Cheesecake Factory Inc (CAKE) 2004 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to The Cheesecake Factory fourth 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 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, February 8th, 2005, 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 fourth quarter of fiscal 2004, that ended on December, 28th, 2004.

We will refer to that quarter as the fourth 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 started.

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

Our revenues for the fourth quarter increased 24 percent to $266.1 million, our net income increased 32 percent to $20.5 million, and our diluted net income per share in increased 30 percent to $0.26.

As we mentioned in our press release, our net income for the fourth quarter benefited by $2 million, or $0.02 per diluted share, from receipt of a property insurance settlement related to bakery product losses incurred by our central bakery production facility during fiscal 2002.

This $2 million benefit is reflected in the other operating expense line item on our income statement.

Before the benefit of the settlement, net income per diluted share would have been $0.02 less, or $0.24 per diluted share, compared to $0.20 cents per diluted share for the same quarter last year.

Though I'm sure most of you know this, for the sake of clarity, I will point out that all references to earnings per share in our press release and in our comments today, reflect the 3 for 2 stock split that was effective on December 8th, 2004.

Our comparable restaurant sales were up a solid 3 percent for the fourth quarter, which was reflective of strong sales throughout the entire country, but especially in Florida, which appears to have rebounded very nicely from the hurricanes in the third quarter.

The Cheesecake Factory has reported positive comparable sales comparisons every year that we have been a public company, and fiscal 2004 is no exception.

For the full year, we reported a comparable restaurant sales increase of 3.9 percent.

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 are very pleased with our operating income results, like all restaurant concepts, commodity cost pressures continue to have an impact on our operating profits.

We did see some fourth quarter cost improvements in a couple of the commodity areas that impacted us throughout most of 2004.

However, this was offset by some unusually high produce prices as a result of the hurricanes in the third quarter.

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

Now, I would like to take a minute and provide some additional color on our topline results for the fourth quarter, and cover our new restaurant growth plan for fiscal 2005.

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

Our total restaurant sales increased approximately 24 percent during the fourth quarter to $247 million.

That 24 percent increase consisted of an approximate 23 percent increase in total restaurant operating weeks, resulting primarily from the openings of 22 new restaurants during the trailing 15 month period, coupled with an approximate 1 percent increase in average sales per restaurant operating week.

Our comp sales increase of 3 percent was principally attributable to our effective menu price increases.

We had a 2 percent effective menu price increase from our winter 2004 menu change, and an approximate 1 percent effective price increase from our summer menu change.

With The Cheesecake Factory concept as busy as 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 increase 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 percent to 2 percent range.

We did mention in our press release today, that comparable restaurant sales were up approximately 3.9 percent for the first 5 weeks of fiscal 2005, in spite of the very wet weather in California in early January, and the severe weather in other parts of the country, that resulted in approximately 20 lost operating days due to restaurant closures.

We believe this speaks highly to the geographic diversity The Cheesecake Factory enjoys as we continue to grow our concepts across the country.

With respect to menu pricing, we are in the process of rolling out our winter menu change, that includes an approximate 1 percent menu price increase.

This modest menu price increase should be sufficient to offset the majority of our expected operating cost increases for 2005, that we know as of today.

As in past years, we will review our operating margin this spring, and consider the need for additional menu pricing, in connection with our summer menu change.

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

We continue to be very pleased with all of our new restaurant openings, and our fiscal 2004 openings are no exception.

To give you a little color, our fourth quarter opening in Milwaukee averaged weekly sales of over $240,000 during the quarter, and our Brea, California, location averaged over 280,000 for the quarter.

While we don't expect them to stay at these volumes, we are certainly very pleased with this kind of initial sales in these markets.

Sales at our Grand Lux Cafes continue to build very nicely, as our 3 locations open for the full year delivered over $46 million in revenues.

The 2 latest Grand Lux openings in Dallas and Houston, both opened with very strong sales during the holiday period, and have maintained these levels through the first 5 weeks of fiscal 2005.

Moving to our restaurant growth plan, we successfully opened 4 restaurants in the fourth quarter, and achieved our stated goal to open 16 restaurants for the full year, including the 2 Grand Lux Cafes I just mentioned.

During the year, we opened 9 restaurants in a 10 week period.

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

This was accomplished with the incredible work of our operations team, led by our President and COO, Peter D'Amelio, and our development team, led by our Senior Vice President of Development, Brian MacKellar.

During 2005, our goal is to open as many as 18 new restaurants, which would include as many as 15 Cheesecake Factory restaurants, and as many as 3 Grand Lux Cafes.

Now, signed leases or letters of intent are in hand for nearly all targeted locations.

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.

However, we recognize the fact that the nature of the sites we choose, lends itself to our opening schedule being more loaded to the back end of the year, and we have properly staffed our development and new restaurant operation teams to accommodate this.

Based on the information we have as of today, we expect to open 5 restaurants in the first quarter, 1 restaurant in the second quarter, 3 restaurants in the third quarter, and 9 restaurants in the fourth quarter.

Based on our recent accomplishment of opening 9 restaurants in a 10 week period, we are very confident in our ability to achieve our 2005 opening plan.

We will provide updates as to the expected number and timing of restaurant openings during the upcoming year on our quarterly conference calls.

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 operating target margins.

Moving to our bakery operations, bakery sales to other food service operators, retailers, and distributors increased 28 percent to $19 million during the fourth quarter.

This increase reflects higher sales to our warehouse club customers, as well as increased sales of The Dream Factory product line.

For the full fiscal year, bakery sales increased 24 percent to $52.9 million.

This is well in excess of our modest growth goal of 5 percent to 10 percent, and reflects the incredible demand for our products to our existing sales channels, as we did not bring on many new customers, but we did see the demand for our existing customer base grow significantly.

Even with these results, please remember that bakery sales accounted for only about 7 percent of our total sales for the fourth quarter, and accounted for only 5.5 percent of our total annual Company sales.

Our plan for the outside bakery sales in fiscal 2005 will continue to focus on generating consistent and predictable sales and contribution margins.

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 for our warehouse club customers.

We currently expect bakery sales to increase approximately 5 to 10 percent in fiscal 2005 compared to the prior 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 sales in our own restaurants, which sold over $130 million of desserts made in our central bakery production facility during fiscal 2004.

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

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

In fiscal 2004, we completed the installation of 4 new ovens in our existing production facility, for a relatively modest capital investment, which effectively increased our production capacity by about 20 percent.

We are also very close to finalizing our plans for a second production facility on the East Coast.

This facility will be built out in phases over several years to allow us to add production capacity as we need it.

Our current expectation is to have the East Coast facility up and running by the first quarter of 2006, and we will keep you advised of our plans in that respect as they evolve.

A second production facility offers clear advantages, not only in terms of serving as a backup production facility for our own restaurants and our outside customers, but also in terms of reducing the freight and distribution costs to our East Coast restaurants and outside customers.

That covers our topline performance for the fourth quarter, and our new restaurant opening plan for fiscal 2005.

So now I will briefly review the individual components of our operating margins for the fourth 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 25.1 percent of restaurant sales for the fourth quarter just ended, compared to 24.3 percent for the same quarter last year, and compared to the 25 percent for the sequential September 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 operation for periods up to 1 year.

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

While we saw some continued cost improvement in poultry and dairy commodities during the fourth quarter, both remained higher than the comparable period of the prior year.

In addition, like most restaurants, we experienced significantly higher costs for produce in the fourth quarter, specifically tomatoes, as a result of the Florida hurricanes in the third quarter.

The good news is that the produce items impacted by the hurricanes, appear to be returning to normal.

While on the topic of produce, I should mention that we experienced minimal impact to our produce costs in January as a result of the recent California rains.

We source very little product this time of year from the areas that were impacted by the wet weather.

We have completed nearly all of our negotiations with suppliers for those expected commodity requirements for fiscal 2005 that can be contracted.

This includes the majority of our poultry requirements, which as we discussed last quarter, is an area in which we only recently managed to enter into contracts with our vendors.

Looking forward to 2005, based on the results of these negotiations and expected market conditions for our noncontractable items compared to the prior year, we are expecting generally flat costs for our grocery, produce, seafood, and bread commodities, slightly lower costs for our poultry and dairy commodities, and slightly higher costs for our meat and fish commodities.

In the aggregate, we expect that restaurant cost of sales, as a percentage of restaurant sales, could be 60 to 70 basis points lower in fiscal 2005 compared to the prior year.

As I mentioned earlier we are implementing an approximate 1 percent effective menu price increase in our current new menu rollout.

This increase will be in all restaurants by the end of February.

We will review our cost trends this spring and consider the need for any additional menu price increases in connection with our summer menu change.

Bakery costs, as a percentage of outside bakery sales for the fourth quarter, were 47.8 percent, which was higher than the 46.6 reported for the same quarter last year, but lower than the 50.6 reported for the sequential quarter.

This year-over-year increase was principally due to an increase in certain noncontracted dairy commodities, such as butter and manufacturers cream.

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

We currently expect to use about 11 to 12 million pounds of cream cheese during 2005, which is the largest single commodity used in our bakery operation.

We have executed contracts for all of our cream cheese requirements for the first 3 months of fiscal 2005, at a fixed cost per pound that is slightly higher than the actual cost per pound in fiscal 2004.

We will contract the remainder of our cream cheese requirements for fiscal 2005 as appropriate, based on market conditions and prices.

We will also purchase cream cheese on the spot market as necessary to supplement our agreements.

We have considered the higher cream cheese costs in setting the selling prices for many of our bakery products for fiscal 2005.

Moving up to the consolidated statement of operations in our press release, total labor expenses for our combined restaurant and bakery operations were 30.4 percent of total revenues for the fourth quarter, which was higher than the 30.2 percent reported for the same quarter last year, but lower than the 31 percent reported in the sequential quarter.

The slight year-over-year increase in labor expenses as a percent of revenues was primarily attributable to a little bit of pressure from our group medical insurance costs, as well as a bit of hourly wage pressure.

Looking forward, we currently expect labor expenses as a percent of revenue during 2005, to be slightly higher than the prior year due to minimum wage increases in a number of large markets for us, including New York, Florida, and Illinois, and some continued pressure on our group medical insurance costs.

Other operating expenses were 22.4 percent of total revenues for the fourth quarter, which was down from the 23.8 percent reported for the same quarter last year, and the 24.5 percent reported for the sequential quarter.

The 140 basis point decrease from the prior year is attributable to the benefit of the property insurance settlement, at about 75 basis points, plus the stronger bakery sales, which resulted in better leverage of our selling and promotional costs versus the prior year.

For the full year of fiscal 2004, other operating costs and expenses were approximately 22.8 percent of revenues, after adjusting for the 4.5 million insurance reserve we established in the third quarter, and the 2 million property insurance settlement we just discussed.

Looking forward for fiscal 2005, we currently expect other operating costs and expenses as a percentage of revenues, to be in that same 22.8 percent range.

G&A expenses for the fourth quarter were 4.2 percent of total revenues for the quarter, which was unchanged from the 4.2 percent in the same quarter last year, but up slightly from the 4 percent in the sequential quarter.

For the full year of fiscal 2004, G&A expenses as a percent of revenues were 4.2 percent, compared to 4.6 percent in the prior year.

We made a concerted effort to strictly manage costs in this area throughout the year to help offset the commodity cost increases already discussed.

Our G&A expense consists of 2 major components.

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

During fiscal 2005, 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 18 new restaurants during the year.

Looking forward, our current expectation for total G&A expenses as a percentage of revenues for fiscal 2005, is in the same range as that achieved during fiscal 2004.

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

Looking forward, our current expectation for total depreciation expense as a percentage of revenues for 2005 remains in the 3.7 percent range, based on our expected growth and investment plans.

Actual preopening costs incurred during the fourth quarter were approximately 3.5 million compared to 4.5 million for the same quarter last year.

We opened 4 restaurants during the quarter just ended, compared to 7 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 2 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 cost for our upscale, highly customized, and operationally complex restaurants is higher than most restaurant concepts in terms of absolute dollars, but is in line with other upscale concepts relative to the scope of operations.

Analysts and investors should factor enough preopening costs into their models for as many as 18 new restaurant openings during fiscal 2005.

Based on the information we have as of today, and as I said earlier, we plan to open as many as 5 restaurants in the first quarter, 1 restaurant in the second quarter, as many as 3 restaurants in the third quarter, and as many as 9 restaurants in the fourth quarter.

Also as I mentioned earlier, as many as 3 of these planned 18 openings could be Grand Lux Cafe locations, for which we currently expect preopening costs to run approximately 15 to 20 percent higher than our normal preopening costs for a Cheesecake Factory restaurant.

In addition, with an early 2006 planned start for our East Coast bakery facility, we expect to incur the majority of the preopening expenses associated with this facility in the third and fourth quarters of fiscal 2005.

We currently expect these preopening costs to be approximately $1 million.

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

Based on our final estimates of FICA tip credits and other income tax components, our effective tax rate for fiscal 2004 was 34.8 percent.

We will initially use this same rate, 34.8, as our estimated effective tax rate for fiscal 2005, and we will adjust it if necessary as we move throughout the year.

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

As of December 28th, our cash and marketable securities in hand were approximately $152 million.

The 30 million increase in this balance from the sequential quarter, represents in part, the proceeds from our gift card program during the holiday season, but is also impacted by the timing of construction cost distributions.

Our cash flow from operations for fiscal 2004, was approximately $151 million, and our cash and accrued CapEx for fiscal 2004 was approximately 142 million, which includes construction in progress for some 2005 openings.

We currently estimate our cash CapEx for fiscal 2005 to be in the range of 150 to $157 million.

This includes approximately 9 to $10 million related to the East Coast bakery facility.

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 2005 through expected operating cash flow, agreed upon landlord construction contributions, and our cash on hand.

We continue to believe that maintaining liquidity position in our current range makes good business sense in this operating environment, so 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 in our capital structure, and currently do not anticipate a need for funded debt, or any other external financing during fiscal 2005, other than landlord construction contributions.

We do have a $35 million credit facility in place, for backup 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 to buy back up to 6 million shares in the open market.

The Company did not buy back any shares in the fourth quarter.

For all of fiscal 2004, the company back bought -- bought back approximately 335,000 shares at a total cost of approximately 9.3 million.

We have approximately 4 million 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, net income, and diluted net income per share for the fourth quarter and the fiscal year.

For both the quarter and all of fiscal 2004, we achieved our stated goals to open 4 and 16 restaurants, respectively, setting new growth records for our Company, and we were able to achieve that record capacity growth with consistent, high quality locations, consistent high quality operational management, and consistent high quality field supervision and corporate support.

We also have an achievable restaurant growth goal -- opening goal for 2005 and, once again, we remain confident that we can execute our growth plan of 20 percent plus revenue and EPS growth, with high quality and consistency.

We believe there is room for approximately 200 Cheesecake Factory restaurant locations, and as many as 150 Grand Lux Cafe locations.

As we only have 92 restaurants open as of today, 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 exiting our growth plan -- executing our growth plan with great confidence.

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

We would like 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 1 question.

And if we don't have time to get to 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.

(OPERATOR INSTRUCTIONS) Matthew DiFrisco, Thomas Weisel Partners.

My question is with respect to the sales growth you had in the bakery sales.

Can you be a little bit more specific about that?

Did you comment that that was benefiting from your strong comp in your restaurant sales, or is there a new client that you brought on, or is it, once again, I guess better than expected growth through the wholesale channel?

Well, Matt, that line item represents only outside sales, so it is not impacted by the restaurant.

So those are outside sales to third parties.

And as I mentioned, those sales were really driven, that increase was really driven by higher demand for our product through our existing customer base.

Primarily, the warehouse clubs, as well as the Dream Factory product line.

So was the warehouse clubs benefiting, or reflected in that strong growth?

Absolutely.

Okay.

And also just a follow-up question.

On your commodity outlook, where you said 60 basis point improvement for 2005, have you factored in a continued decline in dairy, or basically a conservative approach to dairy, and staying where dairy is now?

I think we are relatively conservative.

I think we do anticipate a little bit of easing in dairy cost.

We did factor that in, but weren't overly aggressive in that.

Mike Smith, Oppenheimer.

Just a question about Barnes & Noble.

I guess they are selling Cheesecake Factory cheesecake now.

Is that an effort out of the bakery, or is that an effort out of 1 of the stores, or what exactly -- are you testing something there?

No, it is out of the bakery.

It is our Dream Factory line of products, but we did allow Barnes & Noble to use The Cheesecake Factory bakery name.

They are a great customer, and we are working closely with them.

But it all comes out of our main factory.

John Glass, CIBC.

In '04, I think you had operational initiatives, like commitment to service, better management assessment, working on better kitchen turn times.

Could you discuss maybe what those initiatives are in '05, similar initiatives?

Thanks.

Yes, obviously we are continuing with our service initiative and a few others.

Probably the biggest thing we have on deck for this year, is our kitchen reengineering project, and an actual kitchen management system that we are going to start to test in our restaurants.

So although these are very big projects and will take time and we don't have a start date, we have been diligently working on putting those initiatives together, getting the approach ready.

We have approved equipment going into 1 of our restaurants to help us with our ticket times, and management of our cooking line.

So that is probably the biggest initiative for this year.

And we are testing, as I think we told people the last time, right now we have an 11 store test on the Curbside To Go program that is running now in 11 restaurants.

Hopefully in a couple of months, we will get enough information and then be able to roll that out.

So those are just 2 of the -- 2 of the let's say the bigger ones for this year.

And if I could just follow up on the curbside initiative.

You've always had capacity issues at the restaurants.

Are you saying that's more maybe in the front of the house, and the back of the house still has room to prepare meals, and still sell those effectively?

How do you look at that?

Well, right now because our to-go sales have always been very high, I think, depending on the restaurant, they are probably 8 to 10 percent of our sales.

So that's already included.

We are really doing it as a service to people, and we will know after the next couple of months whether it will actually get us more sales or not.

So, that we haven't actually tested that.

We are doing it as a service.

Certainly, we wouldn't want to lose any of our to-go business, and if we are able to gain any sales from it in maybe the 1 or 2 percent area, then that would be great.

But we will know more by next quarter.

Dean Haskell, JMP Securities.

Congratulations on a great quarter, gentlemen.

My questions refer to the pricing factor in the fourth quarter, and quarterly pricing factors as you see it going through '05, please.

Well, the fourth quarter we had a, really a 3 percent effective menu price increase.

As I mentioned, the 2 percent from the beginning of '03, plus the 1 percent during the summer.

We are in the process right now of rolling in the new menu, which has a 1 percent increase, so that will roll over the 2 percent that we ran at the beginning of January.

So for the time being here, you will have an effective 2 percent price increase in the menu.

And then we'll evaluate the need for any additional price increase throughout the year as we get into our summer change in the June, July time frame.

Okay.

And for the year, the pricing factor was about 3.1 percent, or 3 percent?

For fiscal 2004, I would say the effective was probably about 2.5.

You had 3 percent -- or 2 percent, rather, for almost the whole year, plus 1 percent for about half the year.

So effective for the year was about 2.5.

But during the quarter, there was a 3 percent price increase in the menu.

Bryan Elliott, Raymond James.

The gain on the insurance settlement, was that a 2 million pretax and after-tax, no tax impact?

That was a 2 million pretax.

Okay.

Was there any tax impact?

Sure, it was included -- it's included in our operating income and taxed accordingly.

So, to get to the $0.24 then, you tax adjusted that gain.

Okay.

As marginal or at reported tax rate?

At the effective tax rate of 34.8.

I think after tax it probably had about a $0.015 per share diluted share impact.

Okay.

Very good.

I have a more substantive question, but I'll get back in the queue.

Dennis Forst, KeyBanc.

Yes.

We're almost halfway done with the quarter and haven't had any store openings yet.

If you are going to open 5 this quarter, you must have them pretty well identified and maybe even the timing.

Could you share those with us?

Well, our first opening will be next week in Naples, Florida.

And then the remainder after that are going to be in the month of March, and those markets, which I am happy to share with you are Jacksonville, Florida.

We'll open in Rancho Cucamonga.

We'll open in Los Angeles at The Grove.

And we will open in Sugarland, Texas.

Terrific.

Okay.

I will get back in the queue, also.

Paul Westra, SG Cowen.

Can you give some more details on the new bakery facility on the East Coast?

If this is possible, is it a brand new location?

Is it an extension of an existing structure, or --can you give us, is CapEx ultimately -- ?

Well, Paul, I can't tell you too much, because we haven't signed any deals yet.

We are very close in our negotiations, and I don't want to jinx them.

But the facility we are looking at is a brand new facility.

It was a spec building built by the state to attract businesses into the area.

So it is, from an investment standpoint, it is a good deal for us, and I think it would be good for that economy as well, for us to bring some jobs there.

We mentioned that the first phase of this, we are probably looking at 9 to 10 million of investment.

I couldn't tell you what the second and third phases would be, or how many phases we will actually have.

But at this point, our goal is to put in 1 phase which would allow us to produce a substantial number of cakes, and really leverage that facility, as well as to set up sort of a distribution center for us on the East Coast with a large freezer capacity.

This would be part of the existing structure, right?

This is a brand new building.

It's already built.

It's already built.

The building is already up.

But it is brand new.

It has never been used for anything.

Hil Davis, SunTrust Bank.

Just had a question.

I was wondering, with about a 2.5 percent in price, and comps for the year were approximately 3.9 percent, where are you driving the incremental traffic?

Is it during the lunch period, during the evening period, or the afternoon?

And what part of the week is it usually coming from, given that you are at capacity, but you are definitely seeing -- or is it just improved turn times, table turns?

Well, Hil, I think for the full year that increase of 3.9 is really indicative of what happened in the first and second quarters, where we ran a 6 percent comp in the first quarter, and 4.5 or something in the second quarter, which was really just because the first half of '03 was so slow.

We really kind of caught that traffic back up, plus got our price back, which is really what drove that for the full year.

If you look at the third and fourth quarter of 2004, our comp sales increase was pretty much equal to our menu price increase.

And how about January?

January, we are pretty close to having a 3 percent price increase in the menu still as the new menu rolls out.

So I think we are still benefiting that.

And we are not too far off of that.

John Ivankoe, J.P. Morgan.

If we could review the new Grand Lux units that opened in Dallas and Houston over the last quarter -- or last 2 quarters, and perhaps what that has taught us in terms of 2005 and 2006 potential Grand Lux units, in terms of size of the unit, location of the unit, and what you can do, or perhaps did do, to drive customer awareness to allow you to achieve those kind of volumes.

And David, if you can make a broader statement in terms of, again, of how that concept is evolving in your mind, that would be great.

Thanks.

Well, we certainly learned a lot from the first 3.

Both Dallas and Houston are doing very well.

Houston actually is sales-wise is a little ahead of Dallas, because I think it is really even more in the heart -- in the best area of the city.

We have done nothing to drive sales and our sales are excellent.

And I just think it is the look of the building, people that are fans of Cheesecake Factory that know we are connected somehow, and word of mouth is spreading very quickly, because the restaurants I think have done so beautifully, and have so much to offer.

So we are happy with the sales.

We are not doing anything special.

We are kind of doing the same thing we did at Cheesecake Factory.

When we started, our labor is definitely less.

The economies of the kitchen and the shrinking of the size of our line has helped us knock out some back kitchen labor, and 1 or 2 o men off the frontline, because of combination of how we cook the food.

So all of that is doing nicely .

In Houston, we put in an afternoon tea, which is starting to take off, and we have a dessert bar. 2 new features that we are definitely putting in the 2005 Grand Lux Cafes.

Mike, what am I missing?

Well, I think the first goal with both of those locations was the investment costs -- upfront investment.

And I think it is safe to say that we are actually very happy with the cost to build those.

We're not getting into the details on that yet.

But it wasn't, as David mentioned in the past, our investment cost in those facilities was not too far off from a regular Cheesecake Factory.

So we did a very good job of paring back the investment costs, but maintaining the look and feel of the Grand Lux's that had already -- are in existence.

So we are very happy with that.

And as David just mentioned, now we are really fine tuning the operations, just to continue to see how we can improve the margins there.

Right.

So again, it is menu engineering, working on the new features that we put in, we're continuing to try to cut costs.

We have been able to -- we are building 1 11,000 square foot unit, and one 12, of the 3.

And we are able to put the same size kitchen in both.

So again, we are making a lot of progress to get it ready.

And hopefully by the end of the year, we will have it ready, and we will be able to announce that we have a viable second chain, and then talk in more detail about that.

That's the plan.

Okay?

That's great.

I didn't know I was still on.

Have you announced where the units will be in 2005, the Grand Lux units, and what you are thinking about for '06?

Well, we haven't announced specifically where they are.

We are looking at 3 different sites, as I mentioned, for Grand Lux Cafes. 1 being in the Long Island area.

Another one being in South Florida.

And a third one probably being in the Atlanta area.

Those are our most likely locations for 2005, and we have not talked about -- .

We have lots of choices for 2006.

We are really being inundated with offers to build Grand Luxes by landlords, both in the same malls that we already have Cheesecake Factories in, which we will one of these days, test that out.

Since we have been extremely happy with the lack of cannibalization we've had, that at one of these sites we'll even try going in the same mall and see how we do.

But we have been very happy with that, and we haven't announced any '06s, but as we finish our letters of intent and go into lease, we will let you know.

Are you getting the same kind of improved occupancy cost deals at Grand Lux, as you are seeing at Cheesecake?

Exactly.

Bryan Elliott, Raymond James.

I didn't expect to get back.

I wondered if you could discuss the differential in average weekly sales and same-store sales?

The average weekly sales were up only about 40 basis points year-on-year, and you talked about several stores setting records and coming out of the ground very strongly.

Is that a function of maybe a more pronounced honeymoon period at some of the stores that are going to move into the comp base over the next few quarters?

Or were there some offsetting stores that did not come out of the ground particularly strong?

Could you reconcile those numbers a little bit?

think the biggest part of that, Bryan, as we said in the past, it is the stores coming off their honeymoon period.

You're looking at a fourth quarter '03 versus fourth quarter '04.

We had 7 stores open in the fourth quarter of '03, and actually several open in the late third quarter of '03, which all had very strong honeymoon sales.

Now, those are all not in the comp base yet, but they're coming off those honeymoons.

So you have got a lot of stores that are in that -- on that downslope, down to sort of their average run rate, or what we expect the run rate to be.

I think that's what drives that average weekly sales number down.

Would you expect to see a similar gap in Q1 as those stores are not yet in the comp base?

Very possible, yes.

Stephen Spence, Longbow Research.

I wonder if you could give us an update on the smaller units, how they are performing, and if they are still under consideration for going forward?

When you say small units, Stephen, what are you referring to?

Like in Des Moines.

Des Moines is normal size.

So that is our 10,500 square foot model.

We didn't -- some years ago, we built some 7,500 square foot restaurants, and I think as we have told people, we would enlarge all of those today.

In fact, on 1 of them we already did.

And on another one, we will have the opportunity probably in a year.

We just built an 8,500 foot model in Corte Madera, which is doing very, very well.

And we have planned this year to build 2 more 8,500 foot models, and those are in smaller populations, deeper in the suburbs where we already have a Cheesecake Factory.

For instance, let's say in Raleigh Durham, or out in the suburbs of St. Louis.

So we went a little larger than the old 7,500s to 85, and we will see how those do.

But Corte Madera, so far we are very, very pleased with its sales, and we think we built the right size unit there.

We have time for 1 more question, operator.

Chris O'Donnell, Caxton Associates.

Can you talk a little bit about the impact of the gift card redemptions on your January comp, and what that might have done for ticket?

Was there increased incidence of drink ordering?

Well, the gift card redemption in January, as it was in 2003, is higher than the normal for the year.

But I think our gift card redemption in January of 2005 was pretty comparable to January of 2004.

So we are not seeing a huge change in that metric.

And I couldn't answer the impact on our drinks.

I don't think we have ever really noticed an increase in that, as a result of gift card redemptions.

Or we haven't seen our ticket, our check go up, either.

Thank you, and thank you, operator.

Thank you, everyone.

Appreciate it.

Bye bye.

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

You may now disconnect.