Cheesecake Factory Inc (CAKE) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Cheesecake Factory's third quarter 2007 earnings conference call.

My name is Chantalle, and I will be your facilitator for today's call.

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

(OPERATOR INSTRUCTIONS) I would like to turn the call over to Mr.

Michael Dixon.

Please proceed, sir.

Thank you, Chantalle.

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 who is actually joining us from Tukwila, Washington, just outside of Seattle, where we will open our 134th Cheesecake Factory restaurant later this week.

Joe Peters, our Vice President of Investor Relations, is also with us.

Before we get into 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 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.

Okay we have a lot to cover today.

In addition to reporting results for the third quarter of fiscal 2007 we also announced our growth plan for fiscal 2008 today.

Our agenda for this call will be as follows.

First, we'll discuss our financial results for the third quarter of fiscal 2007 which ended on October 2nd, 2007.

We will refer to that quarter as the 3rthirduarter in our comments today.

We'll also give some color on our expectations for the remainder of the year.

After that we'll discuss our growth plan and performance targets for fiscal 2008.

Finally, we'll open the call to questions and we'll be happy to answer as many questions as time allows.

We'd like to finish up the call in about 45 minutes.

Before I get into the details of the quarter let me take just a minute to formally welcome Russ Bendel to the The Cheesecake Factory family.

As we announced in early September, Russ joins us as President and Chief Operating Officer of The Cheesecake Factory restaurants.

Russ brings with him a wealth of restaurant industry experience and we look forward to him taking our operations to an even higher level.

As we speak Russ is well into his orientation program.

Again, we're very happy to have Russ on board.

So with that, let's get on to the quarter's results.

Total revenues at The Cheesecake Factory for the third quarter increased 15.4% to $375.5 million.

Our revenue growth was comprised of an approximate 16% increase in restaurant revenues and a 4% decrease in bakery revenues.

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

The 16% increase in restaurant revenues represents an approximate 18% increase in total restaurant operating weeks resulting primarily from the openings of 27 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 at The Cheesecake Factory and Grand Lux Cafe restaurants increased 1.2% for the quarter.

By concept, comparable sales increased approximately 1% at The Cheesecake Factory restaurants and increased 4.8% at the Grand Lux Cafes.

While we're pleased to report positive comparable sales again this quarter, the environment for most casual dining operators continues to be challenging.

That being said, 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.

We remained about a percent or so off in traffic with approximately 2.2% of price in our menu during the third quarter.

This trend has been fairly consistent throughout the first nine months of the year.

In our summer menu change, which we finished rolling out in mid-August.

we took an additional 1.5% effective menu price increase to help offset known cost pressures, primarily related to minimum wage, janitorial and dairy costs.

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

Returning to the third quarter, average weekly sales at The Cheesecake Factory restaurants decreased about 1.1%, which is still behind the change in comparable restaurant sales.

As we've 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 in existing markets we generally do not experience nor do we expect to experience the honeymoon sales trends of roughly 130% of sustainable volumes that we often see in new markets.

16 of the 21 Cheesecake Factory restaurants opened since the third quarter of last year are in existing markets.

The strategy of capturing additional profitable market share in areas that we know very well and 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've opened in 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 site 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, four of the 20 Cheesecake Factory restaurants that opened last year were both 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 increased approximately 0.1%.

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

Comparable sales at Grand Lux increased 4.8% in the third quarter On a two year basis, Grand Lux Cafe has delivered comparable sales of 11.5%.

We continue to view this as an incredibly strong performance, particularly in light of the soft operating environment the industry has experienced for nearly two years and for a young concept with no advertising or promotions.

The sales volumes continue to increase at Grand Lux.

We will continue to leverage operating costs and improve this concepts restaurant level margin.

Grand Lux Cafe is 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.

With only 143 restaurants opened to date, the majority of our expected revenue growth for the next few years will continue to come from openings of new restaurants.

Our longer term expectations for annual comparable restaurant sales growth remains in the range of menu price increases, or about 1% to 2%.

For 2007, our overall revenue growth target, including both restaurant and bakery sales, is 15% to 16%.

Which translates into approximately 15% growth in the fourth quarter.

This is a little bit lower than our previous guidance and reflects the slightly softer sales we experienced in the second half of September and through the first couple of weeks of October.

Overall comparable sales through the first three weeks of the fourth quarter are tracking between flat and a positive 1%.

We are on target to achieve our goal of opening as many as 21 new restaurants, including five Grand Lux Cafe.

As we discussed on our last quarterly conference call, 20% to 25% of these openings will be in new markets with the remainder representing opportunities to return to those markets we have been very successful.

In addition, a large number of our targeted 2007 openings are 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 with certainly enough population density to support several more.

As we noted in our press release, the new restaurants that we have opened to date in the Northeast have delivered average weekly sales in excess of $250,000 since opening, consistent with our expectations for high volumes in this region.

In particular, our location in Braintree, Massachusetts, which opened in late June, continues its strong performance with average weekly sales of over $280,000 during its 15 weeks in operation.

We opened six Cheesecake Factory restaurants and one Grand Lux Cafe in the third quarter, in line with our stated guidance.

To date in the fourth quarter, we've already opened two The Cheesecake Factory restaurants in Peabody and Natick, Massachusetts, and a third opening will follow later this week in Tukwila, Washington, a suburb of Seattle as I mentioned earlier.

We expect to open five more Cheesecake Factory restaurants and three Grand Lux Cafes in the fourth quarter, for a total of 11 new restaurants this quarter as originally planned.

As s reminder, there are risks to achieve in 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, city escape 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 commitment so that we can build them out in a timely manner.

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

But that also creates some unique design and permitting challenges.

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

So as a result of these factors it's 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 to consistently manages through these challenges to deliver restaurants on time and an equally talented operations team that gets the restaurants open and running like a Cheesecake Factory from day one.

Remind our investors that it takes 90 to 120 days on average for our new restaurants to work through their normal grand opening and efficiencies and for food and labor costs to reach their targeted operating profit margins.

Now moving to our bakery operations.

Bakery sales, net of intercompany bakery sales, decreased 4% in the third quarter from the year ago procedure to 13.1 million versus 13.7 million in the prior year.

The decrease is due primarily to lower sales to the warehouse clubs which is our largest sales channel for outside bakery sales.

Clearly, the macro pressures impacting dining out occasions are effecting dessert purchases as well.

Our plan for third party bakery sales 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 be approximately flat to down 1% in fiscal 2007 compared to the prior year.

While slightly 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.

Well that covers our top line performance for the third quarter and the update on our restaurant opening plan for the fourth quarter.

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

Cost of sales decreased to 24.7% of revenues for the third quarter compared to 25% in the same quarter last year and 24.7% in the June quarter.

The 30 basis point improvement over the prior year is attributable to favorable year-over-year pricing for produce, seafood, and general grocery items, partially offset by the continued pressure from higher dairy costs.

As a reminder, fluid dairy commodities are one of the only areas in which we are unable to contract price.

And as most of you know, dairy costs have risen significantly this year.

This has a meaningful impact on us due to the amount of manufacturers cream we use in making our fresh whip 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 we have extended certain of our contracts through 2008.

As of today we have contracted for a number of our 2008 commodity requirements, including all of our poultry and beef requirements through 2008 at flat or slight increases to current prices.

We have not yet contracted our cream cheese requirements for 2008, but I note that the contractible price has come down quite a bit over the past few weeks and we will continue to monitor this and lock in a price at an appropriate level.

Based on the contracts we have in place and our current expectations for those items cannot contract, we expect cost of sales as a percent of revenues to be approximately 20 to 25 basis points lower for fiscal 2007 compared to fiscal 2006.

Total labor expenses were 32.2% of revenues for the quarter down from the 32.3% in both the prior year and sequential quarter.

This is a little better than we anticipated and especially impressive in light of the slightly softer sales.

Our operators did a great job managing labor during the quarter, which resulted in a 10 basis point improvement year-over-year.

For fiscal 2007, we still expect labor expenses to be approximately 40 basis points higher than the prior year.

Other operating costs and expenses were 23.9% of revenues for the third quarter, a slight increase from the 23.7% reported in the same quarter last year and the 22.9% in the sequential quarter.

The increase from the prior year period was a result of higher insurance costs, primarily worker's compensation and the deleveraging of fixed costs to operate our restaurants as a result of the slightly lower sales this quarter.

We expect other operating costs as a percent of revenues to be 30 to 40 basis points higher for the full fiscal year relative to fiscal 2006 due to the higher janitorial and insurance costs.

Now this translates into a 120 to 140 basis point increase in Q4 versus the prior year as we benefited last year from some very favorable adjustment to our self-insurance reserves.

G&A expenses for the third quarter were 5.3% of revenues, down from the 5.7% in the prior year and better than the 5.4% in the sequential quarter.

The decrease relative the year ago quarter was primarily due to about $1 million of professional fees incurred in the prior year related to the stock option review.

In addition, we continue to effectively manage our overhead costs in line with our revenues and look aggressively for cost saving opportunities.

Our G&A expenses consist of two major components, the cost for our corporate, bakery and field supervision support team, which should grow at a lesser rate than revenues, and the cost for our restaurant management, recruiting and training program which should grow at a rate closer to our unit growth rate.

During the remainder of 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 fourth quarter is a 50 to 60 basis point improvement compared to the prior year as we lapse some of the option investigation costs incurred in 2006.

For full fiscal 2007 we expect G&A to be flat to a 10 basis point improvement compared with the prior year.

Depreciation expense was 4.2% of total revenues for the third quarter, compared to 4.1% for the third quarter of the prior year and 4.2% for the sequential quarter.

For fiscal 2007, our expectation for depreciation expense as a percent of revenues continues to be in the 4.2% to 4.3% range based on our expected growth and investment plans.

Actual pre-opening costs incurred during the third quarter were approximately $8.7 million compared to $5.4 million for the same quarter last year.

This was a bit higher than we expected due to higher costs in general, which I'll discuss in a moment, and a couple of locations moving forward in the fourth quarter new restaurant opening schedule which resulted in higher pre-opening costs in the third quarter.

We opened six Cheesecake Factory restaurants and one Grand Lux Cafe in the third quarter of this year compared to three he Cheesecake Factory restaurants and one Grand Lux Cafe in the year ago quarter.

We usually incur most of our pre-opening costs in the two months before an opening and the month of a restaurants opening.

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

Our expectation for fiscal 2007 total pre-opening costs is $24.5 to $25 million in support of as many as 21 new restaurant openings during fiscal 2007 including five Grand Lux Cafes.

This is in the same range as we previously guided to, even though much of the Rock Sugar pre-opening costs will move into fiscal 2008.

Our back ended opening schedule, which requires us to hire managers a little earlier than desired in order to have the appropriate number of trained managers in place to support our openings, combined with the increased costs for staff relocation have pushed pre-opening expenses a little higher than originally planned.

Again, based on the information we have as of today, we plan to open eight Cheesecake Factory restaurants and three Grand Lux Cafes in the fourth quarter.

To wrap up our operating margin expectations, we expect operating margins to be 35 to 45 basis points better in the fourth quarter but 30 to 40 basis point lower for the full fiscal 2007 versus the prior year as the slightly lower sales volumes combined with the ongoing dairy cost increases, minimum wage and other margin pressures we've already discussed offset much of the benefits of our effective menu price increase.

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, including in our filings with the SEC.

Included in interest expense net is $2.3 million of interest expense and $150 million in outstanding debt we have under the revolving credit facility during the quarter.

We have an interest rate collar agreement on the outstanding revolver balance that mitigates the risks from interest rate variations and keeps our LIBOR rate within a range of 4.6% 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 $150 million balance is approximately 5.9%, which translates into approximately $2.2 million of interest expense for the fourth quarter of fiscal 2007.

Our effective tax rate for the third quarter was 29.5%.

We continue to plan an effective tax rate of 30% to 31% for the full fiscal year 2007.

Let me provide a brief recap of our stock compensation 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 third quarter was approximately $4.7 million, of which $1.8 million was charged to labor expenses and 2.8 million was charged to G&A expenses.

For fiscal 2007 we continue to expect stock based compensation expense to be approximately $18 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 completed the ASR in September and retired an additional 1 million shares for a total of 7.7 million shares repurchased under this program.

We anticipate a weighed average outstanding share count for the fourth quarter between 72 and 72.5 million shares.

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

The 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 4.7 million shares remaining, net of the shares retired this year.

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

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

As of October 2nd, our cash and marketable securities on hand were approximately $60 million.

Our cash flow from operations through the third quarter was approximately $86 million and our cash and accrued CapEx for the third quarter approximately $144 million, which includes construction in progress for upcoming 2008 openings.

Our estimated cash CapEx for fiscal 2007 is in the range of $195 to $205 million.

This includes the cost for the five Grand Lux Cafes included in our targeted 21 openings, a large percentage of planned openings in the Northeast , which generally have higher than average constructions costs, and a portion of 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 have $150 million in funded debt in our capital structure, as I mentioned earlier, 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 under 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 for the third quarter, both total revenues were somewhat lower than we expected, we did an effective job in controlling costs, and delivered a 50 basis point year-over-year improvement in operating margin before re-opening costs.

Relative to the data points provided by another other casual dining operators during the past month, we believe we're delivering competitively strong results.

As always, our primary focus remains the long term healthy growth of The Cheesecake Factory and the continued enhancements 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 initiative 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 anticipate having KMS in approximately one-half of our restaurants by year end and in all of our restaurants by the end of fiscal 2008.

In addition, we have completed the roll out of our labor scheduling tool, which enables 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 will achieve our stated goal to open 21 new restaurants this year.

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 and $10 million.

Our development group has designed 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 143 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 capital resources and flexibility to continue executing our growth plan with great confidence.

Along those lines, I'd now like to focus on our growth plan for fiscal 2008 which we also announced this afternoon.

We are targeting revenue growth of approximately 14% to 15%, not much different than our revenue growth for the last few years, net income growth of 17% to 19% and estimated diluted earnings per share growth of 22% to 24%.

Let me tell you how we intend to achieve those goals.

Our plan consists of three key objectives, one, expand our restaurant base with high quality locations at a rate that is healthy and manageable for our business.

Two, use our free cash flow to return cash to stockholders through share repurchases, and three, improve our operating margin by 30 to 50 basis points.

Our expansion plan for 2008 is to open as many as 17 new restaurants, including as many as three to four Grand Lux Cafes and one Rock Sugar Pan Asian Kitchen, our newest concept.

The 2008 plan targets approximately four fewer restaurants than we will open in 2007.

This decision is not driven by a lack of great locations or inability to successfully open a high volume restaurant.

As you know, we are the landlords tenant of choice and are offered thousands of site every year.

We're also confident that our development department is capable of opening at least 25 restaurants per year.

However, we have a long term view of our business and as such we're going to slightly recalibrate our opening schedule.

Investors who have followed us for awhile, know that the types of locations that we choose, that is selecting only great locations, historically resulted in a back end loaded development schedule.

We locate our restaurants in newer retail centers where developers target completion before the holiday season, so having an opening schedule in the second half of the year has been a fact of life for us.

We have a full pipeline of quality sites in 2008.

And by targeting 17 openings, we will position ourselves for a more balanced opening schedule in 2009 and beyond.

This will allow us to reaccelerate our growth in 2009 and to continue to target revenue growth in the mid teens for the next several years.

We have identified 60 to 70 potential Cheesecake Factory locations with expected average annual revenues over $10 million and between 130 and 140 locations with estimated annual revenues of approximately $8 to $9 million.

Clearly, we have an ample number of locations to choose from, which makes our near and longer term growth objectives very achievable.

Also, with only 13 Grand Lux Cafes in operation by the end of this year we have significant selection opportunities for this concept as well.

At least one of our 2008 locations will be specifically targeted at the 130 to 140 potential locations we've talked about with projected revenues of 8 to 9 million.

We will test our ability to build a slightly smaller sized restaurant at an appropriate investment cost and still deliver new restaurant ROIs that are among the best in the industry.

The addition objective of our growth plan for fiscal 2008 are increased share repurchases, funded by a lower level of CapEx spending, and improved operating margins in an otherwise difficult margin environment.

Let me spend a minute on each of these areas.

We anticipate total cash capital expenditures in fiscal 2008 to be between 160 and $170 million, an approximate20% decrease from fiscal 2007.

The savings comes from building fewer new restaurants and also from building more efficient, less capital intensive Grand Lux Cafes.

Many of you will recall from our analyst meeting earlier this year we established an objective to reduce Grand Lux investment cost per square foot by $75 to $100.

We've identified the changes necessary to achieve this target without sacrificing the guest experience and those changes are factored into the Grand Lux design plans for next year.

We expect that the reduction in cash capital spending will enable us to generate free cash flow of $60 and $70 million, which we intend to use in support of an active share repurchase program.

We have approximately 4.7 million shares available under our current repurchase authorization and our board may consider the opportunity to increase share repurchases in the future.

On the margin front, we expect that the lower pre-opening costs and increase in G&A leverage, will allow us to improve our operating margin by approximately 30 to 50 basis points.

In light of the expected industry wide pressure from commodity and labor costs, we believe this is a competitively solid margin improvement.

In summary, we're very expected about our ability to achieve our growth plan for 2008 ande beyond.

Our expansion goal position us to open successful, high quality restaurants more evenly throughout the years to come.

It is both an achievable plan and one that will enable us to deliver significant diluted EPS growth while returning value to stockholders through meaningful share repurchases.

That wraps up our prepared remarks 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 in this call, please be courteous and limit yourself to one question and then requeue with any additional questions.

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

Chantalle, we're now ready

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Mr.

John Glass of CIBC.

Please proceed sir.

Hi.

Thanks, Mike, I get the reduction in The Cheesecake growth giving some of the pressures you've had, et cetera, but why slow the Grand Lux as well?

I thought you were sort of in an expansion mode, maybe you were going to continue to swap out more Cheesecake's for Grand Lux's, you could still do that within the confines of a lower absolute growth this year.

Could you maybe talk about your thought process behind also slowing down Grand Lux a little bit?

I think, and David can chime in on this, really we're not looking to slow down Grand Lux, it's really just getting the right spots and having them available at the right time.

And as the locations that we've looked at for 2008 for Grand Lux locations, just getting those right spots, the number that are available for the areas that we want to go to is just a little bit lower.

We're not intentionally trying to slow down Grand Lux.

Again it's a function of the spacing available at the right time.

Right.

Exactly.

And just to follow up do you think that over time those will always be a little bit harder to get?

What gives you confidence you can grow that at a faster clip if you're having difficulty now just trying to open three to four?

I don't think it's a matter of difficulty, again it's just finding the exact right site where we want to go following the growth pattern that we had with Cheesecake Factory.

There's lots of sites all over the country, but we're very particular about how we're growing it, building our reputation, which cities we're going in and the sites we're looking for are incredible sites in an incredible city.

They take time.

We have a lot of them planned.

We have sites that are planned for '09 or '10 that are the absolute best in Boston, the best here and there but they're all over the board in terms of when we're going to get those very special sites that we're looking for for Grand Lux.

Thank you.

And your next question comes from the line of Jeffrey Bernstein of Lehman Brothers.

Please proceed.

Great.

Thanks very much.

Just a question on traffic trends.

I feel that pricing would now be running in the close to 3% range for both brands.

Mostly slightly above your historical averages, Just wondering if you could talk about noticeable impact of sales, traffic or mix.

I know you said you saw a slow down in back half of September, early October.

I was wondering what that's attributable to macro or whether you think there's any issue from a near term fall back on pricing and if not, I'm wondering whether you might consider maintaining those levels perhaps closer to the 3% range in future years given the fact that the consumer's giving you a lot of credit for your value scores.

Thanks.

Well, Jeff, I think to answer the first part of your questions I believe it is still due to the macro trends.

You did hit on it.

We did see traffic slow down in the second half of September and continue in the first couple weeks of October which is reflected in the guidance that we gave on revenues for the full year.

Our average check is still tracking right along the lines of our menu price increase.

So, I don't feel as though we're impacted by that.

Having said that I don't think we will change our pricing strategy.

I think we'll continue to price what we need to do to effectively offset some of the margin pressures.

It's still obviously a very competitive environment and we want to be very careful with the guests out there.

And I think you had mentioned that Grand Lux was running 2% to 3% pricing since you took the 1% increase in the spring.

Is it now the point in time that you would take the full menu roll out?

Just wondering where pricing's going to end up with Grand Lux.

You're right on the current pricing on Grand Lux.

Grand Lux is just undergoing a menu change with I think a slight menu price increase if I'm not mistaken, David?

Right.

I think we're right at about 1 point.

1 point now in addition?

That's right, in addition to what's in there.

What would it be running in total then going forward?

I think it's going still be between 2 and 3%.

Great, thank you.

Your next question comes from the line of Ashley Woodruff of Friedman.

Just a question on your comments on 2008.

That 22, 24% EPS gross goal seems potentially ambitious given that you've seen recently in terms of your same store sales trends, traffic weakening.

What are your when you're looking into 2008, when are you expected to reach that?

What do you need to see in terms of your same store sales trends and on that 30 to 50 basis point improvement in margins are you expecting those other line items cost of sales, bakery and restaurant?

Are you expecting those are flat or I guess could you walk us through that next year?

From a big picture perspective, Ashley, relatively flat on all those line items.

As I mentioned, we should get a little bit of G&A leverage, obviously, we'll get some fairly good pre-opening expense leverage with just the fewer openings which will drive that operating margin growth that I talked about.

I think the real leverage you get from that net income down to the earnings per share is just the benefit of the share repurchase program that we just completed as well as additional share repurchases that we contemplate going forward.

Is that premise on same store sales kind of similar to what you've seen recently or improving in 2008?

No, I think it's relatively similar to what we've experienced lately.

We're not being overly aggressive in assuming the traffic's going to resume.

Okay, thanks.

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

Please proceed.

Mike, if I could quickly just follow up on John's question.

Does that mean going forward there'd be something like 10 to 12 Cakes and then you would think to reaccelerate Grand Lux given the opportunity and that's how we should think about planning the model not necessarily to 17 stores a year?

I think that's a reasonable assumption, Larry.

As David indicated, we want to accelerate the growth of Grand Lux but we also want to be right about picking the best spot.

Our goal would be to continue to ramp up Grand Lux Cafe growth.

We're targeting the 17 total openings for 2008 and then we'll ramp up again from that in 2009.

And I would expect the Grand Lux Cafes will play a bigger part in that growth.

Okay, I get it.

And then my question was actually I get how you can get to 14, 15% revenue growth by balancing out fiscal 2008 relative to 2007 which only had a few opening in the first half of the year.

Wouldn't that necessarily normalize in fiscal '09 and beyond and therefore you wouldn't get the big productivity adjustment and you'd grow more in line with unit opening or capacity week load at that point?

Something like 10 to 12%?

I think that you'll see certainly in the first half of '09 once you get that far out you'll see some of the lower growth in '08 will have an impact on the first half of '09.

I still think that there's opportunities for us to, well one, first to continue to drive that revenue growth into the mid to high teens number with comparable EPS growth.

Certainly we get a benefit on that EPS growth in fiscal 2008 just from the slow down in the -- or the lowering of the pre-opening costs.

Right.

Does that mean then you'd have, you're expecting traffic growth?

You said that you wouldn't be able to grow sales ahead front of pricing.

I guess I'm confused on how it gets to 14, 15% in the out years.

Again, we can target the revenue growth from the new store openings.

We feel we've got plenty of opportunities to grow more restaurants than 17 beyond 2008.

I see.

I misunderstood.

Thanks a lot.

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

Please proceed.

Hi, good afternoon.

Mike, you commented on that the last couple of weeks of September and October slowing and I don't think anyone asked, but has that a national slowing or have you seen any geographic concentration there?

I would say that we've seen California slow quite a bit.

There is a slowing everywhere but I'd say California has slowed more so.

I think interestingly enough the Southwest area has slowed down as well.

So both California and Southwest have kind of led the charge in the slowdown from mid September forward.

Okay and then separately I'm assuming based on your language in the press release that the weightings for the restaurants next year will still be back end weighted and it's really '09?

That's correct.

The idea is to really load the pipeline in '08 so that we have anywhere from 20 to 24 places to choose from, only open the 16 or 17 that we talked about and then move the rest into early '09.

And then just circling back once again on what you've seen in October.

I think you gave the comps from the first three weeks, was October pretty similar to your full quarter comp last year or was it markedly different?

I don't know the answer to that off the top of my head, sorry.

Okay.

Thanks.

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

Please proceed.

Thanks.

This is actually a little follow up on Larry's question there about the -- I think there's a presumption being made by all of us that you will be more balanced in '08.

Can you give us a little bit of how the quarters might look as you break out and open up those total 17 stores and then can you update us on what your estimates are for the CapEx contribution from the Rock brand?

The 2008, as I think Sharon just kind of eluded to, will still be back end loaded.

It just won't be as many restaurants to open in the third or fourth quarter because we're going to open fewer in total..

Still 2008 is still going to be a back end loaded schedule but the idea will be to move some of those that we would have tried to open late in '08 into the first half of '09 to make '09 more of the balanced opening schedule.

And as for the capital costs for Rock Sugar, I don't have a final number on that, so I'm not ready to give that out..

How about the pre-opening?

Typically I think we're looking for almost double the amount of what a Cheesecake's running at now, is that about the same but more in 1Q than some of it falling in 4Q.

Yes, that's true.

What we had put in for 2006, or 2007 rather, I'd said a 1 million to 2 million on the Rock Sugar pre-opening.

I don't think it'd be at the 2 million number but it'll be closer to 1.5 million with most of that falling in the first quarter.

And what are we looking at right now as far as going on within the G&A line as far as leverage being gained in relation to falling a little short of original plans and compensation?

I'm just curious how much are we getting a benefit from lack of bonus contributions in '07 that will come back in '08 when you do start hitting your plan and getting to 22% profit growth, are we going see a ramp up in relative G&A potentially?

As a percent of revenue, as I indicated, we're still looking to get some leverage on that G&A line for '08.

We've never really specifically broken out the bonus costs in that line item.

If any assumptions that are based on what I gave for the 2008 plan would include our potentially hitting those bonus targets but are still expecting to see some year-over-year leverage.

Last question, what do you think will enable you going forward to have it more balanced, the schedule in '09 aside from just deferring some openings?

The presumption was always the best time to open the store though is also around the fourth quarter and the holiday or developers weren't ready to open up.

Why do you feel more comfortable now deferring the Christmas opening time schedule or Thanksgiving time schedule to now maybe January or February when that 's not been a strong period for you in the past to open?

I think we are opened very well in the first quarter.

In other words they just move and they don't get serious about doing their work so everything backs up.

So as far as being a -- it's a fine time for us to open as long as the landlord gets their work done and we can get open.

Does that answer your question?

Well.

We don't feel the first quarter is any worse to open than the fourth, it's just that we havn't been able to because of all of the work the landlord has to do and they don't get started usually until March.

Right but I guess -- I would think that there was a presumption when you got into the site by the developer that you would be opening around Thanksgiving and Christmas and that would be the time.

So often we try to get it open much earlier but it just gets put off for various reasons.

Permitting, landlord getting it done, not wanting to do work during the Christmas season so they don't really start to later.

There's a number of problems that come up.

And we would open as many stores as we could in the end.

We don't like opening at the beginning of January it's too hard to get a staff together but certainly starting the last week in January, February and March is a fine time for us to open if we can get it all put together.

Okay.

I just wanted to see if there wasn't something as far as site selection that's enabling you to go differently away from strip malls and lifestyle centers and more independent stand alones.

Those are still not the sites we prefer.

Okay.

Thank you.

I think just to follow it up, quick.

Generally speaking we tend to be one of the first locations that opens as part of a new development or refurbished development.

We don't necessarily have to be part of that grand opening.

We can open, as David mentioned, a few months later in the first quarter.

By doing that we'll be able to balance our schedule a little better.

Okay.

thank you.

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

Please proceed.

Good afternoon.

I'm sorry if I missed this in the first part, I'm traveling.

What is the comp assumption for 2008 and then what is the pricing within that assumption?

We didn't give either of those.

We just kind of gave that revenue target.

So you've got the 17 restaurant openings with that revenues growth of 14 to 16%.

Okay.

And I think I caught the tail end of one of the earlier questions about the Grand Lux pricing would be 2 to 3% going forward.

Can you make the same commentary on The Cheesecake Factory units?

The Cheesecake Factory right now have 3% in the menu, and they add a weighted 2.2% for the third quarter.

As of today there's 3%.

We haven't made any decisions on our first quarter 2008 price increase but we continue to evaluate the cost pressures and within the next month or so we'll make a finalization on that.

And then just one quick question, first just to make sure that all your employees and families are safe given the fire and evacuation issues in Southern California.

And if you could, I don't want to be overreacting to the situation and it may be too early to tell, but is there any color you can give on impact to your stores at this point?

First, thank you for your concern.

At this point none of our restaurants have been damaged or are threatened to be physically damaged by the fires and as far as I've heard all of our staff members are safe as well.

So, okay on both counts.

Okay.

So just one store potentially at this time and nothing's been closed.

I've heard of some power outage issues today in certain areas and what not.

But not for your stores?

Yes, none of our stores have been impacted.

Okay.

Thank you so much.

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

Please proceed.

Thank you.

Just a question on the difference between the four restaurants that are averaging about 7 million in sales and the one you're targeting to open next year that you're targeting in the 8 to $10 million area, is there a difference between those prototypes?

I think what we're saying is we have developed a 7,500-foot store with the appropriate sized kitchen, scaled down investment.

If we go into those -- when we go into those markets that we will have 7, 8, $9 million choices we'll have the appropriate-size store.

The ones that are doing that currently, some of those are 8,900 square feet, some are 9,000.

In other words, we didn't have a model that small to build into those kinds of volumes.

So now we do.

If we make that selection going forward we believe that it's the right sized store for those volumes.

Okay, thank you.

Is that -- okay.

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

Please proceed.

Good afternoon.

A couple questions on the growth plans.

Would you expect the spreading out into '09 of the openings to possibly reduce pre-opening costs per concept as we get smoother and don't have as much sort of rush at the end of the year?

Yes, I would.

As I mentioned the impact on pre-opening expenses this year there is a bit of a cost because we can't hire as many managers as we need all at once.

So we hire them throughout the year and we can carry extra managers as a result.

By spreading it out we should be able to smooth out our hiring needs and reduce some of those costs.

Would -- okay.

Secondly would you expect any material changes in the level of landlord financings that you've been getting in recent years as a result of this change?

In other words would it be marginally less attractive to a landlord to have you open in February instead of mid-November or early December?

We don't think it will make any difference to landlords.

All right.

Thank you.

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

Please proceed.

hi, thanks.

A couple of follow ups.

First, Mike, on the 22 to 24% EPS growth goals for 2008, you had some one timers in the first quarter of '07 they equated to $0.02 to $0.03.

Just want to make sure that this is inclusive of those things in the first quarter of this past year so you're going to get a little bit of a benefit on a year-over-year basis from those items.

That's correct.

Okay.

So we shouldn't carry that forward into 2009 per se, because you're going to get a little bit of benefit from that?

That's correct.

As far as the CapEx guidance of 160 to 170.

Can you break out?

I assume most of it's growth CapEx, but what would the maintenance piece be?

I don't have that.

I thinks the fair to assume sort of the same ratio as to what it is in 2007 in terms of new restaurant versus the remaining pieces.

Okay.

And then on the 17 units that you targeted, can you just provide the mix of how many are new geographies versus existing?

I can't do that today, Steven.

I think the idea here is that we've got a lot of them to choose from and we're going to pick the ones that are right for us and fit best within our opening schedule.

Those markets could change from the roster that we're going to pick from.

Okay, thank you.

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

Please proceed.

Thanks.

hi, good afternoon.

Most of my questions have been answered.

Could you talk about bakery sales?

You had a flattish outlook to this year lapping last year's big year.

Should we assume a resumption to that 10% levels next year as you look out at the forecast?

Yes, it's a good question.

I think somewhere between 5 and 10% is a reasonable outlook for 2008.

I think some of the softness we've experienced this year in the warehouse clubs.

We've got several different irons in the fire, if you will, both within the clubs as well as some other channels.

So I think somewhere in that 5 to 10% range next year is a reasonable estimate.

But if we look at this year, obviously last year's fourth quarter was your highest on record, up significantly.

It seems you're forecasting for the current fourth quarter flattish number I assume, things haven't materially slowed from what you had feared or expected?

We came into the year expecting to do a little bit better than we are.

Even last quarter I was still expecting to do a positive of 1 to 2% so now I'm flat to negative 1.

There's certainly been some pressure again really in that warehouse club channel but I think the outlook for next year is okay.

And other question on tax rate, should we assume 30% for the fourth quarter for next year?

I think I said 30 to 31 for the full fiscal year which would be the fourth quarter rate obviously.

And I think somewhere in that range for next year is reasonable.

Okay.

Must have missed that.

Thank you.

Still got time for two more questions, operator.

Yes, sir.

Your next question comes from the line of Mr.

John Ivankoe of J.P.

Morgan.

Please proceed.

First question, and I'm sorry if you answered it maybe in different pieces has to do with again lowering the developments slightly for '08, I know one of the reasons is this not wanting to open units back ended anymore.

The last couple of years you've actually done a pretty remarkable job with that from a profit and operations point of view.

You've been at least in line that anyone would have thought you could have done.

Is there something that you saw in the second half of '06 or second half of '07 that made you say that you didn't want to open so many units in a given time period again?

First, thank you for the compliment.

I think that our operations team and development team have done a phenomenal job of opening that many restaurants.

I think the challenge for us is not so much getting them built because our development group can do that or picking the sites because there's plenty to choose from, it's really focusing on what's the right growth rate long term for us.

There's a lot of ancillary costs, sort of the pre-opening costs that we've alluded to.

Some other softer costs that I think would warrant us to try to take a stab at balancing the schedule a little bit which will really again help us longer term.

2009, 2010, et cetera.

That's really the driving force behind it.

Okay.

I'll accept that.

And secondly, Mike I just want to make sure I understand how you're calculating the free cash.

They're kind of rough numbers but they're easy just to do off the back of an envelope.

In '08, maybe $100 million in net income round numbers, $20million of options add back, 75 of D&A maybe gets you cash of 195 and 165 or so of CapEx, numbers like the 30.

Is there a pretty big chunk of working capital benefit that you're expecting in that number or is there something I'm not thinking about?

No, I don't think you're too far off.

I think your numbers are about right.

We'll get a little bit of --

The number I came up with is like $30 million of free cash.

It's not huge but it matters to your equity value.

No, we can go through -- I can try and walk through it with you later.

I don't have the details right in front of me right now.

Okay.

Thank you.

Yes, sir, your final question comes from the line of Destin Tompkins of Morgan, Keegan.

Please proceed.

Thanks.

Just quickly, you've obviously made same assumptions about 2008 with your earnings growth ahead of revenue growth.

Should we assume that you're not expecting much benefit in the way of cost of sales or labor when you said the 30 to 50 basis point is primarily coming from lower pre-opening in G&A.

Can you just update your commodity and labor picture in '08?

I think you're pretty much right on.

As of right now we're assuming relatively flat commodity cost of sales and relatively flat labor with the real benefits coming as you just indicated on G&A and pre-opening.

Great.

thank you.

Thank you everyone.

Thank you.

Bye, bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.