Cheesecake Factory Inc (CAKE) 0 Q0 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good day ladies and gentlemen and welcome to the first quarter fiscal 2010 earnings conference call.

  • My name is Kiana and I will be your operator for today.

  • Later, we will conduct a question-and-answer session.

  • (Operator Instructions)

  • I would now like to turn the conference over to your host for today, Ms.

  • Jill Peters.

  • You may proceed.

  • - VP IR

  • Thank you.

  • Good afternoon and welcome to our first quarter fiscal 2010 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 maybe discussed that are not based on historical fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

  • Actual results could differ materially from those stated or implied in forward-looking statements, as a result of the factors detailed in today's press release, which is available in the investors section of our Website at www.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission.

  • All forward-looking statements made on this call speak 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 some opening remarks.

  • Doug will then take you through our operating results in detail and provide our thoughts on the second quarter fiscal 2010, as well as as update on the full year 2010.

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

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

  • - Chairman and CEO

  • Thank you, Jill.

  • We've seen improvement in our business and are pleased to report that comparable sales in the first quarter were positive about The Cheesecake Factory and Grand Lux Cafe.

  • Our comparable sales improvements was driven by better guest traffic at The Cheesecake Factory.

  • All of our markets delivered positive comparable sales, even in California, which was softer market for us throughout the recession.

  • With comparable sales being better than we anticipated, it drove higher earnings per share, which grew 82% from the first quarter of last year.

  • Clearly, we have a lot of leverage in our business model.

  • Just as we were negatively impacted during the recession, as a result of costs being spread over a lower level of sales, we're able to effectively benefit when sales are on the upswing by spreading what is now a lower cost structure over a higher level of sales.

  • Capturing the leverage from improving sales drove significantly better operating margins in the first quarter.

  • Going forward, our ability to generate continued improvements in comparable sales will play a key role in sustainably improving our margins and helping us deliver earnings per share in the mid teens range over the next five years.

  • In addition, retaining the $27 million in savings that we realized in 2009 from our cost management initiatives, as well as capturing nearly $6 million in planned additional savings in the first quarter of this year, also helped fuel our performance.

  • Our operators are doing an excellent job running our restaurants efficiently, while still delivering a fantastic guest experience.

  • Even the year after we started rolling out efficiency improvements in our restaurants, both our hospitality and technical guest satisfaction scores still remain high.

  • Demonstrating a good balance between cost savings and the importance of the guest experience.

  • On the development front, we opened two new Cheesecake Factory restaurants during the first quarter.

  • Both locations opened to high demand, with long lines on their first day.

  • It's gratifying to see the affinity that consumers continue to have for The Cheesecake Factory brand even after all these years.

  • And this demonstrates to us that we still have many years of profitable unit growth ahead of us.

  • Our plans right now call for one more new restaurant opening in the back half of this year.

  • We recently completed our new menu rollout during the first quarter and guests are responding well to our new menu additions.

  • Our marketing plans for this year will continue to focus on brand engagement to drive profitable comparable sales, using a variety of tools.

  • I hope you will have a chance to visit one of our restaurants during the next couple of weeks to see what's new on the marketing front and try some of our new menu items.

  • With that, I'll turn the call over to Doug.

  • - EVP and CFO

  • Well, thank you, David.

  • Total revenues at The Cheesecake Factory for the first quarter increased to $405.4 million, compared to the prior year first quarter, an increase of 3.2%.

  • Restaurant revenues reflect a 1% increase in total restaurant operating weeks, primarily from the opening of three new restaurants during the trailing 15 month period, plus a 2.9% increase in average weekly sales.

  • Overall, comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased 2.8% for the quarter.

  • By concept, comparable sales increased 2.7% and 4% at The Cheesecake Factory and Grand Lux Cafe respectively.

  • At The Cheesecake Factory concept, we implemented an effective menu price increase of about 0.6%, in our winter 2010 menu change, which gives us about 1.4% of price in our menu from mid-March until the next menu change this summer.

  • Overall, menu mix improved in the first quarter, supported by dessert sales and the stabilization of alcoholic beverage sales this quarter.

  • At the bakery, third party sales were $11.7 million, down versus the prior year, due primarily to lower sales to the warehouse clubs.

  • Cost of sales decreased to 24.3% of revenue for the first quarter of 2010, compared to 25% in the same quarter last year.

  • The 70 basis point improvement was driven largely by lower restaurant cost of sales.

  • About 50% of the savings came from our cost of sales initiatives.

  • The other 50% came from pricing leverage on commodity costs.

  • Total labor was 33.3% of revenue for the first quarter, down 60 basis points from 33.9% in the prior year.

  • Our direct operating labor was about 70 basis points better than the first quarter of last year, due to overall productivity gains stemming from our operational initiatives and leverage from positive comparable sales.

  • Other operating costs and expenses were 24.5% of revenues for the first quarter of 2010, down 140 basis points from 25.9% reported in the first quarter last year.

  • Lower workers' compensation and general liability insurance, savings from our cost management initiatives, and favorability from timing and marketing costs, as well as leverage from positive comparable sales; were the key drivers.

  • I will note, that we expect marketing costs to catch up in the second quarter of 2010.

  • G&A expense for the first quarter was 5.8% of revenues, up 30 basis points as compared to the first quarter of 2009.

  • The majority of the increase was due to performance bonus accruals, as the required accrual in the first quarter of last year was lower.

  • Depreciation expense for the first quarter was 4.5% of revenues, down 20 basis points versus the prior year period.

  • This was due to the impairment charge we recorded in the fourth quarter of 2009, as well as positive comparable sales leverage.

  • Preopening expenses incurred during the first quarter were $2.1 million, primarily in support of two new restaurant openings during the quarter.

  • This compares to $1.7 million in the same quarter last year, mainly due to the opening of one new restaurant during that period.

  • Operating margins in the first quarter of 2010 improved 250 basis points to 7.1%, putting us on track to achieve our intermediate term goal of returning to 2007 operating margin levels of 7.3%.

  • While we originally thought the 2011, early 2012 time frame was a reasonable one for this target, we now expect to be close to accomplishing this objective by the end of fiscal 2010.

  • With operating margins for the year now expected to be between 7.2% and 7.5%, depending on where we fall within our comparable sales range assumptions.

  • Interest expense was $2 million lower in the first quarter of this year due to lower debt balances on our revolving credit facility.

  • During the first quarter, we repurchased a little more than 487,000 shares of our common stock at a total cost of $12.5 million.

  • While this reduced our weighted average shares outstanding, it wasn't enough to offset the increase in WASO caused by option exercises and the additional dilutive impact from unexercised options, resulting from our higher stock price.

  • Our liquidity position continues to be solid, with a cash balance of $107 million, despite using some of our cash flow to fund our share repurchases.

  • Our revolving credit facility balance remains at $100 million.

  • Cash flow from operations for the first three months of the year was approximately $46 million.

  • Net of roughly $7 million of cash used for capital expenditures, we generated about $39 million in free cash flow in the first quarter.

  • That wraps up our business and financial review for the first quarter of 2010.

  • Now, I'd like to spend a few minutes on our outlook for the second quarter of 2010 and our current thoughts on the full year.

  • As we've done in the past, we continue to provide our best estimate for earnings per share ranges based on a realistic comparable sales assumption.

  • Our comparable sales assumption factors in everything that we know as of today, which includes quarter to date trends, what we think will happen in the weeks ahead, weather impacts and the effect of any shifts associated with holidays.

  • As is generally our practice, we do not plan to give any more specifics on second quarter to date comparable sales trends on this call.

  • With that said, for the second quarter of 2010, we estimate diluted earnings per share between $0.34 and $0.36, based on an assumed range of comparable sales of between flat and positive 1%.

  • As expected, our first quarter comparable sales were positively impacted by about 1% from gift card sales in the fourth quarter of last year and from holiday shifts.

  • Thus, our real run rate, coming out of the first quarter, was about 1.5% to 2%.

  • We anticipate comparable sales in the second quarter to be negatively impacted by a holiday shift, as well as less menu pricing and slightly more difficult comparisons.

  • We have considered these factors in arriving at our estimated range of comparable sales.

  • In addition to these impacts, earnings per share for the second quarter will be impacted by higher marketing expenses, as there was a shift of expenses from the first quarter into the second quarter.

  • We're also expecting slight pressure from commodity costs in the second quarter.

  • Mostly driven by higher dairy costs, as compared to the low dairy costs that we saw in the quarter of last year.

  • For the full year 2010, we now estimate diluted earnings per share between $1.28 and $1.34, based on an assumed comparable sales range of between flat and positive 1%.

  • This the best read we have today of performance for the remainder of 2010, assuming no significant decline in the economy.

  • It's hard to know what next nine months will hold.

  • Although, we're seeing some positive indicators of an economic recovery in terms of consumer confidence and retail sales, unemployment remains at 9.7%.

  • And it's even higher in places, such as California, which reached a new high in March, hitting 12.6%.

  • As a result, it's difficult to have a high degree of conviction in the strength of the economy and the pace of a recovery.

  • Our earnings per share guidance represents growth of about 20% to 25%, off a base of $1.07 in 2009.

  • With about 60% of our commodities contracted for 2010, we still expect food costs inflation to be between flat and up 1% this year.

  • This reflects lower contracted prices for our proteins, offset by slightly higher expected dairy and fish costs.

  • We continue to expect our tax rate to be approximately 29% to 30% in 2010.

  • And our projection for capital spending in 2010 is $45 million to $50 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 John Glass of Morgan Stanley.

  • You may proceed.

  • - Analyst

  • Thanks very much.

  • My question, Doug, relates to margin flow through this quarter, considering it's the first quarter we've seen the positive comps in quite awhile.

  • If you look at either operating margin or kind of a proxy for restaurant margin, it's not that much different than it was in the last three quarters, despite having better comps and better average weekly sales.

  • So, are we seeing that you have to add, for example, on the margin, a little bit of labor now that comps have come back?

  • What is the dynamic that's going on?

  • Just so we have a fair level of expectations for what the comp leverage is when you do see further improvement in same store sales.

  • - EVP and CFO

  • Well, John, I'm seeing that we're getting the flow through that we expected to get from the increased comps, even, actually greater flow through than we expected to get.

  • Our guidance for comps for the quarter, we exceeded that by about $0.02.

  • And we got about a $0.06 upside on what our guidance was for earnings per share.

  • And we finished with very high operating margins at 7.1%.

  • So, we saw actually about between 50% and 55% flow through on our additional sales.

  • So, we feel like we got really good leverage on our margins.

  • So, I'd be happy to discuss that further with you but I don't see that we didn't get flow through.

  • We had a 250 basis point improvement over where we were in the first quarter last year.

  • - Analyst

  • If I could just clarify the question.

  • Let's use labor as an example.

  • So, labor, I think, was about 33% of revenues this quarter.

  • And in the last three quarters, it was at or below that level.

  • Is that just a seasonality -- am I just looking at it because maybe seasonality and I shouldn't be comparing that sequentially.

  • It's hard to look at the first quarter last year, since you were just at the very beginning of your cost management programs.

  • And so, that's why I'm looking at the subsequent three quarters to compare this quarter to it.

  • Is that not fair then?

  • - EVP and CFO

  • Well, I think you've got to look too at what the average volumes were.

  • I don't look at it sequentially.

  • That might be one way to look at it.

  • I'd have to look and see if I could understand exactly what you're talking about.

  • I think I understand what you're talking about.

  • I don't know the answer, other than to say that, I think we achieved fabulous leverage on our increased comps.

  • - Analyst

  • Great.

  • Well, thank you.

  • Operator

  • Our next question comes from the line of Jeffery Bernstein of Barclays Capital.

  • You may proceed.

  • - Analyst

  • Great, thank you.

  • Actually, just two questions.

  • One related to the cost savings you spoke about, I think you said $5.5 million in this quarter and you're lapping $20 some odd million last year.

  • I think, last quarter, you mentioned that you thought you'd find significant incremental savings.

  • I'm just wondering whether this $5.5 million this quarter is indicative of kind of a run rate we should assume for the full year.

  • And therefore, a lot higher than the $8 million to $10 million you initially promised for this year.

  • So, I was wondering if you could give us an update on the cost saving outlook?

  • And the second, there's been a few mentions of kind of marketing.

  • Kind of checking on the stores to see what's new.

  • I'm just wondering whether you can give us an outlook on what we should expect from marketing this year with the new recent CMO addition and perhaps percentage of spend?

  • I think you said you're going to catch up in the second quarter.

  • But perhaps what the second half looks like in terms of spend on that front?

  • Thank you.

  • - EVP and CFO

  • Sure.

  • As far as the cost savings outlook, I think what we still feel comfortable with the $8 million to $10 million of cost savings that is really coming over into 2010, from the 2009 initiatives.

  • As you mentioned, we had $27 million worth of cost savings initiatives that we implemented in 2009 and another $8 million to $10 million of savings are expected in 2010.

  • $5.5 million of that happened in the first quarter.

  • We would expect another $1.5 million to $3 million of that to happen in the second quarter.

  • And the final $1.5 million to happen throughout the third and the fourth quarter.

  • There are no announced incremental savings over and above that $8 million to $ 10 million.

  • In fact, any other gains that we made on our margin line this time, were made because of leverage on our comparable sales gains that we had.

  • From a marketing standpoint, we still expect to spend for the year about 0.5% of sales on marketing.

  • So, that's sort of the average.

  • We only spent maybe 25 basis points in the first quarter.

  • And we expect to spend about 75 basis points in the second quarter.

  • So, the second quarter is being negatively impacted by a shift of somewhere between 25 and 30 basis points of marketing, over and above what you might consider an average marketing.

  • And I don't know if you were asking about the marketing programs but I will comment that marketing continues to be focused on many of the same things that have been effective for us in the past.

  • And the overarching principle is that our marketing efforts, we try to really remain on brand with our marketing, which means that we don't do the deep discounting that a lot of other people are doing.

  • And what our marketing efforts are focused on is really our guest engagement is one of the big things.

  • And in fact, we just announced recently, or yesterday, that we've got the Great Glam Burger Challenge going on this quarter.

  • And it's an opportunity for our guests to go online and to be engaged by building their own glam or glamorous burger.

  • And the winning guests, or the winning entry from that, will have their burger put on our menu for a full year.

  • And they will also win one of their choice of one of six glamorous vacations.

  • So, it's a way that our marketing efforts are really trying to engage our guests.

  • Additionally, our marketing efforts are really focused on gaining publicity for us.

  • And we've done an excellent job with this in the past.

  • We've been on "Dr.

  • Phil" a couple of times, "Entertainment Tonight," "Tyra Banks." And in fact, if you want to tune in tonight, it's actually tomorrow morning at 12:05 a.m.

  • we'll be on "Jimmy Kimmel Live!" And I'm sure that I'm not staying up until 12:05 a.m.

  • So I'm going to record that.

  • But Jimmy Kimmel is going to talk about the Great Glam Burger Challenge.

  • So, we are doing a lot of things in marketing.

  • I think they're simple but they're very unique and they're very effective from a sales generation standpoint and from a cost perspective.

  • - Analyst

  • Doug, just to clarify one thing.

  • The $8 million to $10 million in cost saves, that's incremental -- that was incremental cost savings this year.

  • That's not necessarily a roll over from the annualized savings from last year.

  • Is that right?

  • - EVP and CFO

  • No, it's incremental to this year but it has to do with things that were identified last year.

  • - Analyst

  • But then there's still some roll over from the $27 million, depending on when you recovered those savings, when you annualize it, you're getting some incremental flow through this year from the last year's cuts.

  • - EVP and CFO

  • I might be answering your question wrong.

  • We identified cost savings last year.

  • Some of them played out the entire amount during the year.

  • Some of them only played out 50% of a year last year.

  • And the other 50% is happening this year.

  • And what played out last year totaled $27 million.

  • And the remainder of them to play out this year is $8 million to $10 million.

  • - Analyst

  • Understood.

  • - VP IR

  • If I can add, in aggregate, the cost savings initiatives that we've put into place in 2009 will yield savings of a total of $35 million to $37 million.

  • Of which, we'll capture $8 million to $10 million this year.

  • - Analyst

  • Got it.

  • Thank you very much.

  • Operator

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

  • Baird.

  • You may proceed.

  • - Analyst

  • Hi, congratulations on a great start to the year.

  • A question for you, Doug, on comps.

  • Could you break out the mix in traffic components of the comps?

  • I think you mentioned mix was positive but if you could quantify that, that would be helpful.

  • - EVP and CFO

  • Yes, sure.

  • Mix wasn't positive.

  • Traffic up 1.7%.

  • So, sequentially, traffic improved 3.4% because we were down 1.7% in the fourth quarter.

  • So, 1.7% is s traffic.

  • 1.6% is price.

  • And the mix was about negative 0.5%, which is a little better than it has been.

  • Alcoholic beverage sales, we mentioned, are stabilizing, which helped that mix.

  • I wouldn't say alcoholic beverage sales are up yet but they're certainly stabilizing.

  • And with respect to the price component of that, we took menu pricing during the quarter.

  • We entered the quarter with about 1.8% price in our menu and we exited the quarter with about 1.4%.

  • So, that 1.6% is sort of a blend, having taking a menu price increase of about 0.6% somewhere around mid quarter.

  • - Analyst

  • Okay.

  • That's helpful.

  • And then, a question about the guidance for the comps.

  • I was wondering if you could mechanically take us through how you arrived at flat to up 1%?

  • I know that you said, Q1 was inflated by about 1 point from some factors that may not repeat.

  • But if even if you adjust for that and the pricing, it looks like you're guiding a little below what you did in Q1.

  • Is it simply a function of the comparisons or is there something else in there that maybe I'm not thinking about?

  • - EVP and CFO

  • Yes, I'll be happy to do that because you were focused on the right thing.

  • The first thing you really have to do is determine what the right run rate is coming out out of the first quarter.

  • So, we had 2.8% positive comps in the first quarter.

  • And about 1% of positiveness in the first quarter created by these holiday shifts that happened at the beginning and end of the quarter and as well as redemptions of gift cards during the quarter.

  • That was about 1%.

  • So, our real run rate coming out of the quarter somewhere between 1.5% and 2%.

  • So then, if you look at what's going to go on in the second quarter, there's that holiday shift is going to negatively impact us for the first few weeks of the quarter.

  • There's going to be less menu pricing in the second quarter.

  • And we're going to have slightly more difficult comparisons.

  • I think if you add that up, you'll come to the conclusion that you're right in the neighborhood of 0% to 1%.

  • Now, with that said, I will continue to remind people that when we give our sales range assumption, that's meant to be more of a sensitivity than it is a prediction, necessarily.

  • It's what we think we're going to have for comparable store sales but if it allows you to know what earnings per share are anticipated to be, at those sales ranges, 0% to 1%.

  • And if you think that the sales ranges we're actually going to have are going to be higher or lower than that, you can -- you have the information to adjust your earnings per share thoughts accordingly.

  • - Analyst

  • Very helpful.

  • Thank you.

  • Operator

  • Our next question comes from the line of Nicole Miller of Piper Jaffray.

  • You may proceed.

  • - Analyst

  • Good afternoon.

  • Understanding the price conversation, the 1.6% in the first quarter and positive comps, a lot of the -- one of the questions I've been receiving lately is; Does that give you and the industry more pricing power going forward, especially if commodities inflate?

  • - EVP and CFO

  • Do we have more pricing power if commodities inflate?

  • - Analyst

  • Yes, how much are you willing to extend that?

  • Are you going -- how quick are you willing to get back to your 2% to 3% run rate on menu price increases?

  • - EVP and CFO

  • I think it just depends.

  • Really, finding the right balance between pricing and what the guests will accept is always a concern.

  • - Chairman and CEO

  • Right and then, commodity pressure and you look at all three of those, we certainly would not want to fall behind.

  • We did that many years ago and found that wasn't productive.

  • But we look at all three and then try to find the best balance we can.

  • - EVP and CFO

  • And our strategy, really, has been working with respect to what we've done.

  • We've had improvements in guest traffic for two to three quarters in a row and actually turning positive for this particular quarter.

  • And we feel like the pricing that we do have in our menu now, 1.4% in the second quarter and forward until we get to our summer menu change, is enough to offset what we think our estimated market basket inflation is going to be.

  • And when I say, "our market basket," that's cost of sales, wages and utilities.

  • We think those together are going to be up 1%.

  • So, we've got that covered.

  • If we were to have greater increases in commodity costs, next year, probably not going to be this year but next year, then we'd have to look more carefully at that.

  • But still keep in balance between pricing and traffic in mind.

  • - Analyst

  • And then, I know it's a smaller piece of the puzzle but the third party bakery sales, can you talk to us about what's going on in that arena.

  • I see a lot of your peers going into the grocery aisle, the frozen aisle.

  • And what's the long-term opportunity?

  • And do you see anything expanding for you on the horizon?

  • - Chairman and CEO

  • We're looking at it carefully.

  • Pizza is an easy product to sell in grocery stores, one that people are very comfortable with.

  • We'll see how Chang's does.

  • We've had many offers to take some of our items but right now, we're happy with our cakes.

  • And we have opportunities and we're doing some TV tests with that but nothing with our food yet.

  • And again, I want to taste everything that's out there to see if it really is representative of their brands.

  • - Analyst

  • Thanks and congrats on the positive comp.

  • - Chairman and CEO

  • Thank you.

  • Operator

  • Our next question comes from the line of Jeff Farmer of Jefferies & Company.

  • - Analyst

  • Good afternoon.

  • I just wanted to follow up on the earlier marketing question.

  • I think you're coming up on the one year anniversary of the small plates intro.

  • And I think you lapped the guest card promotion in May and June.

  • So, you touched on the this but what's the game plan as you anniversary both of those pretty big traffic drivers?

  • And I know you mentioned the glam burger but is there anything more to it than that?

  • - EVP and CFO

  • Well we have very -- we're very innovative with respect to our menu.

  • And yes, there is lots going on on our menu.

  • I don't really want to get in to the specifics of that, other than the glam burgers.

  • But small plates and snacks and the specials are now a permanent part of our menu.

  • And they're still a very attractive item that's being heavily ordered.

  • There's new people coming in all the time discovering them.

  • So, I don't think we need anything to lap over that.

  • But we do have new menu innovations that are happening all the time and would encourage you to go into our restaurants and see what we have going on.

  • - Analyst

  • Okay, fair enough.

  • And then, just in terms of the discovery aspect, I believe when you first introduced small plates, it was about 5% of mix.

  • I could be wrong on that.

  • But from that perspective, where is it now?

  • - EVP and CFO

  • Well, we're really not going to break that out anymore and let me tell you why.

  • It's just part of the menu.

  • And what we said last time, I think, was that we didn't expect to it change much.

  • And I think if we looked at the actual percentage now, it would probably be about that.

  • But it's not something that we really pay that much attention to because if you come into our restaurant, we don't really care whether you order small plates and snacks or specials.

  • We care that you came in and we want you to buy something.

  • So, buy anything on our menu.

  • And we're just offering you greater choices now that we created these small plates and snacks and specials.

  • - Chairman and CEO

  • It hits a broader group of people that want -- come in for different purposes.

  • So, we are not looking at it as some special thing anymore.

  • It's just one more thing on our menu and it's a permanent piece of it.

  • - Analyst

  • Okay, fair enough.

  • A final question from me.

  • Just drilling down on that return to positive traffic in the quarter.

  • A very difficult question to answer but from your sense of your customer base, are you driving increased frequency from your existing customers or do you think you've been attracting new customers or potentially both over the last couple of quarters?

  • - EVP and CFO

  • I would say that we're driving increased frequency, probably, mainly.

  • - Analyst

  • All right, thank you.

  • Operator

  • The next question comes from the line of Matt Difrisco of Oppenheimer.

  • You may proceed.

  • - Analyst

  • Yes, Hi.

  • This the Rachel Schacter in for Matt Difrisco.

  • Regarding your comps in the first quarter, did you see a monthly improvement and could you quantify any negative impact you saw from weather?

  • - EVP and CFO

  • Sure.

  • It's really hard to say month by month, there's really noise in every one of the months, some positive noise and some negative.

  • For instance, in January and March, they were both -- those months were both very positively impacted by the holiday shifts.

  • And February, as you mentioned, was negatively impacted by weather.

  • I don't think weather hurt us a whole lot.

  • That might of had a -- you've got to say, the weather that was worse than normal weather.

  • So, what was that?

  • So, we would say maybe that 15 basis points or some pretty small number.

  • So, excluding those weeks where there was specific weather or holiday shifts, our comps were pretty steady throughout the quarter.

  • - Analyst

  • Okay.

  • Thanks.

  • And then, also you mentioned that 60% of your commodities are contracted for in 2010.

  • Is cream cheese included in that?

  • - EVP and CFO

  • Cream cheese is largely contracted for, well over 75% contracted for.

  • - Analyst

  • Okay.

  • Thanks very much.

  • - VP IR

  • Operator, next question.

  • Operator

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

  • You may proceed with your question.

  • - Analyst

  • Hi, good afternoon.

  • David, I was hoping you could give us an update on the development front.

  • I know that that's been more challenging with the lack of kind of new venues out there.

  • So, if you could maybe talk to us about the smaller format?

  • What you're kind of thinking about for 2011?

  • And then, maybe any kind of update on Rock Sugar and how that's progressing?

  • - Chairman and CEO

  • Well, as we've said the new format is here to stay.

  • We've built a couple of them and we're very happy with the size, with the volume that they're able to do.

  • So, we'll move forward with that.

  • We don't have that many signed but I'm dealing with I would say 10 to 12 right now, whether some of that is 2011.

  • Will some move into '12?

  • I don't know.

  • But as we've said, Sharon, we're looking at every great site and as many as we can get, we'll take.

  • And that includes building a smaller format for Grand Lux Cafe and bringing that down, bringing the decor down a little bit because some of them are doing extremely well and we haven't lost our enthusiasm for Grand Lux either.

  • And then, Rock Sugar, we've just come out with a new menu and we're working on that.

  • We're looking but I'm only going to maybe look for one.

  • And it's going to be a very special, prime location because we have to build that brand in the right places.

  • It's not just one of those things that we're just going to open in any mall at this particular time.

  • But I'm anxious and as I said, there's a lot of things in the hopper.

  • And as we get them signed, we'll let you know right away.

  • - Analyst

  • Okay, great, thanks.

  • Operator

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

  • You may proceed.

  • - Analyst

  • Hi, thank you.

  • A question on Grand Lux, actually.

  • If you could go through that very significant sequential improvement in comps?

  • If there's anything to read through there?

  • I know it's a relatively small geographic sample but if there's anything operationally or menu-wise or marketing that you did to allow that improvement?

  • - Chairman and CEO

  • We did a little bit of direct marketing but only in the two sites that weren't -- as we've said, the two sites that weren't doing as well as we would have liked.

  • Other than that, no, I think it's the same thing.

  • It's an improving economy, the guest has relaxed, they've had a little bit more money.

  • We are one notch above Cheesecake Factory.

  • And because it got hit a little harder, I think our comps came back a little bit more.

  • But there was really nothing that we've done, other than some local direct mail marketing in two markets.

  • - Analyst

  • Okay, all right, thank you.

  • Operator

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

  • You may proceed.

  • - Analyst

  • Thank you.

  • David, do you mind commenting on geographic variances you're seeing in sales?

  • Obviously, the trends improved in Q1 sequentially.

  • Are you seeing some of the harder hit regions come back quicker?

  • - Chairman and CEO

  • Well, I'm going to let Doug speak to that.

  • But again, every single area improved in the country, as we said, including California and Arizona.

  • So, we were happy.

  • But can you shed a little more light on that, Doug?

  • - EVP and CFO

  • Yes, well, not only every area improved but every area was positive.

  • If you think, we have 11 geographies, if you take southern California and northern California as one geography, we have 11.

  • And every market was positive, including California, including the southwest, including the northwest, which were the three that were not doing as well during the recession.

  • Probably the biggest mover of those three was the southwest, was the biggest sequential improvement from the fourth quarter.

  • Okay.

  • - Analyst

  • Great.

  • And then Doug, do you mind commenting on commodities kind of going out a little ways?

  • The spot market is obviously showing a little bit more food cost inflation currently.

  • And we don't have a good insight on where your contracts are for the most part.

  • But if spot markets remain at this level, would you see significant inflation next year or do you have a sense or is that even on your radar screen at this point?

  • - EVP and CFO

  • I think most of what I've seen is that there is going to be some commodity inflation next year.

  • And our purchasing people are even starting to deal with that today and where they can, maybe extending some of the contracts that we have.

  • But I think that we probably will see some inflation in commodities.

  • We're fine for 2010.

  • I think we feel very comfortable with the fact that we think our commodities are going to be up 0% to 1% and our food costs line, cost of sales line, will be somewhere right around flat to last year.

  • So, we're comfortable with 2010 and 2011 is pretty far off for now.

  • But we'll have to take that as it comes to us.

  • - Analyst

  • Fair enough, thank you.

  • Operator

  • Our next question comes from the line of Christopher O'Cull of SunTrust.

  • You may proceed.

  • - Analyst

  • Thanks, good afternoon.

  • My question is a follow up to the development one earlier.

  • Would you provide some sales and investment cost statistics for these smaller units, like the one in Annapolis?

  • And then, when you think about the development pipeline for '11, do you expect most of the openings to be the smaller prototype?

  • - Chairman and CEO

  • I can't tell you -- you could say most of them.

  • Certainly, what we were building that we thought could do $10 million before and needed a 10,000-footer, now, we'll probably build an 8,000 because we know it can do $10 million.

  • So, in that, we should be able to save some investment costs and choose that size box.

  • But each one we look at, depending on some of them we build, some we have to move into, some we just take the size that the landlord has because that's the size it is, and we're able to function in all of those.

  • And we've gone through those costs before but, Doug?

  • - EVP and CFO

  • Yes, the -- an easy way to explain the unit economics is, if we have an 8,000 square foot unit and a 10,000 square foot unit, basically, at $1,000 per square foot, we'll achieve our desired return on investment, which is 18% to 20%, cash return on investment.

  • So, the smaller unit costs $1.5 million, about, less to build.

  • And so, if it, at 8,000 square foot, does $8 million a year, we'll be very happy with it.

  • The thing that we have found out from Annapolis and now we've opened in Christiana, Delaware , which is it not the same floor plan.

  • It's slightly bigger than that but still smaller than a normal.

  • And we're doing great volumes there.

  • So, what we've proven to ourselves is that those smaller formats can do $10 million in an 8,000 square foot box, which is well over $1,000 a square foot.

  • So, obviously, we get our returns out of that.

  • So, that's roughly a kind of an easy way of the looking at

  • - Analyst

  • Okay, thank you.

  • - Chairman and CEO

  • You're welcome.

  • Operator

  • Our next question comes from the line of Brad Ludington of Keybanc Capital Markets.

  • You may proceed.

  • - Analyst

  • Thank you.

  • Doug, I wanted to ask on commentary that alcohol sales have stabilized or if maybe not back to normal levels, have improved.

  • Can we assume that maybe appetizer and dessert sales are starting to pick up some, as well or is that just more focused on the bar at this point?

  • - Chairman and CEO

  • Well, appetizer sales have always been good.

  • They were never down.

  • Dessert sales started to improve awhile ago and really the last piece there was that they were maybe buying one drink or one glass of wine, rather than two.

  • But now, that is stabilizing and we think it's starting to turn for alcohol.

  • So, the others have actually been good for awhile.

  • - EVP and CFO

  • The dessert sales, actually as a percentage of sales, increased to 0.5% this quarter.

  • So, we were at 15.2% of sales were dessert sales.

  • And last quarter was 14.7%.

  • So, a big increase in dessert sales as a percentage of sales and in the incident rates of desserts being ordered.

  • Those were up as well.

  • And the thing that's down from a mix perspective, alcoholic beverages some but less than they were but nonalcoholic beverages are still less than what they were last year.

  • - Analyst

  • So, it's still people just, if not getting a bar drink, just getting water instead of tea or Coke?

  • - Chairman and CEO

  • That's right.

  • - Analyst

  • Okay.

  • Thank you very much.

  • Operator

  • Our next question comes from the line of Mitch Speiser of Buckingham Research.

  • You may proceed.

  • - Analyst

  • Thanks.

  • First of all, on Grand Lux, you did say comps improved pretty much across the board, I believe, if I got that right.

  • Did the Las Vegas store have a disproportionate effect on the Grand Lux comps?

  • - EVP and CFO

  • It always has -- it could have a disproportionate effect because the volumes are so big.

  • There's two in Las Vegas, by the way.

  • There's two in pretty much the same hotel in Las Vegas, one side-by-side hotel.

  • But out of the 13 Grand Lux locations, I think every one of them was up.

  • It might have been 12 up but most of the Grand Lux locations were up.

  • And I don't think that -- there's always some disproportionate thing that can happen with Las Vegas but that wasn't -- this was pretty broad across the board.

  • - Analyst

  • Great.

  • Also or separately, on the comps gains at The Cheesecake Factory, is there any way to drill down?

  • In general, do you feel that your sales are driven by business activity at all?

  • And have you seen, when you drill down to the traffic, what type of customer may have been coming back more?

  • Were it locals, transients, business activity related, any demographic types of data as to what drove the traffic?

  • Thanks.

  • - EVP and CFO

  • Yes, I would tell you that I don't think our traffic is very largely business driven.

  • So, whether business has increased or not, I don't think that that's where we're necessarily getting it.

  • I think that it was broad across the many different varieties of people that use our restaurants.

  • And I don't think that we have isolated any particular one group that we thought moved a lot.

  • Okay, thanks.

  • Operator

  • Our last question will come from the line of Keith Siegner of Credit Suisse.

  • You may proceed.

  • - Analyst

  • Thanks and I'm going to apologize in advance for belaboring the marketing point just a little.

  • But what I was curious about was you gave us some good detail on the spending around marketing.

  • I just wanted to clarify, is that also the case with the actual marketing efforts?

  • In other words, second quarter was going to be -- have substantially more marketing efforts in place than first quarter, not just the spend.

  • And is that increase in efforts factored into the guidance, that you'll have so much more marketing in 2Q than 1Q?

  • - EVP and CFO

  • I wouldn't say we're going to have so much more marketing in Q2.

  • I would say that in Q1, if you dial into it, in the fourth quarter of this year, we did some things, from a marketing standpoint, that really benefited the first quarter.

  • So, therefore, in the first quarter, we chose not to spend marketing dollars in the first quarter to the same extent that we spent marketing dollars in the first quarter of last year.

  • They're going to be spent in the second quarter to drive these programs that we're doing.

  • But I wouldn't lead you to believe that I think that the programs that we're doing in the second quarter are that much incremental to what programs we did last year.

  • I think they're very unique and I think that they're something that can really move the needle for us but not incremental to last year.

  • - Analyst

  • Okay.

  • That's helpful.

  • And then, one last question.

  • Testing the smaller footprint in Grand Lux Cafe, I'm just curious, since it doesn't have quite the name cache that the Factory has, you don't have quite the same marketing skills and density and efficiencies behind it.

  • Under what situations would you or why would you open a Grand Lux or where would you put a Grand Lux that you wouldn't otherwise just put a Cheesecake Factory?

  • - Chairman and CEO

  • We've answered that when we first started.

  • And that was that, if there's a new area, it's always a Cheesecake Factory.

  • But Grand Lux works well in areas where we have five mile radius restrictions and that there's other great spots to open in.

  • And that's where Grand Lux really plays.

  • So, usually, it would be the second concept in an area and we wouldn't be going with it first.

  • But there are so many of those areas, that it leaves plenty of room to grow Grand Lux.

  • - EVP and CFO

  • And just a good example, that is on Michigan Avenue in Chicago, we could never have two $15 million restaurants, if it wasn't for the fact of having Grand Lux because the Grand Lux is 0.5 mile --?

  • - Chairman and CEO

  • Five blocks.

  • - EVP and CFO

  • Five blocks from the Cheesecake Factory in Chicago.

  • It's the same thing in Las Vegas.

  • There's two Grand Luxes across the street from a very successful Cheesecake Factory.

  • - Chairman and CEO

  • From a very successful Cheesecake Factory.

  • - EVP and CFO

  • So, it allows us to put more restaurants in dense markets and pull a lot more volume out of that market.

  • - Chairman and CEO

  • Exactly.

  • - Analyst

  • Okay.

  • I just wanted to make sure nothing had changed.

  • - Chairman and CEO

  • Nope.

  • - Analyst

  • Thank you.

  • Operator

  • Ladies and gentlemen, that concludes today's conference.

  • Thank you for your participation.

  • You may now disconnect and have a great day.