Cheesecake Factory Inc (CAKE) 2005 Q2 法說會逐字稿

Good afternoon.

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

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

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

After the speakers' remarks there will be a question-and-answer period. [OPERATOR INSTRUCTIONS].

I would now like to turn the call over Mr. Michael Dixon and Mr. David Overton.

Gentlemen, you may begin your conference.

Thank you, Vonda.

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 life 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 statements regarding risk factors and other forward-looking statements in general.

Jane?

Thanks, Mike.

The Company's comments during this conference call held today, July 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 are 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'll discuss the Press Release that we issued today that covers The Cheesecake Factory's financial results for the second quarter of fiscal 2005 that ended on June 28, 2005 and we will refer to that quarter as the second quarter in our comments today.

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

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

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

Our revenues for the second quarter increased 23% to $288.3 million.

Our operating income increased 31% to 34.6 million.

And our net income and diluted earnings per share both increased 32% to 23.3 million and $0.29 per share respectively.

Our comparable restaurant sales for The Cheesecake Factory restaurants were up approximately 1.7% for the second quarter.

As we mentioned in today's earnings release this number was impacted by the shift to the Easter holiday from the second quarter last year to the first quarter this year.

Eliminating the impact of the Easter holiday shift, which we estimate at about $1 million, results in comparable restaurant sales of The Cheesecake Factory restaurants of approximately 2.2%.

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

The Cheesecake Factory has reported positive comparable sales comparisons every year that we've been a public company and in 50 out of 51 quarters.

We've been able to maintain our strong sales productivity for many years without the need to resort to media advertisings or discounting to attract guests to our restaurants.

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

On the margin side of the business we are very pleased with the year-over-year improvement in operating margins.

This was driven primarily by the continued improvement in our cost of sales as we realized the expected benefit from the lower poultry and dairy costs compared to the prior year.

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

First, let me spend a few minutes providing some additional color on our topline results for the second quarter and updating 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 second quarter.

Our total restaurant sales increased approximately 24% during the second quarter to $276 million.

That 24% increase was comprised almost entirely of the increase in total restaurant operating weeks resulting from the openings of 20 new restaurants during the trailing 15-month period.

Our overall comp sales increase was 1.8%, but I would like to spend a few minutes discussing this, as well as the average weekly sales in more detail by concept.

At The Cheesecake Factory restaurants we experienced a 1.7 comparable sales increase.

As I mentioned earlier, this number was impacted by the shift in the Easter holiday from the second quarter of last year to the first quarter of this year.

Excluding the estimated impact of the Easter holiday shift comparable sales at The Cheesecake Factory restaurants would have been about 2.2%.

This is approximately equal to our effective menu price increase at The Cheesecake Factory.

As you may recall we implemented an approximate 1% effective menu pricing increase in our most recent winter menu change.

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

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

Accordingly, we remind our investors to expect that the majority of our plan sales growth for the next few years should come from the openings of new restaurants, not comp sales increases.

Everything else being equal, and in the absence of weather, national events or other factors outside of our control, we only expect to achieve sales increases in our established restaurants that are roughly equal to our annualized effective menu price increases.

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

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

As many of you know we update our menu two times a year, once in the winter and again in the summer.

Due to the size of our menu and the associated printing costs our opportunity for menu price increase is effectively limited to these two windows.

Average weekly sales for The Cheesecake Factory restaurants increased approximately 0.1%.

Now, this is below the 1.7% comparable sales increase I just discussed.

As we've said in the past this gap is due principally to the weekly sales volumes at several newer restaurants that are gradually decreasing as expected from their initial grand opening or honeymoon sales levels to their sustainable and expected run rate levels.

It is common in the restaurant industry for new locations to open with sales volumes well in excess of their sustainable run rate levels due to grand opening promotional and consumer awareness activities that generate abnormally high customer traffic for a period of several months.

Now, let me add a little more color to that.

In the second quarter we had 10 Cheesecake Factory restaurants that were not yet in the comp base, but were open, some or all of the second quarter of fiscal 2004.

The average weekly sales for these 10 restaurants decreased 5% from the prior year.

Specifically, we had two Ohio locations included in that total that dropped 17% from average weekly sales of approximately 250,000 in the second quarter of 2004 to approximately 208,000 in the current year second quarter.

Now, we are very happy with average weekly sales at these locations in the 200,000 -- $208,000 range, but compared to the prior years honeymoon period it is a significant decrease.

The 17 Cheesecake Factory restaurants opened since the second quarter of last year are in various stages of their transition from honeymoon sales to sustainable sales.

As a group we are very happy with the performance of all of these locations.

In fact, our six restaurants opened in fiscal 2005 through the second quarter are averaging weekly sales in excess of $242,000 year-to-date.

On the Grand Lux side we also continue to be very pleased with the sales at our Grand Lux Cafes.

As mentioned in the Press Release today comparable sales at the three Grand Lux Cafes included in the comp base were up 3.6% versus the prior year.

In addition, our two Texas locations continue to enjoy very strong sales.

Before I move on to our growth plan for the remainder of fiscal 2005 let me give you a quick update on our curb side program.

As mentioned last quarter we are piloting the curb side program in 13 locations.

We're in the process of rolling it out to an additional 23 locations which we expect to be offering curb side service in the very near future.

For those restaurants in the pilot program that were open last year we have seen a slight increase in take out sales with no corresponding impact to dine-in sales.

However, it is still too early, and the pilot sample is too small to draw any broader conclusions as to the impact and overall Company sales.

As we mentioned last quarter our ultimate intension is to provide great guest service.

To date we are very pleased with the level of service we have been able to provide our guest through the curb side program.

And consequently, we will expand this program to the additional 23 restaurants shortly and more in the next three to six months.

Moving to our restaurant growth plan we successfully opened one Cheesecake Factory restaurant in the second quarter as planned, one in the third quarter to date, and we 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 in 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 quarter due to the nature of our leased restaurant locations and our highly customized layouts.

However, we recognized 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 operation teams to accommodate this.

Based on the information we have as of today we expect to open as many as two additional restaurants in the third quarter, that would be three in total for the quarter, and as many as nine restaurants in the fourth quarter.

We anticipate that the two Grand Lux Cafes will open in the fourth quarter.

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 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 cost to reach their targeted operating profit margins.

Moving to our bakery operations, bakery sales net of the intercompany sales increased 4% to 12.3 million during the second quarter.

As you may recall bakery sales increased 44% in the first quarter of fiscal 2005 as many of our customers restocked their pipelines after the busy fourth quarter holiday season.

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

We believe the 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 five to 10% in fiscal 2005 compared to the prior year.

Now even with these growth objectives please remember that bakery sales will account for only about 5% of our total sales for the full 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 bakeries most impactful role to our business will continue to be its service as a dependable, high-quality producer of desserts for sale in our own restaurants, which will sale in excess of $150 million of desserts made in our central bakery production facility during fiscal 2005.

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

Now, we mentioned last quarter that we are very close to finalizing our plan for a second production facility in the East Coast.

I can tell you now that we are even closer to finalizing those plans.

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

We still expect to have the East Coast facility up and running by the first quarter of 2006 and we'll 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 cost to our East Coast restaurants and outside customers.

That covers our top-line performance for the second quarter.

And as well as 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 second quarter.

Cost of sales decreased 25.8%.

I'm sorry -- cost of sales decreased to 25.8% as a percent of revenue for the second quarter, compared to 27.1% for the same quarter last year.

And were relatively flat compared to the 25.7% for the sequential 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 using 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 than 30 days in most cases.

As expected we saw a significant cost improvement in poultry and dairy commodities during the second quarter from the comparable period of the prior year.

The cost for the remaining commodities using our restaurants as a group were relatively flat versus the prior year.

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

During the second quarter we were able to contract cream cheese for the remainder of the year at a price per pound slightly higher than the actual cost per pound in fiscal 2004, but comparable to the price per pound we paid during the first quarter of fiscal 2005.

Now we will also purchase crease cheese on the spot market as necessary to supplement our agreements.

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

Now, based on these contracts and our current expectations for those items that we cannot contract 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 31.1% of revenues for the second quarter, which was higher than the 30.5% reported for the same quarter last year, but about the same as the 31% reported in the sequential quarter.

The year-over-year increase in labor expense as a percent of revenues was primarily attributable to increased medical insurance costs which accounted for about 30 basis points and increased labor costs associated with the higher minimum wage in Florida and several other of our larger markets which accounted for approximately 10 to 20 basis points.

Looking forward we currently expect labor expenses as a percent of revenue for the full year of fiscal 2005 to be slightly higher somewhere in the 20 to 30 basis point range than in the prior year due to the minimum wage increases and the continued pressure under group medical insurance costs.

Other operating expenses were 22.4% of revenues for the second quarter, which was the same as the comparable period last year, but down from the 23.1% in the sequential quarter.

The changes in the lease accounting which we implemented at the end of fiscal 2004 have made other operating expenses a bit more difficult to accurately project.

Rent expense was favorably impacted this quarter as we earned landlord construction contributions paid in the form of percentage rent offsets.

This benefit effectively offset the 20 to 30 basis point impact of increased rent expense associated with straight lining minimum rent, combined with the increased cost of electric and natural gas services to our restaurants.

Looking forward for the full year of fiscal 2005 we currently expect other operating costs and expenses as a percentage of revenues to be in the same approximate range as the prior year before the impact of the legal reserve and bakery settlement which we recognized in the second half of last year, or about 22.8% for the full year.

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

Our G&A expense consist of two major components -- the costs 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 food 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 are in the same range as that achieved during fiscal 2004.

Depreciation expense is 3.7% of total revenues for the second quarter, which is up slightly from the 3.6% in the second quarter of the prior year, but down from the 3.8% in the sequential quarter.

Looking forward on this line 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 in investment plans.

Actual preopening costs incurred during the second quarter were approximately 2.1 million, compared to 2.1 million for the same quarter last year.

We opened one restaurant during the quarter just ended compared to two in the same quarter last year.

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

We usually incur most of our preopening costs in 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 restaurants concepts in terms of absolute dollars, but is in-line with other upscale concepts relative to the scope of operations.

We estimate our direct preopening cost from an 11,000 sq. ft. 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 12 new restaurant openings during the remainder of fiscal 2005.

Again, based on the information that we have as of today we plan to open 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 of two of these planned openings could be Grand Lux Cafe locations for which we currently expect preopening costs to run approximately five to 10% higher than our normal preopening costs for a Cheesecake Factory restaurant.

In addition, with an early 2006 planned opening 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.

For the full year of fiscal 2005 we expect total preopening expenses for both the restaurants and the East Coast bakery to be in the range of 17.5 million to $18.5 million.

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

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

Our effective tax rate for the second quarter was 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 continued to remain very strong.

As of June 28th our cash and marketable securities on hand were approximately $174 million.

While this balance was up nearly 23 million from the December year-end balance we do expect this balance to decline during the remainder of the year as most of our planned openings for the year and the related CapEx spending are still to come.

Our cash flow from operations year-to-date was approximately $74 million and our cash and accrued CapEx year-to-date was approximately 59 million, which includes construction and progress for upcoming 2005 openings.

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

As mentioned last quarter the 2005 CapEx estimate includes approximately 15 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 a liquidity position in our current range makes good business sense in this operating environment so that both, we, and our investors, can have continued confidence in our ability to execute our growth plan with maximum financial flexibility knowing that we have the capital already in place to do so.

Now, 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 still have a $35 million credit facility in place for backup liquidity purposes and to support standby letters of credit for our insurance arrangements.

We also have a share repurchase authorization from our Board of Directors to buyback up to 6 million shares in the open market.

The Company repurchased approximately 128,000 shares in the second quarter.

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 had a very solid second quarter.

We achieved comp store sales growth in-line with our menu price increase and we achieved significant improvements to our operating income margin, net income margin, and diluted earnings per share relative to the comparable period of the prior year.

We are on track with our stated new restaurant opening target with seven restaurants open year-to-date, including our Westlake, Ohio location which opened yesterday, and as many as 11 more yet to come.

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 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 99 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 second 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 that we have left on this call.

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

And if we don't 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].

Your first question comes from Ashley Woodruff from Bear Stearns.

Hi, thanks.

David, you discussed in the past and you just mentioned your Cheesecake and Grand Lux targets at the end of your prepared remarks as well.

You said that Grand Lux is in test to that and in five years or so you will have a second growth vehicle as The Cheesecake Factory gets closer to that 200 store target.

At this point are you still comfortable with 200 or do you think it may be higher than that for Cheesecake?

And, then, are you comfortable at this stage with just having Grand Lux as a second concept or do you think you may have other concepts?

We think it could be more than 200, but we are not sure what that number is, so we are still using 200 Cheesecake Factories.

Again, this size, a 10,000 sq. ft. unit -- we haven't -- although they are as small as 5500 and we have 7500-foot units all executing the same menu, the 200 are the 10,000 variety.

I do think that Grand Lux is coming along nicely.

We will be there when we need it.

And I don't think we need to think of the third concept yet, but obviously down the line in order to keep our growth rate up with high quality we will probably need something coming up.

But we want to approve our Grand Lux first and make sure that it's well on its way before we think of the third.

Okay.

And with the two that you opened in the fourth quarter in Dallas and Houston what are your thoughts now having them open for a couple of quarters in terms of changes you may make to the restaurant you will open this year?

Right.

We have incorporated those changes in our saw grass model and we've squeezed that down by another 1,000 sq. ft. or actually 1500 sq. ft., as far as the kitchen goes and some of those things.

So the learning that we have from those two are being incorporated already into what we do this year and then as soon as we get these open I think we will have some more to go.

So with each round we make more and more progress on bringing our cost down, bringing the square footage down in terms of the back of the house and makes it more productive and efficient in terms of labor.

Thank you.

Thanks, Ashley.

Your next question comes from John Glass with CIBC.

Thanks.

My question is regarding comps.

First, you've sometimes given an indication of where comps are trending in the current quarter.

I didn't hear if did you that this time and if you did if you could repeat it or maybe elaborate?

Also, comps 1.8% you reported now includes Grand Lux?

Has that always been the case?

Has it influenced comps in the past?

John, the comps have always included both Cheesecake Factory and Grand Lux.

This quarter we did break out Cheesecake Factory separately, as well as Grand Lux.

We have given some Grand Lux comp information in the past, but the comp number that we've always reported was a combined number for both concepts.

And then in terms of the comps for the current quarter I didn't say anything, but I will tell you that we are really just a couple of weeks into the third quarter and comp sales are good, they're right around the price increase range which is what we expect them to be.

Great.

Thank you.

Your next question comes from Jeffrey Bernstein with Lehman Brothers.

Great.

Thank you very much.

As you mentioned in your prepared remarks, I know you typically expect comps to be roughly in-line with pricing and pretty much operating at peak capacity during the core day parts.

Just wondering if you could talk a little bit perhaps broadly about initiatives to drive incremental traffic outside of those day parts, perhaps late afternoon tea, late night dessert, special breakfast, anything other than the core day parts at the [indiscernible] comp?

One of our specialties is late night dessert and coffee and a lighter menu which is one of the reasons why our sales are what they are.

We are doing a tea in Grand Lux, but there is no plans right now to do a tea at Cheesecake Factory.

And, again, our whole goal is great productivity, great efficiency, bringing down our labor, building more power into our kitchen and to get more throughput.

So that's really what we are working on internally.

Obviously, high quality management and so on and so forth, but we are not expanding the day parts.

We do have breakfast that starts at 11.

We do, do a Sunday brunch, but no plans to increase that at this time.

Yes, Jeff, I would just elaborate to David's point that when you are doing as we are close to $1,000 a square foot you have really extended those meal periods just as much as you can.

So there is not a whole lot more we can do, but it is obviously, as David said, we look for other ways to just improve the efficiencies during those peak periods.

But I need -- I guess the late afternoon would seem to be the area I was focusing on.

I know Grand Lux was trying that tea, it seems like that would potentially be a slow down area.

I didn't know if there was any initiative there to kind of pick that up or?

Not now.

We will see how the tea really goes at Grand Lux and if it's that meaningful then obviously we would think about it for Cheesecake.

Great.

Thank you.

Thanks, Jeff.

Your next question comes from Dennis Forst with KeyBanc Capital.

Yes, Mike, good afternoon.

I just wanted to see if you could give us a little color on regionalization of the chain?

Are there any areas of the country doing particularly well; doing poorer than others?

And did -- given regionalization did Florida have to raise menu prices any more than other areas because of the minimum wage increase?

Well, to your second question we did try to incorporate a slightly higher menu price increase to offset that minimum wage increase in Florida.

But, again, with any of our menu price increases we are not guaranteed to get it.

We've generally been successful.

But we did look a little bit more in Florida for that reason.

Regionally, for the most part I think we talked last time that the Florida region went very strong for us.

I think that's still the case.

Similar to what I've heard from some other restaurant companies we've seen a little bit of weakness in the Midwest, it's not huge, but a little bit of weakness.

But otherwise the rest of the country has been pretty stable.

That would mean Texas and California would still be relatively strong?

They're relatively strong is correct.

Okay, great.

Thank you.

Thank you.

Your next question comes from Sharon Zackfia with William Blair.

Hi, a quick question on Grand Lux.

I think last quarter you gave us comps for -- you excluded Las Vegas.

I think you gave us LA and Chicago.

So I was just wondering apples-to-apples what were Grand Lux comps in the first quarter versus the 3.6 this quarter?

That's a good question, Sharon.

I don't know if I have that at my fingertips.

How about if I get back to you on that?

Okay.

And you are starting to lap the Venetian expansion, right?

That began to lap last year so Vegas is more apples-to-apples at this point?

Yes.

Okay.

Can I ask another question since that was fast?

Sure.

The Midwest route, is that -- are you going to see any impact from that on your cost structure next year for commodities?

What's the general thought on that?

At this point I don't expect to see any and I'm not really aware of what the impact on that could be, so we have to wait and see.

Okay, thanks.

Your next question comes from Bryan Elliott with Raymond James.

Hi, actually a quick clarification and then a question.

The G&A guidance for the full year?

I missed that, I got distracted for a second.

I believe I said it would be comparable to the prior year.

Okay.

But your full year versus full year, okay.

Also the pricing, you say you are taking a 1% on the summer menu that's the equivalent of what we did last year on the summer menu?

That's correct.

So we are still on a -- what is it? 2.2 run rate then going forward?

You're really right around 2%.

2% even, okay.

And thank you.

My question then is, the distinct honeymoon period has been something that has been a phenomenon for you guys for a long time.

It seems like it's having a little more impact now just looking at the differential between same-store sales and average weekly sales and that traditionally has had.

And would that be a function of more free-standing stores versus malls?

Or are in some of the mall or retail activity centers that you have stores that are not yet in the comp base are those seeing bigger honeymoon swings themselves than you've traditionally seen in some of the earlier developed locations?

Can you add a little -- put a little color on that issue?

Sure.

Well, I think to your first point of your question is, we have really seen the honeymoon period probably for about the last three years or so.

Maybe a slightly longer than that, where we've really opened with some significant volumes.

And a lot of free advertising from the sense of promotion when we go into markets there's an awful lot of news coverage because The Cheesecake Factory has arrived.

And that's really what's driven a lot of that honeymoon period that we didn't used to see prior to three, three and a half years ago.

We never had restaurants doing over 300,000 in just a normal city like Cincinnati or Cleveland, but when we come in and we are new we get so much free television on all the news stations that they just come from all over and that's been part of the distortion.

And as for the increased impact lately I can't attribute that to any type of store free-standing mall in-line.

What we do see is that when we go into a new market there is definitely a honeymoon period.

When we go into an existing market sometimes there is and sometimes there isn't.

It's really more dependent upon maybe the size of the city than anything else.

So as I look at it it's really more just a function of the geographic location we have chosen not the specifics of the location itself whether it's mall or in-line or et cetera.

Right.

Very helpful.

Thank you.

Your next question comes from Dean Haskell with JMP Securities.

Good afternoon, gentlemen.

Congratulations on a great quarter.

Thank you, Dean. [multiple speakers].

I also have two questions.

Opening dates for the two remaining units in the third quarter, if you would, and then how much share repurchase was available?

Actually that's just a clarification under the Bryan rules.

[Laughter].

Yes, that's what I'm picking up.

There's questions and clarifications.

The remaining openings for the third quarter -- at this point we are really looking at one in August and one in September.

And then the second question was on the share repurchase, we have approximately 4 million shares still available for repurchase.

And we purchased 128,000 in the second quarter.

Will those August and September be late in each month or will they be early in each month, please?

Let's say early in each month.

Okay.

Good.

Thank you.

Okay.

Your next question comes from Mike Smith with Oppenheimer.

Well, good afternoon.

Mike, I wonder if you could give us a little bit more detail on your pilot to-go program in terms of what kind of volumes you are doing in the 13 that you're seeing?

Well, you know, Mike, it's hard to say.

When I look at to-go sales year-over-year of the 13 restaurants that we are piloting about six or seven of them were in restaurants that were open in the second quarter of last year.

So I can do a comparison to see what take-out sales has done year-over-year.

And I have seen a nice increase somewhere in the range of 5 to 7%, 8% in to-go sales, which as I mentioned a very positive.

And we haven't seen a negative impact on the dine-in sales.

But, again, it's a short time and it's very few restaurants.

So I'm not ready to draw any broader conclusions at this point.

But what kind of volumes can you -- do you think you can do in to-go in a typical unit -- a 10,000 sq. ft. unit?

Could it range up to $1 million?

I don't think I would go that far.

I think overall as we said in the past our to-go sales company-wide are already in that 7, 8, 9% range.

So I don't -- we don't look at that as being a huge driver.

We are not trying to drive that up to 14 or 15%.

I don't think that's possible.

Again, this is really a guest service initiative more than anything.

We want to remain competitive with what other concepts out there are doing to add that convenience for our guests and that's really the big driver for us.

Thank you.

Your next question comes from Peter Oakes with Piper Jaffray.

Hi, in the spirit of clarification and a follow-up question, if I could.

I just want to follow-up with what Sharon was commenting about, the Grand Lux comps and I think in the first quarter call you said for the two units you were up 9.5.

So in this quarter they are up 3.6.

So I was -- maybe just if you don't have any numbers in front of you maybe just your impressions, is that an apples-to-apples or is it a mix or is it just the way the business is evolving?

And then the other one actually is on the to-go it sounds like the roll-out process has gotten pushed back just a little bit.

Is that an execution issue or is it just how the timing shook out or is there anything else you might be able to add that provides some color there?

Thanks.

On the Grand Lux you are correct, I think we gave the comps for the two locations other than the Venetian in the first quarter and those were I think you had said 9%, I can't remember the exact number, they were up nicely.

The Venetian is a five-year-old restaurant.

Now, that is not comping up at the same level.

So that would have been brought that number down a little bit in the first quarter.

So the 3.6% includes the Venetian.

Again, I don't have it in front of me what we did in the first quarter including the Venetian, but it was -- it would have brought that 9% down.

And then in the second question was on the to-go roll-out and the curb --?

The curb side roll-out.

But I think that's really right on time.

We didn't have any specific dates of when we would add to the first test round of 11 restaurants.

So now we have gone ahead and done the next 23.

But we really didn't have a hard schedule of what we would do.

We were really looking at it.

Analyzing it.

Felt very comfortable, that we would go ahead with the next 23, and that's because they are easy to do.

Costs very little money.

And then the last restaurants once we look at this they may take a little bit more physical work to put that in which is why we are leaving them to the end.

And as I mentioned we are very close to it.

David said it's a minimal cost to get these up and running, but it does involve putting the wire in it for the new POS, putting in the phone line.

All of that work is basically done.

So when I say we are very close all of that stuff has been done, so we are just about there.

Okay.

I'll just reference -- I think on last calls you saw it within the next three to six months you would be in about two-thirds of the system.

So I don't want to blow that out of proportion.

Can I just follow-up on one other, I think might be a benefit?

The Midwest commentary about some comp slow down if you were to aggregate your Midwest base, is the softness there of the magnitude where the region as a whole is comping down?

You know, I don't want to get into that level of detail, but I will say that it is certainly soft in a lot of the -- in those Midwest restaurants.

I will just leave it at that.

Okay.

Thanks a lot.

Okay.

Your next question comes from John Ivankoe with JPMorgan.

Hi, thanks.

David, I think I caught an answer to a previous question that you were testing or you were, in fact, were increasing staffing in the kitchen.

So I guess on that comment if I heard it correctly could you discuss bottlenecks to serving more customers as you currently see them, whether it is in the kitchen, whether it is in the dining room, and if there's any near-term initiatives that we may see around those peak hours to bring more customers through the restaurants?

Thanks.

John, I think it's technology that we were really looking at.

We do have now our kitchen management system in one of our restaurants.

It's in full bloom.

It has -- right now it seems remarkable, the kind of help that it's giving us and we are now analyzing all the information which will help us hopefully either cut labor down or move labor around to get food out quicker to our guests.

So that's in one restaurant, as I say it was a lot of work getting the test up, wiring the kitchen, training the staff.

But I think there's going to be a lot of benefit in the analysis of this.

And we are going through it right now.

So at this point we know we are going to make improvement.

I can't tell you there's a bottleneck, but whatever bottlenecks there are we will get to the bottom of it with the system and move forward and we have other re-engineering of the kitchen being studied at this point in terms of time and motion studies.

So hopefully by the end of the year we will have hopefully some very enthusiastic news about some of the new things we are discovering.

Do you want to add anything, Mike?

No, I think you've got both of those.

Those are two big initiatives that are going on right now to improve the productivity of the kitchen.

Okay.

All right, thanks.

Thank you.

Your next question comes from Hil Davis with SunTrust.

Hi.

Hi, Hil.

I was just wondering I guess when you look at I guess the new stores and how they -- the average weekly sales being so [lag.] The real question is, when they role into the comp base do they tend to comp positive, so they do kind of go back to a normalized base and then build off that?

You know, Hil, again, it's a mixed bag.

Some of them do and some take a little bit longer because that honeymoon period can be -- I don't know -- two months; it can be eight months; it can be a year.

And as a result they are going to be at different stages when they roll into that comp base and there -- accordingly their comp sales will be impacted that way.

Does that tell you anything about as you go into smaller markets maybe they have a longer honeymoon period or a higher honeymoon period and what would that tell you about future developments in smaller markets as you get smaller?

And then secondly, any way you can tell the different demographic customers if there is any between -- in Texas especially, Dallas and Houston between a Grand Lux customer or a Cheesecake customer and any difference in frequency or perhaps where they can buy on the menu?

To the first part of the question I can't -- again, I see a mixed bag, whether it's small market, big market, it's very different.

As David just kind of whispered, we are in Sacramento.

It's a smaller market for us, but it's huge.

It's done -- the volumes we are doing there are tremendous.

And it is been a long honeymoon there.

And I hope maybe it won't be a honeymoon.

Maybe it will stay there.

But we are very happy with those kind of volumes.

As for the Grand Lux guests -- I don't, David, if you have any comments on the types of guests.

Yes.

Right now we don't.

We don't know the difference.

We know that many people are using both of them.

They tell us, we see them, the managers know who they are and they enjoy both restaurants and find their favorites.

We think it's really the same guest maybe it's just a little bit more upscale where they are happy to go to Grand Lux because they don't want to wait at a Cheesecake Factory and yet they like upscale casual concept in terms of their every day restaurant.

So one day maybe we will get to the bottom of it when we get a few more open, but right now we are assuming they are pretty much the same.

Great.

Thank you all very much.

Operator, I think we have time for about one more call.

Your next question comes from Paul Westra with SG Cowen.

Great.

Good afternoon.

Just one question, Dave, could you follow-up your comments on the Grand Lux?

You mentioned you made some changes, 1500 sq. ft. less, did you say that was just the kitchen?

Did you make a bigger dining room or are you gearing for a smaller overall box?

And then in light of that question what is your goals for the cost and square footage of the newest and latest round of prototype?

Well, I think -- with the whole box is smaller but most of that came from the kitchen.

And so, again, we are squeezing -- we are able to cook the food in a smaller line and we were able to shrink the prep kitchen, and that is going write toward bringing down that cook labor and the back of the house labor which, again, has been a process from this big restaurant in Las Vegas to what we know people want to eat today.

In terms of what the final cost will be really depends on where we think the volumes are going to end up because again we are having this relationship between our investment costs and our return on capital and so it's all a puzzle that will fit together.

So although our volumes are building and we are bringing our cost down at some point we are going to peg this whether it's 10 million or 8 million or 9 million, wherever we think we are going to be at least for awhile we will make sure that the costs are according.

So our return on investment is where we want it to be.

That's what this whole effort is all about because, again, as I said before, if we were PF Chang's and that was our second vehicle everyone would want to be -- our investors would be very happy and we are just looking for a great second vehicle and it doesn't have to be a rubber stamp of Cheesecake Factory.

As far as the square footage of the boxes, what size are they?

Right now the one that we just built -- that we are building is going to be 11,200 sq. ft.

And I think the next one we build after that we will try to squeeze it down into probably 10,000.

So we will see where it will end up.

Probably it will end up where The Cheesecake Factory suite spot is which is about 10,500 sq. ft. at this time.

Okay, and final question on the to-go.

Just briefly, have you made in that decision to do this nationally yet or officially?

And are the new stores opening up with to-go already in place?

The new stores are opening with to-go.

We pretty much made a decision that we are going to move forward, although, we want to get this 23 done and be -- as I say, what we are doing is taking the easiest and cheapest ones first and the ones that will take just a little more investment we are waiting until last.

And in the end there may be 10% of our stores that won't have it because there is -- it's either no place to pick up or it just won't work physically for that restaurant.

But all the new ones we are opening up with to-go.

Great.

Thank you.

All righty.

Thanks Paul.

Thank you everybody.

Thank you.

Bye bye.

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

You may now disconnect.