Cheesecake Factory Inc (CAKE) 2005 Q3 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to The Cheesecake Factory third quarter earnings conference call.

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

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

If you would like to ask a question during this time, simply please press star then the number one on your telephone key pad.

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

Thank you.

Mr. Dixon, you may begin your conference.

Thank you, operator.

Hello, everyone.

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

Also with us today is David Overton, our Chairman of the Board and Chief Executive Officer;

Peter D'Amelio, President of our Restaurant Division; and Jill Peters, our Vice President of Investor Relations.

Let me take just a second and introduce Jill to you.

As you may have read in the press release we issued a couple of weeks ago, Jill recently joined us from The Financial Relations Board, an investor relations consulting firm, and has worked as an accountant -- in accounting and finance analyst for public companies early in her career.

So both David and I are very excited to have Jill on board and welcome, Jill.

Jane Vallaire, who has been a fixture on these conference calls for many years, is still with us; and has, in fact, recently celebrated her 20th anniversary with The Cheesecake Factory.

Jane has transitioned to our Director of Corporate Administration, and will oversee our equity compensation programs, among other things.

Before we get into the details, let me cover our cautionary statement regarding risk factors and forward-looking statements in general.

The Company's comments during this conference call held today, October 18, 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.

The Company does not undertake any duty to update any forward-looking statements.

Investors and listeners are referred to the further 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.

All right. with that out of the way, 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 third quarter of fiscal 2005 that ended on September 27, 2005.

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

After that, we'll be happy to answer as many questions as time allows.

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

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

Our revenues for the third quarter increased 18% to $293 million through a combination of new restaurant openings, increased bakery sales and increased comparable restaurant sales.

In fact, despite the severe weather and increased energy costs, our comparable restaurant sales of The Cheesecake Factory restaurants were up approximately 0.9%.

As we mentioned in today's earnings release, we did see a noticeable dip in traffic after Hurricanes Katrina and Rita.

Based on our sales trends coming out of August, we estimate our revenues were impacted approximately 3.0 million to 3.2 million as a result of the weather.

Adjusting for this impact, our comparable sales at the Cheesecake Factory would have been about 2.1%.

And I'll cover this in greater detail in our review of revenues.

The Cheesecake Factory has reported positive comparable sales comparisons every year that we've been a public company, and in 51 out of 52 quarters.

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

And 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 also reported some very strong results.

As discussed in today's earnings release, the comparable quarter the prior year included a $4.5 million legal reserve that we established last year for a lawsuit pending at that time.

Now, excluding this charge from last year's results, as it's not truly indicative of our ongoing operations, we reported a 41% increase in operating income, a 43% increase in net income, and a 42% increase in diluted earnings per share.

These margin improvements are a reflection of the improved commodity cost environment, as well as some strong cost management by our operations team during the period of slower traffic.

I'll give a little more detail on this as we review our operating margins.

But first, let me spend a few minutes providing some additional color on our top line results for the third quarter and updating you on our new restaurant growth plan for the remainder of fiscal 2005 and into fiscal 2006.

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

Our total restaurant sales increased approximately 19% during the third quarter, to $279 million.

Now, that 19% was comprised of a 21% increase in operating weeks, resulting from the openings of 21 new restaurants during the trailing 15-month period, and an approximate 2% decrease in average sales per operating week.

So let's spend a few minutes on these comparable sales and average weekly sales in more detail by concept.

At The Cheesecake Factory restaurants, we experienced a 0.9% comparable sales increase.

Now, as I mentioned earlier, this number was impacted by the decrease in traffic surrounding the hurricanes in the southeast.

Again, excluding that 3 to $3.2 million impact to overall sales from the weather, comparable sales of the Cheesecake Factory restaurants would have been about 2.1%.

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 price increase in our most recent summer menu change.

We also had an approximate 1% effective price increase from our Winter 2005 menu change.

With The Cheesecake Factory concept as busy and productive as it is, particularly during the 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.

Now, average weekly sales at The Cheesecake Factory restaurants actually decreased approximately 1.4%.

As we've said in the past, the difference between our comparable sales change and the change in average weekly sales 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.

This effect was slightly exaggerated in the current quarter, with a slowdown in traffic from the hurricanes impacting all locations, both comp restaurants and new restaurants.

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

In fact, seven of those ten actually opened during the third quarter last year, and consequently were right near the peak of their honeymoon sales.

The average weekly sales for these ten restaurants decreased 21% from the prior year.

Now, as a group, they are now averaging weekly sales just under $200,000 a week.

Now, this is slightly below our Company average; but considering the weather and economic factors of the past couple months, well within an acceptable range for us.

The 13 Cheesecake Factory restaurants opened since the third quarter 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, all restaurants opened in fiscal 2005 through the third quarter -- excluding Sugar Land, which was directly affected by hurricane-related closures -- are averaging weekly sales in excess of $226,000 year to date.

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

As we mentioned in the press release today, comparable sales at the three Grand Lux Cafes included in the comp base were up 3.8% versus the prior year.

Now, excluding the Grand Lux Cafe at The Venetian in Las Vegas, which is a slightly more mature restaurant, the Grand Lux Cafes in Los Angeles and Chicago comped up approximately 5.6% for the quarter.

As we've said in the past, this is the type of comparable sales growth The Cheesecake Factory restaurants enjoyed in their early years.

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

We now have the curbside program in 41 restaurants, as we added 28 new locations since last quarter.

For those restaurants offering curbside service that were also open last year, we continue to see a slight increase in takeout sales versus the prior year, with no corresponding impact to dine-in sales.

However, our sample is still too small to draw any broader conclusions as to the impact on overall Company sales.

As we mentioned last quarter, our ultimate intention with this program is to provide great guest service, and we continue to be very pleased with the level of service we are able to provide through the curbside program.

The five Cheesecake Factories scheduled to open during the remainder of the first quarter will also -- will also offer the curbside program, and we'll evaluate the opportunity to roll this program out in more of our older locations over the next several months.

Moving to our restaurant growth plan, we successfully opened three The Cheesecake Factory restaurants in the third quarter, as planned, and two in the fourth quarter to date.

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

To achieve this, we will open five more Cheesecake Factory restaurants and two new Grand Lux Cafes over the remainder of the quarter, for a total of nine new restaurants in the fourth quarter.

Now, as most of our investors know, it is difficult for us to predict the timing of our new restaurant openings by quarter due to the nature of our [INAUDIBLE] restaurant locations and our highly customized layouts.

However, due to the discipline and planning of our development group, we will again achieve our stated goal for the fiscal year.

We also 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.

Now, opening nine restaurants in one quarter is a lot of work.

We have properly staffed both our development and new restaurant operations teams to accommodate this.

We always like to remind our investors that it takes about 90 to 120 days on average for our new restaurants to work through their normal grand opening inefficiencies and for food and labor costs to reach their targeted operating profit margins.

Our preliminary goal for 2006 is to open as many as 21 new restaurants, consisting of approximately 17 Cheesecake Factory restaurants and four Grand Lux Cafes.

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

We'll give additional information as to the proposed timings of these openings by quarter in our next quarter update.

Moving to our bakery operations, bakery sales net of the inner company sales increased 13% to 14.3 million during the third quarter.

This was slightly better than our initial projections, as the warehouse clubs accelerated some of their orders originally scheduled for the fourth quarter.

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

We believe our Dream Factory product line offers an outstanding opportunity to do just that.

At the same time, we will continue to meet the increasing requirements for our warehouse club customers.

We currently expect bakery sales to increase approximately 8% to 10% in fiscal 2005 compared to the prior year.

Now, even with these growth objectives, please remember that bakery sales will only account for about 5% of our total sales for the full year.

While we remain optimistic with respect to opportunities to steadily build our bakery sales volumes over time, we always remind our investors that bakery sales are not as predictable as our restaurant sales.

Our ability to predict the timing of bakery product shipments and contribution margins is very difficult, due to the nature of that business and the purchasing plans of our larger customers, which may fluctuate from quarter to quarter.

In our view, the bakery's most impactful role to our business will continue to be its service as a dependable, high quality producer of desserts for sale in our own restaurants, which we'll 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 announced in July that we would exercise an option to acquire land and a building in Rocky Mountain, North Carolina, to develop our second bakery production facility.

We expect to have this facility up and running during the first quarter of fiscal 2006.

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

The second production facility will offer us clear advantage, not only in terms of serving as 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 third quarter and our new restaurant opening plans for the remainder of fiscal 2005 and into 2006.

So now I'll briefly review the individual components of our operating margins for the third quarter.

Cost of sales decreased to 25.5% as a percent of revenues for the third quarter compared to 26.3% for the same quarter last year, and improved slightly from the 25.8% for the sequential quarter.

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

We're currently able to contract for the majority of the food commodities used in our operation for periods of up to one year.

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

Now as expected, we continued to see significant cost improvements in poultry and dairy commodities during the third quarter from the comparable period of the prior year.

The cost for the remaining commodities used in 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.

As mentioned last quarter, we are contracted for our cream cheese requirements for the remainder of the year at a price per pound slightly higher than the actual cost per pound in fiscal 2004.

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.

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% of revenues for the third quarter, which was the same as the comparable period of the prior year, but slightly better than 31.1% reported in the sequential quarter.

While we have experienced higher medical insurance costs versus the prior year and increased labor costs associated with the higher minimum wage increases Florida and several other of our larger markets, we were able to effectively offset these cost pressures with our menu price increase.

In addition, our operations team, led by Peter D'Amelio, did an excellent job of managing labor throughout the quarter, especially in the period of slower traffic after the hurricanes.

Looking forward, we currently expect labor expenses as a percent of revenue for the full year of fiscal 2005 to be slightly higher -- let's say 20 to 30 basis points -- than the prior year, due to the minimum wage increases and continued pressure on our group medical insurance costs.

Other operating expenses were 22.9% of revenues for the third quarter, which was down from the 24.6% in the comparable period last year, but up slightly from the 22.4% in the sequential quarter.

Now, that 1.7% improvement versus the prior year is entirely attributable to the impact of the legal reserve included in last year's expense, which was equal to 1.8% of revenues.

We did experience about a 20 basis point increase in the current quarter from the increased cost of electric and natural gas service to our restaurants.

And at this time, we expect the cost of electric and natural gas services to our restaurants to increase further in the fourth quarter.

However, for the full year 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, excluding the impact of the legal reserve and bakery settlement recognized in the second half of last year, or about 22.8% for the full year.

G&A expenses for the third quarter were 4.3% of revenues for the quarter, which is up from the 4% in the same quarter last year, but the same as the 4.3% in the sequential quarter.

Our G&A expenses consist of two major components: 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 and into fiscal 2006, we plan to continue to add resources at the corporate support, training and field supervision training activities of our business, commensurate with the planned openings as many as 18 new restaurants during this year, and as many as 21 new restaurants next year.

Looking forward, our current expectations 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 was 3.9% of total revenues for the third quarter, which was up slightly from the 3.7% in both the third quarter of the prior year and the 3.7% in the sequential quarter.

Looking forward our current expectations 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 third quarter were approximately 3.8 million compared to 7.1 million for the same quarter last year.

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

We also incurred preopening costs in both quarters of our openings in progress.

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

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

The preopening costs for our upscale, highly customized and operationally complex restaurants are higher than most restaurant concepts in terms of absolute dollars, but are in line with other upscale concepts relative to the scope of operations.

We estimate our direct preopening costs from an 11,000 square foot single story restaurants 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 nine new restaurant openings during the fourth quarter of fiscal 2005.

As I mentioned earlier, two of these planned openings will 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 The Cheesecake Factory restaurants.

We currently expect preopening costs for each of those bakery facilities to be approximately $1 million.

The majority of these costs should be incurred in the fourth quarter of 2005 and the first quarter of 2006.

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 million.

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

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

As a housekeeping matter, I want to remind everyone that fiscal 2005 is a 53-week year for us.

As a result, there will be 14 weeks in this fourth quarter.

And we do not expect any incremental margin leverage from the extra week, as we account for nearly all of our fixed costs on a weekly basis, and nearly all of our restaurants pay rent based on a percent of sales.

Our effective tax rate for the third 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 September 27, our cash and marketable securities on hand were approximately $168 million.

This balance has decreased about $6 million from the sequential quarter, as most of our planned openings for the year and the related Cap Ex spending are in the third and fourth quarters.

Our cash flow from operations year to date was approximately $110 million, and our cash and accrued Cap Ex year to date was approximately $112 million, which includes construction and progress for upcoming 2005 openings.

We currently estimate our cash Cap Ex for fiscal 2005 to be in the range of $155 to $163 million.

Based on our current expansion plans and current expectations for the operating environment, we expect to be able to finance our Cap Ex 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 the 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 plans 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 still have no funded debt in our capital structure and we currently do not anticipate the need for funded debt or any other external financing during fiscal 2005, other than landlord construction contributions.

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

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

Now, the Company did not repurchase any shares in the third 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.

So to wrap up our business and financial review, our Company had a very strong third quarter in spite of some strong headwinds related to the weather and energy prices.

We achieved solid comp store sales growth, and we achieved significant improvements to our operating income margins -- net income margins -- and diluted earnings per share relative to the comparable period of the prior year.

We believe we will achieve our stated new restaurant opening target for the year, with 11 restaurants opened year to date, including our Nashville, Tennessee location, which opened today, and seven more yet to come.

As we mentioned in our press release today, we will also reach another important milestone in the fourth quarter with the opening of our 100th Cheesecake Factory restaurant in Palm Beach Gardens, Florida, scheduled for early November.

We also have an achievable restaurant opening goal for 2006 and remain confident that we can execute our growth plan of 20% plus revenue and EPS growth, with high quality and consistency.

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

As we only have 103 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.

So that concludes our business and financial review for the third quarter.

At this time, we'll be happy to take some questions.

And we want to accommodate as many questions as possible in the time we have left on this call, so we, as always, 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 to your question 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.

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

We'll pause for just a moment to compile the Q&A roster.

And your first question comes from Ashley Woodruff.

Hi.

Thanks.

Could you talk a little bit more on your thoughts on the consumer going forward?

Have you seen a sustained impact on sales or volatility from spikes in gas prices, or do you think that was pretty short term and related to the hurricanes?

And then, have you seen any shift in how customers are using your restaurants over the past few months?

Ashley, it's Mike.

I think, you know, we did see certainly a traffic impact immediately after the hurricanes.

I think the gas price issues were with us prior to the hurricanes and we didn't really see any traffic related impact related to that.

Since the hurricanes, as I mentioned, we had probably two or three weeks of some down traffic flows, and we have seen those start to return to normal.

And, you know, we're very happy with that.

Our expectation is that this is more of a short lived issue, as the Cheesecake factory has seen in the past with similar issues.

You know, we've had a short term impact, but we generally bounce right back.

Have your sales quarter to date in the fourth quarter been running about in line with your price increase?

They are slightly below the price increase, but they're tracking right back towards that.

So we're very confident that they'll get back in that range.

They have started to improve.

Okay.

Thank you.

And I'm sorry, sir.

Ashley's company was Bear Stearns.

Thank you.

Your next question comes from Martha Shelton, FBR.

Yes, sir.

This is Martha Shelton on behalf of Howard Penney.

A question regarding sales on a regional basis, if you could perhaps comment, aside from the slowdown in sales in the South, how your sales have been doing West Coast, Midwest, Northeast, East Coast?

Martha, the impact on traffic as a result of the hurricanes was really across the country.

It wasn't geographic.

It wasn't limited to those areas that were impacted by the hurricanes directly.

We didn't have any restaurants that were physically damaged from those hurricanes, but we were impacted from traffic across the country.

So absent that, I would say that, you know, as we said last quarter, we have seen some stronger sales in Florida and the West Coast; but as it relates to the hurricane impact, that was kind of across the board.

It was what we call the "CNN" effect, of people just staying home, watching television, being a little paralyzed to go out.

And that's why we think it's now improving since that's no longer the case.

But I think people are establishing their dining out patterns and entertaining patterns as we speak.

They're looking at their budgets.

People are moving down from dinner houses and they're moving -- you know, they're moving around, depending on how hard hit they are.

But in general, it tends to [INAUDIBLE] for us.

Okay.

Thank you.

Your next question comes from Jeffrey Bernstein with Lehman Brothers.

Great, thank you.

Just a question on the overall building costs and permit environment.

I know a number of your restaurant peers have noted a significant uptick in either the price of construction, and just in general difficulty obtaining permits on a timely basis; which I guess has been enough to cause a delay or even a pull back for some of those companies.

You appear comfortable with your openings, especially for the remainder of '05.

Just wondering if you could discuss some of the trends you've seen of late, and how you've been able to manage through those issues.

Thanks.

Okay, Jeff.

That's a good question.

I think, you know, we've always said because of our operating lease model, we're always subject to, you know, landlord delays, permit delays.

But I think our development department has done a fantastic job this year and in prior years of meeting the schedules that we laid out and working around permitting issues, landlord issues, to get our restaurants opened as we initially planned.

So for us to open 18 restaurants this year as planned, including nine in the fourth quarter -- which we are very confident we will achieve -- really is a testament to the strength of our development group and our operations group to get those restaurants open.

But in terms of general construction costs, there's absolutely no question that there's been an inflationary impact in that area, in construction costs.

Not just related to the post hurricane.

I think you go back the last two or three years, construction cost indexes inflated anywhere in the 8% to 10% range.

So there's definitely an impact on that.

Your next question comes from Matthew Difrisco, [INAUDIBLE].

Hi, Matthew Difrisco, Thomas Weisel.

Question regarding your Grand Lux openings and what you've seen to date in those markets.

Specifically Houston and in context to with four openings for Grand Lux in '06, what are you seeing as far as, if any, potential traffic being diverted from the Cake in those markets -- Cheesecake into the Grand Lux -- and what are your expectations when you open up these four in 2006, presuming that they're in markets where you already have a Cheesecake Factory?

Thanks.

Right now, we're seeing no cannibalization from where we opened up at Grand Lux.

We've opened up them very close, a couple of them are right across the street.

And we've had no cannibalization.

I think people will use both.

It is kicked up one notch.

And I think that they're happy to have more of an upscale casual dining alternative.

So in terms of -- our plans right now, we would never open a Cheesecake Factory -- I mean a Grand Lux -- outside of a Cheesecake Factory market.

You know, we then opened up a Cheesecake Factory, and there would be no reason to open up Grand Lux.

So we feel good about it.

We are going to all the same places that we had very, very successful Cheesecake Factories, and have in fact spread the reputation of Cheesecake Factory throughout the United States, for instance Boca Raton -- everybody on the East Coast heard about us when we opened there and then when we opened up in the Northeast, they already knew about us.

And so we are kind of repeating that pattern.

We feel real good about it.

We're doing very nicely in Dallas and Houston.

We are very happy with both those stores.

And thus you saw, that we're comping up.

So that would be my answer.

Your next question comes from Dennis Forst.

Good afternoon.

Given that you are going to try and open as many as four Grand Luxes in '06, it's got to have something to do with bringing the investment costs down and the returns up, getting them at least close to Cheesecake.

Can you give us some idea of where you're moving in that direction, David?

We move closer all the time.

Our -- we -- we're looking forward to operating the two that are coming up in this quarter, because we made a lot of changes.

We squeezed them down and took a lot of expense out, and so we obviously want to operate them and make sure that we did that right, and see where there are more opportunities.

Our cost of goods is very, very close to Cheesecake Factory, and really it's just a few more renovations to get the building in line, and I think we'll have that in line, too.

So I believe we're close, which is why we're, you know, planning on doing the four next year.

We have a lot of confidence that we're going to have a great cash on cash return.

And once we get there, we'll be happy to share that with everyone.

But it's moving along very, very nicely.

Where are those four going to be?

Can you give us any hints?

One is going be in Boca.

And we have one in Atlanta.

And I think there's another one in Scottsdale.

And then we are deciding on the fourth as we speak.

Okay.

Thanks.

Okay.

Your next question comes from John Glass, CIBC.

Hi, thanks.

Mike, you talked about the class of '05 year to date doing about 226,000 in average weekly sales.

What would a comparable number be for the class of '04?

Would it be roughly that sub 200,000 a week level you talked about?

I guess, if the class of '05 follows the natural maturation or honeymoon cycle, would it also tend to go under 200,00,0 or was there something unique to some of those earlier stores you were talking about?

No, John.

It's really hard to compare those.

If you were to take the class of 2004 at this time last year, they were probably slightly better than 226.

But I think that, you know, everyone -- they're all different.

It's all really a snapshot of where they are in that maturation cycle.

So it's really hard to answer that question.

We -- you know, we don't really look at them as a class year, although I did give that statistic.

We're very happy with all of the 2004 openings as well as the 2005 openings.

And I did give that comparable to say that some of that group that opened third quarter of last year are down just under the 200,000 number.

But I think absent the hurricane impact, I think they would have been right at about the Company average, which is what we expect them to be.

Okay.

Thank you.

Your next question comes from Sharon Zackfia, William Blair.

Hi, good afternoon.

Mike, I was surprised to hear you give your occupancy and other guidance for the full year, because I think that implies getting some leverage in the fourth quarter despite higher energy costs.

Was that because of the extra week?

Or where are you?

We'll get a little bit from the extra week -- not too much.

But I still think that, you know, the -- our -- the energy costs for us as a percent of restaurant sales, you know, are somewhere in that 1.6 to 2% range.

I think this quarter we were probably closer to 2.2.

I think we'll probably get another, you know, 10 to 20 basis points impact on that in the fourth quarter.

But I think we'll be able to offset that.

And for the full year, I think we can still hit in that 22.8% range.

And I guess my question, though, is where are you cutting costs off at that?

You know, it's no one individual area.

It's just kind of across the board.

We will get some leverage from the bakery operations -- strong sales, as well as just across the board at the restaurant.

But there's no specific one area that I could point to.

Thanks.

Your next question comes from Dean Haskell, JMP Securities.

Thank you very much.

Good morning.

Good afternoon, everyone.

Mike, your depreciation numbers rose in the third quarter this year.

Did not get any leverage on it from the cost per sales increase.

Is there something else going on inside that number?

I don't think so.

I think, you know, I have certainly noticed that as well.

I think the overall sales were a little bit soft for the quarter, for all the reasons we mentioned.

I think if they were, you know, where we would have liked them to be, we would have leveraged that number appropriately and been right back in that, you know, 3.8 range, which is where I expect it to be.

I think really that's the only thing that's hitting that for the quarter.

So it's really just the revenue shortfall due to hurricanes on D&A?

I think so.

Okay.

Thank you.

Your next question comes from Gary [Rabbins], [Marketus].

Hi, thanks.

Some of my other casual dining holdings have had bigger electricity cost impacts than you guys seem to.

Is that because you've locked into some kind of contract to a rate or -- I mean, how is it that it's such a small change from quarter over quarter and year over year given the increase in spot electricity prices?

Well, I can't speak to what others are doing, but I would say the biggest impact or the biggest difference is just the volume that our restaurants do compared to others.

You know, our restaurants are incredibly productive at just under 1,000 bucks a square foot.

So we are leveraging the energy we're using much more efficiently than others, I would say.

We do do some contracting for our utility costs, but you haven't said that.

You know, those contracts roll over and we'll still be impacted.

But I think the biggest issue is just the productivity of our restaurants.

Okay.

Thank you.

Your next question comes from Hardy Bowen, Arnold Bleak.

Arnold Bleichroeder.

David, I wondered how the -- I know you're experimenting with electronic ordering.

And I wonder how that's going.

Right now, that is -- we think it's a big success that's helping us quite a bit.

We are going to be putting in a couple other restaurants to make sure that we can roll it out and that all of our materials are good for the rollout, and we're anticipating it rolling out to everybody next year, certainly to all the new restaurants.

So it certainly is shaving off a couple minutes.

I don't know if that's -- hopefully that will translate to the bottom line.

Again, we don't have enough experience yet.

But we're very, very happy with how it's helping us manage our kitchen.

Okay.

You could turn the tables a little faster if you do that.

We think we can save some minutes.

And we think there is some bottom line there.

Either way, it has many, many more implications than just turning the table -- just in terms of organization, hot food, maybe less comps, who knows?

Maybe a different way of looking at labor once we really get all the reports in.

But we're still working on creating all the reports and minding the data; but, you know, just even at this early date, we think it's a big help to us.

Okay.

Sounds good.

Thanks, Hardy.

Your next question comes from Andy Barish, Banc of America Securities.

Hi, guys.

Can you hear me?

Yes, Andy.

On the real estate side of things, just two related questions on the -- kind of deals you're seeing out there as you guys have continued to become more of an anchor for a lot of the developers.

Are you starting to see some movement downward on occupancy where, you know, maybe that's going to be able to help you get a little bit of margin leverage longer term?

And then, anything on the development pipeline for '06 in terms of maybe just first half openings versus second half openings that you can see at this point?

Sure, Andy.

I think in terms of the deals that we're seeing, I think you are correct.

We continue to see excellent deals and better deals year over year.

You know, the majority of our restaurants right now are paying 5% of sales and rent.

We are seeing more 4.5 and more 4% deals with comparable landlord contributions.

So we're definitely seeing better deals on that side of the equation.

I think those will continue to get better.

But in terms of them, I think you've hit it right on.

In terms of them having a meaningful impact on our margins and operating costs, it's going to be -- it's going to take some time so we have enough of those in the mix to move the needle on that.

In terms of the opening schedule for next year, I can't give you specifics by quarter, but I can tell you that it will be back half loaded as it always is.

Your next question comes from Hil Davis, Suntrust.

Yes, hi.

Good afternoon.

How are you all?

Good.

I was curious.

You talked about opening 21 next year -- 21 restaurants.

And when you kind of look out maybe in '07 and '08, or in total, how many restaurants do you think you can open on average in any year?

Is it 24?

Is it 27?

And then, how you all think about that in terms of if the unit growth slows, how you all would maybe -- you all would just build the cash on the balance sheet or do something else there?

Thank you.

I think the second half of that question is a much longer-term question to that point.

But in terms of how many restaurants we can open in a particular year, you know, everything we do is somewhat modular, and yes, scalable, that we'll continue to add people to open as many restaurants as we want to or we'd like to and be able to open it at a rate that's healthy for our company.

You know, I would say today we probably on the development side have the capacity to open 24, 25 restaurants a year.

So we're already there.

But that's very scalable, to add more bodies to allow us to open more.

And on the operations side, same answer.

It's very scalable.

So there's no fixed number today.

And we're preparing to grow.

We understand what's on the horizon, and that's why we work so hard on building our infrastructure to prepare for those times, as well as preparing the Grand Lux.

And again, down the line, whatever we need to keep our growth up.

But at least for the next years -- again, we know we're comfortable with that 20 plus growth.

Right.

Thank you all very much.

Thank you.

Your next question comes from Michael Smith, Oppenheimer.

Well, good afternoon.

A couple things, or just one thing actually.

The bakery.

Could you go over the economics of that bakery in North Carolina again?

And if you could, repeat the preopening guidance you gave us.

Well, the preopening guidance was easy.

I think I said for the full year we expect preopening to be 17.5 to $18 million.

And then for the bakery, the East Coast bakery, you know, I think the best answer for that today, the economics of that, is our expectation is that certainly in the longer term that we'll really realize some benefits, both in operating cost as well as freight efficiencies.

But in the short term, as that restaurant -- as that facility gets up and running next year, I fully expect it to be somewhat inefficient in terms of baking cakes, as we kind of get that work force up and running.

But we will realize the freight efficiencies right out of the gate.

So I'm kind of anticipating on those two being a wash for the first year of operations, then as we get into the second year start to realize the benefits of both sides of that equation.

And what is the total investment going to be there?

Our initial invest investment is $15 million.

Thanks.

That's a very -- again, that's a big facility that we're moving into.

We're building out just one operating line, plus the freezer space for our distribution center.

And then over time, we can add additional operating lines.

Thank you.

Your next question comes from Mark Kalinowski, Buckingham Research.

Hi.

Just looking at the long-term stated goal for Cheesecake Factory brand units, right now it's at 200.

You have over 90 in existence.

At what point do you maybe begin to reassess the long-term target, and do you think you're being conservative with the current target of 200?

Well, Mark, I think we're certainly being conservative with that target and -- in terms of when do we reassess?

We're always assessing it.

I think that we're comfortable with that 200 number of -- with The Cheesecake Factory as it is today.

But in terms of making changes to that -- sort of that box and how it operates, that could expand that number well beyond 200.

But the type of The Cheesecake Factory we build today, we're very comfortable that 200 number, and I think it is conservative.

Thank you.

Just one or two more questions, operator.

Your next question comes from Paul Westra, SG Cowen.

Thank you.

Good afternoon.

Just one or two left over.

You mentioned the 3 to 3.5 million impact.

Was that majority actual lost store days?

Can you tell us how you calculated that?

No, really we didn't lose too many store days.

That was really just as we kind of looked at the trends that we had for the first two periods in the quarter and, you know, what we expected to happen in period nine versus what actually did happen.

That's kind of how we came up with that estimate.

The number of actually lost store days is really very few, and mostly just in the Houston market.

Great.

And just a follow up question on your to-go.

Do you have a slight change of opinion on it?

I think -- I was under the understanding that you would probably plan on opening to-go wherever possible physically?

Is that still the case or -- ?

That's still the case.

Yes, we -- we're -- we've rolled out 43 -- ?

We're at 41 right now.

We're at 41 stores right now.

We'll start to work on phase three.

We think that probably around -- ultimately, 90% of our restaurants probably will have a curbside; maybe 10% that there's just no place to stop and pull up a car or be able to do it.

But, you know, in the next month, our hope is that we'll get to about 90% of the Company.

Great.

Okay.

Thank you.

One more question, operator.

Okay.

Your next question comes from Steven Kron, Goldman Sachs.

Great, thanks.

Good afternoon, everyone.

Mike, you spent some time talking about the spread between same-store sales growth and average weekly sales growth.

And one of the contributors, I guess, on a year over year basis to the negative average weekly sales, you mentioned was that you were lapping seven unit openings in the third quarter of last year.

I was just wondering, directionally, if in the fourth quarter, given that you're opening nine this year and only lapping four of last year, should we see the gap between those numbers start to close?

And how should we think about that kind of going forward?

I would expect that gap to close significantly.

But your thought process is correct.

The same way we think about it; with all the new restaurants coming on, we would expect to see that gap between comp store sales and average weekly sales close, if not be right in line with one another.

Okay.

Thanks.

Okay.

That's it, operator.

Thank you.

Thank you.

This concludes today's Cheesecake Factory third quarter conference call.

You may now disconnect.