Cheesecake Factory Inc (CAKE) 2004 Q3 法說會逐字稿

Good afternoon, my name is Meredith,, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Cheesecake Factory third 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 one on your telephone keypad.

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

Thank you.

Mr. Dixon, you may begin your conference.

Thank you, Meredith.

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, October 19, 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 placed on such statements.

Forward-looking statements involve known and unknown risk, 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.

Investor and listeners are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in our periodic files 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 will be as follows: First, we'll discuss the press release that we issued today that covers The Cheesecake Company's financial results for the third quarter of fiscal 2004 that ended on September 28, 2004.

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

After that, we will be happy to answer a few questions as time allows, and we would like to finish up this call in about 45 minutes, so let's get started.

Before we get into the detail of our operating results, I think it's appropriate to first address the legal reserve we established in this quarter.

As mentioned in today's press release, we accrued $4.5 million, or 6 cents per share in the third quarter for estimated expenses, which may be incurred in connection with claims alleging failure to comply with California labor laws with respect to providing meal and rest breaks to hourly employees.

As you may recall from our last Form 10-Q filing, we have three pending lawsuits on this matter, and have received a demand for alleged damages exclusive of interest and penalties for approximately nine million dollars.

Based on our most current mediation discussions, we feel it is appropriate that at this time to accrue half that amount, or $4.5 million.

Unfortunately, California laws regarding meal and rest breaks are complex and often unclear, which makes complying with these laws difficult and subject to interpretation.

We, along with many other employers in California in the restaurant and retail industries, are currently facing lawsuits and other administrative actions regarding the failure to comply with these laws.

In fact, Governor Schwartzenegger has recently recognized this fact and wrote the following in rejecting a bill related to labor issues -- and I'm going to quote him on this -- "inconsistent interpretation of existing law has created confusion relative to when and how employers must provide meal and rest periods to their employees.

This confusion has left many employers facing steep penalties for failing to adhere to the law, even if they believe they have met all required mandates.

In addition, increased penalties for failing to provide necessary meal and rest periods have, unfortunately, provided incentive for some to take advantage of the confusion in this area in the hope of securing hefty awards from employers."

The governor has recently requested the Labor and Workforce Development Agency to immediately commence rule making on the regulations to resolve the confusion in the existing law.

In any event, we do believe the 4.5 million accrual, or 6-cent a share charge, should be sufficient to cover the costs, fees and expenses which may be incurred in connection with these claims, and we are confident that the governor's focus on this issue, as well as our own operational adjustments, should eliminate any future confusion or exposure.

So with that discussion out of the way, I would now like to focus on our results from operations.

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

Our revenues during the quarter increased 25% to a record $247.7 million, and we achieved net income of 12.8 million, or 24 cents per diluted share.

Net income per diluted share would have been been 30 cents after adding back the 6 cents per share impact of the legal [INAUDIBLE] just discussed, and that compares to net income of 14.4 million, or 28 cents per diluted share for the same quarter last year.

The hurricanes and severe weather conditions in Florida and other parts of the southeast directly resulted in approximately 64 lost operating days due to restaurant closures, and impacted our total restaurant sales by approximately 1.8 to $2 million.

In spite of this adversity, our restaurants sales trends remained healthy, and we managed to post a comparable sales increase of 2.6%.

You know, without the lost sales resulting from the hurricanes, we estimate comparable store sales would have been in the 3.4 to 3.6% range.

The Cheesecake Factory has reported positive comparable sales comparisons in every year 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.

We believe this is a testament to the strength of our concept and the sustained popularity of our restaurants.

While we were very pleased with our operating income results, like all restaurant concepts, commodity cost pressures continue to have an impact on our operating profit.

We did realize some improvements in our restaurant cost of sales from the previous quarter, but we are still experiencing a significant increase in commodity costs versus the prior year.

I will cover this in greater detail in our review of the operating margins.

I'll now take a minute and provide some additional color on our top line results for the third quarter and cover our new restaurant growth plan for the remainder of fiscal 2000 and into 2005.

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

Our total restaurant sales increased approximately 25% during the third quarter to $235 million.

That 25% increase consisted of an approximate 23% increase in total restaurant operating weeks, resulting primarily from the openings of 19 new restaurants during the trailing 12 month period, coupled with an approximate 2% increase in average sales per restaurant operating week.

Our comp sales increase of 2.6% was principally attributable to our effective menu price increase.

We had a 2% effective menu price increase from our winter 2004 menu change, and an approximate 1% effective price increase from our most recent summer menu change, which was only in place for about 2/3 of the quarter, resulting in an effective menu price increase of approximately 2% -- 2.6% for the quarter.

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.

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 restaurants openings, and our current year to date openings are no exception.

To give you a little color, our third quarter openings in Des Moines, Iowa, Pittsburgh, Pennsylvania, and Virginia Beech all opened with weekly sales volumes well in excess of $250,000.

While we do not expect them to stay at these volumes, we are certainly pleased with this kind of reception in these new markets.

Sales at our Grand Lux Cafe continue to build very nicely at our three locations open for the full third quarter, and we are very pleased with the opening volumes at our fourth Grand Lux Cafe, which opened up September 28th in Dallas, Texas.

As we mentioned in the press release, we currently plan to open our fifth Grand Lux Cafe during the fourth quarter in Houston, Texas.

Moving to our restaurant growth plan, our development team has been extremely busy.

We have opened 13 restaurants year to date, and eight in the third quarter alone.

Since we did not open any restaurants in July, we've -- effectively and [INAUDIBLE] very efficiently opened eight restaurants in eight weeks.

While this was a new record for us, we still opened these restaurants with the same attention to detail, and focus on quality that we've always put into our openings.

This was accomplished with the incredible work of our operations team, led by our President and CPO, Peter D'Amelio, and our development team, led by our Senior Vice President of Development, Brian McKellar [PHONETIC].

We expect to achieve our stated goal for fiscal 2004 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.

We plan to open as many as four restaurants during the fourth quarter, including our Cheesecake Factory location in Rancho Mirage, California, which opened last week, and one Grand Lux Cafe in Houston, which will open in December.

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 [INAUDIBLE[ locations and our highly customized layout.

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.

Having said that, our capacity growth goal for 2004 is to achieve a 22% increase in total restaurant operating weeks, compared to 21% increase achieved during fiscal 2003: We always like to remind our investors that it does take about 90-120 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 preliminary goal for 2005 is to open as many as 18 new restaurants, consisting of approximately 15 Cheesecake Factory restaurants, and three Grand Lux Cafes.

As mentioned in our press release, we have signed leases or letters of intent in hand for most of these locations.

We will give additional information as to the proposed timing of these openings by quarter in our next quarter update.

Moving to our bakery operations, bakery sales and other food service operators, retailers and distributors increased 24% to $12.7 million during the third quarter.

But please remember, the 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 24% 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 expanding relationship with the Cisco Corporation.

In our view, the company's most impactful role to the business will continue to be a service as a dependable high quality producer of desserts for sale in our own restaurant, which will sell well in excess of 125 million desserts made at our central bakery production facility during fiscal 2004.

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

Our plan for the outside bakery sales in fiscal 2004 continues to be a focus on generating more consistent and predictable sales and contradiction margins.

We believe our Dream Factory protect 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 10-11% in the fourth quarter of fiscal 2004, compared to the same period last year.

While we remain optimistic with respect to our opportunities to steadily build our bakery center 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 baker product shipment and contribution margin 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.

That covers our top line performance for the third quarter and our new restaurants opening plans for the remainder of fiscal 2004 and into 2005, so now I'll briefly review the individual components of our operating margins for the third quarter.

First, starting with the supplement data at the bottom of the financial page of the press release, the cost of restaurant, food, beverages and supplies increased to 25% of restaurant sales for the third quarter just ended, compared to 24.2% for the same quarter last year -- a decrease from the 25.8% for the sequential June quarter.

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.

We are currently able to contract for the majority of the food commodities used in our operations for periods up to one year.

The remaining items consist primarily of fresh poultry, fish and dairy commodities, that we've historically been unable to contract for periods longer than 30 days in most cases.

Since our update last quarter, we have seen some improvement in the commodity market and are realizing benefits of the cost management initiatives we put in place.

Specifically, as we talked about in our last quarter, we have contracted a large portion of our projected poultry requirement for a six month period beginning in July, with options to extent beyond that.

These contracts, combined with the overall easing in the poultry markets in general, resulted in a net decrease to our poultry cost for the quarter compared to the sequential June quarter.

In addition, dairy costs, while still higher on a year-over-year basis, did come down during the quarter.

However, we did not see as much of a decrease in the manufacturer's cream market, which we use in our restaurant and bakery for whipped cream.

With these developments and the 1% percent menu price increase rolled out as part of our recent summer menu change, we anticipate restaurant cost of sales as percent of restaurant sales for the four quarter to be in the same approximate range as the third quarter just ended.

Bakery costs as a percentage of outside bakery sales for the third quarter were 50.6%, which was higher than the 45.8% reported for the same quarter last year, but lower than the 52.1% reported for the sequential quarter.

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

The decrease in the sequential quarter reflects the improvement in the dairy commodity prices, as just discussed.

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

We currently expect to use about nine to ten million pounds of cream cheese during fiscal 2004, which is the largest single commodity used in our bakery operations.

Going forward, we expect bakery cost of sales for the fourth quarter to be in the same approximate range as the third quarter.

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

Moving up to consolidated statement of operations in our press release, total labor expenses for our combined restaurant and bakery operations were 31% of total revenues for the third quarter, which was higher than the 30.5% reported for the same quarter last year, and the 30.5% reported in the sequential quarter.

Our increased labor expense as a percent of revenues in the third quarter was primary attributable to a couple of factors.

First, as previously mentioned, our restaurant sales comparisons for the third quarter were adversely impacted by the hurricanes and other severe weather, which resulted in approximately 64 lost operating days due to restaurant closures.

As a result, we experienced reverse leverage on the fixed portion of labor costs in our restaurant operations.

Additionally, the unpredictable fluctuation in restaurant sales due to the severe weather made it difficult for our restaurant operators to adjust their variable hourly labor accordingly.

Second, as I mentioned earlier, it takes about 90 to 120 days on average for our new restaurants to work through the normal grand opening in inefficiencies, and for food and labor costs to reach their targeted operating profit margins.

With eight restaurant openings in the third quarter, we did experience some of these inefficiencies.

Looking forward, we expect labor expenses as a percent of revenue for the fourth quarter to be fairly comparable to the third quarter just ended.

Other operating expenses were 24.5% of total revenues for the third quarter, which was up compared to the 23.4% reported for the same quarter last year, and the 22.5% reported for the sequential quarter.

Now, this 110 basis point increase from the prior year is attributable to the impact of the legal accrual, which was about 182 basis points, and offset partially by increased leverage of the fixed portion of these costs over the 25% increase in total revenues.

Looking forward for the fourth quarter of fiscal 2004, we currently expect other operating costs and expenses as a percentage of revenues to be in the same range as the third quarter after excluding the impact of the legal accrual.

G&A expenses for the third quarter were 4.1% of total revenues for quarter, which was down from the 4.6% in the same quarter last year and from the 4.2% 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.

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

Our G&A expense consists of of two components -- costs for our corporate, bakery and field supervision support team, which should grow at a lesser rate than revenue, and the cost for our restaurant management recruiting and training program, which should grow to 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 out business, commensurate with the planned openings of as many as 16 new restaurants during the full year.

Looking forward, our current expectations for total G&A expenses as a percentage of revenues for fiscal 2004 is slightly better than that achieved during fiscal 2003.

Depreciation expense was 3.6% of total revenues for the third quarter, compared to 3.5% for the same quarter last year, and 3.5% 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 pre-opening costs were patrol 6.9 million, compared to 4.1 million for same quarter last year.

We opened eight restaurants during the quarter just ended, compared for three in the same quarter last year.

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

We usually incur most of our pre-opening costs In two months before and the month of a restaurant's opening.

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

The pre-opening costs for our upscale, highly-customized and operationally complex restaurant 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 pre-opening costs into the model for as many as four new restaurants openings during the four quarter of fiscal 2004.

We currently expect pre-opening costs to be in the 3-$3.5 million range for the fourth quarter, based on the expected timing of these openings -- the one Grand Lux Cafe included in this mix, as well as some costs being incurred for fiscal 2005 openings.

That covers our review of the major line item components of our operating margins for the third 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 third 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 conclude the year.

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

As of September 28th, our cash and marketable securities in hand were approximately $122 million.

The $14 million decrease in this balance from the sequential quarter represents the ongoing construction of new -- excuse me -- new restaurant locations, and the repurchase of some shares, partially offset by cash flow from operations and landlord contributions.

Our cash flow from operations year to date was approximately $85 million, and our cash and accrued Capex year to date, including construction and progress for company openings was approximately $106 million.

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

Based on our current expansion plans and the 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 makes 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 educed risks 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 -- any other [INAUDIBLE] 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 arrangement.

We also have a share repurchase authorization from our board of directors, which was increased this past August to allow us to buy back up to four million shares in the open market.

We repurchased approximately 52,000 shares in the third quarter at a cost of approximately $2 million.

We have approximately 2.7 shares remaining in our current repurchase authorization.

So 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 quarter, and executed an aggressive restaurant opening plan, with strong new unit performance.

We still face a difficult commodity cost environment, but we are encouraged that these costs improved from earlier in the year.

We expect to achieve our stated growth goals for fiscal 2004 with continued high quality and consistency, and feel confident about our ability to achieve our stated fiscal 2005 growth goals.

While we believe there is room for approximately 200 Cheesecake Factory restaurant locations domestically, and we have only 85 open as of today, we are very encouraged about the potential of Grand Lux Cafe to become a complimentary 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 third 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 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.

Now, if we don't have time to get to your questions in this call, please feel free to call us at our offices after the call.

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

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

Your first question is from Matthew Difrisco with Harris Nesbitt.

Hi, I've got actually two small questions.

First, can you just clarify in the legal reserve, I'm presuming it sound like you described it as though that is for a potential future settlement -- that is not for incurred legal expenses such as the lawyers to mediate this?

And then second, on the G&A guidance, you refer to it as slightly improving from -- as a year for '04 versus '03, although you've been doing some pretty hefty improvement over the last couple of quarters.

Should we then presume that the fourth quarter is going to be more in line, or even maybe higher than what you incurred as percent of sales in 4Q of a year ago?

Okay, Matt, as to your first question, the legal reserve is not related to legal fees.

It's related to the potential settlement costs and expenses that may be incurred related to resolving this case.

And again, this is still ongoing, but this is our estimate of where this thing may settle out at this point in time.

On the G&A costs, we have been able to obtain some pretty good leverage throughout the year.

I would imagine that we certainly will be slightly better than last year -- I think we finished at 4.6% in the cost of -- as a percent of revenue for the full year.

I would expect to be, you know, anywhere from 2-3 basis points better than that.

Okay.

Next question?

Your next question is from John Glass with CIBC World Markets.

Thanks.

A question about your unit guidance for next year.

You talked about 18 units -- that represents roughly 19% growth.

The last couple of years, you've been growing units closer to 22%.

So I guess, are we reaching the point where maybe unit openings on the absolute basis are beginning to level out?

I don't know about leveling out.

I think, you know, John, one of our criteria over the past several years has been an operating week growth statistic, and we feel confident that if we can, you know, get some restaurants open in a little earlier in the year, then we'll be able to achieve that same growth level.

So I don't think we're topping out on what our annual number of unit openings could be, but I think through better scheduling, and with luck -- again, it's not really within our control -- but with some better scheduling of these openings throughout the year, then we get more operating weeks out of them in the year.

Just to be clear, the 18 -- 19% growth would translate into 22% operating unit -- operating week growth?

Yes.

Thanks.

Next question?

Your next question is from Mark Kalinowski with Smith Barney.

Hi, two fairly minor questions.

First, just wondering if you can comment on how the low-carb cheesecake is selling and if that's providing any insight into low-carb trends in general.

And second, just on the pumpkin cheesecake, just wondering if you've had any supply issues this October in getting that product out to your restaurants?

Thanks.

Hi, Mark.

On the pumpkin, I believe we're just fine.

There was some time where we had to, you know, get some alternate suppliers and get it in, but that was months ago, and we're fine with our supply for pumpkin.

The low-carb cheesecake -- and this is probably two weeks old, I don't think I have this week's information -- but it's number two in California, and number eight company-wide in terms of sliced sales.

Huh, that's really something.

Yeah, it's doing very, very well, and a lot of -- there's a lot of people, again, for a number of reasons that like that cheesecake, so we're very happy with the response.

We're working on a -- a flourless chocolate cake that will also be made with Splenda to give people a chocolate alternative, so we're very happy with the response.

It's solid.

We'll probably carry that cheesecake in Grand Lux -- we've had a number of requests for it.

It's new menu change is coming up this month, so we're very happy with the results.

Sound good.

Good luck with it.

Thank you.

Thanks, Mark.

Your next question is from Sharon Zackfia with William Blair

Hi, I have a few questions.

On the G&A, I guess a follow up, how low do you think G&A can go as percent of sales?

I mean, what kind of sustainable levels of 4% -- is it higher than that on an annual basis?

And then, I'm wondering since you're in California, you probably have a good feel on this -- what's the likelihood of Prop 72 actually going into effect and what would that mean for your expenses?

And then lastly, if you could what your pricing policy is at Grand Lux.

I don't know if you said before if you're taking those annual price increases there as well.

I can speak to pricing at Grand Lux where, we're probably somewhere around a 1% price increase for this menu change.

Maybe .8 to one, we have to actually see what that mix will turn out to be.

So like Cheesecake Factory, we take our twice a year menu change opportunity to increase prices where we think it's necessary.

So again, somewhere between, you know, 8/10ths of a point which should be coming off -- and then, Mike?

Yeah, and just to clarify, that Grand Lux menu change out is on a different schedule.

It's in the spring and the fall, as opposed to winter and summer for The Cheesecake Factory.

To your other questions, you know, with G&A expenses, you know, the growth in G&A is not linear, obviously.

We get to -- as we build some infrastructure, we get to leverage it for some time period.

It's more of a step function.

I would say on a go forward basis, that I would expect the absolute G&A dollars to usually increase in somewhere to the 14 to 16 or 17%.

I think that's reasonable.

I think we're doing a little bit better than that as a result of sort of leveraging that sort of step up, as we talked about, but I do think on a regular run rate basis, you're -- you know, going forward that I would expect that 14-16 or 17% absolute dollar increase.

As it relates to Prop 72, you know, I can't give you any better indication of what's going to happen with it.

You know, we did some preliminary analysis of what that might cost us, but it is preliminary, and we're not really prepared to discuss it if Prop 72 was to pass, and the insurance act could go into place.

I will say that we do currently offer health insurance to our employees, and there is a sharing of that cost that is not too different from what is required by Prop 72 as currently written.

So I couldn't tell you what the likelihood of passage or failure of that act is, but we are doing the work just in case it does go into effect.

Thank you.

Thanks, Sharon.

Next question?

Your next question is from Mike Smith of Oppenheimer.

Well, good afternoon.

Hi, Mike.

In the past, you've shared with us the comp store sales increases at your Grand Lux units.

Have they been pretty healthy?

And I wonder if you could expand on what you mean by the strong opening in Dallas?

Well, the -- the comp stores are still -- comp store [SPEAKERS OVERLAPPING] good for all of Grand Lux locations individually and in the aggregate are still positive, and I'll just say, they're well above what the overall number is for the company -- the 2.6%.

Right, and then second question?

Grand Lux Dallas.

Oh, Dallas, yes.

You know, we opened much stronger than we did in Los Angeles, and we increased our second week sales over our first week sales by 30%,.

And again, that's not -- there's no advertising, so I think those are some excellent numbers for, you know, a new restaurant in a city like Dallas with such competition.

So we've been very, very happy, and you know, we're looking forward to the holiday season where so many people will be coming in to the Galleria -- the Galleria is also having a grand reopening -- I think it's the first week in November -- where they're having a lot of advertising because they've just redone and remodeled the whole mall.

So I think we'll have a really good idea of how strong we will be right after January, after the holiday season, but we're extremely happy with the openings so far.

Well, thank you.

Thanks, Mike.

Your next question comes from Stephen Spence with Longbow Research.

Hello.

Yeah, I think that we're expecting a cold winter this year, so I just wondered what your assumptions were in terms of -- of heating costs and so forth in your restaurant operations.

Well, you know, Stephen, our utility costs for the quarter just ended were up, you know, up about three basis points from the prior quarter, but you know, they haven't moved dramatically, I think with -- we're kind in a wait and see at this point.

It's not a huge component of our margin structure, so it [INAUDIBLE] a pretty significant movement for it to have a real impact on us.

I do expect that it will be a little bit higher, but I don't know that it will be meaningfully higher.

Okay, very good.

Thank you.

Your next question is from Ashley Woodruff with Bear Stearns.

Hi, thanks.

I have a question on the investment costs at Grand Lux.

You took out, I think, about 1 million in costs in the Dallas and Houston stores compared to LA and Chicago -- could you discuss the breakdown of that amount that you saved?

How much was just the smaller footprints and how much was actually changing the format of the restaurant?

And then, following that, is a 1 million reduction in investment costs -- is that sufficient to meet your hurdle rate assuming $800 in sales per square foot, or do you think you'll need to cut it up in costs in the -- in your next generation of stores?

We were $75 a square foot more in Dallas than a normal Cheesecake Factory would cost in Dallas.

And again, these costs are different depending on whether they're Union or where they are in the country.

So we took out quite a bit of money, and these are 12,000 square foot restaurants, and not the average Cheesecake, which is a little bit under 11, so they are still large restaurants.

So we're very happy -- we took a lot of it out of the kitchen, we were able to shrink the kitchen -- again, based on menu mix and our learning in these other restaurants.

I think we have a ways to go -- the idea here is to test Dallas and Houston, which have identical kitchens, and then be able to go ahead and take more out.

The one that we're building next year, at least the one that we're looking at, will be in an 11,000 square foot model, which will probably be the norm moving forward for Grand Lux.

And I think we'll be able to get more out, so we do need to get some more out, and it comes from everywhere.

It comes from instead of getting, you know, blown glass light fixtures, we're able to make them out of different materials, and we have time to go ahead and shop that around and make changes.

So it comes from the front decor, It comes from the kitchen, it's not really -- it wasn't really based on size, those savings.

And so it is $800 a square foot and growing, and yes, we need probably three more integrations of next year In order to get the investment costs in our sales lined up where we will get the cash and cash return we're looking for.

We feel very, you know, very positive we can get -- make all that happen, but it's a slow -- you know, a little bit of a process so we don't all of a sudden build a kitchen that's not adequate to serve the people that we want to.

Does that answer your question, or Mike?

Yes, I think just at this stage of where we are with the development of the Grand Lux concept, we're very encouraged that the sales are moving in the right direction.

That $800 a square foot number was through the end of last fiscal year, so that's -- we're well above that number now and will update that at year end.

And as David mentioned, we've proven to ourselves that we can get the investment costs down to a reasonable level, and we keep moving in the right direction, but still deliver the same quality that we want in a Grand Lux Cafe.

So are we at the hurdle rate yet?

No, but they're moving in the right direction, and as David said, we continue to fine tune this with the three openings next year.

Thank you.

Thanks.

Your next question is from Paul Westra with SG Cowen.

Okay, thank you.

Good afternoon.

A couple of questions on -- from your line item guidances, including the food [INAUDIBLE] for the next quarter.

I thought food about being flat, we're seeing some sequential decreases in the commodities like you mentioned -- the dairy, the cheese, and poultry.

So I'm wondering if there's anything else offsetting some of that sequential [INAUDIBLE] movement in the food cost,.

And similarly, with labor, you talked about a flat number for the fourth quarter versus the third, yet the past five years, you've seen improvement in the fourth quarter number versus the third, [INAUDIBLE] excess cost in the quarter that probably shouldn't be repeated with exposure.

So wonder if you're seeing anything within that number that we might be missing

Sure, Paul, I think on the food side, you know, it's been such a volatile year, as you know, with the commodity costs, I think with, you know, what we've seen with the dairy markets and the poultry markets that, you know, there is a chance to do a little bit better in the fourth quarter than we did in the third, but I think historically, dairy prices tend rise in the fourth quarter.

And as our purchasing guidance says, we get in the baking season and we start to see a little more demand in butter markets, and so you see a little pressure in that.

So I don't want to be too optimistic on that.

I think to achieve what we did the in third quarter, you know, and a full eight basis points improvement from the second quarter, we're pretty happy with that, as high as those costs were, but we're still happy to see it move that much slower.

On the labor side, you're right that we certainly don't expect to see a repeat of the hurricane impact that we had in the third quarter.

But we do have, you know, eight brand new restaurants that are -- really be hitting us for the full quarter, plus the other four coming on line in this quarter, so there is a chance for a little bit of improvement there, but I would expect it to be relatively in line with the third quarter.

Okay.

Your next question is from Bryan Elliot with Raymond James.

Good afternoon, can you hear me okay?

Yes.

Couple of questions kind of regarding the extra week next year.

The 22% sort of targeted operating weeks, did that include the impact of the extra week in Q4 '05?

No, I don't think it does.

Okay.

All right.

And have you calculated a rough cut EPS estimate?

Or if not, would 4-5 cents be reasonable at this point?

One, we don't give EPS guidance, and even if we did, I haven't -- we haven't figured that out at this point, so I couldn't really tell you.

Okay, fair enough.

The price increase in Q4, given that we kind of have the full quarter impact of the most recent one, are we looking at a full 3% price increase for all of Q4?

That's correct.

Okay, and then the normal menu update, I recall, is shortly after the 1st of the year, is that right?

Really, the price increase will be in place by the middle of February.

So that's January, February time frame when that rolls out.

Okay, thank you.

Okay.

Thank you.

Your next question is from Andy Barish with Banc of America Securities.

Hey guys, a couple of questions on really, again, the unit development.

You've opened some smaller size markets this year.

Can you give us a little sense of how those restaurants are doing; and then historically, matching that up, you've also talked about square footage growth.

Does opening in some of those smaller markets make the square footage growth different that operating week growth?

Or does the opening of some Grand Luxes kind of offset that and keep those number relatively similar?

Well, I would say first part of your question, the markets that we've opened in this year we've been incredibly happy with.

As I mentioned in the call, you know, Des Moines, Pittsburgh, Birmingham, Alabama, Sacramento -- going back to earlier in the year -- have been incredibly strong openings, and continue to be very strong.

As to the square footage question, most of these restaurants are still in that 11 to 12,000 square feet range.

So, you know, [INAUDIBLE], which, you know, a fill in, which was 8500 square feet, they've all been in 10-12,000-foot range.

So we -- I think, you know, if you go back a few years when we opened in smaller markets out here in California -- Thousand Oaks and Irvine and Mission Viejo -- we opened those as smaller units based on those -- you know, we've seen -- we deemed those to be more suburban locations.

But every one of those units is doing well in excess of a thousand bucks a square foot, and if we have the opportunity, we're expanding every one of those.

In fact, we were able to recently expand Irvine, so you know, we've learned that even in these smaller markets, the 10-12,000 square foot unit works very well.

Thanks.

Thank you.

We have time for maybe one more question.

Your next question is from John Ivankoe with J.P. Morgan.

Hi, John

Hi, sorry about that.

David, a question for you.

As you've, you know, had some time where Grand Lux and Cheesecake Factory have been open in the same market, could you talk about how consumers perceive the difference between those two concepts in terms of, you know, attributes I guess they would care about, like menu and pricing and occasion, and the level of service and the type of service that they have.

And I guess my question is a little bit broader, as -- you know, as you presumably expand, get Grand Lux in the markets where there's Cheesecake, do you perceive it as necessary to expand the difference between those concepts, or are you happy, you know, where things are today as according to the customer feedback?

Thanks.

Yeah.

And you know, John, I think that we will try to come up with more signature items than we even have now for Grand Lux.

We will try to make it different, but really, they're functioning very, very well.

We -- at this point, there will never be a Grand Lux where there's not a Cheesecake, so they have to go together, not cannibalize each other.

So far in the four restaurants, we are not having any cannibalization.

In Houston, we will be opening up across the street, and that will be another test -- which again, we are doing on purpose to see how close can we get and what is the effect.

I think that there, again is a huge sense of demand for upscale casual dining.

The step-up of Grand Lux Soup -- many of our guests [INAUDIBLE] very, very well.

The fancier decor, and a little glitzier, -- we'll be able to put more Japanese Sushi-type items, fresh [INAUDIBLE] items.

We have a more expensive and better steaks.

We have, you know, different kinds of seafood, and we -- we're going up to even breaking the $20 range on a number of our more expensive entrees at Grand Lux,and they're doing very, very well, well, where our Cheesecake Factory, only the steaks go above $20.

So that extra dollar, dollar fifty price point, brings us another subgroup of that upscale casual dining, and that is where we expect Grand Lux to find its space.

Even though people will very easily be able to to go back and forth -- you can't eat at Cheesecake every night, you can't eat at Grand Lux -- you can't eat at any restaurant every night, so if there's more really good, upscale casual dining, the brand's different, the bar is different, the wine list is different, and people will find their favorites at both, is we are experiences right now.

Okay.

In the Grand Lux unit, I guess, either excluding -- or actually, yes, excluding the unit in the Venetian, what is the average ticket at this point, if you can --

Right now, it's a dollar more than Cheesecake Factory; although on paper, it's probably, you know, we thought it would be a dollar and a half; again, we're -- we're -- we have to get our dessert sales up a little bit more and so on.

Our buyer is heavier at Grand Lux, our desserts are a little lighter than Cheesecake, but -- and right now, we're experiencing a dollar more.

But I think we would be happy if it was even a dollar and a half.

Okay.

All right, thanks.

Thank you.

I think that wraps it up, operator.

Thank you, everybody, for your time.

Thank you.

This concludes today's conference call.

You may now disconnect.