Cheesecake Factory Inc (CAKE) 2008 Q1 法說會逐字稿

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  • Operator

  • Good day, ladies and gentlemen, and welcome to the first quarter 2008, The Cheesecake Factory earnings conference call.

  • My name is Akia and I'll be your operator for today.

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

  • We will conduct a question-and-answer session toward the end of the conference.

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

  • Mike Dixon.

  • Please proceed, sir.

  • - CFO

  • Thank you, operator.

  • Hello, everyone, I'm Michael Dixon, CFO of The Cheesecake Factory, Inc..

  • Welcome to our quarterly investor conference call which is also being broadcast live over the Internet.

  • Also with us is David Overton, our Chairman of the Board and Chief Executive Officer; and Jill Peters, our Vice President of Investor Relations.

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

  • I would also note that our press release is available in the investor section of our Web site at thecheesecakefactory.com.

  • 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 in this call speak only as of today's date, and the Company undertakes no duty to update any forward-looking statements.

  • So with that behind us let's move on.

  • This is a special year for us as it marks the 30th anniversary of The Cheesecake Factory restaurants.

  • We opened the original Cheesecake Factory in Beverly Hills on February 25, 1978.

  • We've come a long way since then and along the way developed one of the great restaurant companies in America.

  • We look forward to sharing this special anniversary with our staff and guests throughout the next year.

  • As for the first quarter, we finished the quarter in line with our expectations.

  • Although the operating environment remains challenging as most retailers and casual dining operators continue to feel the effects of a weak consumer.

  • As always, we stayed true to The Cheesecake Factory brand, focused on operations and execution, and closely managed our costs.

  • I'll take you through our operating results in detail and provide you with our expectations for the second quarter of fiscal 2009 as well as the full year.

  • Following these prepared comments 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 this call up in about 45 minutes.

  • So on to the results.

  • Total revenues at The Cheesecake Factory for the first quarter increased 10% to $393.8 million.

  • Our revenue growth this quarter was comprised of an approximate 10% increase in restaurant revenues and a 12% increase in bakery revenues.

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

  • The 10% increase in restaurant revenues represents an approximate 16% increase in total restaurant operating weeks resulting primarily from the openings of 21 new restaurants during the trailing 15-month period, coupled with an approximate 4.5% decrease in average weekly sales.

  • As planned, we implemented an approximate 1.5% percent effective menu price increase in our winter menu change which finished rolling out by the end of February to help offset known cost pressures primarily related to commodity, labor and energy costs.

  • It continues to be a difficult environment to pass along cost pressures via menu price increases, but we will evaluate our opportunities for menu price increase again in our upcoming summer menu change.

  • As I mentioned last quarter, we are in the process of performing a pricing study with outside consultants to better understand the parameters of our brand as it relates to these future price increases.

  • Overall comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants decreased approximately 1.8% for the quarter, including an approximate $1.6 million net impact from inclement weather during the quarter.

  • Excluding estimated weather related impact, comparable sales of The Cheesecake Factory and Grand Lux Cafe decreased approximately 1.2%.

  • By concept that translates into a decrease of 1.3% and 0.6% at The Cheesecake Factory and Grand Lux Cafe respectively.

  • At Grand Lux Cafe, the majority of the comp decline came from our units in California and Florida.

  • While these are all great locations, each doing $9 million to $10 million in sales, these particular geographic areas have been harder hit by the broader economic softness.

  • Sales at the remaining Grand Lux Cafes in the comp base were positive.

  • And as Grand Lux has a relatively small comp base it doesn't take much to move it one way or the other.

  • Average weekly sales of The Cheesecake Factory restaurants decreased about 4% 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 age of restaurant to restaurant size.

  • Longer term we feel very confident there is plenty of high quality growth ahead for our concepts.

  • In addition, we recognize it as an opportunity to drive comparable sales growth in excess of our menu price increase as we work to recoup some of the traffic lost during this challenging economic period.

  • And consistent with our 2008 plan, we are focused on opportunities to improve sales and margins in our comparable base of restaurants.

  • On the development front, we are targeting the highest return, premium locations based on their availability.

  • As announced last quarter, we continue to expect to open between seven and nine new restaurants this year, including six to eight The Cheesecake Factory restaurants and the initial unit of our Asian concept, RockSugar Pan Asian Kitchen.

  • As expected, we did not open any new locations in the first quarter.

  • Our plans for the second quarter of 2008 call for five new restaurants, four The Cheesecake Factory restaurants and the one RockSugar.

  • We currently anticipate opening the remaining new The Cheesecake Factory restaurant in the fourth quarter of this year.

  • Before I move on to our bakery operations, 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, cityscape strip centers and so forth.

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

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

  • But that also creates some unique design and permitting challenges.

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

  • So the 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 on budget.

  • We also have an equally talented operations team that gets these restaurants open and running like a Cheesecake Factory from day one.

  • After opening, it takes about 90 to 120 days on average for our new Cheesecake Factory restaurant to work through their grand hopping inefficiencies and for food and labor costs to reach their targeted operating profit margins.

  • Now moving on to our bakery operations.

  • Bakery sales, net of intercompany sales, increased 12% in the first quarter to $15.1 million versus $13.5 million in the prior year quarter.

  • The increase is due primarily to strong post holiday shipments to the warehouse clubs.

  • As you may recall, our warehouse club sales were a little soft in Q4, but we did get the benefit of restocking that pipeline in the first quarter.

  • While we remain optimistic with respect to opportunities to build our bakery sales volume over time, I remind investors this is a small part of our business and that third-party bakery sales are not has predictable as our restaurant sales.

  • 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 $200 million of desserts made in our bakery production facilities during 2008.

  • Approximately 14% of our restaurant sales consist of dessert sales which is a much larger than achieved by most other casual dining restaurant concepts.

  • That covers our top line performance for the first quarter.

  • Before I get into the individual components of our operating margins for the first quarter let me spend just a minute on the consolidated operating margin.

  • Our overall operating margin at 6% is in line with our expectations and the guidance we gave at the beginning of the year.

  • However, it is a decrease from the 7.1% operating margin in the prior year.

  • I think we're all familiar with the primary causes of margin contraction in the restaurant industry, from increased commodity costs, minimum wage hikes, and escalating energy costs.

  • We've been fairly aggressive in our menu price increases to offset these pressures.

  • But as I just talked about we need to balance the need for price increases against the impact on our guests.

  • As we evaluate the different components of our operating margin our core Cheesecake Factory restaurant business has held its margins fairly steady.

  • In fact, we managed our labor costs very well in a volatile sales environment.

  • However, we did experience some fairly significant year-over-year margin pressure at the bakery and Grand Lux Cafe businesses.

  • The bakery business had over 400 basis points of margin pressure due primarily to significant commodity cost increases, primarily in butter and eggs and some pressure on cream cheese costs.

  • These pressures were partially offset by the distribution efficiencies we are experiencing from our East Coast bakery facility.

  • Of course, we try to pass some of these margin pressures along via price increases, but it is difficult with such a large percentage of our bakery sales coming from the warehouse clubs.

  • Having said that, we do have price increases planned and approved for later in the year.

  • At Grand Lux Cafe, we experienced the impact of four new restaurants opening since August of last year on a base of nine.

  • That's a nearly 45% increase.

  • While expected, this did put pressure on operating margins compared to the prior year.

  • We expect to recoup some of this lost margin as these locations build awareness and sales volume over time.

  • Now let me walk you through the individual line items of our P&L in a little more detail.

  • Cost of sales increased to 25.6% of revenues for the first quarter compared to 25.1% in the same quarter last year.

  • The increase was primarily the result of higher costs for poultry and cheese at the restaurants and higher costs for eggs, butter and cream cheese at the bakery.

  • As you may recall, the significant increases in dairy products started in the second quarter of 2007, so we haven't yet lapped all of that pressure yet.

  • Total labor expenses were 33.7% of revenues for the first quarter, that's up from the 33.3% in the prior year.

  • This increase reflects the deleverage effect from the lower level of sales as well as higher costs stemming from minimum wage increases.

  • Other operating costs and expenses were 24.3% of revenues for the first quarter, up from the 23.8% reported in the same quarter last year.

  • The increase reflects the deleverage effect on the lower level of sales in the first quarter and much of that is attributable to the ramp up of the new Grand Lux Cafe locations.

  • G&A expenses for the first quarter were 5.2% of revenues, down from the 5.5% in the prior year.

  • This decrease was primarily due to a $1.7 million expense in the prior year quarter related to Section 409A tax payments.

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

  • As always, we continue to scrutinize our G&A spending closely in order to effectively control our costs.

  • Depreciation expense was 4.6% of total revenues for the first quarter compared to 4.3% for the first quarter of the prior year.

  • Actual pre-opening costs incurred during the first quarter were $2.5 million compared to $3.1 million in the same quarter last year.

  • Although we did not have any new restaurant openings in the first quarter this year compared to one Grand Lux opening in the first quarter of 2007, we did have some spillover from the Grand Lux Cafe at Palazzo that opened right at the end of the fourth quarter and we had five openings in progress during the quarter which we expect to open in the second quarter of 2008 as I mentioned earlier.

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

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

  • Included in interest expense is $2.7 million of interest expense on the $275 million in outstanding debt we had under the revolving credit facility during the quarter.

  • We have interest rate collar agreements on $250 million of the outstanding revolver balance that mitigates the risks from interest rate variation and keeps our LIBOR rate within a weighted range of 4% to 5%.

  • 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 first quarter was 30.2%, in line with our expectations.

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

  • During the first quarter of this year our Board of Directors increased our share repurchase authorization by 10 million shares to 31 million shares.

  • We have repurchased a total of 15.7 million shares against this authorization, including 2.2 million shares purchased in the first quarter of fiscal 2008.

  • In the aggregate, during 2007 and the first quarter of 2008, we have returned nearly $300 million of capital to shareholders through share repurchases.

  • There are approximately 15.3 million shares remaining in our repurchase authorization, and we continue to expect share repurchases during 2008 to total between $150 million and $200 million.

  • Our liquidity position and financial flexibility remain strong.

  • As of April 1, 2008, our cash and marketable securities on hand were approximately $130 million.

  • Our cash flow from operations for the first quarter was approximately $38 million, and our cash and accrued CapEx for the first quarter, as reported in the statement of cash flows, was approximately $20 million which included construction in progress for 2008 openings.

  • We continue to expect CapEx for 2008 to be in the range of $90 million to $95 million.

  • As I mentioned earlier, we have $275 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 have $25 million available on our credit facility for backup liquidity purposes and to support standby letters of credit for our insurance arrangements.

  • To wrap up our business and financial review for the first quarter it's clear that the operating environment continues to be challenging and we, like others, see no near-term catalyst on the horizon to suggest the economy will improve any time soon.

  • While our total revenue in the first quarter was within our expected range despite inclement and often severe weather in many parts of the country, and we did a good job of managing our costs, it's very difficult to drive any margin improvements in this environment, even at an operationally efficient concept such as ours.

  • That being said, we continue to believe in the strength of our concepts and consumer demand for our brand and we feel strongly that the weakness we're experiencing is macro driven.

  • We're committed to the 2008 business plan that we announced in February and believe it's right plan for us.

  • By focusing on exceptional sites based upon their availability we look forward to continued long-term healthy and profitable growth.

  • We are focused on a number of sales initiatives around our menu as well extensions to the menu such as curbside sales, a new delivery service that we are testing in a handful of markets, and catering which we'll be testing in two restaurants this summer.

  • From an operating efficiency standpoint, our kitchen management system rollout is ongoing and in place in two-thirds of our restaurants and will be in all of our restaurants by the end of this year as planned.

  • With the help of KMS and enhanced labor scheduling tools we're doing a good job of managing our labor to a level that's appropriate for the level of traffic in our restaurants, and we're rolling out our energy management program to a second group of locations to more efficiently and cost effectively run our restaurants.

  • With that as a backdrop, let me spend a few minutes on our outlook for the second quarter and the remainder of 2008.

  • Before I get into the details, let me comment on our decision with regard to our Cheesecake Factory Express unit at DisneyQuest in Orlando, Florida.

  • As you may have read, we will close this facility in the second quarter upon the expiration of our operating agreement for this location.

  • We enjoyed our 10-year partnership with DisneyQuest but decided not to renew the agreement as our focus is on operating full-service restaurants.

  • The impact of this decision was already factored into the initial guidance we provided for the year.

  • Disney will take over the foodservice operations at DisneyQuest and all of our staff members currently working at this location will have an opportunity to interview with Disney.

  • Our expectation for total revenue growth, which includes both restaurants and third-party bakery sales, in the second quarter of fiscal 2008 is 9% to 11% relative to the second quarter of fiscal 2007.

  • Our targeted revenue growth for the full year 2008 is also at 9% to 11%.

  • This full year estimate contemplates comp sales in the negative 2% range and includes an estimated summer menu price increase of approximately 1%.

  • We have not yet finalized the price increase for the summer menu change, but this is a reasonable approximation.

  • 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 45 to 55 basis points higher in the second quarter of 2008 compared to the prior year second quarter, and approximately 10 to 20 basis points higher for the full year compared to fiscal 2007.

  • 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 2008 that can be contracted.

  • We have contracted a portion of our cream cheese requirements for 2008 at a fairly modest mid-single digit increase versus the prior year, and are evaluating opportunities to contract the remaining requirements based on market movements throughout the year.

  • On a positive note, we have also entered into preliminary agreements to extend the contract for our beef requirements through 2009 excluding hamburger at the same price as 2008.

  • Labor expenses are anticipated to be approximately 30 to 40 basis points higher in the second quarter of 2008 relative to the comparable quarter of the prior year due primarily to deleverage from the slower anticipated traffic and higher minimum wage costs.

  • For the full year, we expect labor expenses to be about 25 to 35 basis points higher than the prior year.

  • We expect other operating costs as a percent of revenue to be approximately a full percentage point higher in the second quarter of 2008 related primarily related to lapping a $1 million insurance settlement that we supported in the second quarter of the prior year.

  • In addition, we expect the margin pressures at the bakery and Grand Lux Cafe businesses that I mentioned earlier and the deleverage from slower traffic to continue.

  • For the full year, we expect other operating expenses to be about 80 basis points higher compared to fiscal 2007.

  • Our expectations for G&A expenses as a percent of revenue is to be about 25 basis points lower in the second quarter of 2008 as compared to the second quarter of the prior year, and about 25 basis points lower for the full year 2008 relative to the full year 2007.

  • As you may remember, we had previously guided to a 10 to 20-basis-point increase for full year 2008 so this 25-point decrease is quite a bit better than our previous G&A guidance and reflects the diligent review and management of overhead costs as we align our infrastructure with our current growth strategies.

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

  • Our expectation for fiscal 2008 total pre-opening costs is $13 million to $14 million in support of the seven to nine restaurant openings I discussed earlier, including the pre-opening costs associated with our initial RockSugar location, while $5.5 million of the total pre-opening costs should fall in the second quarter.

  • As I mentioned earlier, we expect to open five new restaurants in the second quarter.

  • We currently expect the remaining restaurant openings for 2008 to fall in the fourth quarter.

  • Accordingly, the remaining pre-opening costs will be slightly heavier in the fourth quarter relative to the third quarter.

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

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

  • We expect net interest expense to be about $3.5 million in the second quarter of 2008, or slightly higher than the first quarter as we have the additional debt outstanding for the full quarter.

  • We expect our tax rate in 2008 to be about 30%.

  • And lastly, we anticipate a weighted average outstanding share count for the second quarter of 2008 of approximately 65 million shares.

  • This detail represents our best estimate at this time.

  • Taken together we believe this will allow us to grow earnings per share for the full year in the 10% to 15% range as we previously announced.

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

  • So 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 on this call please be courteous and limit yourself to one question and then re-queue with any additional questions.

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

  • Operator, we're now ready for questions.

  • Operator

  • (OPERATOR INSTRUCTIONS) Your first question comes from the line of Jeffrey Bernstein of Lehman Brothers.

  • Please proceed.

  • - Analyst

  • Great.

  • Thank you very much.

  • I actually had a question on pricing.

  • I know you periodically, people ask why you're not perhaps more aggressive on the pricing.

  • I know you suggested perhaps a 1% increase in the summer.

  • I know in your commentary you mentioned something about a pricing study with an outside consultant.

  • Just wondering if we can get a little bit more detail in terms of the actual study, what's being conducted, the timing of when a decision might be made and whether or not it might lead to a boost?

  • I know you had said greater pricing impacts the guest.

  • I wondered whether you had seen a negative impact or correlation between the pricing and the guest traffic?

  • Thanks.

  • - CFO

  • Jeff, good question.

  • I think as relates to the pricing study it's ongoing and we expect to have the results in the next month or so.

  • As mentioned in the comments, it's with an outside consulting group and we do believe it will give us some more insight, if you will, on pricing and its impact on our guest traffic, and certainly will play a role in any future pricing decisions that we make.

  • The pricing that I put in there for the second half of the year at 1%, as I mentioned, is just a place holder.

  • We'll continue to evaluate the margin pressures and the pricing we think is appropriate before we get that menu rolled out.

  • - Analyst

  • Thank you.

  • Operator

  • Your next question is a question from the line of Steven Kron of Goldman Sachs.

  • Please proceed.

  • - Analyst

  • Thanks.

  • Two questions actually, if I could, Mike, can you just dive in a little bit to the G&A, the full year guidance as you indicated is lower than what you had previously indicated, so what maybe specifically, can you give us examples of kind of what you're doing on that line to manage the cost line?

  • - CFO

  • Okay.

  • You want me to answer that one?

  • What's your second question?

  • - Analyst

  • The second question is just want to confirm the guidance of top line incorporates down 2% same-store sales if I heard you correctly for the year?

  • Is that right?

  • And if that's right, can you maybe just give us a little bit of color on how you exited the quarter, maybe in March versus January?

  • - CFO

  • Okay.

  • As it relates to the G&A that's a good question.

  • If you apply the math it's some pretty significant G&A savings as we compare year-over-year.

  • I think when we rolled out in February the 2008 plan, I think at the time we even mentioned that we were in the process of continuing to reevaluate our infrastructure and our needs based on this growth strategy.

  • We did go back and we spent a fair amount of time evaluating both head count additions, current head count, recruiting needs, et cetera, a number of different areas, and were able to identify some significant savings that are now factored into our outlook for the remainder of the year.

  • We also, when we come into the year certainly expect to achieve our bonus opportunities and we probably pared that back a little bit based on first quarter results and where we expect the year to be.

  • Those two items combined have resulted in the G&A numbers I threw out there.

  • As it relates to the comp guidance, yes, I did guide 2% negative for the year.

  • We don't get into the monthly comps.

  • I can tell you, though, that we did benefit at the end of the first quarter from Easter being in March, with the location of our restaurants, a lot in Florida, Arizona and some of the other typical spring break destinations.

  • We generally see a little benefit from the Easter timing and the associated springs break.

  • We did get a little bit of bump at the end of the quarter from Easter and we'll be a little bit short in the first part of April as a result of that shift.

  • - Analyst

  • Thanks.

  • Operator

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

  • Baird.

  • Please proceed.

  • - Analyst

  • Good afternoon, Mike.

  • Just a quick follow-up on the early Q2 trends, could you comment on what you're seeing maybe outside of the Easter shift?

  • Is the trend you're seeing consistent with the guidance that you provided for the year?

  • - CFO

  • It is.

  • I think we certainly expect the, I think if you do the math on a negative 2% guidance for the year, the second quarter will be a little bit softer, coming out of the first quarter just under negative 2% and then a negative 2% for the full year.

  • As we start lapping some of the, I'd say the easier comps in the second half of the third quarter and into the fourth we should see some stronger comps, but we expect the second quarter will probably be the toughest comp comparison for the full year.

  • It's hard to gauge based upon the first couple weeks of the quarter because of the Easter shift, but we do believe that full-year guidance is appropriate with what we expect to see.

  • - Analyst

  • Okay, thanks.

  • If I could ask a question about the newer sales initiatives that you mentioned related to curbside and delivery and catering, if you could elaborate on those that would be great?

  • - CFO

  • I think the curbside has been in our -- it's available in all the restaurants that it can be in at this moment and all of our new restaurants open with it.

  • I think we've stepped up the awareness of it within the restaurant and are really focusing internally on the execution of it.

  • The delivery service is something that we're experimenting with in a number of different markets.

  • Really, home delivery, just trying to make it as convenient as possible where we've got it rolling in six markets now with a seventh market about to go online.

  • We've been very happy with the results so far.

  • I think those kinds of convenience initiatives are important for guests today and we want to take advantage of them.

  • - Analyst

  • They are ideas you find excellent outside purveyors of delivery and then hook up with them and try to negotiate the best rates.

  • Great.

  • Thank you.

  • - CFO

  • Okay.

  • Operator

  • Your next question comes from the line of John Glass of Morgan Stanley.

  • Please proceed.

  • - Analyst

  • Hi.

  • Thanks.

  • Mike, you mentioned some margin impacts from both the bakery and the Grand Lux Cafe.

  • Can you talk about maybe, one, how much pressure is coming specifically from Grand Lux maybe in terms of the overall operating margin at 6%.

  • You mentioned the bakery of 450 basis points, but that was probably related to bakery costs to goods, not total cost of goods.

  • Maybe if you could frame that in the context of the overall P&L what kind of pressure those two are putting on it?

  • - CFO

  • That's a good question, but it's a little bit of a hypothetical as we were able to drive that.

  • I think the both combined probably, at least a full percentage point of operating margin.

  • - Analyst

  • Okay.

  • And then just to follow-up on that you said a lot of it had to do with the immature stores at Grand Lux.

  • What is the typical ramp period in which you can get back to what you would expect normalized margins to be, is it a couple quarters, you said, or is it longer?

  • - CFO

  • It's hard to say with Grand Lux because we don't have a lot of experience.

  • When you open in places like Vegas, I think the Palazzo is going to be there pretty quick.

  • Some of the other ones take time as the awareness in those markets.

  • Two quarters, three quarters, I think those are reasonable expectations.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Your next question is a question from the line of Bryan Elliott of Raymond James.

  • Please proceed.

  • - Analyst

  • Thanks.

  • A couple of clarifications, actually.

  • Right on John's question there, the pressure you see from the bakery which is cost of goods related, I know your spot with some of your purchases of dairy, but is it reasonable to assume that that level of pressure, give or take, will sustain through the whole calendar year?

  • - CFO

  • Well, we do, as I mentioned, we've got some price increases planned in almost all channels, and I think it's been approved by the vendors in almost all those channels, and we hope to get those out in the, hopefully, late second quarter or early third quarter.

  • So we'll be able to offset some of that pressure.

  • - Analyst

  • Just some, though?

  • - CFO

  • Some of it.

  • When you look at the kind of pressure you've seen on eggs and some of the other categories that the bakery uses a lot of, not so much cream cheese, I think we'll be able to keep that in a reasonable range.

  • But some of these other ones are close to 100% increases.

  • - Analyst

  • Sure, sure.

  • Understood.

  • Then on the delivery commentary, are we talking about individual home delivery, or are these more like catering to larger group events?

  • - Chairman, CEO

  • No, these are home delivery that Mike was talking about and then our catering menu is going in a couple of stores in Los Angeles.

  • We're going to be working out any bugs in preparation of those foods for parties, offices, meetings, and so on.

  • And then, hopefully, that will be successful and we'll be able to start to roll that out.

  • - Analyst

  • Do you take a margin hit on the home delivery?

  • - Chairman, CEO

  • Very little.

  • That's why it takes careful negotiations.

  • - Analyst

  • Okay.

  • All right.

  • And thanks for those clarifications.

  • My question actually is, Mike, can you give us a little -- I know I'm kind of cheating, but, a little bit of help on sort of non-housing bust states in how well you might be doing outside of California, Florida, Arizona and Nevada?

  • - CFO

  • I don't want no get into too much of the regional analysis.

  • We've talked in the past about those markets you talked about certainly being softer than the others.

  • They certainly continue to be softer than the others, but beyond that I would say all the regions are certainly off from where we like them to be and have room for improvement, some more than others.

  • But clearly California, Arizona, Nevada, are the softest markets for us, actually the whole West Coast.

  • Arizona and Nevada are the softest markets for us.

  • - Analyst

  • Okay.

  • We've heard from some more traditional casual dining chains that there's some pretty nice gains happening outside of the housing bust states.

  • You're not seeing that?

  • - CFO

  • I've seen those numbers as well.

  • I wouldn't say to that extent, but I'd say we're just a little bit off in those markets than we'd like to be.

  • - Analyst

  • Okay, thanks a lot.

  • Operator

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

  • Please proceed.

  • - Analyst

  • Yes.

  • Good afternoon.

  • Mike, would you elaborate what aspects of the price management the outside consulting firm is helping you with?

  • Are you guys looking at trade area analysis?

  • Can you describe what they're doing?

  • - CFO

  • I'm sure you, from your past experience, Chris, have had experience with the pricing studies.

  • It's fairly broad based on all the things you would expect.

  • It's geographic, it's menu par driven, it's somewhat dar par driven, all of those things trying to glean what we can from our consumers, our guests, as to what's moving them on the menu based on price.

  • It's not an exact science, but I think we'll learn enough to help us make some decisions.

  • - Analyst

  • Okay, okay.

  • One follow-up, if you will.

  • If looks like during the quarter you took on debt to repurchase the shares.

  • Yet the Company's cash position also improved.

  • Can you explain why debt was the source?

  • Were you trying to buy down on the collar?

  • - CFO

  • I think that's a good question.

  • We drew down the $100 million.

  • We did buy back the $50 or so million in the quarter.

  • Our hope was to probably accelerate those repurchases a little bit more.

  • We'll get there quickly.

  • I'd would like to certainly use that money in the repurchase plan as we announced already.

  • - Analyst

  • Okay.

  • Thanks.

  • Operator

  • Your next question is from the line of Destin Tompkins of Morgan Keegan.

  • Please proceed.

  • - Analyst

  • Thanks, good afternoon.

  • I first of all want to get a clarification on the menu pricing.

  • I know you said you estimate 1% in the summer menu, but I think you have 1.5% now.

  • Is that all that's in the menu currently?

  • What will you be rolling over when you take the 1% in the summer menu?

  • - CFO

  • There is about 3% in the menu right now, Destin.

  • We had 1.5% from last summer and rolled into another 1.5% in the first part of this year.

  • So there is about 3% in the menu.

  • And then come summer we'll be rolling off that 1.5% from last summer.

  • And as I mentioned, the 1% I put in there is a place holder as we kind of did our forecast for the remainder of the year.

  • - Analyst

  • Okay, and then just other one, if I may.

  • On Grand Lux development, you guys have -- you're not going to open any this year, but you had talked about potentially in '09.

  • Can you give us some estimate of how you -- where you are in that decision-making process and how much time you need to put that in the pipeline?

  • - CFO

  • I think -- David, you can comment on this, but I think all of those construction costs, design costs savings we talked about are well underway and will be factored into any of the Grand Luxes that open next year.

  • - Analyst

  • Okay.

  • But you do anticipate opening more in 2009?

  • - Chairman, CEO

  • We already have one signed and are hoping to sign more.

  • We have a number that we're very serious about for 2010 that have moved from 2009, but we're looking for more.

  • One is signed.

  • - Analyst

  • Great.

  • Thank you.

  • Operator

  • Your next question is from the line of John Ivankoe of JPMorgan.

  • Please proceed.

  • - Analyst

  • Hi, thanks.

  • With hindsight being 20/20 and being able to study specific markets, how much cannibalization effect do you think was in your numbers maybe in 2007 and more specifically the first quarter of 2008, that you may kind of roll off as your growth rate is slowing down?

  • - CFO

  • That's a good question.

  • I think we have kind of estimated in the aggregate about 1% maybe from cannibalization.

  • And you're right, I think when you look in certain markets like the Northeast where we opened a lot of restaurants, say in the Boston market last year, we'll see a little bit more of that impact in that specific market immediately, but in the aggregate still coming out close to that 1%.

  • And, as you point out, we should start to roll over that as the growth slows a little bit.

  • - Analyst

  • This, I think, will be a lot harder to answer, but I'll ask it anyway.

  • What about direct competition?

  • Obviously, there is a lot of development '06, '07, and that is also coming off.

  • Is there any way to quantify any competitive impact in terms of new supply?

  • - CFO

  • From my perspective I would say no.

  • You know, we've always felt that nobody is competing directly against us.

  • I don't know that that hurts us as much, but it's a good question.

  • But as you pointed out, very difficult to answer.

  • - Analyst

  • Okay.

  • Fair enough.

  • Thank you.

  • Operator

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

  • Please proceed.

  • - Analyst

  • Hi, guys, calling for Joe Buckley here.

  • Just one quick question.

  • I was wondering what the dollar amount of that (inaudible) quarter '07 insurance settlement was?

  • - CFO

  • Last year?

  • - Analyst

  • Yes.

  • - CFO

  • I think it was almost exactly $1 million.

  • - Analyst

  • $1 million?

  • Great.

  • I think everything else has been touched.

  • - CFO

  • Great.

  • Operator

  • We have a follow-up from the line of Chris O'Cull of SunTrust.

  • Please proceed.

  • - Analyst

  • Mike, would you explain or remind us why pre-opening expense per store is going to be higher in 2008 versus 2007?

  • - CFO

  • I think we talked about that at the last quarter.

  • The primary drivers of that is really just the increased cost for finding these managers and moving them around and when you relocate a manager in this market it's costing us more to relocate them, whether it's related to housing costs, moving costs, temporary living costs, whatever.

  • That's the biggest driver that we see.

  • - Analyst

  • How many markets are going to be new markets, though, this year?

  • - CFO

  • It's not just necessarily new markets.

  • As we try to make sure that we have a semi-experienced management staff in a new restaurant we may relocate people from all over just to get them there to make sure we have a good balance of new managers and existing managers.

  • - Analyst

  • Okay.

  • Fair enough.

  • Thanks.

  • - CFO

  • I think, operator, just a couple more questions?

  • Operator

  • (OPERATOR INSTRUCTIONS) Your next question comes from the line of Nicole Miller of Piper Jaffray, please proceed.

  • - Analyst

  • Good afternoon.

  • Looking back in 2001 and 2003 how did tax rebates impact your business and do you have any idea of what you might see in this next round of rebates?

  • - CFO

  • That's the million dollar question, Nicole.

  • I think it's difficult when we go back and look at those time periods that you mentioned to see what the real impact was.

  • I think the last significant one was probably 2001.

  • And it was hard for us to really gauge.

  • Our comps at that point used to track pretty consistent with menu price increase, so it was difficult to gauge what the benefit or impact of the rebates rebates were.

  • All I can tell you is we certainly hope to get our fair share.

  • Okay?

  • Maybe one more question, operator?

  • Operator

  • And your last question is from the line of Keith Siegner of Credit Suisse.

  • Please proceed.

  • - Analyst

  • I just wondered if you could talk really quickly about any differences in traffic trends between lunch and dinner?

  • Is one feeling more pressure than the other, et cetera?

  • - CFO

  • I don't think that there is a whole lot of change between lunch and dinner.

  • I think the more if the impact is weekday versus weekend with the weekdays being softer.

  • The weekends holding pretty well, but the weekdays being a bit softer.

  • But lunch and dinner hasn't really changed much.

  • - Analyst

  • Okay.

  • One other quick question.

  • Is there any kind of fixed corporate cost, either training or personnel that flows through the pre-opening or is it solely cost related to each specific unit?

  • - CFO

  • No, there is the cost, some of the corporate costs associated with the folks that travel to the openings and work the openings.

  • We have a corporate new restaurant group that gets charged to that because their job is specifically pre-opening.

  • We also have the cost, it is directly related to pre-opening but not necessarily to an individual.

  • If we have managers that we've hired in advance of a restaurant, so we may carry an extra manager in a restaurant, that individual will get charged to pre-opening until they have been moved to that restaurant.

  • - Analyst

  • Okay, and is that corporate staff that does the traveling, is it smaller now because you're opening less units or is it still busy with the same team?

  • - CFO

  • No, it is a smaller team.

  • - Analyst

  • Okay.

  • That's it for me, thanks.

  • - CFO

  • All right.

  • Operator, thank you.

  • That will wrap it up.

  • Thanks, everybody.

  • Operator

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

  • This concludes the presentation.

  • You may now disconnect, and have a great day.