Cheesecake Factory Inc (CAKE) 2002 Q2 法說會逐字稿

Good afternoon.

My name is

, and I will be your conference facilitator today.

At this time I would like to welcome everyone to The Cheesecake Factory second quarter conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star and the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key.

Thank you.

Mr. Deitchle, you may begin your conference.

Thank you, operator and good afternoon, everybody.

I'm 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 on the call today is David Overton, our Chairman and CEO, who is actually in Chicago at our new Grand Lux Cafe restaurant that just opened a couple of days ago.

And also with us today is Jane Vallaire, our Senior Manager of Investor Relations.

And I'd now like to ask Jane to read our cautionary statement regarding risk factors and forward-looking statements.

Jane, go ahead, please.

Thanks, Jerry.

The company's comments during this conference call held today, July 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 the company to be materially different from any future results or 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 risks and uncertainties associated with forward-looking statements contained in our periodic filings with the Securities and Exchange Commission.

This conference call is the 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 second quarter of fiscal 2002, and also provide a business and financial update.

After that we'll be happy to take a few questions, so we'd like to finish up the call today in about 45 minutes, and we've got a lot of exciting things to cover in our call today, so let's go ahead and get started.

Both David and I were very pleased with the company's record financial results for the second quarter just ended.

The Cheesecake Factory once again achieved record levels of sales and earnings, thanks to our strong concept and brands, and I think especially to the hard work and dedication of our 13,473 staff members across the country.

While the current operating environment for most consumer businesses continues to be very challenging, we believe that The Cheesecake Factory continues to have one of the best opportunities to continue leveraging its unique competitive positioning as a high-quality destination restaurant concept and brand that offers great value to consumers.

For over 24 years now The Cheesecake Factory restaurant concept has consistently been a consumer favorite, and we all know that consumers don't easily give up their favorites, even in slower economic times.

And, our creative, high-quality bakery products have also been consumer favorites for over 30 years now.

Now we'll go over our performance highlights for the second quarter that ended this past Tuesday, July the 2nd.

All of the financial results presented in our press release today, and the conference call that we're going to comment on today do reflect the three-for-two stock split that was effective last year on June 18.

For the second quarter just ended, our total revenues increased 25 percent to $165.4 million.

Our operating income before pre-opening costs increased a strong 35 percent to $21.4 million.

Our operating margin, before pre-opening costs, went up 100 basis points to 13 percent, which is one of the best margin performances that we've ever achieved.

And our net income increased 30 percent to $13.2 million, and our dilute net income per share increased 24 percent to 26 cents.

And now we'd like to provide a little bit of color on our restaurant sales for the second quarter.

Our total restaurant sales increased about 22 percent during the second quarter.

Now, that 22 percent increase consisted of an approximate 20 percent increase in total restaurant operating weeks, and an approximate two percent increase in average sales per operating week.

Our comparable restaurant sales were up about 1.6 percent for the second quarter, which represents our fortieth consecutive quarter - that's 10 consecutive years - of positive comparisons on that measure since our IPO back in September of 1992.

And I just think that's an incredible milestone achieved by any consumer business during that period of time.

Substantially all of the increase in comp sales for the second quarter for us can be attributed to our menu pricing, which is in line with our business model and strategy and our own expectations.

With The Cheesecake Factory concept as busy as it is, particularly during peak meal periods with long wait times at nearly every one of our restaurants, we only expect to achieve increases in comp sales that are approximately equal to our effective menu price increases, and that's what we've been consistently achieving for some time.

While most chain restaurant operations invest significant management time and resources on media advertising to generate incremental sales, our focus and challenge during the past 24 years has always been on operational execution to correctly and efficiently process all of the wonderful business that we're consistently being offered by consumers, again, thanks to the unique brand identities and value positioning of our concepts.

And, we have many of the very best restaurant operators in the industry at our company, led by our senior VPs, Peter D'Amelio and Mark Pratte, and their talented field supervision team.

As most of you know, we traditionally have updated and reprinted our menus twice a year, in January-February and then again in the summer during July and August.

And those updates are really our windows to consider menu price changes for our food items.

At the start of this year, we did take a small menu price increase.

It was slightly less than one percent to essentially cover the increase in the California minimum wage that went up 50 cents an hour at the beginning of this year.

And that slight menu price increase that we took did cover that minimum wage increase.

Given the very favorable food cost environment that we're currently enjoying, it made a lot of sense to us in this operating environment to take a very small menu price increase on our food items this summer in connection with our menu change.

It'll be about half a percent, and again, that'll be concurrent with our July-August menu change that is currently being brought out to all of our restaurants.

While we believe that we've got more pricing power than most casual dining restaurant concepts, our philosophy continues to be to maintain a strong value positioning with our concept.

So we try to keep most of our pricing power in reserve to be used when absolutely necessary to help protect our operating margins.

And we believe that this strategy has been very successful for us during the past 24 years.

And I think that a large part of our sustained success over the past 24 years can be attributed to the value concept positioning at The Cheesecake Factory where our guests believe they always get a great value for their money.

Here are some updates on sales trends for some of our individual restaurants for the second quarter.

We enjoyed above average sales increases during the quarter for several of our restaurants including, but not limited to - let's see, let's go down the list here - San Francisco, which once again had a double-digit sales increase for the quarter, and that was on top of a double-digit sales increase for the same quarter last year.

It's incredible how successful we are on the eighth floor of Macy's in downtown San Francisco, when so many other restaurants have struggled since 9/11.

We also had strong sales increases in Thousand Oaks, California;

Providence, Rhode Island;

Westbury, New York;

Mission Viejo, California;

Columbus, Ohio;

San Diego;

Chestnut Hill, Massachusetts;

Aventura, Florida - just to name a few.

And I think that the locations that I just listed are representative of a good cross-section of all of our geographical markets.

For our two high-volume locations in the Las Vegas market, our Cheesecake Factory location in the Forum Shops at Caesar's also had a very strong sales increase for the quarter.

And sales at Grand Lux Cafe at the Venetian were also up versus the same quarter last year.

So business is clearly back in Vegas for us.

With respect to our restaurants in the great state of Florida - which, again, has had some issues with reduced tourism and travel, and that certainly impacted the economy in that state - sales for our six south Florida locations in the comp base were up just about one percent for the second consecutive quarter, which again, we're happy to see that.

But sales have not yet fully recovered to their pre-9/11 levels for all of our restaurants there, although they're really not that far away.

And I think the same holds true for a couple of our restaurants here in Southern California that have a larger tourism or business meal component in their sales base.

We're also pleased to note that sales for our newer Cheesecake Factory restaurants that are not yet in the comp base, continued strong with their seasonally adjusted average weekly sales still running higher than average weekly sales for Cheesecake Factory restaurants in the comp base.

Sales are gradually growing at our second Grand Lux Cafe here in Los Angeles, which opened last November.

Our sales at this location are currently annualizing between $8 and $9 million.

And if you really think about it, it's really an incredible accomplishment for any new restaurant concept to open up with annualized sales that strong without significant media advertising and promotional support.

As we indicated in our press release today, we successfully opened our third Grand Lux Cafe two days ago in downtown Chicago, and our plans are to continue to fine tune the Grand Lux Cafe concept so that we can better evaluate its future expansion potential.

But we're very encouraged by our results so far with Grand Lux, even though we're still in the incubation stage for the concept.

For those of you that have not yet had the chance to go to Grand Lux, it's an upscale casual dining concept that is often described as a Cheesecake Factory kicked up a notch with an average check running currently about $16.60.

And that's just slightly higher than Cheesecake Factory's average check of about $15.70.

So it's still in the mainstream of casual dining - upscale casual dining.

Shifting to our restaurant expansion plan, we are on track to open as many as 12 new restaurants this year, and thereby increase our total productive square feet by about 24 to 25 percent.

As of today, we're very confident that we have a solid opportunity to achieve this full-year growth goal.

We have successfully opened five restaurants so far this year - Bellevue, Washington on January the 29th, San Antonio, Texas on February 26th - my hometown.

And the San Antonio restaurant continues to do a lot better than my original expectations, which is very, very encouraging.

Boston, Massachusetts at the Prudential Center in the Back Bay on April the 2nd;

Edina, Minnesota on April 23rd - a wonderful restaurant, great strong volumes.

And Grand Lux Cafe, Chicago again, which just opened a couple of days ago on July the 16th, and that's really the square foot equivalent of two of our restaurants.

For the remainder of fiscal 2002, our new restaurant openings will come from the following group of Cheesecake Factory restaurants that are currently under construction or about to undergo construction.

They are Fort Lauderdale on Las Olas Boulevard;

Las Vegas in the Summerlin suburban area;

Orlando at the New Millenia Center on the southwest side of the city;

San Jose at Valley Fair Mall;

St. Louis at the Galleria;

Charlotte, North Carolina at South Park Mall; and Austin, Texas in the Arboretum area.

Now, we believe that all of these locations have outstanding potential for The Cheesecake Factory.

While our opening schedule by quarter for the remainder of this year is still subject to some fine tuning adjustments, again, depending on the progress of construction work and our receipt of the operating licenses and permits that we need to open, as of today, we currently expect to open as many as two Cheesecake Factory restaurants during the month of September, and as many five Cheesecake Factory restaurants in the fourth quarter, of which three of those five can open during the month of October.

So that adds up to as many as 12 new restaurants for the full fiscal year.

Now, last year we opened five, high-volume restaurants very successfully within an eight-week period.

So we have the ability to operationally execute our restaurant opening plan for the remainder of this year.

And our operations and opening teams are fired up and ready to roll.

So we're ready to get after it.

We have two leases already signed for potential 2003 openings - one in Cleveland, Ohio and another one in Edison, New Jersey.

And we have signed several letters of intent that are in final lease negotiations for several potential locations for next year.

We'll keep everybody advised of the full 2003 development plan as it comes together during the next month or so.

While we're on the subject of new restaurant development, we always like to remind our newer investors that our restaurant development model is different than the traditional cookie-cutter chain restaurant development model.

Where pad sites are more easily acquired, the design and construction processes are simplified by having more standardized restaurant layouts, and the companies have more control over the overall development process.

The Cheesecake Factory restaurant development model is really more similar to that of an upscale retail chain.

We currently lease all of our restaurant locations, many of which are in newly constructed retail developments such as shopping malls, entertainment centers, cityscape centers and so forth.

As a result, we rely very heavily on our landlords to deliver or lease spaces to us in a timely manner according to their original commitments, so that we can build them out in a timely manner.

Our locations are upscale.

They're highly customized, which helps to create that non-chain image that we enjoy with consumers, and which we believe represents a significant competitive advantage for us.

But that also creates some special design and permitting challenges for an upscale, highly-customized chain.

However, once we get the spaces from the landlords and get our building permits, our construction and pre-opening processes are typically very consistent, usually taking five to six months to complete on average.

So, as a result of these factors, our opening schedule, by definition, cannot always be as even or predictable by quarter, and it's not uncommon to have planned openings move a few weeks or even a month.

On the other hand, we always pick great locations.

And once we get our restaurants open, they've never been disappointing.

We're still batting a thousand for successful restaurants so far, and I don't think there are many chain restaurant operators that have that successful development track record.

Moving on to our bakery operations, our bakery sales to wholesalers, retailers and food service distributors, which we refer to as outside or third-party bakery sales, increased 77 percent to a record $14.2 million for the second quarter.

Now, most of this sales increase can be attributed to the initial pipeline shipments to an expanded number of locations for one of our existing warehouse club customers.

And then the rest could be attributed to the initial rollout of products for two new food service customers.

We also achieve stronger sales volumes for a few of our existing large food service accounts during the quarter.

We mentioned on our last conference call that we were internally targeting a full-year increase in outside bakery sales in the 15 percent or so range, but I think that our recent strong sales trends suggest that we'll probably do a little bit better than that.

While we remain optimistic with respect to increased bakery sales, we also prefer to be conservative, and always caution our investors that bakery sales are less predictable than restaurant sales.

Our ability to predict the timing of bakery product shipments and contribution margins is really difficult due to the nature of the business and the purchasing plans of our larger customers, which can fluctuate from quarter to quarter.

In our view, the bakeries most impactful role to our business will continue to be at service as a dependable, high-quality producer of deserts for sale in our own restaurants, which collectively are probably going to sell somewhere between $90 to $95 million worth of deserts made in our own production plant this coming year.

Again, that's the component of our restaurant sales.

Deserts represent about 15 percent of our total restaurant sales.

The production facilities capacity utilization last year was about 65 percent, and we're still expecting our capacity utilization to be in the 75 to 80 percent range by the end of this year.

At capacity utilization, our plan is really a function of three factors - the mix of products that we're producing, the volume of each product that we're producing, and how efficiently we're producing each product.

As we did last year, we've added a little more capacity to our existing bakery production facility this year.

We mentioned on our last conference call that we are currently evaluating various alternatives to add additional production capacity in the form of a second production facility, which will probably be located somewhere closer to our east coast restaurants and bakery customers.

We have engaged a nationally-recognized consultant that has a strong track record with many Fortune 500 manufacturing companies to assist us in this evaluation, and we'll keep you advised as we move closer to making a decision later this year on this additional capacity.

So that covers our top line performance for the second quarter, and our new restaurant growth objectives for the full year, so now we're going to shift over to operating margins and take a few minutes and review the individual components for the second quarter.

First, we'll start with the supplemental data at the bottom of the financial page of the press release, and we'll start with the cost of restaurant food, beverages and supplies - the restaurant cost of sales.

That cost went down to 23.8 percent of restaurant sales for the second quarter compared to 25.5 percent for the same quarter last year, and 24.3 percent for the sequential March quarter.

We are currently experiencing lower costs for nearly every food commodity category used in our restaurants due principally to two factors.

First of all, generally favorable supply-demand conditions for most of the commodities that we use in our operations.

And secondly, our increasing economies of scale in purchasing power as we grow our business operations.

And because our menu is so diverse - we use many different food commodities in our operations - about one-fourth of our total restaurant cost of sales consist of fresh commodities such as produce, poultry, dairy, that historically have not been easily contracted for a long period of time, although we're continuing to make progress on our very first contracts for several of our high-volume produce items, such as avocados and strawberries, for longer periods of time.

So we're certainly encouraged about the ability to begin to crack the code in some of the fresh commodity areas over time.

And in the absence of weather or other market conditions outside of our control, we currently expect our food costs to continue to remain favorable during the remainder of this year, again, assuming current supply and demand conditions continue for the commodities that we use, particularly the fresh produce, poultry and dairy commodities.

We have taken steps wherever possible to extend our existing contracts for items such as all of our cheeses, oils, ground beef, beverages, sugar, coffee, all of our seafood items, paper, bread, most of our grocery items where we've extended those out for the full year, and in several instances, well into next year at slightly lower costs than we experienced during the previous 12 months, again reflecting favorable supply-demand conditions and also our increased purchasing power.

Shifting over to bakery costs as a percentage of outside bakery sales for the second quarter, they ran 47.5 percent, which was slightly lower, compared to 49.8 percent reported for the same quarter last year.

And, were also lower than the 48.3 percent reported for the sequential quarter.

This cost is related only to outside bakery sales and is a very small component of our consolidated operating margin.

So, as we always mention during the conference calls, it takes a disproportionate movement in this percentage to result in any material impact on our consolidated financial results.

Since the net purchase costs for many of our key bakery commodities is currently expected to remain relatively stable for the rest of this year, this percentage will fluctuate principally as a result of sales mix given any different 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 distribution channels.

During the second quarter, we finalized agreements with all of our cream cheese suppliers to cover all of our expected cream cheese requirements for the next 12 months at a cost per pound that is slightly higher than the cost per pound experienced last year when our contract at full-year pricing proved to be a slightly better deal for us than our suppliers.

Our agreed upon cream cheese costs for this year is well within the range anticipated in our internal product pricing and margin models.

I think we're in good shape.

Our current expectation for bakery cost of sales as a percentage of total revenues for the rest of this year remains relatively consistent with the range that we've experienced in last year and that we're experiencing on a trend basis so far this year.

Moving to labor costs, our total labor costs for our combined restaurant and bakery operations were 30.6 percent of total revenues for the second quarter, which was equal to the labor cost percentage of revenues for the same quarter last year, and was slightly lower than the 30.8 percent number reported for the sequential March quarter.

During the first half of this year, our restaurant operations have benefited from slightly lower staff turnover rates, slightly lower overtime hours, slightly higher labor productivity, and slightly lower pressure on our average hourly wage rate except in California, as I mentioned earlier, where the minimum wage went up 50 cents an hour beginning - at the beginning of this year, and where we do have 25 percent of our restaurants.

Now, even considering the impact of the California minimum wage increase, our company-wide average hourly rate for the second quarter was about $7.12.

And that was up just one percent compared to the same quarter last year.

Also, during the second quarter, we completed the staffing of a third shift for our bakery production facility in order to support our ramped up production schedule, which did generate some labor inefficiencies that you would expect to be normally associated with getting new production employees fully up to speed and past the learning curve.

These one-time inefficiencies represented about two-tenths of a percent of total revenues for the second quarter.

So the good news is that our bakery operations are now back to their normalized labor productivity trends, and are now well positioned to process all of the upcoming holiday production business, which is certainly our busiest part of our cycle.

Our current expectation for total labor costs as a percentage of revenues for the remainder of this year remains relatively consistent with the range that we experienced for the same period last year, again, assuming that current trends continue with respect to staff turnover rates and labor productivity, overtime hours and the average hourly rate.

Moving to other operating expenses, they were 22.2 percent of revenues for the second quarter, which was slightly up versus the 22 flat reported for the same quarter last year, and down slightly compared to the 22.6 percent for the sequential March quarter.

Compared to the same quarter of last year, we did benefit from lower costs for our energy needs.

Our energy costs represented about 1.4 percent of our revenues compared to 1.8 percent of revenues for the same quarter last year.

Now, this margin benefit was offset in part by slightly higher costs for our insurance arrangements and slightly higher marketing and distribution expenses related to the significant increase in outside bakery sales.

Our current expectation for the other operating expense category as a percentage of revenues for the remainder of this year is for a slight increase in these costs as a percentage of revenues compared to what we experienced during the same period last year, again, due to principally - principally due to higher expected costs for our insurance arrangements, which almost every business in America is currently also experiencing, and slightly higher marketing and distribution costs associated with our increased bakery sale.

G&A expenses were five percent of total revenues for the second quarter comparing favorably versus 5.3 percent for the same quarter last year, and were about the same percent of total revenues as the sequential March quarter.

In terms of absolute dollars, our G&A expenses reflect the fact that we are hiring and training more restaurant managers, and adding some additional corporate support infrastructure to support our planned ramp-up in new restaurant openings.

Now, our G&A expense consists of two major components.

It consists of the costs for our corporate bakery and field supervision infrastructure and support team, which should grow at a lesser rate than revenues.

And then we have the cost for our restaurant management, recruiting and training program, which logically should grow at a rate closer to our unit growth rate.

Our current expectation for total G&A expenses as a percentage of revenues for the full fiscal year remains in the five percent range.

But I think it does have some potential to be slightly lower, again, depending on the degree of sales leverage that we ultimately achieve.

Depreciation expense was 3.3 percent of total revenues for the second quarter, compared to 3.1 percent for the same quarter last year, and 3.4 percent for the sequential March quarter.

I think our current expectation for depreciation expense as a percentage of revenues for the full year remains a little bit higher than what we experienced last year, again, due to principally to the amortization schedule for the restaurant technology investments that we made last year, and other infrastructure and new concept capital expenditures.

Pre-opening costs during the second quarter were about $2.2 million compared to $1.4 million for the same quarter last year.

During the second quarter just ended, we opened one restaurant, but also incurred significant pre-opening costs for other openings in progress, particularly Grand Lux Cafe in Chicago, which just opened, and as we mentioned, is a new concept with higher pre-opening costs, and with 20,000 productive square feet, is almost double the size of our average restaurant, so we've got to incur higher pre-opening costs to staff a much larger restaurant.

For the same quarter last year, we also opened one restaurant, but we also incurred pre-opening costs for other openings in progress.

For our new investors, we usually incur most of our pre-opening costs during the two months preceding and the month of a restaurant's opening.

As most of our investors know, we are required to expense restaurant pre-opening costs in the periods that they're incurred.

So as a result, the timing of restaurant openings and their pre-opening costs will always have an impact on our quarterly earnings comparisons.

The pre-opening costs for our upscale, highly-customized restaurants is higher than most other restaurant concepts in terms of absolute dollars.

But it's in line with other upscale concepts relative to the scope of operations.

Given our expected opening schedule for the remainder of this that we previously mentioned in the call, again, as many as two additional Cheesecake Factory restaurants in September, possibly three in October and two in November, early December, analysts should factor enough pre-opening costs into their earnings models for these openings, and also should allow for the normal 60 to 90-day period following opening for new restaurant operating margins to reach their targeted run rate levels.

So that covers our review of the major line item components of our operating margins for the fourth quarter, and also some forward-looking statements for these components for the remainder of this year.

Again, please refer to the full discussion of risk and uncertainties associated with forward-looking statements in our filings with the SEC.

Just quickly, our liquidity position and financial flexibility continue to remain very strong as of this date.

As of July the 2nd, our cash and marketable securities position on hand was approximately $116 million, our liquid networking capital position was about $61 million.

We believe that maintaining a networking capital position in this range makes a lot of good business sense in this operating environment, so that both we and our investors can have confidence that financially we can continue executing our growth plan with maximum flexibility, knowing that we've got the capital already in place to do so.

Now, there may be a small financial cost associated with the capital resources that we currently carry, but in our view, this small cost is offset by the benefits of reduced risk and flexibility in terms of our ability to execute our growth plan.

Now last year, our cash outlay and accrued liability for cap ex was about $74 million.

We're still estimating our cash cap ex for this year to run somewhere between $70 to $75 million.

For the first half of this year, our cash cap ex was about $37 million, which was right in line with our internal plan.

Based on our current expansion plans and current expectations for the operating environment, we expect to be able to finance our cap ex requirements for the remainder of this year and next year through operating cash flow, agreed upon laying more construction contributions into cash investments that we have on hand.

We still have no funded debt.

We currently do not anticipate a need for funded debt, or any other external financing, other than the landlord contributions that we've agreed upon for this year and next year.

We do keep a $25 million credit facility in place, just for backup liquidity purposes and to support letters of credit, but the annual cost of maintaining this facility is not significant at all.

We do have a share repurchase authorization from our board of directors to buy back up to 1,687,500 shares in the open market.

And during the second quarter we were active.

We bought back approximately 99,000 shares.

So that brings the year-to-date buyback to about 197,000 shares.

We have approximately 640,000 shares remaining in our current repurchase authorization.

We'd also like to take a minute on our call today and welcome Mike Berry to our company.

Mike joined us last month as Chief Operating Officer for the Cheesecake Factory restaurant division, and he brings over 30 years of food service and hospitality industry experience to our company, including senior management and leadership assignments with such highly regarded organizations as Harvard University, UCLA, the Walt Disney Company and Barnes & Noble.

Today, Mike is out working in our restaurants, and we're all looking forward to his contributions to The Cheesecake Factory's future success.

So, to wrap up our business and financial review, we think The Cheesecake Factory's financial performance for the second quarter was very strong, continues our positive momentum so far this year.

Our restaurants continue to enjoy one of the most consistently strong sales trends in the industry.

And with room for at least 200 restaurants domestically, we've got a sustainable period of profitable growth ahead of us for some time to come.

Our restaurant and bakery operations continue strong.

Our morale is very high.

Our financial position couldn't be better.

We're well positioned to execute our growth plan for the coming year.

And so that wraps up our business and financial review for the second quarter, and at this time David and I will be happy to answer a few questions.

And, again, if we don't have time to get to your question on this call, please feel free to call us at our offices after the call.

So, operator, we're ready to take some questions.

.

Thank you, Jerry.

Thank you, sir.

If you do have a question at this time, simply press star and the number one on your telephone keypad.

Your first question is from Brett Levy with

Warburg.

Good afternoon, gentlemen, ...

Hi, Brett.

... and ladies, Jane.

A couple of little maintenance questions and then just one bigger picture.

Share repurchase - is that, was that just really as an offset to dilution?

Secondly - I don't know if you're going to comment on preliminary target for '03 openings.

Third question is, you talked about utilities, insurance and worker's comp.

Could you give us a little bit more clarity on that?

And I guess I'll ask one more minutiae question.

What was the delay in Grand Lux's opening?

I'll leave it to everyone else to ask bigger picture.

OK, well that's four questions, Brett.

So let's see if we can knock them out real quick for you.

First of all, our share repurchase program is intended to partially offset the impact of stock option exercises.

Let's see, secondly, with respect to our development and growth goals for next year, I believe, David, our goal is to once again strive for an increase of 24 to 25 percent in terms of our productive square footage.

Is that correct?

Yes.

And then the third question was to try to give you, as I believe, Brett, a little bit of additional insight on electric energy costs and insurance costs.

Is that - was that correct?

Along with worker's comp.

And worker's comp.

Well, as far as insurance costs, which for us include worker's comp, liability, property, D&O, and our group health insurance costs - when you add up all of those together, they represent - currently represent - less than three percent of our revenue.

So it's not a significant component of our margins.

And as we've indicated, the overall insurance markets for most American businesses are going through a period of hardening post-9/11, and given other events in the business world today.

Worker's comp and general liability are programs that most businesses like us self-insure, because we're able to have more of an impact on controlling those claims in our operations.

We do buy stop loss and catastrophic loss protection like most large businesses do.

And we believe that we'll be able to control those increases as - because we're able to impact the claims activity from our operations.

As far as group medical and property insurance, those are unfortunately impacted by overall inflationary pressures, in health insurance as well as in the property market post-9/11.

I think our increases are probably going to be, on the group medical plan, probably going to be, like all other American businesses, probably in the 20 to 25 percent range.

And it wouldn't surprise me, when our property insurance comes up for renewal here in the fall, we probably don't have a similar increase in magnitude.

So that's the additional color on that.

And then as far as our energy costs go, I think - energy consists of two components, electric and gas.

And electricity seems to be slightly up, but gas is very, very favorable right now.

For the remainder of this year, I would expect, again, based on current trends, our overall energy costs to stay right where they have historically trended around 1.4, 1.5 percent of total revenues.

Again, it's not a large component of our margins.

But I'm not seeing any particular pressure on our scanners for the remainder of the year unless there's something dramatic that happens in the energy markets outside of our control.

And then I think your last question was regarding Grand Lux and its timing of opening.

David, did you want to ...

Yes, it was really a matter of permitting.

Chicago is a pretty tough town, and this was a very, very difficult building.

So, a combination of all of that set it back a little bit.

But it is now opening.

Usually they're not as tough as this particular building in this particular town.

OK?

Next question.

Your next question is from

with U.S.

Bancorp Piper Jaffray.

Hi, this is actually Monica Kaczmarek.

I just had a ...

Hi, Monica.

... question on your technology initiatives that you implemented last year.

If you could talk a little bit about how those are doing and what you're seeing.

Well, we are seeing our labor productivity in our restaurants and our table turns up slightly.

Now, whether we can specifically say that it's due to the technology investments or not, you know, it's very, very difficult to attribute it to just one single thing in a restaurant.

But I think it's fair to say that every one of our restaurant general managers will tell us that our restaurants are operating much more efficiently.

They're operating a little bit quicker.

And that is reflected in our labor productivity statistics.

We track labor productivity a couple of different ways - guests per labor hour and also sales per labor hour.

I think guests per labor hour is the better statistic, because it's not influenced by menu price and mixes and menu price changes.

And our guests per labor hour are up slightly since we put that technology into place.

David, would you like to add anything else to that?

No, I think that's true.

I think beside, just, you know, we can train faster.

We can train easier.

It's pleasing the guests there.

So there's many things.

We also have a frame relay that is part of that, and our communication from corporate throughout our whole system to managers is going quite quickly.

I believe we'll be able to do some credit cards and gift cards over that.

And that whole system should actually pay for itself shortly.

So the benefits keep on coming from all of that investment.

And I - we believe there'll be more that we'll be able to implement as time goes on.

Great.

And I have one follow-up question on the menu price increase that you took at the beginning of the year.

Was that system-wide?

Or was it more heavily weighted in California?

So far we've always done it on every menu company-wide.

And even though, you know, we don't feel we have to, right now, basically our - the pricing is the same all across the country.

Thank you.

Next question, please.

Your next question is from

with

Capital Partners.

Yes, I have two questions.

One, would you mind addressing comp store trends within the quarter and whether you experienced any variability in June, as did many other, you know, upscale brands?

And I have a second question after that.

The answer is, for The Cheesecake Factory restaurant concept and business model, we really don't see much variability in same-store sales trends throughout a quarter.

Our business is very, very steady.

It's not influenced by media advertising or new product introductions.

We're a destination concept, even at all of the shopping malls or entertainment complexes where we happen to be located.

So there really wasn't any material fluctuation intra-quarter, nor in my time at the company have we ever really seen anything materially.

David, would you ...

No, I ...

... like to comment on that?

...

I agree, Jerry.

OK.

And the second question.

Yes.

And, you know, Jerry and Dave, you've been wonderful stewards of the company.

And I don't mean anything by this, but there seems to be a lot of insider sales recently, and I just want to hear from you how you'd like us to think about those going forward.

Oh, for me it's estate planning and 10 years of being public.

And it's the way that the - all the possibilities of people wanting the stock and doing it in one fell swoop and being done with it, seemed to worked for me.

So, I'm still here.

I'm the founder of the company.

I have lots of stock left, and I don't think it should be a message at all for anyone other than it was just time for me to really get into my estate plan and take care of everything I need to do for my family.

And I think, from what I know, I think it's likewise for Jerry.

No, that's correct.

Thank you very much.

OK.

Your next question is from

.

Thank you.

May we infer from your last answer, Jerry and David, that the comps so far in July remain within that one to two percent range?

Comps are positive.

Again, we never give a precise number.

We only do that on a quarterly basis,

, as you know.

But comps are positive quarter to-date.

And we're very pleased with our sales trend.

OK.

And, again, the January price hike - could you refresh our memories what that was?

It was a little bit less than one percent.

OK.

Thank you very much ...

OK,

.

...

and

.

I think we have time for about two or maybe three more questions.

Yes, right.

Your next question is from Hil Davis with Thomas Weisel Partners.

Good afternoon.

Hi.

Hi.

Just two quick questions.

One is, I noticed that comps were readjusted for Q2 last year from 2.4 percent to two percent.

Just curious why that was.

We moved from a 12 to an 18-month comp base to be more in line with the prevalent way of presenting comp sales in the casual dining segment of the restaurant industry.

OK, great.

So there was a - so we went back and adjusted.

And again, it was just a very small, immaterial adjustment.

Sure.

And then, just kind of a bigger picture question, I guess.

Given the current macro environment and higher-end restaurants experiencing a slowdown - and what I mean by higher-end, I mean higher check - in guest counts, they're experiencing a slowdown in guest counts and thus, comps.

Are you all experiencing that meaning is Cheesecake experiencing this trend, especially in any given geographical region?

And if not, why do you think that is?

Well, I can tell you that our sales trends have been remarkably steady for 40 consecutive quarters for 10 straight years.

And as we've gone through all of the national events over the past year, or couple of years, with the economy and the other national events, you know, our sales trends have held up remarkably steady.

There really hasn't been any material shift in what our guests are purchasing in terms of beverages and deserts and food items.

Our lunch and dinner

percentages are roughly the same that they were.

I think we ...

Think of anything else, David?

Yes, I think we think that, you know, there's always been a lot of pent-up demand for Cheesecake Factory.

You know, we do have waits.

We've always been very, very popular.

We've never been a comp store story.

You know, we get full very quickly, really within two or three years.

And then we want to just - we keep opening up new units and grow them.

And I think that's really the difference.

We're not advertising to fill our restaurant.

We - we're very popular.

We get full.

We have a nice little cushion of wait.

There's many people that would love to come to Cheesecake that don't because of the waits.

And so that becomes our cushion in these kinds of times, which I believe is why we have been so steady.

And so, you know, we're really a very different animal when it comes - when it comes to that.

Now, that's what I think.

Thank you very much.

You're welcome.

I think one more question.

OK.

Your last question is from Sharon Zackfia with William Blair Company.

Good afternoon.

Hi, Sharon.

Hi, Sharon.

How are you?

Real good.

A quick question.

On the favorable food costs that you're experiencing, can you give us an idea of how much of that is coming from purchasing leverage versus just lower commodity costs?

You know, I cannot give you a specific percentage breakout on that.

As I look at the different categories on the board in my office here, certainly the fresh commodities that we - that represent the 35 to 40 percent of our total commodities that we use - poultry, dairy and produce - are running particularly low just in general year-over-year.

I did mention in the call that we are beginning to crack the code on produce for some of the large produce items that we use, particularly avocados and strawberries and other things, by going directly to some of the growers and being able now, because of our size, to negotiate purchases directly with the growers, thus bypassing the local produce distributors.

We just hire them to distribute the product to our restaurants, and we pay them a distribution fee, not a fee for the commodity itself.

So, in those areas, I think we're seeing just a general favorable trend in those commodities.

Produce, I think, we're having some impact and getting some better contracts.

And then I can tell you, our purchasing department has done a pretty darn good job, particularly on the cheese side - we use a lot of aged cheeses, which really don't fluctuate as much as, you know, the cheddars or the mozzarellas do, and our purchasing power has helped us there.

Meat we've been able to contract up for longer periods of time, although I think most of the meats that we use are generally running favorable.

So - and I guess the other thing that's impacting is, again, with our growth as a business enterprise, we're able to negotiate much higher volume purchase discounts that are now available to us as a result of our purchasing power.

So, while I can't lay out all of the factors there, clearly, I would have to say that the vast majority would be due to just generally favorable costs in the commodity markets.

But we are having an impact, again, with our purchasing power going forward.

Do you think, on a long-term basis, you know, all else being equal, you can squeeze out 10 basis points, 20 basis points through kind of leverage of your purchasing power?

I think it's clear that there's additional leverage as we continue to grow the company, not only in volume purchase discounts, but also in our distribution network with our primary food service distributors.

So I think there is additional absolute leverage from those factors, regardless of how the absolute cost of some of these commodities fluctuates over time.

OK.

Thank you.

OK.

All right, well thank you very much.

And if there are any further questions, please don't hesitate to call us at our offices.

OK.

Bye-bye.

Thank you, operator.

Thank you for attending.

You may now disconnect.