 9 states in Washington, D.C., including the Reston, Virginia location, which opened today.

With one more opening planned in the next 2 months, annualized run rate revenues are expected to be approximately $150 million upon close of the transaction. And there are 2 more openings planned for the fourth quarter as well as the pipeline for 2020 in place.

North comp store sales increased over 5% in 2018 and they have sustained mid-single-digit comp store sales performance this year, underscoring the strong underlying fundamentals of the concept.North Italia has very strong unit economics, generating about $7 million in sales on average, which equates to roughly $1,200 per square foot.

Target restaurant-level margin is 18% to 20%, and is typically achieved by year 3 of operations. With an average cash CapEx investment of $3 million to $3.5 million, equating to a 2:1 sales to investment ratio, target cash on cash return is 35% plus.

With Italian cuisine, the #1 ethnic food category in the United States, coupled with strong national reception of the North Italia concept to date, we believe there is potential for 200 domestic locations over time.

This supports our plan for 20% plus annual unit growth for the concept.Fox Restaurant Concepts is a restaurant group comprising multiple unique concepts, including Flower Child, Culinary Dropout and The Henry. FRC's annualized run rate revenues are anticipated to be approximately $250 million at the close of the transaction.

Now we believe there is potential for 20% annual unit growth for their aggregate portfolio. We have provided some additional metrics to help you with your modeling on slides eight and 10 of the presentation.

The combined company is expected to be an experiential dining category leader, with nearly $3 billion in pro forma revenues in 2020 and anticipated 8% plus revenue growth, comprised of targeted comparable sales growth of 1% to 2% and 6% to 7% unit growth.We believe our aligned cultures and philosophies and close existing relationship that has supported a good deal of knowledge sharing already, should support a smooth integration.

We expect to capture supply-chain, real estate and additional synergies over time, which we believe, coupled with the North Italia and FRC unit economics, will support our margin recapture objective.

We also expect cash flow generation to accelerate after completing the integration and plan to maintain a balanced capital allocation strategy, comprised of investing in new restaurants that are expected to meet our targeted returns, repaying borrowings under the credit facility and continuing the dividend and share repurchase program.To assist with your modeling for next year, we are providing some initial assumptions around the acquisition impact.

These are just estimates at this point and will depend on a variety of factors, including purchase accounting. We anticipate the acquisitions to contribute as much as $450 million in aggregate incremental revenue in 2020.

For next year, we estimate restaurant-level margins for North and FRC combined to be approximately 15.5%, which reflects a 17% level for North.

Both of these margin figures include a significant number of new units that haven't achieved steady-state margin levels yet, given the high number of openings in 2019.When rolling in North Italia and FRC's G&A, we continue to believe that we will be able to accomplish our longer-term G&A leverage objective.

We currently estimate D&A for North Italia and FRC of approximately 4% to 5%, which will ultimately depend on the impact of the new lease accounting standard and purchase accounting.

And finally, we project preopening costs per unit of roughly 12% of average unit volume for North Italia and the FRC concepts.In closing, with diversified concepts, meaningful unit growth drivers, significant scale, robust cash flow generation and a strong balance sheet, we believe the combined company will be uniquely positioned to drive long-term profitable growth in today's restaurant industry.

We believe the North Italia and Fox Restaurant Concepts acquisitions are meaningful value-creation opportunities to complement the power and potential of the core Cheesecake Factory business.And with that said, we'll take your questions.

(Operator Instructions) Operator?.

(Operator Instructions) And your first question comes from the line of John Glass from Morgan Stanley. Your line is open..

Thanks very much. If I could maybe just two. Just first, on your outlook and your revised outlook for the year, it doesn't seem like your annual outlook changed much just given where you came out in the second quarter and your third quarter objectives now are a little bit lower.

So can you just walk us through what the changes are? Do you think this produce issue is the primary issue within the third quarter in the comp and that things get better on both fronts in the fourth quarter? How do you kind of look at the year-end balance now, particularly given what you've talked about in the third quarter?.

Yes. John, this is Matt. And I think you're right. I would just kind of lead with the fact that not much has changed, we feel very good about the steady productive nature of our core business. So we're right on track really for the EPS objectives.

The few puts and takes, as you noted, I mean, certainly all the counter costs have come up predominantly hitting in the third quarter. We are 90% contracted for our total basket, the small piece out there is produce, so I think we feel good about where that outlook is.

When we look at the comp for the year, it's pretty close to where we thought, maybe a little bit softer for third quarter. I think that we are seeing some of that in the industry.

And when we looked at that, there seems to be a multiyear trend where July has started off a little bit slow across the industry, maybe some changing patterns with school or other behavior there. But that doesn't give us cause for concern. I think pretty steady comp store sales in our projected range.

So very small puts and takes and pretty much in line with where we thought we would be when we started the year..

And when you think about the restaurant level margin projections for the Fox Restaurants that you've provided and you've talked about the accretion or the breakeven in '20.

Have you built in -- to what extent have you build in synergies, assumptions about your purchasing being better or some of the G&A reductions that you can achieve? Can you just talk about what you have or haven't assumed in those ranges for both restaurant margin?.

Sure. I think importantly for everybody this opportunity is about growth. We know -- we think it's an excellent opportunity for us to expand in experiential dining and the Fox team does a great job there, and I think we see a lot of upside in terms of revenue production, cash flow production over time. It's not really a deal predicated on synergies.

We don't expect there to be G&A synergies. Only that we can leverage off of the growth of both companies can produce over time. That being said, certainly, we will have more buying power. We will have greater real estate capabilities. So there will be some, but we're not factoring any of that into our current projections.

That will be something that we work very closely with Sam and his team on to evaluate and could be a benefit in the out years for us..

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

Good afternoon. I guess a couple of questions on the acquisition. I think you gave us enough that we can kind of get to, obviously, restaurant-level profit for Fox and its entirety.

But from an EBITDA perspective, could you kind of break what that might be for the entity that you're buying? And then secondarily, I'm just wondering from a -- I guess I'll just use the word synergy perspective, could you elaborate some of your third-party delivery relationships with the Fox concepts? And I mean how do you think about Fox as kind of a menu incubator as well that could feedback into some of the larger concepts like Cheesecake Factory?.

Sharon, this is Matt. I'll try to tackle the first one. So I think if you think about $450 million of revenue above the baseline, right, we will record I guess some in the fourth quarter. So we're thinking the $450 million is above what you would have previously modeled absent North.

And if you look at around 15.5% margins and then you've got the depreciation and amortization of 4% to 5%. I think the G&A will be essentially in line absent any onetime integration cost with our G&A target there. And then preopening, we tried to give a metric there.

We're using 12% of AUVs and so from that perspective, with the interest cost on the revolver, you're basically getting to a breakeven EPS. And I think you can kind of work backwards into an EBITDA number for the entity and we'd be happy to help you do that off-line as well. But I think that will get everybody pretty close on the overall financials.

And I'll let David talk about the synergies with DoorDash, etcetera..

Sharon, it's David Gordon. Over the past -- over 2.5 years and working very closely with Sam and his team, certainly, Sam is quite the entrepreneur and has created some wonderful concepts and all of them based around fresh quality ingredients, taking great care of people. So there are so many similarities in our 2 organizations.

And as Matt said, as we evaluate those opportunities, whether it's DoorDash to leverage some of the scale of Cheesecake Factory and whatever deal we have today and may have moving forward, we'll look at each one of those individually and decide what's best for the team in Arizona and also best for the broader Cheesecake Factory company.

And then overtime, as Sam continues to create, if there are concepts that we believe would be great to scale nationally, we'll talk about those together as a team and if and when that time comes, we would think about moving -- having that fall under Cheesecake Factory umbrella and then scale nationally like we've done with North and would hope to do in the future all goes well with Flower Child..

I guess I was asking from a menu standpoint. Thank you, David..

Yes. From a menu standpoint, this is David Overton, we'll still -- our team will still be doing Cheesecake Factory and they will be doing their concepts and incubating the new ones.

So we want to keep their concepts very much the way they are and not Cheesecake-ize them in terms of what they are offering guests, and we want to keep our as the same, so that is our plan for the future as of now..

That's very helpful. Thank you..

Your next question comes from the line of Nicole Miller from Piper Jaffray. Your line is open..

Thank you. Good afternoon. My question for the call is going back to your comment about turning on TV. It sounds very much like you will be having branding or brand equity attributes. I'm wondering if you imagined attaching any call to action and then how you would measure the return? And then just a quick clarification.

Could you translate your 1 turn of leverage to the approximate total dollar debt amount?.

Yes. I'll just -- this is Matt, Nicole. I'll just -- we'll probably in the ballpark of about $300 million of debt associated with the transaction, and we would imagine the combined entity would have about that much of operating cash flow. So that's our 1 turn..

And on the TV, it's just a pilot, Nicole, that we're going to start in test in 12 markets, and we will be leveraging our made-from-scratch messaging and all the attributes about how experiential Cheesecake Factory is.

Without a call to action, without an offer, we think that we want to test the aided awareness and see what that does, and we'll measure it over time during the pilot phase and then see what we want to do moving forward..

And in terms of measuring -- oh, I guess, you'll just measure the pilot phase. I guess that's the answer there. Just wondering like if you need a move in something besides I guess obvious..

I think it's -- you're right, you're right. Since it's a pilot and not in every market, I think statistically, we'll be able to build a very valid model that evaluates sort of pre-post net on the comp store sales line and that will give us some perspective.

Obviously, when making an investment like that, you also hope there's a tail so we'll be watching it carefully over time..

Thank you..

Your next question comes from the line of Gregory Francfort from Bank of America. Your line is open..

Just one clarification then a question. Is the percent of AUVs different than percent of sales? I guess just clarifying maybe what that difference is.

And then maybe a longer-term question, does this acquisition change how you're thinking about allocating growth capital long term between CAKE and nation concepts? And I guess I asked that Cheesecake store growth, are you thinking about any differently now that you have maybe 16 brands to play with rather than 7?.

Greg, this is Matt. The first question.

It is sort of one in the same but we're using the percent of AUV because really it's as a percentage of the growth, right? So if you use percentage of sales of the total base, it would be a totally different number but if you think about 20% growth on a $400 million run rate business and 12% of that being the cost of preopening, I think that will get you in the ballpark.

I think with respect initially to capital allocation, essentially the acquisitions will be pretty close to self-funding by year 2. So we don't see a need to really shift any capital allocation decisions around The Cheesecake Factory or a balanced approach. We have gotten a very good deal on the financing piece, they're highly profitable businesses.

So we expect to continue to be able to grow The Cheesecake Factory just as we have been planning to. We expect to continue to provide our dividend, and as we did this time continue to grow that, I think we will balance a little bit in the near term the share repurchase program with paying down some of the debt and that's kind of a fungible pool.

But otherwise, it will be -- essentially, the store that we have the 4 plus, right, we're going to be able to do all of this growth and everything else we were doing before..

Got it, thank you very much..

Your next question comes from the line of Jeffrey Bernstein from Barclays. Your line is open..

Great, thank you. Two questions, maybe first for David or David I guess. As I think kind of bigger picture, back in the day, it was just Cheesecake Factory and then it was Grand Lux and RockSugar and then we were set up for the North Italia and ultimately the Flower Child. Now it seems like we've got another 10 or so more.

Just wondering whether there is any concern on your part because it does seem the other secondary brands didn't ultimately maybe become the growth engine you wanted or maybe didn't achieved the synergies you wanted, I don't know whether this -- just how you think about the addition brands whether or not that just complicates the portfolio versus historical just maniacal focus on The Cheesecake Factory.

I'm just wondering if you can lay out how you've viewed the pros over the cons for that acquisition. And then I had one follow-up..

Thanks, Jeff. This is David. I think our maniacal to how we operate and run Cheesecake factories is going to continue and will never change. As far as Grand Lux and RockSugar, as we stated previously, we don't have any plans to open up any new ones at this time. However, we will stay just as focused on running those brands as we always have.

They have to operate perfectly and deliver great memorable guest experiences, so we'll continue to do that as well. And during this integration period with North, we've also able to stay squarely focused on Cheesecake Factory and as North -- as we start to operate those North restaurants, we'll continue to be able to do the same thing.

90% of our business is Cheesecake Factory today, and over time as North continues to grow at a 20% growth rate, we'll leverage all our expertise in growing a brand to grow North appropriately across the country.And as Sam continues to lead his team and those other restaurants that are running through Phoenix, he's going to continue to operate them and stay squarely focused on providing exceptional guest experiences, learning from his guests as he's done over years and being a creative force and that gives us the ability to know that he's able to do that, while we stay focused on everything that's important and has been important for 40 years at Cheesecake Factory..

Got it. And then my follow-up was just on the operating margin for the portfolio. I know in the past and slide decks you talked about kind of openly going from the 6% range to the 7% range and maybe 25 basis points per year of expansion on that operating margin.

I just was wondering whether there is any change to that strategy or any change to the buckets within it in terms of maybe how you'd see those expanding over the next few years. Now that you layer in this acquisition, I didn't see that particular metric in the newer slide deck..

Jeff, this is Matt. I think that's a great question, and we're currently in the process of evaluating that and we did not include it because it is still something that we're doing the math around. Our objectives around leveraging G&A still exist.

Our opportunities to expand our margins with the international and the CPG business still exist, and we are pursuing those, I think we're right on track for this year. But certainly, we need to kind of recalibrate around the portfolio component of this. Nothing has changed though with respect to keeping core Cheesecake Factory margins flat.

So that still maintains the objective. So those pieces are still in motion but given the portfolio components here, we wanted to pull that back and make sure that we get the math correct. Certainly, nothing about it would be dilutive to any of it -- of those targets in the future..

Very helpful. Thank you..

Your next question comes from line of Bill Slabaugh from Stephens. Your line is open.

Thanks. Yes, just a question about your comments on the consumer. You mentioned it was a more challenging consumer environment during the quarter that your results reflected that somewhat and you've gotten into 3Q as well. So it seems like this is maybe somewhat new versus what you'd been saying in past quarters.

So I'm curious what you've been seeing maybe change within consumer activity and if there's anything to call out either whether it would be geographically around day parts or around different parts of the menu?.

No. I think that -- a couple of things. One, the holiday shift, the Easter was significantly later this year and there was a lot of turbulent weather. It's hard to quantify any of those pieces but certainly that may have been a little bit of a noise.

And as we referenced earlier in the call, July, I think if you look at whether it's KNAPP-TRACK or Black Box or MillerPulse, all of those tracking mechanisms seems to year-over-year -- July settling a little bit and I think we're just as an industry seeing that, I think other companies are reporting that.

I don't think it's significant, I think these are just some of the normal ebbs and flows throughout the year. Our guidance for comps for the year has barely changed. So I think it's just some of those components around the edge. The same geographies I think are performing very consistently.

We haven't seen any of the volatility that we have seen historically when there has been more than anomaly in the sales pattern..

That's helpful. Thank you..

Your next question comes from the line of Andy Barish from Jefferies. Your line is open..

Just a couple on the acquisition, and congrats buying some really interesting concepts.

On the pipeline for 2020, can you give us any color on how much visibility you have and should we think about sort of unit growth as going forward as the handful of Cheesecakes, maybe a handful of North and then sort of 8 to 10 other Fox concepts per year? Is that how you're kind of thinking about that number to get to sort of the mid- to high single digit overall unit growth?.

Yes. I mean I think we don't have a specific number, but I think your math is pretty close. For Cheesecake Factory, we still think 3%, and we feel good that, that target is very achievable and are looking at real estate to support that for next year already.

As referenced, we have a good pipeline for North that would be at least a 20% growth if not a little bit more for next year, that's pretty much in place.

And then I would say you're right on, there's roughly some 45 restaurants within the FRC group that includes Flower Child and we would target that to be about 20% on an annual basis and certainly, they get a lot of interesting real estate opportunities given the different concepts.

So we feel from a real estate perspective and the ability to sort of count on the unit growth, this only helps us in a variety of ways and gives us further leverage. So pretty good opportunity to hit those targets..

And then just quickly, anything we should be thinking about in 2020 on incremental labor cost from a people-retention perspective at Fox? Just as you move through the acquisition and into the kind of first year of ownership to maintain some of the talent there..

Well, Sam and his team are going to still be there. They're going to operate the business just as they have been. I think all the great things that they already do to be a world-class talent provider, they will continue to do that. This -- as we noted, this is not about a synergy situation but more about the growth opportunity.

So they already do a great job with that. It's already embedded in the run rates that we've put out there. So the philosophy that we share around that will continue and I think that the people knowing that we're working together will only benefit each other..

Your next question comes from the line of John Ivankoe from JPMorgan. Your line is open..

Hi. A couple of things. Firstly, on labor, you mentioned wage inflation of 6%.

What's the outlook there? And I asked that in the context that in terms of where your exposure is, I mean, are you seeing stability, are you seeing acceleration in those costs for any jobs whether front of house or back of house? Are there any markets that are actually experiencing any staffing shortages at this point that you're beginning to become concerned about?.

John, this is Matt. On the rate, it's been pretty predictable. I would say once we sort of got into the rhythm of the increases mandated by minimum wage, credit changes, etc., it's been relatively following a pattern and has not been outside of our expectations in any of the quarters.

We would imagine next year, we'll probably be around 5.5% again and the reason it could be slightly different is just the math as the wage goes up, the minimum-wage impact on a percentage basis is slightly lower. Certainly, with this, we get a little bit more diversified as a company in total so we'll evaluate what impact that has.

But from The Cheesecake Factory brand perspective, we are employer of choice and #25 on the best one of the places to work and we're continuing to be able to staff our restaurants. There's a market or 2 that are more challenging but not causing us to have a shortfall in any situation..

Great. And the second question on commodities, I obviously understand that your protein basket is diversified. You don't sell a lot of pork but you also sell non-commodity chicken. Could you comment on your kind of view on the protein market at this point? I mean do you foresee any challenges and if you could elaborate on the produce side.

Is -- do you view avocados as just a seasonal shortfall and if there's anything else on the produce side that actually does give you concern over a quarter or 2?.

Sure. John, this is Matt. On the proteins, for this year, we're contracted. I think that there's still a lot of noise out there around what's going to happen with proteins. But we have such a flexible kitchen, and we've worked around many situations before where you've seen ups and downs and I think the balance does protect us to some degree.

We don't have an outlook yet for 2020 on that but I think just historically we've been able to accommodate what we've needed to do. So I would imagine it to be in a similar range as it has been for the past couple of years in aggregate for the basket. With respect to produce, really predominately around avocados.

I mean it's been a smaller growing season relative to last year. I think the demand continues to rise. You have a little bit of that sort of spike associated with what was happening in Mexico around the farms there and I think it never really subsided.

So some of this is a little bit makeshift but I think, again, very, very transitory in nature based on the historical and we've built that expectation into our guidance regardless..

Your next question comes from the line of Dennis [ph] from UBS. Your line is open..

All right thanks. Just a clarification and then a question. Just first, just wondering if your long-term 5-year targets remain largely unchanged given the commentary you mentioned on the margins? And then the question is about off-premise.

And if you could just share what that online ordering mix of off-premise looks like? What the delivery mix looks like? And then just some thoughts on where that mix can go over the next few years, perhaps as it relates to Cheesecake and if there's anything to add as it relates to off-premise in relation to the acquisition? Thanks..

Sure, Dennis. I'll start. This is Matt. We are reevaluating those long-term targets.

What I would tell you is that we feel more confident about our long-term opportunities to drive profitable growth, given these additional growth engines, and just reiterating that our margin targets around the G&A and the incremental ability for international and CBG to contribute haven't changed.

We just kind of needed to reevaluate the math around the portfolio. But I would say that this just gives us a significant boost to hitting any target that we've put out there before, and once we figure out the math, again, we'll be able to provide an update..

And just on the off-premise front, Dennis, total off-premise was 16% of sales in the second quarter, which was some nice growth over the second quarter of last year, and delivery is about 35% of that 16% and the online ordering is moved up to about 13%.

So that's incrementally grown over time since we rolled out online ordering and about 50% of guests are still phoning in. So we did roll out new packing actually last quarter at the end of first quarter and that's gone very, very well.

That packaging allows the food travel at the appropriate tension -- excuse me, appropriate temperature and also allows for the integrity and the look and feel of the food to be very close to The Cheesecake Factory experience you would get when you're dining in. So we feel great about the continued growth in off-premise.

We think that there's still room across the country for many of our restaurants to continue to grow off-premise sales.

And as far as the acquisition goes, along the concepts and FRC are offering off-premise today, we've already talked to and some of the DoorDash -- some of the markets use DoorDash today and there will be opportunity to continue to grow that business as well..

Your next question comes from the line of Matt DiFrisco from Guggenheim Securities. Your line is open..

Thank you. Just one point I wanted to clarify and then I had a question.

With respect to Easter, was that a benefit or a drag in 2Q?.

So we -- Matt, we anticipated it being a benefit. I think it was slightly but not as much as we thought. It seems to be -- when we obviously get a benefit from the holiday weeks and it's a little bit -- it were a little bit opposite of some of the other casual diners, if you will.

But I think that they were so late in the season this year that maybe it was spread out a little bit between March and April and maybe muted a little bit..

And then just to clarify one more point then my question.

The structure here of the deal, are you owning 100% of Fox? Or does Sam Fox still have a percentage ownership of the entity that will remain in Arizona?.

We will have 100% ownership, and Sam will be staying on and they have opportunities to -- as we've structured the deal, there is an earnout over that time period but it will be 100%..

Okay. And then my question to the David's also, I guess with respect to what you're seeing here as far as the off-premise growth and the correlation with somewhat of the wining business in the dining room.

Does that call into question may be the incrementality that you're getting from delivering off-premise that maybe there could be some greater cannibalization or substitution than we're lead to believe initially..

Well, I think we still feel like there's incrementality there. I think we've said in the past that probably think of 60% incremental, and we can still see that as it's growing over time. I think as Matt stated earlier, some of where we ended up with same-store sales in Q2 whether it feels attributed necessarily to the growth in off-premise.

There could be a small part of that where that is happening as guests continue to look for more convenience not want to come into the restaurant but we don't see that as being meaningful right now. But we'll certainly continue to evaluate it moving forward..

What was the 16% a year ago?.

13%..

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

Thanks. I have a question and then some modeling clarifications. So first up on the question. Your labor cost had been kept very, very well under control over the last 2 quarters, especially in that 2Q looking at our model. I'm just curious you gave us a couple of examples.

But what is driving that and how sustainable is that as we move into 2020?.

Well, I think it's been -- the real noise that we've ever had has been around group medical insurance cost. I think our operators do a tremendous job, our forecasting and labor management tools are best-in-class. And I think as I noted on the wage piece, we have a pretty good read at this point in time.

We also continuously look for opportunities to improve in every area, we're not a step function, we're not going to take the bussers out, for example, we're just going to look to be incrementally better. So I think that, Jeff, is absolutely sustainable going into next year and then if we have higher insurance cost, we do.

And that's -- we've explained that, that's the right long-term business decision for the company but I feel very good about our ability to manage our labor going forward..

I would just add that, as we said earlier that, our retention rates really are industry-leading and our ability to keep our people being on the Fortune 100 list, as Matt talked about, but just more importantly, historically, the way we care for people it really helps them.

Because we can be more productive, we can cross-train people, there's not much lead time, because there's not as much churn. And that's something we feel for sure will continue into next year..

And then just on modeling. So again, you know that, so you currently just have two revenue lines, one for the Cheesecake restaurants and then another line for everything else.

So I'm just curious, I mean, it's a little bit early but will there be a new revenue line for Fox? And in terms of thinking about this on a segmentation basis, are you going to break out Fox as a separate segment? And again, more unsolicited advice that just makes everyone's life far easier in terms of modeling this thing moving forward..

Well, I hear you loud and clear. We're in the process of evaluating all of those with our auditors, and we'll make the decisions as we get closer to the actual close of the transaction and probably be able to provide an update on that in the third quarter call..

Okay. Thank you..

Your next question comes from the line of Peter Saleh from BTIG. Your line is open..

Great, thanks. I just wanted to come back to the TV commercial test and in the 12 markets.

Is this an increased investment spending in advertising or is this a shift? And if this is a shift, where are you shifting the dollars to support this small task?.

It is an increase from the marketing spends historically, and we have that in our plan for this year and it's been part of our AOP and part of what we discussed previously. So we'll continue to evaluate the strategy. Again, as I said earlier, we'll see how it goes.

It is just a pilot and certainly if it drives some incrementality and we see it is making a difference then we'll decide moving forward in next year's plan exactly what that marketing budget's going to look like..

Great. And then just for clarification on one of the Fox Restaurant Concepts that you guys are acquiring.

For Zinburger, are you just acquiring the 6 stores in Arizona or are you acquiring the 24 stores that are across the country?.

Great question, Peter; very, very, good catch on your part. It will be the ones that are based in Phoenix and so that is a concept that Sam successfully launched previously and did so the development rights that has retained the ownership of the ones in Phoenix and that will -- that's the part that will be part of our company..

So the other 18 are -- were they still developed by Sam, I'm just....

No, no they're not. Those rights were purchased by a different company number of -- quite a number of years ago and so we will just -- Sam will continue to operate the Zinburgers that he has and that will be part of what we're doing, but not the other piece of it..

Right. Thank you very much..

Your next question comes from the line of Mary [ph] from Baird. Your line is open..

Good afternoon. Thanks for taking the questions.

Could you just provide the breakdown of traffic and check during Q2? And then as you look toward the second half of 2019 and work through your summer menu update, are you still anticipating roughly 3% pricing for the second half of the year?.

So the answer to the second part is yes. I think we were about a 3% pricing, we'll continue to be at about 3% pricing. The traffic was negative 2.8% but the mix was a positive 0.7% and as we've noted, it's really driven by delivery in higher check average.

And so if we were to adjusted it in a way that some companies do, you're talking about traffic of about negative 2%, which was a bit shorter than what we had guided to and I think that's related to some of the Easter shift and the weather that we discussed..

Thank you very much..

Your next question comes from the line of Jon Tower from Wells Fargo. Your line is open..

Great, thanks. A lot of my questions have been answered but I was just going to follow up on the acquisition. The landscape in restaurants regarding acquisitions has really a relatively poor track record on companies being able to deliver on the synergies that they projected at the beginning of the acquisition.

So I'm curious to hear from you, what gives you confidence on your ability to do that.

Is it the fact that first 3 years now you've had the minority investment in those businesses and therefore, have a fairly strong line of sight into how they grow, how much it's going to cost in people retention, if you would mind just kind of elaborating on that, that would be great?.

Jon, this is Matt. I think you answered your own question. That's exactly right. I mean when you -- we spend as much time with them and collaborated to the degree of it we have with Sam and his team, we're intimately involved in the growth of North Italia over the past 3 years as well as Flower Child and having witnessed the abilities.

We have a very deep knowledge of that and a lot of confidence in them and our ability to work together to continue that momentum. And I would just end by saying, again, it's not about the synergies. I think we have taken a very unique approach in the world of restaurant M&A that may or may not have gone right.

We have dated for 3 years before this marriage and we are also maintaining Sam's team in Phoenix as a stand-alone entity so that we don't disrupt that. So I think that we are just, as we always do at The Cheesecake Factory, taking a slightly different approach that we think is unique and value-driving..

Your next question comes from the line of John Glass from Morgan Stanley. Your line is open..

Thanks. I just had one follow-up and it's more maybe philosophical in nature.

Why is this a better arrangement to buy Fox versus your prior arrangement where I think you had a good opportunity to invest in the concepts you were most enthusiastic about and let the others sort of incubate and when they were ready, you could put more capital into it? Now you own portfolio -- you're spending $270 million of portfolio of some smaller brands, some may work, some may not.

So one may be, what's the rationale for that? And conversely I guess, is this also maybe just a recognition that the consumers may be more interested in smaller brands and that may be able to grow portfolio of smaller 1, 2, 3 ops are perceived independence.

How do you see the trade-off for wanting to own the whole business versus just picking and choosing and maybe your view on how the consumers changing and maybe this is a way to address those changing needs of smaller brands?.

John, this is Matt. I'll take that first part.

Relative to the deal, if you think about the amount of money we may have purchased North for and then 2 years Flower Child, the incremental amount of capital and the way that Sam and his team are willing to work with us on the way that we're financing part of it now and over time, it's just a great win-win financially, right? So we're virtually getting another incremental revenue of $150 million that we're sort of able to pay for over time.

And to top that off, we have a lot of confidence in the ability of the FRC team to do exactly what you're talking about, to be an incubation engine to see what the consumer likes. They've been exceptionally well received in their different endeavors. They are very profitable business. So economically, we were just able to structure a win-win.

I think that's unique, as we said, and different and it sort of came together as we are working on the integration for North Italia.

And we think that the combination of the entities today is more fruitful than waiting over time and the assets that they bring to bear will help with that both in the concepts that they have and then penetrating consumers, as you noted, could be shifting. It certainly gives us a lot of options while not diluting our focus on The Cheesecake Factory..

And I think we know that experiential dining is what people want today and certainly, millennials and gen z and we provide that today at Cheesecake Factory and now we'll be able to provide that in other forms, in other restaurant concepts that will be spread out throughout the country..

Thank you..

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

Thanks, good evening. Just a quick follow-up on the FRC acquisition.

I think about half the units within FRC are Flower Child and if that's right, could you give just a little more color on that concept, specifically sort of how it's performed as it's grown across the country to the East Coast, maybe some specifics on comp trends, AUVs, margins for that concept specifically?.

So Brian, this is Matt. The Flower Child in terms of the revenue production is maybe around 35%, maybe 40%. So it's not quite -- a little over 1/3 so not as much weighted potentially because it is a fast casual and they do have some other concepts that do higher volumes.

And so I think at this point in time, we're providing an aggregate margin because not one of the brands does comprise more than about 35% of the total revenue, and I think it will be more helpful to think about it as sort of an aggregate target for the time being.

Certainly, we're still in the middle of closing the transaction over the next 2 months and figuring out, as Jeff Farmer noted, how we're going to report on the segments, and we'll provide additional updates as we go forward. With respect to the Flower Child brand though, continues to do very well.

It continues to hit the average unit volumes that produce about $1,000 of square foot in sales. And so that's been very strong throughout the country, and we've been visiting many of those locations with Sam over the past 6 months and very pleased with the progress of the brand..

Okay, that's helpful. And could you also just comment on the pipeline that you're acquiring and the specifics on the unit growth outlook into 2020? It sounds like 5 to 6 Cheesecakes.

But how many North's versus other FRC locations are you planning on into 2020?.

So Cheesecake will continue with about a 3% unit growth that we projected, no change there. North will be at least 20%, maybe a little bit more. We have a solid pipeline already identified for 2020 for North to achieve that target.

And in the FRC side, they are well underway developing pipeline that will also be at least 20% for the balance of the business. So we get a lot of tools in the shed here to hit that unit growth and a lot of real estate expertise between the combined company to find those locations. So we're well on our way and feel good about that..

Okay, great.

And then just last one, the interest rate on the debt, can you remind us where that settle out on the expanded facility?.

Yes. It will obviously depend on where we're at in the bracket and where LIBOR sits. I think it's going to probably end up being somewhere just slightly south of 4% maybe when that dust settles and if the Fed keeps lowering, it will be somewhere between 3.5% and 4% for next year I would guess..

All right. Thank you..

And we have now reached the one-hour mark. This concludes The Cheesecake Factory second quarter fiscal 2019 earnings conference call. You may now disconnect..