Cheesecake Factory Inc (CAKE) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the second quarter 2010 The Cheesecake Factory earnings conference call.

My name is Sally and I will be your Operator for today.

At this time all participants are in listen only mode.

Later we will conduct a question and answer session.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I'd now like to turn the conference over to your host for today, Jill Peters.

Please proceed.

Thank you.

Good afternoon and welcome to our second 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 may be discussed that are not based on historical fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available in the investor 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 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 some opening remarks.

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

Following that we'll open the call to questions.

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

Thank you, Jill.

We're pleased to report another quarter of positive comparable sales at both The Cheesecake Factory and Grand Lux Cafe.

The economy is still sluggish and the recovery seems to have slowed.

This is evident in the Federal Reserve's actions last week reducing its outlook for the economy.

In addition, consumer confidence in July declined.

Consumers appear to be cautious about spending with concerns about global instability and the recent stock market volatility cited as reasons for the caution.

However, in spite of this we delivered very solid sales and earnings results for the quarter.

Our better than expected comparable sales in the second quarter were driven by guest traffic gains of 1.4%.

Consumers are very selective today about where they dine out, more so than they've ever been.

Quality, service, and value for the overall experience a guest receives are no longer nice to have, they are necessity.

Our ongoing high guest satisfaction scores are one indicator that we're doing more than just meeting the needs of our guests.

Our comparable sales performance and cost savings increase helped drive 22% growth in earnings per share this quarter.

We now anticipate realizing slightly more in savings than we originally expected this year from our cost management initiatives that we implemented in 2009.

As for development, we expect to open an 8,500 square foot Cheesecake factory in Bridgewater, New Jersey next month, which will be our final new restaurant opening for the year.

Beyond 2010 we're optimistic about the fact that we're starting to see more availability of high quality restaurant sites than we have in the recent past.

These aren't just typical mall sites.

They are a variety of site types including freestanding, in line, and specialty centers.

We don't require owned new model development or expansion of malls for site opportunities.

For example, if a large retailer closes and the space can be carved up into several pieces which opens up additional opportunities for us.

Right now, it's too early to pinpoint the number of new restaurants we expect to open in 2011, but as we have more definitive development plans for next year, we'll share that with you.

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

Well thank you, David.

Total revenues at the Cheesecake factory for the second quarter were $418.9 million compared to the prior year second quarter, an increase of 2.7%.

Restaurant revenues reflect a 1.3% increase in total restaurant operating weeks primarily from the opening of two new restaurants during the trailing 15 month period, plus a 1.6% increase in average weekly sales.

Overall, comparable sales of the Cheesecake factory and Grand Lux Cafe restaurants increased 1.6% for the quarter.

By concept, comparable sales increased 1.6% and 0.9% at the Cheesecake Factory and Grand Lux Cafe respectively.

As we discussed previously, sequential sales comparison have both concepts were impacted in the second quarter by holiday shifts and by heavy gift card redemptions in the first quarter.

In terms of the components that comprise comparable sales, traffic was up 1.4%, as David mentioned.

We had another 1.4% in pricing stemming from an effective menu price increase of about 0.6% in our Winter 2010 menu change.

However, a portion of our menu price increase wasn't realized in the second quarter because of ongoing check management by guests, particularly with regard to beverages.

Looking ahead we plan to implement a 1% effective menu price increase in our Summer 2010 menu change, which will give us about 1.6% of menu pricing entering the fourth quarter of this year.

At the Bakery, external sales were $14.1 million, down slightly versus the prior year.

Cost of sales increased slightly to 24.5% of revenue for the second quarter of 2010, compared to 24.3% in the same quarter last year.

The 20 basis point increase was due primarily to pressure from dairy and cheese costs as expected, offset by pricing leverage on commodity costs and savings from our cost of sales initiatives.

Total labor was 32.5% of revenue for the second quarter, down 60 basis points from 33.1% in the prior year.

This decrease was attributable to overall productivity gains from our operational initiatives and leverage from positive comparable sales.

Other operating costs and expenses were 24% of revenues for the second quarter of 2010, down 30 basis points from 24.3% in the second quarter last year.

Savings from our cost management initiatives and comparable sales leverage, plus lower workers compensation and general liability insurance were partially offset by expected slightly higher marketing costs due to timing.

Our cost savings initiatives benefiting cost of sales, labor, and other operating expenses, were at the top of our expected range in the second quarter resulting in year-over-year savings of about $3 million during the quarter.

Moving on to G&A expenses, they were 5.7% of revenues in the second quarter, down 80 basis points as compared to the second quarter of 2009.

The majority of this favorability came from lapping the accrual related to our Chairman and CEO's retirement plan reported in the second quarter of last year.

Depreciation expense for the second quarter was 4.3% of revenue, down 30 basis points versus the prior year period.

This positive comparison was driven by lower depreciation resulting from the impairment charge we recorded in the fourth quarter of 2009, as well as positive comparable sales leverage.

Operating margins in the second quarter of 2010 improved 180 basis points to 8.9%, putting us on track to surpass our intermediate term goal of returning to 2007 operating margin levels.

We now expect to achieve our goal by the end of this year, a year earlier than we originally anticipated.

Interest expense includes $7.4 million to unwind the remainder of our interest rate collar, as compared to a charge of $3.3 million for a similar expense in the prior year quarter.

The remainder of the interest expense line was $1 million lower in the second quarter of this year due to a lower balance on our revolving credit facility.

We decided to unwind the entire remaining $100 million interest rate collar this quarter rather than unwinding just the portion relating to the amount of debt we repaid.

We eliminated the risk of waiting to unwind the collar as we believed it would likely cost us more to wait than to do it in the future.

As a result we no longer have any interest rate collars in place on our remaining debt balance.

During the second quarter we repurchased 670,090 shares of our common stock at a cost of $17.4 million in the open market and under our 10 B5-1 plan.

We have approximately 6.7 million shares remaining in our current share repurchase authorization.

Our liquidity position continues to be solid with a cash balance of $86 million at quarter end despite using some of our cash to fund our share repurchases, pay down our debt balance by $30 million, and unwind the interest rate collar.

Cash flow from operations for the first six months of the year was approximately $76 million, net of roughly $18 million of cash used for capital expenditures, we generated about $58 million in free cash flow in the first half of the year.

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

Now I'll spend a few minutes on our outlook for the third 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 realistic comparable sales assumptions.

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, known weather impacts, and the effect of any shifts associated with holidays.

As has been our practice, we do not plan to give anymore specifics on third quarter to date comparable sales trends on this call.

With that said, for the third quarter of 2010, we estimate diluted earnings per share between $0.31 and $0.33 based on an assumed range of comparable sales between flat and positive 1%.

Although we did not talk specifically about the second half of the year in April when we last provided our outlook for 2010, our implied comparable sales assumption for the back half of the year has not changed.

Macro indicators have been soft and are slowing as David mentioned.

In addition, we're lapping a more difficult comparison in the third quarter.

This suggests it's prudent to be cautious and certainly there's no externally driven reason to increase our assumptions at this time.

Earnings per share for the third quarter will be impacted by a few items.

First, we're expecting the dairy pressure that we saw in the second quarter to continue, driving higher year-over-year cost of sales.

Additionally, pre-opening expenses will be higher on a year-over-year basis due to our new restaurant opening scheduled for August.

There were no new restaurant openings in the third quarter last year, and finally we're expecting additional marketing expenses in the third quarter, primarily again due to timing.

These three items combined impact third quarter earnings per share by about $0.04.

For the full year 2010 we now expect diluted earnings per share between $1.32 and $1.38 based on an assumed comparable sales range of between positive 1% and 1.5%.

This represents our best estimate as of today assuming no significant decline in the economy.

Additionally, by the time we get to the fourth quarter we will be lapping our toughest comparable sales comparison of the year.

With about 60% of our commodities contracted for 2010, we still expect food cost 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.

Our full year EPS also reflects a slightly higher expectation for cost savings from the initiatives that we implemented in 2009.

We now expect to realize between $10 million and $12 million in savings in 2010, up from the previous range of $8 million to $10 million.

Year-to-date, we have realized about $8.5 million in savings.

We continue to expect our tax rate to be between 29% and 30% in 2010, and our projection for capital spending in 2010 remains at $45 million to $50 million.

In closing, the key takeaways from our 2010 full year outlook are that one, we still expect to see slightly positive comparable sales in the second half of the year.

Secondly, our earnings per share range implies operating margins of between 7.5% and 7.7% in 2010.

So we anticipate doing better than our initial intermediate term goal of returning to 2007 operating margin levels of 7.3%, and finally the mid point of our EPS sensitivity for the year reflects a healthy 26% growth in earnings per share as compared to 2009.

With that said, we'll take your questions.

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

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

Please proceed.

Hi.

Thanks very much.

I just want to -- and maybe I didn't do the math quick enough in your head.

Have you changed your back half of the year earnings guidance?

I know there's been some pushes and pulls in terms of higher costs like food and you've got accelerated benefits, or greater benefits for cost savings and you didn't change your comp guidance.

So is it fair to say you really change your earnings outlook in the back half just getting there differently?

We change it by about a penny.

We had the earnings outlook for the whole year changed by $0.04 and $0.03 was the upside in the second quarter, so we did change it by about a penny.

Got you, okay, thank you.

Your next question comes from the line of Jeff Bernstein with Barclays Capital.

Please proceed.

Great.

Thank you.

Just one clarification on your earlier comment and then a question.

In terms of the clarification, I know you aren't giving specific July comp trends and I don't know if you can give any color in terms of the sequential trends throughout Q2.

I know you've been highlighting the signs of consumer slowdown, but whether or not that means you have seen it or whether you've seen something throughout the quarter in terms of consumer habits or what not, just trying to gauge something perhaps within the quarter rather than in July and then I had a follow-up.

Sure.

I don't want to talk about specifics of month by month for the quarter.

We continue in the quarter to track very closely to our forecast.

So the months where we had expected softer comps because of holiday shifts or because of hard comparisons, well we got softer comps and those where we expected to have stronger comps we got stronger comps.

So we didn't see anything unusual in the quarter that was really strongly externally driven.

I think our comments about the environment are more macro in nature and not necessarily specific to our business and is part of just being cautious for the future I think.

If you're saying were our June comp store sales lower than what they were in May?

The answer to that is yes.

Did we expect them to be lower than they were in May and the answer to that is yes.

So there's nothing that happened in June that caused an alarm to go off that said our sales had slid a lot.

Understood, and then otherwise, just David I guess you made a comment on unit openings and hard to gauge specifics around 2011 just yet, but sounds like you're encouraged that there are more sites available.

Without specific numbers should we expect a meaningful acceleration from Q3 in 2010 given the better real estate market and the more sites available or might it be in that low single digit range?

Well I think on our last call we said that we were juggling about 12-15 sites, or 10-12 sites and that we didn't know how many of those would open in 2011 or 2012, but we're looking at many stages at quite a number of sites more than we did in 2010.

So I'd love to give you a number and I think when we get a little further along, we'll have that, but because we are in a number of lease negotiations right now, with some really very interesting sites.

Got it.

Thank you.

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

Please proceed.

Thank you.

Can you give us some color on price and average check?

It sounds like I jumped on and missed the first couple of minutes, sounds like you were talking a little bit about the bar or drinks.

I just was curious how the comp in the quarter looked as far as price, how much you had in there and then the average check.

Are you seeing still the incrementality from the small plates offering and then Doug, you made the comments about commodity costs.

I'm curious if you have any meaningful price implied in your comp assumptions and your COGS outlook in the back half of 2010, thank you.

Yes, with respect to the components of the comp store sale, so we're up 1.6%.

1.4% is traffic and price in the quarter was about another 1.4%.

So we didn't have 2.8% comps, so some of the price was a negative mix shift impacted our ability to get all of that price and we mentioned guests managing their checks by buying fewer beverages and that's primarily non-alcoholic beverages and really also trading down some around the menu, and I would look at the trading down.

There's at least a positive aspect of that.

The trading down is what we have allowed our guests to do as they navigate our menu.

We've provided them with options, if they want to order small plate and snack item and play a little less they can or if they want to order off the specials menu and get an item that might cost a couple dollars less than what something off the main menu would cost.

So they are doing some of that so some trading down, fewer beverage sales.

Alcoholic beverage sales, interestingly enough, are -- still continuing to be pretty stable.

It's really the non-alcoholic beverage sales.

And the second part of your question I forgot.

Price within your outlook for the commodity outlook that you made the reference to, as well as your comp guidance of the 0% to 1%, how much of that has implied the 1.4% price continuing through that?

Well, starting in the fourth quarter the pricing will actually -- that's in the menu is actually a little bit higher than that or it would be 1.6% because we're going to take a 1% price increase in August that is replacing a 0.8% price increase.

So there will be 1.6% of price in the menu and then the question is what will happen with our mix shift, and when you compare 1.6% pricing to a commodity cost outlook inflation of say 1%, we would expect cost of sales for the year to be about flat, and there won't be any leverage there because some of that check management that's going on with respect to non-alcoholic beverages is with high margin items.

So if there's less Coca Cola or ice tea being purchased, some of that will keep our cost of sales from being leveraged if you will by a greater menu price increase than the rate of inflation on commodities.

Okay, thank you.

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

Please proceed.

Thank you.

Just a quick follow-up to that question on, I guess the negative menu mix that you were seeing.

Do you anticipate that you may begin to anniversary some of the trade down consumers have been doing?

Can you give a sense of when you take this additional 1% of pricing with the Summer menu that some of that may stick more so than what happened in the second quarter?

It could.

I think I would say that first of all that the 1.2% negative menu mix in the quarter is roughly the average of what we've been running over the last say eight quarters.

So it's not unusually high and I think that it could improve and one of the things that I would point to in thinking that it could improve is that we're lapping pretty soon when we put the kids menu in.

So when we put the kids menu in last year, there was a lower beverage cost associated with the kids menu.

So when that laps around, that will probably help cause less pressure on the menu mix.

I don't know how big that is.

It's probably not really big, but that's one thing I could point to where we might see better menu mix.

Okay, thank you.

That's helpful and then you mentioned outside of the holiday shifts and some of the other items that you really haven't -- sales were tracking essentially in line with your expectations.

Is there anything you're seeing differently from maybe a day part mix or geographic trends wise that would stand out to you?

Dayparts, we're up on every daypart.

We're up more on dayparts probably that fell the most, for instance maybe the shoulder periods they fell off the most during the toughest of the economic times, so they're coming back a little stronger.

Geographically, we're still seeing very strong sales in Florida.

We remain solidly positive there.

Some operators are commenting about weakness in Texas, that's still very strongly positive for us.

California and the Southwest, we're slightly negative.

Those were the softest markets throughout the recession and those economies are probably a little less stabilized than some other markets.

While California is our softest market, it's only down 1%.

So if 1% is as bad as it gets that's not that bad, so the worst market we have is down 1%.

Great, and then lastly, just you mentioned some of the dairy pressure that you saw in the second quarter and expected in the third quarter.

Are you looking into 2011 at this point overall for commodities and do you have a read, or are you looking to lock in anything at this point?

It's a little early and we are looking to lock in where we can, but it's a little early to be able to get a lot of good pricing, because the further out you are from when the contract begins and ends, the more risk that has to be priced into what a vendor is willing to do for you.

So while we just had a meeting the other day with our purchasing folks and they're working very diligently on what next year looks like, I would say that, overall that we probably expect to see some overall pressure on commodities next year that's a little greater than the 0% to 1% that we're seeing this year, but again, it's pretty early.

Fair enough.

Thank you very much.

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

Please proceed.

Thank you.

I just wanted to ask how we should kind of look at what to expect with debt repayments and repurchases throughout the year.

Do you have really set goals for each of those or will it depend on share price levels and other factors?

Yes, we're going to allocate between $100 million and $125 million of capital to one or the other of those things this year and so far during the first two quarters of the year, we've used $60 million of that.

It's 30/30, $30 million for share repurchases and $30 million in debt reduction, and I think you're right.

Going forward, if you look at the third and fourth quarter if I were modeling it, I would put $25 million $30 million in each of the third and fourth quarter as either share repurchases or debt pay down and the proportion of which of those it would be has obviously something to do with the stock price because we have a 10 B5-1 plan in place and as you might suspect that plan says buy more stock when it's lower.

So to the extent that we repurchase more shares, we'll repay less debt, but we'll get done at least another $50 million $60 million worth of one or the other of those things throughout the rest of the year.

Okay, thank you.

Your next question comes from the line of Larry Miller with RBC.

Please proceed.

Yes, hi.

I had two quick questions.

One was just about comp store sales in general, and I guess historically you always had a difficult time growing comps because you were running close to capacity and the story used to be expect 1% to 2% comp store sales growth, but if I look back, it looks like you're off about maybe 8% or 10% from peak volumes.

So if you did see traffic come back, is there any reason we shouldn't -- there's a capacity not to grow comps in excess of the historical range?

I think that there definitely is the capacity to grow comps better than the historical range.

I'm not sure where the 8% to 10% -- my math would show we over a two and a half year period of time we lost almost 15% guest counts .

It wasn't check average because our check average actually increased every year during that period of time.

So we lost guest so we have the capacity to gain those 15% guests back if you accept the premise of what's been done before can be done again.

So we have the capacity in our units and if you just assume, say 1% or 1.5% type of guest count growth over the longer term and 1.5% to 2% pricing, you can easily conclude that if we get the menu mix and the customers managing their check down a little bit, we can get 3% comps or

Okay, that actually leads right to my second question which was how comfortable are you taking that 1% price increase given you're seeing that check management from the consumer?

It's an art and not a science, and we go through a very diligent process in determining that exactly what you're talking about, achieving the balance between what we need to have to protect our margins and what we think the guests will be able to accept, and I think it's working.

We've had guest count increases in each of the last two quarters.

So I think we're doing the right thing, but again it's an art and not a science and there's no way you really can tell until you do it, but we're comfortable obviously with what we're doing or we wouldn't have done it.

Okay, thanks.

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

Please proceed.

Thanks.

Just a question on the marketing.

You gave us a little bit of information about the timing of the spend this year and this quarter was a little bit lighter, next quarter was a little bit stronger.

If you could just tell us maybe like what some of the plans are for this quarter and then also does this influence your same-store sales growth on a quarterly basis?

Do you see the trends at the store in sales when you ramp up the spending and could this lead to some of the volatility quarter to quarter in same-store sales?

Part of the marketing spend is we didn't spend the money in the first quarter and we're spending a little bit more on the second quarter of what we would have spent in the first quarter and a little bit more in the third quarter.

So it's largely timing.

I would say for the year that we would expect our marketing spend as a percentage of sales to be about what it was last year, perhaps a tad bit higher, but pretty much about what it was last year.

And your other question was?

Basically can you see it in the weekly sales numbers that are coming in when you ramp up the spending?

Is it tangible to the results as it's spent?

Well, we see -- what we see is redemptions.

So largely what our -- just to remind you of what just what our overall marketing philosophy is, it's continuing to focus on really three things.

One, that we remain on brand and we don't do deep discounting.

That's number one.

Number two is focus on the guest engagement, in other words doing the Great Glamburger Challenge in the second quarter was a good indication of that and then creating positive publicity.

We've been on Entertainment Tonight, Jimmy Kimmel Live, we've recently a couple episodes of the Food Network Unwrapped show.

So I think our marketing folks have done a great job of getting a lot of positive publicity for us.

So those things are all hard to measure.

Sure, they all contribute to our sales gains, but when you have marketing activity in the second quarter of 2009 and then you have marketing activity in the second quarter of 2010 it's awfully hard to really compute what kind of impact it has.

That makes a lot of sense, thanks.

Your next question comes from the line of John Ivankoe with JPMorgan.

Please proceed.

Great, hi.

I'm sorry if I missed this.

I jumped on late like many.

Just if you could comment on guest satisfaction scores, especially as we kind of come into 2010 to the second wave of cost cuts, how those are trending and if you could give us just some specific things in terms of value or overall satisfaction or whatever factors that you think are the best leading indicator of your business is the first question.

And the second question is as the economy really started to slide, you did a great job of introducing small plates and snacks and at least I would assume that was one of the many factors that allowed you to outperform during a very difficult time.

Considering the economies not doing what many of us thought it would have done six to 12 months ago, does that influence your future menu strategy in the near term in terms of adding more traffic in a way that could be profitable like that initiative was.

Okay, I'll comment on guest satisfaction and then maybe David can talk about the menu a little bit, but our guest satisfaction scores remain high.

If you remember last year, we made progress every quarter with increasing our guest satisfaction scores compared to the previous quarter and during the whole year, our year-ended where we had guest satisfaction scores much higher than they were at the beginning of the year.

So we're really pleased with that.

Our expectation for this year is to maintain them or raise them a little bit over time and year-to-date, we're slightly better than we were last year.

So we have maintained our high level of guest satisfaction and even improved it just a little bit.

And with respect to the menu, menu innovation is one of our competitive advantages and we have a new menu coming out here in just a few weeks and David, do you have comments about the menu?

Well, I think that between small plates and snack on the special menu, there's 35 items.

That's as big as most restaurant menus all together.

So there's a lot of items there.

Those items change.

We just changed out four or five small plates and snacks.

We've added four or five special menu items with great value and great creativity.

So I think it's not that we need new menu categories as much as just keeping to make the things that we've already put on better, more exciting, new and fresh, beside making so many of the other items on our menu better.

Plus we've come out with some of the highest best selling cheesecakes in the history of our Company just in the last year.

So the new product development and creativity goes throughout the menu.

I don't know that we need another category per se, but the innovation goes on and I think people are responding to it.

Great.

Thank you.

Your next question comes from the line of Mitch Speiser with Buckingham Research.

Please proceed.

Great.

Thanks very much.

First on Grand Lux, the comp did slow a bit I guess from the first quarter.

Obviously a small base.

Can you discuss maybe what is going on there vis-a-vis the first quarter?

Sure, and you nailed it really with the small base because there's 13 restaurants in the group and that means that restaurants that are very heavily impacted by holiday shifts, for instance our Las Vegas restaurant and our Florida locations were very positively impacted by deposit of holiday shifts in the first quarter and were negatively impacted by the negative holiday shifts in the second quarter.

And because those restaurants makeup such a big percentage of the total sales for the Grand Lux concept, that's why you saw Grand Lux have a more dramatic change in comp store sales than you saw from Cheesecake factory.

Got it and on development and the pipeline that you mentioned, David, maybe 10-12 you're working on in 2011, can you tell us if any of those are the smaller store format?

Yes, right now the 8,500-foot is our favorite restaurant size.

As we've said in past calls, we've done so well with the Annapolis where we opened it, we thought we could do 8 million, it could do 10, it could probably do 11 million.

So to us, unless it's very very urban, potentially high grossing site, we're going to build more and more of those 8,500s because basically we're saving 15% to 20% on our investment and not limiting our sales potential.

So the answer is yes and we're looking forward to opening 7,000 or 7,200 one that will again go in when we think we could do 7 million, but we think they will be able to do eight or nine even saving more money now.

We're going to earmark, hopefully, one of the sites for 2011 with that smaller unit, but yes the 8,500 is our favorite but many of the sites we take they are coming in one size.

We don't build that many build to suits.

We're fitting in line.

We're taking space that's available and if it's 9,200 or 8,900 that's what we'll take because that's what's available if we like the site.

Thanks and my last question is on California.

I think California was comping positive the last couple quarters.

Can you confirm that and is that slowdown just generally with the macro that you're seeing or was there any other impact on California slowing if it did in fact slow?

Well, for all of last year, California was negative by about 3% to 4% and in the first quarter this year was very slightly positive meaning less than one half of a percent positive.

So it was minus 1%, so it did slip a little bit, I don't really have any further insights to that.

Okay, thank you.

Your next question comes from the line of Steve West with Stifel Nicolaus.

Please proceed.

Yes, hi, Matt [VanBled] on for Steve.

I guess my question would just be have you seen any impact in sort of the Southeast region of, I guess vacationers either shifting their location or just not coming?

Have you seen specifics whether it be on week to week or just certain locations in the area?

In the Southeast you said?

Yes, in the Gulf region.

Oh, the Gulf region.

No, Florida and the whole Southeast remains very strong for us.

So we're not noticing anything.

We don't have anything on the Gulf.

Birmingham is the only one in Alabama.

So none of the cities that have problems with their beaches are affecting us and Miami was strong.

Maybe some of those people went to Miami and that's why Miami and Florida were a little stronger, but they haven't negatively impacted us.

Okay, thanks.

Your next question comes from the line of Peter Saleh with Telsey Advisory Group.

Great, thanks.

Just wondering if you could give us an update on labor turnover today versus where it was at the peak, and then also if you could just tell us where the incremental savings, the incremental $2 million is coming from which line items?

Yes, the incremental savings is coming primarily on the labor line and it's coming I would say the majority of it, some of it in cost of sales, some of it in other operating expenses.

And from a retention standpoint or turnover standpoint, our statistics still remain very strong.

They have come off some from the peak.

We don't have the same retention rate maybe than we had a year ago, but still just immensely above what this industry normally sees from management in crew turnover.

So we aren't seeing a big turnover of people by any means.

Thanks.

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

Please proceed.

Thanks, I might have missed this, but can you give us a little bit of guidance in something that sometimes moves the needle here but looks like it's been contracting a little bit, the bakery revenue and the outside accounts?

I guess its been flat to down the last couple of quarters.

Curious if how we're doing as far as acquiring maybe new accounts and new velocity through the existing accounts, what could you discuss about that?

Sure, just continue to remind you and ourselves that the primary role of the bakery is to provide innovative and high quality research for our restaurant, but with that said we also have a second line of business which is to sell externally and there's not a huge long list of external customers.

We sell to a large amount to a few external customers.

So bakery revenues are pretty difficult to predict because they can have spikes or be down just by one customer deciding they are going to order a little bit less of something.

So they are difficult to predict and my expectation I guess for the bakery is that our salespeople in the bakery keep doing a very diligent job that they are doing of keeping in touch with these customers and coming up with new desert ideas like cupcakes and other things that are really helping move the needle.

This is a very competitive business that we're in, but we've made some good strides recently and they have not shown up necessarily on the comparative revenue line yet, and again, it's difficult to predict, but I think that we've got a solid plan for the bakery.

Okay, and just one last guidance question, if you can give us some insight into how we should look at what you view G&A like.

The last two years it's out paced square footage growth as you've halted basically expansion and your general administration costs have continued to grow though after years of it lagging the top line growth.

How should we look at you now as a Company with potentially slower top line growth and is there an ability to cut back some of the framework for development of a faster growth company that might still be embedded in the G&A line?

Okay, yes, sure.

I think that our expectation for 2010 is different than our expectation with respect to G&A moving forward.

For 2010, 2009 -- first of all, about 50% of what is in G&A is salary expense.

In 2009, we held back on a lot of things that we did in 2010 such as give raises to people, such as infrastructure improvements that we need to do from an IT perspective and other things like that.

So we're spending G&A dollars this year that are a big increase over 2009.

Going forward, I would expect over the next three to five year period of time that our growth in G&A would be less than what our revenue growth was.

So that if we do get small, and it won't be tremendous leverage on G&A, but we will expect to have some kind of G&A leverage.

As soon as 2011?

Possibly as soon as 2011, yes.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect and have a great day.