Cheesecake Factory Inc (CAKE) 2002 Q3 法說會逐字稿

Good afternoon.

My name is Linda and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Cheesecake Factory Third Quarter Earnings 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 then 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 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 on the call is David Overton our Chairman and CEO;

Mike Berry, President of the Cheesecake Factory Restaurants;

Mike Dixon our VP Finance and Controller and Jane

our Senior Manager of Investor Relations.

And before we get started today, I would like to ask Jane to read our cautionary note regarding risk factors and forward looking statements.

Jane, go ahead.

Thanks Gerry.

The company's comments during this conference call held today, October 17, 2002, will include forward looking statements within the meaning of he Private Securities Litigation Reform Act of 1995.

Investors and listeners are cautioned that forward looking statements are not guaranteed for future performance and that 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, performance or achievement expressed or implied by forward looking statements.

All forward looking statements made today on this conference call speak only as of today's date.

Investor and listeners are referred to the full discussion of risks and uncertainties associated on 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,

.

Our agenda for the call today will be as follows.

First we'll cover the press release that we issued today that covers our financial results for the third quarter of fiscal 2002.

And we'll also provide a business and financial update and then right after that, we'll be happy to take a few questions.

We'd like to finish up the call today in about 45 minutes and we've got a lot to cover 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 third quarter.

The Cheesecake Factory, once again, achieved record levels of sales and earnings, thanks to our strong concepts and brands and thanks especially to the hard work and dedication of our 14,312 staff members across the country.

While the current operating environment for many consumer businesses continues to be very challenging as we all know, we continue to believe that the Cheesecake Factory continues to have one of the best opportunities to continue to grow and prosper.

Not only do we enjoy the benefits of a very unique brand identity and our competitive positioning, and our 24-years of sustained popularity, but we also have some of the best restaurant operators in the business, led by our operating president,

, with the contributions of Peter D'Amelio and our newly promoted regional vice presidents,

and

and all of their teams.

And now we're going to go over the financial highlights for the third quarter of fiscal 2002 that ended on Tuesday, October the first for us.

Compared to the same quarter last year, our total revenues were up 18 percent to 162 million.

Our operating income increased about 22 percent, to 17.2 million.

Our operating margin increased about 40 basis points to 10.7 percent.

Our net income increased 24 percent to 12.1 million.

And our diluted net income per share increased 20 percent, to 24 cents.

Our financial results for the third quarter just ended include the one time impact of our previously announced voluntary withdrawal of bakery products that were produced in our central production facility during a four day period back in July.

So let's go ahead and discuss that up front and get it behind us.

During the third quarter, we recorded directly identifiable non-recurring expenses associated with a product withdrawal of approximately two point one million, which translates to an impact of about two cents per diluted share.

Now these one-time expenses principally consisted of the cost of disposed products, along with related costs and expenses and net of expected insurance proceeds.

As far as bakery sales go, during the third quarter we reversed about one point four million of outside bakery sales as a result of a withdrawal and we believe that we lost an additional two million or so of potential outside bakery sales during the quarter after the issue occurred.

Again, in addition to the one point four million of known sales that we reversed.

So, you take the two million of expected loss sales, or estimated lost sales, and the one point four million known lost sales, and that comes up to about three point four million of total sales that we believe that we lost in our bakery as a result of this event during the quarter.

Also, as one might expect, as a result of an issue like this, our bakery operations incurred some inefficient labor productivity, some incremental sanitation and related operational expense and some degree of reverse leverage of its cost structure during the third quarter.

These expenses and inefficiencies did impact our consolidated operating margins for the quarter, which we'll cover in more detail later in today's call.

So when we estimate the total impact of the product withdraw on our consolidated results for the third quarter, when you consider product withdraw cost, loss sales and associated operating efficiencies, we believe that the total impact could be conservatively estimated in the range of three cents per diluted share.

Now the good news is we are well on our way to recovering our sales momentum in our bakery operations and we're already back on track in bakery production operations.

We have identified and corrected the mechanical deficiencies in our production facility that led to the issue.

We've strengthened our eternal operating procedures.

We've hired a highly capable and seasoned quality assurance and sanitation executive to head up our bakery QA activities.

Our plant has passed numerous independent inspections with flying colors, including inspections from the FDA and the California State Health Department and we're back in full production for an important holiday season.

I think it's fair to say that there were many lessons learned from this experience and our bakery operations will clearly be stronger as a result.

We were very pleased to mention in our press release today that our bakery operations have re-qualified as an approved supplier to

restaurants, the largest casual dining restaurant company and one of our more significant food service customer relationships.

We are very grateful to have the opportunity to continue our 16 year relationship with

, one of the world's most highly respected restaurant companies.

And now we'll provide some detail on our total restaurant sales for the third quarter.

Our total restaurant sales were up about 19 percent during the quarter.

Now that 19 percent increase consisted primarily of an increase in restaurant operating weeks.

Our comparable restaurant sales were up 1.1 percent during the third quarter, which represents our 41st consecutive quarter of positive comparisons on that measure since our IPO back in September 1992.

We believe that's a very impressive record for any retail or restaurant business over that period of time and currently reflects the sustained popularity of the Cheesecake Factory concept.

Substantially all of the increase in our comparable restaurant sales for the third quarter can be attributed to our menu pricing, which is consistent with our performance for the past several quarters and is all that we expect to achieve given our industry leading sales productivity metrics.

With the Cheesecake Factory concept as busy as it is, particularly during peak meal periods, we only expect to achieve increases in comp sales that are roughly equal to our effective menu price increase in our established restaurants.

It's still a challenging environment out there, but we're happy to say that for the first two weeks of the current fourth quarter our comp sales comparisons have slightly strengthened and again we're very pleased to see that.

And here some updates on sales trends for some of our individual restaurants during the third quarter.

We enjoyed above average sales increases, during the quarter, for several of our restaurants including -- as I scan the list here, once again, San Francisco, Thousand Oaks California, Mission Viejo California, Columbus Ohio, Westbury Long Island, Providence Rhode Island, Las Vegas, to name a few.

So I think these locations are representative of a good cross-section of our geographical markets.

With respect to our restaurants in the State of Florida where reduced tourism and travel certainly had an impact on the economy there, sales for our six South Florida locations in the comp base were up about one percent for the third consecutive quarter, which we're very pleased to see.

Our sales trends were probably softest, during the third quarter, for those restaurants that have a larger tourism or business meal component of their customer base, and we've probably got a couple of restaurants in the Los Angeles market that would fall into this category.

Moving to our Grand Lux Café concept -- our sales continue to gradually build.

At our second Grand Lux Café here in Los Angeles, which opened last November, and our third Grand Lux Café that opened in downtown Chicago this past July, we're very encouraged by the 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 been to Grand Lux, it's another upscale, casual dining concept that some have described as Cheesecake Factory kicked up a notch, with an average check running at about $16.60, that's just slightly higher than Cheesecake Factory's average check, which is running about $15.70.

Our sales at both new Grand Lux Café locations are currently annualizing between eight and nine million, and I think if you really think about it, it's really an incredible for any new restaurant concept to open up with annualized sales that strong.

And we plan to continue to fine-tune Grand Lux Café during the upcoming year.

And to help us get the concept ready for additional future expansion, we announced in our press release today that one of the best operating executives anywhere, Peter D'Amelio, has been appointed President and Chief Operating Officer of Grand Lux Café restaurants.

Peter joined the Cheesecake Factory 12 years ago, and has steadily advanced through the operations organization, with his most recent position as Senior VP of Operations.

He's played a key role in managing the growth and success of Cheesecake Factory over the years, and I think we all believe that his outstanding operational leadership skills will be of significant value in our efforts to prepare Grand Lux Café for further growth.

Moving to our restaurant expansion plan, we're delighted to report that we're on track to achieve our stated goal at the beginning of this year to open as many 12 restaurants during fiscal 2002, and thereby increase our total productive store

by about 24 to 25 percent.

We've opened eight restaurants so far this year, and number nine is scheduled to open tomorrow for lunch at the new Millenia Mall in Orlando, so we're very excited about that.

And then we have three remaining locations that we plan to get open before the end of this year; one in San Jose, one in Austin, Texas, and one in Charlotte, North Carolina, and all of those restaurants should be open before mid-December.

We currently plan to open as many as 14 full-service Cheesecake Factory restaurants during 2003, of which all potential locations have been identified.

During 2001, we successfully opened five high-volume restaurants within an eight-week period, and this year we should open seven within a 14-week period, so we clearly have the infrastructure in place to operationally execute as many as 14 new openings next year.

We do have five leases already signed for potential 2003 openings in Cleveland, Ohio, Littleton, Colorado, Nyack, New York, Edison, New Jersey, and Overland Park, Kansas.

We are in final lease negotiations for the rest of the potential locations for 2003, which include some very exciting potential locations in some new markets for us, such as: Honolulu, Palo Alto, Raleigh-Durham, Cleveland, and possibly Cincinnati.

As many as six of our new restaurants next year will be our free-standing prototype, which is very, very productive.

Our guests love it, and our operators love it.

As in years past, our new openings will likely be weighted toward the second half of next year, and our next conference call we're gonna provide a forecasted opening schedule by quarter for 2003.

While we're on the subject of new restaurant development, we want to always remind our investors that our restaurant development model is different than the traditional cookie cutter chain development model, where pad sites are more easily acquired and the design and construction processes are simplified by having more standardized restaurant layouts and the restaurant companies have more control over the overall development process.

The Cheesecake Factory development model is more similar to that of a retailer when you really think about it.

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

As a result, we have always relied heavily on our landlords to deliver our leased spaces to us in a timely manner according to our original commitments to us and then we can build them out in a very timely manner.

Our locations are upscale.

They are highly customized which helps to create the non-chain image that we enjoy with consumers and which we believe represents a significant competitive advantage for us but that also creates some unique design in permitting challenges.

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

So, as a result of these factors, our opening schedule cannot always be as even or as predictable by quarter.

And again it is not uncommon to have planned openings move a few weeks or even a month.

But, on the other hand, we always pick great locations and once we get our restaurants open, they have never disappointed us.

So we are batting a thousand for successful restaurants so far and there are not that many chain restaurant operators that have the track record for successful development as we have.

Moving back to our bakery operations, our bakery sales to wholesales, retailers and foodservice distributors, which we kind of refer to as third party or outside bakery sales were about $9.1 million for the third quarter which matched our bakery sales for the same quarter last year.

We believe this was a significant accomplishment given the issue that we faced in the bakery during the quarter and the associated disruption of our bakery production operations.

As we continue to recover our sales momentum from the product and withdrawal issue, we currently expect that our outside bakery sales for the fourth quarter of this year should be in the same general range that we experienced for the same quarter last year which was our strongest quarter in the history for outside bakery sales.

Our target for 2003 is to continue to strive to increase our outside bakery sales at least 10 percent.

And again while we remain optimistic with respect to increased bakery sales, we prefer to be conservative and try to 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 are always difficult due to the nature of that business and the purchasing plans of our largest customers which may fluctuate from quarter to quarter.

In our view, the bakery's most impactful role to our business will continue to be a service as a dependable, high quality producer of desserts for sale in our own restaurants which collectively should sell somewhere between $90 to $95 million worth of desserts made in our plant this year.

We are still expecting the capacity utilization of our bakery production facility to end up in the 75 to 80 percent range for 2002.

Our capacity utilization is a function of three factors: it is a function of a mix of products that we are producing, the volume of each product that we are producing and how effectively we are producing each product.

As we did last year, we have added a little more capacity to our existing bakery production plant this year.

We did mention on our last conference call that we are currently evaluating various alternatives to add 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.

So we have engaged a nationally recognized consultant that works with several Fortune 500 manufacturing companies to help us in this evaluation and we'll keep you advised as we move closer to completing our evaluation during the next few months.

So I think that covers our top line performance for the third quarter and our new restaurant growth objectives for the rest of this year and next year, so now we're going to take a few minutes and go over the individual components of our operating margins for the quarter.

Before we get started on our operating margin review, I would like everybody to keep in mind that the one-time impact of the bakery product withdrawal during the third quarter just ended, will distort some of the margin line-item trends.

So I'm going to try to do my best to quantify our estimates of those one-time blips as we go along.

First starting with the supplemental data at the bottom of the financial page at the press release.

Our cost per restaurant food, beverages, and supplies, our restaurant food costs, went down to 23.4 percent.

That's restaurants sales for the third quarter.

And that compared favorably to 25 and a half percent for the same quarter last year and also compared favorably to the 23.8 percent amount for the sequential June quarter.

We continue to experience comparatively lower costs for most of the food commodities used in our restaurants due principally to two factors.

Favorable supply and demand conditions in general for most of the commodities that we use in our restaurants and our increasing economy to scale and purchasing power as well as our efforts to reduce food wastes in our operations.

Because our menu is so diverse, we use many different food commodities in our operations.

About one fourth of our total restaurant cost to sales consist of fresh commodities such as produce, poultry, dairy items that historically have not been able to be contracted for periods longer than a few weeks or a month, although we do continue to make progress on our first contracts for several of our higher volume produce items, such as avocados and strawberries for longer periods of time and we've got more work to do there.

But the initial results have been very, very successful.

In the absence of whether other market conditions outside of our control, we do currently expect our restaurant cost of sales trends to continue to compare favorably during the fourth quarter, assuming current supply and demand conditions continue for the commodities that we use.

Also, we have taken steps, wherever we possibly can, to extend our existing contracts for items such as cheese, oils, beef, beverages, sugar, coffee, bread, seafood, paper, most of our grocery items, well into next year at roughly the same costs that we're experiencing this year.

So, at this point we are not expecting any significant movement in the costs for those commodities that we can contract for going into 2003.

So I think that's a favorable position to be in.

Our bakery costs as a percentage of outside bakery sales for the third quarter, were 43.4 percent, which was lower compared to the 49.3 percent that reported for the same quarter last year and was actually lower versus the 47 and a half percent reported for the sequential quarter.

Now, even though this cost percentage is comparably lower for the third quarter, most of this decrease was offset by increase costs for bakery selling and distribution expenses that are rolled up in the other operating expense line item in our operating margins.

And also please recall that this cost percentage is a very relatively small component of our total margin structure.

So it takes a disproportionate move in this percentage to have any material impact on our consolidated operating margins.

Since the net purchase costs of most of our key bakery commodities has remained generally stable so far this year and we expect it to remain stable for the fourth quarter as well, this cost percentage will fluctuate principally as result of a mix of product shipped for any given quarter.

We make about 250 different products in our bakery production facility and obviously some have higher contribution margins than others, depending on the product and depending on the distribution channel.

Also some distribution channels, such as the warehouse club channel, which is more than half of our outside business, that channel has higher selling and distribution costs than some of our other channels.

With respect to our outlook for bakery commodity costs, our current annual contracts for cream cheese expire during the first quarter of next year.

That's the most significant commodity that we use in our bakery operations.

We currently use, probably, somewhere between eight to 10,000,000 of cream cheese annually.

At this time, based on current and forecasted conditions in the dairy commodity markets, we're expecting to enter into new 12 month contracts for cream cheese during the first quarter of next year at a cost per pound that should be slightly lower than our current cost per pound.

So I think that's good news.

Total labor costs for our combined restaurant and bakery operations were 31 percent of total revenues for the third quarter, which was slightly higher than the 30.6 percent number reported for both the same quarter last year in the sequential quarter.

Labor in our restaurant operations continues to benefit from slightly lower staff turnover rates, slightly lower overtime hours, slightly lower pressure on our average hourly wage rates, except here in California where the minimum wage went up 50 cents an hour beginning of this year 2002 and where we do have 25 percent of our restaurants.

Increased labor for the third quarter was principally due to higher fringe benefit costs, principally group medical insurance and the one-time production inefficiencies and reverse sales leverage on the fixed labor costs in our bakery operations, again, was associated with the product withdraw.

We do expect that the group medical insurance increase, which probably represents I would estimate about 20 basis points of the 40 basis point increase in labor, will probably continue going forward.

Otherwise, we expect that our operating labor costs should continue to track our recent trends.

Please keep in mind that we do have five new restaurants planned to open during the fourth quarter and it takes about 90 days for our restaurants to achieve their targeted operating margins.

Food costs usually reach their targeted levels faster than labor costs in our new restaurants.

Moving to other operating expenses, other operating expenses were 24.1 percent, the total revenues for the third quarter.

Again, that was up compared to the 22.2 percent reported for both the same quarter last year and the sequential quarter.

Now most of this 190 basis point increase, 130 basis points to be exact, is due to the one-time impact of those directly attributable expenses with the bakery product withdraw.

The remainder would be attributable to higher insurance costs for our workers comp, property and general liability coverages and higher bakery marketing and distribution expenses.

Now the insurance cost impact, which probably represents approximately 30 basis points of that increase will likely continue going forward.

As you know, the insurance markets have hardened in general for all businesses for nearly every coverage category and we're unfortunately not immune to that situation.

Moving to our G&A expenses, G&A expenses were 4.7 percent of total revenues for the third quarter, comparing very favorably verses five percent for both the same quarter last year and the sequential quarter.

We've done an excellent job of controlling our G&A expenses here at the company.

In terms of absolute dollars, our G&A expenses are going to fluctuate from quarter to quarter depending in part on the number of restaurant managers that are in our training program during a given quarter and the number of trained managers that we're banking for future restaurant openings.

Our G&A expense consists of two major components - the cost for our corporate bakery and field supervision support team, which clearly should grow at a lesser rate than revenues; and then the other part would be the cost for our restaurant management recruiting and training program, which is going to grow at a rate closer to our unit growth rate which is around 25 percent or so.

Our current expectation for total G&A expenses as a percentage of revenues for the full year this year - fiscal 2002 - remains in the range of about five percent, but could end up a little bit lower than that, depending on the degree of sales

actually achieved during the upcoming fourth quarter.

Depreciation expense was 3.6 percent of total revenues for the third quarter compared to 3.3 percent for both the same quarter last year and the sequential quarter.

Our current expectation for depreciation expense as a percentage of revenues going forward into 2003 remains in the 3.6 percent range - again, based on our expected growth and investment plans as well as the scheduled amortization of our restaurant technology investments that we made last year and the incremental investment costs associated with our second and third Grand Lux Café Restaurants.

Moving to pre-opening costs, our actual pre-opening costs incurred during the third quarter were about 2.2 million compared to two million for the same quarter last year.

During the quarter just ended, we opened three restaurants, including the big Grand Lux Café on Michigan Avenue in downtown Chicago was - had the square footage equivalent of two restaurants.

And then we also incurred pre-opening costs for other openings in progress.

Last year in the same quarter, we also opened three Cheesecake Factory restaurants and incurred pre-opening costs for other openings in progress.

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're required by Generally Accepted Accounting Principles that were adopted by the accounting profession back in 1998 to expense restaurant pre-opening costs in the period that they're incurred, and that's exactly what we've been doing.

As a result, the timing of restaurant openings and their associated pre-opening costs will always have an impact on our quarterly earnings comparisons, so you have to be mindful of that.

The pre-opening cost for our upscale, highly-customized, and operationally complex restaurants is higher than most restaurant concepts in terms of absolute dollars, but is in line with other upscale concepts relative to the scope of operations and the sizes of the restaurants.

As we suggested during our last conference call, given our expected five openings for the fourth quarter - the current quarter that we're in this year, we have suggested that analysts and investors should factor enough pre-opening cost into their earnings models for these five openings and also allow for the normal 90-day period following openings the new restaurant operating margins to reach their targeted run rate

.

So, that covers our review of the major line item components of our operating margins for the third quarter.

I think it's fair to say that in spite of the one-time impact of the bakery product withdrawal and its associated inefficiencies on our margins, our consolidated operation margin - operating margins still were able to expand slightly during the third quarter in spite of all of that, again, thanks to lower food cost and thanks to good G&A expense leverage that effectively offset the other small pushes and pulls on our other line items and our margins.

Again, we have made forward looking statements and please refer to the full discussion of risk and uncertainties associated with our forward looking statements including our filings with the SEC.

Just to spend a minute on our liquidity position, our position and financial flexibility continue to remain very strong as of today.

As of October 1st our cash and marketable securities on hand were about $110 million and our adjusted networking capital position was about $53 million.

We strongly believe that maintaining a networking capital position in this range makes good business sense in this operating environment so that both we and our investors can have continued confidence in our ability to execute our growth plan with maximum financial flexibility knowing that we have got the capital in place to do so.

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

We still estimate that our cash that our capital expenditures for the current year are going to range in the $75 million neighborhood.

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

That we have no funded debt, we do not have a need for funded debt or any other external financing contemplated in the near future other than our landlord construction contributions either for this year or next year.

We do keep a $25 million credit facility in place for backup liquidity purposes and to support our standby letters of credit and support our insurance arrangements.

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

During the first nine months of this year the company has bought back about 197,000 shares of a total cost of about $7.1 million.

So we have got about 640,000 shares remaining in our current repurchase authorization.

So that wraps up our business and financial review.

Both David and I, Mike and the whole team feel that The Cheesecake Factory's financial performance for the third quarter just ended was incredibly strong and 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 we believe for at least 200 restaurants domestically, we have got a sustainable period of growth for a long time to come.

So that concludes our business and financial review for the third quarter and at this time David and I would be happy to answer a few questions.

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

So, operator, I think we are ready for a few questions.

At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad.

We will pause just a moment to compile the Q&A roster.

Your first question comes from Michael Novak.

Good evening guys.

Hey Mike.

How are you doing?

I am doing well thanks.

How are you doing?

We are doing well.

My first question is sort of backing out the impact of food costs going forward.

How would you expect margins to trend over the next couple of years?

If you could talk about the investments you have made in technology and hopefully getting some leverage on some of your fixed expenses.

Where do you think you could take them backing out the food costs?

Well I think that we have said that our targeted operating margin goal is to be in the 12 percent range, and I don't think we're that far away and I believe that we've said that our biggest opportunities lie in increased economy as a scale, not only in the food costs arena, but for all of the contracts that we enter into with respect to all of our operations.

When you look at all of our operating costs, not only with respect to food, but for china, silver, glassware, linens, repairs and maintenance, janitorial expenses, and so forth, we believe that there's opportunity to leverage those relationships.

So that's one important area.

The second important area would be to continue leveraging the fixed costs in our margin structure.

Principally in our bakery operations and in our G&A infrastructure.

I think that's, those are probably the best areas.

The remaining area that we believe that we do have opportunities and

might want to comment on this one, would be in labor productivity.

Again, with our technology investments and further upgrades that we have contemplated, you know, for the next coming years, we believe that there's room in our operating labor to improve labor productivity and

, do you have any additional comments that you might want to add at this time?

No, it's just basically going at a restaurant level economic to each and every one of the restaurants and seeing where there is opportunity and especially when we flex our sales up, that we are taking those opportunities to drop more margins to the bottom line and so that we're continually looking for that.

So, it's a constant, but it is that the rest unit by unit level and that's what we are working on.

So I think those are our best opportunities to gradually make progress toward our 12 percent operating margin goal,

.

Thanks, and then second question, if I may.

Can you talk a little bit about new store productivity with your newer as well as what you're seeing out of the

Café and what you need on a sales per square foot basis to get similar returns?

Well as far as our new Cheesecake Factory restaurants, I think we've been blessed with incredible when we've opened up our last 12 to 14 restaurants.

For example, our most recent opening would be in the St. Louis market.

We opened on October the eighth and our first full week of sales were well over 260,000 bucks.

Now, if you're in the restaurant business or a very knowledgeable restaurant investor like you are,

, you got to know that 260,000 bucks of sales in a week is an incredible number, even for Cheesecake Factory.

And I think that, you know, where do you go from there?

It's just an incredible number and I think internally David and

correct me if I'm wrong, but I think we would be very delighted to ultimately settle out at 215 to 220,000 a week, which would be right at our average in St. Louis and I think St. Louis is a wonderful market.

But I think that as we've grown, our brand identity across the country, when we open up in markets that we've never been before, like St. Louis, we're just incredibly well known by consumers in the marketplace already.

And David would you like to comment on

Café?

We're working towards Cheesecake Factory margins and it would take a little bit to get there.

We still have to work our menu mix and that's why, you know, it's still in the incubation period.

So, they're not numbers that we really put out there, but we are moving much closer to cheesecake members that are pretty close right now.

Thank you.

And is your new restaurant in the Prudential Center meeting your expectations?

Very much so.

I think it's exceeding our expectations.

Yes, and without any accountablization of the other two, which is really nice.

Great.

Thank you.

Good job.

OK,

.

Thanks.

Our next question comes from

.

Hi

.

Could you comment on the comps and traffic trends for mall based verses non-mall based restaurants?

About 60 percent of our restaurants could probably be characterized as being at or near major shopping malls or shopping centers, although we tend to locate our restaurants where there's a lot of upscale retailers and where you have all of the pieces, offices and entertainment and all of the pieces necessary to do that $1,000 of sales per square foot that we

in the restaurant industry and I think it's fair to say that because of our positioning as a destination restaurant we are not dependent, nor have we ever been dependent on the traffic in a mall for our success.

David, would you like to ...

I think we really bring customers to a mall and we never open up looking at the mall to bring customers to us and so we're not seeing any difference, but I don't know that that 's true for other restaurants.

You know, whether malls are slowing down or not, you know, we have our parking right, we have our front door, we have our own hours and so we're doing our own business and we look to that when we select a site and not -- we don't look to the mall business, so that's why I don't think whether mall business is up or down, it doesn't effect us very much.

So I think it's about the same, you know for us it's really more to do with international tourists and some of the other things in some of these markets that are probably affecting us a little, but the mall customer is not.

I think the best example of that would be our restaurant in the top floor of Macy's in San Francisco, here we are on the top floor of a major department store which is a retailer, which I believe Macy's traffic has been down double digit for a couple of years in that particular location, our traffic on the top floor of that retail building has been up double digit.

We were up over 14 percent last quarter and have been up double digit, gosh, ever since we've opened up the restaurant and it's gotten into the comp base.

So I think that's probably the best example of why we are destination restaurant concept and are not dependent on the success, necessarily, of the location of project that we're in.

Yes, that's clearly pretty good especially given the state of things in San Francisco.

Right.

Just a quick follow up, if I could.

You mentioned the $90 to $95,000,000 in sales that -- cheesecake sales that are going to go through the restaurants, is that for 02 or 03?

That would be for '02.

OK, thanks.

OK, Al.

Your next question comes from

.

Yes, good afternoon guys.

Hello, Dennis.

Hi.

I noticed for the first time in, I think, it's about five years the number of or the percentage increase in restaurant weeks was actually larger, Gerry, than the percentage increase in sales.

Meaning that the average weekly volume was below a year ago and year ago's was, I guess, modestly impacted by September 11th and I'm just wondering whether that has to do with mix or the $2,000

in the eighth to 9 range, can you give us some color on that and where that average unit volume may go?

To me that's more important than comparable source sales.

Thank you for that comment, Dennis, you're absolutely right, our average sales per week for the third quarter were actually just slightly off by, I think, seven tenths of a percent.

I think most of that is attributable to the fact that we have several restaurants that are not yet in our comp base that have opened up with such high volumes that are now beginning to settle into their normal one rate volumes for Cheesecake Factory right at our standard productivities and I believe that's probably the phenomenon that we're seeing.

In addition, you do have the impact of the two new Grand Lux Café restaurants that are annualizing, as we've said, $8 million to $9 million versus, you know, the Cheesecake Factory average, which is probably north of 11 million today.

So, those would be the factors - absolutely.

OK.

Thank you.

OK.

Our next question comes from

.

Yes, it's

for

.

Two questions - year-over-year and sequentially, your average ticket - how is that - how did that progress this quarter?

Our average ticket has held steady.

We haven't seen any change in our average ticket or the components of the average check.

About 72 percent of our average check consists of food, and about 13 percent is alcohol-based, and about 15 percent, if that all adds up right, would be our desserts.

And we really haven't seen any material shift at all in the components of our average check or our absolute average check over the past - gosh, 18 months or whatever.

The only time that we see it really move is when we take an effective price increase, and in the past, we've historically been able to achieve our price increase in our average check.

Thank you.

One quick follow-up - with the 100 million plus on the balance sheet and interest rates where they are, though they've moved up a little bit lately - still low - much lower than your earnings yield in your stock, buying back stock is very accretive to earnings.

Is there any - can you provide a little color on your thought process as to whether or not to accelerate or make larger your share purchase program?

Well, I think the answer is that we'll continue to be mindful of the opportunities that we have from time to time to finish off that remaining share repurchase authorization.

I think that if you really take the time to pencil out the numbers - and we do this quite regularly as we're very, very mindful of our obligations to, you know, maximize stockholder value - if you really take the time to pencil it out, you will find that it takes - it would take an incredible amount of our cash reserves to affect a share repurchase to come up with any meaningful incremental impact on earnings per share.

And I think given the current environment, given our growth plans and opportunities, given our current stock price - I think in light and on balance of all of those factors, we felt that the best course of action would be to stay the course and to continue to be opportunistic with respect to our existing share repurchase authorization.

As time goes on if our cash continues to build - and, you know, we are a very successful, cash flow positive company.

And we're a real company with real cash flows.

Each one of these Cheesecake Factory restaurant - these little sweethearts throw off at least two million of operating cash flow a year.

And we are self-financing our capital expenditures today and our current growth plans today.

We do have Grand Lux Café that represents a very interesting growth opportunity for us and we want to kind of keep some powder dry to support that as that continues to evolve.

But at some point, if we keep throwing off a lot of cash, then I think we're really going to have to revisit this analysis and we might have a different point of view.

But I think as far as where we stand on balance today, I think we're going to stay the course.

OK, thank you.

Good quarter in a tough environment.

Thank you very much.

We have time for another couple of questions, operator.

Your next question comes from Sharon Zackfia.

Hi, Sharon.

Hi.

How are you?

We're doing well, thank you.

Good.

I was wondering if you could give us some perspective on average weekly volume trends throughout the quarter, particularly given what should be really easy comparisons after September 11.

Well, you know, Sharon, in our business, if you'll recall after September 11th and through the end of the quarter we really did not see much of a decline in sales with the exception of just a couple of restaurants.

Our two restaurants in Las Vegas and the one right down the street from you in downtown Chicago.

But we did not see significant declines in our business and, in fact, we had several restaurants that actually increased.

And whatever declines that we had other than downtown Chicago, which took a little while to recover because of the issues involving security at that restaurant.

You know Vegas actually bounced back very, very quickly so we really did not see significant declines post 9/11 last year and I think it is fair to say that our sales trends really for the quarter have been fairly steady.

And as I mentioned in my remarks during the conference call, actually during over the past couple of weeks, we have seen a slight uptick in our comparisons.

OK.

Gary, I have in my notes from the third quarter

last year that average weekly sales were down four percent and three percent in the last two weeks of December.

Right.

I am sorry.

In September.

Primarily due to those high volume locations that you just mentioned.

That is correct.

You are correct.

So would we have seen an uptick then as we went into the end of September?

You would have seen that absolutely.

Particularly in those restaurants you would have definitely seen that.

But when you look at all of our other restaurants, I think it is fair to say that our business has been very, very steady and we really have not seen any material movements whatsoever.

OK.

And then just a quick question on the bakery business.

You mentioned the $2 million in sales that you lost after the recall that you estimate.

How much of that was

and how much of that do you expect you will get back in the fourth quarter?

I am trying to get a sense of how many customers we are talking about in

million.

Well, we would rather not get into the specific sales volumes for specific customers because then our competitors that are listening in are going to have a road map as to where to go.

Sure.

But I think what we did say in our comments was that we expect fourth quarter outside bakery sales to be generally in the same range of what we saw for the fourth quarter last year and that was a record quarter for us.

So I think to be able to be on the recovery track and be able to be in a position to make an estimate like that is pretty darn good in that environment.

OK.

Thanks a lot.

Congratulations on the promotion.

OK.

Thank you Sharon.

Your next question comes from

.

Thank you.

Well I got beat to the punch on the congratulations to the promotion.

It is the one thing you omitted in your thorough financial review Gerry.

Thank you Allan.

Hey just - can you just give us a little sense of the timing for opening next year by quarter?

I think what we said Allan is that it is going to probably be - David would you like to go ahead and comment?

Yes.

It is just going to be similar to this year Allan in terms of weighted towards the second half of the year.

There could be the same number in the fourth quarter that there is this year but because so many of these are new construction and/or landlords are preparing the grounds for our freestanding building, we just do not have it all for you yet.

But I can tell you from what I sense, it will be very similar to this year just adding a few more restaurants in the group.

OK.

Great.

Thank you.

You are welcome Allan.

Thank you.

Operator we have time for one more phone call.

Your next question comes from Scott

.

Thank you.

Good Afternoon.

Go ahead, Scott.

Thanks.

Gerry, quick question for first of all on pricing.

I know you overlapped a modest increase in August which leaves you with about 1 percent that was taken early this year.

Any plans for any price increases over the next several quarters?

I think the answer is, Scott, is that we are in the process of evaluating what pricing that we think we are going to need to take here.

We do not have a number yet.

We consider our price increases, as you know, very, very carefully and we're right in the middle of all of our detailed internal forecasting for all our business for next year.

I think that as we look at margins, I think food cost trends are expected to stay very, very favorable, which should help take some of the pressure off of the need for pricing but on the other side of the coin, we have normal inflation that we have to deal with and we also have insurance pressure like every business has in America right now that we're going to have to deal with.

So, I think we're going to make our decisions here probably in the next 30 days and then we'll advise everybody.

You mentioned insurance and I actually had a question there.

Do you - I think at one of the recent consumer conferences you had commented that you had thought your insurance would cover some of the costs of the bakery recalls and the issues there.

Is that something that we should be on the lookout for in the fourth quarter?

No, I don't think so.

The financial impact of the bakery issue has been booked in its totality net of all expected recoveries in the third quarter.

So to the best of our knowledge and to the best that we can estimate, that issue is financially behind us now.

Two other real quick questions, I know you have to go.

The other income line, I apologize if you hit on that, but it's about a half a million versus only about 73,000 last year.

Right.

Can you give us a rough idea of what was in that line?

Sure.

Most of that would be a gains on the sale of our short-term investments in order to finance our capital expenditures.

In other words, we have our money invested in government agencies and treasuries and corporate bonds rated A or better and to the extent that we go through periods in our annual operating cycle where we have to liquidate investments to finance our capital expenditures, then that's what happens.

So we were first, I guess, to liquidate some investments to fund capital expenditures here, 'cause we've got so many restaurants opening up and we have to take gains.

So that's really - that's really what that is.

I guess market gains are a good thing.

Yes, they are.

They could be losses.

Last question for you is I know in the past you've been somewhat hesitant to open late in the fourth quarter because of the hiring environments and so a lot of the retailers staff up and you potentially opening too strong.

How come a little bit of a shift in that thinking this year, you know, with a couple of the openings looking like they could fall between Thanksgiving and Christmas?

We're really fine opening until about December the tenth or twelfth.

It's after that that we usually find that difficult that close to Christmas.

But we have opened many times after Thanksgiving and last year even as late as the second week in December.

But it's after that that we usually do not open and then start looking for a staff of a new restaurant right after New Year's.

So, we've opened many times that late.

It's just later than that, so these next few restaurants should open, you know, as far as we can tell now, will open before that if all goes well.

Thanks, David.

All right.

Hey, thank you and if there are any further questions, just give us a call at our offices.

Thank you operator.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Mr. Deitchle, are there any closing remarks?

This concludes today's Cheesecake Factory third quarter earnings conference call.

You may now disconnect.