Cheesecake Factory Inc (CAKE) 2007 Q2 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen, and welcome to The Cheesecake Factory second quarter 2007 earnings conference call.

  • My name is Shawn, and I'll be your coordinator for today.

  • At this time, all participants are in a listen-only mode.

  • We will be facilitating a question-and-answer session toward the end of this conference.

  • (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Mr.

  • Michael Dixon.

  • Please proceed.

  • - CFO

  • Thank you, Shawn.

  • Hello, everyone.

  • I'm Michael Dixon, CFO of The Cheesecake Factory Inc., 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, who is actually out in the field and joining us from our restaurant in Pittsford, New York scheduled to open later this week.

  • Pittsford is a suburb of Rochester.

  • Jill Peters, our Vice President of Investor Relations, is also with us on the call.

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

  • 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 & 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.

  • Our agenda for the call today will be as follows: First we'll discuss The Cheesecake Factory's financial results for the second quarter of fiscal 2007 that ended on July 3, 2007.

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

  • We'll also give some color to our expectations for new restaurant openings and margins for the remainder of the year.

  • After that, we'll open the call to questions and we'll happy to answer as many questions as time allows.

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

  • As we reported on July 9, total revenues at The Cheesecake Factory for the second quarter increased approximately 16% to $373.2 million.

  • This was a little bit ahead of recently announced expectations as revenues were stronger than anticipated in the days leading up to the July 4 holiday, and we have a very strong opening from our newest Cheesecake Factory restaurant in Braintree, Massachusetts.

  • Our revenue growth this quarter was comprised of an approximate 17% increase in restaurant revenues and a 4% decline in bakery revenues.

  • I'll talk more about the bakery business in a moment.

  • The 17% increase in restaurant revenues represents an approximate 18% increase in total restaurant operating weeks, resulting primarily from the openings of 22 new restaurants during the trailing 15-month period, coupled with an approximate 1.4% decrease in average sales per restaurant operating week.

  • Overall comparable sales of The Cheesecake Factory and Grand Lux Cafe restaurants increased approximately 1.1% for the quarter.

  • By concept, comparable sales increased 0.8% at The Cheesecake Factory restaurants and increased 5.7% at the Grand Lux Cafes.

  • We're happy to report positive comparable sales again this quarter in what remains a challenging environment for most casual dining operators.

  • Although we generally expect comparable sales to be in-line with our menu price increase, we are still a little bit behind that as traffic has not yet returned to normal levels.

  • The good news is we really aren't that far off given that we had an approximate 1.5% of price in our menu during the second quarter.

  • In our summer menu change, which began rolling out last week, we took an additional 1.5% affected menu price increase to help offset known cost pressures, primarily related to labor, janitorial, and dairy costs.

  • As a reminder, we are not lapping any menu price increase from last summer.

  • I would also reiterate that we primarily view menu price increases as a defensive measure to protect our margins against sustained, or long-term cost pressures, not necessarily as a means of driving revenues.

  • Returning to the second quarter, average weekly sales at The Cheesecake Factory restaurants decreased about 1.3%, which is still slightly behind the change in comparable restaurant sales.

  • As we have said many times in the past, there are a couple of factors that generally can impact this comparison.

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

  • When we open an existing market, we generally do not experience, nor do we expect the honeymoon sales trend of roughly 130% of sustainable volumes that we often see in new markets.

  • Twelve of the 18 Cheesecake Factories opened since the second quarter of last year 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.

  • Second, the restaurants we have opened over the last 18 months are considerably smaller on average than those opened 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.

  • 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 average returns at these locations are in excess of our cost of capital and deliver a fully capitalized return in excess of our 25% threshold.

  • Lastly, on a more specific note, three of the 20 Cheesecake Factory restaurants that opened last year were built in smaller markets as they are in slightly -- were built smaller as they are in slightly smaller markets, and consequently delivered average weekly sales below our Company average.

  • While these locations will still deliver initial annual sales of $7 million, or so, and will continue to grow as these markets mature and the retail developments are built out, they do account for a large part of the gap between our comp sales and average weekly sales.

  • Excluding these locations, average weekly sales at The Cheesecake Factory would have declined approximately 0.4%.

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

  • Comparable sales at the Grand Lux Cafes increased 5.7% in the second quarter.

  • On a two-year basis, Grand Lux Cafe has delivered comparable sales of 11.2%, which we believe is an credibly strong performance, especially in light of the soft operating environment the industry has experienced over the past 18, and for a young concept with no advertising or promotions.

  • As sales volumes continue to increase at Grand Lux, we will continue to leverage operating costs and improve this concept's restaurant level margins.

  • Grand Lux is a strong, viable 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.

  • With only 134 restaurants open to date, 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 menu price increases, or about 1% to 2%.

  • In terms of our revenues to date in the third quarter, we've had a solid start with comparable sales at The Cheesecake Factory in the range of our winter menu price increase.

  • Although only three weeks into the quarter, we are pleased with the sales trends to date.

  • For 2007, our overall revenue growth target is 16% to 17%.

  • This will be delivered primarily through new restaurants.

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

  • As we have discussed on our last quarterly conference call, 20% to 25% 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.

  • We opened two Cheesecake Factory restaurants in the second quarter, including our recent Braintree, Massachusetts location which, as mentioned in our earnings release, has performed incredibly strong since opening with average weekly sales in excess of $300,000 in its first few weeks of operation.

  • We expect to open six Cheesecake Factory restaurants and one Grand Lux Cafe in the third quarter.

  • The first of which, as I mentioned earlier, will open in Pittsford, New York in a couple of days.

  • We have additional great locations coming up this quarter in Freehold, New Jersey; Willow Grove, Pennsylvania, and a Grand Lux Cafe in Paramus, New Jersey just to name a few.

  • Of course, we certainly recognize that once again we face a back-loaded opening schedule.

  • This 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 we consistently deliver on our stated growth objectives.

  • As a reminder, there are risks to achieving our opening schedule as 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 lease spaces to us according to their original commitments so 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.

  • 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.

  • Having said that, we have consistently achieved our stated opening targets.

  • We have an incredible development team that consistently manages through these challenges to deliver restaurants on time, and an equally talented operation 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 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 should note that we are moving forward with our Asian test concept, Rock Sugar Pan Asian Kitchen.

  • We have begun construction on our Los Angeles location, and are still targeting to have the restaurant open sometime late this year.

  • This location is not included in the targeted 21 locations I just mentioned.

  • Now moving to our bakery operations.

  • Bakery sales, net of intercompany bakery sales, decreased 3.6% in the second quarter from the year-ago period to $13.9 million versus $14.4 million in the prior year.

  • The primary driver of the decline was the timing of shipments to our larger customers.

  • With Easter being a week earlier this year, we had a fair amount of bakery sales fall in the end of the first quarter this year compared to the prior year.

  • For the first half of this year, third party bakery sales are basically flat with the prior year.

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

  • Based on our current outlook for warehouse club sales and other outside sales channels, we expect bakery sales to increase approximately 1% to 3% in fiscal 2007, compared to the prior year.

  • While lower than our earlier expectations, I remind investors that this is a small part of our business.

  • While we remain optimistic with respect to opportunities to steadily build our bakery sales volumes over time, 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 will sell approximately $200 million of desserts made in our bakery production facilities during fiscal 2007.

  • Approximately 15% of our restaurant sales consists 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 second quarter and the update on our new restaurant opening plan for fiscal 2007.

  • Now I will briefly review the individual components of our operating margins for the second quarter.

  • Cost of sales decreased to 24.7% of revenues for the second quarter, compared to 24.9% in the same quarter last year and 25.1% in the March quarter.

  • While this is an improvement over the year-ago quarter, it is not as much of an improvement as we expected due primarily to the pressure on dairy costs.

  • Fluid dairy commodities are one of the only areas in which we are unable to contract prices, and, as most of you know, dairy costs have risen significantly this year, up about 17% in June alone.

  • This has a meaningful impact on us due to the amount of manufacturers' cream we use in making our fresh whipped cream at the restaurants.

  • 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 have contracted with suppliers for those expected commodity requirements for fiscal 2007 that can be contracted and, where possible, with we have extended certain of our contracts through 2008.

  • As of today, we have contracted nearly all of our poultry and beef requirements except hamburger through 2008 at flat or slight increases to current prices.

  • Based on the contracts we have in place and our current expectations for those items that we cannot contract, we expect cost of sales as a percent of revenues to be approximately 20 to 30 basis points lower for fiscal 2007, compared to fiscal 2006, and in this same range for the third quarter.

  • Total labor expenses were 32.3% of revenues for the second quarter, up from the 31.7% in the same quarter last year, but down from the 33.3% in the sequential quarter.

  • The increase over the prior year was mainly driven by the higher minimum wages in a number of markets in which we operate, and an increase in our medical cost accrual stemming from increased participation from restaurant staff members in our medical insurance plans, as well as higher cost per participant.

  • For fiscal 2007, we expect labor expenses to be approximately 40 basis points higher than the prior year which translates to relatively flat labor expenses in the third and fourth quarters compared to the prior year.

  • Other operating costs and expenses were 22.9% of revenues for the second quarter, a slight decrease from the 23% reported in the same quarter last year, and a 90-basis-point improvement from the 23.8% in the sequential quarter.

  • In the second quarter this year, we recorded a $1 million insurance benefit from the settlement of disputed coverage under an employment practices claim.

  • The related lawsuit was settled in 2004, but we were just able to negotiate some insurance coverage.

  • Absent this benefit, other operating expenses as a percent of revenues would have been 23.1%, a slight increase from the prior year due primarily to higher janitorial costs.

  • We currently expect other operating costs as a percent of revenues to be 25 to 35 basis points lower in the third quarter versus the prior year, due to more favorable utility cost comparisons, but about 10 to 20 basis points higher for the full fiscal year relative to fiscal 2006, again, due to the higher janitorial costs.

  • G&A expenses for the second quarter were 5.4% of revenues, up from the 5.2% in the prior year, but better than the 5.5% in the sequential quarter.

  • The increase relative to the year-ago quarter was in-line with our guidance, as we continue to effectively manage our overhead costs in-line with our revenues and continue to aggressively look for cost-saving opportunities to offset the unexpected first half pressures previously discussed.

  • 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 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 percent of revenues for the third quarter is about 10 to 20 basis points lower than the prior year, and flat to slightly lower for the full fiscal year versus fiscal 2006, as we lapse some of the option investigation costs incurred in the second half of the prior year.

  • Depreciation expense was 4.2% of total revenues for the second quarter compared to 4% for the second quarter of the prior year, and 4.3% for the sequential quarter.

  • For fiscal 2007, our expectation for total depreciation expense as a percent of revenues is in the 4.2% to 4.3% range based on our expected growth and investment plans, and taking into account the new East Coast bakery plant that came online in fiscal 2006, and a small additional investment for that facility in fiscal 2007.

  • Actual pre-opening costs incurred during the second quarter were approximately $3.7 million, compared to $3.3 million for the same quarter last year.

  • We opened two Cheesecake Factory restaurants in the second quarter of both this year and last year, and we also have the upcoming July opening this year.

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

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

  • Our expectation for fiscal 2007 total pre-opening costs is $24 million to $25 million, in support of as many as 21 new restaurant openings during fiscal 2007, including five Grand Lux Cafes.

  • This amount includes approximately $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 six Cheesecake Factory and one Grand Lux Cafe in the third quarter.

  • Pre-opening expense for the third quarter should be in the $7 million to $8 million range.

  • To wrap up our operating margin expectations for fiscal 2007, we expect operating margins to be flat to 10 basis points lower than the prior year as our menu price increases effectively offset the dairy costs, minimum wage and other margin pressures we already discussed.

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

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

  • Included in interest expense net is $2.3 million of interest expense on the $150 million in outstanding debt we had under the revolving credit facility in the quarter.

  • As a reminder, we have an interest rate collar agreement on the revolver that mitigates the risk from interest rate variations and keeps our LIBOR rate within a range of 4.7% to 5.4%.

  • We also pay a bank margin on top of LIBOR which will vary based on our debt-to-EBITDA ratio.

  • Our current interest rate on the $150 million balance is approximately 6%, which translates into approximately $2.3 million of interest expense for the third quarter of fiscal 2007.

  • Our effective tax rate for the second quarter was 30.3%, in-line with our expectations.

  • We continue to plan on an effective tax rate of 30% to 31% for the remaining quarters of fiscal 2007, subject to adjustment, if necessary, as we move through the year.

  • Although we're now on an apples-to-apples comparison with both the current and last fiscal year, reflecting stock-based compensation expense in the income statement, let me give you a brief recap of this expense for those investors who are tracking it as a separate line item.

  • Our total stock-based compensation expense reflected in the income statement for the second quarter was approximately $4.8 million, of which $1.6 million was charged to labor expenses and $3.1 million was charged to G&A expenses.

  • For fiscal 2007, we continue to expect stock-based compensation expense to be approximately $18 million to $19 million, of which about $8 million will be charged to labor expenses and approximately $11 million will be charged to G&A expenses.

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

  • Lastly, before I move off the income statement let me provide some comments on the $200 million accelerated share repurchase, or ASR, that we entered into in the first quarter of this year.

  • We retired 4.7 million shares in the first quarter and another 2 million shares in the second quarter.

  • The ASR was structured so that the broker delivered an initial minimum number of shares to us up front.

  • While the initial shares represent the majority of the total number of shares we will retire, there may be additional shares delivered to us at the end of the contract period, which still has a few months left on it.

  • We anticipate a weighted average outstanding share count for the third quarter between 73 million and 74 million shares.

  • As we have discussed, we expect the impact from the ASR to be neutral to fiscal 2007 earnings per share with the benefit from the reduced share count offset by the interest expense.

  • This transaction will be accretive to fiscal 2008 and beyond.

  • Our share repurchase authorization from our board of directors is currently 16 million shares, of which there are approximately 5.6 million shares remaining, net of the shares retired to date this year.

  • The authorization does not require us to purchase any shares and may be terminated at anytime.

  • However, we expect to repurchase shares in the future as a means of offsetting the dilution from stock option expenses.

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

  • As of July 3, our cash and marketable securities on hand were approximately $91 million.

  • Our cash flow from operations for the second quarter was approximately $85 million, and our cash and accrued CapEx for the second quarter was approximately $105 million, which includes construction and progress for upcoming 2007 openings.

  • Our estimated cash CapEx for fiscal 2007 remains in the range of $200 million to $210 million.

  • This includes the cost for the five Grand Lux Cafes included in our targeted 21 openings, the large percentage of planned openings in the Northeast, which generally have higher than average construction costs, and the cost of our Asian test concept.

  • Based on our current expansion plan 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 have $150 million in funded debt in our capital structure as I just mentioned, and currently do not anticipate a need for additional funded debt or any other external financing during fiscal 2007 other than landlord construction contributions to meet our fiscal 2007 growth objectives.

  • We do have $50 million available on our credit facility for backup liquidity purposes and to support standby letters of credit for our insurance arrangements.

  • To wrap up our business and financial review, while total revenues were slightly higher than our last guidance, our overall results for the quarter were generally in-line with our expectations.

  • We were very happy to report a second consecutive quarter of positive comparable sales and believe it is particularly meaningful relative to what many other casual dining operators have experienced.

  • We are encouraged that our comparable restaurant sales to date in the third quarter continue to be positive and in-line with our winter menu price increase.

  • We face some headwinds this quarter on costs, particularly dairy.

  • While we have seen some indicators that the rise in dairy costs may start to moderate by the end of this year, we remain cautious and the summer menu price increase is intended to offset these dairy cost pressures.

  • As mentioned earlier, we are proactively reviewing the commodities that we have under contract to take advantage of opportunities to renegotiate and extend those contracts.

  • It's this type of cost management that will help us to recover margins and put us in position to effectively leverage any increase in traffic.

  • As always, our primary focus remains the long-term, healthy growth of The Cheesecake Factory, and the continued enhancement to our productivity and profitability.

  • Delivering a great guest experience is our Number One priority, and we continue to be pleased with the progress of our productivity initiatives, such as the kitchen management system, which we believe will allow us to more effectively and efficiently deliver a better experience to our guests.

  • We retrofitted 16 Cheesecake Factory restaurants with KMS this year and still expect KMS to be installed in approximately one-half of our restaurants by year end.

  • In addition, we are progressing with the rollout of the labor scheduling tool, which will enable our managers to spend less time on scheduling and more time on the floor with guests and developing and training staff members.

  • On the growth side, we are on track to open as many as 18 more restaurants this fiscal year, and we are excited to expand our presence in the Northeast, which is an extremely successful geographic area for us.

  • We continue to believe there is room for approximately 200 Cheesecake Factory locations of our current size and scope, and as many as 150 Grand Lux Cafe locations.

  • We also believe there are an additional 130 to 140 Cheesecake Factory locations that can deliver annual revenues between $8 million and $10 million.

  • Our development group is working to design a restaurant at an investment cost that is appropriate for this expected volume, so that we can grow our business at steady or increasing rates of return.

  • With only 134 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.

  • Our strong financial position provides us with the capital resources and flexibility to continue executing our growth plan with great confidence.

  • That wraps up our prepared remarks for the second 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 that we have left on this call, please be courteous and limit yourself to one question, and then re-queue with any additional question.

  • And, if we aren't able to get to your question on this call, please feel free to call us at our offices after the call.

  • Shawn, we are now ready for questions.

  • Operator

  • Thank you.

  • (OPERATOR INSTRUCTIONS) Your first question comes from the line of John Glass from CIBC World Markets.

  • Please proceed.

  • - Analyst

  • Thanks.

  • The question about the openings in the Northeast that you guys cited a couple of times, I guess, specifically here in Boston, I think you have five restaurants in the market now, and Braintree, I guess, was very successful.

  • Can you talk about do you experience cannibalization?

  • This is a relatively small market, I guess, is my point.

  • Five Cheesecake's -- I don't know if you have markets that are much more dense than that, but given on a per capita basis probably not.

  • Are you seeing cannibalization from your other units when you open it?

  • And how quickly do those other units recover if you do see that?

  • - Chairman, CEO

  • John, the ones that we opened so far haven't.

  • Cambridge and Boston are the closest we have in the whole country, and we didn't have any cannibalization there.

  • There was a little when we opened Burlington for Cambridge and Cambridge has come back nicely.

  • Other than Natick, we don't know what will happen with Chestnut Hill and with North Shore yet, and in Braintree, I don't think we'll have any because those markets are very distinct and different.

  • So, it's hard to tell, many times they come back.

  • Once in a while it's a percent or two or three, but I -- Boston has been, really, one of our best markets, and every store has come back so far.

  • - Analyst

  • Great.

  • And I know this violates the rule a little bit.

  • A question, Mike, just on the margins, you talked about data over 100 basis points.

  • And you came in just down 70.

  • Is this difference solely that settlement, that million dollars, or is there something else that was more favorable than you initially thought?

  • - CFO

  • I think the settlement accounts for about half of that difference, and I think the other half is we came in above the high end of our revenue expectations, which really accounted for the remainder.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

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

  • Please proceed.

  • - Analyst

  • Hi.

  • I do have a question, but one, I first just want to first clarify.

  • You said the current comp in the quarter, and it appeared to be also your outlook is in-line with the winter price increase.

  • I assume you meant all price increases that you have including, even though it's early, but the one taken a week ago, so your presumption is holding the price or at least recognizing a lot of your price increases including the 1.5 that was taken last week?

  • - CFO

  • Just to clarify, since we really don't have the summer menu price in effect now, or it's really just starting, so comps to date at The Cheesecake Factory are more or less in line with the winter menu price increase, which was 1.5%.

  • We would hope to and expect to get some benefit from the new menu prices rolling out from here forward.

  • - Analyst

  • Exactly, Okay.

  • Just wanted to clarify that.

  • Can you also speak a little bit about what effect you are seeing right now on potentially the mix effect on COGS from the smaller portion sizes that are being offered, [X-ing] out sort of the effect from the price.

  • I wonder how much benefit you getting that on the introduction of that still as a tailwind for favorable effect on your mix effect?

  • - CFO

  • I don't think -- from a mix perspective, I haven't really seen much as a result of that.

  • We've talked in the past, we have seen more fish items from a cost of sales perspective because we put more fish dishes on the menu, but not really from the smaller portions, the lunch portions, if you will, haven't seen much of an impact from that.

  • - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Your next question comes from the line of Nicole Miller with Piper Jaffray.

  • Please proceed.

  • - Analyst

  • Good afternoon.

  • - CFO

  • Hi.

  • - Analyst

  • If we wanted to pull out that last two benefit, was it exactly $1 million and about $0.02 in earnings, or how did that come out?

  • - CFO

  • It was exactly $1 million for the quarter and that would actually be slightly less than $0.01 if you did the math on that.

  • - Analyst

  • Okay, thanks.

  • And what was the tax rate.

  • I'm sorry, I missed that.

  • - CFO

  • It was 30.3% for the quarter, and we're still targeting something between 30% and 31% for the full year.

  • - Analyst

  • And then -- I'm sorry, we gut cut off, just at the very beginning of the call, but you talked about the commodities you contracted.

  • Can you run through what that was for me real quick again?

  • - CFO

  • Well, just --

  • - Analyst

  • On the poultry and beef?

  • - CFO

  • Yes.

  • I'm happy that we were able to contract -- we have extended our poultry contract through the end of '08 and we just recently extended all of our meat contracts, with the exception of hamburger, through the end of '08, and both of those were done at flat to slight increases versus what we're paying this year.

  • - Analyst

  • Thanks very much.

  • - CFO

  • Uh-huh.

  • Operator

  • Your next question comes from the line of Larry Miller with RBC Capital Markets.

  • Please proceed.

  • - Analyst

  • Hey, guys.

  • To follow-up on the last question about commodities, if you were to, and I'm sure you're talking with your suppliers, contract on cream cheese today, any indications of what that might look like in '08?

  • - CFO

  • That's a good question.

  • I don't know that one.

  • Certainly, it wouldn't be as favorable as the pricing we have today.

  • But like I mentioned, we are starting to see some moderation in the dairy commodities.

  • So our bakery purchasing folks watch that every day.

  • And we'll try to jump in at what we think is the right time, but I couldn't give you a number on that today.

  • - Analyst

  • Talking about that moderation, you said there were some indicators that you are looking at that say it's going to be lower.

  • What exactly are those?

  • - CFO

  • I think that some of the futures prices on butter have come down from their high.

  • They're still high, don't get me wrong.

  • But it's moving in the right direction.

  • - Analyst

  • Okay.

  • I'm just a little confused, Mike, on the share count guidance.

  • It seems like it be a little high because it's actually above the second quarter, your 73 million to 74 million basis.

  • Can you help me understand that?

  • - CFO

  • I don't know what the timing will be of any incremental shares we may get from the wrap up of the ASR, so I'm being a little conservative on that.

  • I imagine we'll be a little higher just for any of the general grants that are given to our operations team throughout the year, but that's really the only true impact on that.

  • - Analyst

  • So the shares that you will be giving will increase the count, is that how it works?

  • - CFO

  • That's correct.

  • - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • Your next comes from the line of Bryan Elliott with Raymond James & Associates.

  • Please proceed.

  • - Analyst

  • Hi, good afternoon.

  • The -- actually I have -- that was going to be my question.

  • Another one I have is the settlement is fairly small, but was a -- clarification on that, was that included in the forward guidance for the full year operating expense number?

  • - CFO

  • Yes.

  • In the other operating expense that includes all of the information through the second quarter, as well, correct.

  • - Analyst

  • Okay.

  • My question is on the bakery business, did you take price to your wholesale customers to offset the big increase in the non-cream cheese cost that you are seeing in that business?

  • And did that have any impact possibly on the sales?

  • - CFO

  • I don't think it has impacted the sales.

  • I think still the majority of our sales, as they have been for a long time, are through the warehouse clubs.

  • Obviously, they are very cost conscious, and so any price increases we have for them have to be carefully thought through.

  • We were able to take some price through that channel last year and coming into the beginning of this year.

  • I don't think price has played a role in that.

  • I think it is really just a factor of some of the traffic at the warehouse clubs, and we've just got to get some products in there that's going to move.

  • But, for the most part, I don't think it's related to price.

  • - Analyst

  • So your last price to them was before the spike in dairy then, it sounds like?

  • - CFO

  • Well, it was in conjunction with our contract on cream cheese, so that was already factored in, which is clearly the biggest driver of the cost of our cakes.

  • That was contracted and factored into our pricing decisions with the clubs.

  • - Analyst

  • All right.

  • Thank you.

  • - CFO

  • Yes.

  • Operator

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

  • Please proceed.

  • - Analyst

  • Hi, good afternoon.

  • - CFO

  • Hi, Sharon.

  • - Analyst

  • Could you give us color on sales trends as the quarter progressed, and perhaps, it sounds like things strengthened in the second half of June and hopefully will continue into July.

  • Was that a pretty broad-based strengthening that you saw in the latter part of June and so far this month?

  • - CFO

  • I don't know that it changed that much.

  • Obviously, we don't give monthly comps, I don't want to get into it too much.

  • But I don't think we saw a whole lot of difference.

  • I think, as I mentioned, the reason that we were able to come in a little above the guidance that we had given in late June was the way the Fourth of July fell this year versus last year, on a Tuesday versus a Wednesday, we weren't really sure what to expect with sort of that -- what was a four-day holiday weekend last year became kind of an oddball this year.

  • So we did a little better than we thought.

  • And, as I mentioned, Braintree was a little better.

  • More or less, the sales were pretty consistent throughout the quarter with what we thought.

  • - Analyst

  • Okay.

  • Can I ask a follow-up, as well?

  • I was just a little confused on the interest expense guidance.

  • Why was it that the interest expense was a bit lower in June than what you are projecting going forward?

  • - CFO

  • It's a net number, so we have interest income in our cash balances, as well.

  • - Analyst

  • Okay.

  • So would it be fair to project a similar net number going forward?

  • - CFO

  • I think so, although with most of our construction happening in the back half of the year, I think our cash balances will come down a little bit, so we may not have quite as much interest income to offset the interest expense.

  • - Analyst

  • Okay.

  • Thank you

  • - CFO

  • -- within a small range.

  • - Analyst

  • Thanks.

  • - CFO

  • Yes.

  • Operator

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

  • Please proceed.

  • - Analyst

  • Great.

  • Thank you.

  • Actually, just a follow-up question, you talked about the summer price increase that you think will be enough to offset your known cost pressures in the second half.

  • Just wondering, as you think about the pricing that was necessary, is that based on the current peak levels or are you actually factoring in an assumption that cost pressure abate to a certain degree?

  • Just trying to determine whether there is possible margin leverage possibilities?

  • - CFO

  • Well, I'll conservatively say that there may be some margin leverage possibilities, but we're looking at all of the cost pressures from labor, and there were a number of states, four or five states that had July minimum wage increases.

  • We're looking at those.

  • In we're looking at all of the commodities, including dairy.

  • We're certainly not trying to price for the peak, but based on what we know today, trying to accommodate all of those.

  • Would love to be getting margin leverage, but with the variety of cost pressures, I think, that like a lot of restaurants, we're struggling just to keep level with them.

  • - Analyst

  • Right.

  • And you actually mentioned the two extensions, I guess, you got with the chicken and it sounds like beef, ex-burgers, just wondering were there opportunities for other extensions through '08, or actually, maybe, what percentage of your total cost of goods is the beef and chicken, and is there a chance you can get further lockage for '08?

  • - CFO

  • We're working on it every day.

  • I specifically mentioned chicken and the beef, absent burgers, just because I think it -- that was a big deal for us, and I think we were able to do a pretty good deal on the poultry, trading off a small increase for the remainder of this year to lock that same price in for end of '08.

  • In light of what is happening with corn prices and the expectations for poultry, I felt very good that that was a great deal for us, and beef I was very happy to say that we were able to lock that in flat.

  • So, poultry, ex-produce, as a category, poultry is our biggest single commodity.

  • So to have that visibility is very -- is beneficial for us.

  • We're not a huge beef user, but the different varieties of beef, again, excluding hamburger, it's a decent size to our cost structure, so it's good to have that locked up, as well.

  • - Analyst

  • What kind of ballpark percentagewise, what percentage are those two as a percentage of your total there now locked?

  • - CFO

  • I think poultry is probably 10% or 11% of cost of sales, somewhere in that range.

  • I couldn't tell you what the beef is without the hamburger because hamburger is the biggest piece of it, but excluding that, beef as category is probably only 6% or 7% of the total, but that includes hamburger.

  • So we'll get that one locked up quickly, I hope.

  • - Analyst

  • Okay, so most of the costs are still outstanding, but those are two that you were, obviously, able to lock in?

  • - CFO

  • Yes.

  • Just remember, as a group our biggest usage is our produce, which is a big group.

  • Poultry and dairy all together.

  • And those three items account for over a third of our total cost of sales,or those three categories count for a third of our cost of sales.

  • Dairy, we will not be able to lock up except for cream cheese, and then produce we have been pretty successful in, but those are going to be shorter-term contracts, not through the end of '08, certainly.

  • - Analyst

  • Great.

  • Thank you.

  • - CFO

  • Okay.

  • Operator

  • Your next question comes from the line of Joe Buckley from Bear Stearns.

  • Please proceed.

  • - Analyst

  • Thank you.

  • Question on your Northeast expansion and the Braintree experience, but also what you are thinking for the balance of the year, do you think you are opening at honeymoon levels in the Northeast?

  • Is the market so penetrated or so lightly penetrated that might be the case?

  • Or do you think these volumes will be more sustainable?

  • - Chairman, CEO

  • We think they are more sustainable, Joe.

  • You know, it's denser population.

  • I think some of the restaurants that have opened on the bottom side of our range were lighter populations that we believe would grow, and these were very good, special sites that we wanted to do.

  • But any time we are going into the Northeast, they are really much more densely populated than certainly a lot of these sites in the West and even the Midwest.

  • So we think we can sustain them.

  • I think that's been the case in Boston and New York and Philadelphia.

  • We have Willow Grove opening up, that's near King of Prussia, and King of Prussia is one of our best stores in the $14 million range.

  • And we think Willow Grove will be strong, too.

  • So I think it's really just dense population, and I think we have a great reputation there.

  • - Analyst

  • Thank you.

  • Operator

  • Your next question comes from the line of Chris O'Cull with SunTrust.

  • - Analyst

  • Good afternoon.

  • - CFO

  • Hi, Chris.

  • - Analyst

  • Hi.

  • Mike, you mentioned that 16 units have the new kitchen management system in place.

  • Can you tell us how many of those are in existing restaurants versus new restaurants?

  • And then also in the existing units, what kind of benefit you are seeing in terms of throughput at peak periods?

  • - CFO

  • All of the new restaurants have it, and what I meant to say by that was 16 restaurants have been retrofitted.

  • So those are older restaurants that have been retrofitted.

  • All of the new restaurants are opening with the kitchen management system in place.

  • And I think -- as we have talked in the past, it's a little bit hard to measure, but in some restaurants, we have seen a nice uptick in throughput during those peak lunch and dinner periods, really as a result of KMS.

  • Again, I don't want to apply that everywhere because we don't see it in every restaurant, but it has proven to be a very efficient driver of moving throughput.

  • I think in those locations, we saw a 1% or 2% increase in sales, which if we can sustain that across the board, that's a nice uptick, but we're a little bit cautious in saying that's the case just yet.

  • - Analyst

  • What is the rollout schedule for the last half of this year?

  • - CFO

  • Again, all of the new restaurants will have it.

  • I think we're done with the retrofits this year because our team will kind of shift into the new restaurant openings.

  • And we'll continue --

  • - Chairman, CEO

  • At the end of the year, there will be 50% of our restaurants will have the system and all of Grand Lux Cafes.

  • - CFO

  • That's correct.

  • - Analyst

  • Okay.

  • - Chairman, CEO

  • We'll go ahead and select some more retrofits for next year and all of the new restaurants will get them.

  • So it make take us a few years to have them in every restaurant old and new.

  • - Analyst

  • Great.

  • And then the labor scheduling system.

  • Is that system -- does that have the functionality to improve maybe labor productivity in terms of just forecasting guest counts for managers to respond quickly to changes in guest counts and the hours they need?

  • - CFO

  • It has some of that potential, yes.

  • It gives us better templates to manage, to set the labor hours based on our expectations of sales, so it does give us that visibility, as well, yes.

  • - Analyst

  • Are you considering any -- or do you expect any improvement in labor costs from the new system?

  • - CFO

  • I'm not --

  • - Chairman, CEO

  • We're hopeful

  • - CFO

  • Yes, we're hopeful, but we're not factoring it in.

  • I think the biggest driver of that system is that it frees up our managers, as I mentioned, to spend less time on scheduling and more time on the floor.

  • - Analyst

  • Okay.

  • Okay.

  • Great, thanks, guys.

  • - Chairman, CEO

  • We have time for one or two more questions, Mike?

  • - CFO

  • I think we have time for two more questions.

  • Operator

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

  • Please proceed.

  • - Analyst

  • Thanks.

  • Hi, guys.

  • - CFO

  • Hi, Steven.

  • - Analyst

  • Just a quick clarification on your quarter to date sales indication, which implies kind of flattish traffic -- is that a blended sales number, or is that specifically The Cheesecake brand?

  • - CFO

  • That was just The Cheesecake Factory.

  • - Analyst

  • Okay.

  • Are you guys taking price currently at the Grand Lux?

  • - CFO

  • Grand Lux is on a different cycle.

  • We took about a percent back in the April time period.

  • They are more on a spring/fall menu change cycle.

  • - Analyst

  • Okay, so do they only have 1% now or is it 2%?

  • - CFO

  • I think they have between 2% and 3% in the menu at the moment.

  • - Analyst

  • Okay.

  • And then my real question is on the Grand Lux and clearly, going forward, that will be a bigger driver of total unit growth, and can you just kind of give us an update on the initiatives to kind of strip out some of the costs associated with the building of those restaurants?

  • - CFO

  • David, do you want to talk about that one?

  • - Chairman, CEO

  • Go ahead and start and then I'm chime in, Mike.

  • - CFO

  • I think what we have said -- we have given some thoughts in the past, is that we're probably looking to drop $100 a square foot out of that facility to get it where we want it.

  • We have identified $60 to $70 per square foot of that.

  • All of the 2007 locations are pretty far down the design path.

  • So we're looking to put those efficiencies into the 2008 restaurants, and I think we probably have got another two go arounds with our development group and with David to get to that $100, but I think it's very achievable.

  • - Analyst

  • Okay.

  • Thanks a lot.

  • - CFO

  • Okay.

  • - Chairman, CEO

  • Okay.

  • Operator

  • Your next question comes from the line of David Tarantino with Robert W.

  • Baird.

  • Please proceed.

  • - Analyst

  • Hi, good afternoon.

  • Quick clarification on a prior question.

  • Did you indicate that your expectation for the balance of the year would be to achieve flat traffic?

  • - CFO

  • Well, basically we have said we're -- I think the broader answer is that we're looking for 16% to 17% revenue growth.

  • So our expectation is -- it has been for the year relatively flat traffic, and just trying to get as much of the menu price as we can.

  • - Analyst

  • Okay.

  • I guess a follow-up to that would be what would give you confidence in your ability to achieve that in the second half, given that you have higher pricing in the menu, and you haven't really been able to achieve flat traffic year to date?

  • - CFO

  • I think the traffic is kind of settled a little bit lower than we would like.

  • We have given back a little bit, but I think some of the trends that we have seen in the last quarter would indicate that it is achievable.

  • Now, again, there's a lot of pressures out there on our guests, so I think somewhere between flat traffic to getting our full menu price is achievable.

  • - Analyst

  • Okay.

  • Thank you very much.

  • - CFO

  • I think we have time for one more question, operator.

  • Operator

  • Your next question comes from the line of Ashley Woodruff with FBR.

  • Please proceed.

  • - Analyst

  • Thanks.

  • First, I just had a quick follow-up on the Grand Lux comment.

  • Lowering the cost by $100 per square foot.

  • Did you say you think you can actually achieve that in the stores that you open in 2008, or you'll just make progress towards it?

  • - Chairman, CEO

  • We think we can achieve most, if not all of it in the stores we open in 2008.

  • - Analyst

  • Okay.

  • - Chairman, CEO

  • We're already working on it, anything we could add in with these stores that weren't already in progress we're doing, so we're ready to start doing that as soon as we start building them in '08.

  • - Analyst

  • Okay.

  • Thanks.

  • And then my real question is how has the new bar menu, I guess the happy hour bar menu been doing since you rolled that out, I guess, a month and a half ago or so, have you been happy with that?

  • - CFO

  • Yes, I think it's -- I wouldn't call it a happy hour, but it is smaller portions of some of our favorite or more popular appetizers that are really available sort of during that 4:00 to 6:00 period.

  • It's not combined with drink specials.

  • It's just more of an opportunity during a slightly slower time to drive some traffic into the bar area.

  • I would say we have advertised it in the malls that we operate in.

  • I think we're certainly happy with the way we're operating and delivering against it, and I think over time we'll probably see some traffic build during that time period as a result, but it's still pretty early in the game for that.

  • - Analyst

  • Okay.

  • Thank you.

  • - CFO

  • All right.

  • I think that wraps up our call, so thank you everyone.

  • - Chairman, CEO

  • Thank you.

  • Operator

  • Thank you for your participation in today's conference.

  • This concludes the presentation.

  • You may now disconnect.

  • Good day.