Cheesecake Factory Inc (CAKE) 2002 Q1 法說會逐字稿

Good Afternoon, my name is Molly and I will be your conference Facilitator today. At this time, I would like to welcome everyone to the Cheesecake Factory First Quarter Investors Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer period.

If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad and questions will be taken in the order that they are received. If you would like to withdraw your question, press the pound key. Thank you Mr. Deitchle, you may begin your conference.

I, thank you operator and good afternoon everybody, I am Jerry Deitchle of the Cheesecake Factory and welcome to our quarterly investor conference call, which is also being broadcast live over the Internet. Also, with us today is David Overton, our Chairman and CEO, who is actually in Minneapolis to decide of our next restaurant opening and David, you are with us, right?

Absolutely.

And how's the restaurant looking today.

I think its another success, I hope.

Great. And also with us on the call today is Mike Dixon, our VP, Finance and Controller; and Jane Vallaire, our Senior Manager of Investor Relations; and I would like to ask Jane to go over our standard cautionary statement regarding risk factors and forward looking statements. Jane, go ahead.

Thanks Jerry. The company's comments during this conference call held today April 18th 2002 will include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors and listeners are cautioned that forward looking statements are not guarantees of future performance and that an undue reliance should not be placed on such statements.

Forward looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of other company to be materially different from any future results, performance or achievements expressed or implied by forward looking statements.

All forward looking statements made today on this conference call, speak only as of today's date. Investors and listeners are referred to the full discussion of risk and uncertainties associated with forward looking statements contained in our periodic filings with the Securities and Exchange Commission.

This conference call is a property of The Cheesecake Factory Incorporated. Any retransmission, rebroadcast or redistribution of this call without the express written consent of the Cheesecake Factory Incorporated is prohibited. Jerry?

Thanks Jane. Our agenda for the call today will be as follows, first we'll cover the earnings release that we issued today for the first quarter of fiscal 2002 and try to provide a detailed business financial overview for everybody. Then after that we will be happy to answer a few questions. We would like to finish of the call in about 45 minutes.

We got a lot of exciting things to talk about the call, so let's get started. Both David and I were extremely pleased with the company's record financial results for the first quarter. The Cheesecake Factory once again, achieved record levels of sales and earnings. Thanks to our strong concepts and grants and thanks especially to the hard work and dedication of our 12000, gosh, almost 13000 staff members across the country.

Our current operating environment for many consumer businesses continues to be challenging as we all know, and we continue to believe that The Cheesecake Factory continues to have a very good opportunity to continue leveraging its strength, as a high quality destination restaurant concept that offers superior value to consumers.

We just passed our 24th anniversary on the restaurant side of our business and our 30th anniversary on the bakery side of our business. So for all of those years, The Cheesecake Factory has consistently been a consumer favorite. The consumers don't easily give up their favorites, even so reckon on times.

And now we'll just take a minute, quickly summarize our performance highlights for the first quarter of fiscal 2002 that ended on Tuesday, April 2nd. All financial results that we are going to talk about today and were presented in our press release, reflect the three for two stock split, that was effective last year on June 18th, 2001. So, to quickly summarize for the first quarter just ended, our total revenues were up 25 percent, for just over a $150 million.

Our operating income before pre-opening costs increased a strong 40 percent to 17.7 million. Our operating margin before pre-opening costs increased to 130 basis points to 11.8 percent. Our net income increased 26 percent to $10.6 million and our deluded net income per share increased 24 percent to 21 cent.

Now we are going to give you a little color as we always do on our restaurant sales after the first quarter. Our total restaurant sales increased about 22 percent for the quarter. Now that 22 percent increase consisted of a 19 percent increase in restaurant operating weeks, and an approximate three percent increase in average sales per operating week.

Our comparable restaurant sales were up 2.1 percent for the first quarter and that represents our 39th consecutive quarter of positive comparisons on that measure and I don't know of many publicly held restaurant businesses that can claim that. Most of our increase in comparable sales for the quarter can be attributed to enterprising

.

We understand that the comp sales statistic is important to restaurant industry investors but we always like to remind everybody that our new restaurant is usually open very busy and stay very busy. And in many locations it is very difficult to just process more business because we are so full, close to full capacity from the very beginning.

We do have industry leading sales productivity metrics that we are very proud of, and again those continued to be a function and that only our unique quality restaurant concepts in our positioning, but it also is a direct function of the consistent day-to-day operational execution of our concept by the restaurant management teams led by our senior VP, Peter D'Amelio, and his outstanding field supervision team.

Here are some updates on sales trends for some of our individual restaurants for the first quarter. We enjoyed some very strong sales increases during the quarter for many of our restaurants including, as I scan the list here, are locations in Baltimore, Cambridge, Mass, Houston, Westbury, Long Island, Aventura Mall in the South Florida Market

and several restaurants here in California including San Diego, Thousand oaks, Mission Viejo and our location on the top floor of Macy's in Union Square in San Francisco just continues to pump the sales. Its just a mind boggling restaurant and that's just to name a few of our great restaurants.

Speaking to the Las Vegas market, where we have two of our highest volume locations, our Cheesecake Factory location in the Forum shops at Caesars, also had a strong sales increase for the first quarter. Well, our sales for Grand Lux Cafe in the Venetian Property were about almost even with the same quarter last year and again I think most of our investors know that,

sales for Grand Lux Cafe at the Venetian, are a little more directly dependent on convention activity at the adjacent Sand Convention Center. So, to get back to almost even there, I think is a wonderful accomplishment for Grand Lux.

With respect to our restaurants in the great state of Florida where reduced tourism and travel certainly has had an impact on business conditions in that state, we are happy to say that sales for our six, South Florida locations in the Palm Bays were up one percent for the quarter which again was very pleasing to see in spite of a difficult operating environment in that state. We are also very happy to report that sales for our newer Cheesecake Factory restaurants that aren't accomplished yet, continue to be very strong.

Their average weekly sales are still running about 10 percent higher than the average weekly sales for the Cheesecake factory restaurants that are accomplished. I think that's a very important statistic in our view as there continues to be upsize - upside sales productivity as evidenced by our new restaurants. We are also very pleased that sales are continuing to build very steadily at our newest Grand Lux Cafe here in Los Angeles.

We mentioned at the

conference a week or so ago that our sales are currently annualizing between $8 and $9 million at this new location and you know, if you really think about it, its really an incredible accomplishment for any new restaurant concept to open up and just open the doors without any external advertising stimulus

and automatically reach annualized sales levels of the $8 to $9 million levels that continue to build. So we continue to be very, very excited about our future prospects for Grand Lux Cafe and we are really looking forward to our next opening in downtown Chicago here in a months or so.

Shifting to our restaurant expansion plan, we successfully opened three restaurants during the first quarter, one in Bellevue, Washington on January the 29th, one in my home town of San Antonio on February the 26th, which is done much better than I thought it would do, and it continues to do very strong.

And Boston, Massachusetts at the Prudential Center in the Back Bay on this past April the second, which is opened up extremely strong for us. All three new restaurants again opened to strong initial sales volume, and we are very pleased with their continuing strong sales trends.

For the full year of 2002, it is still our plan to open as many as 12 new restaurants and increase our total productive square feet by about 24 to 25 percent. And as of today, we are confident that we have a good opportunity to achieve this full year growth goal. As we noted in our press release today, we've signed leases for ten more potential locations including Minneapolis, which will open next week at South Dale Mall in Edina which we are very excited about.

Our third Grand Lux Cafe on Michigan Avenue in downtown Chicago which is the square foot equivalent of two restaurants by the way, Fort Lauderdale on Las Olas Blvd, we have one in Las Vegas out in the suburbs, Orlando at New Millenia Center, San Jose at Valley Fair Mall, St. Louis at the Galleria, Charlotte North Carolina, South Park Mall, Edison New Jersey at Mineral Park Mall and Austin, Texas in the Arboretum.

You know, this is the first time that we have been able to say this early in any fiscal year, that I have been with the company that all leases have been signed for potential openings for the year. We believe that all of these potential locations have outstanding potential for restaurant concepts and additionally we are working on several others intent for that we believe equally as exciting potential locations for 2003.

While we are on the subject of new restaurant development we always like to remind our investors that our restaurant development model is different than the traditional cookie cutter chain restaurant development model. And that business

to more recently acquired the designing, construction processes are much more simplified by having standardized restaurant layouts and

as a result the companies have more overall control over the development process. In our business model, it works a little bit differently, because our locations are upscale, they are highly customized which helps to create the non-chain image we enjoy with consumers and which really gives us a tremendous competitive advantage.

We do

of our restaurant locations and many of which were in newly constructed retail development. So, as a result we rely on our landlords deliver all these spaces to us in a timely manner according to their original commitments to us. And once we get the spaces from the landlords and we get our building permit, our construction and pre-opening processes are typically consistent and we really got them down , usually taking about five to six months to complete on an average.

So, those are some of the differences between the classic restaurant development model and ours. And that causes that the fact that our opening schedule by quarter of any fiscal year is a little bit tough to predict. And having said that, as of today, we can give you a little bit of insight as to how we expect openings for the remainder of the year, again this is still subject to some change.

We do currently expect to open as many as two restaurants in the second quarter, as many as three restaurants in the third quarter, and as many as five restaurants in the fourth quarter, of which three of those five could open very early in the fourth quarter, in the month of October. So that adds up to as many as 12 new restaurants for the full year.

While our opening schedule again by definition cannot always be even or as predictable by quarters cookie cutter concepts are better able to do. Our record for highly successful new locations is one of the best in the industry, we're always pick the right location, we always perform outstandingly.

Moving to our bakery operations, our bakery sales to wholesalers, retailers and food service distributors, which we call outside bakery sales or third party bakery sales, increased a strong 54 percent to a record 12.6 million for the first quarter. A large portion of this increase represents initial pipeline shipments to an expanded number of locations for one of our existing warehouse club account and we also enjoyed stronger sales volumes for a few of our other existing food service accounts.

As we mentioned in our last conference call, we're still internally targeting a full year increase in outside bakery sales in the 15 percent range or so, but based on expected business conditions and opportunities that we're working on, its fair to say we certainly have an opportunity to do a little bit better than that. While we remain optimistic with respect to increased bakery sales and contribution margin, we always remind our investors that bakery sales are less predictable than Restaurant sales.

Our ability to precisely predict the timing of bakery product shipments and contribution margins is really difficult due to the nature of that business and the purchasing

of our larger accounts which are going to fluctuate quarter-to-quarter.

In our view the bakery's most impactable role to our business continues to be at services dependable, high quality producer of desserts for sale in our own restaurants which collectively should sell about 90-95 million of desserts made in our production plants this coming year. As we've mentioned in the past our bakery production operations are currently running very efficiently.

The production facility's capacity utilization last year was about 65 percent and even in the view of some of the new business opportunities we have but we're still expecting our capacity run rate to be in the 75 to may be 80 percent range by the end of this year again, give the volume of mix and production that we're currently expecting for the year.

As we did last year, we're gonna add a little more capacity to our existing bakery production facility this year. We did mention in our last conference call that we're currently evaluating various alternatives to add additional production capacity, which will take the form of a second production facility which will probably be located somewhere closer to our East Coast Restaurants and our East Coast Bakery customers. So, we'll keep your advised as we move closer to making a decision on that later this year.

So, that covers our top line performance for the first quarter and our new restaurant goal-objectives for the full year. So, now we're gonna take a few minutes and review the individual components of our operating margins for the first quarter, and if you've got the press release handy, move over to the financial page and start at the bottom with the supplemental data, that's where I am going to start.

If you get to that point on the press release, we'll start with the cost of Restaurant food, beverages and supply, and that cost decreased to 24.3 percent of restaurant sales for the first quarter just ended and that compared to 25.6 for the same quarter last year and 25.1 for the sequential December quarter.

We are currently experiencing lower costs for almost every commodity category used in our Restaurants, so, I think it's due principally to two factors, first of all favorable supply-demand conditions in general for most of our major food commodities, and secondly, we are experiencing increasing economies to scale and better purchasing power.

Because our menu is so large, and we use many food commodities in our operations, about one-fourth of our total restaurant cost of sales as most of our investors know, consists of fresh commodities, such as produce, poultry and dairy, they really can't easily be contracted over long periods of time although we are currently working on some potential breakthroughs for a few of those categories that we hope to finish some work on later this year.

In the absence of weather or other market conditions outside of our control, we currently expect our food cost to remain very favorable during the remainder of this year. We've taken steps where ever reasonably possible to extend out our existing contracts for those items that we can contract for,

oils,

, sugar coffee, sea food, paper, bread and a lot of our grocery items, dry items, and we are contracted out for the whole year and in some cases even longer at slightly lower costs that we experienced last year, again reflecting favorable supply-demand conditions and our increased purchasing power.

Moving to bakery process, a percentage of outside bakery sales for the first quarter, they ran 48.3 percent which was just slightly higher than the 48.1 percent that we had for the same quarter last year and 47.1 percent reported for the sequential December quarter. Now, this cost is related only to our outside bakery sales and only consist of ingredient and packaging and some variable manufacturing costs.

Its a very small component of our consolidated operating margins so, as we always mentioned, it takes a disproportionate portion movement in this percentage to result in any material impact on our consolidated financial results. The net purchase cost for most of our key bakery commodities is currently expected to remain relatively stable this year, so fluctuations in this little percentage here really going to be created principally as a result of the mixed products shipped for any good quarter.

We produce about 250 different products in our plant and obviously some have higher contribution margins than others again depending on the product and the distribution channel of customers. So, during the first quarter we did finalize agreements with our Cream Cheese suppliers to cover all of our supply to Cream Cheese needs for the next 12 months the cost propound that is slightly higher than the cost propound that we experienced last year.

Last year our contracted full year pricing has improved to be slightly better deal for us than for our suppliers. Our agreed upon cream cheese cost for this year is well within the range anticipated in our internal product pricing and margin models, so we're pleased to have that important commodity marked up for the year what we believe to be as a very good price.

Our current expectation for bakery cost and sales as a percentage of total revenues for the full year of fiscal 2002 remains relatively consistent with the range we experienced last year.

Moving to labor costs our total labor costs as per our restaurant and bakery operations were 30.8 percent of total revenues for the first quarter. And that was slightly lower than the 30.9 percent reported for the same quarter last year.

But it was higher than the 29.9 percent, the sequential number for the December quarter again. Our December quarter is a very seasonally heavy quarter from the revenue perspective versus the first quarter, in both the restaurant and bakery operations. The slight decrease in the labor costs percentage versus the same quarter last year was due principally to increase revenue leverage although we are still benefiting from slightly over-staff turnover rate in our restaurants,

slightly over overtime pay, slightly higher labor productivity, and less pressure on our wage rate except here in California, of course where the minimum wage went up to another 50 cent an hour starting in January and where we got 25 percent of our restaurant.

Also during the first quarter we did staff up a third shift for our bakery production facility which generated some one time labor inefficiencies that we believe amounted to about a tenth of a percent of total revenues and hopefully that's behind us.

Our current expectation for total labor costs is a percentage of revenues for the full year of fiscal 2002 remains relatively consistent with the range of experience last year. And again it has a potential I think to end up slightly better, depending on further reductions in our staff turnover rates and overtime and increased sales leverage.

Moving to other operating expenses. Our other operating expenses were 22.6 percent of total revenues for the first quarter. And that was down slightly compared to the 22.9 percent reported for the same quarter last year but it was up slightly compared to the 22.4 percent reported for the sequential December quarter. Compared to the same quarter last year, this year we benefited from lower costs for energy, our utilities, our electric and gas bills.

This year for the first quarter they represented about 1.5 percent of sales, for the same quarter last year they were 2 percent of sales. Now the margin benefit from these lower energy costs is also impart by slightly higher costs for insurance arrangements and slightly higher production and distribution expenses related to the ramp up for our outside bakery sales, the filling of that pipeline of the big warehouse club customer.

So we had a net year over year reduction in this cost as a percentage of revenues of about 30 basis point. Our current expectation for this operating expense category as a percentage of revenues for the full year of fiscal 2002 is for - perhaps there may be a slight increase in these costs compared to what we experienced last year. Again, due principally to higher expected costs for insurance arrangements which unfortunately almost every business in America is currently experiencing.

Moving to G&A expenses. Our G&A expenses were 5.0, 5 flat percent of total revenues for the first quarter comparably to the 5.3 percent the same quarter last year and 5.2 percent for the sequential December quarter. In terms of absolute dollars in the G&A category, our G&A expenses do reflect the fact, as you would expect, we were hiring and training

restaurant managers to support our planned ramp up in the restaurant openings.

Our G&A expense consists of two major components. The first component would be the cost for our corporate bakery and field supervision support team and infrastructure which should grow at a lesser rate than revenues. And then the other component is the cost for our restaurant management recruiting and training program which logically should grow at a rate closer to our unit growth rate.

So having said all of that, our current expectation for total G&A expenses as a percentage of revenues for the full year, of fiscal 2002 still remains in about the 5 percentage range, but again, has some potential to be slightly lower depending on the degree of sales leverage that we ultimately achieve this year. And depreciation expense was 3.4 percent of total revenues for the first quarter that was up compared to 3.2 percent for the same quarter last year and 3.3 percent in the sequential quarter.

Our current expectation for total depreciation expenses as a percentage of revenues for the full year of fiscal 2002 remains just slightly higher than what we experienced during the fiscal 2001 and that's due principally to the amortization scheduled for our restaurant technology investment that we made last year and other infrastructure related capital expenditures.

Moving to pre-opening costs. Our actual pre-opening costs incurred during the first quarter was about 2.7 million compared to 1.4 million for the same quarter last year. During the quarter just ended this year, we opened three restaurants and incurred pre-opening costs for other openings in progress, compared to just two openings in the same quarter last year.

I think most of our investors know that we're required by generally accepted accounting principles to expense restaurant pre-opening costs in the period that they occurred. So as a result of that, the timing of restaurant openings and their associated pre-opening costs will always have an impact on our quarterly earnings comparisons.

And the pre-opening costs for our upscale, highly customized and operationally complex restaurant is obviously much higher than most other restaurant concepts that's in terms of absolute dollars, but when you compare scope of operations, I think its in line with other concepts.

As we mentioned earlier in this call, we currently plan to open as many as 12 new restaurants during 2002. So investors should factor into their earnings models, enough pre-opening costs to cover that many potential openings for the full year. Since most of our restaurant pre-opening costs are incurred during the two months prior to opening, in the month of opening, investors should consider modeling enough pre-opening cost for the equivalent of, say,

two or three effective openings for the second quarter, four or so effective openings for the third quarter, remember, we could have three restaurant openings in the month of October and if that occurs, then we'll have heavier pre-opening expenses in the third quarter, we getting ready for that. And then for the fourth quarter, 3 or so pre-openings cost purposes probably should be considered.

Again, now we want to remind everybody that our planned opening schedule by quarter, for the remainder of this year is again difficult to precisely predict which is nothing new to investors that understand and appreciate our business model. But again as we mentioned as if today we are confident that we have a good opportunity to achieve our full year growth goal.

Moving to our effective tax rate, last year it was 36 percent, for fiscal 2002 we're initially using a slightly lower effective tax rate at 35.7 percent, I think we are going to hold on to that rate for the time being. Again we'll update it as necessary as we move throughout the year. So I think that covers our review of the major line item components of our operating margins for the fourth quarter and also for provided some forward looking statements for these components for the remainder of this year,

and I think to sum it up our current food cost environment is very favorable and should certainly helped us to off set this unexpected slight increases for a couple of the other costs and expense categories in our business, thus giving us a good opportunity we think to achieve our goals to increase deluded net income per share for the full year by about 25 percent. Again, please refer to the full discussion of this concept, please associate it with forward looking statements that are included in

files.

And just quickly on our liquidity position. Our liquidity position and financial flexibility continue to remain very strong as of today. As of the end of the first quarter we had a about $99 million of cash and short term investments on hand, now that was offset by current liabilities of about $60 million. So our liquid net working capital position is only about $40 million. We believe very strongly that maintaining a net working capital position in this range makes a lot of sense in this volatile environment.

So that we can continue growing our business with flexibility and confidence knowing that we got the capital already in place to do so. And there certainly might be a small financial cost occurring as working capital but in our view, the benefit of reduced risk in terms of our financing ability to execute our growth plan far outweighs whatever small occurring cost there might be.

The fiscal 2001 last year, are cash outlay and accrued liability for capital expenditures was about $74 million and we are currently estimating our cash CapEx of this year to be in the range to $70 to $75 million.

For the first quarter just ended, our cash CapEx was approximately $22 million which was right on our internal plan. Based on our current expansion plans that are current expectations of the operating environment, we expect to be able to finance our CapEx requirements for the coming year through operating cash flow agreed upon landlord, construction contribution, cash and investments we have on hand. We have no funded debt.

Currently don't anticipate a need for any funded debt or any other external financing other than the landlord construction contribution that have been agreed to, for this year or even next year. We do keep a $25 million credit facility in place for backup liquidity purposes to support various letters of credit for our insurance and other arrangements, but again the annual costs maintaining this facility is not significant.

We also have a share repurchase authorization from our Board Of Directors to buy back up to 1,687,500 shares in the open market. During the first quarter we brought back about 98,000 shares. We have approximately 7,40,000 shares remaining in our current repurchase authorization.

So to rap up our review, we thank the Cheesecake Factory's financial performance for the first quarter of fiscal 2002 as very strong, certainly starts off fiscal 2002 with positive momentum force. Our restaurants continue to enjoy one of the most consistently strong sales trends in the industry and with room we believe for at least 200 restaurants domestically, we got a sustainable period of profit and growth ahead of us for some time to come.

Our restaurants remain incredibly popular with consumers. Again, thanks for this superior value that we offer guests in terms of high quality and creative foods, service on the

occasions. Our restaurant and bakery operations have never been stronger. Our staff moral is high. Our financial position and flexibility remains very solid and we are very well positioned to execute our growth plan for the coming year itself.

That concludes our business and financial review for the first quarter and at this time David and I will be happy to answer a few questions, and if we don't have time to get to your questions on this call, please feel free to call us at our offices after the call. OK, David are you ready?

Absolutely, thank you Jerry.

OK. Operator we will take some question.

At this time I would like to remind everyone, if you wish to ask a questions please press the number star, then the number one on our telephone keypad now. Your first question comes from Michael

.

Mike?

I have a couple of questions on the gross margins numbers

sold. If you had to break out the 130-140 basis point for improvement you saw, you mentioned two factors, lower commodity cost and economies of scale. How much does economies of scale account for and how much do you think we can project throughout the balance of the year?

You know, its a very good question, Mike, and I do not have a precise answer for you as to how much is economies to scale and how much if it is just favorable supply-demand conditions. You know, I just would hesitate to speculate on that except just to make the general comment that we are improving our ability and our purposing power to contract out with a lot of our major suppliers from our business services.

I think all we can say about our food cost environment for the remainder of the fiscal year is kind of what we said at conference call, and that is that again in the absence of any weather condition or other force outside of our control, our current expectation is for a favorable food cost environment for the remainder of the year.

As I look at all of our categories from grocery, pottery, meat, cheese, food, fish,

, cheese, preserve costs, bar costs, that kind of

even produce costs. It looks to me versus the same quarter last year, almost every category as a favorable percentage in terms of revenues versus the same quarter last year.

The only one that was flat was on the produce line and I think some of you may have heard that there was a short term issue with some

which is in the process of working out. But again it wasn't that material for us and it could very well be as time goes on that produce cost might even turn a little bit favorable for us as you know we have a number of initiatives underway to work on, some longer term contracting for some of our produce needs was I think I mentioned in our conference call comments.

So I think that's probably the best that we can ensure at this time, because, it's where our crystal ball is at this moment.

Jerry, to me - I mean just looking back, it seems to have been a secular trend since 1994, when restaurant costs sells were above 30 percent and last year that came down to 25.4 and looks like this year is going to be an improvement over last.

So, I mean certainly there is - economy is here and I guess I am trying to get a sense of how low can they go?

Well it's good question. I wish I - I do not have an answer for you. I think as time goes on we will get a better sense for how much of our total food commodities needs so that we can begin to workup on a longer term basis and really flex purchasing power.

Again, 40 percent - roughly 1/4th of our total food costs are still a representative of produce very inappropriate costs which up until now have been very, very difficulty to contract for and for us to use our purchasing power over longer periods of time due to the fresh nature of those commodities versus some areas that we are beginning to focus on. So I think there is further upside but I just can go and apply for - quantify it for right now.

OK. Well on the flip side, bakery costs is a percentage of bakery sales used to be in the low 40s or you know couple of years, it was even in the high 30s, you know what has caused it to go up 800 basis points, and you know is there again opportunities for scale to impact that?

I think there are some opportunities for scale impact there, although I can't really quantify things specifically for you. Probably as we grow, we are going to have better purchasing power but as we mentioned in the conference call, just a couple of things might be to keep in mind.

First of all, it takes a huge move in this percentage to make any material move on our consolidated results of operations. Secondly, as I think we have been mentioning over the past 6 to 9 months, this percentage is really driven more by the mix product shipped as opposed to real changes in the underlying commodity cost.

So in those quarters where we have got a large component of say, warehouse club, shipments going up and you would tend to see this a little bit higher, also depending on the customer and the distribution channel, our margins are structured from where there may be a slightly higher cost of sales, yet there is a trade-off and lower marketing and distribution costs.

So depending on the mix of new customers that we are bringing on, you know and mix of product shipped for any given quarter you can see a fluctuation in that - in that particular lien item. Again I think we indicated that we expected a full year percentage for that small element of our margins to be roughly the same as it was last year. So I think the that's the kind of

.

One more quick question, if I may?

Sure.

You mentioned that your third Grand Lux Cafe is going to be opening at Michigan Avenue. If I remember correctly, one of your top grossing restaurants is also on Michigan Avenue and wanted to know how close the second one is going to be and if you -

if you are factored in the risk of some sort of cannibalization clearly there are different names, and I don't know if there is anything that associates to restaurants, but you could please talk about that I would appreciate it.

I can speak to that Mike. We are opening Grand Lux near Cheesecake Factories as a part of you know our study to make sure that we don't have any cannibalization and if we do what it would be. You know we are in Las Vegas. We where exactly across the street from that - and in the Beverly Center where probably just two miles from our Beverly Hills location. And we had not experienced any cannibalization because of Grand Lux.

And we are not anticipating any in Chicago either but that is why we are actually opening them near the Cheesecake Factories to make sure that they can coexist together, take advantage of these incredible markets, like to say downtown Chicago where there is room for hundreds and hundreds of restaurants and that we would be able to open at least two. They are different names, they are different menus and I believe yes go to both Cheesecake and Grand Lux.

So we will know when we open it, but because of our experience so far we haven't found any cannibalization.

Great well thank you. I look forward to trying it.

OK. We liked it. Thanks Mike. OK next question.

Your next question comes from Allan

.

Oh, good afternoon. Good quarter David and Jerry.

Thank you Allan.

And David I am going to see you at dinner tonight, apparently.

I'll be there.

OK. I have three questions actually. One is - Jerry could you just go on the labor line difficulty you have gone over those. Could you just run through total management turnover, GM turnover, and hourly turnover.

Sure. Our General Manager turnover is almost zero as a result of the strength of our managing equity program and the other steps that we have taken to what we work on, quality of life and other factors. So our General Manager turnover is really almost nil and I think that is one of the reasons why we have been so successful in preparation of operation and execution of our restaurants.

The turnover for the entire management group for our restaurants, as you know we average roughly 11 or 12 managers per restaurant, so you have got 50 some odd restaurants so you have got a group of well - between 6 and 700 managers out there. When you work at that group, our turnover rates - the last time I saw the statistics was for just a month or so ago, I think we're around 15 to 16 ...

Yeah, I think we're about 14 percent for the first quarter.

14? OK, so and that's really a couple of ticks down from where it was running roughly the same period a year ago. And then on the hourly turnover, where we historically had run somewhere probably between 75-80 percent, I think we're down probably in the mid 60s. So, we've seen a little bit less hourly turnover, which again translates favorably into less training costs at the restaurant

which impacts the labor line.

And they are still well below the industry ...

Oh, absolutely, about half. Yeah, at least a half and even more so and even at the General Manager level, you know, with almost zero turnover. The only turnover we've really had is to the mostly - if we've had some it's kind of been more our idea than their idea, and they haven't been that much of that either.

OK. Right. Second question of my three, that I have is, you just, you've given the statistics in the back, I think it's an interesting one, sales per square foot and average unit volume across the system.

Right. Yes, for fiscal 2001 our sales per square foot to get to even $1000 mark which is more than twice the average for the restaurant industry in general or the casual dining segment, the quick service segment.

However, you slice it or dice it, that $1000 bucks a square foot is incredible, and then average sales proceed share a little over 34000. Average sales per week, gosh I am going from memory, I think we're a little over a 203,000. And an average sales per full service restaurant open for the entire year were 11,018,000.

And - so then, when you say that your new stores are opening

.

They are opening in the 11 millions. Actually some are traveling even at one first year open over 13.

Right, and there is no material difference in the average size of those new restaurants either. They're right on the average for the existing base, so they're more productive per square foot.

You know, as we quote, as we've said they used to be five years till they hit the, you know, sort of their menu increase to, you know, to move them forward and now, really they are hitting those kinds of numbers after two to three years. I just - we believe it's just our reputation that's preceding us.

OK. And then lastly just on the CapEx, I mean, I'm just using a sort of an average cost of just call it 5 million cash investment per unit?

OK. Well, that would be an average gross cost before

.

Before TI?

Right.

OK, and that average right now including key

would be about, what is it 4500-4600?

Probably in that range. Now, that would also include pre-opening costs. Our targeted

economics from an investment perspective, we tried to target on a gross costs per square foot in investments somewhere between 425, 475 a foot. We tried to target a landlord contribution or TI money and again we've made these disclosures before somewhere - anywhere from third to 40 percent of that cost.

Our pre-opening costs usually run on an average for a 10,000 square foot Cheesecake Factory restaurant in established market. Our pre-opening costs can run somewhere in 25,000 bucks or so - 600 to 700,000. Again that's on an average for a 10,000 square foot Cheesecake Factory.

So, I think if you pencil out the numbers on that, the average net cash investment including pre-opening costs and kind of an average say 10000 square foot Cheesecake Factory Restaurant, is probably going to be somewhere between 3.6-3.8 million I would guess.

OK. So, then well, diffusing the average sort of cash after there has been an improvement by 13 units was just roughly assumed the Grand Lux is 2x the normal unit, that's about 60 million in CapEx for new stores. Is that about right?

That's right. And that's exactly right. Plus of the as many as 12 that we would like to get open this year, there are two of the 12 that do not have any TI money available but their rent structures are obviously much more favorable.

Right.

So, plus there's, you know, the money that we have to put out for a couple of the restaurants will be in construction for next year.

OK. So, that I guess we're not going to set these like 10-15 million in the CapEx budget that would also include potentially a bakery

.

We have a - we have about a million or so, that's been reserved for capacity additions to our current bakery facility this year. We also have a new leased training facility and test kitchen and some office space that's being constructed next door to our current bakery manufacturing plant,

that we're going to have to have a build out for, and I think we've got 3 or 4 million reserved for that, and then the rest would be, what we consider to be maintenance CapEx and some other miscellaneous growth projects that we have on

.

OK, all right, great, thank you.

OK.

I think we have time really just for about one more question.

OK.

Your next question comes from Ryan Elliot.

Hello, Ryan.

Hey thank you. A couple of them to ask, but just to clarify the sales per square foot, the question just came up. The new units are about the same, so they're doing 10 percent growths higher than old stores or same stores. You're getting 10 percent higher sales per square foot in your stores. Is that correct interpretation?

I think that's correct.

OK. You mentioned insurance, can you put a little more color on that, what the magnitude of your insurance increases have been, and maybe what the prior year base was in basis points or in dollars or something?

You know, I don't have all of that data immediately available, if you'd like to call me back, I'll work on that and get it to you. Its not a big part of our margins, but I can tell you that the insurance increases that we're experiencing are really not that much different from what you've been reading in the press that all businesses are experiencing.

Our health insurance program is going to be up 25 percent this year, but again its not that big of a component of our margins, but its up 25 percent. Our property and casualty insurance is probably up similarly. Worker's Comp and general liability costs, again those are self-insured and we have a lot of ability to control those claims as a result of how we operate our restaurants, so we've been working very hard to work on that, but even though you're self insured,

you do purchase

protection to really cap out any ultimate exposure and so certainly those costs have gone up a little bit. So that's really that the dimensionalizing that I gave you right now. Again, if you wanna to call me a little later, I'll try to work up some

.

OK, fair enough, then the last question would be on the labor line. Could you give us a flavor for ex-California, what you see as a sort of entry level of wage inflation year over year currently?

You know, its - this maybe up about a percent or so. I mean its just very, very low right now. Again I think that the economy is loosened up a little bit, I think for the most part we've been able to hold our average hourly rates for our staff members.

Again with unemployment up a little bit, we're getting a better quality staff member that's applying for us, so we're able to - I think hold our wage for the most part, most of our markets. But there's a component in the average hourly rate that's probably anywhere from a dime to 15 cents that's related to overtime, so if we are better staffed, then we can reduce our overtime and have an impact on the average hourly rate as well. So its not increasing much.

In California, have you and, or competitors, you know, taken some price to overcome the minimum wages, you sense that the competitive environment and the like, that people are - operators are kind of absorbing it

David do you want to comment on that?

We did take some in January and some of that was specifically for minimum wage. We're studying that now, as to how much price if any we can take in June, which is the next time we change our menu, so we'll be looking at that carefully. But again, some competitors are still down from 911, they haven't raised prices in a couple of years, because they're looking for more volume.

So its - you know, you have to really look at it on a market by market basis and see what your competition is doing, and our competition is certainly just not - you know the public chains, but its really every restaurant out there. But we really have covered most of that in January and now we're looking to see what we can do with our June menu change.

Very good. Thanks a lot.

OK, thank you all for joining us today.

Absolutely and if there is any one that couldn't get a question in, please call me at our offices. We'll be here for a while this evening. Thank you.

Thank you very much.

Thank you for participating in today's teleconference. You may now disconnect.