Cheesecake Factory Inc (CAKE) 2004 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to The Cheesecake Factory first-quarter investor conference call.

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

After the speaker's remarks there will be a question-and-answer period. (Operator Instructions).

I would now like to turn the conference over to Mr. Mike Dixon, Senior Vice President and Chief Financial Officer of The Cheesecake Factory.

Sir, you may begin.

Thank you, operator.

Hello, everyone, I am Michael Dixon, CFO of The Cheesecake Factory Inc., and welcome to our quarterly investor conference call which is also being broadcast live over the Internet.

Also with us today is David Overton our Chairman of the Board, President and Chief Executive Officer; and Jane Vallaire, our Director of Investor Relations.

Before we get started, Jane will cover our cautionary statement regarding risk factors and forward-looking statements in general.

Jane?

Thanks, Mike.

The Company's comments during this conference call held today April 20, 2004, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Investors and listeners are cautioned that forward-looking statements are not guarantees of future performance and that undo 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 achievements expressed or implied by forward-looking statements.

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

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

Investors and listeners are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in our periodic filings with the Securities and Exchange Commission.

This conference call is the property of The Cheesecake Factory Inc.

In any retransmission, rebroadcast or redistribution of this call without the expressed written consent of The Cheesecake Factory Inc. is prohibited.

Thanks, Jane.

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

First, we will discuss the press release that we issued today that covers The Cheesecake Factory's financial results for the first quarter of fiscal 2004 that ended on March 30, 2004.

We will refer to that quarter as the first quarter in our comments today.

After that, we will be happy to answer a few questions if time allows.

We would like to finish up this call in about 45 minutes, so, let's get started.

Both David and I were very pleased with The Cheesecake Factory's financial results for the first quarter compared the same quarter last year.

Our revenues during the first quarter increased 28 percent to $220.5 million.

Our net income increased 32 percent to $16.7 million and our diluted net income per share increased 28 percent to 32 cents.

As we noted in our press release today, our comparable restaurant sales were up a very strong 6.1 percent for the first quarter.

That is our largest quarterly increase in comparable sales since the fourth quarter of 1998.

We believe this is due in large part to the same popularity of our restaurant concepts, great operational execution in our restaurants and favorable weather comparisons on the East Coast, California, and several other areas that were impacted last year by the severe winter weather.

Our restaurant operations team, led by a recently appointed president and COO of The Cheesecake Factory restaurants, Peter D'Amelio, did an outstanding job of managing our controllable costs and expenses during the first quarter -- especially considering the pressure on commodity costs.

The Cheesecake Factory has reported positive comparable sales comparisons in 46 out of the 47 quarters that we have been a public Company.

We have been able to maintain our strong sales productivity for many, many years without the need to resort to media advertising or discounting to attract guests to our restaurants.

There are not many restaurants businesses of a similar size or scope of operations that are able to make that statement.

We continue to rely on our 26 year reputation with consumers for excellence in food, service ambiance and value to sustain our industry-leading sales productivity metrics over the long-term.

And we continue to believe this is the best long-term competitive strategy for our business.

The Cheesecake Factory restaurant business model has always been a pure operating model, focusing on great restaurantuering, great operational execution and offering great quality and value to consumers.

And with demographic and the lifestyle trends supporting increased consumer demand for casual dining occasions, we believe The Cheesecake Factory's competitive positioning as a high-quality, upscale, casual concept with superior value should enable us to continue to capture an increasing share of those casual dining occasions as we continue our expansion across the country.

While we were very pleased with our operating income results, like other restaurant concepts, we were impacted by increasing commodity costs.

We attempted to offset this pressure with our winter menu price increase of approximately 2 percent, but the cost increases in the poultry and dairy markets were significant.

We estimate the impact on our restaurant cost of sales -- from commodity costs pressure -- was approximately 1 million to $1.1 million.

And I will cover that a little bit further in our review of the operating margins.

Now I will take a minute to provide some additional color on our topline results for the first quarter, as well as cover our new restaurant growth plan for the remainder of fiscal 2004.

And after that, I will briefly review our operating margin trends for the first quarter.

Our total restaurant sales increased approximately 28 percent during the first quarter to $211.2 million.

That 28 percent increase consisted of approximately 22 percent increase in total restaurant operating weeks, resulting primarily from the openings of 14 new restaurants during the trailing twelve month period, coupled with an approximate 5.1 percent increase in average sales per restaurant operating week.

As I mentioned earlier, our comps sales were up 6.1 percent for the first quarter.

This is principally attributable to two factors.

Considerably more favorable weather versus the prior year, which not only allowed us to keep our restaurants open -- as you may remember, we were closed for 22 operating days in the first quarter of fiscal 2003 -- but also allowed us to garner considerably greater usage out of our patio seats.

Again, that accounts for 17 percent of our total available seat.

On top of that, we had an approximate 2 percent effective menu price increase.

With The Cheesecake Factory concept as busy and productive as it is, particularly during peak meal periods when most our guests want to dine with us, we don't have much excess capacity to grow significant amounts of real sales at most of our established restaurants.

Accordingly, we remind our investors that the vast majority of our planned sales growth for the next few years should come from the openings of new restaurants -- not comps sales increases.

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

We continue to believe that the right longer-term expectation for annual increases in our comparable restaurant sales is in the 1 to 2 percent range.

With respect to menu pricing, we completed the rollout of an effective 2 percent menu price increase in mid-February.

As in years past, we will review our operating margins this spring and consider the need for, and our ability to take, additional menu pricing in connection with our summer menu change in the June to July time frame.

For those new restaurants not in our comps sales base just yet, most are continuing their expected normal transition from their grand opening honeymoon sales volumes to their sustained run rate levels.

Having said that, we continue to be very pleased with all our new openings, and believe we have several in this group that could very well settle in with sales run rates that are higher than our current average.

For instance, our Honolulu location -- which opened in the fourth quarter of last year -- continues to average weekly sales in excess of $350,000.

While it is still too early to tell how sales at our two most recent openings -- the Birmingham, Alabama and Cincinnati, Ohio -- will settle in after their honeymoon period, both of them opened very strong, with first week sales in excess of $250,000 and $320,000, respectively.

As we also noted in our press release today, sales continued to build very nicely at all three of our Grand Lux Cafe's during the first quarter.

Compared to the same quarter last year, overall Grand Lux sales were up 19 percent in the first quarter.

We're delighted to see Grand Lux Cafe's reputation for excellence continuing to grow in all three markets where we currently have those restaurants.

We continue to fine-tune our menu and operating systems to prepare Grand Lux Cafe for future expansion.

And as we mentioned in the press release, we currently plan to open Grand Lux Cafe's in Dallas and Houston during fiscal 2004.

Our objective with Grand Lux Cafe is to have a second upscale casual dining growth vehicle ready when we need it, with an excellent return on investment profile.

We continue to be very excited about the longer-term growth potential of Grand Lux Cafe, as it really plays to the strength of our core competencies of the Company, and also plays with the strengths of current lifestyle and demographic trends that favor the casual dining segment.

Moving to our restaurant growth plan -- as mentioned, we successfully opened two new Cheesecake Factory restaurants during the first quarter.

And as previously disclosed, our goal for all of fiscal 2004 is to open as many as 16 new restaurants -- which would include as many as 14 cheesecake factory restaurants and as many as two Grand Lux Cafe's.

Signed leases or letters of intent are in hand for all targeted locations for 2004.

And as most of our investors know, it's difficult for us to predict the timing of our new restaurant openings by quarter, due to the nature of our lease restaurant locations and their highly customized layouts.

Based on the information we have as of today, we expect to open two restaurants late in the second quarter -- one in Sacramento California and one in Alpharetta, Georgia -- as many as seven more restaurants during the third quarter, and as many as five more restaurants during the fourth quarter.

As in recent years, the majority of our planned openings for 2004 will likely occur during the second half of the year.

And it takes about 90 to 120 days on average for our new restaurants to work through their normal grand opening inefficiencies, and for food and labor costs to reach their targeted operating profit margins.

Our capacity growth goal for 2004 is to achieve a 22 percent increase in total restaurant operating weeks -- and that is compared to a 21 percent increase achieved during fiscal 2003.

We will continue to provide updates as the expected number and timing of restaurant openings during our quarterly investor calls.

We always remind our investors that our restaurant development model is very different than the traditional cookie-cutter chain restaurant development model, where pad sites or lease spaces are more easily acquired, the design and construction processes are simplified by having more standardized restaurant layouts, and the restaurant Companies have more control over the timing and execution of the development process.

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

What we refer to as a retail lease restaurant development model.

We lease building shells, or we retail spaces, for most of our restaurant locations -- many of which our newly constructed or to be constructed; retail developments -- such as shopping malls, entertainment centers, cityscape, strip centers and so forth.

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

Our locations are upscale and 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.

By the same token, our high degree of customization also creates some unique design and permitting challenges.

So, as a result of these factors, it is not uncommon to have planned openings move a few weeks or even a month or so, due to various factors outside of our control.

Once we get the spaces from the landlords, and obtain our building permits, our and construction and preopening processes are typically consistent -- usually taking five to six months to complete on average.

Now, we have a highly professional in-house design and construction department, and we continue to add staff to that department in order to support our future growth plans.

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

Moving on to our bakery operations -- bakery sales to other foodservice operators, retailers and distributors increased 21 percent to 9.3 million during the first quarter.

But please remember that bakery sales accounted for only about 4 percent of our sales for the quarter, and approximately 5 percent of our annual Company sales.

The 21 percent increase reflects higher sales to our Warehouse Club customers, as well as increased sales of our Dream Factory and SYSCO Supreme products through our expanded relationship with the SYSCO Corporation -- which some of you may remember we announced about a year ago.

As many of you know, SYSCO is the largest foodservice marketing and distribution organization in North America, with over 420,000 restaurant and other foodservice customers.

Our expanded SYSCO relationship is continuing to make steady progress in line with our expectations.

Our Dream Factory and/or SYSCO Supreme products, are now carried in about three-fourths of the SYSCO operating Companies across the Company, and our internal sales and outside broker networks are marketing directly to many of SYSCO's customers, so that more of our products will be pulled through SYSCO to the ultimate end-users.

Our plan for the bakery in fiscal 2004 is to continue our focus on generating more consistent and predictable sales and contribution margins from our outside bakery sales.

We believe our Dream Factory product line offers an outstanding opportunity to do just that.

Based on our first quarter results, our bakery team is very confident in their ability to meet or possibly exceed our targeted 5 percent increase in outside bakery sales during 2004, with solid contribution margins.

While we remain optimistic with respect to our opportunities to steadily build our bakery sales volumes over time, we always remind our investors that bakery sales are not as predictable as our restaurant sales.

Our ability to predict the timing of bakery products shipments and contribution margins is very difficult due to the nature of that business and the purchasing plans of our larger customers -- which may fluctuate from quarter to quarter.

In our view, the bakery's most powerful impact to our business will continue to be a service as a dependable, high-quality producer of desserts for sale in our own restaurants, which will sell in excess of $100 million of desserts made in our central bakery production facility during fiscal 2004.

Approximately 15 percent of our restaurant sales consist of desserts sales -- which is a much larger percentage than achieved by most other casual dining restaurants concepts.

As for our bakery production expansion plan, we don't have much to update since our last comments.

We are in the process of adding about 20 percent more capacity to our existing bakery production facility here in California for a relatively modest CapEx investment.

We also continue to believe that it is in our best long-term interest to eventually phase-in a small second production facility on the East Coast.

A small second facility would offer us clear advantages -- not only in terms of serving as a back up production facility for our own restaurants and outside customers, but also in terms of reducing the freight and distribution costs to our East Coast restaurants and outside customers.

There is no definitive timeline for opening a second production facility.

But at this point, we do not expect any material preopening or capital expenditure activities related to such a facility to be incurred during fiscal 2004.

That covers our topline performance for the first quarter as well as our new restaurant opening plan for fiscal 2004.

So, I'm only going to spend a few minutes to review the individual components of our operating margins in the quarter.

First, starting with the supplemental data at the bottom of the financial page of the press release, the cost of restaurant food, beverages and supplies increased to 24.9 percent of restaurant sales for the first quarter just ended -- compared to 23.5 percent for the same quarter last year, and 24.3 percent for the sequential December quarter.

The menu at our restaurant is one of the most diversified in the foodservice industry.

And accordingly, is not overly dependent on a single commodity.

Changes in costs for one commodity are often, but not always, counterbalanced by cost changes in other commodity categories.

The principal commodity categories for our restaurants include -- fresh produce, poultry, meat, fish and seafood, cheese, other fresh dairy products, bread, and general grocery items.

Now, we're currently able to contract for approximately two-thirds of the food commodities used in our operations for periods up to one year.

The remaining one-third of our restaurant cost of sales consists of fresh produce, poultry and dairy commodities that are not currently contractible for periods longer than 30 days in most cases.

As a result, these fresh commodities can be subject to unforeseen supply and cost fluctuations, due principally to weather and other general agricultural conditions.

And as most of our investors know, we experience very favorable commodity costs through the first quarter of last year, after which we, along with other foodservice operators, experienced a gradual increase in commodity costs through the remainder of fiscal 2003.

On our last conference call, we indicated that restaurant cost of sales as a percentage of revenues would probably be in the same range as the fourth quarter of fiscal 2003.

This assumption was based on our known contracts for various commodities, our expectations of changes in the costs for other noncontracted commodities, and our 2 percent effective price increase, which is established to offset the margin impact of these expected cost increases.

As I previously mentioned, the cost increases for poultry and dairy items -- both noncontract items -- were significant.

We estimate the impact on our restaurants cost of sales from commodity cost pressure was approximately 1 million to $1.1 million.

At this point, we do not foresee any reductions in the cost of these commodities, and anticipate a similar to slightly larger impact per quarter on restaurant cost of sales for the remainder of fiscal 2004.

Now, we will consider any ongoing commodity cost pressures, and our ability to potentially offset these with menu price increases, in connection with our summer menu change during the June and July time frame.

Bakery costs, as a percentage of outside bakery sales for the first quarter were 48.9 percent, which was slightly higher than the 47.3 percent reported the same quarter last year, and the 46.6 percent reported for the sequential quarter.

This increase was principally due to a shift in the sales mix, to products with slightly higher cost of sales, and an increase in certain noncontracted dairy commodities -- such as butter and manufacturers cream.

We produced about 200 different products, and some made higher contribution margins than others, depending on the product and distribution channel.

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

Also, please note that this cost percentage is a relatively small component of our margin structure.

As we mentioned in our last conference call, we have entered into contracts for cream cheese for fiscal 2003 that call for a slightly higher cost per pound than we paid during the past 12 months.

We currently expect to use about 9 to 10 million pounds of cream cheese during 2004 -- which is the largest single commodity used in our bakery operations.

We have considered these higher cream cheese costs in setting the selling prices for many of our bakery products for fiscal 2004.

Moving up to the consolidated statement of operations in our press release -- total labor expenses for our combined restaurant and bakery operations were 31.3 percent of total revenues for the first quarter -- which was lower than the 32.3 percent number reported for the same quarter last year, but higher than the 30.2 percent reported in the sequential quarter.

The decrease in labor expenses as a percent of revenues for the first quarter versus the same quarter last year was primarily attributable to the leveraging of the fixed components of our labor costs, with a 28 percent increase in total revenues.

In addition, the unpredictable fluctuations in restaurant sales due to severe winter weather in the first quarter of the prior year made it difficult for our restaurant operators to adjust our variable hourly labor accordingly.

Looking forward, we expect labor expenses as a percent of revenue for the remainder of the year to be fairly comparable to the prior year.

Other operating expenses were 22.7 percent of total revenues for the first quarter, which was down compared to the 23 percent reported for the same quarter last year, and the 23.8 percent in the sequential quarter.

This decrease over the prior year is primarily attributable again to the increased leverage on the fixed portion of these costs (indiscernible) 28 (ph) percent increase in total revenues.

However, this benefit was partially offset by increased costs for natural gas and electric services to our restaurants of approximately 20 basis point of total revenue.

Looking forward for fiscal 2004, we currently expect the utility cost pressure in the 15 to 20 basis point range to continue -- in the other operating expense category.

But, we also expect to regain some leverage of the fixed costs and expenses in this category from increased restaurant and bakery sales volumes.

G&A expenses for the first quarter were 4.4 percent of total revenues for the quarter -- which was down from the 5 percent in the same quarter last year, but up from the 4.2 percent in the sequential quarter.

This decrease over the prior year, again, is primarily attributable to increased leverage of the fixed portion of these costs over the 28 percent increase in total revenues.

In addition, we did make a very concerted effort to strictly manage costs in this area to help offset the commodity costs increases, which I already discussed.

Our G&A expense consists of two major components.

The cost for our corporate, bakery and field supervision support teams -- which should grow at a lesser rate than revenues -- and the costs for our restaurant management, recruiting and training program -- which should grow at a rate closer to our unit growth rate.

During fiscal 2004, we plan to continue to add resources to the corporate, support, training and field supervision activities of our business, commensurate with the planned openings of as many as 16 new restaurants during the year.

Looking forward, our current expectations for total G&A expenses as a percentage of revenues for fiscal 2004 is in the approximate -- same approximate range achieved during fiscal 2003, but could be slightly more or less, depending on the degree of sales leverage actually achieved.

Depreciation expense of 3.7 percent of total revenues for the first quarter compared to 3.8 percent for the same quarter last year and 3.6 percent in the sequential quarter.

Looking forward, our current expectations for total depreciation expense as a percentage of revenues for 2004 remains in the same range, based on our expected growth and investment plans.

Actual preopening costs incurred during the first quarter were approximately $2 million compared 1.5 million for the same quarter last year.

We opened two restaurants during the quarter just ended, as well as in the same quarter last year.

We also incurred preopening costs in both quarters for other openings in progress.

We usually incur most of our preopening costs during the two months before and the month of a restaurant's opening.

As most of our investors know, we are required by generally accepted accounting principles, that were adopted by the accounting profession back in 1998, to expense restaurant preopening costs in the period they are occurred.

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

The preopening costs 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.

Analysts and investors should factor enough preopening costs into their models for as many as sixteen new restaurant openings during fiscal 2004.

As previously mentioned, we plan to open two restaurants during the second quarter, as many as seven restaurants during the third quarter and as many as five restaurants during the fourth quarter.

In addition, as many of as two of those remaining fourteen openings will be Grand Lux Cafe locations, for which we currently expect preopening costs to run approximately 25 percent higher than our normal preopening costs for a The Cheesecake Factory restaurant.

That covers our review with the major line items components of our operating margins for the first quarter.

Again, please refer to the full discussions of risks and uncertainties associated with our forward-looking statements included in the Company's filings with the SEC.

Our effective tax rate for the first quarter was 35.1 percent, the same as for fiscal 2003.

We have currently planned on using the same rate -- 35.1 -- as our estimated effective tax rate for the remainder of fiscal 2004, subject to adjustment if necessary as we move through the year.

Our liquidity position and financial flexibility continue to remain very strong.

As of March 30th, our cash and marketable securities on hand were approximately $158 million.

The $21 million increase in this balance from the sequential quarter represents cash flow from operations, as well as proceeds from stock option exercises.

We do expect this balance to decline during the remainder of the year, as most of our planned openings for the year and the related CapEx spending are still to come.

Our cash flow from operations for the first quarter was approximately 25 million, and our cash and accrued CapEx for the first quarter was approximately 16 million, which includes construction and progress for upcoming 2004 openings.

We currently estimate our cash CapEx for fiscal 2004 to be in the range of 130 to $140 million.

Now, this estimate includes approximately $20 million to purchase an office building contiguous to our current bakery production facility, to support our need for space as we continue to grow our Company.

This space currently houses our culinary, training and operations support activities.

Based on our current expansion plans and current expectations for the operating environment, we expect to be able to finance our CapEx requirements for fiscal 2004 through expected operating cash flow, agreed-upon landlord construction contributions and our cash on hand.

We continue to believe that maintaining liquidity position in our current range makes good business sense in this operating environment.

So 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 the capital already 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 offset by the benefits of reduced risk and flexibility in terms of our ability to execute our growth plan.

We have no funded debt and currently do not anticipate a need for funded debt or any other external financing during fiscal 2004, other than landlord construction contributions.

We do have a 35 million credit facility in place for back up liquidity purposes and to support standby letters of credit for our insurance arrangements.

We also have a share repurchase authorization from our Board of Directors to buy back up to 1,687,500 shares in the open market.

We have approximately 600,000 shares remaining in our current repurchase authorization, though the authorization does not require us to purchase any shares and may be terminated at anytime.

To wrap up our business and financial review, our Company achieved solid increases in total revenues, net income and diluted net income per share for the first quarter.

We are on track with our openings and feel confident in our ability to achieve our stated growth goals for fiscal 2004 with high-quality and consistency.

While we believe there is room for approximately 200 Cheesecake Factory restaurant locations domestically, and we only have 75 open as of today, we're very encouraged about the potential of Grand Lux Cafe to become a complementary second growth vehicle for business.

We believe that our business has a sustainable period of profitable growth ahead of us for several years to come, and our strong financial position also provides us with the capital resources and flexibility to continue executing our growth plan with great confidence.

And that concludes our business and financial review for the first quarter.

At this time, we will be happy to answer a few questions.

We do want to accommodate as many questions as possible in the time that we have left on this call.

So, we respectfully request that each participant be courteous to all other participants and limit themselves to just one question.

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

Operator, we are ready to take a few questions.

(Operator Instructions).

Coralie Witter, Goldman Sachs.

I have one clarification to ask before I ask my question.

When you talked about the cost of sales running about 1 million higher, and continuing that way through the rest of the year, did that include an offsetting impact from a planned price increase?

Or are we to understand that if you took a price increase in the middle of the year, the impact of that line item would be less?

Good question, Coralie.

What we're trying to say is that -- if we were able to take a price increase in the middle of the year, and that summer menu changed, it will hopefully offset some of that impact.

Okay.

And then the question I had was on Grand Lux.

You have some nice sales increases there.

Can you comment on where you are with the buildout costs and that the unit economics look appealing to you?

And then related to that, which quarter will those Grand Luxs open up in?

Coralie, this is David.

We open up in the fourth quarter -- is that right?

End of third --

It will be close to late third, early fourth quarter (multiple speakers)

Yeah, late third, early fourth quarter.

The building costs -- here again, we need about four or five more iterations to get this down, but the one that we just finished and cost it out is within $75 a square foot of Cheesecake Factory at this time.

And then once we make sure that that operates well, we are highly confident we can get these costs down while our sales increase.

So, as we say, we are very confident that we can get all the numbers right and make this a great business going forward.

And we're making lots of progress as we speak. (multiple speakers)

I'm sorry, I think it's fair to say, Coralie, that we are really attacking it from both sides.

The sales numbers continue to improve.

The corresponding margins at the locations themselves continue to improve.

And as David mentioned, the investment costs continue to come down.

Right.

And the objective is to get it to a square footage cost that is similar to a Cheesecake Factory?

Again, we have to see in the end what these end up grossing.

But they will be -- it will be consistent between our costs and our sales at Cheesecake and what they will be at Grand Lux.

Right now, again, we think we need to go into 2005, see where they end up in sales, see how far we can get them down.

And that is our goal.

So, I think we will be very happy with our cash on cash return and our ROI, and then we will know what they are and communicate that to everyone involved.

Okay.

Thank you.

Mark Kalinowski, Smith Barney.

I just wanted to ask about sales trends in general.

It looks like the back half of Q1 was quite good for same-store sales growth.

And there was more going on than just an easy weather comparison.

So, just wanted to get your take on what else may have contributed to the strong sales?

And also sales trends to date in Q2, please?

Thanks.

The (indiscernible) sales trends, as we mentioned, we're very happy with that 6.1 percent comp comparison.

For the full quarter -- for the full first quarter there was a lot of things going on.

The weather obviously was the biggest impact.

I think -- certainly there was a war starting last year.

There was a lot of things that were going on, all of which were impacting sales.

As it relates to sales trends, we continue to see very favorable trends.

As we look into the first couple of weeks of the second quarter, the sales trends are very strong -- but I don't want to give any numbers.

Because I think with Easter holiday in there and the (indiscernible) a couple of weeks -- shifting a week from prior year, it's a little misleading.

But we are very happy with the sales trends as we go into the second quarter as well.

Are they at least positive so far in the Q2?

Oh, absolutely.

Good to hear.

Matt Difrisco, Harris Nesbitt Gerard.

Hi.

The question is regarding the bakery sales to third parties.

And you commented on mix.

Could you just expand on that a little bit?

Is that seasonal?

Or is that your new customer base and perhaps the business going to SYSCO is a lower margin business (indiscernible) the business going to cost go (ph)?

Thank you.

Okay, Matt.

The bakery sales are several different channels.

The biggest one, obviously, is the sales to the warehouse clubs.

But we do also sell to the Dream Factory products through SYSCO, as well as the SYSCO Supreme label through SYSCO, as well as a couple of other different channels.

The shift in the mix is not necessarily seasonal.

A lot of it is going to depend on the timing of the Warehouse Club orders, as I think we have said in the past, those orders can be extremely large and they can shift from a week to another week, which moves them from a different quarter to a different quarter.

But, that will certainly impact the mix in any one quarter.

The margins on these products are all a little bit different.

We have never gotten into the specifics of the margins on individual product lines or distribution channels.

But they are a little different.

We have said in the past that costs associated with the Warehouse Club sales -- they also -- there's also additional selling and marketing costs, broker costs etc., that will be included in the other operating cost line, in addition to the cost of sales line.

(inaudible)

Did that answer your question?

Yes it does.

Actually, I have a follow-up on the Grand Lux also.

Can you give us, I guess, on the Grand Lux -- how much of that is benefiting from the Las Vegas store -- I guess, doing well with that market?

Or is it a shared experience throughout all the brands or is there somewhat of a skew more to the Vegas side on the upside?

No.

Really, they're all doing great. (indiscernible) they were in there.

The Chicago store is comping up as well as the Vegas store, and our Los Angeles store is also comping up in the high teens.

So they're really all doing well, and I believe it's just word-of-mouth catching on.

They are really functioning as Cheesecake Factory did in the older days where they were not quite as popular as they are today -- where we opened up with two-hour waits.

So they are finding their audience.

Their reputation is spreading, and we're exceedingly happy with how they're doing.

Okay.

Thank you.

John Glass, CIBC World Markets Corporation.

Thanks.

I just wanted to go back to the food cost question.

I was still unclear -- in the first quarter the food costs were up like 130, 140 basis points year-on-year -- are you suggesting food costs continue to go up year-over-year at that rate?

Or are you saying that they will look like they did in the first quarter as a percentage of sales?

John, at this point, certainly they are up considerably from the prior year -- but that was to be expected, I think, with the ramp up in food costs throughout the year.

I think we finished the fourth quarter at about a 24.3 percent.

And our hope was -- our intention was to keep it in that range -- 24.3 or 24.4.

We ran a 24.9 for the first quarter.

What I am trying to say is that at this point I think it's going to stay in that 24.9 percent range.

Absent us being able to effectively implement menu price increases.

But, having said that, our next menu price window is not until the summer menu change.

And was any of the increase in food costs related to or how much of it was related to the new store openings and efficiencies there or was this purely commodity?

You know, I'm sure there's probably a small part related to the new store efficiencies.

But, the vast majority of that is just commodity costs.

Thank you.

Eric Wold, Merriman Curhan Ford.

One quick clarification first, as well then a question.

Just refresh me with the 6.1 percent comp you mentioned -- if you X-out kind of the weather from last quarter -- kind of make last quarter and more normalized, and about the 1 percent higher delta in menu price increase to (ph) take in this quarter versus last year, would you have seen kind of a comp somewhere in kind of 1.5, 2 percent range -- is that more realistic?

I would say that is probably about right, yes.

And then the question, maybe update us from the last call on what you saw was the gift card redemptions through the quarter and how that drove sales?

And how that kind of was reflected in the sales?

Was it more -- do you see people more coming more on (indiscernible) shoulder times?

Was it more takeout than you had before?

How was that reflected?

Well, I don't know that we have any hard data on that.

I certainly think that we saw, in January, as we mentioned earlier, some significantly higher gift card redemptions than we had in prior years, and certainly at any other time during the year.

Which was, again, was reflective of our very strong gift card sales during the 2003 holiday season.

I cannot give you any specifics on whether gift card usage is drawing people to different parts of the day.

I will tell you that we have seen that when a gift card is used, either to pay for a check or pay for a part of a check, that we have a higher check average.

I think the gift cards do encourage people to spend a little more.

So, it's both a function of the higher redemptions as well as the fact that people tend to spend a little more when they are paying with a gift card.

And then just lastly, when you mentioned that, I think, on the last call, the gift card redemption was up 19 percent by the time you gave the Q4 call, was that about the same as it was for the full quarter?

I think the 19 percent refers to the gift card sales at comparable restaurants year-over-year, which we had indicated at year end.

Okay perfect, thanks, guys.

Dennis Forst, McDonald Investments.

I wanted to get an idea of what the right cost of sales would be.

David, it looks like in the late '90s, early 2000s, you were running somewhere 25 -- 25.5 percent on a regular basis.

And then you got a lot of commodity help during 2002, 2003, and now we're kind of moving back towards the higher level.

But, thinking long-term, what is the right cost of sales for your stores to keep both the margins in good shape but also to keep the customers very happy?

I will let Mike answer that, Dennis.

Dennis, I think you are right.

We certainly have seen -- if you go back in time, some great improvement in our restaurant cost of sales.

As you mentioned -- from even the 26 is down into the 25's.

Yeah, but as we had said over the last couple of years, there was a couple of things that were impacting some of that, that decrease.

Or really impacting that decrease where the very favorable commodity costs market, as well as our increased purchasing power.

It's very hard for us to separate those two items, but the commodity -- the favorable commodity cost is obviously going to come and go, but our purchasing power should continue to grow as our restaurant grows -- as our number of restaurants grows.

What is the right number?

I think somewhere in that 24 percent range is something that we would be happy with.

But, it is hard for us to project that out very far.

But, if you say in the 24 percent range, and I picked 24 as a point number, does that mean longer term you are going to get price increases or going to get purchasing power leverage to do better than the 24.8 you're looking for this year?

That's a fair statement, yeah.

Okay.

Good enough.

Thanks a lot.

Mitch Speiser, Lehman Brothers.

I think -- also get on the clarification on the food cost side as it relates to the pricing.

The winter menu kicked in, I believe, in February at 2 percent.

I think you only had a 1 to 1.5 percent price increase before that.

So is it safe to say that you will get a little more -- or the average price in the second quarter -- the average price increase should be higher than in the first quarter?

Well, I am certainly getting the full benefit of that 2 percent menu increase for the full quarter, if that's what you're asking -- that's correct.

Okay.

So there should be perhaps a little bit more leverage, although you're saying food costs are a little bit up more than they are in the first quarter --?

You know, if you look at some of these prices, especially the poultry commodities, that -- they ramped up throughout the first quarter.

The growth seems to have slowed, and hopefully stalled, although it's not stopping -- or not going down yet.

But so we're facing those higher costs for the whole second quarter until something happens in that area.

Great.

If I could just slip in a second question for David.

Can you talk about the productivity initiatives that you have alluded to in the past?

Can you get a little bit quicker with table turns?

And just also, as it relates to the average check, excluding pricing, is there any limitation why you could not increase comps to a higher -- through positive mix shifts, excluding price increases?

Thank you.

We think that with a (indiscernible) item menu it is very hard to really move people -- the basis to the concept is to really give people all these choices, and let them order what they want, and give them more interesting things.

So I don't think that we can really move people very effectively.

As far as the productivity goes, one of the big things we did was putting in the front desk system.

And although I cannot give you exactly, the feel that there was easier training, there was better to use, people got a better table, we think that we got a little more of a turn on that.

But it's very hard to predict.

Do you have any info on that?

No.

I think that is it.

In terms of the productivity improvements we've talked about, for this year we have talked about looking at some kitchen efficiencies.

But those are in the very early stages, and will not really benefit us or impact us if at all till late in the year.

Right, so I think, just our normal -- how we manage our numbers -- how we get operational excellence out of all of our restaurants, incentivizing managers.

These are all the things that push us forward in terms of great operations and hitting our budgets.

Okay, we have time for about one more call, Marcus.

Our final question comes from Bryan Elliott, Raymond James.

Good afternoon.

Just a clarification and then a question.

A clarification on the SG&A.

Did you indicate expectations or guidance of flat as a percent of sales G&A over the balance of this year?

Did I get that right?

Yes.

I would like to come back to the food costs for the last question.

You mentioned you're not contracted on dairy and poultry and produce.

You mentioned that poultry had a sort of leveled off after running up throughout the first quarter.

Dairy leaves spot price indications from various sources indicate continued exponential rise.

Are you in fact having to pay those kinds of prices?

Or are you in an important customer kind of status, where you are able to kind of share some of that true commodity spike with some of your suppliers?

Can you give a little color on the dairy outlook? (multiple speakers)

I think on the dairy side there is a couple of things.

First, is on the bakery -- as it relates to the bakery -- the cream cheese is obviously our largest commodity.

That is contracted.

Right, understood.

I am thinking of the restaurant side.

When you get to the restaurants, the dairy costs -- they are not a huge part of our cost of sales structure.

But having said that, we certainly do leverage all of our existing relationships with vendors to help offset some of these price spikes.

That is happening, yes.

I guess you all don't cook with a lot of butter, and that sort of thing.

Oils are also up a lot, though.

Is that something that you're concerned about?

Or do you have a way to protect yourself if we have this soybean shortage and run out of soybeans, like some people are talking about?

How do you protect yourself in that kind of a situation?

Well, most of our oils are contracted, so we're okay in that respect.

But again, that is a very small percentage of our cost of sales.

Okay.

Thanks you very much.

Alright.

Thank you everyone for joining our call today.

Thank you.

This concludes today's Cheesecake Factory first-quarter investor conference call.

You may now disconnect.