Cheesecake Factory Inc (CAKE) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter fiscal 2009 earnings conference call. I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay conferences. I would now like to turn the conference over to your host for today, Ms. Jill Peters. Please proceed.

Good afternoon and welcome to our third 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 facts 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.

David will start off the call today with opening remarks. Doug will then take you through our operating results in detail and provide our current expectations for the fourth quarter as well as our initial thoughts on 2010. 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 third quarter were better than we expected due to stronger comparable sales as well as lower costs of goods sold and restaurant operating expenses. Guest traffic was stable with second quarter levels, and we saw a nice improvement in menu mix, particularly through increased dessert sales. At The Cheesecake Factory, the comparable sales pressure was slightly more pronounced in the West, particularly in California and the Northwest. The Southwest region, which includes Arizona and Nevada, is starting to stabilize on a sequential basis. And Florida and the Southeast were actually both slightly positive. Given these geographic trends and our demographics of attracting a higher end guest, we believe that recent gains in the stock market could have a positive impact on our guests.

We introduced our Stephanie's Ultimate Red Velvet Cake cheesecake on July 30, and it is a top selling cake in nearly all of our restaurants. It represented nearly 12% of dessert sales for the third quarter, which is quite remarkable given was only in the restaurants for two months of the quarter. It's this level of menu and product innovation that continues to define The Cheesecake Factory and I believe is helping us deliver moderate sequential improvement in comparable sales as the a time when the industry as a whole is not.

In addition to the Red Velvet cheesecake, we also introduced a number of new items during our summer menu change, which was completed in mid-September. Given the success we've seen with our more value oriented small plates and snacks, we expanded this menu with eight new items. We also introduced the kids' menu to further satisfy our guests' needs. Strategically, increasing the small plates offerings keeps the menu fresh and helps focus guest interest and attention in this category. Importantly, our average check in the third quarter grew slightly.

On the topic of value, we were pleased to be recognized by Zagat as the Best Value In Full Service Chain during a recent survey that they conducted. Value is an important determination for consumers right now when deciding where to dine out. In the upcoming Grand Lux menu change, we will likewise be focused on the concept of value. It's one of the most extensive menu changes we've ever done at Grand Lux, with dozens of new items being introduced.

Another critical factor in our comparable sales performance is guest satisfaction. We continue to make strides in overall satisfaction scores, with another modest increase from the June quarter. As we've said in the past, guest satisfaction scores are very important to us, but the continual step up is particularly significant right now because it demonstrates that we're achieving the right balance between cost savings and service.

Our cost management initiatives are progressing well, and we captured over $8 million in savings during the third quarter, for a year-to-date total of nearly $19 million. This is relative to our target of between $22 million and $24 million in cost savings for this year, so we're right on track, and we continue to look at additional opportunities to further align our operations with current sales volumes.

The third quarter was a busy one for our marketing team, with campaigns related to National Cheesecake Day and Hunger Action Month. We believe these campaigns were successful at engaging guests and driving brand awareness. The publicity surrounding National Cheesecake Day generated substantial advertising value, which is excellent leverage on our marketing budget. The Drive Out Hunger tour was unlike anything we've ever done before. The tour visited 30 restaurants in 30 cities in 30 days in September, beginning in Los Angeles and culminating in Washington, DC. Along the way, we collected more than 300,000 cans of soup for local food banks, garnered local publicity, and energized our staff.

Finally, some comments on development. While we don't plan opening any additional restaurants this year, at this time our plan for 2010 calls for as many as three new Cheesecake Factory restaurants and we continue to look for additional sites.

At this time, I'll turn the call over to Doug to review our results, discuss our outlook for the fourth quarter, and provide some thoughts on 2010.

Thank you, David. Total revenues for The Cheesecake Factory for the third quarter were down slightly at $400.6 million dollars. Restaurant revenues reflect a 2% increase in total restaurant operating week, primarily from the opening of three new restaurants during the trailing 15-month period, offset by an approximate 2% decrease in average weekly sales. Overall, comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurant decreased 2.8% for the quarter. By concept, comparable sales decreased 2.4% and 6% at The Cheesecake Factory and Grand Lux Cafe respectively.

At The Cheesecake Factory, we implemented an effective menu price increase of just under 1% in our summer menu change, which gives us about 2% of price in our menu as compared to last year for the remainder of 2009. Our average check at The Cheesecake Factory was higher this quarter compared to the third quarter of last year. Dessert sales continue to be positive, although sales of beverages are down. Additionally, we continue to see a slightly higher check average for guests ordering from the small plates menu.

Comparable sales in the third quarter at Grand Lux Cafe were a little weaker sequentially. While we have a couple of locations that are delivering positive comparable sales, others have sales levels that are below average, which we are working to improve through specific marketing and other initiatives, including the extensive new menu rollout that David spoke about earlier. We continue to closely monitor these units and evaluate their performance. At the bakery, third party bakery sales were down about 1% versus the prior year at $14.1 million.

Cost of sales decreased to 23.9% of revenue for the third quarter 2009, compared to 25.7% in the same quarter last year. The 180-basis point improvement was driven primarily by lower restaurant cost of sale. We continue to capture cost savings associated with our cost of sales initiative, which accounted for about 50% of the favorability in the third quarter. Our menu development efforts, along with other things such as negotiating more favorable pricing for commodities and ordering more efficiently to reduce partial truckload deliveries are delivering meaningful savings.

The other half of the cost of sales benefit stem primarily from lapping the commodity price spikes that occurred in the summer of 2008. During this timeframe, prices were significantly higher for a number of items including pastas, grains, cooking oils, produce, and dairy. Additionally, our bakery continued to benefit from its favorable year-over-year contracted price for cream cheese.

Total labor was 32.9% of revenue for the third quarter, down 30 basis points from 33.2% from the prior year. We continue to experience higher health insurance costs in the third quarter. Absent this, our direct operating labor was about 80 basis points better than the third quarter of last year, due to our operational initiatives, which resulted in improving our overall productivity. Other operating costs and expenses were 25.5% of revenues for the third quarter of 2009, down 10 basis points from 25.6% reported in the third quarter last year. Utilities were favorable by about 50 basis points, offsetting higher marketing expenses as compared to last year of about the same amount. Savings from cost management initiatives slightly more than offset deleverage from lower sales.

G&A expense for the third quarter was 6% of revenues, up 70 basis points as compared to the third quarter of 2008. The majority of this increase came from performance bonus accruals, which we did not have last year. Interest expense included a $2 million charge to unwind a portion of one of the two remaining interest rate collars we have on the outstanding balance on our revolving credit facility.

Our liquidity position continues to be solid. Our cash balance stands at approximately $82 million at quarter end, despite using $50 million during the quarter to reduce the balance on our outstanding debt. After paying down an additional $25 million early in the fourth quarter, our revolving credit balance now stands at $125 million. We he have repaid $150 million since year end, exceeding our previously stated goal of reducing our debt by $125 million this year.

Cash flow from operations through the end of the third quarter was approximately $146 million. Net of roughly $24 million of cash used for capital expenditures, we generated about $122 million in free cash flow in the first nine months of the year. That wraps up our business and financial review for the third quarter.

Now I'll spend a few minutes on our outlook for the fourth quarter and preliminary comments on 2010. Sales visibility remains low due to both last year's volatility and the ongoing economic uncertainty, particularly with regard to unemployment levels and weak consumer confidence. However, we will continue to provide our best estimate for earnings per share based on our comparable sales assumptions. Because earnings per share are highly correlated to our assumed levels of comparable sales, I continue to urge you to consider our estimates to be more of a sensitivity analysis than an absolute prediction. With that said, for the fourth quarter 2009, we expect diluted earnings per share of between $0.18 to $0.20 based on an assumed range of comparable sales between minus 2% and minus 3%.

There are two items that we expect will negatively impact our fourth quarter comparable sales range by a total of approximately 1%. The first is the holidays. Halloween will fall on a Saturday and Christmas will fall on a Friday, both of which we expect will be detrimental for us compared to last year. In addition, our holiday marketing strategy has shifted away from retail sales toward a focus on gift card sales to bring guests back into our restaurants in the future. While this will dampen our fourth quarter's comparable sales a little, we believe this approach will help us achieve our goal of building future guest visits.

Our fourth quarter estimates imply diluted earnings per share for the full year 2009 on a GAAP basis of between $0.89 to $0.91 and full-year comparable sales of about minus 3%. On a nonGAAP basis, our implied full-year earnings per share estimate is $0.96 to $0.98, excluding the previously discussed items that we recorded in the second and third quarters. The combined impact from these items cost us approximately $0.07 in diluted earnings per share. The last page of our press release contains a description of these items.

Excluding a projected 50 basis point benefit from lower preopening costs, we expect our operating margins in 2009 to be about flat to slightly lower as compared to 2008, depending on where we fall within our assumed range of comparable sales. We now expect our tax rate to be between 25% and 26% for 2009, based on a higher level of profitability resulting in less leverage from the FICA tip tax credit. Our projection for capital spending in 2009 remains between $35 million to $40 million.

Now for some preliminary thoughts on 2010. Our initial 2010 estimate calls for diluted earnings per share of between $1 and $1.10 based on an assumed range of comparable sales between minus 1% and minus 2%. With about 60% of our commodities contracted on an annual basis for the next year, we currently expect food cost inflation to be between flat and up 1% in 2010. This reflects lower contracted prices for poultry and meat, offset by expected higher costs for some of our noncontracted items such as dairy and general grocery. Based on opening as many as three The Cheesecake Factory restaurants next year, we estimate capital expenditures in the range of $55 million to $65 million.

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?

(Operator Instructions). Our first question comes from the line of Steven Kron of Goldman Sachs.

Hi, guys. First on the guidance, Doug, just real quick. Does that include any additional cost saves as you guys look to expand potentially on that $22 million to $24 million that you laid out. And then secondly, David, on the unit development front, three units next year, sounded as if you're going to look for sights to maybe go above that. Can you maybe just talk about your current thinking on where you stand for reaccelerating growth down the road and how you're thinking about that?

The guidance does include the cost savings initiative that'll bring to us $22 million to $24 million for the year. It also includes $8 million to $10 million of the 2010 guidance that assumes $8 million to $10 million of continuing cost savings from the cost savings initiative that we've already put in place.

Nothing new beyond that?

Nothing new.

Okay.

Steven, I personally am committed to growth. I like growing the company. We have our 8,000 foot The Cheesecake Factory done. We have plans for a 7,200. So as landlords, and I think some of them are starting to consider accelerating their building plan, but as great sites come up, we will be very interested in them. I certainly like to see us be somewhere between 10 and as many as 15 or so. But they all have to be great sites. We have no reason to grow just to grow right now.

The great sites are still very expensive. They haven't really come down. There's all kinds of people that are always willing to take great sites, whether they're clothing or -- Forever 21 can take 40,000 square feet and wipe out some great sites for potential restaurant sites.

Having said that, we are still looking. These three sites were old sites that landlords moved. We still have sites that they have moved into 2010 and 2011 that we're committed to. We'll fill in as many as we can.

Great, thank you.

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

Thank you. Doug, first question was on same store sales. You gave us the guidance for the fourth quarter, but the last couple quarters, you've kind of given us an update quarter to date, if you're in that range. Can you give us any specifics there?

Well, I don't think we've given you any real specifics on quarter to date guidance. I think what we have told you is that the -- when we gave guidance, we've always factored in everything that we knew at the time we gave the guidance, so we have three weeks of fourth quarter same-store sales under our belt. That's been factored in. The additional thing that I would say about the fourth quarter that you should take into account is what I said in my remarks about Halloween shifting and Christmas shifting, and small shifts to more of a focus on gift card sales from retail sales. That's about a 1% type of impact on the fourth quarter. So if you look at the minus 2% to minus 3% guidance that we gave, you could really look at that on a comparable basis as minus 1% to minus 2%, if you wanted to ignore these other things that are happening as far as assessing what we think about our operations and our ability to generate sales.

Okay. So with those two, I guess, the calendar shifts ahead of us, it's possible that you could be running above that trend and expecting those to be -- negatively impact your trend going forward. Is that fair?

Well, that's fair, but it's not necessarily true -- but that could be true. I mean, I'm just saying to you that we took those three weeks. We know what those are. We know what we think the next 10 can be -- or we don't really know, but we're giving our best guess to what the next 10 can be. That's how we came up with it. The holiday shifts are yet to come.

On the 2010 guidance, the sales guidance of negative 1% to negative 2%, and EPS $1 to $1.10. It wouldn't seem -- I had to run the numbers, and it wouldn't seem like that factors in a whole lot of margin improvements to 2009. Can you give us what the margin assumptions are? Is that driven by the fact that there could be some sales deleverage with that comp assumption?

There's definitely going to be sales deleverage if you run negative comps. Negative 1% to negative 2%, you'll definitely have sales deleverage. So just by -- in order to keep margins reasonable, we're going to have to have continued focus on cost savings initiatives. So as I said, $8 million to $10 million of cost savings initiatives we already identified are in that number, but we're still trying to identify other ones. I don't want to get into what individual margin assumptions are for now, except for with respect to costs of sales, we did give some color on that.

Okay. As you think about working your way back towards margins from 2007 or from some of the stronger years, what comp assumptions do you think you need to see? Can you see some nice leverage with the low single digit positive same-store sales numbers?

I would say so, sure. If you look at the margins that we ran this quarter, they're not back at the pinnacle of where we were, but they're certainly a good step back toward where we were at minus 2.8%. So certainly comps of plus 3% would generate some real positive margin improvement.

Okay. Last question, with that being said, as you look at the fourth quarter guidance, the comps don't appear that much different than what you ran in the third quarter, yet it seems like the margins may not be quite as strong as they were in the third quarter. Is that fair, and is there something that maybe will limit the margins? The potential in the fourth quarter relative to the third quarter?

If you want to look on a sequential basis, and you understand the 1% holiday shift stuff, I'll call it that, and we're really guiding or saying minus 1% to minus 2%. And so take the midpoint of that at minus 1.5%, that's a pretty good sequential improvement over minus 2.8%. So we're assuming that the sales are getting stronger. Now, the margin assumptions -- again, we factored in everything. I'm not sure I understand the question about the margins.

It seems as though the margin improvement in the fourth quarter didn't look as strong as what you just reported in the third quarter. I was just trying to make sure that there wasn't some expenses you were expecting that might limit the margin improvement the fourth quarter.

Part of it is we have KMS in the third quarter, and we've had cost savings initiatives basically help you out compared to the previous year for one year. So KMS was completely implemented into our system by the end of September of 2008. So really, that particular thing is not going to help us very much in the fourth quarter. It did help us a lot in the third quarter.

Some of the cost saving initiatives you saw from David's comments, $19 million worth of cost savings through the first three quarters and $22 million to $24 million expected for the year -- there's maybe not that many. Some of those have rolled off is what I'm saying and won't be impacting the fourth quarter. I'm not assuming we're going to have deterioration any more than normal deleverage from minus 2% to minus 3% comp store sales.

Thank you. That's helpful.

Our next question comes from the line of Joe Buckley with Banc of America.

Thank you. Question on the three openings -- are those full sized Cheesecakes or the smaller floor [plans]?

Full size.

Dave, did you say you might be able to rev it back up to as many as 10 to 15 for next year?

I didn't say for next year. I said I'd like to, given quality sized landlords beginning to remodel sites, and as long as we have good A-sites to choose from,. that that's what we'd like to do. Not that that's what we were going to do.

Okay. That's like what you would like to do on an annual basis, looking out a couple of years?

It could be. Although, I can tell you if a few more great sites came in right now, it'd not be in the next year, but we'd certainly be willing to build them.

Okay. And you may sound like these were, I think you stated specifically these were sites that had been previously planned. How many sites like that are there? How many might there be in the pipeline?

There's about four more that we basically committed to, but the landlords have put them either into 2010 or 2011. And as soon as they lock down their opening date, then we'll put them on our list. But that we've already basically liked and thought were great sites but just got -- they got held up.

Okay. Then one last one from me. Doug, in the 60% of food that's contracted, is the cream cheese included in that or is that yet to come?

That's yet to come.

I know dairy markets have turned up in the next couple of weeks. Any sense on that or is that just too early?

No, I don't have a sense on where we are with respect to contracting for next year on cream cheese.

Thank you.

Our next question comes from the line of John Ivankoe of JPMorgan.

Thanks. Can you talk about the three new Cheesecakes that you're planning for fiscal 2010? Optically, it looks a little high. Is it that you're taking a [ton] of improvement dollars or are there other store level or corporate projects that you're pursuing? Or could it also just be the fact that you have a lot of money that's in that number anticipating fiscal 2010 openings?

Are you talking about the CapEx projection for next year?

That's correct, Doug.

Yes. It looks higher than it should be. It's higher based on three openings. These openings are not more costly than any other opening that we've done. We would spend anywhere between $6 million and $8 million open at each restaurant. In that CapEx assumption are some assumptions with respect to first quarter 2011 openings, and that CapEx number is -- this early in time there's big swag factor to it. You have to put -- in the fourth quarter, if we're going to be opening a restaurant in the first quarter 2011, we're going to be spending money in 2010. So there's no big other projects that are assumed in there, and there's probably some level of cushion in those numbers.

Okay. When will the units open throughout the year in fiscal 2010? Are you prepared to say that?

Two of the three will opened in the first half of the year. Really both in the first quarter. And the third one was still a little up in the air. We would hope to open that in the second quarter.

Just one more if I may, a little bigger picture. When you looked at your rate of development, with hindsight being 20/20, kind of 2005, 2006, 2007, were you able to identify any particular properties, maybe things that you did wrong, where you think maybe we penetrated this market too deeply or maybe this other market didn't deserve a 10,000 square foot unit, that you won't do differently in the next cycle?

I don't think there's too much of that. We think a lot of the restaurants that opened up under our projections were because of the economy -- they stopped building. Housing developments that were supposed to be built out stopped. We opened with all the best people with Nordstrom's, with great department stores, great names. We didn't open at any off sites, anything too far out. We didn't take any more risk than we normally did. I just think that some of these developments were on the newer side. We were more dependent on the housing market being filled in, and that's what stopped. So will we be a little more prudent on some of these deeper suburban sites? Probably. I think when you really look at the sites that are underperforming, I think in the end we'd all say it's mostly due to the economy.

Great. Very helpful. Thank you.

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

Thank you. Looking at the -- following on to John's question there on the development, with two openings happening in the first quarter potentially, are you going to have the majority of the preopening fall in for those stores of the fourth quarter 2009, so annualized 2010 will have a lower preopening as well?

Well, we would expect preopening in the fourth quarter to be somewhere in the neighborhood of $1 million, I think. So I'm not sure -- I had to break out some of that preopening may be happening then, but most of it will be in the first quarter of next year.

Okay. So you'll have about $4 million or so in 2009, and I would expect a lower than $4 million in 2010 given that you'll have some of those new stores dollars fall in 2009 and you're only having one store fully open in 2010, incurring the expenses in 2010, correct?

We're going to have the preopening expenses in 2010 for pretty much three restaurants. And we had one restaurant in 2009.

Right. Okay. But you also had dollars fall in from 1Q from a prior store and also some others.

We did have some of that. The other thing to remember about preopening expenses and the way we account for them is a little bit different maybe than some companies, which is we have relocation costs that are in there. We have manager bench strength that were -- that we have in there. It's not per se directly associated with the opening of restaurant. That's why we have -- another question you might have is why have preopening at all in the third quarter this year? We haven't spent any preopening money, and it had to do with those items like that, the bench strength items. So it's a little bit more convoluted to figure it out, but we'd be happy to work with you online on how you go about looking at that.

That'd be helpful. Also just looking at the comp, if I look back last year, I guess we're all looking at an easier comp for the quarter. Could you describe how that progressed in the three months of 4Q 2008 to get to that combined down [7.1]? Did it start off significantly stronger and get weaker towards the end as most did in December?

It started off -- the strongest month was in November. The weakest month was December. So it started off -- so that tells you right there. It started off weak, and got better in November, and real weak in December.

Okay. Are you then trending right now below, are you trending close to those numbers of what you're guiding to? Or are you expecting a little bit more given that November was the strongest month and December was really weak? Are you trending at those numbers for 4Q that you're guiding to or are you being a little conservative?

We -- again, I don't know how many times I have to say it. We have factored in everything that we know as of today. Everything we know, three weeks' worth of sales. Everything that we think's going to happen in weeks following this using the best crystal ball that we have, including what happened last year -- we didn't leave that out. We didn't leave out holiday shift, and that's what we came up with. And we're not trying to be conservative. In fact, we put a number down that is actually significantly better sequentially than the third quarter was.

I don't mean to get you frustrated. Through all of the conference calls we've heard different things where weather's impacted some people and the first start to October, and then some have seen a sequential improvement. I think one of your peers just said that. I'm just curious on what you were seeing. Sorry to keep hammering the point.

Just because the comps were low last year, I think you saw in the third quarter that I was asking third quarter September about -- what about the low-level sales that you had last September? Well, we were fortunate that we were able to compare favorably with that this year. But a number of other restaurant companies when lapped around easy comparisons, didn't compare that favorably. So I don't think -- it's not a guarantee that a lousy year creates a greater year the next year. I think there's a lot of other factors involved.

100% agreed. Can you give us a little indication of what type of pricing environment might be embedded in 2010 as far as your comp guidance? Is there no price?

Yes -- that's a good question. We have assumed that we will get our normal price increase of 2%. Again, there's really nothing guaranteed about that. What we're obviously going to do when it comes upon each of the menu changes that we'll do next year is make an evaluation at that point in time whether -- we'd like to not have to raise prices. And so we'll evaluate it then, but what's embedded in that minus 1% to minus 2% is that we'll take 2% price.

I can come up with a good price without making you mad at me, Doug. Glad I got one there at the end. Last question. David, where do we stand, or when can we expect to start to see some of the smaller prototypes? I think we were looking at -- some of us on the Street were looking at this as a vehicle that could re-ignite the growth at Cheesecake. What's the governor on that? Why aren't we seeing that maybe be one of the three or two of the three stores in 2010?

Three stores in 2010, and I think three or four others were all decided on in 2008 and 2009 early this year, but they were put off by the landlord. So these aren't like sites -- we are looking for those sites. If we definitely find the right one and we're looking at a whole bunch of things right now, want to look at -- want to open one of those [270, 300s]. I do think you're right. We could ignite at a whole new level of growth in those markets. I for one, we have the building design. We just want to put it down, have another Annapolis where we make sure that we're doing the volume somewhere between $7 million and $8 million, and then we'll know what we have. I'm anxious to get it built.

Appreciate the time. Thanks.

Our next question comes from the line of Brad Ludington with KeyBanc Capital Markets.

David, I wanted to ask -- I missed at the beginning, you talked about California, Nevada, and Florida, and the Southeast. I didn't hear the other region and what the trend was on that.

I think that was the only one. We said that we stabilized in Nevada and Arizona, that we're still a bit negative in California. A nice surprise is we were just a little better in Florida and the Southeast. Whether that had something to do with the stock market coming back and the number of retirees and so on that they felt better, we weren't sure, but that's how we saw it. The rest were the way they've been.

Thank you. Can you comment on -- some of the stabilization you've seen? Have you seen any movement in customers back to bar drinks or other drinks other than water or maybe the tea that they've been drinking over the last year?

Our beverage --

Alcoholic beverage sales and beverage sales in general are down.

We're still saving money there, desserts were off. That helped us quite a bit, whether it was because of Stephanie's Cheesecake or just -- we find that when people order small plates and snacks, they tend to order dessert more often, because they take their savings and they continue to buy and make themselves happy. Other than that, it's still the same thing. Bottled water is down a little bit. Alcohol's down a little bit. That is where they're managing their check.

Doug, you talked about in previous quarters the positive impact of the small plate menu. And I think we'd estimated it was up to maybe 60 basis points benefit last quarter. Is it somewhat similar with the expanded menu or more significant or anywhere around there?

I think out of our 180 basis points comparative -- positive comparison with prior years, about 90 basis points of that has to do with what we call initiative, and menu development is one of the initiatives. So if you take that 90, I'm not sure I know how many. I would say 30 to 40 basis points of that 90 basis points has to do with lower costs of sales because we're selling lower cost items. Also on those initiatives are a supply chain network, our SKU review, and other things that we did also as part of that 90. Maybe 30 to 40 is a menu development piece.

Okay. And then finally, I'm sorry to drag, just one quick one. We expected I think -- it's been around $1 million of amortization of the swap interest in your interest line through at least the first quarter of fiscal 2010. Should we expect something like that to continue going into second, third, and fourth quarter in 2010?

We took it -- when we take the hedge off, that's no more amortization that needs to be done with respect to that piece. The rest of our debt, all $125 million is all hedged, so that's going to be some amortization. So I would say if you were amortizing, you're -- basically $25 million of $150 million went away, so you have still the rest of it yet to do.

Thank you very much.

Welcome.

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

Thanks. First question, follow up on that a little bit, all of the remaining debt is hedged. Can you talk about what your thoughts are regarding additional debt reduction from here? Would you like to reduce the swaps or I mean the hedge somewhat and pay down debt from here? How are you thinking about this level? You've reached that targeted greater financial flexibility that you've talked about in the past.

Absolutely, we have. If you want to look at what we're going to do with our free cash flow next year, that would be one way of asking that question. And I think in the short term that it makes sense to continue to pay down our debt. That's certainly certainty in that result, and the impact, we know what the impact on the P&L is. If we pay down our debt, we have a revolver. We always have the ability to draw it back out any time we want. So it's not like once you pay it back, you don't get it back.

Longer term, our first priority with respect to free cash flow is always going to be used to fund CapEx for growth, but beyond that, we're going to need to make some strategic decisions -- share repurchases, the possible institution of dividend. Those are considerations, but haven't been decided on. When we -- if we do decide as I mentioned to continue to pay down our debt, which looks likely, then the question is, will we take off the hedge each time -- because you don't have to remove the hedge, but historically, when we have paid off our debt, we've removed the hedge. And we've done that for a number of reasons. One, it gives us cash and accounting certainty. But the real reason is that we're in the restaurant business, not in the interest rate speculation business. So if you have a hedge in place, and no debt in place that would be a naked hedge. So we probably -- although that would be acceptable to do, it would not be something we would probably want to do. So with respect to paying off our debt next year -- when we pay off our debt, we're going to more than likely remove the hedge as well.

That's perfect. Very helpful. Then the second question. Just wanted to ask just quickly about Grand Lux Cafe. It's been underperforming a little bit here. You talked about some menu changes. Do you think the difficulties in marketing that content compared to a Cheesecake are somewhat contributing. What might have to happen to start to talk about growing that concept again?

Well, it's not that we stop. I think we're being very careful. We have a little smaller prototype size that we're waiting to find the right location and build. We filled the menu with value, which is one reason why I think it's lagging Cheesecake right now in this economy, because it is viewed as being higher price. Its comps are still better than [Nap Track] and many of our competitors. Remember, outside of Vegas, there's only 11 of them. So we really haven't built its reputation. Although we are marketing in a few of those areas, we have not given up on Grand Lux by any means. We're think we're on the right track and doing the right things to give it a real push here, given that we're in this economy and we don't know when it's going to end.

Okay. Thank you.

Our next question comes from the line of Jonathan [Comp] with Robert W. Baird.

Hi, thanks for taking my call. It's Jon Comp for David Tarantino. Looking at The Cheesecake Factory comp in Q3 that you just reported, can you maybe provide a little more color on how the comp improvement progressed throughout the quarter? And maybe if you would point to any of the specific marketing initiatives that worked particularly well?

Sure. Just in general, I'll point out what happened during the quarter. July and August were fairly even with each other, and September was better than July and August, and it was better for a couple of reasons. One, there were easier comparisons in September, and then there was also this Labor Day holiday shift, Labor Day was one week later, had the effect of extending the big summer selling season one week, so that was helpful to the quarter. Let's see. The other part of your question was?

Marketing initiatives.

Marketing initiatives. And the second quarter, I mean, the third quarter we had a couple of things going on. Interestingly enough, there weren't many direct sales drivers in our marketing program in the third quarter. We did two very significant things that David talked about associated with National Cheesecake Day and some great media publicity that surrounded that. And then Hunger Action Month, where there was a lot of very high staff engagement and also us distributing some guest cards for future visits in the fourth quarter. The third quarter did not have, other than some guest cards that we gave out on National Cheesecake Day, which only amounted to about 200,000 pieces, there wasn't a lot of direct sales drivers in the third quarter. In spite of that, really, the strength of our brand and efforts focused on our guests garnered us slightly better sequential comps than the second quarter.

Okay. Thanks. Then just a quick follow-up. Thanks for the color on the marketing in Q3. Maybe if you could expect your expectations for Q4 and into 2010 a little bit?

With respect to marketing?

Yes.

In the fourth quarter there's really two parts to the marketing program. The first part I mentioned. It was the distribution of about 2 million guest cards during the month of September that are redeemable -- well, there are actually two cards in each guest card that guests got when they were in our restaurant, and one of those cards is good for redemption for a free slice of cheesecake with a $30 purchase on Sunday through Thursday for the first half of the fourth quarter. The other card is good after Thanksgiving. So those are two things that we think will help us in the fourth quarter.

In addition to that, we have another piece of the marketing program we call Share the Joy. The second part of the program will be implemented after Thanksgiving, and it'll be focused on our signature items such as cheesecakes. It will be focused on gift card sales. We've not really announced the details yet, so I want to hold off talking about the specifics. That's in general what we have going on in marketing.

For next year, we're still developing our plan. We're going to continue to be focused on The Cheesecake Factory brand engagement and driving profitable comp store sales growth. We'll remain on brand with any marketing we do. We'll resist the temptation to discount and just the budget of what we spent on marketing will be driven by the specifics of that plan. That's still in the works.

Great. Thank you.

You're welcome.

Our final question comes from the line of Jeffrey Bernstein with Barclays Capital.

Great. Thank you. Couple questions. Just wanted clarification on the guidance for next year. I think you said $1 to $1.10. You're talking about lapping your nonGAAP $0.96 to $0.98 guidance in 2009?

Actually, that number that we gave for next year is GAAP guidance. So yes, that -- however you want to compare that to this year, that's what our GAAP guidance is for next year.

Okay. And just to clarify, 2% price you're expecting at this point in 2010. I think you said the commodity basket would be flat to maybe up 1%. We're not getting too much of a margin opportunity there. That would have to allow for meaningful restaurant margin expansion?

We talked about incorporating 2% into the guidance. 2% of menu pricing. We didn't say we would definitely do that. We're saying that's what we have done before and that's what is in the guidance. But if you have 2%, if we are able to get 2% menu pricing and commodity costs in costs, and inflationary costs with respect, the food is only 1%, then we should have slightly lower costs of sales.

Okay. Then the cost cuts, the $22 million to $24 million in 2009 -- is any of that cutting that might be required to be reinvested perhaps in 2010, if it will reaccelerate unit growth beyond 2010? Or have the cuts that been done have no negative impact or not require any reinvestment for reaccelerating unit growth?

That's a good question. A lot of the costs that -- we've looked at that. A lot of the costs aren't going to come back. If you think about the initiatives that we've taken, we're more efficient now. And things like labor because of the KMS system or because our staff is cross trained or whatever, we won't lose those efficiencies. The piece of the initiatives that could come back is if we're fortunate enough to really grow our restaurant sales, we might require additional staffing in the restaurant that we don't have now or we have rightsized, if you will, related to the reduction of sales volume.

But your real estate development people and other things related to the actual searching and opening of new units. I'm assuming those people are no longer there, or they have been redeployed and just returned to that role?

Well, we have the number of real estate development people right now that we need to accomplish any growth that we foresee, at least for the next year or more.

Just lastly, I don't know if you would share this or not, but I know you talked a lot about dessert and alcohol. Talk about maybe dessert, alcohol, and appetizers? Each as the percentage of sales and perhaps margin contribution on each relative to the core menu?

Not margin contribution, but desserts as a percentage of sales have actually -- David said were very strong. Last year at this time, they were about 14% of sales. Now they're about 15% of sales. Doing very well. Alcoholic beverages are more in the, let's see, I'm looking for the number, 12% or 13% of sales. That's, as you might imagine, fallen off a little bit over time. What was the other one you asked about?

Appetizers relative to entrees.

I don't have that information.

Alcohol you said is now 12% to 13, or was 12% to 13%?

Now it's 12% to 13%.

What had it been in good times?

I think the highest it ever got was about 15%.

Great. Very helpful. Thank you.

You're welcome.

All right. Thank you, everyone. Is that it? All right, bye-bye.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.