Cheesecake Factory Inc (CAKE) 2006 Q1 法說會逐字稿

Good afternoon.

My name is April, and I'll be your conference operator today.

At this time I would like to welcome everyone to the first quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

I would now like to turn the call over to Mr. Michael Dixon, Chief Financial Officer for Cheesecake Factory.

Please go ahead.

Thank you, April.

Hello, everyone.

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

Also with us today is David Overton, our Chairman of the Board and Chief Executive Officer; and Jill 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, April 25th, 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 in this conference call speak only as today's date.

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

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

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

Any retransmission, rebroadcast, or redistribution of this call without the express written consent of The Cheesecake Factory Incorporated is prohibited.

Okay.

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 first quarter of fiscal 2006 that ended on April 4, 2006.

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

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

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

Before I get into the details of our results, let me remind everyone that we did implement Statement of Financial Accounting Standards No. 123(R) in the first quarter, and consequently, our results reflect the impact from expensing stock options.

For ease of comparison, I will attempt to isolate the stock option impact on the various P&L line items as we go through our comments today.

So with that little bit of accounting housekeeping out of the way, let's talk about our operations.

Performance of The Cheesecake Factory restaurants in the first quarter, compared to the first quarter of last year was heavily impacted by what I'll call calendar shifts.

For the first time in our history, we had two significant sales-impacting holidays shift out of the quarter compared to the comparable quarter of the prior year.

As our prior fiscal year ended on January 3, 2006, the New Year's week holiday traffic fell in the fourth quarter of our last fiscal year.

In addition Easter week, which is a revenue-generating holiday for us because of the number of warm weather and Spring Break destination markets in which we operate, moved from the first quarter of last year to the second quarter of this year.

Specifically the loss of these two holidays resulted in the current quarter resulted in an estimated $4.5 million impact on our comparable revenues.

Combined with some continued slightly slower traffic in general, that many in the industry seem to be experiencing, revenues for the quarter were up 14%.

While we think we did an admirable job of managing our costs of sales and G&A expenses, this level of sales growth impacted our margins, as some de-leveraging of labor and other operating expenses is reflected in our operating income.

I'll cover this in more detail in our review of the operating margin.

So let me spend a few minutes to provide some additional color on our top-line results for the first quarter and update you on our new restaurant growth plan for the remainder of fiscal 2006.

And after that, I'll briefly review our operating margin trends for the first quarter.

Our total restaurant sales increased approximately 15% during the first quarter, to $293 million.

That 15% increase was comprised of an approximate 19% increase in total restaurant operating weeks, resulting primarily from the openings of 20 new restaurants during the trailing 15-month period, coupled with an approximate 3% decrease in average sales per restaurant operating week.

Our comparable sales at The Cheesecake Factory restaurants decreased approximately 1.6% for the quarter.

Now it's interesting to note that the only other time in the past 13 years that we've experienced negative comparable-store sales for a quarter was in fiscal 2003, when we also had an Easter holiday shift.

At that time it was also combined with some fairly severe weather.

This time it was combined with an added holiday shift.

Excluding the estimated impact of the calendar holiday shifts, comparable Cheesecake Factory sales would have increased approximately 0.6%.

This is a little bit below our current menu price increase of approximately 2% and reflective of the slightly slower traffic that we and several other casual dining companies have experienced of late.

It's important to remember that, unlike most national restaurant chain operations, we do not rely on media advertising or discounting to drive short-term sales increases for our upscale, casual dining concepts.

Instead we rely on our 28-year reputation with consumers for excellence in food, service, ambiance, and value to sustain our industry-leading sales productivity metrics over the long term.

The Cheesecake Factory has always been an operating Company, focused on great restaurateuring and operational execution.

We believe this is the best long-term, competitive strategy for our upscale concepts.

We very fortunate to have some of the best restaurant operators in the industry, led by our COO, Peter D'Amelio, our four regional vice presidents, and the rest of our outstanding restaurant operations team.

With The Cheesecake Factory concept as busy and productive as it is, particularly during peak meal periods, we really 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, nation 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.

Having said that, we do believe that in the short-term, we will continue to experience slightly lower traffic, like, again, like many others in the casual and upscale, casual dining segment, which will keep our comparable sales growth positive but slightly below menu price increases.

For the first few weeks of the second quarter, sales are benefiting from the Easter holiday shift, and comparable sales are tracking just below our menu price increase.

With respect to menu pricing we just completed our winter menu change that includes an approximate 1% effective menu price increase.

This laps the 1% menu price increase we rolled out in the first quarter of the prior year.

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.

However, I will remind everyone that we view menu price increase as a defensive measure to protect our margins against sustained or long-term cost pressures.

We do no use menu price increases to drive short-term revenue increase or to cover temporary cost increases.

Average weekly sales of The Cheesecake Factory restaurants decreased approximately 3.4%.

After adjusting for the impact of the calendar shift, average weekly sales decreased approximately 1.2%.

This is slightly behind this change in comparable restaurant sales.

As we discussed in our last conference call, when we open in existing markets, we generally do not experience, nor do we expect the honeymoon sales trend of 130% or so of sustainable volumes that we often see in new markets. 12 of the 18 restaurants opened since the first quarter of last year are in existing markets, as we continue to capture additional, profitable market share in those areas that we know very well.

We are pleased with all our new restaurant locations, including the two we recently opened in the first quarter just ended, Chesterfield, Missouri and Southlake, Texas.

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

Comparable sales at the Grand Lux Cafes increased 3.6% in the first quarter, or 4.8% after adjusting for the impact of the calendar shift.

Our location in Long Island, New York, continues to deliver impressive performance, with average weekly sales in excess of $220,000.

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

Grand Lux continues to solidify itself as a strong, viable second concept for The Cheesecake Factory.

Moving to our restaurant growth plan.

As I just mentioned, we successfully opened two Cheesecake Factory restaurants in the first quarter, as planned, and are on track with our fiscal 2006 goal of opening as many as 21 new restaurants, including two to three 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.

Our restaurant development model is very different than the traditional cookie-cutter chain restaurant development model, where pad sites are more easily acquired, the design and construction processes are simplified by having more standardized restaurant layouts, and the restaurant companies have more control over the overall development process.

We currently lease all of our restaurant locations, many of which are in newly-constructed or to-be-constructed retail developments, such shopping malls, entertainment centers, cityscape strip centers, and so forth.

As a result, we rely heavily on our landlords to deliver our leased spaces to us in a timely manner according to their original commitments so that we can build them out in a timely manner.

Our locations are upscale and highly customized, which helps to create the non-chain image that we enjoy with consumers and which we believe represents a significant, competitive advantage for us.

So that also creates some unique design and permitting challenges.

Once we get the spaces from the landlords and obtain our building permits, our construction and pre-opening processes are typically consistent, usually taking four to six months to complete, on average.

So as a result of these factors, it is not uncommon to have planned openings move a few weeks or even a month due to various factors outside of our control.

But having said that, we remain very confident in our ability to achieve our full-year restaurant growth plan for 2006.

We always pick great locations, and once we get our restaurants opened, they have always been profitable.

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

So based on the information we have as of today, we expect to open two restaurants in the second quarter, five to six restaurants in the third quarter, and 11 to 12 restaurants in the fourth quarter.

We are very confident in our ability to achieve our 2006 opening plan, and we believe we will be able to achieve an approximate 20% square footage growth for the year.

However, since many of these opens are late -- openings are late in the year, we won't realize the benefit of them until fiscal 2007.

As we mentioned on our last call, we 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 remainder of the year on our quarterly conference calls.

We'd also 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.

Before I move on to our bakery operations, I will note that we have no real meaningful updates on the potential third concept we discussed last quarter.

We have not yet signed a lease for this restaurant, but we are currently evaluating potential sites and we are still targeting to open no later than the first half of fiscal 2007.

Now, moving to our bakery operations, we opened our East Coast bakery facility, located in Rocky Mount, North Carolina, late in the first quarter.

The plant was opened on time and on budget.

At this time, we are continuing our expected commission of the plant and expect to be making production cakes this week.

Our intention is to ramp up production at this location gradually over the next couple months, as the work force goes through its learning curve.

Bakery sales, net of intercompany bakery sales, decreased slightly in the first quarter, to 12.9 million versus 13.4 million in the prior year.

This decrease was expected, due to the fact that we were lapping a 44% increase from the first quarter of fiscal 2005.

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

We will leverage our added capacity from our East Coast facility to continue to meet the increasing requirements of our warehouse club customers and to pick up new, profitable business as it comes available.

We currently expect bakery sales to increase approximately 8 to 10% in fiscal 2006 compared to the prior year.

Please remember that bakery sales will only account for about 5% of our total sales for the fiscal year.

Although 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 roll to our business will continue to be at service as a dependable, high-quality producer of desserts for sale in our own restaurants, which will sell in excess of $170 million of desserts made in our bakery production facilities during fiscal 2006.

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.

Well, that covers our top-line performance for the first quarter and our new restaurant opening plan for the remainder of fiscal 2006.

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

Cost of sales decreased to 25.1% as a percent of revenues for the first quarter, compared to 25.7 for the same quarter of last year, and compared to 25.9 for the comparable December -- or for the December quarter.

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

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

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

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

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

Based on these contracts and our current expectations for those items that we cannot contract, we continue to 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, as reported, were 32.4% of revenues for the first quarter, which includes $1.6 million of stock option expense.

Excluding the stock option impact, labor expenses were 31.9% of revenues, which is up from the 31% for the same quarter last year and the 30.5% from the sequential quarter.

The year-over-year increase in labor expenses as a percent of revenues is primarily attributable to the calendar shift I discussed earlier.

We expected a certain amount of deleveraging of labor costs with the lower average sales per week.

However, when sales do decrease a little bit, it is a delicate balance to ensure we are delivering the level of service our guests expect, while still achieving reasonable labor costs.

In these instances, we will never sacrifice the guest experience for a short-term labor cost savings.

For fiscal 2006, we now expect labor expenses, before the impact of stock option expensing, to be approximately 10 basis points higher than the prior year, primarily due to the lost leverage experienced in the first quarter and slightly lower traffic predicted for the next quarter or two.

Please note that this estimate does not -- does not consider the impact of any potential minimum wage increase in California.

Other operating expenses were 23.6% of revenues for the first quarter, which is up from the 23.1% reported for the same quarter last year, and the 22.1% from the sequential quarter.

The 50-basis point increase from the prior year is due almost entirely to increased cost for utilities.

Natural gas expenses, as a percent of restaurant revenues, increased 40 basis points from the first quarter of the prior year.

In addition, we lost some leverage on our fixed costs due to the slightly lower average sales per week, and we had about $100,000 of stock option expense included here as well.

For the full year of fiscal 2006, we currently expect other operating costs, as a percent of revenues, to be about 20 to 30 basis points higher than fiscal 2005, due primarily to the increased cost for gas and electric service to our restaurants.

G&A expenses, as reported for the first quarter, were 5.1% of revenues, which includes $2.6 million of stock option expense.

Excluding the stock option impact, G&A expenses were 4.2% of revenues, compared to 4.3% for the prior year and 4.2% for the sequential quarter.

As we have always done, we continue to effectively manage our overhead costs in line with our revenues.

Our G&A expenses consist of two major components -- the cost for our corporate bakery and field supervision support team, 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 2006, we plan to continue to add resources to the corporate support, training, and field supervision activities of our business, commensurate with the planned openings of as many as 21 new restaurants during the year.

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 do continue to add -- to strengthening our infrastructure slightly to properly support our restaurant and bakery operations.

Depreciation expense was 4% of total revenues for the first quarter, compared to 3.8 for the first quarter of the prior year, and 3.9% for the sequential quarter.

Looking forward, our current expectation for total depreciation expense, as a percentage of revenues for 2006, in the 3.8% to 3.9% range, based on our expected growth and investment plans.

Actual pre-opening and costs -- actual pre-opening costs incurred during the first quarter were approximately $4.3 million, compared to 4.4 million for the same quarter last year.

We opened two restaurants and a bakery production facility during the quarter just ended, compared to five restaurants in the same quarter last year.

We also incurred stock option expense of about $100,000 in the current quarter and pre-opening costs in both quarters for other openings in progress.

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

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

The pre-opening 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 pre-opening costs on 11,000-square-foot, single-story restaurant in an established Company market to average approximately $785,000.

We will also incur some indirect pre-opening costs associated with our corporate support team's involvement in new restaurant openings.

Analysts and investors should factor enough pre-opening costs into their models for as many as 21 new restaurant openings during fiscal 2006 and several restaurants we will open in early fiscal 2007.

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

As I mentioned earlier, two or -- two to three of these planned 21 openings could be Grand Lux Cafe locations, for which we currently expect pre-opening costs to run approximately 10 to 15% higher than our normal pre-opening costs for Cheesecake Factory restaurant.

For the full year of fiscal 2006, we currently expect total pre-opening costs for both the restaurants and the East Coast bakery to be in the range of 23 to $24 million.

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

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

Now we recognized $1.5 million of other income in the first quarter related to the value of the land and building contributed by the local government for our East Coast bakery production facility, which, as I discussed earlier, opened in the first quarter.

Our effective tax rate for the first quarter was 33.3%, which was slightly lower than the 34.9% we initially projected for the fiscal year, as we were able to clear some estimated liabilities subsequent to the completion of our -- of an IRS audit during the quarter.

We currently plan on using an effective tax rate of 34.9% for the remaining quarters of fiscal 2006, subject to adjustment if necessary as we move through the year.

Before I move off the income statement, let me touch again on stock options accounting.

Our total stock option expense reflected in the income statement for the first quarter was approximately $4.3 million.

This is in line with our full fiscal year 2006 estimate of $19 million, of which about 6 million will be charged to the labor expense line, 12 million will be charged to general and administrative expense, and the remainder will be split between other operating expenses and pre-opening expenses.

This amount is consistent with prior year's option costs, as reflected in our footnotes and adjusted for year-over-year growth.

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

As of April 4th, our cash and marketable securities on hand were approximately $185 million.

Our cash flow from operations for the first quarter was approximately 29 million, and our cash and accrued CapEx for the first quarter, net of $5 million of deemed landlord financing, was approximately 27 million, which includes construction in progress for upcoming 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 plan.

We have no funded debt in our capital structure, and currently do not anticipate a need for funded debt or any other external financing during fiscal 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 six million -- 6 million shares in the open market.

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

We have approximately 4 million shares remaining in our current repurchase authorization, 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 achieved respectable results for the quarter.

Revenues were a bit lower than we would have liked due to the calendar shift and some continued traffic weakness in the casual dining segment.

In addition, the lower revenues, as well as some significant utility cost pressure impacted our margins.

We will diligently manage our cost, as we always do, to the slower traffic expected for the next couple quarters, but our primary focus will remain on the long-term growth of The Cheesecake Factory and the continued enhancements to our productivity and profitability.

To this end, we are very pleased with the progress of our productivity initiatives, such as the Kitchen Management System and labor scheduling tools, which we believe will allow us to more effectively and efficiently deliver a better experience to our guests.

In addition, our growth initiatives, such as our site selection software, are helping us development an inventory of potential restaurant locations that we feel will be equally successful to our current roster of industry-leading sites.

On the growth side, we achieved our stated goal to open two restaurants in the quarter, and we are on track to open as many as 19 more restaurants this fiscal year.

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

As we only have 112 restaurants open as of today, we believe that our business has a sustainable period of profitable growth ahead of it 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 first 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 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.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from the line of John Glass with CIBC.

Hi, thanks.

I just wanted to sort of delve a little bit more into the weakness in traffic or comps you've seen at The Cheesecake Factory.

Can you talk about weather?

You didn't mention that as one of the factors, but imagine it probably had something to do with it.

So is there any way you can parse that out?

And can you talk about the regions you're seeing weakness in, if it's outside of California, maybe day part, if it's concentrated in -- earlier in the day versus dinner?

Just some more color on that, please.

Sure.

I think to the first part of your question, there was some weather impact, John, I think January was probably a little more favorable in the last year;

February and March, a little worse.

On the balance, in the aggregate, it was probably wasn't a huge impact, although, in certain geographic areas it was significant, such as Northern California and some other parts of the country and some of the eastern areas as well.

As for general traffic on a geographic basis, we continue to see the biggest weakness in the Midwest, which we've talked about for the past several quarters, that hasn't changed.

We've also seen a little bit of weakness, more than we would like, certainly, in Southern California, and -- yes, that's certainly been some weather impact there.

It's been a little bit colder and rainy down in this part of the country as well.

And I think those are the two segments that stand out the most.

As for day parts, I would say at this part, we've seen a little bit of traffic softening in what we would consider the mid-afternoon segment, as well as the late-night segment, which could be a lot of reasons for that.

Maybe just we haven't extended the meal periods as long as we have in the past.

But that's really where the slower traffic is showing up.

We're still basically at capacity during those peak meal period times.

Got you.

Thank you.

Your next question comes from the line of Steven Kron with Goldman Sachs.

Hello?

Okay.

Next question?

Okay.

Your next question comes from the line of Jeffrey Bernstein with Lehman Brothers.

Great.

Thanks, very much.

I just had a broad question on throughput.

I guess, the most frequently asked question we get pertains to how you can service more customers, getting more people into the store, boosting comps.

So, I guess, my question has two parts.

First, just wondering if you can give us an update on the different kitchen initiatives we've spoken about in the past?

I know you mentioned the KDS system.

Previously, you mentioned time motion studies.

Just wondering if we can get updates on the progress of that and where you're seeing the benefits most?

And, then, second, just, perhaps, what are the bigger initiatives that we should be looking at going forward as we move through '06 in terms of improving the operational efficiency in both front and back of the house?

Thanks.

Thanks, Jeff.

I think the -- on the kitchen display system, we're calling it the Kitchen Management System, KMS.

It is currently in three of The Cheesecake Factory restaurants, and we're in the process of rolling it out to all of the Grand Lux Cafes.

It will be included in all of our new restaurant -- Cheesecake Factory openings this year, as well as new Grand Lux Cafes and probably some of the larger Cheesecake Factory restaurants will be retrofitted this year as well.

I think it's fair to say that we are incredibly pleased with the results that it's delivering to us, both in terms of the quality of the food coming out of the kitchen, the timing of the delivery to the guest, I think improving the overall guest experience.

We are seeing a little bit of labor savings on the kitchen line as a result of this as well.

So we are very happy with that and continue to move forward with it.

The time-and-motion study has resulted in some very valuable labor data for us, which allows us to schedule labor more efficiently.

And we're in the process of piloting that in, I think, three or four restaurants, which is just starting.

So we'll get some more information on that as we move forward.

Those are the big initiatives from a productivity --

More of those will help with labor, more than they will with throughput at this particular time.

Right.

Those are the big initiatives we have at this moment, Jeff.

Next question?

Yes.

Your next question comes from the line of Sharon Zackfia with William Blair.

Hello, Sharon?

Hi.

Can you give us an update on where the minimum wage proposal stands from a government prospective?

In California?

Yes.

The last I've heard is that there's competing proposals out there, and it could very well become a ballot initiative at the end of the year, which means it's unlikely we'll see anything happening this year.

But we're -- some of the increases are significant, raising it $1, and then another increase post that.

But at this point, it's all speculative, because there's two or three initiatives that different constituencies are pushing.

And, so, it's too hard to say, although, it -- like I said, it doesn't look like it will happen this year.

Okay.

And, then, separately, I'm aware that casual dining trends have been somewhat volatile over the past couple of quarters, but -- I mean, how do you, as a management, gain comfort that what you're seeing is a broader issue and not something specific to the concept?

I mean, what do you look at, whether it's consumer responses to the concept, your wait times or, just, anything you can tell us about how you look at the business internally so that you're comfortable that the concept is still on track?

Well, again, because -- this is David.

Because we're still so very busy and selling all the same things we normally sell through our main lunch and dinner period.

It's just little tiny bits here and there.

And our alcohol sales are excellent.

In fact, they're up.

Our entrees are up.

Our check average is up.

So we think that, again, the economy, the -- people's -- that extra burden of gasoline prices and utilities and so on, that individuals -- that it's just little bits here and there in certain areas.

So we, obviously, have gone through and analyzed every single piece of our business.

And right now we feel that it just is this particular period, and if the weather picks up and things stabilize, that we'll be fine.

Having said that, we're still looking everywhere and doing everything we can to make sure we keep our guests excited about coming to Cheesecake Factory.

But if you walked in one of them, you certainly wouldn't notice that we're down 1% or even -- or know where to find it.

Mike, do you want to add to that?

No, I think that that's right on.

I think we're looking, Sharon, at about two quarters, maybe two-and-a-half quarters where the comp sales have trailed a little bit behind menu price increase, not huge, but maybe 1 point or a little bit more than 1 point, as in this quarter.

So I think that there's certainly a little bit of a traffic issue.

We have seen it in other areas, other parts of the industry.

As for our own operations, we feel very comfortable that, with what we're doing operationally, is excellent.

Our commitment to service scores, mystery shopper continue to remain very strong.

I think the new menu items we put out -- that David and the team have put out have been very well accepted.

So I think we're still doing all the right things, there's just a little bit of softness that's more of an macro issue than it is just specific to Cheesecake.

Do those macro issues make you a little bit more hesitant to use pricing going forward to the extent you have in the past?

I would say, yes, but, I mean, again, we've always been very cautious with our price increases and, if anything, we'll just be even more cautious.

Okay.

Thank you.

Your next question comes from the line of Paul Westra with Cowen.

Hi, there.

It's actually Colin Guheen for Paul.

Just one question here on the comp.

How much of the comp from the calendar shift due to Easter do we get back in the second quarter?

Well it's hard to say.

As I mentioned, for the first few weeks of the quarter, we're tracking just under our menu price increase.

And we've already lapped Easter.

So I think we're still experiencing some of the slower traffic that we mentioned, so I think we're -- we'll still be targeting to get close to menu price increase.

I don't think that we'll get a bigger benefit than that.

Okay.

And the menu price increase is at 2?

Right.

And just a quick question on the retrofit opportunity with the KMS system at existing Cheesecake Factorys and where you guys stand with that?

Again, for -- on The Cheesecake Factorys, we're only going to retrofit probably four or five locations, so it's not too many.

It will be --

Altogether, this year we're going to be putting it in about 30 stores.

Right.

So that's a lot for this year.

We're going to study it.

We want to make sure that we're getting all the data we want from it before we just go and rush.

So when we do put it in the rest of the restaurants, which we think will be a good idea, we'll get results immediately from it.

So we feel this year we're going to put it in the 30 stores, and then we'll go ahead and have a plan of attack for next year.

So to understand how to actually implement it in the existing stores versus -- you already know that the benefits that it's going to bring to those stores.

Is that a fair way?

Some of them.

But we are -- we still don't have the full complement of reports, so we can go after better labor scheduling and speed up the process even more.

So as we get more information and get better reports, we're able to make some more changes, and I think it's best that we go ahead and do Grand Lux because it will be the whole chain, but, then, with Cheesecake, we still have more to learn before we want to drop it in the whole thing.

It's an easy decision for new restaurants, because the incremental cost from the old system is minimal.

It's just, you want to make sure the benefits are there before you incur the retrofit costs throughout the chain.

Understand.

Thank you.

Okay?

Your next question comes from the line of Steven Kron with Goldman Sachs.

I'll try this again.

Can you guys hear me?

Got you.

Yes.

Okay.

Good afternoon.

I just had follow-up to the comp question, the same-store sales question.

We've talked about the price -- the menu price increasing, and that being 2%, and you guys excluding seasonal shifts plus 0.8.

Of that 1.2 spread, can you kind of parse through and tell us what's, kind of, traffic and what might be mix?

Are you seeing the customer use the restaurant any differently?

I would say it's almost all traffic.

David, I think, mentioned earlier, our average check is actually tracking nicely, slightly ahead of menu price increase at the moment.

And, then, the mix -- the mix at The Cheesecake Factory doesn't change that often, it's really fairly stable.

So it's really almost all traffic.

Okay.

And, then, one last question on unit development.

You talked in the past -- in the past couple of months about some units slated to open at the beginning part of '07.

Is there any visibility on that?

Or -- it sounds as if it's going to be a little bit more closer to the front end on some of those units next year.

Any thoughts there?

Right now, though we don't have it exact and as you know, things move around a lot, but we're hoping to have seven or eight, at least, in the first half of the year, somewhere around that number.

It could be more, it could be less.

But those are ones that look like they can fall in the first half of this year -- I mean, next year.

Okay.

Thanks.

Your next question comes from the line of John Ivankoe with JPMorgan.

Thanks.

Hi.

Just a couple of housekeeping questions, and maybe one quick follow-up on that.

Hey, Mike, what was the pre-opening for the Rocky Mount facility in the first quarter?

It was right around $1 million, just probably a touch over that.

And was there any other income -- income statement impact from that?

Or would that be in future quarters?

In future quarter.

Okay.

And if I may, could I get an update on the takeout, or maybe more specifically, the curbside initiative, if there's any new development or movement in takeout sales at your concept?

Thanks.

Okay.

The curbside initiative is now in, probably, 60 or 70 restaurants.

And I think where -- as we've mentioned on a prior call, we're not aggressively pushing it out to existing restaurants except for those where we feel will get the biggest bang for a buck.

It is included, basically, in all new locations.

And, again, I think the program, as we've always said, is operating very well, it is a great guest service.

We haven't seen a tremendous increase in our to-go sales, which, as we've said in the past, we're already running to close to 9%, which is a pretty good -- pretty good clip.

So we're very happy with the program and we'll continue to evaluate putting it in some of the older stores over time.

But we're not in a hurry at this moment.

Great.

Thanks.

Your next question comes from the line of Bryan Elliott with Raymond James.

Good afternoon.

Just a quick question on the average unit sales, which I believe -- if memory serves from prior conference calls, the difference between now and maybe a few years ago is that the initial honeymoon pop and sales levels shortly after opening have receded a bit relative to where they were a few years ago, and that is one of the main factors creating the persistent gap between same-store sales and average weekly sales.

Is that an accurate recollection?

That's a fair statement, yes.

When you go back and look at, then, those stores that exhibited a slightly different opening pattern, do you see any changes in their settling-in pattern?

In other words, are they as productive from a sales return on capital standpoint once maturity has hit, year two, for example, or however you all would measure it internally?

Are they still at the same levels that we would have seen, say, three years ago?

I would say that's a fair statement.

Certainly, the return's going to be a little bit less, only because the construction costs have gone up and those restaurants are a little bit more expensive to build.

But in terms of, within the four walls, the sales, the operating margins that are being delivered, they're comparable with our other restaurants.

And I think that's reflected by the fact that they're -- as they roll into our comp base, again, absent some of the holiday shifts, we're still experiencing positive comparable-store sales.

All right.

And real quick, if I could, the, sort of, write-up of the land donation from North Carolina I assume was a non-taxable event?

Correct.

Thank you.

Your next question comes from the line of Matt Difrisco with Thomas Weisel Partners.

Hi, I have a question and a favor to ask.

First, on the favor, can you, before the call's over, just sort of go through the dollar options expensing through the income statement, because I think -- as far as I know, I think you're one of the first restaurant companies to have options expensing in pre-opening.

But if you could just help us so we can get to a comparable basis for margins?

And, then, my question is a follow-up to John's regarding the pre-opening cost.

I guess, you said, now, it's a $1 million for the bakery facility.

Can you break that out further down to what amount of dollars or percentage came from stores left over from fourth quarter and what potentially from 2Q because just at first blush, two stores still at that 3-million-plus number, 3.4 million, relative to 5 stores opening last year seems kind of large, especially considering one of the stores being in Texas, where I know it's a big state, but you have several stores already in Texas.

I would have thought the pre-opening would have been a little bit maintained there.

Yes, I think pre-opening was probably a little bit higher than we would have liked.

I think there's -- without getting too specific, because I don't have it in front of me, but there is several hundred -- 2 or 300,000 from the prior year end fourth quarter that kind of rolled into this year, which we didn't capture at the end of last year.

Probably a couple hundred or so related to openings coming up, which I think accounts for the bulk of that overage.

Okay.

So should that imply, then, that they're going to open relatively early in the second quarter?

No, I think some of it's also related to -- the openings for the second quarter are planned probably for mid to late in the quarter.

But we have started to incur some costs.

We're also -- I think that kind of rolled into that is, sort of, the management recruiting that's going on and making sure that we're getting our managers on board early enough for these openings.

And, specifically, we've seen a little bit of tightening of that market.

We probably had -- as a result, had to hire some people earlier, especially for the Grand Lux Cafe concept, since we don't have as many locations to train them in existing facilities or to pull experienced people from existing facilities.

So that's been front loaded a little bit as well, much more so than the normal 2.5 pre-opening cycle.

So are we still good, though, with the number that you used in the 10-K regarding the pre-opening, or should we nudge it up given the -- ?

I think there we said 24 to 25 million.

I think in the guidance I just gave, I said 23 to 24.

It's come down a little bit primarily because I had some money in there for the third concept in the chance that we might get some of it open this year -- get it open this year, but since that looks like it's going to be second quarter or so of 2007, I don't expect to be incurring pre-opening for that.

Okay.

And, then, if you could just get back to the option sometime before the call is over that would be great.

Thanks.

Yes.

I was just looking for that number.

I think I had -- just so you know, I had one point -- let me just go through my notes real quick and I'll give you that number.

In the labor line, we had $1.6 million.

In the other operating expense, we had approximately 100,000.

In G&A, there was 2.6 million.

And in pre-opening, there was approximately 100,000.

And the rules under FAS 123(R) as we read them, and I believe interpret them correctly, is the option cost needs to follow the labor.

And so to the extent that we have labor in pre-opening, that has option expense associated with them, then that option expense should be recorded there as well.

Interesting.

Okay.

Thank you.

Okay?

Thanks.

Your next question comes from the line of Larry Miller with Prudential.

Thank you, very much.

I was just -- wanted to ask a different question about G&A, Mike.

It was actually pretty well controlled, better than I would have thought, given the negative comp-store sales.

Can you talk about anything in that line or any color on that line that might give us an idea, either if you're controlling that better or there's a timing issue or some bonuses?

Well I can tell you it's -- well, I guess, a little bit bonus.

We certainly haven't accrued any bonus for the full fiscal year as a result of the overall results, but other than that, I think as we always do, we manage that line very closely.

And to the extent that we can either postpone completely or just delay for a couple of months the bringing on of new hires, that's what we will do.

And, again, I think we've done that in the past and we did it again this quarter.

Okay.

I also had a question for David.

David, can you kind of update us on the sales performance of some of the newest Grand Luxes and just your overall level of confidence with the brand as it stands today?

Yes.

I think our -- the last ones opened have all opened great.

Sawgrass is doing over 200,000?

220,000.

Oh, Sawgrass, 200,000.

Yes, Sawgrass is over 200,000, which we think is great.

It opened before the -- it was the first one open in this new, little center.

And so we're extremely happy with that.

And, of course, Long Island, as we said, is over 220 and growing, and we haven't even opened the patios yet on -- in Long Island, where we have large patios for the summer.

So we've been very, very happy.

The comps have been good.

The old stores are doing great, and we couldn't be happier.

And the sites that we have coming on this year and next year are all -- heavily urban, very, very densely populated sites, or some of the best sites that we have Cheesecake Factorys near them.

So we're excited about the sites that are coming on as well that are some of the best in the country.

Thank you.

Operator, we have time for one more question.

Okay.

Your next question comes from the line of Andy Barish with Banc of America Securities.

Hi, guys.

I just had one other clean-up.

Most of the other questions have been asked.

On the Rocky Mount pre-opening, does any of that continue here in the 2Q?

I think we're pretty well done with the pre-opening for Rocky Mount.

And, as I mentioned, we expect to start -- we've got a little bit of -- maybe a week or so that kind of leaked into this quarter, but nothing substantial.

Thank you.

Okay.

Thank you, Operator.

I think we're all set.

Thank you, sir.

This concludes today's conference call.

You may now disconnect.