Cheesecake Factory Inc (CAKE) 2005 Q1 法說會逐字稿

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

All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Dixon, you may begin your conference.

Thank you, operator.

Hello, everyone.

I'm Michael Dixon, CFO of The Cheesecake Factory Incorporated and welcome to our quarterly investor conference call, which is also being broadcast live over the Internet.

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

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

Jane?

Thanks, Mike.

The Company's comments during this conference call held today, April 19, 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.

Our agenda for the call today will be as follows: First we will discuss the press release that we issued today that covers The Cheesecake Factory's financial results for the first quarter of fiscal 2005 that ended on March 29, 2005.

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

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

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

Before I get into the details of our operating results let me spend just a minute to recap some of the accounting changes that we, along with many other publicly traded restaurants and retailers, have addressed over the past several months.

I'm sure many of you are probably tired of hearing about this but I think it is worth one more review in order to ensure that we're all on the same page.

As we disclosed on our annual report on form 10-K A filed on April 5, 2005, we restated our financial statements for fiscal years 2004, 2003, and 2002, to correct the accounting for our operating leases.

While there were several changes to our accounting policies in this area, as detailed at length in the 10-K, the effect on net income and diluted earnings per share was fairly small.

In fact, the restatements resulted in a $0.01 decrease in earnings per share for fiscal 2004 and had no effect on earnings per share for fiscal 2003 and 2002.

The cumulative adjustments retained earnings at the beginning of fiscal 2002 was $267,000.

I received several requests for detailed restated quarterly income statements for fiscal 2004 and 2003 so that many of you could update your models.

To accommodate these requests we filed a form 8-K last Thursday, April 14 with additional details of the quarterly restatements.

We previously announced that the corrected lease accounting would result in approximately $600,000 of increased expenses in the first quarter of fiscal 2005.

This amount is reflected in the results released today.

For the remainder of fiscal 2005, we can only expect a quarterly impact on expenses to be about the same as the first quarter or $600,000, or about $2.4 million for the year.

This impact will be included in our comments throughout today's conference call, as we refer to our expectations on various line items of the income statement for the remainder of the year.

With the accounting housekeeping out of the way, let's talk about our operations.

The Cheesecake Factory restaurants passed an impressive milestone in the first quarter.

Based on our average annual unit volumes about $11 million the opening of our 91st Cheesecake Factory restaurant last month put ut over the $1 billion annual revenue mark on a run rate basis.

Now, I can't think of any other restaurant Company that can claim $1 billion in revenues with fewer that 100 units.

All of us at the Cheesecake factory, especially David, who created this concept from nothing are understandably proud of this achievement.

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

Our revenues for the first quarter increased 22%, to $268.2 million, and our net income and diluted earnings per share, increased in line with our expectations, to 19 million and $0.24 per share respectively.

Our comparable restaurant sales were up a solid 3.4% for the first quarter.

As we mentioned in today's earnings release, this was accomplished in spite of some fairly severe weather throughout the country, which resulted in approximately 20 lost operating days due to restaurant closures and near record rainfalls in California.

Geographically, we saw very nice comparable sales increases in all regions but especially in Florida and Texas.

And we did benefit from the shift in the Eastern spring break period from Q2 of last year to the first quarter of fiscal 2005.

The Cheesecake Factory has reported positive comparable sales comparisons every year that we've been a public Company and in 49 out of 50 quarters.

We've 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.

On the margin side of the business, we were very pleased with continued improvement in our cost of sales and our management of labor costs.

In addition to the incremental expenses associated with the accounting change, we experienced some pressure in this quarter in insurance and utility costs.

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

Before I get into more detail on our top line results and operating margins let me address the slight change in income statement presentation on our press release.

Effective with our form 10-K filed for fiscal 2004 we began including a note to the financial statements detailing segment information related to our restaurant and bakery operation.

As a result, we will no longer break out bakery sales and cost of sales separately on the face of the income statement.

The bakery sales information will be available in the business segment note, and included as supplemental information in the press release as we did today.

We will review cost of sales for the restaurants and bakery on a combined basis.

Let me spend a few minutes to provide some additional color on our top line results for the first quarter and update you on our new restaurant growth plan for the remainder of fiscal 2005.

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

Our total restaurant sales increased approximately 21% during the first quarter to $255 million.

That 21% increase consisted of an approximate 20% increase in total restaurant operating week, resulting primarily from the openings of 21 new restaurants during the trailing 15-month period, coupled with an approximate 1% increase in average sales per restaurant operating week.

Our comp sales increase of 3.4% was principally attributable to our effective menu price increases.

We implemented an approximate 1% effective menu price increase in our most recent winter menu change.

This lapped the 2% effective menu price increase from the prior year's winter menu change.

We also added an approximate 1% effective price increase from our summer 2004 menu change.

In addition, we experienced some very strong sales in several marks as already discussed and as a result of the shift in Easter and spring break to the first 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.

With respect to menu pricing, as I just mentioned, we completed our winter menu change that includes an approximate 1% 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 of as of today.

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

We are very pleased with our new restaurant openings in the first quarter.

To give you a little color, the Naples, Jacksonville, and Rancho Cucamonga locations averaged weekly sales in excess of $280,000 for the first quarter.

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

Two of which are new markets for us.

Generally speaking, all of the new restaurants that are not in our comp base just yet are conditioned continuing their expected normal transition from their grand opening honeymoon sales volumes to their sustained run rate levels.

We also continue to be very pleased with our sales at our Grand Lux Cafes.

As we mentioned in the press release today, revenues at the Los Angeles and Chicago locations were up 9.5% during the first quarter from the comparable period of the prior year.

In addition, we were very encouraged to see the average weekly sales build by 7% at the two Texas locations, after coming out of the fourth quarter holiday season.

Before I move into our growth plan for the remainder of fiscal 2005 I wanted to give a quick update on our curbside program.

As we discussed in our last call, we are piloting the curbside program in 13 locations.

With to go sales at our restaurants already in the 8% range we don't really expect a big revenue boost as part of this program.

Our ultimate intention is to provide great guest service.

Through the first two months or so of this pilot program we have seen a slight increase in to go sales at these test locations.

We do not yet have an update and enough to make any conclusions on the overall restaurant sales in the long term.

However, we are very pleased with the level of service we have been able to provide our guests through the curbside program and the fact that the program requires minimal capital investment.

As a result, we are confident that we will expand this program to more restaurants in the next three to six months.

Moving to our restaurant growth plan, we successfully opened five Cheesecake Factory restaurants in the first quarter as planned.

And are on track with our fiscal 2005 goal of opening as many as 18 new restaurants, including as many as two Grand Lux Cafes.

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

As most of our investors know, it is difficult for us to predict the timing of our new restaurant openings by a quarter due to the nature of our leased restaurant locations and our highly customized layout.

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 half of the year.

And we have properly staffed our development and new restaurant operations teams to accommodate this.

Based on the information we have as of today, we expect to open one restaurant in the second quarter, as many as three restaurants in the third quarter, and as many as nine restaurants in the fourth quarter.

Now, based on our fiscal 2004 accomplishment of opening nine restaurants in a 10-week period, we are very confident in our ability to achieve our 2005 opening plan.

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

Now, we also like to always remind our investors that it takes about 90 to 120 days on average for our new restaurants to work through their normal grand opening inefficiencies.

And for food and labor costs to reach their targeted operating profit margins.

Moving to our bakery operation, bakery sales, net of inter-Company bakery sales, increased 44% to $13.4 million during the first quarter.

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

As we discussed on our last conference call, we are experiencing very high demand for our products through our existing sales channels.

Our focus continues to be on servicing the increased demand from this existing customer base and not on generating new customers.

We introduced new retail packaging in the club channel in the fourth quarter of fiscal 2004, which certainly helped sales during the holiday season.

But also seems to have carried over into the first quarter as well.

In addition, the clubs did restock their pipeline as a result of the strong prior quarter sales.

Even with these result, please remember that bakery sales accounted for only about 5% of our total sales for the first quarter.

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

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 8% to 10% 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 sale at our own restaurants.

Which will sell in excess of $150 million of desserts made in our central bakery production facility during fiscal 2005.

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

Now we also previously commented that we've been evaluating various alternatives to add additional production capacity to our bakery operations in order to support our long term growth plans.

We are 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.

The second production facility will offer us clear advantages, not only in terms of serving as a backup production facility but also in terms of reducing the freight and distribution costs to our East Coast restaurants and outside customers.

That covers our top line performance for the first quarter and our new restaurant opening plan for the remainder of fiscal 2005.

So now I will briefly review the individual components of our operating margins for the first quarter.

Cost of sales decreased to 25.7% as a percent of revenue for the first quarter compared to 25.9% for the same quarter last year and compared to 26.7% for the sequential December 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 fish, dairy, and some produce and poultry commodities that we have historically been unable to contract for periods longer that than 30 days in most cases.

We saw continued cost improvement in poultry and dairy commodities during the first quarter from the sequential quarter and both showed some improvement from the comparable period of the prior year.

In addition, we experienced lower produce costs in the first quarter as the price spike on tomatoes that we discussed last quarter has abated, and the significant rains in California in the first quarter did not materially impact produce costs.

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

The only exception being our cream cheese requirements for the bakery.

We have contracted cream cheese through May at a fixed cost per pound that is slightly higher than the actual cost per pound in fiscal 2004.

And 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.

Based on these contracts, and our current expectations for those items that we cannot or have not yet contracted, we currently expect cost of sales for the full year as a percentage of revenues to be approximately 80 to 90 basis points lower in fiscal 2005 compared to the prior year.

Total labor expenses were 31% of revenues for the first quarter.

Which was lower than the 31.3% reported for the same quarter last year, but higher than the 30.4% reported in the sequential quarter.

The slight year-over-year decrease in labor expense as a percent of revenues was primarily attributable to leveraging the fixed part of these costs with the higher restaurant and bakery sales.

And more importantly, an excellent job by Peter D'Amelio and his operations team of focusing on overall labor productivity.

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

Other operating expenses were 23.1% of revenues for the first quarter, which was up from the 22.6% reported for both the same quarter last year and the sequential quarter.

Approximately 20 basis points of this increase in the prior year is related to the change in lease accounting.

The remainder represents increased costs for utilities and insurance.

Looking forward, for the full year of fiscal 2005, we currently expect other operating costs and expenses, as a percentage of revenues, to in the same approximate range as the prior year which was about 23.1%, as we stated.

G&A expenses for the first quarter were 4.3% of revenues for the quarter which was down slightly from the 4.4% in the same quarter last year but up slightly from the 4.2% from the sequential quarter.

Our G&A expense consists of two major components.

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

And the cost 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 percent of revenues for fiscal 2005 is in the same range as that achieved during fiscal 2004.

Depreciation expense was 3.8% of total revenues for the first quarter.

Which is the same as the first quarter of the prior year and the sequential quarter.

Looking forward, our current expectation for total depreciation expense as a percentage of revenues for 2005, remains in the 3.8% range, based on our expected growth and investment plans.

Actual preopening costs incurred during the first quarter were approximately 4.4 million, compared to 2 million for the same quarter last year.

We opened five restaurants during the quarter just ended compared to two in the same quarter last year.

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

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

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

The preopening costs for our upscale highly customized and operationally complex restaurants is higher than most restaurant concepts in terms of absolute dollars.

But is in line with other upscale concepts relative to the scope of operations.

With the recent accounting change, we now estimate our direct preopening costs for an 11,000 square foot single story restaurant in an established company market to average approximately $775,000.

Analysts and investors should factor enough preopening costs into their models for as many as 13 new restaurant openings during the remainder of fiscal 2005.

Once again, based on the information that we have as of today, we plan to open one restaurant in the second quarter, as many as three restaurants in the third quarter and as many as nine restaurants in the fourth quarter.

As I mentioned earlier, as many as two of these planned openings could be Grand Lux Cafe locations.

For which we currently expect preopening costs to run approximately 5% to 10% higher than our normal preopening costs for a Cheesecake Factory restaurant.

In addition, with an early 2006 plan start for the 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 with the major line item components of our operating margins for the first 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 first quarter was 34.8%.

The same as for fiscal 2004.

We currently plan on using the same rate, 34.8%, as our estimated effective tax rate for the remainder of fiscal 2005.

Subject to adjustment if necessary as we move through the year.

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

As of March 29, our cash and marketable securities on hand were approximately $162 million.

Our cash flow from operations for the first quarter was approximately $29 million, and our cash and accrued CapEx for the first quarter was approximately $21 million.

Which includes construction in progress for our upcoming 2005 openings.

We currently estimate our cash CapEx for fiscal 2005 to be in the range of 158 to 166 million.

This is increased a bit from our guidance on the last conference call due primarily to the changes in accounting, specifically landlord construction allowances received as offsets to percentage rent, are no longer netted against our CapEx estimates.

These amounts are recorded as reductions to rent expense, as earned.

For fiscal 2005, we estimate approximately 6 million of landlord construction contribution to be received as a reduction to percentage rent.

The 2005 CapEx estimate includes approximately 13 to 15 million related to the East Coast bakery facility.

Again, this is a bit higher than our previous guidance as we currently plan to build out more distribution center space, based on the anticipated available square footage, and the projected benefits of having additional distribution capacity.

Based on our current expansion plan, 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 contribution, 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 still 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 contribution.

Now, I do want to point out that as a result of the changes in accounting for leases we are now recording a deemed landlord financing on our balance sheet.

Landlord construction allowances related to restaurant locations, for which we are deemed for accounting purposes only, to have an ownership interest are reflected in our balance sheet as deemed landlord financing.

This liability is amortized over the lease term based on the rent payments designated in the lease agreement.

And you can take a look at the 10-K for a little bit more detail on the accounting for that item.

We do have a $35 million credit facility in place for backup liquidity purposes and to support stand by 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 first quarter.

We have approximately 4 million shares remaining in our current repurchase authorization, although the authorization did 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 first quarter.

We achieved our stated goal to open five restaurants in the quarter.

All of which opened with the same level of quality that we and our guests expect.

As I mentioned earlier, we are on track to open as many as 13 more restaurants this fiscal year.

We have an achievable restaurant opening goal for 2005, and we remain confident that we can execute our growth plan of 20% plus revenue and earnings per share growth with high quality and consistency.

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

As we only have 97 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 executing our growth plan with great confidence.

That concludes our business and financial review for the first quarter.

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

Now we want to accommodate as many questions as possible in the time we have left on this call so we respectfully request that each participant be courteous to all other participants and limit themselves to just one question.

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

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

[OPERATOR INSTRUCTIONS] Your first question is from Eric Wold.

Just a real quick question.

Maybe update us on the construction plans for Grand Lux?

Previously, the thought as many as two or three Grand Lux's, and now you're saying as many as two.

Did one kind of move into next year?

Or you know, kind of where are your thoughts on how many you're going to open this year and then next year as well?

This is David, Eric.

We are going to open two this year, one did move into next year, and we replaced it with a Cheesecake Factory.

And we're not positive about how many we're growing next year.

But you know, I would say somewhere between two and four, depending on the results of the ones we just opened and the ones we opened this year.

Was it one that moved - - that the third one moved into next year or is it one that you just felt didn't make sense and you actually pulled the plug on location?

No, it moved.

The site just moved.

The timing of the availability of the site went to next year.

Your next question is from Peter Oakes.

I would be kind of curious following up on Grand Lux if you could update now that you have had just a little bit more maturing what if any cannibalization are you seeing from the traditional Cheesecake's in the trade area?

And also kind of your sentiments, David, as to the maturing process given that we're still pretty early in the cycle, and you know, how that maturing process contrasts versus Cheesecake?

Thanks.

Well, Peter, I think that the Grand Lux Cafes that we opened last year, I guess to kind of address part of the second half of your question, as we mentioned in the press release, they are maturing very well.

The comp growth that we are seeing from the top line at these Grand Lux's really mirrors what The Cheesecake Factory used to do with double digit comp growth in the early years and then kind of slowing down a little bit to menu price increase.

But we're seeing some tremendous growth and we're very happy to get there as we said in the press release with really no advertising.

In terms of cannibalization, we're right across the street in Houston, and actually that restaurant is still comping up.

That's right.

Which is great news.

And in Dallas, we've see no cannibalization.

So on the cannibalization front, really they don't seem to be touching each other at all.

There's definitely a segment that uses both but they're really functioning very, very independently.

We just opened the Grove in Los Angeles, and it is a smaller restaurant doing over $200,000, and hasn't touched the Grand Lux that is one mile away.

So really when we look at all five, and whether we open a Grand Lux to a Cheesecake or a Cheesecake closer to a Grand Lux we're not seeing any cannibalization.

Your next question is from John Glass.

Could you - - Mike, could you just go back and discuss in a little more detail the performance of the noncomp restaurants?

And what I guess I'm looking at is specifically you had about a 21% increase in restaurant sales, capacity growth was 20, comps 3.4.

So there was a little less productivity or contribution from those newer restaurants.

Was the weather maybe adversely impacting some of the late '04 openings?

Was there some other - - was there something else at work there that could account for that?

Well, when you look at the restaurants and real really it goes back to that honeymoon effect that we talked about.

When you look at the restaurants that are included in that noncomp base year over year, I have several restaurants, we have several restaurants that were in that base last year that were doing huge volumes, 280 a week, 300 a week that have now ramped down closer to 200, 210, 215 level, which is what we expected them to.

Do so you've got a big decrease in those and that's what is really affecting it.

If I look at the newer restaurants not in the comp base this year for the first quarter they are really doing as strong or stronger than the restaurants last year restaurants that they're comping against.

But if you're looking at the first six months of the restaurant - - it is a little confusing.

If I look at the first six months of a restaurant, this batch that are in there this quarter are actually stronger than the ones last year.

So that decrease that you see or the slower average weekly sales in the noncomp restaurant really relates to that honeymoon effect as those restaurants come off those really hyper volumes in the first several months.

Your next question is from Steven [Crime].

Just a question, I was wondering if you guys can provide some color on what you're seeing in your restaurants with regard to kind of the economy and rising gas prices?

And whether you're seeing any change in consumer buying patterns, particularly towards the end of March, and if you have any early read on April thus far?

You know, we haven't really seen much change at all.

I think that's really reflected in those comp sales numbers that we're seeing.

I don't know as a concept that The Cheesecake Factory and the type of guests that's drawn to The Cheesecake Factory is as immediately impacted by higher gas prices than maybe some other concepts.

And I think that's reflected in the strong comp sales.

And you know, certainly as you get into the - - we don't give monthly comps but our sales are incredibly strong through March as a result of really the spring break shift.

And as I look into the first several weeks of the second quarter here we are comparing against the spring break period of last year, so we're holding up very well.

Can you quantify what that shift was?

In terms of what?

From the spring break?

Yes.

You know, I would say round numbers it is probably $1 million, $1.5 million.

Your next question is from Sharon Zackfia.

On the third - - second bakery that you're building outen the East Coast, should we expect that to be immediately accretive to earnings once it's opened?

And how should we think about the longer term margin impact from that facility?

I would say that there's - - I am assuming that there will be inefficiencies as that facility gets ramped up to operate the way it should.

And we're talking about '06 because there is not really adding anything into '05.

But as I look into '06, I would expect some inefficiencies early on but I think those inefficiencies will be offset fairly well right out of the gate by the freight savings that are associated with having that facility.

So I don't know that it is accretive to earnings.

I think it should operate right out of the gate fairly close to the margins that we're operating at today.

And then over time, I would expect it would be beneficial because we will start to realize those freight and distribution savings.

Can you give us any order of magnitude on how beneficial?

I can't today.

Your next question is from John Ivankoe.

Thanks.

A quick question to you, Mike.

I think the previous guidance on COGS was down 60 to 70 basis points and now I think the word you used was lower.

I mean is that just semantics or is there something that has changed in the last couple of months that actually does mean an alteration to your guidance?

And is it fair to assume that that previous level that was discussed will still be something close to what you expect?

Thanks.

Well, I think actually, I've increased it.

I think I said 60 to 70 last time and now I said 80 to 90.

I think what we experienced in the first quarter has indicated that cost of sales are going to be even a little bit better than we anticipated initially.

So that is really reflective of the contracts that we were able to lock up and the visibility that we have as of today to those other items and expectations with commodity costs for the remainder of the year.

Okay.

Great.

I missed that.

Thanks, Mike.

Your next question is from Bryan Elliott.

Good afternoon.

Just want to clarify whether that - - the Cheesecake express unit is in the average weekly sales and restaurant weeks or if those are just a full size units?

The only one that is included on that press release, the operating weeks, includes the one Cheesecake Factory express unit.

It does.

It does.

Okay.

So is that possibly - - when we calculated our average weekly sales could that be, since that's a fairly small unit, I have no idea what the sales are, could that be the explanation of the breadth of that gap which is a bit of a concern?

No, I don't think that is it.

I think it is really what I talked about with John Glass.

Okay.

All right.

Can you give us just a feel for sales contributions from that?

From the express unit?

Yes.

Boy, I think on an annual basis, I was going to say about 3 million on an annual basis.

Oh, okay.

All right.

And that opened in the current quarter Q1?

No, no.

That's been open for five years.

That's the one that's located at the Disney Quest facility in Orlando, Florida.

Oh, no, I'm sorry, okay, I thought that - - okay, I was - - I misinterpreted that.

Okay.

Thank you.

You're welcome.

Your next question is from Ashley Woodruff.

Hi, thanks.

My question is on the curbside to go test.

You said you will probably roll it out to more stores over the next three to six months.

Do you think it will be just another 10 stores like a test over the next three to six months or maybe you will go to the whole system?

And then can you give us some details on the average check that you see on to go and what the margins look like relative to regular prices?

I would say that our intention is to roll it out to as many stores as possible that are I guess easily set up.

So we will start with the easy ones first and get those taken care of.

And that will probably get us through about two-thirds of the restaurant base that we have.

And then the ones that are going to be a little more difficult and maybe a little more costly we will wait until we have a little more experience under our belt and then go back and revisit those.

In terms of the average check for the to go sales, I don't have that information in front of me.

I don't know that it is really that different from our overall average check.

Slightly less obviously because we sell a little bit fewer beverages and a little bit fewer desserts.

And with that one-third that is harder to roll out curbside to, what do you think you would have to do?

Is it just a matter of sort of redesigning where the parking spaces are or would it be a more significant expense?

Each one is a little bit different, Ashley and some are very easy to set up, others we probably would have to add more POS's or other things.

So we're looking to see how many we're going to roll out in Phase II.

Anything that is even remotely more difficult or would take more time we are going to leave for the last phase to see really what kind of incremental sales there are here.

Your next question is from Andy Barish.

Hi, guys.

On the margin breakout that you're giving now, it looks like restaurant margins were down about 100 basis points.

And Mike, I think you explained most of it was preopening and utilities.

Is the first quarter usually the lowest seasonal margin?

I believe it is.

I think I would have to go back and check but I believe that is a fair statement.

I think, you know, on an average sales per week basis, the first quarter tends to be the lowest.

Okay.

And then on the - - just on the bakery margins that you broke out now, they were up actually considerably year-over-year, yet you said your cream cheese costs are currently higher.

Is there a productivity capacity utilization issue that is overriding all that or - -?

Well, again, I didn't break out any bakery margins specifically other than I talked about the cost of sales and I think we indicated previously our cream cheese contracted costs are a little bit higher than last year.

Not dramatically higher but a little bit higher.

And then yes, we're certain to see, with the kind of volumes that the bakery is doing, are you getting some nicer leverage on some of the fixed costs in the bakery operations.

Your next question is from Hil Davis.

Hi, my questions have been asked and answered.

Thank you very much.

All right, Hil thank you.

Your next question is from Adam Weiss.

If you look at the amount of CapEx that you spent on new units divided into the 18 - -

Adam could you speak up?

We can hardly hear you.

How is that?

Much better.

Thank you.

If you look at the amount of new unit CapEx you're budgeting for this year and you divide it by the 18 new units I'm coming up with about $7 million per unit.

Is that not right?

That's a little bit high but I think it is not too far off.

And your units are coming out, it looks like, between 10 and 11,000 square feet.

So it is looking like over $600 a square foot, which is significantly higher than what you spent in the past and talked about in the past.

So can you get into that a little bit as to why - - I know you're getting less money from the landlords but in general, is it just costing you more?

Well, there's a couple of pieces to that.

One is the - - one I will come back to this but certainly the restaurants are costing a bit more.

But no, part of it is, as I mentioned, there is 6 million or so that is not - - that we used to reflect as net against that CapEx that we're not reflecting now.

So that's part of it.

The other is that we have a mix of deals where we're, you know, not taking TI and paying lower rent which is also impacted in there.

But I do think when you come back to the -- at the end of the day there certainly has been an increase in construction costs in general.

I think the inflation index for construction last year was in the 7% to 8% range if I'm not mistaken so it has been a little bit of a run-up.

And we are seeing that in our CapEx spending.

And economically, when you are taking less money from the landlords, are you getting a pretty decent return on the money that you're spending?

When I look at it in terms of a fully capitalized ROI, it really hasn't changed that much over time.

So it is a bit of a trade-off.

And I think from the fully capitalized perspective, we feel we're still in the range that we were previously.

Is that enough money to impact margins going forward in terms of lower rent?

Or is it just too small - -

Well, there is not enough in the mix yet to have a meaningful effect.

Over time it will.

But certainly you're trading off a little bit lower rent and you will have a little bit more investment so your depreciation will be impacted a little bit but that is over a longer period of time.

Your next question is from Mike Smith.

Good afternoon.

Well, most of my questions have been answered.

But Mike, could I get you to go through the themed restaurant rent thing one more time?

Well, without going into painful accounting detail;

I will just say that the accounting rules are basically set that in some instances when we accept landlord construction money or construction allowances we are deemed to be the owner of the property, as opposed to just taking the money and passing it through to pay for leasehold improvements.

And again, I won't go into the specifics of when that happened.

But we have a few restaurants that fall into that category.

And as a result, those landlord construction allowances stay on our books as deemed landlord financing or, PET if you will.

And then that rent or that financing gets amortized over the life of the lease as we make rent payments to the landlord.

It is a little crazy.

I think --

Does this differ - - I mean otherwise you would be capitalizing these units?

Well, we are capitalizing them.

We're still capitalizing the assets.

But rather than netting the landlord construction allowance against some of those assets, we're - - you're grossing up the assets and grossing up your liabilities a little bit.

How many units was that?

You know, I think there's probably five or six restaurants in the total mix that kind of fit into that category.

But again, Mike, I should go - - if you're interested I would be happy to go into it with you in greater detail.

I think it is probably too much of an accounting exercise for this call.

Perfect.

Your next question is from Paul Westra.

Yes, hi, good afternoon.

Just two quick ones left.

The price component just following up you're running 2% year-over-year now with the two ones?

I just want to confirm that.

And then the second quick question, is this operating lease change, it shouldn't - - is there anything we should know quarterly or is it just look year-over-year and there should be no surprises as we project forward?

Well, two thing things.

On the first question, I think the - - what was the first question?

Do you expect a menu price increase?

Yes, 2% is correct.

For the first quarter we probably had a little bit more than that.

It is just the timing of the way they rolled out but today we have an effective 2% menu price increase on the menu.

And then the accounting change for the leases, as I indicated I think it is probably going to be about 2.4 million for the year, based on what I think most of you folks, the way you modeled - - initially.

I think there is probably an initial 2.4 million in expense for the full year that needs to be considered.

And then on a go forward basis past this year, then you will just kind of be lapping sort of a normal situation.

Time for one more call, one more question, operator.

Your next question is from Dennis Forst.

Yes, I wanted to follow you low up, Mike on the cost of sales one last time.

You said 80 to 90 basis points better.

That's the combined what used to be the bakery and restaurant cost of sales?

That's correct.

The 80 to 90 basis points better than the combined number last year, which I think was 26.5%?

That is correct.

Okay.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.