The Cheesecake Factory Incorporated

Good day and thank you for standing by. Welcome to the Cheesecake Factory Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. And if you require any further assistance, just press star 0. I will now turn the call over to your first speaker, Ms. Stacey Fite, Vice President of Investor Relations. You may begin your conference.

Thanks, Maria. Good afternoon and welcome to our second quarter fiscal 2021 earnings call. On the call today are David Overkin, our Chairman and Chief Executive Officer, David Gordon, our President, and Matt Clark, our Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call, items will be discussed that are not based on historical 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.thechoosecakefactory.com. and in our filings with the Securities and Exchange Commission. All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements. In addition, during this conference call, we will be presenting results on an adjusted basis, which excludes non-cash acquisition-related contingent consideration and amortization expense, and the cost to terminate the company's interest rate swap and reflects the then potential impact of the conversion of the company's convertible preferred stock into common stock for the period that it was outstanding during the quarter prior to the repurchase and conversion on June 15th. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our press release on our website as previously described. David Overton will begin today's call with an opening remark, and David Gordon will provide an operational update. Matt will then briefly review our second quarter results and provide a financial update. With that, I'll turn the call over to David Overton.

Thank you, Stacey. Comparable sales at the Cheesecake Factory restaurants increased 7.8% relative to the second quarter of fiscal 2019. This performance helped us achieve record revenues and generate revenue $109 million in cash flow from operations in the second quarter. All of our locations except Toronto had some level of indoor dining capacity, and we continued to see significant pent-up demand to dine at our restaurants across the country. Notably, we generated stronger sales at the Cheesecake Factory restaurants on Mother's Day and Father's Day this year versus 2019, in spite of indoor capacity restrictions. In fact, we had one location that did 100,000 in sales on Mother's Day with just 50% indoor dining capacity, underscoring the tremendous brand affinity for the Cheesecake Factory. Continued strength in the off-premise channel again supported our strong sales performance during the second quarter. With the lifting of indoor dining restrictions in California and a number of other markets toward the end of the second quarter, we saw comparable sales further strengthen into July as nearly all of our locations are operating with no restrictions. Fiscal 2021 third quarter to date through July 26, comparable sales at the Cheesecake Factory restaurants increased 10% versus 2019. And we have seen consistency in this metric each week this month. Our operators did a great job managing and leveraging the strong sales levels, delivering delicious memorable experiences for our guests and also exceeding our expectations across our key performance indicators, including food efficiency and labor productivity. This performance drove strong restaurant-level margin results at the Cheesecake Factory restaurants during the second quarter. On the development front, two North Italia restaurants opened in Miami and San Antonio, and Flower Child opened in Atlanta during the second quarter. Just last week, North Italia opened a second location in the Nashville area in Franklin. We remain on track to open as many as 14 new restaurants across our concepts this year. Internationally, we now expect as many as two Cheesecake Factory locations to open under licensing agreements as one restaurant in the Middle East is now anticipated to open in 2022. With that, I'll now turn the call over to David Gordon.

Thank you, David. When we reflect on where we were a year ago during the depths of COVID-19, we are so grateful for our teams who enabled us to deliver the tremendous second quarter results to sustain the sales strengths in the July to date period. Based on average weekly sales quarter to date of approximately $230,000 of the Cheesecake Factory restaurants, this equates to nearly $12 million on average per unit on an annualized basis. Off-premise has comprised approximately 27% of sales, with average weekly sales quarter to date of approximately $61,000, equating to nearly $3.2 million of off-premise sales per unit on an annualized basis at the Cheesecake Factory restaurants. As a reminder, summer is generally a seasonally softer period for the restaurant industry off-premise channel and third party delivery providers. So for additional context, this off-premise average weekly sales level is about double the level that we saw during the same period in 2019. With the strength of our sales performance, We've shifted our marketing for the Cheesecake Factory restaurants primarily back to brand-based messaging to raise the profile of the Cheesecake Factory brand. Pre-COVID, we were evaluating upgrades and enhancements to our marketing and technology platform, including the potential launch of a rewards program to drive our next-generation marketing strategy. The success we had driving sales and frequency through targeted campaigns during COVID has reinforced our view that now is the right time to move forward with these initiatives. We completed a significant amount of consumer research to develop a program that is on brand for the Cheesecake Factory and our guests, and we are targeting a launch next year. We plan to migrate our email database to a more robust CRM system to work hand-in-hand with the rewards program as well. In the interim, We are also revamping our website to transition to a more commerce-forward platform to deliver a better guest experience with the goal of driving lists in conversion rates and average order value for online ordering. The new site is expected to launch by the end of this year. Turning to staffing, we are pleased to share that following our recent recognition on Fortune Magazine's 100 Best Companies to Work For list for the eighth consecutive year, We were also just recognized as a best workplace for millennials. We continue to believe these accolades demonstrate our position as an employer of choice. While we have encountered some pockets of staffing challenges as markets fully removed indoor dining restrictions and the labor market remains very competitive, this has not meaningfully stifled our sales performance at the Cheesecake Factory restaurants. and we have made good progress towards being fully staffed for the current sales levels. In fact, we are now above pre-COVID staffing and have lower hiring needs versus the time of our first quarter call. At the same time, we continue to maintain industry-leading retention at both the manager and hourly staff levels, which we believe is a key contributor to a positive guest experience. Notably, We saw an increase in guest satisfaction at the Cheesecake Factory restaurants during the second quarter relative to the same period in 2019. We have also seen positive guest satisfaction rates at North Italia, which we believe are contributing to the strong sales performance of that brand. We have seen consistency in the sales performance with third quarter to date through July 26th comp store sales up approximately 10% versus 2019 levels, with off-premise comprising approximately 15% of sales. With this sales strength, we have shifted our marketing back to primarily brand-based messaging with a celebratory tone and our traditional local focus. We continue to believe North Italia's performance reinforces the long-term potential for the brand. FRC drove stronger sales and margin performance during the second quarter as well, and third quarter to date sales have further strengthened. We are very encouraged by all of our concepts' performance during the second quarter and the continued sales strength we have seen in third quarter to date. We continue to believe we are well positioned for the future given the strength of our brands, best-in-class operators, and the breadth of high-quality growth vehicles. And with that, I will now turn the call over to Matt for our financial review. Thank you, David.

Second quarter comparable sales at the Cheesecake Factory restaurants increased 150% year over year. Relative to the 2019 period, comp sales were up 7.8%. Off-premise represented approximately 31% of total Cheesecake Factory restaurant sales during the second quarter. Revenue contribution from North Italia and FRC totaled $114.4 million. North Italia comparable sales increased 182% year-over-year and rose 10% versus the 2019 period. Sales per operating week at FRC, including Flower Child, were approximately $103,000. And including $15.4 million in external bakery sales, total revenues were a record $769 million during the second quarter of fiscal 2021. As usual, I'm going to provide year-over-year detail on expenses. But of course, note that the significant disparity in revenues, given the impact from COVID in the second quarter last year, drove abnormal year-over-year variances. Cost of sales declined 240 basis points, primarily driven by sales mix and pricing leverage. Labor declined 580 basis points, primarily reflecting sales leverage. Other operating expenses declined 1,520 basis points, primarily due to sales leverage, partially offset by higher restaurant-level incentive compensation. Our operators leveraged the sales strength to drive margin performance. with restaurant level margins at the Cheesecake Factory restaurants following the trajectory we would have expected at the second quarter sales levels. We saw similar strength of performance at the mature North Italia locations and do want to remind everyone that we have opened three new North Italia restaurants year to date through the second quarter and have a number of other newer locations that haven't yet reached steady state operational levels. which impacted aggregate reported margins. G&A, as a percentage of sales, declined 580 basis points, also primarily due to sales leverage, partially offset by a higher corporate bonus accrual. Pre-opening costs were $2.8 million in the quarter, compared to $2.1 million in the prior year period. Two North Italian restaurants, and one flower job location opened during the second quarter, whereas we didn't open any restaurants in the prior year period but had costs associated with our new unit development department and restaurant management bench. Second quarter GAAP diluted net income per share was 37 cents. Adjusted net income per share was 80 cents. Now turning to our cash flow and balance sheet. The company generated approximately $109 million of cash flow from operating activities during the second quarter. CapEx sold approximately $24 million during the second quarter for required maintenance and new unit development. We ended the quarter with total available liquidity of approximately $400 million, including a cash balance of approximately $162 million and approximately $240 million available on a revolving credit facility. Total principal amount of debt outstanding was $475 million, including $345 million of 0.375% convertible senior notes due 2026 issued during the second quarter and $130 million drawn on our revolving credit facility following the previously announced $150 million repayment during the second quarter. We also completed the offering of 3.125 million shares of common stock during the second quarter. As previously disclosed, We used the net proceeds from the convertible senior note and the common stock offerings to fund the repurchase of 150,000 shares of the previously outstanding convertible preferred stock and the conversion of the remaining 50,000 shares of convertible preferred stock into approximately 2.4 million shares of common stock. This simplified our capital structure and eliminated future convertible preferred dividends. For GAAP accounting purposes, $13.6 million of the total consideration paid was deemed to be an assumed dividend during the second quarter of fiscal 2021. Looking ahead, given that the operating environment continues to be very dynamic, we want to keep you updated on our underlying expectations for 2021. Following the benign commodity inflation we experienced in the first half of the year, We currently expect total cost of sales inflation of approximately 3% for the back half of the year. Given the normal seasonal sales trend for the Cheesecake Factory restaurants and FRC, coupled with anticipated wage inflation in line with our prior commentary, we believe the labor line could deleverage by up to 25 basis points in the back half of the year from the second quarter level. With regard to other operating expenses, we expect the second half of the year, on average, to be slightly higher than the second quarter on a percent of sales basis as we take the opportunity, given the sales strength, to reinvest in the business and fund costs associated with the rewards program we are building. We currently have 3% pricing in the Cheesecake Factory menu and plan to remain at that level for the second half of the year. We believe this is sufficient to cover the inflationary factors currently contemplated. We continue to expect G&A of approximately $47 million for each of the third and fourth quarters. And we now estimate our tax rate for the full year to be approximately 8%. With respect to development, we continue to expect to open as many as 14 new restaurants this year, and we anticipate pre-opening expense of approximately $9 million in the back-up of the year to support the remaining new unit openings. We anticipate about $65 million in CapEx for the second half unit development, as well as required maintenance on our restaurants. with our full year CapEx budget now expected to be approximately $95 million. Looking further ahead, we have solid momentum in the key restaurant financial drivers, including comparable sales, new unit development, margin recapture, and our balance sheet. We believe this momentum will enable us to further accelerate our unit growth to our targeted 7% level in 2022 and continue to take market share as we also continue to focus on driving sales and leveraging that performance to drive bottom line results. With that said, we'll take your questions.

And at this time, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, just press the pound key. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Nicole Miller from Piper Sender. Your line is open.

Good afternoon, and thanks for the update. Just the first question. It's great to see net net things up above 2019 with some off-premise kicking in. Maybe you're not quite made whole on the in-person, in-dining room component or channel. So how do you think about reaching that equilibrium and how you get back to capacity in the dining room, given the behaviors that you're seeing today?

Hey, Nicole. This is Matt. Thanks for the question. It's a good one. It's interesting when we look at the current run rate in Q3 from a sales basis, we're almost back to the sales that we had on premise in 2019 with the overs really coming from that off-premise piece that you mentioned. So, you know, I think we still actually have capacity to go because as similar to everybody else in the industry, those sales are driven on-premise by a little bit more check average than historical. So I think we still have room to grow both components, frankly. And so, you know, at an equilibrium, if you will, you know, there's opportunity to drive both channels still as we go forward.

And then just one last clarifying point on the store-level margin for the back half. I got the pieces like 3%, you know, COGS inflation wages might be up, excuse me, you might be levered 25 basis points. That's modest. You know, operating might be up percentage-wise. But then you made the comment 3% in the cake menu sufficient to cover store-level margin. I guess I'm just going to ask, so does that mean store-level margin is

net net can look like 2q but we still with that price or we still need to modify a little bit for a step down just so we get that modeling right yeah and listen i i think i wouldn't say it's a a step down i think we're trying to make sure that everybody remembers since last year was in a good guidepost, and it's been so many ups and downs, that there is some modest seasonality to the business, right? So Q2 has never looked like Q3 margins, right? And so looking at Q2 historically has been a peak margin for the Cheesecake Factory brand every year. So there's just going to be movements off of Q2. You could also look at it on a year-over-year basis. That might be more applicable for the inflation commentary, but less applicable because last year was so different, right? And so we're just trying to hone in. I think when you look at the totality of it for the back half of the year, you know, we're still looking at some solid margin improvement as a company over 2019, but it may just not be a smooth pace because of seasonality.

Okay, we can come back to that. Thank you very much. Appreciate it.

And your next question comes from the line of John Power from Wells Fargo. Your line is open.

Yeah, just a couple ones from me, hopefully you can hear me okay. Just following up to that last point, just to clarify, you mentioned as a company margin better versus 2019. Are you referring specifically to EBIT margins on that, Matt?

Yes, correct.

Okay. Okay, great. Thank you. And then, so just digging a little bit into some of the investments here, or some of the comments, you had mentioned that some of the new stores are acting as a bit of a drag on the aggregate store level margins, mostly because they're not up to maturity yet. Is there a way that you can potentially quantify that for us so that we can kind of blend it into our expectations going forward? That's point one. And then second, You'd also mentioned the idea that in the back half this year, other OPEX is going to see some investments in that line, which will move it up relative to the second quarter, tied to the rewards program and investment in technology. Will those be ongoing spend, or is that something that's purely one-time back half, 21 investment only?

Hey, John, it's Matt. So on the first one, just specifically referencing OPEX, North Italia, and we did provide some context in that the mature margins there are pretty much right in line with the Cheesecake Factory margins, right? So the difference is just the timing of the buildup of the newer restaurants. So in totality, that brand is seeing pretty much the equivalent margin, and that's what we would expect to see as all the stores ramp up over time. With respect to the investment, it's really specific to the back half of this year, right? There's some upfront costs that we have to incur to get the program going, but then on an ongoing basis, we would expect it to be accretive, right? It's going to provide the revenues, but that doesn't happen until we launch it. So it's really specific for the back half of this year.

Yeah, and then just kind of following up on that point, how should we think about this program itself? Is it going to be similar to, like, other programs where it's spend-based and you guys plan on focusing it solely on the Cheesecake Factory brand, or is this something that's going to be utilized across the portfolio?

Hi, John. This is David Gordon. We, as you might anticipate, it won't be necessarily similar to what's happening across the industry. It'll definitely be on brand for the Cheesecake Factory brand. And certainly as we have more details to share as we get towards next year, we will. And it will only be for Cheesecake Factory at this point in time. That's our current strategy.

Okay. I'll yield the floor. Thank you.

And our next question comes from Jeff Farmer from Gordon Half Kits. Your line is open.

Thank you. It looks like we're several months into the return of indoor dining on Wednesdays. What's almost a national basis? I'm just curious what your thinking is right now in terms of the updated numbers you're seeing on the sustainability and incrementality of those off-premise sales.

Well, I think, as we said, looking at where we are so far quarter to date is off-premise at 27% of sales. They continue to remain very, very solid. At the end of Q2, they were at 31%. And as we look at the restaurants that have been open longer in those more mature states that have had 100% seating capacity, Georgia, Florida, et cetera, they too have maintained, you know, that mid to high 20s percent. So we still feel pretty bullish that our ability to execute off-premise very well, along with the value of the menu and the offerings of the menu, that we will continue to hold a good portion of the off-premise growth.

The other way to think about, Jeff, this is Matt, is just that we're up almost double where we were in 2019. And so one of the things we've always talked about is the percentages will move a little bit as we continue to regrow the on-premise, which is great, right? I mean, we're tracking right now at a 12%. million AUV level, and we're still at $1.6 million on off-premise, right? So I think that's an important piece also, right? We've always talked about if we could even keep a million dollars of it, and yet with fully reopened dining rooms for the past month, we're still keeping $1.6 million of it.

That's very helpful to hear that. And one unrelated question. So A little bit premature here, but just in terms of markets that have seen some pretty material jumps in COVID case counts, it looks like Florida, Missouri, Oklahoma, where Cheesecake does have restaurants. Any sort of early read on how consumer behavior has changed or has it not?

I think to your point, Jeff, it's early. It's too early to say. Certainly here in L.A., where no mask mandates went back into effect in L.A. County, it didn't really seem to have much of an impact or effect. Who knows long-term? what will happen across the country. I think it's a little too soon to tell. People certainly right now, Pierre, just don't want to get out there. Thank you.

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

Hi, thanks, and good evening. I appreciate the quarter-to-date comments and the $230,000 a week at the Cheesecake Factory brand. Matt, can you remind us what the seasonality looked like in 2019, moving through the third quarter, kind of comparing July maybe towards August and September, just to have a good base there on seasonality?

Sure, sure. And it's not just 2019. I would say it was – Every one of the years that I've been here prior to COVID, the seasonality is very predictable. So August looks a lot like July. And then when you hit the back-to-school month of September, there's a pretty meaningful drop in average weekly sales. It's pretty similar to January. I'm going to say it's in the 15% to 20% range. So what you end up with is the quarter sales on an average weekly basis are pretty equivalent across each of the four quarters. Q3 is just slightly lower than Q2 because of that September movement.

All right, that's helpful. And on North Italia, I think you said North is in the quarter-to-date period running up 10%. Just to make sure we're all on the same page since we don't have sort of the historical context back to 19, can you provide where AWS are at North in the quarter-to-date period?

Yeah, we are running approximately 6.8 million customers an AUV, so I'm looking for that on my weekly sales level here. I'd have to do the math. But it's virtually the same as it was in the third quarter, which was a $6.9 million AUV, so it's about a $100,000 change. And that's a little bit of the seasonality we're referencing, too, because of the focus that, you know, historically some of those restaurants have been in Arizona. So... If you take 6.8 and divide by 52, you'll get that.

Yeah, it's about $130,000 a week. Yeah.

Okay, great. And then last one, I just wanted to ask about the cash flow on the balance sheet for a second. I think you were expecting to get a tax refund at some point under the CARES Act in 2021. Was that reflected in that cash from ops balance or cash from ops performance in Q2? I think you said 108, spot 8, if memory serves.

It has not been reflected yet. We've adjusted the timing of filing some of our tax returns to reflect some of the changes in the business and some of the decisions. And so we've pushed that out a little bit, obviously not needing it at this point in time, and are reflecting on the best way to approach that. And then also there's a little bit of a repayment of some of the cash benefits from the payroll tax deferrals that will come up also. So none of that is yet reflected in our current cash balances.

Okay. Okay, great. And just the posture on the balance sheet, Matt, $160 million of cash and the $475 million, I think, of total debt. Historically, the company has not had much in the way of any debt. What's the sort of longer-term view exiting COVID? Is there a targeted leverage ratio you're thinking about internally? Or just how are you prioritizing capital allocation beyond new unit growth and obviously investing in the core and technology, et cetera?

Thank you. Yeah, that's a great question, Ms. Madigan. And I would say, you know, our intention would obviously be to, with the great cash flow that we're generating, pay down the revolver as we go. I don't see any reason that we would, you know, obviously do anything with the new convert, which is, you know, unbelievably effective capital. So, you know, once we clear through the revolver, I'm sure that the board will be very interested in restarting some of the capital return programs, including the dividend and some form of share repurchase, because I would foresee that we will have excess capital. That would probably be in the early parts of next year, right? We're still in an amendment process. for the revolver, and that will go through this year, assuming, you know, we clear all the hurdles, which I think we already have through the second quarter, so that won't be a problem. So I would imagine we would be there, you know, early part of next year towards that balanced allocation again.

All right. Thank you. I'll pass it along.

And your next question comes from the line of Drew North from Baird. Your line is open.

Great. Thanks for taking the question. I wanted to follow up on the unit development pipeline. You've discussed the target of 7% unit growth in 2022, and now you're about 18 months out from that period. So I wanted to get a sense of how the development pipeline is shaping up. I guess, is there any color you could provide in terms of the pipeline for Cheesecake or the other brands and the visibility to hitting that 7% unit growth target for next year? And then just as a follow-up, as you rebuilt this pipeline, has there been any change in the thinking or the process around the company's real estate strategy going forward? Thanks.

Thanks, Drew. This is David. I think we feel good about that 7% unit development growth. The pipeline looks strong across Cheesecake Factory North as well as some of the other FRC brands. The good news is our real estate strategy continues to be just looking for great A sites, and we see some good availability out there, whether that is in a traditional mall location or for some of the other brands in the lifestyle center or even smaller centers when it comes to a flower child as an example. So we really are pretty bullish on that 7% number, and 2022 appears to be looking good thus far.

And this is Matt. Just from where we've said that split may come out, I think we're pretty much tracking to how we've described it. Cheesecake Factory is sort of in the 2% to 3% total growth from a unit build and then pretty equally distributed between FRC and North. And I think that we're probably farther ahead in the pipeline than you know we were pre-covered in terms of being able to meet it because we have a diversification and obviously there's more opportunities that are coming up thank you very helpful and your next question comes from the line of michael rothstein from goldman sachs your line is open

Hi, thanks for taking the question. Just had a quick one on June and labor. Did you guys have, what did the cadence look like in terms of adding labor back to the stores when, you know, something like California reopened in June? And can you talk a little bit about the average weekly sales progression coming from your update at the end of May going through June and then obviously, you know, running pretty well quarter to date? Thanks.

Sure, Michael. As Matt, for the cadence perspective, I mean, I think it played out almost exactly like we would have predicted in describing the reopening scenario associated particularly california as you mentioned so our business update when we did the refinancing you know we were at a seven percent versus 2019 comp and we ended the quarter at a 7.8 and we're running at a 10. and so you know we had talked about the delta between 50 to 75 and no restrictions in california being about a 10%, they're 20 to 25% of our business. And so if you do the math, it actually played out exactly with the consistency that we would have anticipated. I think from a labor perspective, you know, our approach is to try to add a commensurate with the reopening. As David Gordon mentioned, our staffing levels are now above where they were pre-COVID. Certainly with the sales strength, we want to continue to be able to support that. But we have slightly fewer needs now than we did at the time of our last call. So we've done a good job. It's just that we're so dang popular, we have to keep up.

Great, thanks. And one other quick one. On those 100% capacity states like the Floridas, Missourias, Georgias, where you're still seeing that mid-to-high 20% off-premise mix, what do the on-premise AWS look like there? Is that more in line with history, or are those also running a little bit high?

So if you break down just you using the average performance, We're running $12 million on average, and our geographies tend to work out in total pretty close to the averages if you group them big enough. You know, a Florida versus a California, it's not that different. So if we're doing that, we're doing $3.2 million. on an off premise basis, I think you can back into kind of where the on premise would be. And it's, you know, like we said, it's running pretty much in line with the pre COVID on premise. So just maybe a little bit below that.

Great, thanks.

And your next question comes from the line of James Rutherford from Stephen, your line is open.

Thank you. I wanted to start with Flower Child, if I could. It looks like sales have rebounded very nicely with that business of over about 108% year-over-year. I'm just curious your latest thoughts about the long-term potential of that brand and your priorities at scaling that nationally.

I think we still feel really great about Flower Child. We're sitting at 27 restaurants today in 10 states. It continues to perform well in just about every state, every different type of geography that it's going into. So we feel good about it. It did perform well and has performed well through COVID. They do a great job with off-premise execution. They do a great job with speed and throughput, and it's just a very high quality of food. We're just as bullish, maybe more than we were pre-COVID at this point. And we'll continue to have our team members involved in Flower Child, but Sam and his team continue to grow it here in the short term. And we'll evaluate as we move into next year when we might completely take over all the operational aspects.

Okay. Thanks for that. And then I wanted to ask another one on margins. I know we've talked about it several times here, but just from a different angle. If I look at your restaurants in total, you're running here in the quarter at sales levels higher than 2019, yet total restaurant margins are down about 50 basis points from that 2019 level in 2Q. I think most of that variance is in other operating costs. I'm just curious if you can talk about maybe the puts and takes there on other operating and how we should think about kind of to go forward on that. Thank you.

Sure. I think there's also, of course, there's some movements, right, because the 2019 was pre-acquisition. So there's just some reorganization a little bit maybe in there. I think the other operating expense piece obviously includes also So there's been a significant move up in that side of things. And so when we look at that on a go-forward basis, like we said, for the back half of the year, we would expect it to be, you know, you know, slightly higher as a percentage of sales just for the third and fourth quarter as we invest in a rewards program. And by that we mean, you know, 10 to 20 basis points sort of in that line. But I think in general, if you look across, you know, the other line items, obviously cost of sales and labor both leveraging on those sales piece. And I think it's just the dynamic of the acquisition and the investment in the delivery channel.

Thanks very much.

Your next question comes from the line of Lauren Silberman from Credit Suisse. Your line is open.

Thank you. On the average weekly sales at 230,000, with on-premise nearly fully recovered, off-premise two times pre-COVID, what's your confidence in being able to maintain the 230,000 average weekly sales volumes going forward? Is there any reason we should expect to see these volumes come down as we move through the rest of the year? I guess with the exception of seasonality that you pointed out, just in the context of perhaps on-premise transactions aren't fully recovered and then off-premise has come down a bit. just on seasonality. So is there opportunity even above the 230?

Hey, Lauren, it's Matt. I think it's, you know, it's still the wildcard question, right? It's a good one. I mean, I think that, you know, we feel very good about the stability of the comp trend. And so, you know, that will play out, as you know, you know, across September and October might be a little bit different on the average weekly sales. And then typically, you know, in December, you can have really, really high average weekly sales. But I think we feel like the business as it's progressed really from the middle of march until now has taken on the characteristics that are hallmarks of the cheesecake factory which are really predictability and dependability and as i noted earlier you know we still have plenty of capacity so i still think that there are opportunities in both of those channels to continue to drive sales going forward so you know we'll see where it goes but we're happy with the trajectory as it stands today

Great, thanks. And then just a bigger picture question on Cheesecake Factory brand. I believe historically you've talked about a 300-unit potential. Over the last 18 months or so, has that changed anything in how you're thinking about the unit potential for the brand?

Hi, it's David Gordon. It has not changed. I think that our flexibility and ability to have different sizes of Cheesecake Factories gives us probably even a little more confidence that we can hit that 300 number. We have the new cheesecake factory built here in Oxnard that's close to 6,000 square feet that's performing very, very well with some great margins, all the way up to the large-sized cheesecake. So we think that 300 target is still very realistic for us over time.

Great. Thank you, guys. And again, if you would like to ask any questions, just press star 1 on your telephone keypad. Your next question comes from the line of John Power from Wells Fargo. Your line is open.

Yeah, hey, thanks again for taking my question. Just wanted to circle back on the margin thing again. I hate to beat a dead horse, but I am curious. I think previously we talked about the idea of potentially seeing 30% or so incremental margins on volumes roughly above 2019 levels. This quarter wasn't necessarily the case. It didn't tie out, I think, to that level, nor, I mean, obviously with the investment in the third and fourth quarter around the rewards program doesn't sound like that's going to be the case either. So I'm curious if that can hold again into 2022 and beyond, or, you know, are other inputs like labor inflation going to impede that incremental flow through level and

And if we harken back, a lot of movement between them. I think when we look at sort of the run rate of the company at a 5% EBIT level in the back half of 2019, certainly everything we're doing right now is going to be exceeding that at that 30% for the three quarters, second, third, and fourth quarter combined for this year. So I still think in totality that it does make sense. I think it's always tough when you look at one quarter and some of the pieces within that versus looking at it over maybe a little bit more of an extended period of time.

OK. That's it for me. I'll circle up with you later. Thank you.

And again, if you would like to ask any questions, just press star 1 on your telephone keypad. Your next question comes from Rahul Crow from J.P. Morgan. Your line is open.

Hey, guys. Thanks for taking my question. This is Rahul from John Ivanko. Two-part question on the marketing strategy and the G&A here. Can you expand a bit more on the next generation marketing strategy you just touched upon in the initial comments? And specifically, if you have a strategy around off-premise marketing, given this is a layer you would want to be sticky over time, And the second part, what would this mean for the G&A expectations long term? I know you guys talked about the 6.5% for this year and 6.4% for next year. Is there any long-term target and how this could change in the context of this new spending?

Sure. This is David. I'll turn it over to Matt on the G&A front. I think on the longer-term rewards, while we won't go into any details again today, there's no reason why we won't be able to use rewards in a targeted way. And if we make a decision that we want to target off-premise opportunities, as we did throughout COVID, we'll have the flexibility to do that. As we learn more about those guests, which will be a key component of the overall strategy, is to understand a little bit more about our guests generally, whether that's their ordering preferences or their spend habits, and how we can continue to grow that spend over time. And that could be done through our premise channel, and also hopefully will be done by driving traffic back into the restaurants.

And it doesn't impact our G&A expectations at all. So no change with those.

Thanks, guys. Thanks for the comment.

And that's our last questions. Speakers, do you have any closing remarks?

No, thank you for joining the call. We look forward to connecting with you next quarter.

And this concludes today's conference call. Thank you for participating. You may now