Cheesecake Factory Inc (CAKE) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome for the second quarter fiscal 2009 earnings conference call. My name is Kesha and I will be your operator for today. At this time all participants are in listen-only mod. We will conduct a question-and-answer session toward the end of this conference. (Operator Instructions). I would like to turn the call over to Ms. Jill Peters. Please proceed.

Good afternoon anticipate welcome to our second earnings car. 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 may be 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 investor 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 of today's date and the Company undertakes no duty to update any forward-looking statements. David will start off the call today with some opening remarks, Doug will then take you through our operating results in detail and provide an update on our current expectations for the year. 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 second quarter were better than we expected, due to both higher comparable sales, as well as larger than anticipated benefits captured from our operational initiatives. We saw an improvement in guest traffic again this quarter, about 0.5% from first quarter levels. While the magnitude of the improvement was less than what we experienced last quarter, we're pleased that guest traffic moved in a positive direction. One of the factors that we believe contributes to our guest count is guest satisfaction. Not only did we gain six percentage points year over year in our overall guest satisfaction score, but we improved by a percentage point sequentially, at well. Improvement in the metric is important in an absolute sense, but it's also of particular interest because it indicates we haven't inadvertently traded off guest satisfaction for cost savings.

We continue to focus on an innovative product development and will begin to rolling out our summer menu in a week. In an effort to bring more value to the menu, we are expanding the small plates of snacks category. The small plates of snacks and specials menus are proving to be successful ways for us to deliver great food at moderate prices with lower food costs. As part of our summer menu change we will be launching a new cheesecake, Stephanie's Ultimate Red Velvet Cake Cheesecake, on July 30th, National Cheesecake Day. As you may remember National Cheesecake Day was a huge hit for us last year.

We're gearing up for another big event with two in-restaurant promotions and the launch of this new cheesecake, which presents a great media opportunity. We're also planning an unprecedented national campaign in September around hunger action month that will take our partnership with Feeding America to a higher level. This event will incorporate both sales building and cause-related elements in addition to driving a lot of exposure for us.

As you may have seen, we launched the first phase of our new website this week, which provides visitors the same WOW experience online that guests have in our restaurants. We have a lot of marketing activities that we're working on which we believe are moving the needle in driving guest traffic and sales while elevating the visibility of our brand.

Added to our in-restaurant sales effort is the recent additions of David Broad to our team. David is our Vice President of eCommerce and is charged with increasing our online sales effort, which is a nice opportunity for us to expand. In addition to our focus on sales and guests, we are capturing the benefits associated with our operational reengineering initiatives, which are contributing to our performance. We realized over $6 million in savings during the second quarter for a six-month tally of over $10 million.

We've also identified other cost saving opportunities that we expect will deliver another $8 million in savings this year. As a result, we're increasing our total savings expectations for the year from a range of $14 million to $16 million to a range between $22 million and $24 million, We reached our goal of paying down $100 million of our debt balance about six months earlier than planned. We expect to repay another $25 million by the end of this year while still maintaining a comfortable level of cash on our balance sheet.

Finally, some comments on development. At this point it's not likely that we'll open another restaurant this year. This site has moved into 2010. But, we don't view this negatively. The lower CapEx spending will go toward boosting our cash balance, further strengthening our balance sheet and increasing our future flexibility, and we'll have even more time and resources to focus on operations and execution at our existing base of restaurants. However, we do intend to resume our growth when the economy improves.

At this time I'll turn the call over to Doug to review our results and discuss our outlook for the rest of the year.

Well, thank you, David. Total revenues for the Cheesecake Factory for the second quarter were basically flat at around $407.9 million. Restaurant revenues reflect a 4% increase in total restaurant operating weeks, primarily from the opening of eight new restaurants during the trailing 15-month period offset by an approximate 3% decrease in average weekly sales. Overall, comparable sales at the Cheesecake Factory and Grand Lux Cafe restaurant decreased 3.2% for the quarter. Our concept, comparable sales decreased 3% and 5.4% at the Cheesecake Factory and Grand Lux Cafe respectively. Comparable sales benefited by approximately 1% from easter and spring break shifting into the second quarter this year.

At the Cheesecake Factory, the comparable sales pressure was still slightly more pronounced in the west, particularly in California, a continuation of the trends we've seen over the past year. We saw some moderation and softness in Arizona and an improvement in Florida, which delivered comparable sales that were above our overall average, Our average check at the Cheesecake Factory was higher again this quarter. Alcoholic beverages sales are down, dessert sales continue to be positive and sales of nonalcoholic beverages also turned positive in the second quarter. In addition, we are seeing a higher check average from guests ordering from the small plates and snacks menu.

While comparable sales in the second quarter at Grand Lux Cafe were similar to the first quarter, we do continue to see varying performance, with very high sales levels at some restaurants and sales levels well below average in other locations. We have specific marketing and other initiatives in place to improve performance at these lower-volume locations. We are closely monitoring these units and will continue to evaluate their performance.

Moving on to bakery operations, third-party bakery sales were about flat with the prior year at $14.4 million, but their contribution to our earnings were higher than in the second quarter of last year due to lower cost of sales and labor. Consolidated costs of sale decreased to 24.3% of revenue for the second quarter of 2009, compared to 25.7% in the same quarter last year. The 140 basis point decrease was driven primarily by lower restaurant cost of sales. We continue to capture cost savings associated with our small plates and specials menus, which accounted for over one-third of the cost of sales favorability in the second quarter. In addition, we experienced better commodity costs on spot market purchases of cheese, dairy, groceries and produce. Our bakery benefited from the favorable year-over-year contracted price for cream cheese.

The remainder of the improvements stem from our efforts in improving our supply chain through changing in vendor selection and consolidation and more efficient management in the size and frequency of our orders. Total labor was 33.1% of revenue for the second quarter, up 40 basis points from 32.7% in the prior year. We experienced higher health insurance costs in the second quarter of this year and we lapped some favorable health insurance claims activity from the second quarter of last year. In addition, we lapped the beneficial adjustment to our stock option forfeiture rate in the second quarter of last year. Absent these items, our direct operating labor was actually 60 basis points better than the second quarter of last year as a result of our operational initiatives, which improved our overall productivity.

Other operating costs and expenses were 23 -- 24.3% of revenues for the second quarter of 2009, up 70 basis points from 23.6%, reported in the second quarter last year. The increase was due to lower self-insurance reserves last year and higher marketing expenses this year, partially offset by favorability and utility costs. G&A expense for the second quarter was 6.5% of revenues up 150 basis points as compared to the second quarter of 2009. The majority of increase came from the accrual for our Founder's retirement plan, as previously disclosed, as well as an accrual for corporate bonuses, which we did not have last year. Interest expense included a $3.3 million charge to unwind one of the interest rate collars we have in place on the outstanding basis of our revolving credit facility.

Other income reflected approximately $700,000 in proceeds we received from a life insurance contract related to our deferred compensation plan. Our effective tax rate was 25.5%, in line with our expectations. Our liquidity position continues to be solid. We increased our cash balance to $96 million at the end of the second quarter, despite using $50 million during the quarter to pay down a portion of our revolving credit facility. After paying down an additional $25 million early in the third quarter, the balance on our five-year revolver now stands at $175 million. We have repaid $100 million since year end, which achieves our previously-stated goal, and we still intend to pay down another $25 million by year end. Cash flow from operations through the end of the second quarter was approximately $104 million. Net of roughly $13 million in cash used for capital expenditures we generated about $91 million in free cash flow in the first half of of the year.

That wraps up our business and financial review for the second quarter, now, I'll spend a new minute on the outlook for the third quarter and for the remainder of 2009. Despite a continued low level visibility for the rest of the year due to both last year's volatility and the ongoing economic uncertainty, we will still continue to provided our best assumption for earnings-per-share ranges based on our comparable sales estimates. As I've said in the past, earnings per share are highly correlated to our assumed levels of 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 on a GAAP basis of between $0.80 and $0.86 based on the assumption that comparable sales will be in a range of -3% to -4%. Given the nonrecurring items that we recorded in the second quarter, which cost us about $0.04 in diluted earnings per share, our guidance, excluding these items, on a non-GAAP basis is $0.84 to $0.90.

For the third quarter of 2009 we expect diluted earning per share between $0.20 and $0.23 based on an assumed range of comparable sales between -4% and -5%. This range reflects the run rate for the second quarter absent the 1% favorable holiday shift. Our current expectations for food cost inflation to be about 1% this year, down from the 1.5% to 2% projection we gave in April reflecting a continued decline in commodity costs for some of our noncontracted items, particularly dairy. We expect food cost inflation to be off \set by our efforts to improve our supplies chain efficiencies and with the approximate 1% price increase that we are taking with the summer menu change we'll have about 2.2% of pricing in the menu for the full year. As a result, costs of sales as a percentage of revenues for 2009 should be about a full percentage point lower than 2008. Excluding a projected 50 basis point benefit from lower preopening costs, we expect our operating margin for 2009 to be lower by approximately 45 to 90 basis points, as compared to 2008, depending on where we fall within our assumed range of comparable sales. Our projections for capital spending is now estimated to be between $35 million and $40 million this year.

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. Operator, you can now open the line for questions.

(Operator Instructions). Our first question comes from the line of John Glass with Morgan Stanley, please proceed.

Hi, thanks. How much of the $22 million to $24 million in savings have you captured so far this year? Can you ta --- is this the kind program that gets larger as the year progresses, so what's the right run rate to think about these saving are as you get into 2010?

Sure, we've captured around $10 million of the $22 million to $24 million so far. A little more than $4 million in the first quarter and somewhat less than $5 million in the second quarter, so right around $10 million. And -- so we've got another $12 million to $14 million to go and we just found really what we're calling phase two of our cost savings initiatives. We've just really implemented that and that was the additional $8 million that brought our guidance on total savings of the year up to $22 million to $24 million. Now that said, there will be some savings that roll over into 2010. This is just the estimate for 2009. I don't know if I have that number right here in front of me, but it's probably at least another $10 million next year just from what we've identified so far.

And just to be clear, so by the fourth quarter you might be saving $7 million per quarter if you think about $12 million to $14 million in the back half. So that's the run rate and then later on top of that maybe another $2 million to $3 million per quarter that could come from the extra $10 million, is that the way to think about it?

I think the $7 million a quarter's roughly the right way to think about it and the rest of the initiative will probably run out earlier in 2010 as they lap around with what we've done in 2009 rather than just an even amount every quarter.

Got you. All right, thank you.

Your next question from the line of Steven Kron with Goldman Sachs. Please proceed.

Hi, thanks, guys. Question first on the same-store sales front, just trying to get a sense throughout the quarter it seems like you had some stability. Can you comment on how the quarter ended up versus how it began and given your guidance for the quarter maybe just comment on how July is tracking? And then secondly on the cost saves maybe, Doug, you could just talk a little bit about where that extra $8 million is coming from? As you guys embark on this phase 2, where are the opportunities that you're seeing within the P&L?

Sure. Let's talk about our overall trends. Our overall trends in comparable sales have been right at around 4.2% for quite awhile. I know we ended the quarter at 3.2%, but remember, there was this benefit at the beginning of the quarter from the Easter and spring break shifts, so we -- there was not a big change in comp sales during the month. In other words, May was not dramatically different than April. It was -- if you got a normalized week it was somewhere in the neighborhood of an average of roughly 4.2%, and looking forward into July there's really not much of a change to that. It's still running roughly about the same amount.

Now with respect to the extra $8 million, it comes -- I would break it up into a couple of pieces;, one being greater-than-expected cost savings from existing initiatives and then really some new initiatives. The greater-than-expected cost savings from the existing initiatives come really on the cost of sales side where we're getting some additional savings more than what we expected from the specials menu rollout. I don't think we factored in quite enough initially for that as we rolled that out into 47 more restaurants in the second quarter. And frankly, our efforts toward renegotiating contracts with certain of our vendors to get better pricing many we're going better than what we thought on that so we've raised what we think we can get out of that, as well as labor.

We went a little bit further with our expo hours and eliminated some hours out of some higher-volume restaurants that we really didn't originally have in our estimate. And then there's some new savings that are really part of the $8 million and it's a number of labor -- primarily labor initiatives to gain greater efficiencies, including some cross training. We're also requiring staff member contributions toward our group health plan to be a little higher. We're doing a number of things -- a number of -- really the labor savings initiatives, each one of the new initiatives are rather small, but they add up.

It's not like front of the house labor, you're talking about other types of labor initiatives.

Some of it is front of the house labor, some of it, but it's mostly other initiatives, yes.

Okay, thank you.

Your next question comes from the line of Joe Buckley with Banc of America. Please proceed.

Thank you. (inaudible) direct labor is actually down as percent of sales. Are there other (inaudible) in insurance and the various items (inaudible) favorability this quarter that we should think about for the second half of the year?

Yes, you cut out a little bit on me, but I think I got it. There was some noise in this quarter. We actually did improve, but the noise in the quarter, I'll call it, was higher medical costs this year and then some lapping of some very favorable activity next year, one of those being favorable medical claims activity and the other being an adjustment we made last year to our stock options forfeiture rate that was favorable. And neither one of those I would -- they're not going to continue -- or certainly not continue to the same extent for the rest of the year. Such as, if I look at labor prognostications, if you will, for the third and fourth quarter, I would expect the printed labor number without explanation to be lower in 2009 in the third and quarter than it was in 2008.

Okay, (inaudible) you can still hear me. On snacks space you mentioned expanding that with the summer menu, could you elaborate a little bit on what you're doing in terms of price points and (inaudible)?

Joe, the price points are the same. They're $3.95 to $6.95. We've added about eight new items, we've taken off just a couple of the bottom sellers of the last one, and then we also have added other new items onto the menu, some regular entrees and taking some off and putting some on. But I would say that we have eight new items on the small plates and snacks, still priced the same, with excellent food costs.

Okay, thank you.

Thank you.

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

Thank you. I wanted to understand better the comp guidance, would it be correct to assume that looking at 3Q as '08 that you started off stronger in that quarter and then tailed toward the end so you're easier comp comparisons come later in the quarter? Just want to understand the context that you're giving this somewhat conservative 4% to 5% comp guidance for 3Q down.

Sure. It's -- again, 4.2% -- -4.2% is our trend. Part -- and what you say is absolutely right. In September the comp sales got much worse last year, but what really characterized last year and what makes giving any comp guidance for the third quarter this year somewhat problematic is the volatility last year. So, we're having to factor in how we are going to have to do against it. Are we actually -- I think in September last year comps were down something like 6.5%. Are we going to be able to count on going up against that kind of volatility and match up really well with that. So it just -- it made it difficult, but 4.2% is what our trend has been and our guidance is right -- just may be a little higher than that.

Okay. And then, Doug, going back to Grand Lux you mentioned that there's some lower volume stores somewhat under review. It eerily reminds me of [Bugaboo Creek] here a little bit. Are there any negative cash flow stories here with the Grand Lue concept?

Well, there are. The Grand -- let's go back to the beginning. Grand Lux has some of the best performers in the entire system here, a least two or three of the top performers are some of the -- at least from a sales standpoint some of the performers in the country or in our -- both of our concepts put together. Part of the reason, I think, for any underperforming Grand Lux locations have to do -- at least in part we can blame ourselves for when we opened them and where we chose to open them at what part of the economic cycle and it was -- so, we do have some Grand Lux' that we're keeping an eye on, but -- and there is negative cash flow on a couple of them, yes.

Okay, and then lastly. Understanding the COGS comment where you're talk about the plates being favorable as far as percentage of the improvement of COGS came from the plates menu and the expansion of that, understanding that it came out partially through the second quarter would you then get a greater benefit from that shift in higher margin products in the third quarter and the back half of the year?

I would think maybe slightly. The question is how much contin -- when factoring in what you're going to write down on the cost of sales line how much commodity favorability you're going to factor in, because we -- if you take the 140 basis point of favorable costs of sales we had this quarter, maybe 50 to 60 of it has to do with menu development initiatives, the specials and the small plates and snacks menu, but a good 50+ basis point has to do with commodity cost benefits that we were able to capture because of -- from mainly largely noncontracted items; cheese and dairy are two of them. There might be slightly more benefit in the second half from that, but it's really going to be dependent -- the total cost of sales benefit's going to be dependent on what commodities do, as well.

Okay. I know I said it was my last question, but I actually have one other one and then I'll leave you guys to answer this. Looking at no growth in the back half of the year what contingencies do you do to hold onto the staff in the event that you do reignite growth in 2010 -- and presumably, you will -- and are they working on a smaller prototype, are they sitting in -- are they experimenting with ideas? How do you rebuild the team and where are you directing their efforts and where are we seeing -- would there be a cost savings as far as bringing down the staff size permanently for a brand -- growth of a slower portfolio going forward?

No, I think that -- yes, that I are working on smaller prototypes for -- several for Cheesecake Factory and one for Grand Lux Cafe. The key position, our development people are still with us. We've also given facilities over to development,which -- where they are saving money, so we're able to convert temporarily some of the development people over to facilities, so that worked out very well so we could keep all of our very strong people there. And in terms of management, we take our strongest people and we convert them to normal managers rather than new openings. And some of the people that may have been border line can go and then we'll have plenty of time to know what our growth rate is once we start to put these things back on paper and rebuild.

Your next question comes from the line of Jeffrey Bernstein with Barclays Capital. Please proceed.

Great, thank you. Actually, just a couple of follow-ups on the prior questions, In terms of the small plate detail just wondering if you can give any more color in terms of whether it be mix of frequency or what contribution is to sales? I know you said that the average check is higher with a small plate order, I'm just wondering if we can get any more color on how far the small plates have progressed in terms of contributions.

Well, if you take the small plates and snacks and special menu category together it represented in the second quarter and really in the first quarter, as well, about 5% of sales. So, the costs of sales in general for the whole category -- either of those two categories is lower than the average cost of sales. Not lower by a lot, but somewhat lower and so if you take 5% and figure in a lower cost of sales that's where we're getting some of our cost savings from.

So if the -- I'm trying to get that right, 5% of sales from the combination of those things and yet that contributed more than a third of the COGS favorability?

That's correct. That's correct. And if -- I think if you work through math you'd find that even if those items were only a percent or two less that would drive COGS down from the 40 or 50 basis points we're talking about.

Okay, now I have to do that math. And then, in terms of the question on unit growth and you say you'd like to reaccelerate it when things get better, no more planned for this year, when things do get better what is the right level? I know you say you're not going to give 2010 until next quarter, but if you were thinking more big picture can you reaccelerate it to the levels that you were at a couple of years ago or is it a lower growth level that you think is probably more appropriate going forward when things do stabilize?

I think we're going to be prudent about that. One thing that we've often said is we're not -- if we find an "A" location right now we're not turning down that location. One of the issues, obviously, today is the developers are not able to -- there're not a lot of new developments coming out and some of older developments are not being completed, so some of it is beyond our control. I don't think, certainly within the near term, you're going to see us building the types of restaurants we did -- just the numbers percentage wise you just can't do what we did before, but you're going to see an acceleration. So I think that looking forward at earnings per share growth, while if you go back five years ago a great percentage of our earnings per share growth would come from new restaurants and a smaller percentage from same-store sales growth, we're still going to get earnings per share growth from building new restaurants, but I would tell you that a larger percentage of our earnings per share growth is going to come from comparable sales increases.

Okay. I know -- if you look back to the middle of the decade it seemed like you were doing 15 to 20 new units a year, is that something that can never be achievable again, or are you more cautious just because it seems like the supply/ demand perhaps won't allow you to reaccelerate to that pace at any point in time?

I think we're going to still -- we're going to have to look at that when we get closer to it. I think right now we're -- it's hard to look out in this environment, and if your were looking in, say, just 2010 and 2011 we'd love to be able to have low single-digit percentage growth in new restaurants, which could be anywhere from five to ten, maybe more, but not probably 15 to 20.

Got you, and just lastly, are you seeing benefits from rent reduction? I know that's something you guys have been pursuing, whether it be cotenancy clauses or just reductions. Any benefit from that?

There's some benefit from that. Certainly we're vigorously pursuing anything in our lease that allows us to reduce our rents because of shopping centers not being full or cotenancy provisions, so it's not a huge material amount but we are seeing some.

Great, thank you.

Your next question comes from the line of Jeff Farmer with Jefferies. Please proceed.

Great, thank you. You touched on this, but from a big picture perspective how would you characterize the changes to your marketing perspective, and more specifically, what we expect moving forward on the advertising front?

Well, I think we've -- marketing's brand new to us and think we've done a really good job moving -- the marketing's done a really job of moving the needle for us. In the second quarter probably out of our comps maybe 40 to 80 basis points -- it's a little soft in how you compute it -- was -- I contribute to our marketing campaign. I think that in -- for the amount of money that we're dedicating to marketing that we get a great bang for our buck. We only are spending something between 40 and 50 basis points, 0.5%, on marketing and I think that our marketing team has done a fabulous job in being a good steward of that money and I'm real excited about this third quarter campaign coming out. It's a little bit different than anything -- well, certainly a lot different than anything we've done in the past and I think that we're going to get a lot of really good publicity out of the things that that we're doing around, "A," national cheesecake day and then the whole month of September, the national hunger month, we've -- we haven't announced the specifics, yet, but there's a very exciting and a big campaign that's going, I believe, do a good job of aiding our brand awareness.

Yes, attracting a lot of media.

Yes.

Having said that, is there media outside of the restaurants for the small plates and snacks menu?

Well, in the second quarter part of our promotion was to -- it wasn't outside of the restaurant. Part of our promotion the second quarter was when you came in during the distribution period you received a flyer that had two cards in it. One of the cards entitled you to come back and have a -- try small plates and snacks if you ordered two entrees, so, we did promote it in that manner, but that's the only promotion of that that we have.

Okay, and then just a quick follow up on that. You mentioned the 5% sales mix, what's the progression been, how has that looked over the last several months? Has that number continued to build for you guys?

It has been about the same, it's been pretty steady. In the second quarter a little more of the 5% -- well, we got a little bit of lift with small plates and snacks because, as I said, we promoted them so we got a little lift there, but it's been mostly the same. I wouldn't say it's deteriorating or going up.

All right, thank you.

our next question comes from the line of David Tarantino with Robert W, Baird. Please proceed.

Hi, good afternoon. Doug, could you -- just a quick clarification on the comp, could you break it down between pricing, mix and traffic for Q2?

Sure, it was -- traffic was -- so -3.2% is the total comp, traffic was down 3.8%, which was an improvement over the first quarter, the first quarter, we were down 4.3% so we like seeing that, it's a little bit of an improvement there. And then check average increased somewhere between 0.6% and 0.7%. And if you dive deeper at the check average pricing was about 2.2% or 2.3% and then we offsetting pricing a little bit of a negative mix shift and the negative mix shift came primarily from alcoholic beverage sales, which are still down versus last year.

Okay, thanks. And then, my question really is about the pricing that you're taking in the summer menu. First, what made you decide to take that pricing and second, how did you go through the thought process relative to your pricing power versus all of the discounting that we're seeing in the industry?

I think we're in general being -- we want to be very cautious any time we take pricing, because, obviously, when're you really battling with everyone else for guest counts, taking a price increase certainly does not have the impact of wanting more peop -- more people wanting to come to your restaurant. So, part of it there was a need to take price in order to stabilize margins and I think we did a very good job of balancing that with the fact that we don't want to take too much pricing. Actually, we took 0.9%, I think. Somebody told me yesterday it was 0.88% actually and we ran up to 0.9%. Do you have any other comments about the process of that, David?

No, I think that we did it very carefully and I think we were comfortable and felt this was not the time to fall behind on margins, certainly not with our guests and where we are in the marketplace.

Just a quick follow up for clarification, was the pricing taken to improve margins or was it taken to offset inflationary pressures and if so, what are the pressures that you're offsetting?

I would think -- I don't differentiate between those two very much. They were -- it was the -- part of what David said I think is true. If you don't take pricing a little bit all the time you can never really catch it up, right, it's very difficult to catch it up. If you skip three 1% price increases that you might have normally taken you really then can't make up for that by taking a 3 % price increase, That's almost impossible to do. I think we've -- we have cost pressures. Right now we have favorable commodity costs bit how long will that last. And our margins today are substantially less than what they were five years ago and substantially less than last year, even. Still we're making a lot of progress on the cost front. I'm really very pleased with that progress we're making, but we still have extreme cost pressures.

Okay, thank you.

Our next question comes from the line of Larry Miller with RBC Capital Markets. Please proceed.

Yes, thanks. Actually I had two quick follow ups and then a question. So related to development, that discussion that you had about the future development, what would be the timetable that you would need to be able to put people back in place, or put a development plan back in place? Is that 18 months or so, or more? And then you talked about the small plates -- that was my second follow-up question -- and what -- you said the check is higher, can you give us some magnitude on how much higher it is? And then finally me question would be, Doug, the last thing you were just talking about, which is that margins are vastly lower than they were several years ago, in what scenario, if any, could you get back to that level? Thanks.

Sure, let's talk about that one. You want to go --

Well, on the development there's really not a matter of time. Everything we added on was modular, we have all of our main people. If we got ten restaurants tomorrow we have the teams to open ten restaurants tomorrow or begin that process to get them open. So at this moment there's nothing stopping us from generating our growth. All we need are the sites and the landlords to build and our confidence in the economy in terms of all of these areas. And in the meantime we're looking at many, many sites today and we will take all of the A1s as soon as we feel confident. Doug?

What was the cost question, again? I'm --

Yes, so first of all, the hi -- small plates how much higher the plate check might be?

Yes, it's pennies, it's not -- we're not talking about 5% higher or anything, we're talking about $0.05 or $0.10 higher.

So really the way we should view it is that even though it's a smaller ticket it's not having a check average impact?

That's right, because that would obviously be the big fear, right? If you put in this menu that had three items that were $4.95 that somebody come in and orders a glass of water and a $4.95 item and then their check average would be $4.95, which we couldn't stand very much of that, so we're glad that the check average remained flat and it's slightly up.

Sounds like you guys are watching me as I come in. The -- and then on the margin side what I was asking was, if you -- under what conditions might -- is it even possible that you might be able to get back to those or recapture the margin level of yesteryear?

Oh, okay. Yes. Internally the way that we're looking at it we're taking it one step at a time. If you go back to 2007 margins -- operating margins, they were around 8.5%, which is somewhere in the neighborhood of 250 to 300 basis points better than where we expect to end this year. And the scenario to get back there some of it's going to be this cost cutting. We have -- and the cost initiatives and we've made some great progress there, but the real avenue to get back is we have to have a plus sign in front of comparable-store sales and until we do that we're not going to be able to get all the way back. So step number one would be to get back to the 2007 margins and then after that I think that we can move toward the margins that we had in 2005. And it's -- the good news is I think that when comparable sales return that our Company and our cost structure is much leaner and meaner, if you will, than what it was -- not that we were overly fat before, but everybody's got some fate and now the fat is gone and we're not going to add the fat back immediately when sales return. Hopefully we'll do a good job of never adding it back. But I think that margins will grow quickly when comparable sales get belter.

That's what I was after, thank you, Doug.

You're next question comes from the line of Destin Tompkins with Morgan Keegan. Please proceed.

Thank you. Doug, you guys generated a lot of free cash flow in the first half of the year and your cash balance is obviously pretty high, is there any reason why you couldn't generate similar amounts in the back half of the year given that CapEx is going to remain limited, and if so, would you look to pay down the debt than what you're -- than the additional $25 million or would you just let the cash balance build? How do you think about your use of free cash flow?

I think that's a great question. It's a question that we talk about a lot. One of the impediments to paying down debt past $150 million is we have two hedges on -- one of $100 million of the $150 million and one on $50 million of the $150 million so those two interest rate hedges are in place and to take them away would cost some money and we paid $3.3 million this quarter to take off the hedge on the $100 million and these other two have -- it would -- on that second $100 million it'd be a bigger number right now today than $3.3 million. I think that what we're going to do right now is do an analysis where we'll look at what if we paid down debt, we might even give at least consideration to whether or not we pay down debt and not take the hedge off.

You don't have to take the hedge off, but if you don't take the hedge off you're sort of playing in the interest free derivatives markets, which is obviously not the business that we're in. We'll have to look at that, because taking the hedge off requires writing a check, which is painful as well. I would say we'll have to weigh what the interest savings would be to have lower debt because we're not making very much money on our $90+ million cash. We've got it invested conservatively and conservative investments are not making very much these days, as you know. So we'll weigh that -- what we're going to lose in interest income with what we'll gain in lower interest expense and then weigh in the whole consequences of hedge accounting and make a determination. I;d like to pay it off. I know that's a long answer, but that's how I'm thinking about it.

Why wouldn't you leave some of the debt on there until the hedges expire and maybe use some of that cash to repurchases shares?

We could leave the debt on the he -- the hedge expires in April of 2012 so that's -- I got to have to have some binoculars to see it from here, it's a pretty long way off. We could do that, but what we have to do, I think, is develop more of a -- more of a -- we're in a period of time now where the economy's been like it has been for the last six to nine months. We need to revamp our strategic plan for how are we going to create value, whether it be repurchasing shares, paying a dividend, what is the appropriate permanent debt level? There's a lot of questions that we should be answering and that we will in the next three or four months and I'll be able to respond to that better.

Okay, and then one more, if I may. Do you have any initial thoughts on the commodity outlook in the next year? I know it's early but do you feel like it's going to be flattish or do you think you might see some pressure on some of the commodity categories?

I've got -- I have some information on one or two different commodities and how I think will turn out, but like you said I think it is early. We may be able to give you something a little bit better in the third quarter, but most of our annual contracts are calendar year and right now the visibility into next year, it's only July it's not that good.

Great, thank you, guys.

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

Good afternoon, thank you. Just -- actually just some cleanup items. Doug, what kind of tax rate is implied in your guidance for the second half or full year.

I believe it's 24% to 25%.

Okay, that's full year?

Yes, everybody's nodding their heads, so it must be right.

Okay. And do you expect to book any preopening in the second half if we're not going to open stores?

The answer to that is yes and it's a funny answer. We have -- from an accounting standpoint what we have chosen to do -- and it made a lot of sense during the years when we were opening a lot of restaurants -- is to charge whatever manager bench we have to preopening. So we have except managers -- that bench is not zero now but it's been greatly reduced. We have certain managers that can either move into a new restaurant or backfill when there;s attrition at manager levels in restaurants. They're not sitting on a bench, but they're in a restaurant, but we're charging them the preopening costs, so there'll be some small amount of preopening in the back half of the year.

All right. And the 5% of sales you talked about on the small plates, is that -- or the 5% mix of small plates, is that a percent of sales or a percent of customers?

Percent of sales.

Percent of sales, so since -- but I guess if the average ticket from people who buy those things is pennies away from the normal that would be roughly 5% of customers, as well? Am I thinking about that correctly?

I think you're thinking about it right. It sounds right.

Okay. And last question I have just on the G&A line. I know this quarter we had full bonus accrual against, I believe it was none last year, did we have none in the back half as well in '08?

Yes, the answer for the whole year is zero.

Yes, that's what I thought, just wanted to clarify. All right, thank you very much.

Our next question comes from the line of Keith Siegner with Credit Suisse. Please proceed.

Thanks, just a couple of quick follow ups, can you hear me?

Yes.

I wanted to just follow up on the Annapolis small box. We got some details on it last quarter, you sounded pretty enthusiastic, talked about possibly getting to a $200,000 average with the sales number for that box. Now that it's been open for a little longer -and granted I understand this a strange environment -- how is it doing now? Do you still feel as enthusiastic? Is there anything else you've learned from that that makes you feel either better or worse about additional smaller boxes?

No, I think we feel great about it, it's still performing very well. The idea that that box can do $200,000 with that we're moving forward on that. As we said last time we really don't think we're going to tweak that much more, we're working on a 7,200 square foot box for future smaller markets, but it's all still good and just what we said last time. No new news. All good news.

Okay, and then one other question. I just wanted to see, how do you measure the success of some of these days like a national cheesecake day? I know you're very on top of customer trends and things like that, but is the success from a promotion like that a comp pickup in in the day, do you see repeat traffic? How do you jump the effectiveness of those programs?

One of the ways we do it is to see how much PR, how much national media coverage, and the people that we use actually put a dollar amount on what it would cost to get that if you were go and pay for it, so that's one of the any the metrics we use is are we getting $3 million or $4 million worth of advertising. And really, some of these things you can get nationally, locally, and so that's one of the big ways. It's not so much what we're doing that day in terms of dollars, it's we push, in general, brand awareness, top of mind and how much PR we can get. Do you have anything to add to that?

No, I think -- the other thing that we are doing that day is we have a huge increase in business during that day -- or at least we did last year -- and we would expect to have that this year. Those people that come into our restaurants that day are also going to receive a card that allows them to come back and have a slice of cheesecake for every $30 that they spend, so we're going to be doing a similar sort of bounce back thing that day that will, we hope, to fuel sales later in the quarter, as well.

That's actually very helpful. One last question, it's an easy one. How is Rock Sugar doing? Any updated thoughts there?

No, it's doing very well. We're still tweaking mostly the labor, we're happy with it. We are looking at a couple of possible sites in the country, maybe looking to do one more, but really not a lot of new news with Rock Sugar, it's just perfecting what we're doing.

Thank you very much.

Our next question comes from the line of Paul Westra with Cowen and Company. Please proceed.

Great, thanks, good afternoon, everyone.

Hello.

A question on (inaudible) the second half just to make sure I got it correct. The question --

You are breaking up, Paul, can you speak clearly?

Yes, I'll do my best.

Oh, we got it now.

Okay, great. I was just trying to reconcile some of the implied line item guidance you gave for the second half to make sure I got it correct. I just wanted to make sure. You did mention you expect in your guidance full year store-level margins to be down in that 45 to 90 basis point range, but my question is given your commentary that you expect that maybe 100 or 150 basis points of food labor -- I'm sorry, food costs down year over year, and I think to Joe's question you mentioned labor should be flat to down. It seems like you're implying the other operating occupancy line to be up substantially in the 200+ basis point level Is that correct and if so why?

Let me see if I can reconcile that for you. The cost of sales, what we did say was 100 basis points, not 100 to 150, so if we expect cost of sales to be lower by 100 we would expect other operating expenses to be higher by 100 and they offset each other. Then we would expect, as you mentioned, labor to be slightly lower than last year for the year. The real increase is coming from the G&A line where we had this Founder's retirement benefit accrual that we took this quarter that'll be in that number at the end of the year, as well as the bonus accrual, and then a little bit of an impact from sales deleveraging on the G&A line and on, really, depreciation line. So, the way I'd look at it is that G&A's probably going to be about 60 to 80 basis points worse than last year and depreciation maybe ten to 20 basis points worse than last year and the whole rest of the P&L just slightly better than last year.

Okay, that is helpful, and then just one other question on your G&A. Once we've got that -- can take that $23.5 million quarter run rate that you posted here -- I think what you just mentioned implies that -- is that a good number to look for 2010, as well, or do you expect to get some extra cost savings or maybe even some additions?

Well, we've got to go through the planning progress for 2010 and it depends what our initiatives are going to be for year. But for the full year this year, I think including the Founder's retirement benefit, it's going to be around $80 million and I would say from that number we would not allow G&A to grow at a pace of any faster than what we thought revenue could grow.

Great, that's helpful. thanks and congrats on a good quarter.

Thanks.

Our last question will come from the line of Nicole Miller with Piper & Jaffray. Please proceed.

Thank you, good afternoon. I just wanted to ask, as you look at the economic environment and then, Doug, you made some mention of looking at the Grand Lux portfolio and all of that in combination, has it changed the long-term opportunity for what the whole portfolio looks like over time? I think you had mentioned numbers historically that would imply doubling of the current unit base.

I think that you've got to take this environment out of it and look forward to a more normalized environment, and when I say normalized I don't really believe that we're ever going to be back to where we were from a economic standpoint for a long, long time to back to where we were a few years ago. But if you've taken that into account, taken into account that we have the Annapolis restaurant and we can build smaller prototypes that allow us to go into more locations, I would think that from a Cheesecake Factory standpoint alone there's at least 30 to 50 more big ones and maybe 100 of the other ones -- 100 to 150 of the other ones. And Grand Lux, we haven't done a model on that, but I would say that we could double the number of units in -- over time. That's a pretty long period of time that that would take to do.

And then it doesn't sound like you have any commodity locks for 2010, but I just wanted to confirm that?

We done have any right now that I know of.

Okay. Thank you so much.

Okay.

Thank you, everyone.

Thank you for your participation in today's conference. this concludes the presentation, you may now disconnect. Great day, everyone.