Cheesecake Factory Inc (CAKE) 2009 Q1 法說會逐字稿

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

I will be your operator for today.

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

We will conduct the question-and-answer towards the end of this conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Miss Jill Peters.

Please proceed, ma'am.

Thank you.

Good afternoon, and welcome to our first quarter earnings call.

I'm Jill Peters, Vice President of Investor Relations.

With us today are David Overton, Chairman and Chief Executive Officer, and Doug Benn, Executive Vice President and Chief Financial Officer.

Before we begin, let me quickly remind you that during this call, 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.

Which is available in the investors section of our website at thecheesecakefactory.com 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.

On the call today, David will begin by providing some opening remarks.

Doug will then take you through our operating results in detail and update our expectations for 2009.

Following that, we'll open the call to questions.

Without further delay, I'll turn the call over to David.

Thank you, Jill.

Our results for the first quarter were better than we expected, primarily as a result of a significant upturn in comparable sales relative to the fourth quarter.

As traffic was the main driver with an almost three percentage point improvement this quarter from fourth quarter levels.

Another important development in the first quarter was a moderating of the degree to which guests were managing their checks.

Guests are still reducing their beverage orders, both alcoholic and non alcoholic but dessert orders are up year-over-year helping to boost our average check.

While we delivered solid results for the first quarter and earnings were $0.06 above the high end of our range, we are reminded by the news media on a daily basis that the economy remains weak.

Unemployment is high, real estate values are down, and while the consumer confidence index showed improvement recently, it remains low.

This is all the more reason for us to stick to our strategy and continue to focus on what we can control.

This is the approach that we took in the first quarter and the approach that we will continue to take throughout the year.

Our key priorities have not changed.

We're focused on guest satisfaction, product development, cost savings and debt repayment.

We executed across all of these priorities in Q1 and I'll share some thoughts with you on the progress in each area.

First, everything we do in our restaurants we do to deliver a great experience to our guests.

We know that once they enter our restaurant, their experiences are entirely within our control.

So we concentrate on executing at every step, from quoting an accurate wait time, all the way through the time we deliver and close out of the check.

Most of our restaurants are on a wait during lunch and dinner, and accurate quote is an important service metric.

During the past 12 months we've improved on this metric by five percentage points.

This contributed to a seven percentage point gain in overall guest satisfaction scores during the same time frame.

Our guest satisfaction scores are a leading indicator of whether a guest will return or recommend The Cheesecake Factory.

So it's an important metric for us to track and always strive to improve upon.

On the product development front, the rollout of our small plates and snacks menu was completed in mid March and the outcome that we have seen to date has been positive.

This menu is a way for us to provide a broader array of price points and promote a greater value perception while still maintaining our high starts for quality and innovation.

Seeing guest use this new menu as an add on when they might not have otherwise ordered an appetizer and also for shared dining.

Our data shows that guests who ordered from the small plates and snacks menu during the first quarter had check averages that were higher then those for guests who did not order from this menu.

In addition, we're seeing a benefit to our cost of sales from these items as the result of their favorable food costs.

Our second quarter marketing promotion will emphasize this new menu category, which we believe is an effective way for us to increase guest awareness and drive trial usage.

Second quarter promotion will further build on our marketing efforts, which are already delivering against our goals of driving guest counts, boosting our check average and deepening our engagement with guests.

In addition, we had a very strong publicity campaign around the Share The Love promotion, resulting in appearances on programs such as "Dr.

Phil" and "Entertainment Tonight".

The visibility we gained from this caliber of media coverage highlights our brand and publicized what is new in our restaurant.

Our cost initiatives are also contributing to our performance.

We realized over $4 million in savings during the first quarter and we expect our initiatives to continue to deliver savings throughout the rest of the year.

Our financial position is strong and we are on track with our goal to reduce our debt this year.

We repaid $25 million of the $275 million balance on a revolving credit facility in the first quarter while increasing our cash balances from year-end levels.

Finally, some comments on development.

We opened one new restaurant during the first quarter as planned in Walnut Creek, California.

We've talked about the softness that we've seen in California over the past 18 months or so.

However, Walnut Creek has been open for just over two months and is averaging about $300,000 in weekly sales.

This is incredibly strong performance in normal economic times, let alone in a recession.

The take away here is that although any market can experience softness, there is usually varying performance within that market.

I think the Walnut Creek location also illustrates the strength of our brand and underscores the value premier location.

Our smaller Annapolis location is performing very well.

For those of you who are newer to the The Cheesecake Factory story, the Annapolis location is the first of our new 8,000 square foot restaurants.

It was built at an investment cost that is more than 20% lower than our 10,000 square foot model but has the potential of delivering $200,000 in average weekly sales.

Annapolis is living up to its potential and we continue to be pleased with its performance.

In terms of development for the remainder of the year, we expect that we will open at most one additional restaurant.

This reflects the current expected opening date for the developments in which our restaurants will be located.

In summary, our team did an excellent job of executing our strategy this quarter.

Our performance was the result of the collaboration across our entire Company from operations to finance.

There's still more work for us to do and we believe that the continued focus on brand enhancement, the guest experience, and proven financial management will help us to continue to drive solid performance.

Now I would like to turn the call over to Doug to review our results and discuss our outlook for this year.

Doug?

Thank you, David.

Total revenues for The Cheesecake Factory for the first quarter were basically flat at $392.8 million, reflecting year-over-year restaurant revenues -- reflecting flat year-over-year restaurant revenues and a 13% decrease in bakery revenues.

Restaurant revenues reflect a 4% increase in total restaurant operating weeks primarily from the opening of eight restaurants during the trailing 15-month period, off set by an approximate 4% decrease in average weekly sales.

Overall, comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurant decreased 3.4% for the quarter.

By concept, comparable sales decreased 3.2% and 5% at The Cheesecake Factory and Grand Lux Cafe, respectively.

Comparable sales benefited from the New Year's holiday shift during the first quarter and we gave less back at end of the quarter than we expected in relation to the Easter and spring break shifts.

At The Cheesecake Factory, while comparable sales were still softer than we would like in general, the pressure was slightly more pronounced in the West, particularly in California and Arizona.

This is a continuation of the geographic trends we've seen over the past year.

At Grand Lux Cafe, about 70% of the comparable sales decline came from our one unit in California and our three units in Florida.

Again, a continuation of the trends that we've seen in previous quarters.

Moving onto our bakery operations, third-party bakery sales decreased 13% in the first quarter to $13.1 million versus $15.1 million in the prior year quarter.

In the first quarter of last year, we had strong post holiday shipments to the warehouse clubs which did not reoccur this year.

The club stores are being careful with their inventory as customers are purchasing fewer discretionary items in light of the economy.

Cost of sales decreased to 25% of revenue for the first quarter of 2009 compared to 25.6% in the same quarter last year.

The 60 basis point decrease was solely due to improvement in our restaurant cost of sales.

And most of the decrease within restaurant cost of sales was the product of our development of the small plates and snacks and specials menus, which have lower food costs.

In addition, cost of sales improvement stemmed from favorable commodity costs primarily related to produce, cheese, and meat.

The remainder resulted from changes in vendor selection and consolidation and more efficient management in the size and frequency of our orders.

Total labor was 33.9% of revenue for the first quarter, up 20 basis points from 33.7 in the prior year.

We experienced higher health insurance cost in the first quarter of this year as we lapped some favorable claims activity in the first quarter of last year.

Our direct operating labor absent this health insurance increase was actually about 75 basis points better than the first quarter of last year.

Half of this improvement came from labor efficiencies resulting from fewer new restaurant openings in the fourth quarter of 2008 versus the fourth quarter of the prior year.

The other half of the labor savings was made possible by the rollout of our kitchen management system as well as changes to our manager staffing levels.

Other operating costs and expenses were 25.9% of revenues for the first quarter of 2009, which is up 160 basis points from 24.3% reported in the first quarter of last year.

Approximately 50 basis points of this increase resulted because of favorable adjustments to our workers compensation and general liability self insurance reserves in the first quarter of last year.

An additional 50 basis points of the increase came from incremental marketing expenses in the first quarter of this year.

And the remainder of the roughly 60 basis points represents continued sales deleverage.

While the deterioration in other operating costs and expenses has improved, we will continue to focus efforts here to get comparisons closer to flat with the prior year.

G&A expense for the first quarter was 5.5% of revenue, up 30 basis points as compared to the first quarter of 2008.

The majority of the increase came from an accrual for corporate bonuses this year, versus no accrual last year as well as higher costs associated with our retail gift card program.

Depreciation expense was 4.7% of total revenue for the first quarter compared to 4.6% for the first quarter of 2008.

Pre-opening costs incurred during the first quarter were $1.7 million compared to $2.5 million in the same quarter last year.

As expected, this decrease resulted from our reduced opening schedule in the first half of this year relative to last.

Interest expense included $4 million of expense on the $275 million in debt we had outstanding under our revolving credit facility during the quarter.

This compares to $2.6 million in interest expense in the first quarter of the prior year.

The increase in interest expense reflects the higher rates that went into effect in conjunction with the amendment to our credit facility in January of 2009.

In addition, our average debt balance outstanding was higher in this year's first quarter than last year.

Our effective tax rate for the first quarter was 22.8%.

The decrease from the prior year first quarter was attributable to a higher proportion of employment-related tax credits in relation to pretax income.

Our liquidity position continues to be solid.

As David mentioned, we increased our cash and marketable securities balance from year-end levels to $89 million at quarter end, while at the same time using $25 million to pay down our revolving credit facility.

The balance on our five year revolver is now $250 million.

The credit facility is in place until April 2012.

And although we have no principal payments due prior to that time, our plan continues to be to further reduce our debt this year on the second quarter and and during the second half of the year.

Our cash flow from operations for the first quarter was $41 million, and net of $11 million in capital expenditures, we generated approximately $30 million in free cash flow during the quarter.

That wraps up our business financial review for the quarter, now let's spend a few minutes on the outlook for the second quarter and the remainder of 2009.

Visibility continues to be cloudy in this uncertain and often times volatile economic environment, but we will continue to provide estimated ranges for diluted earnings per share based on comparable sales assumptions.

We will also share some thoughts with you on directionally where we see our costs heading for the remainder of the year.

As I said last quarter, while the earnings per share ranges we provide are our best estimate of where we expect to be based on factors known at this time, they are highly correlated to the assumed levels of a comparable sales.

As a result, I continue to urge you to consider our guidance to be more of a sensitivity analysis than an absolute prediction.

With that said, for fiscal 2009 we now anticipate diluted earnings per share between $0.67 and $0.75 based on the assumption that comparable sales will be at a range of between negative 3% and about negative 4.5% for the year.

Although we have not made a definitive decision about our summer menu price increase our comparable sales assumption for year includes a place holder of about 1% for the summer menu price increase.

We would now expect our tax rate to be quite a bit lower than the 29% we projected at the start of the year.

We expect our full year tax rate to fall between 24% and 25% as a result of employment-related tax credits and a lower level of non tax deductible deferred compensation expense.

Our current earnings per share range for the year of $0.67 to $0.75 includes about $0.04 of benefit from this lower tax rate assumption.

For the second quarter of 2009, we expect diluted earnings per share between $0.19 and $0.21 based an assumed range comparable sales of between minus 4% and minus 5%.

This comparable sales assumption for the second quarter reflects pricing of approximately 2.2% currently in our menu.

The $0.19 to $0.21 range includes $0.03 in expense related to the anticipated unwinding of an interest rate collar that is necessary because of our plan to pay off additional borrowings during the quarter.

Our current expectation is for food costs inflation in the 1.5% to 2% range, down about 100 basis points from our projection in February, reflecting a decline in commodity cost for some of our non contracted items.

With 60% of our commodities contracted on an annual basis, plus additional contracts in place that run three or six months, this is the best read today that we have on the level of the expected increase.

With our assumed menu price increase for the year, we now expect cost of sales as a percentage of revenues for 2009 to be lower relative to 2008 levels.

We expect other operating costs to continue to be driven higher by deleverage on the lower level of sales and a full year of marketing expenses this year as well as the lapping of favorable adjustments to our insurance costs in 2008.

Excluding a projected 40 basis point benefit from lower pre-opening costs, we expect our operating margins in 2009 to be lower by 90 to 140 basis points, as compared to 2008 depending on where we fall within our assumed range of the comparable sales.

Our projection for capital spending is now expected to be between $40 million and $45 million in 2009, of which about $13 million to $16 million will be spent on the development of new restaurants.

As a result of the lower forecasted capital spending and higher expected earnings, we now estimate our free cash flow will be better than we last projected by about $15 million, resulting in an estimated $85 million to $95 million in free cash flow this year.

We plan to utilize this free cash flow combined was a portion of our cash on hand to reduce the outstanding balance on our credit facility.

We now expect to pay off a minimum of $100 million of the revolver balance as compared to our previous estimate of between $75 million and $100 million, which will bring our debt level down to $175 million by year-end.

With that said, we'll take your questions.

In order to accommodate as many questions as possible, please limit yourself to one question and then requeue with any additional questions you have.

(Operator Instructions).

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

Please proceed.

Doug, could you just repeat what you said about the pressure on the labor line this quarter relating to that one-time health benefit adjustment?

Is that a one time this quarter or does that persist?

And can you talk about where you think, I guess specifically labor goes this year, is there -- are you really seeing I think you said 75 basis point decline year-over-year?

Is that something sustainable at the current levels?

Can that accelerate through the years as you implement more cost savings and KMS systems?

Thanks.

Yes.

Let's talk first about the quarter.

The quarter, labor is up overall by 20 basis points but we had the -- last year we implemented a new health insurance carrier.

And anytime a new carrier's put in place, there's a lag effect on the claims coming in.

And so the claims early on last year that came in and were booked into our expense were lower and this year we're seeing a more normalized claims level.

So the comparison is negative here at the first part of the year but we could expect that year the end of the year, possibly by the fourth quarter that maybe we'll see some positive comparisons.

Because our health insurance expense for the year last year was not unreasonably low, it was just low earlier in the year.

With respect to the labor line, I would expect for us to -- we announced at the start of the year, our last conference call that we had about $5.5 million worth of labor related initiatives that had to do with the Kitchen Management System, manager staffing, et cetera.

We're well on our way.

We claimed about $1.5 million worth of those this quarter and we would expect to continue to claim some labor benefits throughout the rest of the year.

And I would expect that labor for the year ends the year relatively flat, perhaps a slight improvement over the previous year.

Thank you.

And your next question comes from the line of Joe Buckley from Banc of America-Merrill Lynch.

Please proceed.

Thank you.

Just to follow-up on that question, I think David mentioned $4 million in cost savings in the first quarter and sounds like 1.5 might have been on the labor line.

Could you run through some of the other cost programs?

And then maybe also I think you indicated food costs would be down, labor, flat to maybe down, but operating margins still under pressure.

So maybe talk about that other operating expense category and what pressures you're seeing within that category of costs?

Sure and in addition to the labor costs savings, during the first quarter, we have identified a number of other cost savings for the year that a lot of them in the cost of sales area.

The development of lower food costs items with these small plates and snacks and the management of our supply chain and our order quantities is really going to be -- has been already in the first quarter and will continue to be a big savings for us.

The other operating expense line is where most of the pressure is.

And we do have some savings initiatives that we have put in place there, that was unrealized during the rest of the year.

A good example is in the repairs and maintenance area where we're just doing a better job of paying attention to that, have assigned it.

It's being controlled by one person.

We're being more prudent and reasonable about the way that we're doing our repair and maintenance expenses.

So if you look at our operating margin overall, we expect it again to be under pressure for the year as a whole, with food costs down, labor flat and again other operating expenses are where the pressure is going to come from.

And some that is marketing, and -- but some of that is just the deleveraging impact that we're seeing.

But that's the area where we're concentrated the most right now.

Thank you.

And your next question comes from the line of Jeffrey Bernstein from Barclays Capital.

Please proceed.

Great, thank you.

Just a question on the full year guidance.

I think based on your own guidance, the first quarter looks like you beat by about $0.07 from the mid point and I think you said the tax rate is going to help you by $0.04.

So you're talking about perhaps $0.11 of upside to what you think your prior full year guidance was.

It looks like you raised the full year guidance by about $0.10.

It seems to be roughly a wash.

But yet I would think two things, one the comps are better or at least your guidance for the full year is for comps to be better than what it was last quarter.

And I would think some of the cost savings opportunities that you experienced in the first quarter you would see some continuation of that for the rest of the year.

So I'm just wondering if you can piece those things together whether or not I'm missing something or whether this guidance for the rest of the year is somewhat conservative at this point?

Yes.

I think you're only missing one piece.

So if you take a 10% change in our -- or a $0.10 change in our guidance, $0.06 kind of represents the upside from the first quarter as you said.

$0.03 to $0.04, about $0.4 represents the taxes.

And then we're factoring in about an additional $0.03 for better than expected performance or better than what we expected before performance either in comps or cost savings or whatever.

But that's off set by the $0.03 that we're going to take an expense in the second quarter related to the unwinding of the swap.

So I think that brings it together at least it brings together in my mind if you take $0.06 and add $0.04 tax benefit and the $0.03 for better than expected performance and subtract $0.03 because we're going to unwind the swap you'll get about to the $0.10 that we raised the guidance by.

So the $0.03 that you said represented the comp and/or cost savings, I guess it's there where I would assumed it would have been more just based on the cost-saving benefit you had in the first quarter and now you're looking for the comps to improve by what looks like more than 100 basis points?

Well, they're probably meant to improve.

If you look at it carefully, I think because I had to do this in order to make sure that I understood it, the comps are meant -- are improving some over what our previous guidance was.

So I'm really speak ing to the incrementality if you will between what our previous guidance was and what it is now.

So we're not expecting comps to get significantly better than what our previous guidance was.

And during the last part of the year, they were pretty robust.

In the fourth quarter we have to run pretty good comps.

I think I talked about that in the call last time that there is pretty high expectations for the fourth quarter since our comps were so negative in the fourth quarter of 2008.

But was there sequential improvement in the comp through the first quarter and into April?

There was.

Let's talk about that for a second.

So during the quarter, basically our comps, if you look, we have big improvement in our traffic.

So we were minus 7% traffic in the fourth quarter and we were only minus about 4.2% traffic or 4.3% traffic in the first quarter.

So traffic improved greatly.

Our comps stayed relatively the same.

If you take out the holiday shifts at the beginning and the end of the quarter our comps stayed relatively flat during the quarter in other words didn't deteriorate or accelerate.

And that flat percentage is about 4.5% down.

That's about what roughly what a normalized week right now is running for us.

And we ran only minus 3.4% in the first quarter and part of that had to do with favorable holiday shifts and we might have gotten a little bit of weather benefit out of that.

So when we look at second quarter, we basically said 4% to 5% and that's that 4.5%.

Great.

Thank you very much.

You're welcome.

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

Please proceed.

Thanks.

I guess just following up on that last point that you were talking about, the 4% to 5% guidance you're giving on same-store stores for the second quarter that seems to be what you're running at now.

Do you think of that as kind of deceleration versus what you saw in the first quarter?

I understand there was a calendar shift, but you're starting to cycle over much easier levels from last year.

Maybe you can first comment on that.

And maybe quantify the calendar shift that you saw the end of the quarter that might be influencing the beginning of April as well.

But my question was more targeted towards the small plate items that seem to drive some success there.

Can you may be talk a little bit about it as far as what mix you saw in your menu?

And if I understood correctly, the targeted marketing is going to go towards that in the second quarter?

Should we expect the same 50 basis points of marketing expenditure in the second quarter as well?

You might have to repeat some of that -- a lot of questions at once.

Sorry about that.

Go ahead, Doug, do you want to talk about small plates.

I'll talk a little bit that.

Small plate and snacks are obviously they're doing very well for us.

It's obviously a way to provide our guests with a different price point items and give them greater value.

We're getting very good frequency for use of those items.

In fact, we had -- one of the advantages of them is the higher check average that they are currently commanding.

And they are also driving our cost of sales lower.

SO that's what is so exciting about this menu category for us.

In addition to giving a great new choice to our guests with a value perception.

I think that's right.

That's what is happen with them.

Okay.

What's the mix?

What's the mix on your menu at this point.

What percentage of the sales are on those small plate?

I don't know that number.

We're selling thousands of them.

We can get that number but we don't have it right now.

It's enough to make about a 40 basis point difference positively on our cost of sales.

Plus we have our special menu in each restaurant, or at least in 100 of them.

There's eight or nine items that were priced well but they had a great food costs and they're being ordered very intensely.

So combine that with the small plates and snacks and that's what is contributing to the lower food costs.

And then this within the next couple of weeks, we have another 40 restaurants that will be rolling out our special menu that didn't have them yet.

So that should help a little more as well.

And I think with respect to lapping around the more favorable or easier sales comparisons.

That really doesn't happen until near the end of the second quarter.

The first part of the second quarter, after you get through the first three -- few weeks is pretty tough.

We were still doing relatively well the second half of April and all of May last year.

So the comparisons don't really get easier until June.

And at the end of the quarter I said we didn't get hit quite as hard at the end of the first quarter as we expected from the shift of the Easter and spring break holidays.

That was only about half a percent impact.

So when we're looking at the second quarter sales and trying to come up with what a reasonable same-store sales assumption is for the second quarter, we wouldn't expect a whole lot of benefit from it either.

In fact we know what it is.

It's been three weeks and we've factored that into the guidance of minus four to minus five that we gave.

Okay, that's helpful.

And then just the last piece to that never-ending question that I asked.

Did I hear you correctly that this quarter you will have the targeted marketing towards those small plates and should we expect the same 50 basis points?

Well, we have mentioned that.

So there's a couple of cards in there.

One as we did in the first quarter or the last quarter, was to have some cheesecake, to come in for an extra visit.

And then we also gave an extra card in there to come in and get a little deal on the small plate and snack because we thought it was helpful.

So we really sort of doubled down with this one.

I think it's a great offer, and plus we have some Internet, web-based offers and prizes and things.

There was a marketing piece that came out today.

You can look at that for some more details and go to the website.

But that is what we're going to be focusing on for the second quarter.

There's a Press Release that went out today that's very detailed about the second quarter.

About exactly what we're doing.

Great, thank you very much.

You're welcome.

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

Please proceed.

Hi, good afternoon.

I just want to be a little clearer I guess on the guidance for the second quarter.

So understanding that your comps get easier or your comparisons get easier in the month of June.

Are you running a lit bit worse than the negative four to negative five and you assume it will get better or you running in that range and assume you have the opportunity to get better against easier comparisons?

We would look at our base same-store sales right now as being about minus 4.5%.

If you take out holiday shifts.

We've completed three weeks of the quarter.

After three weeks of the quarter, we're running better than minus 4% to minus 5% but we have to be running better than minus 4% to minus 5% because of the fact that we did have some benefit from the Easter and spring break shifts.

So we're looking at the quarter as if the next -- the next three to six weeks are pretty tough comparisons.

So we're probably -- will be under -- we would expect that we would be be probably worse than what our trend line run rate is.

This is not an absolute prediction obviously and that's what I said at start.

That I -- we do the best job we can of taking into account all of the factors that go into this.

And when we do that, we get minus 4% to minus 5%, but we'll see.

We'll know a lot of more after the next four to six weeks is up and then it will get a little easier in June.

Understood.

I just wanted to make sure you're running ahead that with the Easter shift at this point.

We're, yes.

Okay, so getting to better questions.

On the marketing spend, are you actually changing the amount of marketing spend this year or just the way you're spending money?

And I'm thinking of that as a percentage of sales?

We're changing the amounts of the marketing spend.

We didn't have -- we had very little if any marketing spend last.

Mark just came on board in the middle of the year and it took him those months to get settled, so now we've given him a budget and he's working within that budget.

Do you say already what the goal is as a percent of sales for marketing spend this year?

About half a percent.

And then -- I want to make sure I understand the labor.

I think you mentioned $5.5 million in labor initiatives.

Was that an annualized number and you were saying you've captured $1.5 million in the first quarter?

Did I understand that correctly?

That's exactly right.

I think you said it right.

Okay.

And may be a better long-term question.

So I understand why you slowed growth in this environment, I think everyone appreciates that, I guess I'm curious as to where your new unit returns are trending maybe for the class of 2008 or the one you've opened so far this year?

And how you think about the long-term opportunity for The Cheesecake Factory?

What would be the triggers for you to reaccelerate growth?

If you kind of walk us through maybe the longer term thesis at this point and the returns you're getting on the units.

Well, the one that we opened this year was doing really well.

I mean it's in California, which we've said is one of the weaker markets and it's in northern California and doing close to $300,000 a week.

And in fact the last three that we've opened, Annapolis, Maryland and Towson and Walnut Creek are all doing well.

They're all $200,000 to $300,000 restaurants.

We never turn down an (A) site.

I think we're being more particular now than we were let's say when we were opening 22, 23 stores in 2006 and 2007, but there's no great site that we will turn down today.

We're looking at -- there's at least a dozen sites we're looking at right now for 2010 and I don't know how many we'll get.

A lot depends on the economy, the strength of those sites and will all of those deals get done.

A number of the sites that we were going to open this year it was landlord's choice to hold them off to 2010 and some may even go into 2011, mostly because most of the tenants, the retail tenants and other tenants ask these landlord today hold off these sites so they didn't have to drop out.

So we're still growth and I, for one, am always on the hunt for great sites.

We have some sites that are doing extremely well as Doug just mentioned.

And so and then as the economy gets better, I think Sharon we will consider picking it up even more.

Sharon, one of the big things that I would say from a development standpoint, one of the opportunities we have to expand our brand in future has to do with the success of this new smaller format restaurant that we talk about a lot in Annapolis, Maryland.

We were surprised by the amount of sales it can do.

We were hoping that it could do $8 million in annual sales.

Actually that 8,000 square foot format can do $10 million in sales.

So, at a lower investment cost of about $1.5 million for that restaurant, the propensity or the chance for that type of unit to generate great returns in many expanded number of locations from the larger format is great.

Okay, so just to be clear in 2010, I know it's early, but we should, at this point expect unit development to accelerate again?

I mean do you expect to open more than two?

Yes.

I can't make any promises, but answer is yes that we would expect to.

Okay.

Well I've got a great borders that is closing on Michigan Avenue.

That would be a great Rock Sugar.

So keep it in mind.

We were talking about that today.

We've got to see how they're willing to split the store up but we were just talking about that morning.

If you want to hire me for real estate let me know.

Thank you.

Thanks.

And your next question comes from the line of Matt DiFrisco from Oppenheimer Company.

Please proceed.

This is [Jake Bartlett] in for Matt DiFrisco.

And I had a question about -- you mentioned that California and Arizona were still your weak markets or weakest markets.

I'm wondering whether they improved more than other markets in the quarter?

Would that be a source of all of the upside versus your expectations with sales?

I would say that main thing.

One of the things that we saw.

We talked about urban versus suburban markets before.

And the urban markets are still performing better than suburban markets but part of the upside we saw during the quarter was a little bit of the closing of the gap on suburban markets.

Urban markets are still performing better, but suburban markets stepped up their game a little bit if you will.

So it's not so much of California versus Florida versus Arizona.

It's -- where we saw the change was suburban markets got a little bit better.

Okay.

And just to try to I guess delve into more of the comp.

In the first quarter, I believe you mentioned that the traffic was fairly consistent throughout the months, but I'm wondering whether there was any relation to the rollout of the new menu?

And whether there's any market variations that would have kind of made it improve throughout the quarter?

Maybe that's mixed, maybe not traffic but the mix --

I would tell that you if you look at our 3.4% negative comp for the quarter, basically 2.2% is pricing and the menu and there's a 1.2% negative menu mix shift and about 4%, 4.2% negative traffic.

But the traffic improvement, it's a little hard to tell because in the first part of the quarter we saw that this shift from the New Year's holiday, but I don't think that it was -- it's hard to say.

I don't think it was marketing related.

I think the facts are that basically we saw pretty flat performance throughout the quarter and not an improvement or deterioration.

Okay.

I guess the interesting part is that others don't seem to have seen that trend.

So it's particular and impressive.

The marketing program did work for us.

The small plates and snacks helped us a lot.

Better execution.

I think that we've really tried to hone in and make the execution in our restaurants better.

Maybe all that -- it's hard to tell what helps at what point in time but all of those things are contributing.

Okay, great.

And one thing that might be helpful just so I have it clear, what you're lapping for traffic in the second quarter.

And also the first quarter -- the first and the second quarters of 2008.

Helpful.

So what you're lapping for traffic?

The traffic, I have same-store sales in the first and second quarter of 2008 but let's get together off line on that.

I don't know the traffic numbers.

Okay.

Thank you very much.

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

Please proceed.

Thank you.

Excuse me if you've already mentioned this.

I was trying to understand if the small plates and new menu was in the system for the full Q1, how much contribution -- how much it contributed to Q1 both same-store sales and the cost of sales improvement?

And then should we expect a full year's benefit in Q2?

Can you clarify the timing of the rollout?

Yes.

Most -- it was all in by the end of the quarter, but it was in for most of the quarter and had about a 40 basis point positive impact.

That and the specials menu together had a 40 basis point positive impact to cost of sales.

Okay, so you saw a benefit to cost of sales.

I think you also mentioned that it -- you saw better average check with it as well, but you --

Yes, so better average check and we had more profit from every dollar collected.

So it's all good.

Okay and the negative mix that you mentioned, how did that -- I mean I guess how do we reconcile those two?

Well, there are other items our menu other than small plates and snacks.

We actually -- that's true.

Actually the mix improved.

In the fourth quarter of last year our mix was about impacted us negatively by 2.5%.

In this quarter it only negatively impacted us about 1.2%.

And basically we still have lower incidences of people ordering beverages, both alcoholic and non alcoholic beverages.

However, part of the reversal was that dessert incidences are now up.

So we have people ordering desserts again, which helped close that gap a little bit.

Okay that's very helpful.

So in terms of how much Q1 was in place for Q1, it was maybe in place for half the quarter?

Is that a good rule of thumb?

Probably maybe about that - the special menu was in a little longer and the small plates took a little longer to rollout.

Thank you.

And your next question comes from the line of Brad Ludington from KeyBanc Capital Markets.

Please proceed.

Good afternoon.

I just wanted to ask if you could provide a little more color on -- in the release you mentioned that you're further working on supply chain initiatives or optimization of the supply chain.

Can you give some color on what those initiatives are that could lead to further benefit there?

Sure.

Well we're talking and looking through every SKU that we have and trying to make a determination on without impacting our guest in a negative way or reducing our quality, if there a better way to order a product either to by the quantity we've order it.

The amount of times we have it brought to our restaurant, the size of the containers, those types of things are what we're looking at.

And we think all of those together can be a pretty big number for us.

Okay.

Thank you very much.

Yes.

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

Please proceed.

Good afternoon.

Just a clarification.

So on the small plates and the special menu.

I guess you just did on the small plates.

They were in by the end of the quarter, but the specials.

That was in the week before that, Bryan?

Let me add to that, Bryan.

There's still more runway to go on that.

We're putting -- that specials menu was not in every -- it was in -- the restaurants that it was in it was in for the whole quarter but there were about 48 restaurants that it was not in that is going to go into.

So part of what we're looking at going forward in our savings on the cost of sales front is from that specials menu being in another 48 restaurants.

Okay.

And that was held back from those 48 so you could have a sample or a control group to test?

Yes.

It was just at way that we decided to roll it out.

We broke the rollout of that, went with the small plates and snacks knowing we could pick that up later.

Okay.

And the 40 bips on the food side from the mixed shift and the benefits of those two combined.

I assume those wasn't 40 bips in Q1 that's 40 in the restaurant that have had it in and that you're seeing once it fully in and the customers are ordering, correct?

That was the impact in the first quarter.

Oh, it was?

Oh.

So if you sort of systemize that given that it wasn't fully in neither was fully impactful for the whole first quarter then it might be more than 2X that number once we're fully rolled out would it not?

I would not go there with that.

I think it could be a little better but I think that's way too much.

And I guess just flush that out.

Why?

If it was 40 bips whole first quarter and it was a minority of the store weeks, why when it's in the 100% of the store weeks would it not have a commensurately larger impact?

I wouldn't say it was in the minority of the store weeks.

I would say the answer to that question on how -- when the small plates and snacks menu went in and being specific about that is not something where we were 100% prepared to answer.

I would tell you we've taken everything into account for the quarter and for the year.

The second quarter coming up and for the year and I would lead you to believe I think our cost of sales for the year can be up to 60 basis points better than what they were last year.

Okay.

Got it.

Thank you.

Thank you.

Operator?

Hello?

Can you still hear me?

Yes.

Go ahead.

That's my line is still open.

I don't have any other questions.

Okay.

Everyone can e-mail me and I'll ask the questions.

And your next question comes from the line of Nicole Miller Regan.

Please proceed.

Hello this is [Rob Whiler] actually for Nicole.

Just a quick question for you.

At the end of the fourth quarter, it looks like the leverage ratio is about 1.55 times.

Can you give us an update of what it was at the end of the first quarter?

Sure, it was 1.47.

1.47.

Then on the fixed charge what was it at end quarter?

It was 2.28 which was well over the minimum of 1.9.

Okay.

And then on the preopening costs, what are those tracking at now?

It just seems like they're a lot higher then -- because you only opened one store in the first quarter.

So could you give a little more on the preopening?

Well, that was pre-opening and I think that also in that number is some of the manager bench strength that we keep -- we've cut that back some because of the number of openings we're doing but some of the pre-opening costs relate to that.

And I don't know if that makes up the entire difference that you're seeing, but that's what I would say.

Okay, thank you.

You're welcome.

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

Please proceed.

Hi, it's Colin Guheen for Paul.

Following up on that.

So what's a good level of kind of preopening for this year given that when you're not opening units there might be some other costs in that line?

Well, a good level of preopening for the entire year would probably be somewhere like -- last year it ran around $11.8 million for the year.

And this year I would say for the year somewhere in the neighborhood of $5 million to $5.5 million.

Okay, great.

And does that conclude an assumption of having some of next year's unit openings?

That would.

It includes -- we don't really -- we said up to one more additional restaurant.

We don't really know if that's going to happen because we're not in total control of that.

But it would also include some of the restaurants that David mentioned that we're hopefully will be able to open in the first quarter of 2010.

Some preopening costs for that.

But it's all assumptions obviously but we have assumed something for that.

Okay and then can you just talk about the bakery sales.

Kind how those are trending outside of this quarter and what kind of impact that the destocking at the club stores might have on the forward --?

Well, they were down this quarter obviously.

The warehouse clubs again, are being very careful with their orders and their inventory levels.

And so that's where we're seeing the pressure if you will from third-party bakery sales.

And we would hope to have that pick up.

We're working on that but that's a big third-party bakery sales are highly dependent on our club business.

Okay.

So it could be fair to see them down for a few more quarters or just modest growth?

It could.

I would probably expect to see them down for at least the next few quarters.

Great, thanks a lot.

You're welcome.

And our last question comes from the line of Chris O'Cull from SunTrust.

Please proceed.

Thanks for taking my call.

Question and I can appreciate the interest in opening restaurants, but I guess a longer term question here, I mean when you look at your operating margin this year hovering around 5%.

And you go back and look at where you were a few years ago, 500, 600 basis points higher, what's changed other than obviously the decline in guest counts that would prevent you from being able to recover a lot of that margin?

You're asking a good question, and I don't think -- the difference between where we are today and where we were is very much a matter of same-store sales growth.

Once we get back -- the good news -- the bad news about declining same-store sales environments is there's deleveraging that really hurts you.

The good news when it's going the other way is leveraging works both way.

So I would expect we may not get 500 or 600 basis points back, but we can certainly get a good bit of that back once we can do a good enough job where we earn those guests coming back in our door in a positive comparison format.

So if we get the same-store sales back to 3% or 4% which I think we can do over the the longer term as soon as we get out of this economic issue that we're in, I think you're going to see some nice expansion of the margins.

And when you think about development, I mean longer term, even, do you anticipate expecting development in concurrence with margin recovery?

SO if margins are continuing to decline we shouldn't anticipate any kind of development.

It would really come we we see margin recovery, is that fair?

I think that's pretty fair.

I think it's -- rather than margin recover I would say, sales recovery.

Now, as David said, we're not going to pass on A sites.

Again, just like we said, when you have restaurants that are still doing $10 million, $12 million, $14 million that you're opening.

As long as you can continue with those sites they're going to help you come back, ut we're going to be very particular.

So I think we can have some growth with our A plus sites as well as continue try to improve margins.

Okay, let me move onto the small plates.

David, I know the small plates of the menus have only been out for a short period of time.

But, first has the back of the house had any issues executing the additional items?

Given that I mean my experience has been I go in and order a couple of them because -- especially the snacks.

Is that additional had -- had that been an initial issues for the back of house or lines?

Right now, I think we have that pretty well.

We're looking at our food production times all the time in each restaurant to make sure that is doesn't slow it up.

Or we work on.

So I think we've scheduled all of the restaurants with the appropriate cooks at the right time to get those out.

So far, we -- I have no reports of anybody struggling to do that.

And I think we nicely worked it in to the flow.

Okay and then one last question regarding the small plates.

When you look at the summer menu rollout is the plan to still keep that menu separate from the main menu?

I think for right now, yes.

We have another six or seven that we want to substitute test that I think are even better so we're going to expand that section just a little bit and replace let's say the bottom two or whatever just to keep it new and fresh.

And I think that because it's separate there's a lot of intensity going to that, to the ordering of that and the special menu.

So for a while longer we'll keep it separate.

At some point it will probably have a page of its own, but not just yet.

Okay.

Great, thanks, guys.

Yes.

All right, is that it?

Okay, well thank you everyone.

Thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect, and have a wonderful day.