Cheesecake Factory Inc (CAKE) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Cheesecake Factory earnings conference call.

My name is Eric.

I'll be your coordinator for today.

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

We will facilitate the question-and-answer session towards the end of the conference.

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

Michael Dixon, CFO of The Cheesecake Factory, Inc.

Please proceed.

Thank you, Eric.

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, and Joe Peters, our Vice President of investor relations.

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

I will also note that our press release is available in the investor section of our website at thecheescakefactory.com.

Throughout our call today items that 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.

So we finished a somewhat disappointing fourth quarter, as the consumer slowdown felt by most retailers and casual dining restaurant operators impacted us as well.

However, our results held up reasonably well on a sequential basis relative to overall casual dining industry trends.

While we are looking forward to and planning for the future, I think it's important to give you a little color on the fourth quarter results.

We also announced an update to our business plan for fiscal year 2008 today.

I will provide some details on the rationale for this plan, as well as some line-item guidance for modeling purposes.

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

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

Before I get into our operating results, let me spend just a minute on the nonoperating charges we incurred in the fourth quarter.

As mentioned in our press release, we recorded approximately $2.6 million in one-time pretax charges related to the settlement of various legal matters.

Of this total, $500,000 related to employment practice issues and $2.1 million related to the pending settlement of federal and state shareholder derivative actions filed against the Company and related parties.

Now there is a potential for some additional insurance recovery against the settlement charges, but that is not yet determined.

These one-time items had about a $0.03 impact on our results for the quarter.

Okay, on to the operating results.

Total revenues at The Cheesecake Factory for the fourth quarter increased 13% to $406.3 million.

Our revenue growth this quarter was comprised of an approximate 14% increase in restaurant revenues and a 9% decrease in bakery revenues..

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

The 14% increase in restaurant revenues represents an approximate 18% increase in total restaurant operating weeks, resulting primarily from the openings of 34 new restaurants during the trailing 15-month period, coupled with an approximate 4% decrease in average sales per restaurant operating (inaudible).

Overall comparable sales of The Cheesecake Factory and Grand Lux Cafe restaurants decreased approximately 0.4% for the quarter, including an approximate $1.2 million impact from inclement weather during the quarter.

Now excluding the estimated weather-related impact, comparable sales of The Cheesecake Factory and Grand Lux Cafe would have increased approximately 0.1%.

By concept that translates into a 0.1% decrease at The Cheesecake Factory restaurant and a 2.1% increase at the Grand Lux Cafe.

While restaurant traffic was lower than we expected, from a competitive standpoint we believe our comparable sales held up relatively well in light of the trends experienced by many casual dining operators during the fourth quarter.

Average weekly sales of The Cheesecake Factory restaurants decreased about 2.8%, which is still slightly behind the change in comparable restaurant sales.

As we've discussed in the past, there are a number of factors that impact this comparison, from the age of the restaurant to the restaurant size.

Now we continue to be very pleased with the progress at our Grand Lux Cafes.

Comparable sales at Grand Lux Increased 2.1% in the fourth quarter, excluding the weather impact, and that's lapping a very strong 7.8% comp in the fourth quarter of 2007.

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

As sales volumes grow at Grand Lux we will continue to leverage operating cost and improve this concept restaurant level margin.

Grand Lux Cafe is a strong, viable second concept for The Cheesecake Factory.

Longer term we feel very confident there is plenty of high-quality growth from the openings of both Cheesecake Factory and Grand Lux Cafe brands.

In addition, we recognize there is an opportunity in a normalized operating environment to drive comparable restaurant sales growth in excess of our menu price increase as we work to recoup some of the traffic lost during this challenging economic period.

On the development front, we entered four new markets this year, as we successfully extended our brand into Rochester, New York; Tulsa, Oklahoma; West Hartford, Connecticut; and Salt Lake City, Utah.

In fact, our Salt Lake City location is averaging in excess of $265,000 in weekly sales during the 13 weeks since it opened.

In addition, our strategy of returning to those markets that we know and have been successful in is delivering solid performance against our expectations.

As we noted in our press release, the new restaurants that we've opened to date in the Northeast have delivered average weekly sales of the group of roughly $235,000 since opening, consistent with expectations for high volumes in this region.

On the Grand Lux Cafe front, our newest location in the Palazzo Hotel Resort and Casino in Las Vegas is averaging about $295,000 in weekly sales since its opening.

In total we met our target of opening 21 new restaurants in 2007, including five Grand Lux Cafes.

In the fourth quarter we opened eight Cheesecake Factory restaurants and three Grand Lux Cafes, as planned.

I'll talk about our 2008 development plan shortly, but I do want to remind investors of the risk to achieving our opening schedule, as we currently lease all our restaurant locations, many of which are in newly constructed or to be constructed retail developments, such as shopping malls, entertainment centers, city-scape strip centers, and so forth.

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

Our locations are up-scale 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 of 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 preopening processes are typically consistent, usually taking four to six months to complete on average.

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

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 operations team to get these restaurants opened and running like a Cheesecake Factory from day one.

After opening 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 margin.

Now moving on to our bakery operations, bakery sales, net of intercompany bakery sales, decreased 9% in the fourth quarter from the year-ago period to $22.8 million versus $24.9 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 occasionally continue to effect their purchasers, as well.

While we remain optimistic with respect to opportunities to build our bakery sales volumes over time, I remind investors that this is a small part of our business and that third-party 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 name 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 important contribution 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 in excess of $220 million of desserts made in our bakery production facilities 2008.

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.

So that covers our top-line performance for the fourth quarter, so now I'll briefly review the individual components of our operating margins for the fourth quarter.

Cost of sales decreased slightly to 26.2% of revenue for the fourth quarter, compared to 26.3% in the same quarter last year.

Ten basis point improvement over the prior year is attributed to favorable costs in produce, meat and seafood categories, partially offset by the ongoing pressure from higher dairy cost and as well as a slight increase in poultry prices.

As you may recall, we extended our poultry contract last summer through the end of 2008 in exchange for a slight price increase.

I'll point out that despite the increase in dairy prices for fiscal 2007 we managed to improve our commodity cost on a full-year basis by 20 basis points relative to the prior year, as a result of very strong commodity price management and negotiations.

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.

Total labor expenses were 32.3% of revenues for the fourth quarter.

That's up from the 31.7% in the prior quarter(sic - see Press Release).

This increase reflects the deleveraging effect from the lower of sales, as well as higher costs stemming from minimum wage increases.

Other operating costs and expenses were 23.1% of revenues for the fourth quarter.

That's up from the 22.1% reported in the same quarter last year.

The increase reflects the benefit last year from a favorable adjustment to our self-insurance reserve, as well as the deleverage effect on the lower level of sales in the fourth quarter of 2007.

G&A expenses for the fourth quarter were 6% of revenues, down slightly from the 6.1% in the prior year.

Excluding the $2.6 million of legal settlements that were recorded in the fourth quarter of 2007, G&A expenses were 5.3% of revenues.

The decrease relative to the year-ago quarter was primarily due to about $800,000 in professional fees related to the stock-option review incurred in the fourth quarter of the prior year.

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, and the cost for our restaurant management, recruiting, and training programs, which should grow at a rate closer to our unit growth rate.

For the full year, after adjusting for the one-time costs I just mentioned, G&A as a percent of revenues was 5.4% in both fiscal year 2007 and 2006.

So in spite of the fairly-significant deleverage effect from lower sales, we still managed to open our target restaurants and effectively control our G&A costs.

Depreciation expense was 4.3% of total revenues for the fourth quarter compared to the 3.9% for the fourth quarter of the prior year.

Actual preopening costs incurred during the fourth quarter were a bit higher than we expected, at approximately $11 million compared to $12 million for the same quarter last year.

Our back-ended opening schedule required us to hire managers early in order to have the appropriate number of trained managers in place to support our openings.

This pushed preopening expenses a little higher than originally planned, combined with increased costs for staff relocation.

In addition, we experienced higher costs related to the Grand Lux Palazzo opening, as the opening date for the hotel and casino was rescheduled several times.

We opened eight Cheesecake Factory restaurants and three Grand Lux Cafes in the fourth quarter of 2007 compared to 13 Cheesecake Factory restaurants in the year-ago quarter.

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

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

Included in interest expense is $2.4 million of interest expense on the $175 million in outstanding debt we had under the revolving credit facility during the quarter.

We have an interest rate collar agreement on $150 million of this outstanding revolver balance that mitigates the risks from interest rate variation 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 effective tax rate for the fourth quarter was 30.2%, in line with our expectations.

Let me provide a brief recap of our stock-based 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 fourth quarter was approximately $4.8 million, of which $1.8 million was charged to labor expenses and $2.9 million was charged to G&A expenses.

Lastly, before I move off the income statement, let me comment on our recent share repurchases.

During the fourth quarter of 2007 our board of directors increased our repurchase authorization by five million shares to 21 million shares.

In 2007 we returned approximately $250 million of capital to shareholders through share repurchases, including 2.2 million shares that were bought back in fourth quarter of 2007, for an aggregate price of $49 million.

The 2.2 million shares repurchased were funded by a combination of cash on hand and borrowings available under our revolver.

There are approximately 7.5 million shares remaining in our repurchase authorization and we expect continued buybacks going into 2008.

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

As of January 1, 2008, our cash and marketable securities on hand were approximately $49 million, our cash flow from operations through the fourth quarter was approximately $160 million, and our cash and accrued CapEx through the fourth quarter, as reported in the statement of cash flows, was approximately $211 million, which includes construction in progress for 2008 openings.

Adjusting for the mechanics of lease accounting, actual cash CapEx expenditures for 2007 was approximately $204 million.

As I mentioned earlier, we have $175 million in funded debt in our capital structure.

We expect to be able to finance our CapEx requirements for fiscal 2008 through expected operating cash flow, agreed-upon landlord construction contributions, and our cash on hand.

We do have $25 million available on our credit facility for back-up liquidity purposes and to support stand-by letters of credit for our insurance arrangements.

To wrap up our business and financial review for the fourth quarter, there is no doubt the operating environment has gotten a little tighter.

Our total revenues were lower than we expected, as a result of both weather and the macro environment, and cost pressures have not moderated.

Even for a best-in-class concept, such as The Cheesecake Factory, which operates at very high levels of efficiency and productivity, it's clear that the current economic environment has impacted and will continue to impact operating results.

That being said, we continue to have confidence in the strength of our concepts and consumer demand for both of our brands, and we believe we are well-positioned for the eventual recovery of the economy.

We remain committed to the long-term, healthy growth of The Cheesecake Factory and Grand Lux Cafe, and as always will continue to look for ways to enhance our productivity and profitability.

With that as the backdrop, let me share with you the details of our fiscal 2008 plan.

As we discussed in today's press release.

we are updating our business plan for fiscal 2008, focused on a prudent allocation of capital intended to enhance overall earnings per share growth and increase returns on invested capital.

Tactically this means we are targeting revenue growth of 10% to 12% in 2008 and we adjusted our planned new restaurant openings for the year to between seven and nine.

While we expect margin pressures to continue in 2008, we believe the combination of lower preopening costs from fewer openings, and the benefits from the improvements we made to our capital structure last year, as well as our ongoing focus on returning capital to shareholders, will result in diluted earnings per share growth of between 10% and 15%.

A lot has changed in the macroeconomic environment over the last 3.5 months since we announced our preliminary plan for 2008 in late October.

Unfortunately these changes have not been positive.

Confidence in the economy is falling, the housing market has further deteriorated, and concerns about a recession have escalated.

This has significantly impacted consumer discretionary spending, resulting in a decrease in traffic across the casual dining segment.

In addition, casual dining stocks, along with most of the market, have experienced significant pressure over the past several months.

All of these factors went into our decision to revisit our plans for fiscal 2008.

We will continue to drive earnings per share growth through a prudent allocation of capital.

Historically this was accomplished primarily through new restaurant openings.

However, based on the macro pressures I just mentioned and and the expected returns from buying back our stock at current levels, we believe the most effective way to drive earnings per share growth and increase incremental returns on invested capital in 2008 is to scale back our new restaurant growth and increase our emphasis on returning capital to shareholders.

For 2008 that translates into seven to nine new restaurant openings combined with an ongoing share repurchase program.

We still believe there are plenty of high-quality sites available for our brands and we will continue to select premier sites for our concepts.

However, the best sites are not always available when we like them to be.

We will open fewer new locations, renew focus on exceptional sites based upon their availability, and again, return the excess capital resulting from a reduction in openings to our shareholders.

Let me give you more specific on the 2008 plan.

We plan to open six to eight Cheesecake Factory locations in 2008, as well as the initial unit of our newest concept, Rock Sugar Pan Asian Kitchen.

We do not have any new Grand Lux Cafe locations in the 2008 plan at this time.

Based on the locations that are available and the site selection discipline I just discussed, we did not find and Grand Lux sites that met our criteria.

However, we remain committed to Grand Lux as our second concept and fully intend to continue rolling it out at exceptional locations.

The 2008 plan will also provide us with an increased opportunity to focus on the investment side of the Grand Lux returns equation, as well as allow additional time to explore opportunities for operational refinements and margin enhancement.

As I mentioned earlier, we are targeting sales growth at 10% to 12% in 2008.

While we're optimistic about the long-term potential of The Cheesecake Factory brands, we are also realistic about the current state of the consumer.

As such, we are expecting continued pressure in guest traffic in the casual dining sector and are assuming our comparable restaurant sales will decrease between 1% and 2% in 2008 from 2007 levels.

This reduced traffic, combined with ongoing margin pressures in several areas that I'll get into detail in a moment, will result in some definite operating margin pressure before preopening expenses.

However, the reduced preopening costs resulting from fewer openings will offset this pressure to keep our overall operating margin relatively flat with 2007.

In terms of menu pricing we are implementing an approximate 1.5% effective menu price increase in our winter menu change, which would be rolled out by the end of this month, to help offset known cost pressures, primarily related to commodity, labor, and energy costs.

As we have always done, we will consider additional menu price increases later in the year to help offset additional pressures that may arise, as well as drive margin enhancement.

We are always cautious about menu price increases, as we strive to maintain the value proposition of The Cheesecake Factory.

This is even more important when faced with a very difficult consumer environment, as we are today.

The Company's in the process of performing price, with the help of consultants, to better understanding the pricing parameters of our brands.

The results of these studies will help establish our pricing philosophy for the future.

As for the capital allocation portion of the plan, we expect to generate between $80 million and $90 million of free cash flow.

To be clear, this is operating cash flow after tax and net of our estimated CapEx requirement.

These funds, along with additional leverage opportunities, will be used primarily to repurchase our stock in 2008.

As I detailed earlier, our board of directors increased our share repurchase authorization to bring our total shares available for repurchase to approximately 7.5 million and may consider additional authorizations.

The combination of these elements gets us to earnings per share growth of between 10% and 15%.

For 2008 and beyond our objective is to maintain a financial structure that gives us the flexibility to continue to actively pursue the best return on capital, through both selecting premier sites when they become available and returning excess capital to shareholders.

Through a continued execution of a high-quality growth plan and prudent allocation of our capital, we believe we can grow earnings per share in the 10% to 15% range for several years.

In summary we very feel optimistic about our 2008 -- our plan for 2008, and believe we're making the right choices for the long-term health of our business.

We will continue to grow our concepts, using a disciplined approach and selecting only those sites that are high quality and high margin.

Opening fewer units will also have the effect of limiting saturation in any market, preserving the uniqueness of our concept, and mitigating the risk of cannibalization.

With less emphasis on new restaurant openings, our operations team can focus more on sales and margin-enhancing opportunities at our existing base of restaurants.

As we have always done, we will also evaluate our infrastructure to ensure we are properly structured to support our current level of business and the planned growth.

All in, we believe our plan balances the need for short-term results and allows us to return a meaningful amount of capital to shareholders, while also strategically positioning us for the long term.

To assist investors with their financial models I will now briefly run through, by income statement line item, our expectations for the first quarter and full-year 2008.

As I mentioned, we are targeting full-year earnings per share growth of 10% to 15%.

However, as you would expect, the majority of that growth comes in the second half of the year as we lapse the preopening expenses from 2007.

Our expectation of total revenue growth, which includes both restaurants and third-party bakery sales, in the first quarter of fiscal 2008 is 10% to 12%, relative to the first quarter of fiscal 2007.

As outlined in today's press release, our targeted revenue growth for the full-year 2008 is also 10% to 12%.

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 50 to 60 basis points higher in the first quarter of 2008 compared to the prior-year first quarter, and approximately 25 to 35 basis points higher for the full year compared to the prior year.

We have contracted with suppliers for those expected commodity requirements through 2008 that can be contracted.

Regardless, we do expect continued cost pressure in produce, as the poor growing season in 2007 is expected to impact 2008, as well.

We have contracted a portion of our cream cheese requirements through 2008 at a fairly modest, mid single-digit increase versus the prior year, and will evaluate opportunities to contract the remaining requirements based on market movement throughout the year.

Labor expenses are anticipated to be approximately 20 to 30 basis points higher in the first quarter of 2008, relative to the comparable quarter of the prior year, due primarily to deleverage from the slower anticipated traffic.

For the full year we expect labor expenses to be about ten to 20 basis points higher than the prior year.

We expect other operating costs as a percent of revenues to be approximately 30 to 40 basis points higher in the first quarter of 2008, again, related primarily to the deleverage from slower traffic, combined with ongoing utility and janitorial cost pressures.

For the full year we also expect other operating expenses to be 30 to 40 points higher compared to fiscal 2007.

Our expectations for G&A expenses, as a percent of revenue, to be about 20 basis points higher in the first quarter of 2008, as compared to the first quarter of the prior year, and about ten to 20 basis points higher for the full-year 2008 relative to the full-year 2007.

We expect depreciation expense to be approximately 20 to 25 basis points higher in first quarter of 2008, compared to the first quarter of 2007, and about ten to 20 basis higher for the full year, based on our expected growth and investment plans.

We anticipate cash CapEx in 2008 to be between $90 million and $100 million.

Our expectations for fiscal 2008 total preopening costs is $13 million to $15 million, in support to the seven to nine new restaurant openings that I discussed earlier, including the preopening cost associated with our initial Rock Sugar location.

About $2 million to $3 million of the preopening cost should fall in the first quarter.

We do not plan to open any restaurants in the first quarter, but do expect to have at least two new restaurants opening early in the second quarter.

We will give additional guidance on our planned restaurant openings by quarter on our quarterly updates during the year.

As a reminder, we usually incur most of our preopening costs during the two months before an opening and the month of a restaurant's opening.

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

Absent any additional leverage in the first quarter, which has not yet been determined, we expect net interest expense to be at $2.5 million to $3 million.

We expect our tax rate in 2008 to be in the range of 31% to 32%.

And lastly, we anticipate a weighted-average outstanding share count for the first quarter of 2008 of approximately 69 million shares.

Now I realize that's a lot of detail, but that represents our best estimates at this time.

Of course, we will update you further throughout the year on our quarterly conference calls.

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 that we have left on this call, please be courteous and limit yourself to one question and then requeue with any additional questions.

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

Operator, we're now ready for a few questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Steven Kron with Goldman Sachs.

Please proceed.

Hey, thanks, good afternoon.

One question on just your development slowdown.

I just want to be certain that I understand it, that the idea here is not so much that you're backing off long-term unit development targets but more so that it seems as though you're raising the bar, at least from a return hurdle standpoint, as to what you're willing to look at.

And I guess can you just comment on that?

And then, just as a second piece to that, the earnings growth profile of 10% to 15%, it sounds as if you're saying that that is what you expect for the next couple of years.

Should we take that to mean that we will likely sit at this seven to nine unit development for the foreseeable future?

Thanks.

Good question, Steven, and I think the first half of your question is right on.

I think what we're saying with this plan is that we're focusing on really a prudent allocation of capital.

and as we look at the best allocation of the capital to drive earnings per share and returns in general, today we feel that translates into the seven to nine restaurants with an aggressive share repurchase program as a way to return capital to shareholders.

On a go-forward basis, keeping that same mentality, and as you mentioned targeting that 10% to 15% EPS growth, that balance will change based on the dynamics of the market at that time.

So it could be a few -- of the great sites are available and they're out there, we want to take them, so that could end up being a few more or a few less in this year with an allocation of the remaining capital towards returning it to shareholders.

Our plan is really never to turn down an A site, and as they come up for either concept, we will absolutely be taking them.

The next question?

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

Please proceed.

Yes, thank you.

If I could first follow up a little bit on that and then ask a question, as it relates to the Grand Lux' that you decided not to open this year, you said there was something about the criteria that they didn't meet.

Can you elaborate on that point?

And then also, can you just talk about this, generally speaking, you're traffic has been slowing for a while now and yet we haven't really heard for you guys an articulate plan about driving traffic growth.

I understand the macro is probably worse than anybody would have guessed here, but how do you think about pulling some leverage to drive traffic growth over the next 12 to 24 months?

Thanks.

On Grand Lux Cafe, a couple of them moved from `08 to `09 that we really loved.

Others we felt were not the icon sites that we really want to start Grand Lux with.

We've some incredible sites, downtown Chicago, Las Vegas, the sites we have in Miami, but the sites that we were looking at for `08 and early `09 were just not at the level we want.

So we're going to wait for even beyond that A site, that icon site, to make sure Grand Lux continues to get launched in the same way we launched Cheesecake Factory year ago to make sure that we really get our reputation going in the city and then move out to the suburb.

So, we have about -- a number of sites that we've listen looking at for awhile, tracking.

Some of them have moved to 2010 because of new construction, and so they got put off and we'll see how many we really can get in `09.

But we're extremely happy with the returns, we're extremely happy with Grand Lux, and I wish we could get some open for `08.

We are actually disappointed, but they will be great when we open them.

And then in terms of -- I guess you're asking about increased marketing, we're certainly looking at various marketing things.

Again, part of the increase in our gift cards and our 40% increase was really -- we look at that as marketing because there is an expense to that, where in the old days we probably never would have marketed in that way.

We do it today to increase our sales at the discount to that.

We have a number of other things with the -- with Master Charge, American Express, Visa, and other things that we're doing, increased visibility, giving to community causes to drive more business in the individual communities, and we're considering other things.

At this moment we don't have any kind of massive radio or TV spot.

We think we are too spread out to have that be effective.

And I would just follow that up.

I think clearly you're swimming against the tide in trying to drive traffic in this environment.

We'd like to see it come back, but again, relatively speaking, when you look at the traffic decline across casual dining in general.

we've probably held up as well or better than anybody.

So, we've go to be very careful in how allocate costs towards driving incremental traffic in this environment.

Next question?

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

Baird, Please proceed.

Hi, good afternoon, everyone.

A question on your guidance assumptions for `08, Mike, your said you were assuming comps down 1% to 2%, if I heard that correctly, and that's below what you saw in Q4.

I'm just wondering if you're seeing anything now that might cause you more concern than what you had in Q4 or just if you could give some more detail on your thought process is there?

I think, again, we're trying to trend off what we've seen most recently, and I think we saw, absent of a holiday pickup, a decelerating traffic through the fourth quarter and I think that's the trend that we're trying to be relatively cautious in planning our expectations for 2008.

Okay, and if I could ask one other question.

Just wondering what you think your opportunity is in the existing restaurants in terms of increasing margins for those.

I think that was mentioned previously, just wondering what the thought process is there?

Thanks.

I think it's fair to say we do believe there are opportunities.

The restaurants -- our restaurants operate pretty darn well, but when you lose traffic you've got to reevaluate your operating procedures and look for some margin enhancements.

And clearly when you look at our operating margin trends over the past few years, for lots of reasons there's been a decrease in those margins.

So we recognize that the -- with less of a focus on growth, certainly in 2008, we have an opportunity to focus more on the operating efficiencies of each of our restaurants, and that's one of our primary objectives in this year and beyond.

So I couldn't put a dollar or a percent increase on it for you, but we certainly recognize there are some opportunities to drive the margin.

Next question?

Next question comes from the line of Joe Buckley with Bear, Stearns.

Please proceed,

Thank you.

Just a question -- obviously you were planning just a couple of months ago to open up more sites.

Are there costs associated with changing those plans, any leases that have been signed already or up-front costs that will be recognized?

No, Joe.

We -- everything we signed we wanted to keep.

We were able to move some of those sites to 2009, and any of the others that we decided not to go forward with, we had no costs to get out of.

Okay, and then just one other quick one, Mike, The net interest expense number for the first quarter actually looks a little lower than what it was for the fourth quarter.

I'm sorry, which expense?

The net expense number for if first quarter --

Right.

-- that you mentioned, $2.5 million to $3 million, I think, looks a little bit lower than the fourth quarter.

Is that just a function of year-end cash balances, or --?

Well, it's a combination of that.

I think also in that interest expense number is the portion of interest associated with deemed landlord financing on the leases, which kind of skewed that up a little bit in the fourth quarter.

So I think we'll -- I think the number coming down in the first quarter's more in line with where we expect it to be.

Okay, thank you.

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

Please proceed.

Good afternoon.

Just wondered, as you look forward with the slower growth whether you would expect to see, and if you don't, why you wouldn't, expect to see the average weekly sales to the same-store sales gap close?

I think over time that's a fair statement, we would expect to see that happen, sure.

Thank you.

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

Please proceed.

Hi, can you talk somewhat about your new unit returns?

It looks like there may have been some deterioration in the unit productivity, particularly in this quarter, and maybe how you're assessing, in a more normal consumer environment, your appetite for growth at this stage?

Well, I think the return certainly, whether it's new units or existing, were impacted, obviously, by the lower traffic across the board in 2007.

So, our focus on the slightly slower growth in 2008 is to make sure that we are focused on those premier sites that we feel from a traffic perspective have less risk, are going to be able to drive the returns in excess of our expectations, which we've targeted that mid 20%, fully-capitalized cash-on-cash return, and that stays the same.

We just want to make sure that we're picking the premier sites that we feel very confident are going to deliver that.

Again, it's harder to do in an environment with the traffic declines as we saw in 2007.

When you're pulling back on the new unit openings, is there any particular region where you've seen enough softness that it just doesn't make sense to redeploy capital in that area?

I wouldn't say it's as much regional.

Again it's -- there's fantastic sites everywhere in the country and when those come available, those are the ones we want to make sure that we take.

It's really a site by site than any particular regional weakness.

And just to be clear, do you view this internally as more of a macro issue or do you think you're getting to the position where there's just a scarcity of class A real estate sites for you?

I don't know that there's a scarcity.

Certainly there's fewer of them by default; however, there's plenty of them left, but we want to make sure that we're holding out and getting just those sites

Right, and we're not opening just to hit a number, but we're opening because each one is excellent and we 100% believe in it.

Okay.

And are there any dangers of any store closures?

No, all of our stores, as we've always said, are profitable.

They all deliver positive cash flows, so at this point we wouldn't consider that.

Okay, thank you.

Your next question comes from Matt DiFrisco with Thomas Weisel Partners.

Please proceed.

Thank you.

Why aren't we going to see more leverage or any leverage on G&A in 2008, if you presumably are cutting back growth in the infrastructure and G&A has been somewhat of a dri -- has been driven also by the up-front investment of development.

So if you're having, basically, half or less than half the number of store openings I would think G&A also has potential, as well as your growth being slower in the EPS side, I would think bonuses would reflect the similar muted outlook?

I think that clearly there are opportunities for G&A leverage, but I think it's important to think about our G&A structure.

As I look at the cost structure of our G&A, I would say 85%, probably 90% of the costs are really -- they're not geared towards new restaurant openings, they're geared to supporting the150-some restaurants that we have today.

So if you look at the costs specifically associated with that growth of new restaurants, there is some room for leverage and I think that's being reflected in there.

If you look at the overall -- on a year-over-year basis we've talked about being relatively flat on G&A, I think that's reflective of, at this point we are considering that we would accrue some bonus, which we did not have a bonus 2007 or 2006.

We also have increased cost with our gift card programs, which as David mentioned, went from $60 million in sales to nearly $80 million in sales on a year-over-year basis, and so we captured the fee, or the commission costs we pay for the third party on that and defer that over the life of the expected redemption period.

So those are things that are driving the G&A up.

I think we've captured quite a bit of the applicable leverages there.

There's always going to be more opportunities and we're going to continue to find it.

Okay, and just as a bookkeeping, can you just verify -- you said one to two down in traffic or same-store sales for 2008?

1% to 2% down in comp sales.

In comp sales.

And then also, can you just break out that charge -- I missed it if you did in your prepared remarks, the net $1.8 million -- or it was a little higher, a little over $2 million in the fourth quarter, the $0.03.

Where was that in the line items?

Where did it impact?

It's all in G&A.

All in G&A.

Thank you.

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

Please proceed.

Great, thanks, good afternoon.

Just another couple follow ups on the pricing philosophy for 2008.

You said 1.5%.

With that, you forecasted about an 80 basis point hit.

Was that -- is that function solely as traffic, meaning if you had guided for flat traffic, 1.5% would have helped margins flat?

And I guess, following up with that, I have a question.

It seems like another point price increase of roughly 2.5% next year could have held margins if it was gotten through successful.

Why so conservative, I guess, on the other side?

Well, I think the -- we've guided to the 1.5% price increase that's rolling out now.

Of course, as we have always, when the summer menu change rolls around, we'll consider what pricing opportunities are available, what incremental margin pressures are there, taking into account the state of the guests -- our guests, the state of the consumer, et cetera, and look for opportunities to help offset some of the margin pressures you just identified.

And depending upon what's happening at the time, maybe get some margin enhancement.

I can't say that that'll happen this summer, but that certainly is where we want to end up over time, using pricing to get a little bit of that margin back.

And I guess related, with that 1.5% pricing for the year, what you're looking at is only a modest ten or 20 basis point up on labor, that would imply labor inflation rates are down considerably from what you've seen.

Is that a correct assumption or are you looking at cutting back and making some efficiencies elsewhere?

No, I think that's probably true.

I'd have to think about that some more, gut I think that's true.

Great, thanks.

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

Please proceed.

Thank you.

Mike, I have a couple of questions on the '08 guidance.

It sounds like same-store gift cards -- gift card sales were pretty strong during the holiday season.

Are you seeing unusually low redemptions in January?

I don't think -- historically on a monthly basis January, obviously, tends to be the highest redemption month.

I don't have the percents in front of me.

I don't think it's that different than it's been in prior years.

So, our January sales -- I don't think anybody asked so far -- we mentioned it, but our comp sales through the first four weeks of 2008 are pretty much in line to the guidance I suggested as comp sales for the year.

But that's taken into account that we've had absolutely terrible weather in California for the first several weeks of year and are down quite a bit in that market, but overall we're still in that range of a -1% to -2% right now.

Okay, and does you margin -- let me make sure I'm clear on this, does your margin guidance for '08 reflect additional pricing in the summer?

At this point it does not.

Okay.

And then, if you look at the preopening expense per unit that's projected, it seems to be much higher in `08 than what it was in 2007, and I mean, preopening per unit.

Is this true?

Well, I think at this point it's a little higher.

I think we've got to figure out -- and somebody asked earlier about the leverage opportunities -- whether there's opportunities to better manage our manager -- plan management growth, which is bringing managers on early and carrying them, waiting for the restaurants to open, we'll still be -- even though it's fewer units, we'll still be a little more back-end loaded, so making sure that we've got those costs completely under control.

I think the costs of relocation and moving managers around has increased considerably.

I would say the direct costs associates with the restaurant when we get in there for the two months or so before a restaurant opens -- or the month before our restaurant opening, those are pretty consistent.

It's that management carrying cost and relocation cost associated with it that has increased in 2007 and that we've got to evaluate closely for 2008.

Okay, and last question.

I know in the last call I think you guys mentioned something about a prototype for 2008.

Could you describe some of the benefits you hope to get from a new prototype?

Well, we -- we are trying to have several of these sizes, so we can open the appropriate restaurant in the appropriate market.

So if there is an A site but it's in a market that is a little less populated and -- or that we're limited to maybe 8,000 square feet, we want to have the right box with the right kitchen and the right cost.

So we will be working on that.

We're pretty much done.

We'll waiting to open one, make sure that everything is sized properly, and we then we'll have one of these boxes.

It'll be approximately, I don't know, 7,800 to 8,000 square feet where we think it'll be more economical than the sizes we've been opening in the past years.

No change to the menu?

No change to the menu.

Cook everything, just less costs going into a market that -- a site that needs to be smaller or we deem that it should be smaller.

Great, thanks, guys.

Operator, we have time for about two more calls.

Your next question comes from John Ivankoe with JPMorgan.

Please proceed.

Yes, hi.

Thank you.

The question is on pricing, especially in light of this current environment.

Firstly, it sound like the pricing that you're taking is fairly cost-driven, so I just want you to comment in terms of how you think your consumer will do with pricing?

And secondly, in the context of communicating consistent value, which a lot of your lower-end peers are talking about, we've seen in previous years things like smaller lunch portions and we've seen the bar menu, for example, I think you use in 2007.

So could you comment if there's anything that might be upcoming in 2008 to bring back the consumer that might be somewhat fiscally constrained?

Right now we are really -- we'll just be adding to those categories, keeping them alive and fresh with new items.

We're going to add more of the weight management items for those people that are weight conscious, probably some open-faced sandwiches and other meals besides just salads.

But we have more -- we want to be very careful about cheapening, changing our concept, doing things that we may be sorry for later, but continuing to just bolster the sections that are on the menu now and then the consumer -- we think our consumer will be better off.

Well, actually, we've historically been very successful at getting our price increase and as I think you're alluding to, John, the 1.5% seems -- is relatively modest in this environment.

But as we balance out our need to cover our margin pressures, as well as try to find margin enhancement, we think that's a reasonable price increase at this point, and I don't anticipate any trouble in getting that.

Okay, thank you.

Last call, operator?

Operator, our last call?

Your next question comes from the line of Howard Penney.

Please proceed.

Hi, thanks very much.

You may have answered this indirectly, but I was trying to get at some of the other benefits, other than the obvious, to the organization from the slowing growth, meaning, obviously, the increase in free cash flow and lower preopening expenses, and just some of the other benefits that accrue to the organization over the next 12 months as you refocus your growth?Thanks.

Sure.

Well, I think you've hit on the big ones, and the other one which we talked about was making sure that our infrastructure is properly suited for that growth, both today and into the future.

I think the biggest one, which is harder to put your finger on immediately, is those operating margin enhancements that are available at the restaurant, from increased focus and attention from the team, who has to spend less time on new restaurants, more time on the restaurants.

You also get the benefit of less cannibalization, and then I think maintaining the value of brand and protecting the long-term strength of The Cheesecake Factory brand.

Those are the other benefits that accrue to us, both in 2008 and longer.

Okay, operator, I think that was our last call.

Yes, sir.

That concludes the Q&A.

Thank you, everybody.

Thank you.

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

This concludes our presentation.

You may now disconnect.

Have a good day.