Cheesecake Factory Inc (CAKE) 2004 Q2 法說會逐字稿

Good afternoon, my name is Meredith.

I will be your conference facilitator.

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

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

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

If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad.

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

Thank you.

Mr. Dixon, you may begin your conference.

Thank you, operator.

Hello, everyone, I'm Michael Dixon, CFO of the Cheesecake Factory Incorporated 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 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, July 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 undue reliance should not be placed on such statements.

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

Any retransmission, rebroadcast or redistribution of this call without the express written consent of the Cheesecake Factory Incorporated 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 second quarter of fiscal 2004 that ended on June 29, 2004.

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

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

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

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

Our revenues during the second quarter increased 25% to $234.9 million and we achieved record net income of 17.8 million or 34 cents per diluted share compared to net income of 15.3 million or 30 cents per diluted share for the same quarter last year.

In spite of some very challenging commodity costs, particularly in the poultry and dairy markets, we managed to achieve these record results through effective leverage of the higher sales and strict spending controls across a number of cost categories.

As we noted in our press release today, our comparable restaurant sales increased a very strong 4.5% for the second quarter.

We believe this is due, in large part, to the sustained popularity of our restaurant concepts and great operational execution.

The Cheesecake Factory has reported positive comparable sales comparisons in 47 out of the 48 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.

Our restaurant operations team led by our President and COO of the Cheesecake Factory restaurants, Peter D'Amelio, did an outstanding job of managing our controllable costs and expenses during the second quarter, considering the pressure on commodity costs.

While we were very pleased with our operating income results, like many other restaurant concepts, commodity cost pressures had an impact on our second quarter profits as we mentioned after the first quarter, we attempted to offset this pressure with our winter menu price increase of approximately 2%.

But the cost increases in the poultry and dairy markets were significant.

In fact, some of our investors may have heard us say in the past, that if we weren't the Cheesecake Factory, we'd probably be the Chicken Factory as we sell an awful lot of chicken.

Poultry costs actually represent about 12 to 13% of our restaurant cost of sales.

In that poultry market specifically, we saw our costs per pound increase 35% year-over-year and 22% from the first quarter alone.

Going forward, we have taken steps to mitigate some of this cost pressure which I will cover in our review of the operating margins.

I will now take a minute and provide some additional color on our top-line results for the second quarter and cover our new restaurant growth plan for the remainder of fiscal 2004.

After that, I will briefly review our operating margin trends for the second quarter.

Our total restaurant sales increased approximately 25% during the second quarter to $223.1 million.

That 25% increase consisted of an approximate 21% increase in total restaurant operating weeks, resulting primarily from the openings of 14 new restaurants during the trailing 12 month period, coupled with an approximate 4% increase in average sales per restaurant operating week.

While on the topic of restaurant sales, I did want to take a second to mention our recently launched six-carb original cheesecake.

This cheesecake which is made with Splenda and will appear to guests on either a low-carb diet or a sugar-free diet is proving to be very popular in the restaurants currently offering it, quickly becoming one of our top three selling desserts in these locations in a very short period of time.

This six-carb original cheesecake will soon be available at all our locations as we finish our summer menu change.

Our comp sales increase to 4.5% was principally attributable to two factors.

Considerably more favorable weather versus the prior year, which allowed us greater usage of our patio seats, which as you may recall account for about 17% of our total available seats plus an approximate 2.5% effective menu price increase.

That menu price increase is comprised of an approximate half a percentage from the summer of 2003 plus the 2% increase from our winter 2004 menu change.

With the Cheesecake Factory concept as busy and productive as it is, particularly during peak meal periods, 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 to expect that the majority of our planned sales growth for the next few years should come from the openings of new restaurants, not comp sales increases.

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.

Consequently, we continue to believe that the right, longer term expectation for annual comparable restaurant sales growth is in the 1 to 2% range.

With respect to menu pricing, we are in the process of rolling out an effective 1% menu price increase with our summer menu change and should have this completed by early August.

As many of you know, we update our menu two times a year, once in the winter and again in the summer, due to the size of our menu and the associated printing costs, our opportunities for menu price increases is effectively limited to those two windows.

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

We continue to be very pleased with all of our new restaurant openings and our current year-to-date openings are no exception.

Birmingham, Alabama and Cincinnati, Ohio are averaging weekly sales in excess of $240,000.

While Sacramento, California and Alpharetta, Georgia, which opened late in the second quarter, also had very strong openings.

Sales at our Grand Lux Cafes continue to build very nicely at all three of our locations during the second quarter, with comparable sales increases of 18% in the aggregate.

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 two new Grand Lux Cafes during the second half of fiscal year 2004.

One in Dallas, and one in Houston.

Continuing with our restaurant growth plan, we have successfully opened four new Cheesecake Factory restaurants fiscal year to date.

Two in the first quarter and two in the second quarter.

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 Cafes.

As most of our investors know, it is difficult for us to predict the timing of our new restaurant openings by quarter.

Due to the nature of our leased restaurant locations and our highly customized layouts.

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.

However, based on the information that we have as of today, we expect to open as many as seven new restaurants in the third quarter, including one Grand Lux Cafe in Dallas and as many as five more restaurants during the fourth quarter, including one Grand Lux Cafe in Houston.

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

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

We always like to remind our investors that 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.

Moving to our bakery operations, bakery sales to other food service operators, retailers, and distributors increased 21% to $11.9 million during the second quarter.

But I'll ask you to please remember that bakery sales accounted for only about 5% of our total sales for the quarter and will only account for approximately 5% of our total annual company sales.

The 21% increase reflects higher sales to our warehouse club customers as well as increased sales of our Dream Factory and private label products, offered through our expanded relationship with the Cisco Corporation.

Our Dream Factory and/or the private label products are now carried in nearly all of the Cisco operating companies across the country and our internal sales, and outside broker networks are marketing directly to many of Cisco's customers so that more of our products will be pulled through Cisco to the ultimate end users.

There is plenty of room for this sales channel to continue to grow and we are very encouraged that our current year-to-date sales through this channel are more than three times the sales for the same period of last year.

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.

At the same time, we will continue to meet the increasing requirements of our Warehouse Club customers.

We currently expect bakery sales to increase approximately 8% to 10% in the second half of fiscal 2004 compared to the same period last year.

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 product 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 impactful role to our business will continue to be its service as a dependable, high quality producer of desserts for sale in our own restaurants, which will sell well in excess of $125 million of desserts made in our central bakery production facility during fiscal 2004.

Approximately 15% of our restaurant sales consist of dessert sales, which is a much larger percentage than achieved by most other casual dining restaurant concepts.

That covers our top line performance for the second quarter and our new restaurant opening plan for the remainder of fiscal 2004.

So now I will briefly review the individual components of our operating margins for the second 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 25.8% of restaurant sales for the second quarter just ended, compared to 23.9% for the same quarter last year.

And 24.9% for the sequential March quarter.

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

We are 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 costs in sales consists primarily of fresh poultry, fish, and dairy commodities that we have historically been unable to contract for periods longer than 30 days in most cases.

Although, I don't think it's a surprise to anyone that commodity costs in general have risen dramatically.

Both year-over-year and from the sequential quarter.

However, I think it was a bit of a surprise that the anticipated easing of cost pressure in some of the commodity segments did not occur in the second quarter.

In fact, the cost for poultry, which is our single largest commodity in which we have historically been unable to contract for any extended period, continued to increase through the second quarter as I've previously mentioned.

On the positive side, we have taken the steps to minimize our commodity cost exposure going forward where available.

We have secured the majority of our poultry supply for the next six months at a fixed price without changing our product specifications for this fresh commodity in any way.

Due to our increase in volumes we were able to work with our vendors to secure this arrangement and eliminate any additional poultry upside cost exposure.

Dairy costs, while still high on a year-over-year basis, have begun to come down.

However, we believe it will take a little time for these lower costs to work their way through to the manufacture's cream market, which we use in our restaurants for whipped cream.

With these developments and the 1% menu price increase being rolled out as part of our summer menu change, we anticipate restaurant cost of sales as a percent of restaurant sales to be in the range of approximately 25.2 to 25.4% for the second half of fiscal 2004.

Bakery costs, as a percentage of outside bakery sales for the second quarter were 52.1%, which was higher than the 45.5% reported for the same quarter last year and the 48.9% reported for the sequential quarter.

This increase was principally due to an increase in certain non contracted dairy commodities, such as butter and manufacturer's cream.

As we mentioned on our last conference call, we have contracted for most of our fiscal 2004 projected cream cheese requirements.

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.

Going forward, bakery commodity costs should benefit from the lowering costs in the dairy market.

In addition, we will evaluate price increases as necessary to offset commodity cost pressure.

Please note that this cost percentage is a relatively small component of our overall margin structure.

Moving up to the consolidated statement of operations in our press release, total labor expenses for our combined restaurant and bakery operations were 30.5% of total revenues for the second quarter.

Which was lower than the 30.9% reported for the same quarter last year and lower than the 31.3% reported in the sequential quarter.

The decrease in labor expenses as a percent of revenues for the second quarter, versus the same quarter last year was primarily attributable to the leveraging of the fixed component of our labor cost with the 25% increase in total revenues.

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 22.5% of total revenues for the second quarter, which declined from the 23% reported for the same quarter last year and the 22.7% 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 25% increase in total revenues.

Looking forward, for the remainder of fiscal 2004, we currently expect other operating costs and expenses as a percentage of revenues to show modest improvement from the comparable period to the prior year, as we expect to gain some leverage in the fixed costs and expenses in this category from increased restaurant and bakery sales volumes.

G&A expenses for the second quarter were 4.2% of total revenues for the quarter, this was down from the 4.8% in the same quarter last year and from the 4.4% in the sequential quarter.

This decrease over the prior year is primarily attributable to increased leverage of the fixed portion of these costs over the 25% increase in total revenues, in addition we did make a concerted effort to strictly manage costs in this area to help offset the commodity cost increases already discussed.

Our G&A expense consists of two major components.

The cost for our corporate bakery and field supervision support team, which should grow at a lesser rate than revenues.

And the cost 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 expectation for total G&A expenses as a percentage of revenues for fiscal 2004 is in the same approximate range achieved during fiscal 2003, but could be slightly more or less depending on the actual degree of leverage achieved.

Depreciation expense is 3.5% of total revenues for the second quarter, compared to 3.6 for the same quarter last year and 3.7 in the sequential quarter.

Looking forward, our current expectation 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 second quarter were approximately $2 million, compared to $1.8 million for the same quarter last year.

We opened two restaurants during the quarter just ended and two 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 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 casual concepts relative to the scope of operations.

Analysts and investors should factor enough preopening costs into their models for as many as 12 new restaurant openings during the remainder of fiscal 2004.

We currently expect preopening costs to be in the 6.5 to $7 million range for the third quarter and in the 3 to $3.5 million range for the fourth quarter, based on the expected timing of these openings, the two Grand Lux Cafes included in this mix, as well as some costs incurred for early fiscal 2005 openings.

That covers our review of the major line item components of our operating margins for the second quarter.

Again, please refer to the full discussion 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 second quarter was 35.1%.

The same as for fiscal 2003.

We currently plan 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 June 29, our cash and marketable securities on hand were approximately $136 million.

Now, the $22 million decrease in this balance from the sequential quarter represents the purchase of an office building, contiguous to our current bakery production facility, which we discussed in our last conference call, the repurchase of some shares, and the ongoing construction of new restaurant locations, offset by cash flow from operations and landlord contributions.

Our cash flow from operations year to date was approximately $65 million and our cash and accrued CapEx year to date, including the approximate $21 million for the purchase of the office building and construction in progress for upcoming openings was approximately $71 million.

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

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 a liquidity position in our current range makes good business sense in this operating environment so that both we and our investors can have continued confidence in our ability to execute our growth plan with maximum financial flexibility, knowing that we have 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 other external financing fiscal 2004, other than landlord construction contributions.

We do have a $35 million credit facility in place for backup liquidity purposes and to support stand-by letters of credit for our business -- 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 repurchased approximately 162,000 shares in the second quarter at a cost of approximately $6.8 million.

We have approximately 438,000 shares remaining in our current repurchase authorization, though the authorization does not require us to purchase any shares and may be terminated at any time.

To wrap up our business and financial review, our company achieved solid increases in total revenues for the quarter.

In spite of a very difficult commodity cost environment, we also managed to achieve record net income and net income per share results.

We are on track with our openings and feel very 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 restaurants locations domestically and we have only 77 open as of today, we are very encouraged about the potential of Grand Lux Cafe to become a complementary second growth vehicle for our 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 provides us with the capital resources and flexibility to continue executing our growth plan with great confidence.

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

We want to accommodate as many questions as possible in the time 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.

Now, 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 now ready to take a few questions.

Thank you, at this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number 1 on your telephone keypad.

Your first question is from John Glass with IBC.

Thanks, it's John Glass from CIBC.

Can, a clarification and then maybe a question.

If you could just clarify how much pricing you anticipate being in the third quarter with potentially some rolling off from last year?

And then I'm not sure how much of the pricing that you're taking now actually gets into the third quarter.

And then if you could comment, I guess, on the higher cost of sales at the bakery, perhaps, did you discount to get higher sales?

Or has there been some permanent mix shift in that business that's going to elevate the cost of sales there?

Thanks.

As for your first question, John, the pricing -- we have about a, as I mentioned, about a 2.5% increase in the menu as of today.

A half percent from last year and 2% from the winter of this year.

The 1% that we're rolling out will probably be, as I mentioned, will be in place by really the end of July.

So, you will get two months of that and that kind of when the -- the half a percent from the prior year kind of rolls out at about the same time.

So, really for that, I guess August/September period you will probably have close to 3%, but for the full quarter it won't be a 3%.

As for the bakery cost of sales, I think the biggest pieces moving that, as I mentioned, are really the commodity costs, primarily the manufacturer's cream as well as some butter costs, you know, again like everybody else, we're subject to the dairy -- the dairy spike that's been going on.

Those are not contracted items for the bakery.

I do think that longer term those will come back down to the 50% range or maybe a little bit lower as the dairy prices continue to come down.

Gotcha.

Thank you.

Your next question is from Mark Kalinowski with Smith Barney.

Hi.

I will also have one question and one either half-question or clarification, however you want to look at it.

First, on the preopenings, if you look at how 2003 shook out, the unit opening schedule, unit-wise, was quite similar, but the preopening costs, at least looking at it on a percentage of sales basis looks a little bit lumpier, looks much higher in Q3 and lower in Q4.

And just curious why that might be and what might be more typical in years 2005 and beyond.

And then also, just wondering, when is your next 53-week fiscal year?

Thanks.

I will answer the second one first.

The 53-week -- next fiscal 53-week year will be next year, fiscal 2005.

As for the preopening costs, Mark, really what you're seeing there is just the timing of the openings during the quarter.

We've got the 7 openings in -- in the third quarter, most of which are going to be later into August, probably early into September or even late into September.

So, you'll have the full cost of those preopenings hitting in this quarter.

We also have several early fourth quarter openings, so you've really got the preopening costs for a larger number of restaurants hitting in the third quarter.

You know, on a go-forward basis, the timing, as we've said in the past, our preopening costs are incurred really in the two months prior and the month of in opening.

And that really hasn't changed.

So it's really just a question of where in the quarter those openings fall?

So in 2005 and beyond there may be some years that look more like last year did, some years that look more like this year did, that type of a pattern?

Yeah, again, it's quarter by quarter.

It depends on where the openings fall.

And you know, as we -- as we've always said our opening schedule is a little less predictable than a lot of other companies, because we don't know the exact turnover from our landlords and a lot of the other contingencies that go into it.

There are times, Mark, where we can have a restaurant built, but the center is not ready to open.

Right.

We had spent money earlier, I mean, there's various differences that would cause those numbers to move around.

Okay, thank you very much.

You're welcome.

Your next question comes from Dennis Forst with Key McDonald.

Good afternoon.

I wanted to ask about the chicken prices.

You said that you've locked in your fresh chicken for the next three months.

Is that right, Mike?

That's correct.

That means through the end of the calendar year?

Through the end of the calendar year, correct.

And you historically do not lock in price?

You know, historically we've really been unable to.

And I think partially as a result of the spike that we've seen, we were much more aggressive with our vendors but I also think that as our volume increased we got the leverage to do that and we're able to do some deals or some programs with our vendors.

And the price is a fixed price as of today?

It is a fixed price that's lower than today's, so it's a better price than we've been paying recently.

I won't say the exact price, but it's something we feel very, pretty comfortable with.

Okay.

Do you think because of your increasing leverage you're going to be able to continue to contract for chicken, one of the items you haven't been able to in the past?

I think that's a fair statement.

I think that --

At least for the next six months.

At least for the next six months.

And David just mentioned, at least on a, probably a rolling six-month basis we think we can do that.

Okay, so that's why your prediction that cost of sales will be down some 50 basis points sequentially for the next couple of quarters.

Correct.

We see we will get some of the leverage, some of the benefit of these lower prices that we've been able to contract for.

And at least -- and by all means it reduces the upside exposure that we had in the second quarter.

Good.

Thanks.

Thank you.

Your next question is from Matt DiFrisco with Harris Nesbitt.

Hi.

My question's regarding the G&A and a significant amount of leverage you're gaining there.

The one thing that seems a little bit out of there is that you are still putting up very good comps this quarter, 4.5% and the first quarter, as well, a phenomenal comp.

Are there bonus accruals in there accounting for the likelihood of a continuation of good, positive comps, say 3 to 4%?

Or are you looking at this on an annual basis, where you're predicting maybe a slowing of the comp?

I'm just wondering, is there enough accruals being made for the bonus for the annual period or should we -- if you can come out with a good, strong comp in the second half of the year, could some of that be mitigated by maybe even having to step up accruals to meet some bonus accruals?

Mark, most of our -- we have a few different bonus programs but all of our operators that are bonus quarterly, those bonuses are included in there on a regular basis.

So, there is no impact from that.

Okay.

And then on just a follow-on question.

Can you update us on the capacity for the bakery, the third party bakery capacity?

Is there going to be a need in -- by '05, do you think, for new bakery facility?

I don't believe we'll have a need in '05.

As we've said in the past, I didn't mention it on this call, but we are adding some additional capacity to the bakery here that will increase that productive capacity by about 20% with a really a fairly modest investment of adding four additional ovens.

We believe that that investment will certainly carry us through 2005.

I think in terms of a second east coast bakery production facility that we've talked about in the past, I think we would be looking to some time in 2006 to have that online.

Okay, thank you very much.

Okay.

Your next question is from Stephen Spence with Longbow Research.

Hello, good quarter, guys.

I have a question about the Grand Lux.

With two of them opening in Texas, where you're pretty well-known as the Cheesecake Factory already, does that affect your expectations for their opening?

Or does being well-known not make a difference for Grand Lux?

It's always helpful to have Cheesecake Factory in the same city because I think there's a lot of then interest in trying a second concept of Cheesecake Factory, although we don't really advertise it, in the menu we do say that it's by the creators of the Cheesecake Factory and we found that to be helpful in the Los Angeles and Las Vegas.

So, I think it's a good thing that there are Cheesecake Factories there and I don't think we would open at this time in a city that didn't have a Cheesecake Factory because it's really a, you know, a complementary concept and not one, you know, if there was a good location we'd open a Cheesecake first and we'd use Grand Lux to fill in after we established a city.

But in terms of your outlook, then, for the Grand Lux sales, do you expect them to have to build as much as the original ones did?

Or will they open at higher levels?

No, I think they will build.

You know, it still is Texas.

I'm sure many people have been to Las Vegas but I think they will build like Cheesecake Factory used to build and that is, you know, where the sales are not coming out at, you know, these incredible 250 to $350,000 a week in opening weeks, but will -- will comp up nicely.

I think it will take some years before it really creates its own national reputation but because of Cheesecake Factory, I think it will build nicely, again, like Chicago and our others, you know, can be up between 20 in some weeks, 30%.

It catches on quickly, but it's not going to come out of the box like a Cheesecake Factory.

Okay, great.

Thank you.

Your next question is from Dean Haskell with JMP Securities.

Good afternoon, Mike and David.

Hi, Dean.

Was there any delays in the second quarter for Sacramento?

Or Alpharetta?

And then the second question is -- is there a change in unit size, perhaps because of the markets those units are a little smaller?

No, both of those are -- are exactly our 10,000 square foot free standing prototype and depends on when you're talking about, but in terms of when we firmed up the year, at the beginning the year, Sacramento and Alpharetta have been on time.

In fact, I think Alpharetta probably opened a few months earlier than we had thought it would in 2003.

But no, they were on time as far as I can remember.

Is that right?

That's right.

Okay, thank you.

You're welcome.

Your next question is from Sharon Zackfia with William Blair.

Hi, it's actually Sharon Zackfia.

How are you?

Hi.

Congratulations by the way, the Grand Lux last Friday.

An hour-wait completely ruined my dinner experience by having to wait that long.

I did have a follow up question on the Grand Lux.

I know that we're starting to lapse the expansion of the room capacity at the Venetian, I think this month, can you give us some perspective on where we should expect those comps, you know the 18% comps to go once we start to lap that benefit you got from the Venetian?

Well, Sharon, I think you're right, there was a benefit from the extra capacity and room expansion at the Venetian, but in terms of, you know, the comp store sales at any individual restaurants, we generally don't get into that.

But yes, we did lapse 1,000 rooms, but overall, as we mentioned second quarter, Grand Lux comps were up 18%, which is very positive.

I guess, though, just thinking about Vegas, I'm sorry, excluding Vegas so looking at L.A. and Chicago, is it more reasonable to think of kind of mid-single or high single digit comps for those locations?

I would say that, again, without giving individual restaurants that 18% comp is -- was not limited to the Grand Lux Cafe in the Venetian only.

Okay, thanks.

You're welcome.

Thank you.

Our next question is from Andrew Barish with Bank of America.

Hello?

Just trying to get a sense on the -- the G&A numbers.

I mean it sounds like you've done a very good job dollar-wise, but in the back half of the year it sounds like some spending will start to take place, I guess, to staff up and get people for these new restaurant openings, if we're going to assume on a percentage of sales basis it's going to be more similar to the last year, is that correct?

I think it will be a little bit closer to last year, that's true.

Yes.

Okay.

So dollar amount, some increases from the first half of the year?

Absolute dollars I would expect to go up, correct.

I do think we will get a little bit better leverage than we did last year, especially in the third quarter.

I think last year's fourth quarter we ran about a 4.2% that quarter.

I don't think we will improve much upon that.

Thank you.

Okay.

Your next question is from Ashley Reed with Bear Stearns.

Hi, thanks.

I have one question with two parts.

Could you talk about how you measure your ability to take a price increase in the restaurant in terms of whether you can measure any customer pushback or any change in menu mix?

And then kind of a follow-up to that, how did you decide to take a 1% price increase this go-round?

Why not take a little bit more and offset all the food costs.

How did you make that decision?

Well, actually we try to take the least amount we can.

So when we looked at pricing and where we thought it would be at the time, and we had to do this a month before, you know, we had to do this in May, that is what we felt we needed to maintain our margins.

At the time.

So that's how we got to the 1% and in terms of, you know, the -- the price in general, we have always got our full menu pricing, so we have found that people have not traded down and really we can go back from when we were public in 1992 and although we are always very cautious we've always gotten our full menu increase.

And so although -- you know, as they say, we're very cautious but we have gotten it -- we, you know, you can look at the economy and see when people expect that prices are going up and they feel they're going up and sometimes it's easier and sometimes it's harder, but we never take a price across-the-board, we always do it, you know, there's some -- some art and some science to these increases to have them pass through without anybody feeling that we are, you know, gouging.

And I think we're very good at it and that's why I think we've gotten our price increases quarter after quarter.

Yeah, just to expand on that for a second.

In terms of the 1% that we took in this price increase for this -- this current menu change, you know, we certainly aren't going to price at the high end of any spike in the commodity costs.

We're not going have sort of a knee-jerk reaction like that.

Our expectation at the time we made that -- we took that price increase was that we would start to see some relief in the poultry and dairy markets.

I think we will, it just didn't happen on the time-line that we had hoped.

So I think the 1% over time we feel will be the appropriate price increase and it accomplishes all the other factors that David just mentioned.

Okay.

Thank you.

You're welcome, Ashley.

Your next question is from Peter Oakes with Piper Jaffray.

Hi, gentlemen and Jane.

Actually I have one question if I may, maybe follow up on that on another issue, but firstly on G&A, if I could just go one different angle on that.

If we look back for second quarter both this year and last, the dollar amount was up about 9% versus the prior year, yet on average the revenue was a little bit more than double that.

And historically I don't think of you folks as being all that loose with your money to begin with.

So, Mike, you had mentioned that part of the success was -- was obviously the sales leverage, you know, on the fixed cost, but also managing your costs more effectively.

So I just wondered if maybe there's a few more items you just might be able to share with us as we think about the behavior of that going forward.

And then I will follow up after that if I can.

Thanks.

Well, I'm not sure I got the whole question, but the -- in terms of a 9% absolute dollar increase, I think when their top-line is growing at, you know, 20 plus percent, 25%, and there are different components of G&A cost, which I mentioned a lot of which we would expect to grow at a rate equivalent to our top-line increase, I think the 9% increase is showing some pretty good cost controls in that respect.

Does that answer your question?

Yeah, no, you know, I'm asking, you know, why you're able to contain it so effectively when there isn't that much fluff, at least what I think of on the corporate side that you folks are pretty well contained and yet it's not like you had that easy of a comparison to begin with.

I'm really just trying to understand if you look at the major components of G&A, where do you seem to be capturing more than sales leverage to keep that aggregate number going up only a single digit amount, when obviously your top line is well ahead of that?

Right.

I think that the, you know, the 9% increase absolute dollars does, as you mention, show some pretty good cost controls.

I think we were able to, you know, evaluate some of the programs, some of the hires that we had planned for this year and to postpone some of those, maybe a quarter, maybe even a year in some cases.

And I think that's what's being reflected their.

I also think you're seeing some of the benefits of some of the programs and efficiencies that we've established here at the corporate office to really leverage those sales better.

You know, I think, again, it was certainly a focus of ours for this quarter and will continue to be a focus -- I don't know that we will continue to get the same degree of leverage that we did in this quarter.

Did you have a follow-up?

Did we lose Peter.

Hello?

Your next question is from Paul Westra with SG Cowen.

Following up, if you could, on some of your questions regarding the guidance.

On your margin guidance estimates, is that assuming the long-term 1 to 2% same-store sales assumption?

I think the -- the -- again, we would expect our same-store sales to kind of go back to the price increase.

The level of price increase, which, you know, as we mentioned earlier in the Q&A here, we are going to have, you know, somewhere between 2.5 and 3% for this quarter.

Okay.

And then related question, even with the potential point or two slowdown in comps a questioning on the guidance and certainly the first half of the year you've had pretty significant labor and other occupancy expenses leverage, granted on good comps, you're taking a little bit more price increase, yet your guidance is for flat in those two line items, can you explain what may be incrementally more expensive or should we just take that as your conservative guidance.

I'm sorry on the labor and other--

Labor and occupancy line items were levered 40 and 50 basis points in the second quarter, much more in the first quarter.

You're taking a sequential price increase, yet your guidance for those line items are flat in the second half.

I'm just wondering if you could give a little more color on if there's anything there that happened in the first half that won't happen in the second half?

Or...

I think on a labor line item, I think that I assumed would be relatively flat, in the sense that now we're really kind of just comping up with our price increase, which will help to offset some of the labor costs, be it health insurance or just general wage increases.

So it's potential to get a little better leverage, but I'm not counting on a whole lot.

On the occupancy and other line, I did mention that I do expect to get some better leverage there year-over-year for the reasons you just mentioned that we'be got that price increase in there.

So there's nothing extraordinary positive happened in the first half?

It was just pretty much fundamental good leverage on the--

It was good leverage, I mean, running 6% comps in the first quarter and 4.5 in the second.

And one other follow-up question.

Your interest income, I know you had a $22 million lower average balance, but your other income -- your other expense line, which is an income line and your income -- interest income line was about $1 million short year-over-year.

What's a good gauge to use going forward on those two line items?

I think the -- the other income line item will be fairly comparable to what we experienced in the second quarter.

I think the interest income line item, again, will also be probably more comparable to what we experienced in the second quarter.

Great, thank you and good quarter.

Okay.

I think we have time for one more question, operator.

Okay, your last question comes from John Ivankoe with JP Morgan.

Actually, hi.

The question regards sales trends throughout the quarter.

I don't know if it's something you commonly discuss, but given the context of a lot of other releases in the industry, if you could comment on your underlying sense of traffic throughout the month, why your business responded or didn't respond perhaps relative to others and if there's any indication of what perhaps that means for the current quarter?

That would be great, thanks.

Well, we don't comment on our quarterly comp trends, although I will say that, you know, our traffic throughout the second quarter was very strong.

I do think, though that, again, if you just look at the comps that we're comparing to in the prior year, in the first half of the year we had some fairly easy comparisons, you know, .3% last year in the second quarter, as you get into the third and fourth quarter, those comparisons become a lit little bit harder.

And as I think I had mentioned a second ago with Paul, we're going to get back to the point where we expect to get more of our price increase only.

Does that answer your question, John?

More or less, yes, thanks.

But the underlying thing is, you know, traffic was strong throughout the entire second quarter?

At relatively similar levels?

Yes.

Great.

Thank you.

Okay.

I think that's it.

Thank you.

Thank you.

This does conclude today's conference call.

You may now disconnect.