Cheesecake Factory Inc (CAKE) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the second quarter 2008 The Cheesecake Factory earnings conference call.

My name is Nakita and it will be my pleasure to assist you today.

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

(OPERATOR INSTRUCTIONS) I would like to introduce your host, Jill Peters.

Please proceed, ma'am.

Hello, everyone.

I'm Jill Peters, Vice President of Investor Relations at The Cheesecake Factory Incorporated, and welcome to our quarterly investor conference call, which is also being broadcast live over the internet.

Also with us today is David Overton, our Chairman of the Board and Chief Executive Officer; Cheryl Slomann, our interim Chief Financial Officer; and Matt Clark, our Vice President of Strategic Planning.

Before we get into the results, 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 Investors section of our website 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 on this call speak only as of today's date and the company undertakes no duty to update any forward-looking statement.

Our agenda today will be as follows.

David will provide some opening remarks and then Matt will take you through our operating results in detail and provide you with our expectations for the third quarter of 2008 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.

At this time, I will turn the call over to David.

David?

Good morning.

I would like to begin by taking a moment to address our announcement yesterday regarding Mike Dixon's resignation as Senior Vice President and Chief Financial Officer of the Cheesecake Factory.

Although Mike resigned, he will be available to the company as a financial consultant during an interim transition period.

Although the timing of Mike's departure was awkward given our earnings report today, it was unrelated to our business results.

We decided to accelerate the timing of our earnings release and conference call so that we can focus on our business.

We thank Mike for his many contributions over the eight year tenure and wish him the best.

Our board of directors appointed Cheryl Slomann, currently our Vice President and Controller, as interim Chief Financial Officer.

Both the board and I have complete confidence in Cheryl that she will lead a smooth transition while we conduct a search for Mike's replacement.

I know that some of you had an opportunity to meet Matt Clark when he was in New York last month attending an investor conference with Mike and Joe, or last year at our analyst meeting.

Matt has led our strategic planning area for the past 2.5 years, having previously held similar roles at Kinko's and Dannon.

Matt will play an integral role during this interim period.

He worked closely with Mike in developing our 2008 business plan and has responsibility for all of our modeling and forecasting, so Matt will be be taking you through our details of the results today.

And lastly, before we get into the details of the quarter, I would like to formally welcome Mark Mears to the Cheesecake Factory.

As we announced last week, Mark joined us as Senior Vice President and Chief Marketing Officer.

Mark brings with him almost 25 years of brand marketing, advertising and promotions experience, which will be a big asset to us as we look to further build the brand and expand the awareness of The Cheesecake Factory.

We believe we have a great opportunity ahead of us to leverage our brand through a strategic marketing effort and we're very excited to have Mark on board.

As to the second quarter, we'll be finished -- while we finished the quarter in line with our earnings per share expectations, there's no doubt that consumer environment remains challenging as reflected in our guest traffic levels.

We continue to believe that our 2008 business plan is the right plan for this operating climate and we remain focused on executing against that plan by hitting our development target, continuing our share repurchases, and carefully controlling our costs.

With that, I will turn the call over to Matt to discuss the results.

Matt?

Thank you, David.

We'll now take you through our operating results in detail and provide you with our expectations for the third quarter of 2008 as well as the full year.

So let's jump into the numbers.

Total revenues at The Cheesecake Factory for the second quarter increased 9% to $407.1 million.

Our revenue growth this quarter was comprised of an approximate 9% increase in restaurant revenue and 5% increase in bakery revenues.

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

The 9% increase in restaurant revenues represents an approximate 15% increase in total restaurant operating weeks, resulting primarily from the opening of 25 new restaurants during the trailing 15 month period, coupled with an approximate 5% decrease in average weekly sales.

As planned, we implemented an approximate 1% effective menu price increase in our summer menu change, which will be rolled out by the end of August to help offset known cost pressures, primarily related to commodity, labor and energy cost.

It continues to be a difficult environment to pass along cost pressures through menu price increases, and while cost pressures remain present, we felt that a 1% price increase struck the appropriate balance between margin protection and consideration for a generally weak economic environment.

During the quarter, we did complete our menu pricing study that we mentioned on last quarter's call.

And although the details of that study are proprietary, I will tell you that we achieved our objectives in both getting a sense of the level of future price increases that the consumer can bear, both nationally and regionally, as well as validating the perceptions consumers have about our brand.

Not surprisingly, consumers rated The Cheesecake Factory very high on their total experience in our restaurants, the variety in our menu, and the uniqueness of our menu items, and the taste and freshness of our food as well.

Overall comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants decreased approximately 4.1% for the quarter.

By concept, that translates into decreases of 4.1% and 4.5% at The Cheesecake Factory and Grand Lux Cafe respectively.

At The Cheesecake Factory, comparable sales were softer than we would like in all geographic regions, but they were softest in the Southwest and West regions, very similar to last quarter.

At Grand Lux Cafe, the majority of the comparable sales decline continued to come from our units in California and Florida.

In addition, we are seeing a bit more weakness in the Las Vegas market.

Keep in mind that between the Grand Lux Venetian and Grand Lux Palazzo locations, we averaged sales of $900,000 per week in the second quarter.

While these are phenomenal numbers, the Venetian location is off a little bit from the prior year second quarter.

Average weekly sales at The Cheesecake Factory restaurants decreased about 5%, 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 that there is plenty of high quality growth ahead for our concepts.

In addition we recognize there is an opportunity 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.

Consistent with our 2008 plan, we're focused on opportunities to improve sales and margins in our comparable base of restaurants.

This includes driving guest awareness of new menu items from our limited edition 30th anniversary cake, which we'll talk more about in a moment, to our new summer items, as well as looking at other creative ways to market our brand to guests by leveraging the expertise of our new Chief Marketing Officer.

On the margin front, our purchasing group continues to look aggressively for opportunities to extend commodity contracts and reusing the expansion of our energy management program as a means to hold down utility costs.

As for development, we are targeting the highest return premium locations based on their availability.

We expect to open seven new restaurants this year, including six Cheesecake Factory restaurants and the initial unit of our Asian concept Rock Sugar Pan Asian Kitchen.

As expected we opened four Cheesecake Factory restaurants and Rock Sugar in the second quarter.

As we mentioned in the press release, we are very pleased with the new openings for the second quarter.

The Glendale location average sales in excess of nearly $300,000 per week and the Roseville location sales were in excess of $210,000 per week.

To post this level of sales at new restaurants in a difficult environment and in the soft California market speaks volumes to the popularity of our brand.

In addition, the response to Rock Sugar has been extremely strong.

The restaurant has enjoyed average sales in excess of $1,000 per square foot since opening.

This is incredibly strong for a brand new concept.

Feedback from guests and the word of mouth buzz have also been very positive.

While we intend to take our time with the expansion of this concept, it's clear to us that Rock Sugar has significant growth potential.

We currently anticipate opening the remaining two Cheesecake Factory restaurants in the fourth quarter of this year.

This includes one location in Towson, Maryland and a smaller prototype unit in Annapolis, Maryland.

As we've talked about previously, we believe there's an opportunity for 130 to 140 locations of these slightly smaller Cheesecake Factory locations that we estimate can deliver about $8 million in average annual sales.

The Annapolis location will be a good test to ensure we have a restaurant that can support our full menu and investment costs that will achieve our required rate of return for this expected volume.

Once we have proven the returns from these smaller units, we can accelerate its growth as the economy improves and based on the availability of exceptional sites.

Now moving onto our bakery operations.

Bakery sales net of intercompany sales increased 5% in the second quarter to $14.5 million versus $13.9 million in the prior year quarter.

The increase is due primarily to higher sales to the warehouse clubs.

While we remain optimistic with respect to opportunities to build our bakery sales volume over time, we remind investors this is a small part of our business and that the third party bakery sales are not as 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 sell in excess of $200 million of deserts made in our bakery production facilities during 2008.

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

That covers our top line performance for the second quarter.

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

Our overall operating margin for the quarter was 7.4% versus a 9.5% margin in the comparable quarter last year.

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

We've been fairly aggressive in our menu price increases to offset these pressures, but as I mentioned earlier, 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, we continue to experience some fairly significant year-over-year margin pressure at the bakery and Grand Lux Cafe.

At Grand Lux Cafe, we experienced the continued impact of four new restaurant openings since August of last year on a base of nine, a nearly 45% increase.

While expected, this continues to place pressure on operating margins compared to the prior year.

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

The bakery had about 340 basis points of margin pressure due primarily to significant commodity cost increases, primarily in butter, eggs, and cream cheese.

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

We have implemented price increases to pass through some of these cost pressures, but this is not an easy task, with such large percentage of our bakery sales coming from the warehouse clubs.

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

Cost of sales increased to 25.7% of revenues for the second quarter, compared to 24.7% in the same quarter last year.

The increase was primarily the result of higher costs for poultry, cheese, and general grocery items.

Total labor expenses were 32.7% of revenues for the second quarter, up from the 32.3% in the prior year.

This increase reflects the deleverage effect from the lower-level of sales, some higher insurance cost for the quarter, as well as higher costs stem from minimum wage increases.

These were partially offset by about a $1.5 million benefit from the adjustment of the stock option forfeiture rate.

Other operating costs and expenses were 23.6% of revenue for the second quarter, up from the 22.9% reported in the same quarter last year.

The second quarter of 2007 included a $1 million insurance benefit from the settlement of disputed coverage under an employment practices claim.

Absent this benefit, other operating expenses as a percent of revenues would have been 23.1% last year.

The increase this year reflects a higher utility cost and the deleverage effect on the lower level of sales in the second quarter.

G&A expenses for the second quarter were 5% of revenues, down from 5.4% in the prior year.

As planned, we continue to aggressively manage our overhead costs in this environment and appropriately scale our infrastructure or growth plans.

In addition, G&A benefited $0.7 million or about 15 basis points as a portion of the benefit from stock option forfeiture rate adjustment, as reflected in this line item.

Depreciation expense was 4.5% of total revenues for the second quarter, compared to 4.2% for the second quarter of the prior year.

Actual preopening costs incurred during the second quarter were $4.6 million compared to the $3.7 million in the same quarter last year.

We had five new restaurant openings in the second quarter this year, including Rock Sugar, which had higher preopening expenses since it's a new concept, compared to two Cheesecake Factory openings in the second quarter of 2007.

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

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

Included in interest expense is $3.2 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 risk from interest rate variations 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 second quarter was 28%.

The decrease in the rate from the first quarter is primarily a result of the lower taxable income as a percent of revenues.

The FICA tip credit, the largest single component of the effective tax rate, has a bigger impact on the tax rate with the lower pretax income tax margin.

In addition, we had two discrete items flow through the effective rate this quarter.

We accrued $2.2 million in taxes and increase related to the potential disallowance of the deductibility of certain executive compensation under the provisions of Internal Revenue code section 162M.

As we previously disclosed, the IRS is auditing our tax returns for fiscal years 2003, 2004, and 2005 pertaining to the deductibility of compensation in excess of $1 million per year paid to certain executive officers resulting from their exercise of stock options later determined to be misstated.

We received a notice of proposed adjustment from the IRS in May of its proposal to disallow the deduction and accordingly accrue the potential taxes and interest during the second quarter.

This item was offset by a $2.4 million reduction in income tax expense related to IRS approval of our application for a change in accounting for construction allowances.

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 18.1 million shares against this authorization, including 2.4 million shares purchased in the second quarter of 2008.

In the aggregate during the past 18 months, we have returned nearly $350 million of capital to shareholders through share repurchases.

There are approximately 12.9 million shares remaining in our repurchase authorization and we continue to expect share repurchases during 2008 to totaled between $150 million and $200 million.

Our liquidity position and financial flexibility remain very strong.

As of July 1st, 2008, our cash and marketable securities on hand were approximately $95 million.

Our cash flow from operations for the second quarter was approximately $73 million and our cash and accrued CapEx for the second quarter as reported in the statement of cash flows was approximately $40 million, which includes construction and progress for 2008 openings.

We expect cash CapEx for 2008 to be in the range of $75 million to $80 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 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 backup liquidity and to support standby letters of credit for our insurance arrangements.

To wrap up our business and financial review for the second quarter, it continues to be a challenging operating environment for casual dining.

While total revenues were within our expected range they did come in at the lower end of the range and comparable sales were a bit softer than we expected.

However, we continue to believe that weakness we're experiencing is macro driven.

We have a strong brand in the Cheesecake Factory, a developing brand in Grand Lux Cafe, and see early promise from Rock Sugar Pan Asian Kitchen.

Our decision to build our marketing efforts will only increase the strength of our brands as we look at strategic ways to drive guest awareness and ultimately guest traffic.

Our menu and the extension of our menu remain our biggest assets.

Our summer menu additions have been available in southern California for about a month, and response to our new menu items has been favorable.

The rollout of home delivery service is expanding and will be offered in 62 restaurants across 13 markets within the next month.

We're also set to launch our catering test in two restaurants this summer.

Furthermore, we're doing a good job at managing our cost structure and using tools such as the kitchen management system, labor scheduling, and the energy management program to further improve our operating efficiency.

The KMS rollout is on track to be completed by the end of August as planned.

The energy management program shows good potential in its ability to manage our energy usage and utility costs in the initial set of restaurants running the program.

We experienced a reduction in utility costs of about 25 basis points in those restaurants and have now rolled the program out to a second group of locations.

With that as a backdrop, let me spend a few minutes on our outlook for the third quarter of 2008 and the full year.

With the current sales volatility and dynamic cost environment in a difficult to forecast.

Regardless, we will share our expectations with you based on the information we have at of today.

Our expectation for total revenue growth, which includes both restaurants and third-party bakery sales in the third quarter of 2008 and for the full year is 8% to 9% relative to the respective prior year periods.

This contemplates comparable sales in the negative 4% to negative 5% range for the third quarter and then negative 3% to negative 4% range for the full year 2008.

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 about 40 basis points higher for the third quarter 2008 compared to the prior year third quarter and about 50 basis points higher for the full year compared to 2007.

The principal commodity categories for our restaurants include fresh produce, poultry, meat, fish, 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 the majority of our cream cheese requirements for 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 movements throughout the year.

On a positive note, we have also extended the contract for our beef requirements for 2009, excluding hamburger, at the same price as 2008.

Labor expenses are anticipated to be 80 to 90 basis points higher in the third 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 cost.

For the full year we expect labor expenses to be about 40 basis points higher than the prior year.

We expect other operating costs as a percent of revenues to be approximately 50 to 60 basis points higher in the third quarter of 2008 and about 80 to 90 basis points higher for the full year, relative to the respective prior year periods.

This is also related primarily to the deleverage from slower traffic and ongoing margin pressure at the bakery and Grand Lux Cafe that I mentioned earlier.

Our expectation is for G&A expenses in the third quarter of 2008 as a percent of revenues to be flat with the third quarter of prior year and about 20 basis points lower for the full year 2008 relative to the full year 2007.

The year-over-year reduction in G&A costs reflects the diligent review in management of overhead costs as we bring our infrastructure into alignment with our current growth strategy.

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

Our expectation for 2008 total preopening costs is $12 million to $13 million in support of the seven restaurant openings that I discussed earlier, including the pre-opening costs associated with our initial Rock Sugar location.

About $3 million of the total pre-opening costs should fall in the third quarter.

As a reminder, we usually incur most of our preopening costs 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.

We expect net interest expense to be about $3.5 million in the third quarter of 2008 and we expect our tax rate in 2008 to be about 29%.

And lastly, we anticipate a weighted average outstanding sharecount for the third quarter of 2008 of approximately 64 million shares.

This detail represents our best estimate at this time.

Of course, we will update you again when we report third quarter results in October.

I'll now turn the call back over to David for some closing remarks.

Thank you, Matt.

We believe we have the appropriate business plan for this environment and we are executing against that plan.

We are managing our margins well relative to sales and traffic levels and we have an incredibly strong balance sheet, which gives us the flexibility to execute our strategy with confidence.

As planned we continue to return capital to shareholders through our aggressive share repurchase plan.

From a development perspective, we clearly have a lot of high-quality growth for all of our concepts, our core Cheesecake Factory concept of the 10,500 square foot size, a slightly smaller Cheesecake Factory around 8,000 square feet, Grand Lux Cafe which is still in its infancy, and Rock Sugar Pan Asian Kitchen -- we believe our concepts will provide many years of healthy and profitable growth.

As a final note, before we move into the question and answer session, we have some activities taking place next week as we officially kick off our 30th anniversary celebration in conjunction with National Cheesecake Day on July 30th.

Our restaurants will be offering every slice of more than 30 varieties of our cheesecake at $1.50 per slice that day to dine in restaurant guests, the same price that we offered the cheesecake the day our first restaurant opened in Beverly Hills in 1978.

We are also launching a special limited edition cheesecake, the 30th Anniversary Chocolate Cake Cheesecake on that day.

$0.25 from the sale of each slice of the Chocolate Cake Cheesecake sold this year will benefit the national hunger relief organization America's Second Harvest, the nation's food bank network.

We are very happy to benefit such a worthy cause as part of our anniversary celebration.

In addition, I'm scheduled to be interviewed on a number of local news and radio programs in a variety of markets next week talking about our 30th anniversary.

These are just the start of what will be a year-long celebration and we'll keep you updated as additional activities are announced.

That wraps up our prepared remarks.

At this time, we will be happy to answer your questions.

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

Operator, we are now ready for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of John Glass with Morgan Stanley.

Please proceed.

The menu pricing study you referenced, why are you just taking -- why aren't you implementing it currently and just taking the 1% pricing?

Is it because of the current environment or do you anticipate rolling it out later in the year?

And maybe if you don't want to talk about the details, can you just talk about the order of magnitude of pricing opportunity you might have in the future based on that?

This is Matt.

I think what we're saying is that we did complete the study in the second quarter and the 1% that we're targeting right now that we're rolling out in our menu change contemplates the information we received in that study.

So to that extent I think we're utilizing the information already.

We'll continue to gauge consumer response during the next six months, and as you know we'll have another menu change in January of next year.

And just to clarify, what's the total amount of pricing assumed in the third quarter then?

Approximately 1%, plus we're lapping over the 1.5% from last year, so it's about 2.5% in aggregate.

Thank you.

Thank you, John.

Next question?

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

Please proceed.

On the commodity side of things, I appreciate the guidance for 2008.

If we think about where you're current contracts are set relative to kind of spot market prices out there, any early read on what '09 could look like as you guys start to renegotiate as we head into the back half of the year?

Yes, I think we're obviously always looking at the market as you said, Steven, and we'll continue to look at market and evaluate it over the next three to six months.

It's a little bit early to get a good read and pass on any guidance for 2009.

Just given the turbulence in the market today.

Thank you, operator?

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

Please proceed.

Good afternoon.

Hi, Sharon.

I'm interested in what you're seeing that might be different from the first quarter in terms of your trends?

I think P.F.

Chang's went over a lot of detail yesterday on some things that they're seeing flip flop.

If you could talk about day parts, days of the week.

Anything that might be changing other than obviously overall trends are a bit tougher?

I don't see any changes, Sharon.

The weekends are still very, very strong.

The weekdays are a little weaker.

People move across the menu, lots of people go out to eat and either don't have a beverage or dessert and try to still go out, but nothing that's really different.

I didn't listen to the Chang's call, so I'm not sure what they said, but no changes for us on that level.

Are you seeing any negative mix shift offset your price where people are foregoing the appetizer or switching to getting a couple of appetizers and foregoing the entrees?

I think when you poll people and ask, some people will drop a beverage off or split a dessert.

There's a little change there but there's not any great movement and it's things you would expect in this economy.

Okay, best of luck.

Thanks, Sharon.

Your next question comes from the line of Joe Buckley of Banc of America Securities.

Please proceed.

It's Steven Barlow in for Joe.

I was wondering -- how did comps and traffic trend through the quarter?

And specifically regionally did the differential in your weakest markets and the rest of the country -- did that increase any from the fourth quarter of '07 and the first quarter?

Thanks.

Matt?

I would say really throughout the quarter it was pretty much the same rates.

The comp sales have been relatively stable in the range.

And the comparison between the softer markets and the rest of the country has also remained pretty similar to the Q1 environments.

So we're not seeing it exacerbated nor improved in comparison.

Thanks.

Thank you.

Next question, operator?

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

Baird.

Please proceed.

Good afternoon.

Quick clarification on the guidance.

Just wondering why you would expect comps to start to improve or become less negative as you move out to Q4?

Yes, really what we're saying is as of today, best guidance that we have.

And that contemplates the fact that we started to see some of the consumer slowdown in the fourth quarter of last year.

And so really would be just a nominal lapping of that if we maintain as of today.

Okay, and then a broader question on the pricing study.

What did that tell you about your current value proposition or the perception of your value proposition in today's environment, and are there opportunities on the menu to improve that value proposition?

Well, I think there's always opportunities.

I think that we're at the point where we're still perceived as a value given our overall experience, but in this environment I think we feel that we have to still be very careful.

It's given us great regional opportunities and pointed those out to us, which are very helpful.

But in general, this is still an economy to be very cautious of.

So we're going slow but we do have more information now to tweak regionally.

Okay, thank you.

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

Please proceed.

Thank you.

Just wanted to clarify the CapEx guidance.

I think you gave us, it was $80 million to $90 million cash number for the year and wondered what either your TI expectation is or what the gross expectation is?

I think that we gave you a slightly lower number than that, Bryan.

I'm looking for it, sorry.

No problem.

$75 million to $80 million and that's our net number that we're quoting.

Yes, and what's the gross equivalent?

I don't think that we are providing the gross equivalent because it's not a cash driver for us.

The gross is what is on the GAAP statements, right?

You're correct.

I don't have the gross at my fingertips.

We certainly can get back to --

All right, thank you.

Your next question comes from the line of Matt DiFrisco of Oppenheimer.

Please proceed.

My question is with regards to the '09 growth and where you could open stores.

I'm wondering in modeling the fourth quarter -- at least it seems like you're implying $3 million in pre-opening.

How many stores should we expect in the first half of '09?

And given your pipeline is pretty broad and long-term, you should know how many stores are opening both Grand Lux and Cheesecake?

I don't have it in front of me either, but I think it's about two to three stores in the first quarter.

And so that's what I think we're doing right now.

And I think we should have a good portion of our '09 stores in the first half of the year.

Are those going to be a mix between Cheesecake and also the two or three Grand Lux that you plan on opening in '09?

As of now I think they're mostly Cheesecake and probably one or two Grand Lux.

For the first half of the year?

For the year.

Okay, so can you give us a total for '09 what you're thinking about now?

Because one of the other comments from P.F.

Chang's was that the bistro is having a tough time with this economy to find [A] sites.

I think a lot of our sites moved from '08 to '09 and so on, but I think we're planning about the same we have this year.

Something like seven to nine.

I don't have the list in front of me right now, but we're thinking it's going to be about the same and we're happy with all of the sites.

Okay.

And then also can you just talk a little bit about what you might be seeing as far as further improvements on the labor line?

How you're reducing labor?

Is the smaller box a way also to get labor down as -- if you're looking at operating weeks or square footage relative to sales?

Just trying to see how you are maintaining your labor margins and potential low-hanging fruit ahead.

In terms of productivity, as we mentioned, both KMS and the labor scheduling -- they both have done a very good job of that.

If you look at the labor line relative to sales, our productivity has been holding pretty much in line with prior year despite lower comps.

A little bit of deleveraging is occuring on some of the managerial and other line items within labor.

With respect to an 8,000 square foot box and how that might apply, I think we look at that as a total return package, so there's balances between the investment as well as the building and other operational costs that will balance with the labor to give us those total returns.

I don't think we look at it as one line item or the other to drive the return.

Okay, thank you.

Thank you.

Your next question comes from the line of Keith Siegner of Credit Suisse.

Please proceed.

Thanks.

Just a question on the Grand Lux margins actually.

With more than half of the units in some of the challenged regions -- but as you lap those inefficiencies at the four units opened in late '07, as we think about margins in the second half, do you still expect margins at Grand Lux based on this guidance to be down or could they potentially be flat in the second half?

I think you'll model out the guidance.

Obviously those restaurants that were opened last year will continue to ramp and do better over time and we would expect that, but it's really a small population if you look at it in terms of the total company as well.

So certainly we do expect to continue to ramp our productivity in newer locations.

And that will be reflected in the overall guidance.

Just one other quick question.

Could you just give us a little bit of a sense of how does the energy management program work?

Is it something computerized or a change in lighting?

How are you achieving these savings with the energy management program?

You're pretty close.

It's really a use of technology to help us determine the most efficient allocation for the HVAC units, for the gas and ovens, the lighting -- not to disturb any aspect of the guest experience but really to optimize it.

And using computers you're able to do that with a little bit more efficiency.

Every 5% to 10% of timing of when you turn something on, that makes a big difference.

Thanks.

Your next question comes from the line of Brian Moore of Wedbush Morgan.

Please proceed.

Good morning.

Good morning.

Just a clarification on the Q3 same-store sales guidance.

I guess this would appear to imply improving traffic trends.

I think given that you have, if I'm correct, 50 basis points of price rolling off in Q3.

I'm wondering what gives you that -- what is the implicit traffic improvement in Q3?

I think if you run through the numbers, the range of guidance that we gave for Q3 of negative 4% to negative 5% comps really implies the run rates that we're at today, the visibility we have as of today.

So I think it's incorporated within that and the difference is not that significant.

Okay, thank you.

Thank you.

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

Please proceed.

Thanks.

My question was on the share repurchase activity, especially as we go into 2009.

How do you see the capital structure evolving?

Do you think you'll continue to use cash flow from operations for ongoing share repurchases or could you see potentially using a little bit more debt?

I think we're pretty comfortable with the leverage ratio we have today.

I think as everybody is aware, it's an environment in which to be cautious.

So certainly the use of free cash flow is a good means for us to repurchase shares and that's probably our target for 2009 at this point and time.

Great, thanks.

Thanks.

Next question?

Your next question comes from the line of Chris O'Cull of Cheesecake Factory.

Please proceed.

Hello, everyone.

It's Chris O'Cull with SunTrust.

Hi.

David, how are people going to be made aware of the delivery service and have stores that are offering the service seen any improvement relative to a control group?

Well, definitely we -- in the cities that we have delivery, the delivery companies advertise it.

They all have delivery books and booklets they send out.

It's on their computer screens and websites.

It's being advertised to the community that it does have to go.

Right now, those stores are doing well.

We definitely have accretive sales, and -- but again they can only be in cities that have very reliable high-quality delivery services.

We go out and make our deals with them, and then they go ahead and start to advertise and that they will deliver Cheesecake food.

That's how it is working.

It's doing very nicely.

We're definitely happy we're doing it.

We spend a lot of time certifying those services to make sure our food gets there right, is packaged right, and that our guests are happy.

What percentage of the system can have that service today?

Maybe -- it's hard to say.

We think maybe 50% because it's pretty urban.

And you need to have high-quality delivery services available, and really a lot of these companies are growing.

They're moving to new cities.

They know how to do it now, and so it's really growing.

So at this point it's urban but as they grow, we'll grow with them.

Matt, one last question.

Why was food cost so much higher during the quarter than what you guys initially guided to, given you contracted?

Could you tell us what proteins or items moved on you?

It was not the contracted items.

It's some of the ancillary items that are not necessarily locked into contracts.

We mentioned grocery in particularly as seeing spikes in that area as well as a little bit of pressure from additional fuel surcharges, based on gas prices.

Those were really the big drivers.

Thanks.

Operator, we have time for one more question, please.

Your next question come from the line of Jeffrey Bernstein of Lehman Brothers.

Please proceed.

Great, thank you.

Just based on all of the guidance you provided in terms of sales and costs, I think you previously had mentioned earnings expectations for 10% to 15% earnings growth.

I know after last quarter, it was geared towards the lower end.

Wondering internally -- would you still assume -- at this point should we be looking for closer to flat growth in 2008 in terms of earnings, then perhaps see a rampup in '09?

What do you see in the back half of '08 and into '09?

I think really in our guidance, the expectations as of today is what we laid out and really for 2009 I don't think we're prepared yet.

We typically will do that in the third quarter, so we haven't explicitly given that number.

But I think we've given on a line item basis the best visibility we have today.

One last followup.

David, you mentioned at beginning about the Mike Dixon resignation.

You noted it was somewhat awkward timing.

Perhaps if there's any more color in terms of why the resignation, whether he's pursuing other opportunities, or what the rationale was ahead of earnings?

Really, I think that's all we really can say is we're sorry is happened so quickly.

It's one of those things.

We love Mike Dixon, he's great to work with and an excellent CFO, but it's just one of those bad situations of timing.

So there's really no more than I can add other than thanking Mike and we'll be on a search for a new one.

In the meantime today, if you want any more questions answered, just call in to Joe and Matt.

They'll be happy to answer your questions and give you more color on the numbers.

So with that, everyone, thank you very much and we'll talk to you later.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day