Cheesecake Factory Inc (CAKE) 2006 Q4 法說會逐字稿

Good afternoon.

My name is Jeremy, and I will be your conference operator today.

At this time, I would like to welcome everyone to the fourth-quarter fiscal 2006 earnings conference call. [OPERATOR INSTRUCTIONS].

Thank you.

Mr. Dixon, you may begin your conference.

Thank you, Jeremy.

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.

Not with us is Peter D'Amelio, whose last day with us was last Friday.

David and I both want to thank Peter for his many years of incredible service to The Cheesecake Factory, and wish him nothing but success in his future endeavors.

Before we get into the details, let me briefly cover our cautionary statement regarding risk factors and forward-looking statements in general as well as a quick housekeeping item.

Throughout our call today, items may be discussed that are not based on historical fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, and in our filings with the Securities and Exchange Commission.

All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements.

Before I get into the details of results, let me remind everyone that fiscal 2006 is a 52-week year for us, and fiscal 2005 was a 53-week year, with an extra week in the fourth quarter of fiscal 2005.

Where practicable, I will omit the estimated impact of this additional operating week for many financial or statistical comparisons.

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 2006 that ended on January 2, 2007.

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

We will also discuss our full-year results for fiscal 2006, and give a little color on our plans for fiscal 2007.

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

We would like to finish this call up in about 45 minutes.

So let's get into the details.

As we reported on January 8th, total revenues at the Cheesecake Factory for the fourth quarter increased approximately 18% from the comparable 13-week period of the prior year.

Our total restaurant sales increased approximately 17% during the fourth quarter to $336 million, excluding the $23 million benefit from the additional operating week in the prior year.

On a reported basis, total restaurant sales increased approximately 9%.

This increase was comprised of an approximate 9% increase in total restaurant operating weeks, resulting primarily from the openings of 30 new restaurants during the trailing 15-month period, coupled with a basically flat average sales per restaurant operating week.

Overall comparable sales at the Cheesecake Factory and Grand Lux Cafe restaurants increased approximately 0.8% for the quarter, also as previously reported.

We did not take a menu price increase in our summer menu change so we had an approximate 1% effective menu price increase in the menu from July to December of 2006.

While we believe the decision not to raise prices last summer was the right move for the long-term benefit of the company, this decision did impact our margins, and I'll talk about this in a few minutes.

We are currently in the final stage of rolling out our winter, 2007, menu which should be completed by mid February.

This menu change included an approximate 1.5% effective menu price increase to help offset known cost pressures, primarily related to labor.

I will remind everyone that we view menu price increases as a defensive measure to protect our margin against sustained or long-term cost pressures, not as a means of driving revenues.

Returning to the fourth quarter, average weekly sales at the Cheesecake Factory restaurants decreased slightly, about 0.9%.

This is a little behind the change in comparable restaurant sales, but the gap has narrowed since our third-quarter earnings report, primarily as a result of the significant number of new restaurants opened in the fourth quarter delivering solid sales performances.

As we mentioned in our press release, our 13 openings in the fourth quarter are averaging weekly sales of nearly $210,000 since opening.

In fact, several markets that a few years ago we might have considered too small to support a Cheesecake Factory are proving to be very successful.

As a group, our Albany, New York;

Omaha, Nebraska;

Buffalo, New York; and Boise, Idaho, locations are averaging weekly sales in excess of $245,000 since opening.

These are impressive numbers in what is not yet a normalized sales environment and in slightly smaller markets.

This gives us a lot of confidence about our growth plan.

While the gap between comparable restaurant sales and average weekly sales is relatively small this quarter, I think it is worth reminding our investors of some of the things that can impact this comparison.

First, the timing of new restaurant openings and the associated honeymoon sales period will always have an impact on the variance between comparable sales and average weekly sales.

When we open in existing markets, we generally do not experience, nor do we expect, the honeymoon sales trends of roughly 130% of sustainable volumes that we often see in new markets. 14 of the 20 Cheesecake Factory restaurants opened in fiscal 2006 are in existing markets.

The strategy of capturing additional, profitable market share in areas that we know very well and where our brand recognition is high has worked well for us.

And we will continue to maximize this opportunity in the future.

I'll give an update on our 2007 markets in just a minute.

Second, the restaurants we have opened over the last 18 months are considerably smaller on average than those open prior to that time period.

The average number of productive seats is about 5% less at those restaurants not in the comp base compared to those restaurants in the comp base.

Now this is a function of opening restaurants in great markets as our preferred sites become available and appropriately fitting the restaurant size to those markets.

Most importantly, the returns at these locations are in excess of our cost of capital and deliver a fully capitalized return in excess of our 25% threshold.

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

Comparable sales at the Grand Lux Cafes increased 7.8% in the fourth quarter.

For fiscal 2006, our very first Grand Lux Cafe at the Venetian resort in Las Vegas passed the $26 million revenue mark, and our Chicago location exceeded $15 million in revenues.

In addition, our newest location in Boca Raton, Florida, continues to do well, averaging over $215,000 in weekly sales since opening.

We believe it's a very solid performance for a young concept without advertising or promotions.

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

Longer term, we feel very confident that there is plenty of profitable growth ahead for both the Cheesecake Factory and Grand Lux Cafe concepts.

With only 131 restaurants opened to date, we remind our investors that the majority of our expected revenue growth for the next few years will continue to come from the openings of new restaurants.

Our longer term expectation for annual comparable restaurant sales growth remains in the range of 1% to 2%.

Moving to our restaurant growth plan, we successfully opened 13 restaurants in the fourth quarter and achieved our stated goal to open 21 restaurants for the full year, including one Grand Lux Cafe.

During the fourth quarter, we opened 13 restaurants over an eight-week period, and set new records for us by opening a couple of these locations in about 75 days.

This was a significant accomplishment for us, and while it was a challenge, we successfully opened all these locations with the same level of quality we always demand.

We certainly recognize that a backloaded opening schedule is the nature of our business, due to the types of locations we choose.

We are not only prepared to accomplish this type of opening schedule in all functional areas of our business, but we consistently deliver on our stated growth objectives, as well.

As for 2007, our overall revenue growth target is 18%.

This will be delivered primarily through new restaurants.

Our goal is to open as many as 21 new restaurants, including as many as five to six Grand Lux Cafes.

I would say that 20 to 25% of these openings will be in new markets, with the remainder representing opportunities to return to those markets where we have been very successful.

In addition, a large number of our targeted 2007 openings will be in the northeast, which has proven to be a very strong geographic area for us, with a number of high-volume restaurants already operating in this region, but certainly enough population density to support several more.

Our current plan calls for one Grand Lux Cafe opening in the first quarter, one Cheesecake Factory restaurant opening in the second quarter, and the remaining openings falling in the third and fourth quarters.

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

As a reminder, we currently lease all of our restaurant locations, many of which are in newly constructed or to-be-constructed retail developments such as 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 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 nonchain image that we enjoy with consumers and which we believe represents a significant competitive advantage for us.

But 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.

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.

We have an incredible development team that consistently manages through these challenges to deliver restaurants on time, and an equally talented operations team that gets these restaurants opened and running like a Cheesecake Factory from day one.

We always like to remind our investors that it takes about 90 to 120 days on average for a new restaurant 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 not signed the lease on the space for our Asian test concept that we've discussed in the past, but we do have an agreement that has allowed us to start work.

We plan to have this restaurant opened by Labor Day of this year.

This location, which will be here in the Los Angeles area, is not included in the targeted 21 locations I just mentioned.

We'll have additional updates on this concept on our first-quarter conference call.

Now moving to our bakery operations, bakery sales, net of intercompany bakery sales increased 32% in the fourth quarter from the year-ago period, excluding the $1 million benefit from the additional operating week in fiscal 2005.

On a reported basis, third-party bakery sales increased 26% in the fourth quarter to $24.9 million versus $19.8 million in the prior year.

This increase was due primarily to higher sales to our warehouse club customers, and the timing of shipments.

Now you may recall that our third-quarter bakery sales were down slightly versus the prior year third quarter.

Again, related to the timing of shipments.

Our plan for outside bakery sales in 2007 continues to focus on generating consistent and predictable sales and contribution margins.

We will leverage the added capacity from our east coast facility to continue to meet the increasing requirements for our warehouse club customers and pick up new, profitable business as it becomes available.

We currently expect bakery sales to increase approximately 8% to 10% in fiscal 2007, compared to 2006.

I'll remain optimistic with respect to opportunities to steadily build our bakery sales volumes over time.

We always remind our investors that bakery sales are not as predictable as our restaurant sales.

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

In our view, the bakery's most impactful role to our business will continue to be its service as a dependable, high-quality producer of desserts for sale in our own restaurants, which sold 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.

That covers our top-line performance for the fourth quarter and our new restaurant opening plan for fiscal 2007.

So now I will briefly review the individual components of our operating margins for the fourth quarter and give you our thoughts on these items for fiscal 2007.

Cost of sales increased to 26.3% of revenues for the fourth quarter, compared to 25.9% for the same quarter last year, and 25% in the September quarter.

The increase versus the prior year is primarily attributable to the higher percentage of total revenues from our bakery operations in the current quarter, and the higher cost of sales associated with those revenues.

On the restaurant cost of sales side we did experience some unexpected cost pressure in the fourth quarter on produce costs, related primarily to tomato prices.

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

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

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

We have contracted with suppliers for those expected commodity requirements for fiscal 2007 that can be contracted.

We recently completed the contract for our fiscal 2007 cream cheese requirements in our bakery operations at a price per pound slightly less than the actual cost per pound in fiscal 2006.

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

As is the case with any commodity contract, we can still be subject to unforeseen cost pressures due to weather or other acts of God.

That is certainly true with produce, as we do expect an impact from the recent frost in California.

Based on the contracts we have in place, our current expectations for those items that we cannot contract, and the visibility we have today on produce, we expect cost of sales as a percent of revenues to be about 10 basis points lower in the first quarter compared to the prior year first quarter, and approximately 40 to 50 basis points lower for the full fiscal year 2007 compared to the prior year.

Total labor expenses as reported were 31.7% of revenues for the fourth quarter, which includes $1.9 million of stock-based compensation expense.

Excluding this impact, labor expenses were 31.2% of revenues, which is up from the 30.5% for the same quarter last year, but lower than the 31.7% in the sequential quarter, also excluding stock-based compensation expense.

The year-over-year increase in labor expenses as a percent of revenues was primarily due to the deleveraging of labor costs with the lower average sales per week and the fact that we did not take a price increase as part of our summer menu change.

Given that service is a significant part of our overall value proposition, we strive to balance restaurant staffing appropriately to achieve reasonable labor costs, but we will never sacrifice the guest experience for short-term labor cost savings.

For the full year fiscal 2006, labor expenses as a percent of revenues excluding stock-based compensation expense increased to 31.5% versus 30.8% in fiscal 2005.

For fiscal 2007, we expect labor expenses to be approximately 30 basis points higher than the prior year.

Primarily due to the implementation of minimum wage increases in 16 states in which we operate.

This estimate does not factor in the possibility of an increase in the federal minimum wage.

In the first quarter, we expect almost a full percentage point increase versus the prior year first quarter as the minimum wage increases were effective January 1 while our menu price increase is phased in over the quarter.

Other operating expenses were 22.1% of revenues for the fourth quarter, a decrease from the 22.7 reported from the same quarter last year and from the 23.7 in the sequential quarter.

The improvement over both the year-ago quarter and the September quarter was mainly due to improvements in both the utility costs to our restaurants and our self-insured reserves.

For the full year fiscal 2006, other operating expenses were 23.1% compared to 22.7% in the prior year.

For fiscal 2007 we currently expect other operating costs as a percent of revenues to be flat to slightly favorable relative to the 23.1% in fiscal 2006.

G&A expenses as reported for the fourth quarter were 6.1% of revenues, which included $3.1 million of stock-based compensation expense and approximately $822,000 in expenses related to the internal stock option review, which concluded in late November.

Excluding the stock-based compensation expense and the expenses incurred in conjunction with the internal review, G&A expenses were 5% of revenues, up from the 4.6% from the prior year, and the sequential quarter on a comparable basis.

For the full year fiscal 2006, G&A expenses excluding stock-based compensation expense and expenses related to the internal stock option review were 4.6% of revenues, basically flat with the prior year.

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 costs 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 2007 we will continue to add resources to the corporate support, training, and field supervision activities of our business to properly support our restaurant and bakery operations for the planned 21 new restaurant openings.

Our expectation for total G&A expenses as a percent of revenues for the full year fiscal 2007 is basically flat with the prior year at 5.5%.

Depreciation expense is 3.9 % of total revenues for the fourth quarter, compared to 3.9% for the fourth quarter of the prior year and 4.1% for the sequential quarter.

For the full year fiscal 2006, depreciation expense was 4% of revenues versus 3.8% in the prior year.

For fiscal 2007, our expectation for total depreciation expense as a percent of revenues is in the 4% to 4.1% range, based on our expected growth and investment plans and taking into account the new east coast bakery plant that came on line in fiscal 2006 and a small, additional investment plan for this facility in fiscal 2007.

Actual pre-opening costs incurred in the fourth quarter were approximately $12 million compared to $8 million for the same quarter last year.

We opened 13 Cheesecake Factory restaurants in the fourth quarter of this year, compared to opening seven Cheesecake Factory restaurants and two Grand Lux Cafes in the same quarter last year.

We also incurred pre-opening costs in both the current and prior-year quarters for other openings in progress.

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

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

The pre-opening costs for 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.

Our expectation for fiscal 2007, total pre-opening costs is 25 to $26 million in support of as many as 21 new restaurant openings during fiscal 2007, including five or six Grand Lux Cafes, as well as an approximate $1 million to $2 million in pre-opening costs associated with the Asian test concept.

Again, based on the information we have as of today, we plan to open one Grand Lux Cafe in the first quarter, one Cheesecake Factory restaurant in the second quarter, and the remaining locations in the second half of the year.

Pre-opening expense for the first quarter should be in the $2.5 million to $2.7 million range.

To wrap up our operating margin expectations for fiscal 2007, we do expect operating margin improvement over fiscal 2006 in the range of 40 to 60 basis points.

This is driven primarily by the cost of sales benefit and lower pre-opening costs as a percent of revenues offset partially by the labor cost increases.

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

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

Our effective tax rate for fiscal 2006 was 28.2%.

This is lower than our previous guidance as we were able to reduce a previously established tax accrual associated with certain tax aspects of our operating leases.

While this was a nice one-time benefit, we currently expect our effective tax rate for fiscal 2007 to be back in the approximate 31% range.

As a result of this movement in tax rate we currently expect net income growth for fiscal 2007 to be in the same range as revenue growth.

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

Our other income from fiscal 2006 was approximately $2 million, which included the $1.5 million benefit related to the land and building contributed for our east coast bakery.

We do not expect a similar other income benefit for fiscal 2007.

Before I move up to income statement, let me recap the accounting for stock-based compensating.

Our total stock-based compensation expense reflected in the income statement for the fourth quarter was approximately $5.1 million, and for the full year, our total stack-based compensation expense was approximately $18.2 million.

For fiscal 2007, we expect stock-based compensation expense to be approximately $20 million to $21 million, of which about $8 million will be charged to labor expenses and approximately $12 million will be charged to general administrative expenses.

As a percent of revenues, this amount is fairly consistent with fiscal 2006.

On the balance sheet, our liquidity position and financial flexibility continue to remain very strong.

As of January 2, our cash and marketable securities on hand were approximately $134 million.

Our cash flow from operations for fiscal 2006 was approximately $155 million, and full-year cash and accrued CapEx was approximately $188 million, which includes construction and progress for upcoming 2007 openings.

We estimate our cash CapEx for fiscal 2007 to be in the range of $200 to $210 million.

This includes the cost for the five to six Grand Lux Cafes included in our targeted 21 openings, it includes the large percentage of planned openings in the northeast, which generally have higher than average construction costs.

And it includes the cost of our Asian test concept.

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 2007 through expected operating cash flow, agreed upon landlord construction contributions, and our cash on hand.

We continue to believe that maintaining an adequate liquidity position makes good business sense in this operating environment, so that 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.

However, we also recognize that our current structure gives us opportunity for a number of strategic financial alternatives, which our Board will consider in fiscal 2007.

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 2007 other than landlord construction contributions in order to meet our fiscal 2007 growth objectives.

We 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 shares in the open market.

We did not repurchase any shares during the fourth quarter.

We have approximately 2.4 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 conclude our business and financial review, we finished a difficult year with a solid fourth quarter for revenues, and we're very happy to post positive, comparable store sales for both the Cheesecake Factory and Grand Lux Cafe.

For both the quarter and the year, we experienced some margin pressure related to a bit of deleveraging from the lower average weekly sales and our decision not to increase prices as part of our summer menu change.

We continue to focus on controlling those areas of our P&L that we could affect and as we always do we focused on operational execution and delivering a great guest experience.

We also concentrated on executing our development plan for fiscal 2006, which we achieved.

Our productivity initiatives such as the Kitchen Management System and Labor Scheduling Tools continue to progress nicely, and we believe these tools will allow us to more efficiently utilize labor and more effectively deliver an even better guest experience.

In fact, KMS will be installed in approximately 70 restaurants by year end fiscal 2007.

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

We believe our top-line growth target of 18% for fiscal 2007 is an achievable goal.

While we expect to show operating margin enhancement as we leverage our buying power to help offset known labor and minimum wage cost pressures, our targeted EPS growth will be in the range of revenue growth, due to the projected tax rate for fiscal 2007.

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

With only 131 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.

And one final note before we wrap up.

Some of you will notice that we filed a tender offer form with the SEC this afternoon.

This offer is directed solely at our staff members for the purpose of trying to correct their stock option grants that were deemed to be priced incorrectly.

We believe that staff members that accept the tender offer will avoid potentially adverse tax consequences resulting from tax guidelines under Section 409-A.

There is no impact to our financial statements as a result of this tender offer other than some modest costs associated with the filing.

That concludes our prepared remarks for the fourth quarter, and at this time, we'll be happy to answer your questions.

In order to accommodate as many questions as possible in the time we have left on this call, please be courteous and limit yourself to one question and then requeue with any additional questions.

If we're unable to get to your question on the call, feel free to call us at our offices after the call.

Operator, we're ready now for questions.

[OPERATOR INSTRUCTIONS].

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

Your first question comes from Steven Kron with Goldman Sachs.

Thanks.

Good afternoon.

Question on the top-line guidance of 18%.

Last quarter, Mike, you talked about the algorithm basically being 16% unit development, and 18% operating week growth.

I got the impression from the release and the comments that -- and please correct me if I'm wrong that these unit openings may be developing little bit later than you had originally anticipated during the year.

Just wondering whether you still feel good about that operating week growth of 16% -- I'm sorry.

Of 18%, or are we now thinking 16%, more commensurate with the unit development and now we're baking in more of a 1% to 2% growth same store sales.

Thanks, Steven.

I think the operating week growth, our projected operating week growth is still right in the 18% range.

So I think even on the last call we had an inclination that the timing of these openings was going to be back end loaded as it is.

So this did include -- the 18% included that back-ended opening schedule.

Next question?

Your next question comes from John Glass with CIBC.

Thanks.

Mike, I guess it sounds like there's a fair amount of the margin pressure comes in the first quarter here with labor and some other components.

What kind of comp are you -- comp store sales estimate are you factoring in?

More specifically, how's January going, if there's any leading indicators out there?

And if you could in answering that talk a little bit about how gift card redemptions might be playing into the first six or eight weeks of the year, as well.

Oh, I can tell you that comparable sales through the first four weeks or so of the fiscal year have been impacted by the weather.

We started off the first week I'd say week and a half very strong.

Then I think you saw the weather kick in.

I would say at this point the comparable sales to date are slightly negative, but factoring out the weather impact, they're basically flat to slightly positive, not, right around that same range.

The gift card redemptions have proven so far to be better than they were in prior years.

Certainly January is always a big month for gift card redemptions.

And so far, what we've seen is that it's even a little better this year.

And I think as we've mentioned, our gift card sales for the fourth quarter were -- for fiscal 2006 were fantastic from our perspective.

We did about $50 million in sales for the year, which was really almost a 60% increase over the prior year.

So I think that will help us certainly in the first quarter to some extent and hopefully carry it through the year.

Thank you.

Next question, operator?

Next question?

Your next question comes from Bryan Elliott with Raymond James.

Good afternoon.

Also following up on the sales.

Actually, I have so many questions, it is hard to choose.

Let me ask this one.

The margin in the fourth quarter, when you look particularly at food and labor, you mentioned you normally see inefficiencies and most of us understand that pretty well, I think.

Can you give us a sense of how much the 13 store openings in eight weeks may have impacted food and labor margins given the higher sort of percentage of sales coming from inefficient stores year over year?

I don't think I could give you an accurate number, Bryan.

But you're certainly right on in terms of having an impact on both of those numbers.

I think the bigger driver was the element that I did talk about in the prepared remarks both on cost of sales and labor.

But certainly having that many restaurants especially so many that opened, even into December, which is unusual for us, certainly had an impact throughout the quarter.

So I couldn't give you an exact number.

All right.

Thank you.

Okay.

Your next question comes from Joe Buckley with Bear Stearns.

Thank you.

Could you give us an update on what you're thinking about the investment costs for Grand Lux.

You talked before about trying to take those costs down.

Would that be evident even in the first-quarter opening?

No, I don't think so, Joe.

I think as David had mentioned in the past, we're still kind of building in those I'll call premier sites or landmark sites that are really establishing the brand.

I think you'll see some of those savings hopefully in the later year openings, but certainly in the next year openings definitely.

David, any thoughts on that?

No.

I think we'll have some estimates of what we can really do probably by next quarter.

We have lots of meetings taking place, but we only have the one, and the rest are in the fourth quarter of Grand Lux.

So we have some time to get those designed in.

Okay.

Thank you.

Next question?

Your next question comes from Woodruff with Friedman, Billings, Ramsey.

Hi, Ashley Woodruff.

My question is a little more what kind of bigger picture on the timing of new store openings.

It seems like, only opening two in the first half of '07, I think it may be as a percent of total openings, the most back-end weighted that you've ever been.

I'm curious why over time as you've opened more stores and gotten better at it, and had better relationships with landlords, why you aren't able to pull anything more forward and why -- why the trend has actually been somewhat in the other direction?

Ashley, it would be great if we could.

You might imagine that we try very hard to do it.

But as long we're looking for the very best sites and not compromise on the quality of the sites that we're choosing, these things just are taking time.

And the environment out there is tougher than it's ever been for landlords to go through cities, local building departments, so on and so forth.

I think you all know the story.

Some other people that work with malls.

We try all the time.

In the middle of last year it looked like we were going to have eight or nine in the first half of the year.

And then when you really get into them and you look and see what has to be done and you see when they get department store approval or whatever it is that they need to move forward, time just goes by.

So we try, it would be much easier for all of us if we could.

The only thing I can tell you is we're not compromising on the quality of the sites, and we're not going to have to close a bunch of stores because we're in a hurry.

Correct.

Thank you.

Your next question comes from John Ivankoe with JPMorgan.

Mike, if you could just clarify the common and other operating expenses.

I know you said something about insurance accruals in the fourth quarter.

Was there -- was it just less year over year?

Is that a trend that we should expect to continue, or was it a reversal, and how meaningful was it if there was a reversal in the fourth quarter?

I don't -- it's not really a reversal because you're always -- we're looking at those reserves every quarter.

I think we did hit a point in our sort of self-insured history where the actuaries were comfortable to build in some of the trends that we've been experiencing.

We did get a benefit of adjusting those reserves to what we think the right amount is.

And I think that they should stay at that lower level then on a go-forward basis.

So you won't get a benefit necessarily in terms of trueing up the reserves but I just don't see them growing at a rate going forward that's out of the ordinary.

Can I ask you how much that was in basis points in the fourth quarter.

I don't think I have that in front of me, John.

Okay.

Thanks.

Your next question comes from Destin Tompkins with Morgan Keegan.

Thanks.

My question is on menu pricing.

On the 1.5%, can you tell us whether that is more -- you taken more in certain regions or if that is 1.5% across the board?

And then on that looking at your history, or your experience at menu pricing, is there any correlation you can draw between markets that you've been more aggressive with menu pricing and then the traffic trends you've seen there?

It's pretty much across the board.

We have -- there's a few states where the minimum wage went up a little bit more, and there might have been a couple of tents in those states because we believe that everyone will be increasing their pricing.

But for the most part it's the same.

There's a couple of states that had no increase, and so we might have backed down a couple of tenths of a point.

And so we're not really aggressive anywhere, and we have no real history of pressing it and seeing how we're doing.

Having said that, as a state has higher minimum wage, or a city in San Francisco, we have priced accordingly because we believe our competition is doing the same thing.

Thanks.

Next question, operator?

Your next question comes from Andrew Barish with Banc of America Securities.

Hey guys.

Just a question, I may have missed it on the fourth quarter G&A, Mike, there was -- and if you care to quantify, some of these nonrecurring with the legal expense, option review, just to --

I think as I mentioned the option review was about $824,000 of expense in the fourth quarter, which we certainly hope is nonrecurring.

Okay.

And was there anything else in that number that made it look a little bit higher than maybe the previous quarters, or -- ?

You know, again, I think other than the option expense, it was a little bit higher in that quarter relative to the earlier quarters.

Okay.

But that was really it.

Thanks.

Next question?

Your next question comes from Paul Westra with Cowen and Company.

Thanks.

I just want a clarification first on that 18% growth outlook you have for net income and EPS, that is obviously dollar to earnings per share number and the comparable net income.

That's correct.

Great.

Also just following up on Andy's question.

It seems like G&A was higher than perhaps we thought.

And you had to go back a few years to look at a comparable up.

I think you said apples to apples was up 40 basis points once you've kind of looked out beyond stock comp and beyond the $800,000 charge.

Is there anything going forward that will be seasonally higher going forward?

I don't think so.

Paul, I think it's important to look at G&A on the full-year basis because some of those costs, some of it's just pure timing.

I think on a year-over-year basis if you back out the stock options piece, absolute dollar G&A growth was over 15%, which is pretty good actually and right in the range of where we'd like to see it, when we're targeting 20% revenue growth.

Granted, we didn't hit the revenue target, but that makes it difficult to scale back G&A completely based on that.

So I think in the aggregate, the G&A growth was pretty darn reasonable for what we did.

And I think the guidance that we gave for next year, while it doesn't really show any leverage, since we basically projected it to be flat, is really reflective of just kind of building a little more infrastructure internally as Grand Lux Cafe continues to grow.

Then on next year's tax rate, should that be pretty comparable every quarter?

We're projecting -- right now we'll plug it at 31% for the year right now by quarter.

Last question if you don't mind on produce.

You mentioned the freeze.

And I know produce prices are still inflated.

Can you tell us what the near-term outlook is there?

As I mentioned, I think what we're seeing in the fourth quarter.

We're looking to see cost of sales improve 40 to 50 basis points for the year.

We're only expecting about a 10% basis point improvement over the first quarter over the prior year.

That's really just reflective of the produce impact.

Great.

Thank you.

Next question.

Your next question comes from Dan Lewis with RBC.

Hi, it's actually Larry Miller.

David, can you give us an update on the search you might have underway for a President of the company?

And just one other follow-up.

Is it internal, is it external, so forth, where you are?

It's both.

We're well underway with many names to consider.

We're going to be very cautious, and very thorough.

And -- but, you know, it is -- it is well underway.

And we're looking forward to that day when we can bring somebody on board with hopefully some good qualities to add to what we're doing.

You know, in the meantime --

Just on the tax rate because I might have missed it, what was it in there that caused it to be so low, Mike?

We -- you know, we had projected it to be about 31%.

And as I mentioned in the comments, we did get the benefit of being able to reduce a previously established tax accrual for, in essence, an uncertain tax position that became more certain in the fourth quarter.

So that was a one-time event that got us that extra benefit.

Okay.

So 31% would be sort of an effective tax rate.

Then you had the benefit of the accrual --

31% would be the effective tax rate on a go-forward basis, but for the full year of '06, it did come in at the 28% and 28.2.

For the fourth quarter specifically, what would be a good effective tax rate, 31% then?

For --

For Q4?

Excluding that accrual.

Yes, somewhere in that range, that's correct.

Thank you very much.

Your next question comes from Nicole Miller with Piper Jaffrey.

Thanks.

Mike, I wanted to clarify on the cost of goods sold and impact you've discussed now for the first quarter and then the full year.

Is that your, I guess the ability for that cost of goods sold to go down, is that more of an effort of something you've locked in and where you've locked in prices or are you counting on some ability to leverage the increasing costs?

Really almost all of our commodities that I mentioned are contracted, and we're seeing pretty favorable contracted prices on a year-over-year basis.

So we're definitely get something leverage of the price increase that we're taking to cover other areas.

We're getting some leverage on that on the cost of sales line item.

We're kind of looking at it in the aggregate.

I don't we can offset completely the labor cost pressures we expect, but we'll get a little extra leverage on the cost of sales line to help with that.

Okay.

So it's safe to say that then the commodities that you have contracted were at favorable prices versus a year ago period, and then the produce that you contracted is what's eating away at that in the first quarter?

That's pretty much true.

They're either comparable or slightly favorable to the prior year in the aggregate.

There's a couple that went up but some that went down and some that stayed flat.

But in the aggregate, they're generally flat, and then except for the produce where we'll see some pressure on that certainly in the first quarter, and my guess is that some of it will drag on throughout the year, but primarily in the first quarter.

Thank you.

Okay.

Next question.

Your next question comes from Chris O'Cull with SunTrust.

Yes, good afternoon.

For the guest counts for the quarter, could you tell us, I may have missed it, but what were the guest count declines in the fourth?

I don't think I gave that number and I generally don't.

Not that I couldn't, I just don't have it in front of me, Chris.

Okay.

Let me ask you.

In the kitchen management system that you guys are testing, are you seeing improvements in the throughput at the restaurants where it's being tested or the quality of the product or both?

Yes.

I think we're seeing a little bit of both.

I think one of the biggest learnings we're having is in the new restaurant, the kitchens seem to get up to operational excellence much quicker than they did on the old system.

So that certainly helps.

But I don't know, comments, David, on general throughput?

I think in some restaurants we're getting a little bit more in some of our bigger ones, with the higher volumes.

And it's hard to tell on some of the others.

But we're really through the test period.

And we -- we're committed to the system, we're just rolling it out to the restaurants that, will give us the most benefit first.

So each year -- all new restaurants are getting it.

They're doing about 15 to 20 restaurants a year.

All of Grand Lux has it.

And it will take us a few years to get throughout the system at this point.

Everyone loves it.

It's easier to operate.

The training's quicker.

There's lots of good things about it.

And we are completely committed to it.

Okay.

Great.

Okay, operator.

I think we have time for just a couple more questions.

Your next question comes from Sharon Zackfia with William Blair.

Hi, Sharon.

Hi, good afternoon.

Mike, if your comps are running slightly negative right now with more price rolling in, does that mean it should be somewhat better for the full quarter?

I would hope -- absent the weather, which seems to be kind of crazy and you being in the midwest would know as well as anybody.

Absent weather settling down a little bit and with the price rolling in, maybe we should be able to get back to slightly positive.

It's certainly cold here.

Yes.

And then for the full year, the 18% of that income growth, is that predicated on your long-term comp target?

The long-term comp target of 1% to 2%?

I don't know that we'll hit that for the full year.

I think we could be -- we should be in that range, yes.

So you can hit the 18% net income even if you fall slightly shy of that?

Well, I think we should be in that 1% to 2% range still.

That's correct.

Okay.

Thank you.

Okay.

Operator.

One more question.

Your next question comes from Jeffrey Bernstein with Lehman Brothers.

Just under the bell.

Just two clarifications actually.

First, I just want to make sure for all of '07, I think you said -- in answer to an earlier question, 18% operating growth.

And I know you're taking 1.5% pricing.

I wanted to make sure you're still saying it's 18% top line.

It just seemed like a little disconnect.

Then I had a follow-up.

Thanks.

That's correct.

We're looking for about 18% top-line growth.

And that's -- it would seem if you would say on the operating week growth and the benefit from menu pricing and presumably 1% to 2% that it might be a little bit north of that.

Is there another component in there?

If anything it may be slightly north of that, but not much.

I think in the aggregate we're still targeting the 18% overall.

Okay.

Just a clarification on your opening remarks.

You talked about labor cost pressures and the increase that you're expecting for all of '07.

I know you mentioned minimum wage in 16 states.

But your guidance didn't actually factor in a federal increase.

Just wondering if you sized up what the potential impact would be should the federal increase go through?

Thanks.

I don't have that in front of me.

We did look at it.

I think it's important to note that the majority of our restaurants -- I think some in the range of 65% to 70% already operate in states with a higher than federal minimum wage.

So there will be some impact.

But it won't be sort of an all-encompassing.

So whatever impact there is as a result of that, we would factor into our summer menu change and try to accommodate that.

Thank you.

Okay, operator.

Thank you.

Thank you, everyone.

That concludes today's fourth-quarter fiscal 2006 earnings conference call.

You may now disconnect.