Cheesecake Factory Inc (CAKE) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen.

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

My name is Katie and I'll be your coordinator for today.

At this time, all participants will be in a listen-only mode.

We will be conducting a Q&A session towards the end of the conference.

(Operator Instructions)

I would like to now hand the call over to your host for today, Mr.

Matt Clark.

Over to you, sir.

Good afternoon.

And welcome to our third quarter fiscal 2010 earnings call.

I'm Matt Clark, Senior Vice President of Finance and Strategy.

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 fourth quarter and full year fiscal 2010, as well as our initial thoughts on 2011.

Following that we'll open the call to questions.

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

Thank you Matt.

We are very pleased to report another quarter of positive comparable sales at both The Cheesecake Factory and Grand Lux Cafe, our third in a row.

Our total comparable sales have been consistently strong and now stand at 2.4% year-to-date after recording a 2.8% increase during the third quarter.

With this performance, we clearly are capturing market share this year.

While there remains some uncertainty about the overall economy, we continue to focus on what we can control and have been very successful in moving our business forward, delivering significant and sustained sales increases, margin expansion and earnings per share growth.

Our better-than-expected comparable sales in the third quarter were once again driven by strong guest traffic gains, which increased 2.8% over the last year and year-to-date, our guest traffic is up 2.3%.

With growing traffic and sales leveraged against more efficient operations, we have delivered an increase in income from operations that is over 31% year-to-date, and margins that have expanded by 160 basis points compared to the first three quarters of 2009.

As we have done for over three decades, we consistently strive to surpass the expectations of our guests.

This has helped us maintain our industry-leading nearly $10 million in average unit volumes even in this environment.

Our ongoing high guest satisfaction scores and traffic increases are two indicators that we're doing much more than just meeting the needs of our guests and reflect the vitality of our concepts.

We successfully opened an 8,500 square-foot Cheesecake Factory restaurant in Bridgewater, New Jersey in August which was our final new restaurant opening for the year.

All of our new restaurants are performing well, exceeding both sales and returns expectations.

The recent openings are great examples of the high capital return investment opportunities we have in their high average unit volumes speak to the pent-up demand that exists for The Cheesecake Factory across the country.

With our growing pipeline of prime locations and consistent with our overall business plan, we currently expect to open as many as six to nine new locations in 2011.

We remain committed to pursuing all prime sites and expanding each of our brands.

We are confident that as we reaccelerate unit growth, we have the necessary depth and talent within the best-in-class operating teams to continue to effectively execute our highly differentiated brand.

Our expansion opportunities are not constrained in any way as we have a healthy balance sheet and we generate more than enough cash flow to fund all of our future plans.

With that, I'll turn the call over to Doug who will take you through our operating results and thoughts about fourth quarter 2010 and 2011.

Well, thank you David.

Total revenues at The Cheesecake Factory for the third quarter were $418.4 million compared to $400.6 million in the prior year third quarter, an increase of 4.4%.

Restaurant revenues reflect a 1.5% increase in total restaurant operating weeks due to the opening of three new restaurants during the trailing 15-month period, plus a 2.7% 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 2.9% and 1.4% at The Cheesecake Factory and Grand Lux Cafe, respectively.

As David mentioned, the key driver of our comparable sales increase was a significant gain in guest traffic which was 2.8%.

It is important to note that we were able to achieve this increase in traffic without the use of discounting, and hence our sales increases were at full margin.

In addition, we had 1.3% in pricing in our menu which was offset by mix trends that were similar to those we saw in the first part of the year.

Looking ahead, we will also have approximately 1.3% of menu pricing in the fourth quarter of this year as we implemented a nearly equivalent level of pricing to prior year within our summer menu change.

It is further noteworthy that our comparable sales trends were fairly steady throughout the third quarter, both month-to-month and geographically.

We believe this further speaks to the broad-based momentum we have in our business.

At the bakery, external sales were $15.3 million, up 9% versus the prior year.

Cost of sales increased to 24.4% of revenue for the third quarter of 2010 compared to 23.9% in the same quarter last year.

The 50 basis point increase was due primarily to pressure from dairy and cheese costs, as expected, partially mitigated by pricing leverage on other commodity costs and savings from our cost of sales initiatives.

Total labor was 32.8% of revenue for the third quarter, down 10 basis points from 32.9% in the prior year.

This decrease was primarily related to leverage from the positive comparable sales.

Other operating costs and expenses were 24.9% of revenues for the third quarter of 2010, down 60 basis points from 25.5% in the third quarter last year.

Savings from our cost management initiatives and comparable sales leverage, plus favorable experience related to our self-insured workers' compensation and general liability insurance plans contributed in this area.

Overall, our cost of sales initiatives -- our cost-saving initiatives, benefiting cost of sales, labor and other operating expenses were within the range of our expectations resulting in year-over-year savings of just under $1 million during the quarter.

G&A expenses were 5.7% of revenues in the third quarter, down about 30 basis points as compared to the third quarter of 2009.

And depreciation expense for the third quarter of 2010 was 4.3% of revenues, down 40 basis points versus the prior year period.

Both of these year-over-year improvements were driven by a leverage from our solid comparable sales growth.

Net interest expense continues to come down as we pare back our funded debt, and was $1.7 million, or 0.4% of sales in the third quarter of fiscal 2010.

This was made up of approximately $700,000 in deemed landlord financing, with the interest expense from the balance on our credit facility making up the remaining amount.

Our tax rate for the quarter was 25% as income tax expense was positively impacted by approximately $700,000, due to a favorable settlement with the IRS.

Absent the settlement, our tax rate would've been approximately 28%.

In total, operating margins in the third quarter of 2010 improved 70 basis points to 7.5% keeping us on track to measurably surpass our intermediate term goal of returning to 2007 operating margin levels.

We now not only expect to exceed that goal by the end of this year, by more than 40 basis points, but we will do so one year earlier than we originally anticipated.

In addition, we expanded our margins while simultaneously growing our guest counts and maintaining our high guest satisfaction ratings.

We believe this combination is one of the primary drivers enabling us to create meaningful and sustained increases in guest traffic, comparable restaurant sales, free cash flow and improved shareholder value.

During the third quarter, we repurchased approximately 900,000 shares of our common stock at a cost of $21.2 million.

Year-to-date, we have repurchased just over two million shares at a cost of $51.2 million.

We still have 5.8 million shares remaining in our current share repurchase authorization.

Our liquidity position continues to be solid with a cash balance of $59.8 million at quarter-end, compared to a debt balance of only $40 million, and as we further reduces the amount outstanding on our credit facility by $30 million in the third quarter.

Cash flow from operations for the first nine months of the year was approximately $110 million.

Net of roughly $29 million of cash used for capital expenditures, we generated about $81 million in free cash flow in the first three quarters of the year.

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

Now, I'll spend a few minutes on our outlook for the fourth quarter and full year 2010, as well as our current thoughts on fiscal 2011.

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 assumptions factor in everything we know as of today, which includes quarter-to-date trends, what we think will happen in the weeks ahead, known weather influences and the effect of any impact associated with holidays.

As has been our practice, we do not plan to give any more specifics on fourth quarter-to-date comparable sales trends on this call.

With that said, for the fourth quarter of 2010, we estimate diluted earnings per share between $0.33 and $0.36 based on an assumed range of comparable sales of between positive 1.5% and 3%.

This range of comparable sales is consistent with our performance so far this year while also taking into consideration the negative impact from certain fourth quarter holiday shifts of approximately 50 basis points, as well as taking into account our tougher comparisons to sales levels from the fourth quarter of last year.

Earnings per share estimates for the fourth quarter also include considerations for current commodity price trends for which we are not fully contracted.

For example, in the dairy category.

Note that we expect food cost inflation to be up between 1% and 1.5% this year.

For the full year 2010, we now estimate diluted earnings per share between $1.39 and $1.42 based on an assumed comparable sales range of between 2% and 2.5%.

This is an increase over our prior guidance in both sales and earnings and reflective of our strong third quarter results.

We expect our tax rate to be approximately 28% in both the fourth quarter and for the full year 2010 and our projection for capital spending in 2010 is now $40 million to $45 million.

We are also now projecting an increase in capital deployment toward debt reduction and share repurchase.

Our current estimate is for a total of $125 million to $150 million to be utilized towards these activities for the full year.

To sum up for 2010, we expect to see solidly positive comparable sales in each quarter and for the full year.

Our earnings per share range implies operating margins of approximately 7.7% to 7.8% in 2010.

The midpoint of our earnings per share sensitivity for the year reflects a strong 32% growth in earnings per share as compared to 2009, and our improved performance is enabling us to generate greater free cash flow and create additional shareholder value through increased capital allocation activities.

Here are a few key aspects with respect to 2011.

As David mentioned we plan to open as many as six to nine new restaurants.

Our total capital expenditures are expected to be between $70 million and $90 million.

We also plan to continue paying down our debt and repurchasing shares.

The combined amount expected to be used in these capital allocation activities is projected at over $100 million for the year.

For the full year 2011 we are currently estimating diluted earnings per share between $1.55 and $1.70, based on an assumed comparable sales range of between positive 1% and 3%.

This assumes our best estimate at this time -- this represents our best estimate at this time and incorporates everything we know as of today, and includes the fact that 2011 is a 53-week year for us, with the extra week falling in the fourth quarter.

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 Instructions) Your first question comes from the line of Jeffrey Bernstein from Barclays Capital.

Great.

Thank you very much.

Actually, two questions.

One just related to -- seems like there's a debate between margin and pricing with a lot of restaurants as we look to 2011.

I'm wondering if you could give us some thoughts on the commodity outlook specifically for 2011, which is what's already contracted at what percentage.

And then your thoughts in terms of the importance of maintaining the existing margin and perhaps taking price versus willing to forgo some price increase in order to not disrupt the fragile traffic improvement?

And then just separately on the six to nine units for 2011, if you can give some color on perhaps what size units we're talking about.

I know you have the bigger and the smaller box and then any limitations whether it be real estate or people that would prevent you from accelerating that?

Or what might have prevented further acceleration 2011 or what would prevent you from doing even more in 2012 and beyond?

Thank you.

Sure, sure.

Let's talk first about the commodity cost expectations for next year.

When we look at our commodity costs, we call it our commodity cost basket which is cost of sales, utilities and labor.

And across all three of those basket components, for each of those components we would expect to have commodity cost inflation of between 1.5% and 2%.

And with respect to the cost of sales piece, we feel very good about that estimate because most of our proteins for next year are already wrapped up and contracted for so we know what we're going to be paying for that, for those proteins which are a significant part of our cost of sales so that gives us confidence in that number.

With respect to the labor of commodity costs basket, we feel comfortable with that because we have been doing a great job in managing our average hourly rate.

We would expect it to go up some though next year as wage rates rise to keep top talent in place.

So I think I addressed what you asked there and maybe I'll let David talk about the six to nine new units.

Right.

Jeff, there's no real limit -- nothing limiting us in real estate.

These are the number of sites that we have ready in that we are comfortable reporting now.

In terms of 2012, there's nothing that's saying we can't do more than ten.

It's really just finding the prime sites, making sure they're great.

A lot of the mall owners have not really started to build yet and they really haven't started to remodel yet so you're dealing with a lot of sites that take a little longer whether they're on the street, they're there with smaller landlords, so on and so forth.

So they don't come quite as quickly as they used to but I believe they're out there.

We certainly have sites that we're looking at and lease negotiations with for 2012 and 2013 and even beyond so we feel pretty good about that.

But a number that we can give you to model is that six to nine right now.

That's not saying there couldn't be more.

Jeff I also believe you asked about pricing.

While not providing really any specifics at this point in time with respect to menu pricing details for 2011.

As you know, we take two menu price increases a year at The Cheesecake Factory brand in February/March timeframe and again in the August/September time frame.

And we don't want to fall behind on our pricing and our history has been that we're willing to take enough pricing to at least offset and cover commodity costs increases.

So that's what I would guide you to think at this point in time.

And do you know the breakdown of the six to nine between the different sizes?

There's -- I can't say, one at 8,500 square feet, there's a few 10,000 square feet.

I think there's going to be one that's 7,200 square feet, which we're happy to try that prototype out.

The rest are a mixture of between 8,500 square feet and 10,000 square feet.

But really it's going to be hard to model that because the 8,500 square feet can do $10 million and the 10,000 square feet can do more so I would just look at those as pretty much all the same.

Except for the one 7,200 square feet.

Very helpful.

Thank you.

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

Please proceed.

Thanks very much.

I'm curious about your overall margin -- EBIT margin expectations for next year?

It sounds like the rate of increase will slow, maybe even flattish.

How much of that is a result of reinvestment in infrastructure that you're going to make next year as you start to open units?

In other words do you expect to continue to or start to build or rebuild the bench managers for future openings that you may have depleted over the last couple of years?

So obviously, maybe some pre-opening.

And I'm not sure if you speak to the margins ex pre-opening or with pre-opening.

There's some pre-opening expenses.

Maybe if you could address that and also talk about if you've also just found more offsetting cost savings as you did this year to help margins along?

Sure.

Our expectation for next year on margins is that they improve.

So we have improvement.

There's, I believe in the guidance that we've given, there's -- take the midpoint of the range somewhere between 30 basis points or 40 basis points of margin improvement that's in there and that's after pre-opening costs which we would expect would be a little bit higher next year obviously with six to nine new units opening.

So it might be -- it's even greater than that it seems.

We're going to -- those margin improvements are going to come primarily from where they came from in the third quarter and will come from in the fourth quarter which is from assumed increases in comparable store sales.

So if you take the midpoint of our range of comparable sales for next year of 1% to 3% and just assume 2%, we'll get enough leverage from that 2% to generate somewhere around in the midpoint of that range, maybe 30 basis points or 40 basis points of margin improvement.

Now with that said, we're still going to be entering next year and not factored into our numbers is any kind of additional cost savings initiatives that we might be able to find and implement.

We have implemented big cost savings initiatives as you know and over 2009 and 2010, there's not as much left there but there is something and we will find some other things where we can save some money while at the same time still accomplishing our primary objective which is to drive guest traffic.

Thank you.

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

Please proceed.

Thank you.

I wanted to ask on trends of the consumers coming in, how -- are they still remaining stable on bar sales?

I think you said last quarter that, that was stable, not up or down and then also the non-alcoholic sales, an iced tea or soft drink or something at lunch.

Also just to throw the other one in and then I'll let you go.

Does that translate also to -- how are, how's business coming on business spend and any private parties that may book?

Okay, on alcoholic beverage sales, they continue to be stable so that's holding true.

They're actually -- our sales dollars were positive this quarter and our incident rates were slightly positive so I'll call it beverage sales are hanging right in there.

With -- as you mentioned, guests had been managing their checks, some with respect to non-alcoholic beverages and incident rates, with respect to non-alcoholic beverages are lower.

However, in the third quarter we did see some very positive news which was some sequential stabilization in non-alcoholic beverage incident rates.

So if that trend of stabilization continues, we would expect to begin to capture more of our menu price increases as that stabilization of those lapse around and therefore, no longer having negative year-over-year comparisons.

With respect to business spending --

We really -- we don't take reservations and we don't do any large private parties.

So it would be hard for us to comment on that.

Again, our guest traffic is up.

Our sales are up and we don't compartmentalize it that way.

Okay, thank you.

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

Please proceed.

Doug, as we -- as I look at the third quarter and the labor expense specifically, it seemed like you didn't get quite as much leverage in the third quarter as what you'd gotten in prior quarters despite a pretty good comp.

Was there anything unusual that was limiting maybe as much sales leverage as what you'd experienced recently?

We probably got a little more sales leverage from our cost savings initiatives than from our positive comparable sales and the leverage there than what's showing up on that line.

The one thing that we did have this quarter is the bakery incurred some expenses, primarily related to labor.

It was unplanned overtime, which was they used to ramp up production to accommodate some big orders that they received that weren't anticipated and that were last-minute in nature.

The good news though is that external bakery sales, as we talked about, were up 9% in the third quarter and we would anticipate fourth quarter bakery sales year-over-year to be up as well.

So I think that's what pulled it down just a little bit more.

Okay, so it doesn't sound like we should see that going forward and then as another follow-up, I just wanted to see if you could quantify what the extra week in 2011 might be worth?

About 2%.

If you take the earnings per share range that we gave, about 2% of that, I think would amount to about $0.03 a share.

And then the sustainability or the -- in terms of those costs going forward around the bakery, that overtime should lessen.

It should lessen, yes.

Great, thanks.

Your next question comes from the line of Jonathan Komp from Baird.

Please proceed.

Hi, thanks.

This is Jon Komp calling in for David.

Just a quick question.

Thinking about the marketing plan for the next quarter for Q4.

I know last year you called out a shift towards focusing more on gift card-related promotions during the holiday season.

And I'm wondering if you can just give more color on if you're planning something similar this year or if you're expecting the focus to be meaningfully different than what you did in the past.

It's going to be a little bit different.

But a little bit the same.

Let me explain that.

Last year, we had our promotion was a complimentary slice of cheesecake really with every $25 gift card purchase and that was a very successful promotion for us.

So we sold a lot of gift cards that were redeemed in the first quarter, if you remember the impact on the first quarter sales.

So we're going to be doing something similar to that.

However, this year we're going to be making that offering available online.

We're planning to expand our digital footprint by launching a virtual e-card -- e-gift card program and guests will be able to buy their gift card online and receive their complimentary slice of cheesecake online and either print out that gift card immediately or send it to someone, so it'll be much more virtual than it has been in the past.

We think that should help stimulate and drive some more sales of those items.

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

Please proceed.

Thanks very much.

On the gross margin for 2011, can you give us a sense of what you're modeling in there?

I would assume there's probably at least 1.5% pricing you're taking and just to get a sense of -- you're saying 30 to 40 basis points of ebit margin expansion, if that reflects gross margins up or down.

And if I could maybe just slip another one in there.

Just on what metrics you look at to gauge the health of your customer?

Is it anything to do with retail mall traffic or is it just general macro numbers that we all look at?

Thanks.

I would look at the margins for next year, the gross margins being the midpoint of the range being relatively flat.

Then with the margin expansion coming primarily from more fixed type of items like depreciation, G&A to some extent, with a little bit of both going the other way with respect to pre-opening costs.

And then the way that we gauge our customers -- I don't remember what he said.

Can you repeat that part of it again?

Sorry, can you hear me?

Yes.

I was just trying to get a sense of how you gauge the health of your customer base?

Any particular metrics that you look at as you look at the fourth quarter, what you don't know about the fourth quarter and how your consumer is holding up in this environment?

I think our consumer is holding up really well because we've had the 2.8% guest count increases.

We have 2.8% more people coming into our restaurant in the third quarter, and had some momentum coming out of the third quarter.

And despite that, we're willing to say that for the fourth quarter, we would expect comp store sales gains of between 1.5% and 3% in an environment even where we have this negative holiday shift and a hard comparison going on so we're very confident.

If you look at department stores, the stock market, sales of luxury goods, those are all things that bode well for us.

Great, thanks.

You're welcome.

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

Please proceed.

Thank you.

Doug, I'm sorry.

I jumped on late.

If you could just go back and if you've mentioned this already on the price, what you had in the quarter and what might be embedded in that guidance in the fourth quarter to be sustained.

And then, David, I had a question with respect to the six to nine opening.

Also, I'm sorry if you already specified this but are -- should we assume that they're all cheesecakes or are we ready to see RockSugar may be find a second or third store, start to look at those locations?

Let me talk about pricing first.

The -- in the third quarter, we had about 1.4% of price in the menu, and I mean in the third quarter.

Entering the fourth quarter we have about 1.3% of menu pricing in because we took a menu price increase in the summer of about 0.7% which was replacing a price increase that we were lapping of 0.8%.

So we took roughly the same amount of price so basically the amount of pricing we have in our menu in the third -- in the fourth quarter is going to be about the same as it was in the third.

Okay.

And then the stores?

They are all cheesecake factories.

We have one 7,200 square-foot test model for Cheesecake and we have one new Grand Lux iteration that we're doing.

So that's what we'll have for next year.

How many of -- what percent of both stores are going to be in new markets versus existing markets?

There's not a lot of new markets for us.

We're pretty much everywhere but -- so they're all a mix of markets that we're in.

There's some new cities but in states that we have seven or eight other stores.

Okay.

And then I guess what is your first primary use of your cash?

Would you think this is an opportunity maybe to take advantage of building out the pipeline for greater growth in years ahead or maybe making acquisitions of some lesser brands that have some nice real estate but you could just put your better format in there?

Our number one use of cash is always going to be the organic growth of our three bands.

So while we're saying six to nine for next year, we're pursuing all A locations that meet our criteria and so that would be the number one use of our cash.

Acquisitions are something that are down the list somewhere.

We would certainly do for next year if you look at our capital allocation, we'll have over $100 million of free cash flow after the six to nine new restaurants.

And we will use that to pay back debt and to repurchase shares and I would expect that our -- by the end of the first quarter, our debt would be paid down to zero.

So a dividend would be not in consideration?

Well, right now I think I would say we're keeping our powder and our options open with respect to dividends for now.

We're not ruling out anything in the future with respect to the possibility, certainly of paying a dividend but in the next few quarters, we think we have other excellent capital allocation alternatives to pursue which should provide good value.

Understood.

Thank you very much.

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

Please proceed.

Yes, hi.

I'm Matt (inaudible) for Steve.

One follow-up to the sales mix figures that you gave earlier.

I was wondering if you could comment a little on dessert incidents and maybe trends you're seeing there as well as if there's been any change in the incidents or amounts of average check on the small plates and snacks when those are included in an order?

We're not going to break out the small plates and snacks anymore with respect to the amount that are ordered there or the check average related to them.

But with respect to dessert sales we still have a positive incident rate so we're selling more desserts this year than we did last year.

Okay.

And then one follow-up as well.

On the six to nine units, could you give any color on when in the year you're expecting those to open and maybe what the risks to coming in near the six or the potential of actually going over the nine, just how that breaks out?

I wouldn't comment on that second question but I will tell you on the first question, we'll open one of those during the first quarter and probably the rest of them evenly split somewhere between the third and the fourth quarters.

So it's back-end loaded.

Okay thank you.

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

Please proceed.

Thanks.

I just wanted to follow up a little bit higher-level question.

You mentioned before how historically, you'd price sufficient to offset the cost inflation and if you look at the COGS line item, historically, in going back to when you would break out bakery and restaurant costs, you're still floating near historical lows.

And actually when you take out the bakery cost, which is a higher COG and you compare it to the peer group, you have one of the lowest COGS out there.

So low compared to history and low compared to the peers, is there a point at which the COGS really just structurally can't go any lower?

Do you think about that or is there a point where the value proposition of the food becomes impaired?

As you think about pricing going forward in that context, how does that come into play?

Well, I think that we have shown that what our number one priority is increasing guest traffic and in order to do that, you have to be very careful about what price increases you take so we have been steady with our price increases but not really taking great price increases.

We have taken enough to offset inflation and maybe over time, cost of sales have fallen some because of just the mix of items being ordered.

But we would look first at being able to make sure that we can sustain same-store sales growth over the long term and be very careful about the balance between pricing and margins.

Do you have any other comments about that, David?

No, I think that's exactly right.

Thanks.

At this time, we have time for only two more questions.

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

Please proceed.

Good afternoon.

How much testing have you done for that virtual cheesecake promotion?

Taste testing, the virtual versus the real?

No, I didn't say that very well.

That was good.

The paper cheesecakes?

They're excellent.

A question on -- just a couple of clarifications on the 2011 guidance.

Does it assume any share repo or is the guidance before any share repo?

It assumes share repo.

It assumes allocation of around $100 million worth of capital to either debt repayment or share repo so depending on what's paid off in the fourth quarter, the remainder of debt will be paid down in the first quarter.

And are you locked at all?

You said you are locked on proteins.

What's the dairy status for 2011?

That's not something you can really lock on very well.

So we're not locked on that now and we're not for 2011.

Right.

And your assumption embedded in the guidance is low single digit, dairy?

Well, we're not going to comment on every item within the cost of sales guidance but I would say that we would expect our commodity basket with respect to cost of sales to be up 1.5% to 2% and some of those protein things are down, some of them are flat.

Other things that we know about are going to be up or down and then dairy we have an increase in but I don't want to go through each and every one.

Sure, okay.

Actually, the protein commentary is very helpful.

Thanks.

And finally, you talked about the dividend question, a couple questions ago, but just a follow-up to that as well.

Should we see the pending confiscatory tax regime on dividends be successfully dealt with, would that be a circumstance that you would factor into your thinking about dividends?

Maybe very peripherally.

I think the way we would look at it is what dividend can we pay that would be meaningful and that we could sustain for a long period of time and increase over time and taxes are taxes.

That's not a big consideration.

All right, very helpful.

Thank you.

You're welcome.

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

Please proceed.

Thank you.

David, I just wanted to clarify on the development I think you said there would be one Grand Lux next year and also if that's the case, did you say it would be a new test model through (inaudible).

As we've been saying, we're bringing the size down to the 8,300 square feet or so that we found so helpful at Cheesecake Factory.

We've worked on the interior of the store a bit.

We brought the decor down so it was a little more casual and people didn't feel it was such a special occasion and in fact, there's a menu roll-out that's happening in a couple of weeks that has a lot of new things on it.

We're really looking forward to opening next year's Grand Lux and hopefully, it'll be right in line with having Grand Lux be a continued growth vehicle for us.

Okay.

And then on the timing of that would that be the one in the first quarter or one of the ones in the back half?

It's one that will be either third or fourth.

Thank you.

Okay, well thank you very much, everyone.

Ladies and gentlemen, thank you for your participation in today's conference call.

You may now disconnect.

Have a wonderful day.