Cheesecake Factory Inc (CAKE) 2003 Q2 法說會逐字稿

Good afternoon.

My name is Brian 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.

At this time I would like to turn the call over to Mr Gerald Deitchle You may begin your conference.

Thanks, operator.

Good afternoon, everybody.

I'm Gerald Deitchle, President and CFO of the Cheesecake Factory and welcome to our quarterly investor conference call, which is also being broadcast live over the Internet today.

Also with us on the call is David Overton, our Chairman and CEO, Mike Dixon, our VP Finance and Controller and Jane Vallaire, our DIR.

Before we get started, I'd like to ask Jane to read our standard cautionary note regarding risk factors and forward looking statements.

Jane, go ahead, please.

Thanks, Jerry.

The company's comments during this conference call held today July 22, 2003 include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Investors, listeners are cautioned that forward looking statements are not guarantees of 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 many future results, performance or achievements express or implied by the forward looking statements.

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

We do not undertake any duty to update any forward-looking statements.

Investors and listeners are referred to the full discussion of risks and uncertainties associated with the forward-looking statements contained in our periodic files with the SEC.

This conference call is the property of the Cheesecake Factory Incorporated, and any retransmission, rebroadcast or redistribution of this call without the express written consent of the Cheesecake Factory Incorporated is prohibited, Jerry.

Thanks, Jane.

With that out of the way, our agenda for the call will be as follows.

First we'll cover the press release that we issued today that covers the Cheesecake Factory's financial results for the second quarter of fiscal 2003 that ended on July 1, 2003.

And during the course of this call, we're going to refer to that quarter as the second quarter.

After that, we'll be happy to answer your questions as time allows.

We'd like to finish up the call in about 45 minutes.

Let's go ahead and get started.

Both David and I were very pleased with the Cheesecake Factory's financial results for the second quarter.

Our company achieved record net income for the second quarter of $15.3 million or 30 cents per diluted share compared to net income of $13.2 million or 26 cents per diluted share for the same quarter last year.

In spite of a cooler and wetter spring that impacted patio utilization for the several of our higher volume restaurants during the quarter particularly on the east coast, our comparable restaurant sales achieved a slight increase during the second quarter, which we were very pleased to see.

Our restaurants have achieved positive quarterly comparable sales comparisons during 43 of the 44 quarters that our company has been publicly held and we're very, very proud of that strong track record for our industry.

We believe that our consistent sales trends and industry leading sales productivity metric are strong testaments to the sustained popularity of the restaurants over the years and the sustained ability of our restaurant management teams to correctly execute our concept as we continue to grow our company into a larger national restaurant business.

Clearly, the macro economic environment has been very challenging during the past couple of years for most consumer businesses, but in spite of that environment, the Cheesecake Factory has been able to maintain and even slightly grow our comparable sales volumes adverse weather conditions not withstanding without the need to resort to media advertising or discounting to stimulate consumer interests in the concepts.

Both David and I believe very strongly that's a truly impressive accomplishment for any consumer business in this environment.

We continue to rely on our 25-year reputation with consumers for excellence in food service, ambiance and value, and it's really those factors that sustain our industry leading sales productivity metrics over the long term.

We believe this is the best long term competitive strategy and positions for the upscale casual dining concepts.

The Cheesecake Factory has always been a operating restaurant company.

We have always been focused on great restaurant touring, and great operational execution and to that point, we're very, very fortunate to have some of the best restaurant operators in the industry led by our operating Presidents Mike Curry for Cheesecake Factory Restaurants and Peter D'Amelio for our Grand Lux Cafe Operations ably assisted by our Regional VP Jack Belt and Wayne Jones and the rest of our outstanding restaurant operations team.

Now I'm going to give you a little color with respect to the top line results for the second quarter and cover our growth plan for the rest of this fiscal year and then Mike Dixon will review the operating margin trends for the quarter.

I think, as you will hear from Mike we believe that our restaurant and bakery operators did a very commendable job of managing our controllable costs and expenses during the second quarter.

Our total revenues for the second quarter were about $188.6 million, up 14% compared to the same quarter last year.

The total restaurant sales were up about 18% during the second quarter to about $178.8 million.

Now, that 18% increase consisted of a 19% increase in total restaurant operating weeks, and that resulted from the openings of about 12 new restaurants during the trailing 12-month period.

That was partially offset by an approximate 1% decrease in average sales per week, which in turn was principally attributable to the expected sales declines for many of the 12 recent openings as they normally transition through their grand open honeymoon periods.

As we previously mentioned, many of our new restaurants continued to open with initial annualized sales volumes anywhere from 20% to 40% above their targeted sustainable run rate level.

In fact, several of our recent restaurant openings have set new opening records for our company, and we can go right down the list of St. Louis, St Jose, Edison New Jersey, Charlotte, North Carolina, West Nayak, New York, Overland Park, Kansas, to name a few that immediately come to mind.

Generally over a period of several months, sales volumes for most of the new restaurants will gradually settle in to the sustainable run rate level that we continue to target in the range of $1,000 bucks of annual sales per square foot in total for each year of new restaurant opens.

This is really the targeted sales level that we require in most cases for our new restaurants to achieve the targeted return on investment profiles for each new restaurant.

As we preparedly mentioned, our comparable restaurant sales for the second quarter were up slightly, about .3%, which is principally attributable to the menu pricing.

We think it's very important to remember that the Cheesecake Factory is still a relatively small chain in terms of the absolute number of restaurants in our company.

For the second quarter just ended, we only had 48 restaurants, and our comp base that were open for the full second quarter in both years that we're comparing.

We don't have hundreds of restaurants like many of the large casual dining chains that we are often compared against.

Accordingly, the sales trends of just one or a couple of our high volume restaurants in our comp base can have an impact on the aggregate comp sales statistic.

For example for the quarter just ended, our the comp sales comparison would have probably been closer to 1% if we took the consideration -- just a couple of restaurants with large patios that were clearly impacted by the cooler and wetter spring season that we experienced particularly on east coast.

With respect to comparable sales comparisons at the Cheesecake Factory we always remind the investors that everything else being equal, and the -- in the absence of weather and national events or other factors outside of our control, we only expect to achieve increases in comp sales that are roughly equal to our annualized effective menu price increases in the established restaurants.

I think our menu price increases have averaged about 1% to 1.5% in the past couple of years.

We did implement an approximate 1% menu price increase that was completed during the January to February period in all of the Cheesecake Factory restaurants.

That was in connection with our winter menu change.

We are implementing a very small effective menu price increase of just a couple of tenths of a percent, along with our summer menu change that will finish up rolling out during the July, August time frame.

In light of our industry leading sales productivity, the Cheesecake Factory, as many say, we're a victim of our own success when it comes to the comp sales metric.

Our average annual sales per square foot of $1,000 is already more than twice the average for the casual dining segment, so it's very difficult for us to surpass that level of productivity.

With the Cheesecake Factory concept, busy and productive as it is, particularly during the peak meal periods, we don't have much excess capacity to grow significant amounts of real sales in our established stunts.

So, we always like to remind our investors that the vast majority of our plan growth in total restaurant sales for the next few years will come from adding new capacity to our national restaurant operations by opening new restaurants.

It's not going to come from comp sales increases.

Our Grand Lux cafes continue to do extremely well.

Sales continued to build at all three Grand Lux cafes during the second quarter.

Compared to the same quarter last year, sales for the Las Vegas and Los Angeles Grand Lux cafes each increased a strong 7% during the second quarter.

And sales for our downtown Chicago location continue to build, and our annualizing in excess of $10 million.

Our continuing to fine tune the menu and operating systems to get Grand Lux cafe ready for future expansion and based on the successful efforts to far, we currently plan to open as many as two more Grand Lux cafes during 2004.

And all of us continue to be very excited about the long-term growth potential of the concept.

Moving over to our restaurant expansion plan, we noted in our press release today that we remain on target to open as many as 14 new Cheesecake Factory restaurants during fiscal 2003.

As we originally planned, four new restaurants have opened so far this fiscal year.

We previously commented that our new restaurant development plan will be back loaded this year as in past years, and as many as 10 additional cheesecake factory restaurants are planned for opens during the August to December time period this year, and I'm happy to say that we are ready operationally to successfully execute these openings Last year, we successfully opened seven restaurants during a 13-week period, so we clearly have the infrastructure and the capability in place to correctly execute the upcoming openings.

Due to the nature of the lease spaces that we select for the restaurants and the customized layouts, it's not possible for us to precisely predict by quarter the exact timing of the restaurant opens and their associated pre opening costs, but having said that we are committing to opening as many as ten additional restaurants during the rest of this year and thereby increase the total restaurant productive square feet for the full year by 23% and also increase our total operating weeks for the full year by about 21%.

The following locations are under development for potential openings during the rest of this year.

Raleigh, North Carolina, McKean, Virginia at Tyson's corner, white plains, New York,.

South snons(ph), California, Woodland, Texas on the north side of Houston.

Cleveland, Ohio, Peoria, Arizona.

That's Arizona, 234 the Phoenix market, and a potentially huge unit from a sales perspective in Honolulu, Hawaii, next to the royal Hawaiian hotel on Wakai beach.

We're very excited about the high quality and strong sales potential of all of those locations.

At most investors know, pre opening costs are significant for the Cheesecake Factory for the upscale, highly customized and operationally complex concepts.

Most of the pre opening costs are incurred during the two months before and the month of actual opens and we're required to expense the costs as we incur them.

Even though we cannot precisely predict the exact timing of the upcoming opens by quarter, we once again are suggesting that our investors should be expecting pre opening costs for the equipment of as many as six to seven opens for pre opening cost purposes for the third quarter, and another four to five opens for pre opening cost purposes for the fourth quarter which includes a little extra pro opening cost for the Honolulu location that could potentially open in the fourth quarter and also the fourth quarter will probably have some impact of potential openings for Q1 of 2004 from a pre opening cost perspective.

Additionally, we have previously commented that it generally takes about 90 days or so for our new restaurants to work through food costs and labor in efficiencies that are commonly associated with new restaurant opens.

So once again, we suggest that our investors should be expecting some very margin impacts from the upcoming clustered openings during the third and fourth quarters again.

All due to the timing of the opens.

The good news is, once we get these opening and their associated pre opening costs behind us during the next five months.

These new restaurants should significantly contribute to sales and earnings growth during 2004.

At this point, our planned opens for 2004 have potential to be a little more front loaded than in recent years, although we don't have absolute control of the timing of our opens due to our retail development models.

Our restaurant development model speaking about that, is very different than the traditional cookie cutter chain development model where you can go out and get a pad site and design and construction process are much more simplified because you have standardized restaurant layouts and restaurant companies have the control over the development process.

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

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

As a result, we rely heavily on the landlords to deliver the lease spaces to us in a timely manner, according to their original equipment so we can build out the spaces in a timely manner.

All of the locations are upscale.

They're customized which helps to create a non-chain image that we enjoy with consumers and we think is a significant competitive advantage for us, but it creates unique design and permitting challenges.

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

So, as a result of these factors and our retail lease development model, it's not uncommon at all to have planned openings move a few weeks or as much as a month due to various factors outside of our control.

But having said that, we always pick great locations.

Once we get our restaurants opened, they have never been disappointing.

We're batting at 1,000 for successful restaurants so far and there aren't many chain restaurant operations that have the successful development track record that the Cheesecake Factory has.

Moving to the bakery operations.

Bakery sales to other food service operators, retailers and distributors were $9.8 million for the second quarters and that very close to our previously announced $10 million sales estimate for the quarter.

As a matter of longstanding policy, I think most investors know that we generally do not provide estimates of sales and earnings for our business.

However, we decided to make an exception as it relates to bakery sales for the next couple of quarters in order to give the investor as much visibility as we can on bakery sales, again, given the purchasing plans of the larger customers which are difficult for us to predict.

In the press release today, we indicated that we currently expect bakery sales for the upcoming third quarter to be in the range of $10 million to $12 million.

If we achieve bakery sales in that range, we would also achieve a positive sales comparison versus the third quarter last year.

The upcoming fourth quarter is seasonally our strongest quarter for bakery sales and we are expecting another busy fourth quarter this year.

We are in the process of finalizing our expected customer orders from our large customers for the fourth quarter.

We'll wrap that up during the next 60 days or so.

We'll update you as to our expected sales for the fourth quarter on our next conference call.

Earlier this year, we were happy to announce an expanded relationship with Cisco Corporation that we expected to favorably impact the bakery sales volumes during the second half of 2003.

The expanded Cisco relationship is continuing to make steady progress just as we had expected.

Our sales team continues to meet with the various Cisco operating companies across the country.

About half of the Cisco operating companies across the country have just started to purchase our dream factory products and about a third of the operating companies have just started purchasing the Cisco supreme products that we manufacture.

The warehouse club sales continue to be a little softer than we expected, but our sales with other national retail chains continues strong and we continue to do expect a busy up coming fourth quarter in the bakery operation.

While we remain optimistic with respect to increased bakery sales, we try to be conservative we always remind 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 difficult due to the nature of that business and the purchasing plans of our larger customers, which are going to fluctuate from quarter to quarter.

In our view, the bakery's most impactful role to the Cheesecake Factory continues to be its service as a dependable, high quality producer of desserts for sale in our own restaurants.

Our restaurants will probably sell well in excess of $100 million of desserts this year, 15% of our restaurant sales are dessert sales and most of those sales are accomplished with products that are made in our central bakery production facility.

We have previously commented that we have been evaluating various alternatives to add additional production capacity to the bakery operations in order to support our growth plan over the longer term.

This year, as we have previously mentioned, we're going to increase the capacity of our current production facility by about 20% at a relatively low cap ex investment that we have contemplated in the cap ex budget this year.

We're probably going to commence on capacity addition activities on a small scale on the east coast starting sometime next year and we'll keep you advised of our progress in that respect.

I think that covers our top line performance for the second quarter and new restaurant opening plan for the rest of this year, so now I'm going to turn the call over to Mike Dixon our V.P. of Finance.

And Mike is going to review the individual components of the operating margins for the second quarter.

Go ahead, Mike.

Thanks, Jerry.

First we'll start with the data at bottom of the financial page of the press release.

The cost of food, beverages and supplies were 23.9% of restaurant sales for the second quarter ended compared to 23.8% for the same quarter last year and 23.5% for the sequential March quarter.

Since the second quarter of last year, we have experienced comparatively lower costs for the most of the food commodities used in the restaurants due principally to two factors, favorable supply/demand conditions in general for most commodities and our increasing economies of scale and purchasing power.

Because the menu is so diverse we use many different food commodities in the operation.

We are able to contract for only two-thirds of the food commodities used in the food operations for periods of one year.

The remaining one-third of our restaurant cost of sales consists primarily of fresh produce and poultry commodities and a very small amount of food and dairy commodities, none of which we are currently contractable for periods longer than 30 days in most cases.

As a result the fresh commodity can be subject to unforeseen cost fluctuations due to weather and other general agriculture conditions.

In the absence of weather or other market conditions outside of our control, we expect the costs for the various commodities for the remainder of 2003 to remain about the same as we experienced in 2002, assuming supply and demand conditions continue for the commodities that we use, particularly the fresh, produce, poultry and dairy.

As we have mentioned in the past we have taken steps wherever possible to extend the existing contracts for items such as cheeses, oil, beef, beverages, sugar, coffee, seafood, bread and most grocery items through the remainder of 2003 and beyond at roughly the same cost we experienced during 2002.

However, Jerry did mention, we have a significant number of openings planned for the second half of the year.

As the cost of sales of the new restaurant will typically be higher during the first 90 to 120 days of operation we expect cost of sales as a percent of restaurant sales would be higher during the August to December time frame.

Bakery costs as a percentage of the outside bakery sales for the second quarter were 45.5%, which was lower than the 47.5% reported for the same quarter last year, and the 47.3% reported for the sequential you can quarter.

This line item principally consists of the raw ingredients and packaging costs for the bakery sales for food service operators, retailers and distributors.

While this cost percentage is lower relative to the second quarter last year, most of this decrease was offset by increased cost from bakery selling and distribution expenses.

Better rolled up in the other operating expenses in our operating margin.

Also, please note that the cost percentage is a small component of the margin structure.

Since the net purchase costs for most of the key bakery commodity remain generally stable during the first half of 2003 and is expected to remain generally stable for the remainder of fiscal 2003 this cost percentage will fluctuate principally as a result of the mix of products shipped for any quarter.

We produce about 200 different products and some of which have higher contribution margins than others depending on the product and the distribution channel.

Also, some distribution channels such as the warehouse club channel have higher selling and distribution costs than other channels.

Cream cheese is the largest single commodity used in the bakery operations.

As we said before in the first quarter we entered into new agreements for the remainder of fiscal 2003 that called for a slightly lower cost per pound for cream cheese than we paid in the previous 12 months.

We currently expect to use 9 to 10 million pounds of cream cheese during 2003.

Moving up higher to the consolidated statement of operations in the press release, total labor costs for the combined restaurant and bakery operations were 30.9% of total revenues for the second quarter.

This is higher than the 30.6 number for the same quarter and lower than the 32.3% reported in the sequential quarter.

The increase in labor expense as a percent of revenues for the second quarter versus the same quarter last year was attributable to a couple of factors.

Like almost every business in America, we continue to face higher costs for the group medical insurance benefit plan, which we believe will increase approximately 11% to 12% this year and that will result in a 10 to 20 basis points impact on labor costs.

In addition the lower bakery sales compared to the same quarter last year resulted in some reverse leverage in our fixed cost in our bakery operation.

For the second half of the year labor expense as a percent of revenues will continue to be impacted by the higher medical insurance costs and also be impacted by the planned openings as many as ten new restaurants.

Again, it takes 90 to 120 days for our restaurants to achieve the target of profit margins with labor expense probably being the most difficult to manage and optimize.

Other operating expenses were 23% of total revenues for the second quarter.

This is up compared to the 22.2% compared for the same last year, but flat with the 23% in the sequential quarter.

This percentage increase compared to the same last year was primarily attributable to increased costs for the worker's comp, property, and general liability insurance programs, increased costs, financial gas services to our restaurants, and again, some reverse leverage from the lower bakery sales on the fixed portion of other operating costs and expenses.

Going forward we expect the increase insurance arrangements, which amounts to approximately 40 basis points of the revenues to continue throughout 2003.

GNA expenses for the second quarter were 4.8% of total revenues that was down slightly from the 5% in the comparable quarter last year and the 5% in the sequential quarter.

Now, in terms of dollars, our GNA expenses will fluctuate from quarter to quarter, depending in part on the number of managers and training program during the given quarter and the number of trained managers that we are banking for future restaurant openings.

As most of the opens this year in the third quarter and fourth quarters, we are still in the early stages of building our bank of trained manager in the second quarter.

Our GNA expense consists of two components, the cost for our corporate, bakery and field supervision support team, which should grow at a lesser rate than the revenues and the cost of the restaurant management and recruiting program, which should grow at a rate closer to our unit growth rate.

As we mentioned that our couple calls we have leased additional office space for expanded management training and culinary R & D activities to keep up with our growth rate.

We have also added new senior positions to our restaurant field supervision organization and other investments to support our future growth.

Accordingly, we expect G & A expense to progressively increase from quarter to quarter during the remainder of fiscal 2003.

We still expect the total GNA expenses at the percent of revenues for the full year of fiscal 2003 to be in the 5% range.

That percentage will depend in part on the degree of revenue leverage actually achieved.

Depreciation expense is 3.6% of total revenues for the second quarter compared to 3.3% for the same quarter of last year and 3.8% in the sequential quarter.

Our current expectation for total depreciation expense at the percentage of revenues for the remainder of 2003 is in the 3.6% range based on our expected growth in investment plans.

That percentage will depend in part on the degree of revenue leverage actually achieved.

Actual pre-opening costs incurred during the second quarter were approximately $1.8 million compared to $2.2 million for the same quarter last year.

During the quarter just ended we opened two restaurants compared to one opening in the same quarter last year, however, we incurred substantial pre opening costs during the same quarter last year related to our third Grand Lux cafe restaurant, which opened in Chicago in July, 2002.

We incurred pre opening costs in both quarters for other openings in progress.

Now as Jerry mentioned, we incur most of our pre opening costs in two months before the opening in the month of restaurants opening as most of investors know we are required by generally accepted accounting principals that were adopted by the (inaudible) 1998 to expense pre opening costs in the period they're incurred.

As a result, the timing of restaurant openings and their associated pre opening costs will always have an impact on our quarterly earnings comparison.

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

As the remainder, analysts and investors should factor enough pre opening costs for as many as 10 new restaurants openings during the remainder of fiscal 2003.

And again as Jerry mentioned it's difficult to predict the exact dates that the restaurants will open, however for modeling purpose, we believe that we should incur pre opening costs for as many as six to seven restaurants in the third quarter and four to five restaurants in the four quarter the pre opening costs.

As a result the pre opening costs will be higher in the fiscal 2003 prior compared to the prior yore.

One of the fourth quarter opening will be a large Cheesecake Factory in Honolulu Hawaii that will likely require costs of in excess of $1 million as investors should also consider in the modeling the normal 90 to 120 day period for restaurant operating margins to reach the run rate levels.

That covers our review of the line item components of the operating margins for second quarter In summary, the cost pressures that I identified in the insurance and utility areas exists, but we continue to benefit from food costs and control of the operating and G & A expenses that we can control.

As Jerry mentioned, the restaurant opens planned for 2003 is solidly on track and the bakery sales by quarter as the opportunity to increase sequentially during the rest of 2003.

We have a good opportunity to resume the leveraging of the fixed costs in the margin structure going forward.

Please refer to the full discussion of risks and uncertainties associated with the forward looking statements included with the company's files in the sec.

The tax rate was 35.7%, the same as for fiscal 2002.

We plan to use the same rate, 35.7 as the estimated effective tax rate for the remainder of fiscal 2003 subject to adjustment as necessary as remove through the year.

The liquidity position and financial flexibility continue to remain strong.

As of July 1, the cash and marketable securities on hand were approximately $127 million while the balance was up $13 million from the December year end balance, we expect the balance to decline during the remainder of the year as most of the planned opens for the year and the relate the cap ex spending are still to come.

Our cash flow from operations year to date was approximately $47 million, and our cash and accrued cap ex year to date was approximately $39 million, which included construction progress for upcoming opens.

We currently estimate the total cap ex spending for the full year of fiscal 2003 to be in the rate of $90 million.

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 fiscal 2003 through expected operating cash flow, agreed upon landlord construction contributions and the cash and investments on hand.

We continue to believe that maintaining the total liquidity in the range makes good business sense in the operating environment.

So we and our investors have continued confidence in the ability to execute the growth plan with the maximum financial flexibility knowing that we have the capital in place to do so.

There may be a small financial cost associated with the capital resources that we carry but the small cost is up step by the benefits of the risk and flexibility in terms of our ability to execute the growth plan.

We have no funded debt and do not anticipate a need or other external financing for fiscal 2003 or than the landlord construction contribution.

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

We have a share repurchase operation from the board of directors to buy back up to $1.687,000 shares on the open market.

The company does not buy back any shares in the second quarter.

We have approximately 610,000 shares remaining in the repurchase authorization.

I think that wraps it up.

Jerry, back you to.

Thanks a lot, Mike.

Just to wrap up the business and financial review.

The Cheesecake Factory achieved solid increases in net income for the diluted per share for the second quarter.

We opened four Cheesecake Factory restaurant so for the issue just as we originally planned.

We're on track to open as many as ten restaurants during the rest of this year, also as we originally planned.

Our bakery sales volumes are continuing to gradually build.

The restaurants continue to lead the industry in term of the absolute sales productivity with room for at least 200 restaurants domestically.

We strongly believe we have a sustainable period of profitable growth ahead of us for several years to come.

That concludes the business and financial review for the second quarter and to end at this time, we'll be happy to answer a few questions.

We'd like to accommodate as many questions as possible in the time that we have left on this call, so as a courtesy, we would ask that you limit yourselves to just one question.

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

Operator, we're now ready to take a few questions.

Your first question comes from the line of Andy Barish of Bank of America Securities.

Hi, folks.

A quick question on the same store sales numbers.

Can you give us a (inaudible) I know the average unit volumes are down as new units come off the honeymoon.

Do you think they're having a slight negative impact on the comp numbers as well as they move into the comp base and just quickly on the absolute pre-opening numbers.

Do you still kind of look for $11 to $12 million, I think that was the number that you had in your first quarter Q.

Let's talk about comp sales for just a minute.

Historically, when Cheesecake Factory restaurants used to open up prior to us having a national brand identity and national awareness with consumers, we used to have a three to five year steady build in the volumes.

So, when they would enter the comp base after 18 months, we would get a little bit of positive contribution from those restaurants as they continued to mature out over the remaining three to five years after their opening.

In the past couple of years, as you noted and as we have commented, we have had the reverse happening.

We are experiencing honeymoon periods for most of the new openings, as they enter the comp base after 18 months, for the most part, we think that most of the sales have settled into the sustainable run rate levels, after they get into the comp base, after an 18-month period.

So, we're not really seeing or expecting any negative impact from the new restaurants entering into the comp base in the next, you know, going forward in the next year or so, but compared to what we used to get, the lift we used to get from the new restaurants a couple of years ago, we are missing that little component.

Then your other question was related to absolute the opening costs.

The only guidance that we can give you, Andy, is that in the third quarter, because we have a number of openings scheduled for the third quarter, and early in the fourth quarter in October, we mentioned that you should probably factor in for pre-opening costs purposes, maybe not on an absolute opening basis probably for pre-opening costs, costs for as many as six to seven restaurants in the fourth quarter third quarter, and four to five restaurants in the fourth quarter.

The average pre-opening cost for a 10,000 square foot Cheesecake Factory restaurant usually averages $700,000 to $750,000.

I think that Mike Dixon also mentioned that in the fourth quarter we do have the Honolulu location where the pre-opening costs are going to be a little higher, probably around $1 million or so, due to the extra travel, expense for our training teams.

So, that's really the best guidance that I think we're prepared to give at this time.

Next question.

Your next question comes from the line of Bryan Elliot of Raymond James.

Good afternoon.

On the guidance for Q3, the other operating expense last year, with the bakery problem, my recollection is that we had some unusual other operating costs associated with that.

Would the guidance for some further increases in that number similar to Q2 have been before the impact of those sort of non-recurring or after, and if they were before, refresh my memory on general magnitude of the non-recurring.

Okay.

I will be happy to do that, Brian.

As I recall in the third quarter last year, we had approximately $2 million of non-recurring costs associated with our bakery recall.

So, last year, for the third quarter, I think our other occupancy costs were around a little over 24% of total revenues for the quarter and I think that the guidance that Mike gave you with respect to insurance and utilities and related costs are really excluding the impact of that one-time impact for the same quarter last year so you probably want to kind of look at most recent trends over the past couple of quarters this year, and just factor in exactly what Mike had suggested.

I got interrupted when we were talking about tax rate.

Was there a tax rate guidance change or do you except tax rate to remain flat?

No we expect it to remain in the 35.7% level.

And again as Mike noted, we always take a look at our tax position on a quarterly basis, and if we have to true it up on a year to date basis as required by generally accepted accounting principles, you know we'll need to be prepared to do that, but based on what we're seeing at this moment, I think we're comfortable with the 35.7 for the rest of this year, based on what we know today.

Thanks a lot.

Okay, Brian.

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

Hi.

You have obviously done a really good job controlling expenses through the first half of this year and I guess I'm wondering, are we going to see the catchup in any of those costs in the second half of the year other than what you mentioned with all the new stores coming onto the base?

I don't think that we have anything that we're anticipating that is going to fall outside of our control that we're controlling at the moment.

Mike mentioned the utilities and insurance costs, which were a little bit outside of our control and I think we have to provide for them, but as it relates to controllable food and labor and occupancy costs in our baseline restaurant operations, I think that our operators continue to do an excellent job in controlling those costs and we would be surprised if they drifted outside of control over the next six months or so.

So, to answer your question, other than the factors that we talked about, prus the temporary margin impact of the clustered opening, you see coming, we don't expect to see anything really different from a controllable cost and expense perspective in the baseline restaurants.

You haven't deferred any of the costs for the training center that you were going to open this year?

No.

Actually the training center opened last year, in October.

Oh, okay.

That's really kind of baked into the numbers.

Actually, it's baked into the comparisons starting in the fourth quarter, the occupancy costs for the training and culinary center, right.

Okay.

Thanks.

Thank you.

Next question.

Your next question comes from the line of Dennis Forst of McDonald Investments.

Good afternoon.

Given that you're going to start opening stores next month for the second half, can you give us guesses as to third quarter opens by either date or week of opening.

You know, Dennis, it is very, very difficult for us to give you that precise timing with respect to our restaurant openings, because for all of the factors that we have previously discussed.

I think that if you are trying to come up with a good revenue estimate or operating weak estimate for the next couple of quarter, I believe that if you modeled in somewhere around, say 21% increase in operating weeks for the third quarter and maybe a 22% increase for the fourth quarter, that would probably be the best help that we could give you at this time, but please understand that even we cannot precisely predict the exact week of opening of our restaurants.

It's not uncommon at all for a restaurant opening to move a week or two, not based on our permitting issues, but a lot of times we're at the mercy of the entire project that we're opening up our restaurant.

If the landlord cannot get all of his life safety permit for to the entire project, oftentimes we have to wait until they're ready to go.

I think we have a couple of situations coming up here of the ten that we'd like to get open during the next six months where we're he going to be ready before the projects are ready.

But we're going to have to wait until the projects get far enough along to get their permits before we can get ready.

That's a bit of a wildcard.

David, anything else to add there?

We are going to have restaurant sitting a month until the landlord can get enough stores open to open.

So -

What was that?

Which one is that?

Yeah.

David.

I think that's -In Cleveland, Ohio.

Cleveland.

Okay.

Then right -

That's really the best that we can give you, because that's as much as we know at this moment.

Thanks a lot.

Okay.

Okay, Dennis.

Next question.

The next question comes from the line of Paul Westra of SG Cowen Securities Corporation.

Question on the bakery guidance.

I just wanted to follow up.

You may have mentioned in the last conference call that second half sales could be up as much as 40% year over year.

The current guidance for the quarter is closer to 25-ish.

I wondered if the previous projection of 40 may turn out to be aggressive, or could you catch up on the fourth quarter.

I think what we said on the last conference call, it was our objective to get full year bakery sales very, very close to the exact amount that we achieved last year.

I think our last year outside bakery sales were in the neighborhood of $48 million.

We don't really know exactly what the fourth quarter is going to be like at this moment.

We're in the process over the next 60 days of finalizing all of the potential orders from our large customers.

We do know and have a good feel for what the third quarter is going to look like, which we said in the press release, $10 million to $12 million.

The fourth quarter as you know is the seasonally heaviest quarter.

In years past, it's represented as much as 35% of the full year bakery sales because of the holiday impact.

We do have significant cakes in inventory that we're ready to market, so we have parred up the inventories and we're planning out the production runs at this time.

So, it's very, very difficult for us to give a fourth quarter estimate at this time.

So, without being able to do that, it's hard to tell you what the full year or the last six months is going to be.

But, the fourth quarter is typically our busiest bakery season, as you know, and we'll be able to give you more information here on the next conference call.

Great.

If I could sneak one more question, you have a Grand Lux.

Could you give us what your earnings have been with the banquet area in Chicago.

Any changes to the concept looking into the '04 opens and maybe where they would be located?

No.

I don't think there's any changes.

I think that the -- that's very large restaurant in Chicago.

And so we had had no choice as to the space, so the banquet room was a nice way to use that.

The volume isn't as high as the bottom line is better.

We are -- the one will be in Dallas and we are hoping that the other will be in the Miami area for '04.

Thank you.

Thank you, Paul.

Next question.

Your next question comes from the line of Mike Smith of Fahnestock & Company.

Good afternoon.

Jerry, I notice if you went over what the number of openings you're trying to schedule for '04, I missed that.

Would you do that again?

I don't think we have announced a specific number of openings for '04 yet.

I think our goal continues to be to try to increase our productive capacity in terms of square footage in operating weeks somewhere between 22 and 25% for the year.

How that manifests itself in absolute openings for the year depends in large part as to when those openings come online for next year.

We're in the process of putting together our development plan for next year, and perhaps maybe on our next conference call we'll be able to give you a little more specifics on that, but our overall capacity growth goal has remained unchanged.

I emphasize that the Cleveland store, I did hear it was finished, it just wasn't opened yet because of the development?

We're saying that in the case of Cleveland, we are -- our store will be ready a month before the landlord's grand opening and he is allowing us to open.

So, there are times where those are the issues that we face, so we'll be ready in September and they'll be -- we really are not going to be aloud to open early, and we'll have to wait for their grand opening in October.

We're just giving that as an example of what can happen with this kind of development.

Thanks.

Okay.

You're welcome, Mike.

We'll take one more question on the call and then any further questions, please feel free to call us at our office.

Your final question comes from the line of Skip Carpenter of Thomas Weisel Partners.

Good afternoon, guys.

Hi, Skip.

Jerry, first question for you.

You mentioned that the comps in the quarter may have been up more like in the 1% range had it been for I guess certain markets, specifically that had some rainy or adverse weather conditions.

Any specific markets that you could share with us that had a greater impact with regards to that.

Was that Northeast specifically, Florida, or Southern California?

Primarily our east coast restaurants that have large patios we're talking about Atlanta and we're talking about Baltimore and also here in California was a little cooler and rainier as well.

And we had a couple of restaurants, particularly our Marina Del Rey restaurants that has two-thirds of the seating outside on the patio and it was clearly impacted by that and also our Redondo Beach Restaurant that has a significant number of patio seats.

If you take the few restaurants into consideration and adjust for what they could have had had we had full patio utilization, we believe that the overall same store sales would have been closer to 1%.

Thank you.

Maybe this question could be directed to David.

In the press row lease, you talked about the new store openings and the specifically the newer one, which West Nayak or Overland Park.

You commented that you could look at these businesses as generating potentially higher average sales going forward.

What are you learning or seeing in terms of that?

Is that just a function of as the business expands and the consumer recognition continues to build that you have the confidence level that you can see an afternoon uptick in terms of AUV in the new stores.

I think they're all different throughout the country.

I think in the east coast, with the heavy population we're seeing, you know, incredible sustained sales in the New York, New Jersey area, and in the Boston area, other areas, you know, they don't have quite the populations, so we do very well and again closer to our average, in some of these northeast areas the population is so dense that we end up just having higher sales volumes.

Having said that, there are some areas that there is a little less sales but more bottom line and other areas where you get all of this volume but you have more costs involved.

So, it really differs throughout the country.

You know, we look at sales, but we're also looking at bottom line the deals we can cut, the kinds of rents we have to pay and the average wage, even for hourly workers are very different throughout the country.

So, we use this matrix in order to understand where we're going to go, so sales volume isn't the only thing we're looking at even though we thrive on high sales.

I understand that.

I'm just trying to get a better understanding in terms of you saying in the press release higher than average sales volume once their honeymoon grand opening periods are completed.

Again, I'm just trying to get a sense as to why there's the confidence level that you new units are going to be able to sustain a higher than average sales volume.

Based on the locations we selected and sales trends so far.

As we watched the transition through the honeymoon periods, they're coming down and adjusting as we expect, but they're maintaining higher than average sales productivity due to the factors that David mentioned.

Most of the East coast restaurants have far exceeded our initial sales productivity estimates but as David mentioned the cost of doing business as to be considered.

But then again when you look at San Jose, you look at St. Louis, you look at our restaurants that we have opened up in the country, due to the strength and the locations and the brand identity, we have just been very, very fortunate to be able to say that we hope that.

Sales will settle in higher than the $1,000 bucks a foot that we originally targeted.

Every location is a little bit different.

I wish there were a cookie cutter demographic model or location model that we could absolutely predict with certainty how these restaurants are going to do, but as David mentioned, every one is a little different.

Great.

Thank you so much.

Okay.

I think that concludes our questions that we'll take on this call, and if you have any others, please feel free to call us at our services.

Okay, operator.

This concludes today's conference call.

You may now disconnect.