Cheesecake Factory Inc (CAKE) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to The Cheesecake Factory fourth quarter earnings release conference call. [OPERATOR INSTRUCTIONS] Mr. Dixon you may begin your conference.

Thank you, operator, hello everyone.

I'm Michael Dixon CFO of the The Cheesecake Factory Incorporated.

Welcome to our quarterly investor conference call which is also being broadcast live over the Internet.

Also with us today are David Overton, our Chairman of the Board and Chief Executive Officer and Joe Peters our Vice President of Investor Relations.

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, February 7, 2006, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Investors and listeners are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements.

Forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance ,or achievements of the Company to be materially different from any future results, performance, or achievements expressed or implied by forward-looking statements.

All forward-looking statements made today on this conference call speak only as of today's date.

We do not undertake any duty to update any forward looking statements.

Investors and listeners are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in our periodic filings with the Securities and Exchange Commission.

This conference call is the property of The Cheesecake Factory Incorporated.

Any retransmission, rebroadcast or redistribution of this call without the expressed 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 fourth quarter of fiscal 2005 that ended on January 3, 2006.

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

We will also discuss our full year results for fiscal 2005 and give a little color on our plans for fiscal 2006.

After that, we will 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.

As a reminder fiscal 2005 was a 53-week year for the Company, resulting in one additional operating week in the fourth quarter and thus one additional operating week for the full year.

Where appropriate, I will omit the estimated impact of this additional operating week from any financial or statistical comparison.

Both David and I were very pleased with The Cheesecake Factory's financial results for fiscal 2005.

The full year sales increased 22% and we passed the $1 billion mark in annual revenues with fiscal 2005 revenues of $1.2 billion.

As we mentioned on a previous earnings call we also opened our 100th Cheesecake Factory restaurant in fiscal 2005.

These are significant milestones for our company.

Not just because they're big numbers but because we believe we achieved this growth while still delivering a great guest experience and in no way compromising The Cheesecake Factory brand.

We are committed to continuing to grow our business at a rate that's healthy for our company.

Our comparable restaurant sales increased 1.7% for fiscal 2005 which marks our 13th consecutive year of positive annual comparable sales growth, or every year since our 1992 IPO.

We're very pleased with this number especially in light of the hurricane-related sales impacts we experienced in the second half of this year.

In fact, we estimate our comparable restaurant sales growth would have been slightly better than our 2% effective menu price increase for the year absent the post Katrina slowdown in traffic we discussed last quarter and the hurricane related restaurant closures in the fourth quarter.

I'll cover the fourth quarter in more detail in just a moment.

We also recorded record operating income for fiscal 2005 of $129 million.

This absolute dollar amount certainly grew with the increase in sales but more importantly we achieved an 11% operating income margin, the best operating income margin in our history.

This is an 80 basis point improvement over the prior year.

We believe this is the best operating income margin among all company owned and operated restaurant companies.

Our goal is still to get to a 12% operating income margin on a sustained basis.

That's before the impact of stock option expensing.

Our history of improving cost leverage and tremendous discipline in cost management gives us a lot of confidence that we will achieve this goal.

Let me take a minute and provide some additional color on our top line results for the fourth quarter and cover our new restaurant growth plan for fiscal 2006.

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

Our total restaurant sales increased approximately 25% during the fourth quarter to 308 million.

Excluding the $23 million benefit from the additional operating week, sales increased approximately 16% from the prior year.

That 16% increase consisted of an approximate 17% increase in total restaurant operating weeks resulting primarily from the openings of 22 new restaurants during the trailing 15 month period coupled with an approximate 1% decrease in average sales per restaurant operating week.

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

At The Cheesecake Factory restaurants we experienced a 0.5% comparable sales increase.

As discussed in our press release this number was impacted by 52 lost operating days in our Florida restaurant due to hurricane Wilma.

Excluding the estimated 1.2 million impact to overall sales from these closures, comparable sales of The Cheesecake Factory restaurants would have increased about 1.1%.

This is still slightly below our effective menu price increase at The Cheesecake Factory.

We did experience a continuation of the post Katrina softer traffic we discussed in our third quarter call for a fairly good portion of the fourth quarter.

Now, the good news is that through the first five weeks of fiscal 2006, comparable restaurant sales are again tracking in excess of our effective menu price increase.

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 amount 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, natural 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.

Average weekly sales of The Cheesecake Factory restaurants decreased approximately 1.8%.

This metric is impacted by a couple of factors.

First, average weekly sales are impacted by the actual size of the new restaurants entering the mix.

The average productive square feet and number of seats at restaurants opened over the past two years is approximately 6% less than those restaurants opened in fiscal 2002 and 2003.

This reduced size will certainly impact our sales volumes.

This reduction is a function of both the markets we have entered as well as the space available in those markets.

Second, as we have said in the past average weekly sales are impacted by 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 volume 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.

This effect was slightly exaggerated in the current quarter with the restaurant closures due to hurricane Wilma and the continued post Katrina slowdown in traffic impacting all locations, both comp restaurants and new restaurants.

With that said I do think it's fair to say that we did expect our average weekly sales at The Cheesecake Factory restaurants to be a bit stronger in the fourth quarter than they actually were.

While we did experience the expected decrease in average weekly sales from those restaurants that are not in the comp base, but were open during the fourth quarter of fiscal 2004, we did not experience the huge honeymoon sales immediately following an opening that had helped us in the past, to offset our restaurants transitioning down from their honeymoon highs.

We believe this is due to the fact that 9 of the 16 Cheesecake Factory restaurants opened in 2005 are in existing markets.

Generally speaking, we do not experience as strong a grand opening rush in existing markets as we do in new markets.

In any event we are very happy with all of our fiscal 2005 openings.

As we mentioned in the press release, we experienced very strong sales in several new markets open in the fourth quarter.

Nashville, Tennessee, Tyger, Oregon, which outside of Portland, and Fresno, California, with average weekly sales in excess of $265,000 in these markets.

As a group our fourth quarter openings averaged very solid weekly sales of approximately $222,000 and all of our fiscal 2005 openings average weekly sales in the fourth quarter of $205,000.

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

This modest menu price increase should be sufficient to offset the majority of our expected operating cost increases for 2006 that we know of as of today.

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

We are also very pleased with sales at our Grand Lux Cafe locations.

As noted in our press release, comparable sales at Grand Lux Cafe were up 3.8% in the fourth quarter and 3.3% for fiscal 2005.

Now, our two locations in Texas which opened near the end of 2004 each delivered very strong annual sales of approximately $8 million in their first full fiscal year of operation.

In addition, our fourth quarter opening in Long Island, New York, experienced average weekly sales of approximately $212.000.

We believe this is incredibly strong for a new concept with no advertising or no promotion.

Moving to our restaurant growth plan we successfully opened nine restaurants in the fourth quarter and achieved our stated goal to open 18 restaurants for the full year including two Grand Lux Cafes.

During the fourth quarter we opened nine restaurants in a nine week period.

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

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

During 2006, our goal is to open as many as 21 new restaurants which would include as many as 18 Cheesecake Factory restaurants and as many as 3 Grand Lux Cafes.

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

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

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

Based on the information we have as of today, fiscal 2006 will be no exception to this rule.

In fact, we expect this year to be a little bit more back end loaded than previous years.

Our current plan calls for 2 openings in the first quarter, 2 in the second quarter, 5 to 6 in the third quarter and 11 to 12 in the fourth quarter.

Based on our recent accomplishment of opening nine restaurants in a nine-week period we are very confident in our ability to achieve our 2006 opening plans and we will be able to achieve an approximate 20% square footage growth.

Now, however, since many oven these openings are late in the year, we won't realize the benefit of them until fiscal 2007.

As of today we currently project our operating week growth in fiscal 2006 compared to fiscal 2005 on a 52 week basis to be approximately 17%.

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

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

So in addition to The Cheesecake Factory and Grand Lux Cafe opening plans we do continue to evaluate other new concepts and ideas.

As a growth company, we believe it's important that we are constantly looking for new ways to grow our business.

To this end we are currently developing a new concept but we still have a lot of work to do.

I can tell you that it is a broad based Asian concept with very little Chinese influence.

We are interested in this category due to the growing popularity of a wide variety of Asian foods among Americans.

We have not yet signed a lease for this restaurant but we are currently evaluating potential sites.

The opening of the restaurant will depend on finding a suitable location though at this point we would hope to have it open no later than the first half of fiscal 2007.

We'll give more details on this concept as it develops.

But in the meantime I will remind our investors that our primary growth vehicles remain new Cheesecake Factory restaurants.

Followed by new Grand Lux Cafes.

Moving to our bakery operation.

Bakery sales to other foodservice operators, retailers, and distributors increased 4% to $19.8 million during the fourth quarter.

Excluding the $1 million benefit from the additional operating week bakery sales decreased approximately 1%.

Now, this slight decrease is not a concern because, as you may recall from our third quarter conference call, we had a fair amount of sales originally planned for the fourth quarter that were accelerated by our customers into the third quarter.

For the full fiscal year bakery sales increased 13% to $59.9 million.

This was slightly in excess of our modest growth goal of 10% and reflects the incredible demand for our product growth -- for our product through our existing sales channels.

Similar to the prior year we did not bring on many new customers but saw demand from our existing customer base grow significantly.

Even with these results, please remember that bakery sales accounted for only about 6% of our total sales for the fourth quarter and accounted for only 5% of our total annual company sales.

Our plan for outside bakery sales in fiscal 2006 will continue to focus and generate consistent and predictable sales and contribution margins.

With our second production facility located in Rocky Mount, North Carolina coming on line near the end of the first quarter of fiscal 2006, we will be well positioned to meet our internal restaurant requirements and continue to meet the increasing requirements for our warehouse club customers.

We currently expect outside bakery sales to increase approximately 8 to 10% in fiscal 2006 compared to the prior 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 as service as a dependable, high quality producer of desserts for sale in our restaurants which sold nearly $165 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 that achieved by most other casual dining restaurant concepts.

That covers our top line performance for the fourth quarter and our new restaurant opening plan for fiscal 2006.

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

Cost of sales decreased to $25.9% as a percent of revenues for the fourth quarter, compared to 26.7% for the same quarter last year and increased slightly from the 25.5% 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 are currently able to contract the a majority of the food commodity used in our operations for periods up to one year.

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

We saw significant improvement in the produce and poultry commodities during the fourth quarter from the comparable period of the prior year.

You may recall that tomato prices spiked in the fourth quarter of 2004 as a result of hurricane damaged crops.

In addition poultry costs have continued their significant year-over-year improvement.

For the full year of fiscal 2005, cost of sales improved 80 basis points pretty much as expected.

We have contracted with suppliers for those expected commodity requirements for fiscal 2006 that can be contracted.

We were also able to contract for the majority of our cream cheese requirements in our bakery operations for the full year at a price per pound slightly less than the actual cost per pound in fiscal 2005.

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

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 50 to 60 basis points lower in fiscal 2006 compared to the prior year.

Total labor expenses were 30.5% of revenues for the fourth quarter which was slightly higher than the 30.4% from the comparable period to the prior year but slightly better than the 31% 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 in 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 did an excellent job of managing labor throughout the quarter, especially in the period of slower traffic after the hurricanes.

For the full year labor expenses as a percent of revenues increased just slightly to 30.9% in fiscal 2005 versus 30.8% in fiscal 2004.

For fiscal 2006, we currently expect labor expenses before the impact of stock option expensing to improve 10 or 20 basis points from the prior year as we expect wage inflation in general to be fairly minor and the fact that many of the larger minimum wage increases that we know of as of today occurred in fiscal 2005.

I will give more detail on the impact of stock option expensing in a minute.

Other operating expenses were 22.7% of revenue for the fourth quarter which was up slightly from the 22.5% in the comparable period last year, but down slightly from the 22.9% in the sequential quarter.

That 20 basis point increase versus the prior year is entirely attributable to the benefit of a $2 million insurance settlement included in last year's expense which was equal to 80 basis points.

Excluding this benefit other operating expenses as a percent of revenue actually decreased 60 basis points.

Now, there's several reasons for this decrease but the biggest relates to our bakery operations which had a much more efficient fourth quarter in 2005 versus 2004 and was able to leverage some of their fixed costs over the extra operating week.

In addition we began to realize some of the benefit of the California Worker's Comp reforms that were put in place a couple of years ago.

These benefits were partially offset by the increased cost for electric and natural gas service to our restaurants.

For the quarter utility costs increased approximately 40 basis points over the comparable period of the prior year.

For the full year of fiscal 2005, other operating costs were 22.8% which is the same as the prior year after you exclude the impact of the legal reserve and the bakery settlement recognized in fiscal 2004.

For fiscal 2006, we currently expect other operating costs as a percent of revenues to be about 20 basis points higher than fiscal 2005 due primarily to the increased cost for gas and electric service to our restaurants.

G&A expenses for the fourth quarter were 4.2% of revenues for the quarter which was the same as the fourth quarter the prior year but down slightly from the 4.3% in the sequential quarter.

For the full year fiscal 2005, G&A expenses were . 4.2% which was the same as the prior fiscal year.

Our G&A expenses consist of two major components.

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

During fiscal 2006 we plan to continue to add resource to the Corporate support, training, and field supervision activities of our business commensurate with the planned openings of as many as 21 new restaurants during the year.

Looking forward our current expectation for total G&A expenses as a percentage of revenues for fiscal 2006 before the impact of stock option expensing is approximately 10 to 20 basis points higher as we continue to strengthen our infrastructure to properly support our restaurant and bakery operations.

Depreciation expense was 3.9% of total revenues for the fourth quarter which is up slightly from the 3.8% in the fourth quarter of the prior year but the same as the 3.9% in the sequential quarter.

For the full year of fiscal 2005 depreciation expense was 3.8% which was up slightly from the 3.7% in the prior year.

Looking forward our current expectation for total depreciation expense as a percentage of revenues for 2006 remains in the 3.7 to 3.8% range based on our expected growth and investment plans.

Actual preopening costs incurred during the fourth quarter were approximately $8 million compared to 3.6 million for the same quarter last year.

We opened nine restaurants during the quarter just ended, including two Grand Lux Cafes compared to four in the same quarter last year.

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

In addition, we incurred some preopening costs in the fourth quarter of fiscal 2005 related to our East Coast Bakery facility.

We usually incur most of our preopening costs during the two months before an opening and the month of a restaurants opening.

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

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

We estimate our direct preopening costs for an 11,000 square foot single story restaurant in an established company market to average approximately $785,000.

Analysts and investors should factor enough preopening costs into their models for as many as 21 new restaurant openings during fiscal 2006.

Again, based on the information that we have as of today, we plan to open as many as 2 restaurants in the first quarter, 2 restaurants in the second quarter, as many as 6 restaurants in the third quarter and as many as 12 restaurants in the fourth quarter.

As I mentioned earlier, as many as 3 of these planned 21 openings could be Grand Lux Cafe locations.

For which we currently expect preopening costs to run about 10 to 15% higher than our normal preopening costs for a Cheesecake Factory restaurant.

In addition we estimate preopening costs associated with the East Coast Bakery facility and the new restaurant concept which I manage could be as much as -- the new restaurant concept which I mentioned could be as much as 1.8 to $2 million in fiscal 2006.

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

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

Based on our final estimates of FICA tip credits and other income tax components our effective tax rate for fiscal 2005 was 34.5%.

We currently estimate our effective tax rate for fiscal 2006 to be 34.9%.

We will adjust this rate if necessary as we move through the year.

Now, before I move off of the income statement let me touch on stock options accounting.

As most everyone knows we will be required in fiscal 2006 to begin expensing stock options in accordance with Statement of Financial Accounting Standards number 123R.

For fiscal 2006 we currently expect this expense to be approximately $19 million, of which about 6.5 million will be charged to the labor expense line and 12.5 million will be charged to general and administrative expense.

This amount is consistent with prior years options cost as reflected in our foot notes, and as adjusted for year-over-year growth.

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

As of January 3, our cash and marketable securities on hand were approximately $177 million.

That $9 million increase in this balance from the sequential quarter represents in part the proceeds from our gift card program during the holiday season, offset by construction cost distributions.

Our cash flow from operations for fiscal 2005 was approximately $165 million and our cash and accrued CapEx for fiscal 2005 was approximately 170 million which includes construction in progress for some 2006 openings.

We currently estimate our cash CapEx for fiscal 2006 to be in the range of 190 to $195 million.

Based on our current expansion plans and current expectations of the operating environment, we expect to be able to finance our CapEx requirements for fiscal 2006 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.

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 plans.

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 2006, other than landlord construction contributions.

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

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

For all of fiscal 2005, the Company bought back about 128,000 shares at a total cost of approximately $4 million.

We have approximately 4 million shares remaining in our current repurchase authorization, though the authorization does not require us to purchase any shares and may be terminated at any time.

To wrap up our business and financial review our company achieved solid increases in total revenues, net income, and diluted net income per share for the fourth quarter and the fiscal year.

For both the quarter and all of fiscal 2005, we achieved our stated goals to open 9 and 18 restaurants respectively, setting new growth records for our company.

And we were able to achieve that record capacity growth with consistently high quality location, consistently high quality operational management, and consistently high quality field supervision and corporate support.

We also achieved record operating income margins through our continued diligence in leveraging and controlling costs.

Even with our strong top line growth we have not lost our focus on the bottom line.

We have an achievable restaurant opening goal for 2006 and though our operating week growth will be about 17% for the fiscal year, we remain confident that we can achieve our 20% plus revenue and EPS growth goals on average over the next several years with high quality and consistency.

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

As we have only 110 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 fourth quarter, and at this time we will be happy to answer a few questions.

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

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

Operator we are now ready to take a few questions.

Thank you. [OPERATOR INSTRUCTIONS] First question comes from Jeffrey Bernstein.

Great.

Thank you very much.

I had actually just one question, it's kind of on your smaller brands.

First it's related to the Asian concept you mentioned.

Just wondering if you can give some details behind the brand, perhaps research you've done and direction you plan on taking the brand?

And then just kind of a related question on your newer concepts on Grand Lux I saw the '06 target was originally for four openings.

I don't know if that was tweaked back a little bit or perhaps pushed off into '07.

Thanks.

On our preferred concepts, I don't think -- I think, really, Mike said everything we wanted to say about it.

It's very broad based, very little Chinese and as we get a lease signed and closer to the opening, as supporters go on, we'll be happy to say more.

We've always said there would be three to four Grand Luxes.

I think there's still a chance that one will come into '06.

But I think three is really the best expectation.

It's just how they move around and when they are going to actually, when we're going to take it over, and be able to build it and get it open.

I think it's -- on the Grand Luxes, I know we did talk about four on the last quarterly call.

It's a fluid number.

It's not a reflection of our confidence in Grand Lux.

It's just a reflection of the timing of those spaces becoming available.

Thank you, Jeffrey.

Thanks.

Thank you.

Your next question comes from Matthew Difrisco.

Mike, can you update us on the current price that you have going on in 1Q in reference to your comp credits.

We have about 2% in the menu right now.

We have 1% from last summer and then the 1% tha's rolling out as we speak.

And last summer was August?

It was July/August time frame when that one rolled out and then this one is January/February.

Okay.

Thank you.

Thank you.

Your next question comes from Ashley Woodruff.

First just a quick clarification on your first quarter to date same store sales.

You said they were running above your price increase.

Could you quantify how much that is?

And do you think that's just related to weather?

Well, as I just mentioned with Matt, we've got about 2% in the menu.

We are certainly above that 2% number.

We are benefited a little bit in the month of January because of some winter storms that hit in January of '05.

But I think even without those we are still tracking above that 2% number.

Okay.

Then my real question was on the kitchen display system that you've been testing.

Can you update us on the rollout of that and what benefits or weaknesses you've seen in the store that has had it for a while.

Yes.

We've committed to putting it into all of our new stores so starting with our second store in St. Louis this month, it will be going in.

We're going to wait a little longer before we go ahead and decide on whether we're going to retrofit.

Operationally it's been a huge help in terms of smoothing out the line, having less food up there.

Making it simpler for our expediter.

We're still evaluating whether we're really getting more throughput.

We can't control how long guests sit there.

We need some more experience, but operationally, it has really been an answer to our prayers in terms of managing the kitchen.

Do you think you could retrofit your stores or do you think that's not possible really?

We have no doubt that we can retrofit.

But we really want to just see how much that will be against what we really think the financial benefits are.

We know what the operational benefits are.

We need some more restaurants under our belt before we can gauge that.

Okay.

Thanks.

Thanks, Ashley.

Thank you.

Your next question comes from Peter Oakes.

Following up on the KDS system, David, can you talk a little bit about what you've learned with that unit as far as helping you manage the kitchen, the ebb and flows, the peaks and valleys.

Kind of like day to day but within the day and what it means as far as possibly staffing levels.

What you've learned with that.

Well, we certainly know that we don't need as talented an expediter.

We know we've done some tests in restaurants where at any particular time there was over 35 dishes in the window which, again, the food doesn't come out as good.

It could be confused or mixed up by the servers and with the KDS system there's been under ten.

The orders come up, they're sold much quicker, it gets to the guests quicker.

We've been able to shave two, three minutes off of some delivery times.

So all of that has been a huge help.

Again, in the end though are we able to get more throughput is what we don't know.

But what we do know is the cooks are just a little faster all by themselves and we're still creating reports to help us look underneath and be able to staff our kitchens in a way that maybe we can see some labor savings.

That's still under consideration.

Mike, do you have anything to add?

Yes, I think Peter maybe you and I have talked.

I've talked to some folks that the real benefit of the KDS that we've seen immediately isn't necessarily just in the throughput.

It's delivering a better quality product, if you will, to our guests.

The return on that's going to come back over time with a more loyal customer.

So we're very excited about KDS.

I don't think, I don't want anybody to think that the fact that we haven't immediately rolled it out to all of our locations is any indication of us not being happy with it.

It is a big investment.

We're just trying to do it smart.

Have you seen any improvement on waste cost at this point or it is really just too soon to say?

I think it's too soon to really put a number on that.

Even in our restaurants, as busy as they are, obviously do operate quite efficiently.

So I don't know that we're going to see giant improvements on it.

But we may end up getting a little bit of a benefit from it.

I just meant like hot food going out hotter, if that's possible.

But the one other question, if I may, on the CapEx number, '05 had some impact in there related to the East Coast Bakery.

And with the uptick you're seeing there in '06 is there anything besides restaurant level expenditures that would account for the increase?

We still have probably 5 or 6 million to go on the East Coast Bakery to get to that $15 million initial investment plus maybe a little more in '06.

I do have some money in there, somewhere between 5 and 7 million probably for the third concept assuming that we do get it open this year.

Those are the biggest pieces.

But then I also have a fair amount of investment in there because we at this point with the way our schedule's laid out looks like we're going to have quite a few of early '07 openings which will incur a fair amount of CapEx in '06.

Thanks a lot.

Your next question comes form Dennis Forst.

Mike, in your normal Qs you break out what the cheesecake factory average weekly sales were.

Can you do that for the fourth quarter for us for '05 and '04?

I thought I said that, didn't I?

You said average weekly sales declined 1.8%.

I wasn't even sure if that was fourth quarter or the year.

I didn't have a frame of reference.

You didn't give the dollar number.

Okay.

I apologize, Dennis, I don't have it in front of me, but I will get that to you.

I'll ask when I call you later.

Can I just ask about stock options as long as I didn't get an answer on the other.

The $19 million is a noncash item, is it not?

That's correct.

Why would you not then break it out separately?

Why embed it in labor and G&A and then make it confusing for us to try and get a cash flow number?

It will certainly disclose it.

Whether it's included in that labor and G&A line or just disclosed in a footnote.

It will be very clearly distinguishable.

Okay, great.

All right, talk to you later.

Thanks Adam.

The next question comes from Mark Kalinowski.

Hi, Mark.

Mark, please pick up your handset, sir, and state your question.

We'll come back to Mark.

Thank you.

The next question comes from Steven Kron.

I actually had just two quick related questions.

The first is just a clarification.

Mike the 17% capacity growth -- operating week capacity growth that you are talking about for '06 is that on a 52 week basis?

That's correct on a 52 week basis.

Okay.

Can you give us a sense on the mix between new and existing markets on the schedule for this year?

You mentioned the average weekly sales may be tracking below expectations, part of the reason being new units in existing markets.

Just wondering what the mix might look like in '06?

We'll have 7 to 8 new markets out of the 18 cheesecake factories.

All of the Grand Luxes are new markets.

For Grand Lux.

For Grand Lux.

Okay.

Mike, are you still optimistic that that gap that we've talked about in the past between average weekly sales and same store sales should narrow during this year and be more commensurate with each other.

I still think it will.

But again, for the reasons that I stated in the call notes, I think it may not happen as quickly as I wanted it to.

I think it will -- that gap will close.

Okay.

Thank you.

Thank you.

Your next question comes from Howard Penney.

My question is not necessarily about the new concept and what it's going to be, but the thought process behind why you need another concept.

And just to play devils advocate here, outside of the need, the unmet need for Asian food.

I would have to imagine that there's something else internally that you would be thinking about for the need to have a third concept.

Howard, we just look out in the future when we look at all the other concepts out there.

And every one of them has become multi concept companies.

They've all needed it for high quality real estate, and high quality growth.

It's taken five years between the first Grand Lux and the second and here we are seven years later and now we're rolling along.

So as we really look out into the future and again we haven't even started building this.

If it wasn't for Mark Kalinowski, we probably wouldn't have even mentioned it.

When you look out in the future we see the need that we have to get going early.

We are very happy we have Grand Lux today.

Able to go back in the same high quality real estate that we got when we started out Cheesecake Factory.

And it gives us lots of choices where we're not stuck taking secondary locations just to hit a growth goal for any particular year.

So as we look out and we think about where we're going to be five years from now, this is the time to get that second, that third concept started because it does take a long time to prove out.

Are you there?

Yes.

No, I was just thinking about your answer and the fact that a lot of these companies that have gone to be multi concept companies have not necessarily been successful.

Not that they've been--.

Yes.

That's why we're starting early.

That's why we're starting early.

I think Grand Lux, it is very successful and is going to be equally successful in its own right as Cheesecake Factory and so we're looking out again four, five years when we're going to need it.

So we're putting one down and we're going to see how it goes.

We have other ideas as well.

So it's just we're a very creative company with such a large menu it's very easy for us.

We have such -- the broadest focus of any casual dining concept in the country and so for us to take a segment and go ahead and blow it out is not very difficult.

Again, we're talking about four, five years in the future just laying down one and testing the waters.

Thank you.

Thank you.

Thank you.

Your next question comes from Larry Miller.

Yes.

Hi.

First, I just wanted to follow-up on the pricing.

I haven't had a chance to plug the numbers in, Mike, but with that 1% price, is it your expectation that margins will be flat in 2006 ex option?

I think excluding options we should still see a little bit of a margin enhancement.

The cost of sales improvements that I talked about will help us offset some pressure in some other areas.

I think we could see a 10 or 20 basis point margin improvement for the year.

Great, thanks.

Then I just wanted to ask you about the 9 of the 16 stores that you talked about that you opened in existing markets.

You were talking about less of a honeymoon.

Do they typically open that at mature volumes and hold that or how do those stores look relative to the mature base?

For the most part they're opening pretty darn close to what we expect them to stabilize at.

I think that the fourth quarter, coming out of the third quarter and the fourth quarter where sales were kind of soft in general across the country, that impacted us a little bit.

But our expectation is that those existing markets will open just about what their run rate should be.

Thank you very much.

I think we have time for a couple more questions.

Thank you.

Your next question comes from Sharon Zackfia.

Hi.

Good afternoon.

I didn't think I was going to make it there.

Hi, Sharon.

On the gift cards, Mike, I might have missed it, but did you give out any metrics on how many gift cards you sold this holiday season?

I didn't give a dollar amount but I will tell you that our gift card sales increased about 22% over the prior year.

Okay.

So that would be a mix of comp and new stores then.

Right.

We've had our gift card program now for four years I think, it's a pretty established program.

Okay.

Have you seen any -- I mean the January numbers that you mentioned, are you seeing a disproportionate benefit, do you think from reductions?

Or has that been--?

I don't think disproportionate.

I think it certainly, like most companies you see a bigger redemption rate in January.

But for us I don't see that it's that much higher than it was last January.

Then just one other question just to harp a little bit more on the third concept.

David, is this something where you would contemplate going a lower price point than Cake or would you probably go higher, stay around the same?

Higher.

Thank you.

Last question, operator.

Thank you.

Your last question comes from Mike Smith.

Hi, Mike.

Well, good afternoon.

I've got one question so I have got to decide which one here.

Could you tell us what you expect the comp store sales gains to be on the Grand Lux?

Are they kind of like Cheesecake Factory was six to eight years ago in that they're not well known and they do build up after the initial honeymoon?

That is correct.

This year we ended up 3.3% for the full year.

I think absent The Venetian which is a more mature location it's probably even a little bit higher than that.

So we would expect them to act like you just said, like a Cheesecake Factory of six or seven years ago.

How are The Cheesecake Factories doing nearby the Grand Lux, particularly I guess the ones in Houston and Dallas?

We really have not seen any cannibalization from Grand Lux Cafes on The Cheesecake Factories in any of those markets.

Pretty much every one in the Grand Lux locations, Grand Lux Cafes are located very close to a Cheesecake Factory.

Do I have one more question here?

One more.

Okay.

The bakery, when do you expect the bakery to come online and should we factor in any savings that might come from your transportation costs?

We expect the facility to come online or to really start producing cakes late in this quarter.

I don't know about any meaningful production.

But they will be producing cakes in March of this year.

Terms of the freight efficiencies, as I said in the past, there will be freight efficiencies.

But I think that the operating inefficiencies from the learning curve will kind of offset those for a while.

I think once that settles down we'll start to realize the benefit of the freight efficiencies.

Thank you.

Thank you, operator.

You're welcome.

That will do it.

Thank you.

This concludes today's conference call.

You may now disconnect.