Cheesecake Factory Inc (CAKE) 2010 Q4 法說會逐字稿

Good day, ladies and gentleman, and welcome to the fourth-quarter 2010 The Cheesecake Factory earnings conference call.

My name is Cathy, and I will be your operator for today.

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

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

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

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

Jill Peters.

Please proceed.

Thank you.

Good afternoon, and welcome to our fourth-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 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 only as of today's date.

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 first-quarter and full-year 2011.

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

Now, I'll turn the call over to David.

Thank you, Jill.

We're very pleased to report another quarter of positive comparable sales.

Our business was pretty stable throughout the quarter, excluding the weather and holiday shift, and we saw strength in key markets, such as Texas, the Midwest, Florida and Southeast.

Comparable sales performance in the fourth quarter contributed to full-year comparable sales of 2%, the best it's been in six years.

We're clearly capturing market share and doing so on the strength of our concept, food, and service.

In addition, the bakery had substantially higher sales in the fourth quarter.

Customers responded well to new products as we continue to introduce innovative desserts to them.

With average unit volumes of nearly $10 million and guest counts of over 75 million at The Cheesecake Factory last year, we maintain our best-in-class position in casual dining.

This helped us deliver a healthy 130 basis point increase in operating margins last year, which led to over 30% earnings per share growth in 2010.

In addition, we now have zero debt on our balance sheet, a more favorable credit facility in place and a solid cash balance of over $80 million.

We're in an exceptionally strong position for 2011 and beyond.

We opened our first new restaurant of the year a few days ago in Houston.

It's one of our 8,000 square foot formats, and the first of as many as 6 to 9 new restaurants that we plan to open this year.

In addition to domestic growth, we recently announced our initial expansion plans outside of the US.

We signed the license agreement with a Kuwaiti company to open 22 Cheesecake Factory restaurants in 5 countries in the Middle East over the next 5 years.

This is the first step in our global development strategy.

We're evaluating other markets, being extremely selective about our partners, focusing on excellent operating companies with expertise in multiple countries.

International growth provides one more way for us to enhance our future earnings potential and continue building shareholder value.

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

Thank you, David.

Total revenues at The Cheesecake Factory for the fourth quarter increased 4% to $417 million compared to $401 million in the prior-year fourth quarter.

Restaurant revenues reflect a 1.9% increase in total restaurant operating weeks due to the opening of 3 new restaurants during the trailing 15-month period, plus a 0.8% increase in average weekly sales.

Overall, comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurant increased 2.1% for the quarter after excluding the impact from snowstorms in the Northeast and rain in California.

In addition, the holiday shift had a small impact on comparable sales.

An increase in guest traffic once again drove the improvement in our comparable sales, but it's important to note that our average ticket improved as well, to the best it's been in 3 quarters.

We are implementing a 0.7% menu price increase in our winter 2011 menu change, lapping a 0.6% increase from the winter of 2010.

As a result, we'll have 1.4% in pricing by the end of the first quarter of this year.

At the bakery, external sales were $31.9 million, up 22% versus the prior year, as David referenced earlier.

Cost of sales increased to 26.3% for the fourth quarter of 2010 compared to 25.3% in the same quarter last year.

This increase was due primarily to the higher bakery sales as well as continued pressure from both restaurant and bakery dairy costs as expected.

Favorability from produce and general grocery costs offset some of the increases.

Our cost of sales as a percentage of revenue for the full year was approximately flat, in line with our expectations.

Labor was 30.8% of revenue for the fourth quarter, down 120 basis points from 32% in the prior year.

This decrease was primarily related to lower equity compensation as well as a benefit from the Federal HIRE Act, which resulted in lower employer FICA costs, and to continued management of restaurant labor costs.

Other operating costs and expenses were 25.1% of revenues for the fourth quarter of 2010, up from 24.8% in the fourth quarter of last year.

Although insurance expense in the fourth quarter of this year was consistent with what we experienced in the first 3 quarters of the year, we had an unusually low expense in the fourth quarter of last year impacting the comparison.

G&A expenses were 5.9% of revenues in the fourth quarter, down 60 basis points as compared to the fourth quarter of 2009.

The decrease came about due to lower bonus accruals in the fourth quarter of this year relative to the prior-year period, and depreciation expense for the fourth quarter of 2010 was 4.3% of revenues, down versus 4.8% in the prior-year period.

The favorability stem from positive comparable sales leverage as well as the impairment charge we recorded in the fourth quarter of 2009.

Net interest expense was $1.5 million in the fourth quarter of 2010, down significantly from $5.4 million in the fourth quarter of last year.

Last year's net interest expense included $2.2 million to unwind an interest rate collar as well as interest expense on a higher average debt balance.

Our tax rate for the quarter was 23.8%, better than we expected, due primarily to a higher manufacturing tax deduction on the significant increase in the production of bakery products in the fourth quarter.

In total, operating margins in the fourth quarter of 2010 improved 90 basis points to 7.4%, helping us to achieve the best full-year operating margin that we've had in 3 years at 7.7%.

Ultimately, our goal is to return operating margins to peak levels.

We made significant progress toward this objective in 2010, and this was done while we increased our guest count and maintained high guest satisfaction scores.

This is exactly what we set out to do, take market share, and provide a great guest experience to encourage repeat visits.

During the fourth quarter, we repurchased just over 35,000 shares at an approximate cost of $934,000.

During 2010, we repurchased about 2.1 million shares, returning over $50 million (sic - see press release) in cash to shareholders.

Our liquidity position is as strong as it's ever been, with a cash balance of about $82 million and no bank debt.

We repaid the $40 million outstanding on our former credit facility in the fourth quarter, and entered into a new $200 million revolving credit facility with more favorable terms and additional financial flexibility.

Cash flow from operations for the year was approximately $165 million, net of roughly $42 million of cash used for capital expenditures.

We generated about $123 million in free cash flow during the year, which we used to pay off $100 million in debt in addition to returning a substantial portion of our cash to shareholders through share repurchases, as I mentioned earlier.

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

Now, I'll spend a few minutes on our 2011 outlook.

As we have done in the past, we continue to provide our best estimates for earnings per share ranges based on realistic comparable sales assumptions.

These 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 impacts associated with holidays.

2011 is a 53-week year for us, with the extra week following in the fourth quarter.

Our assumptions for the full year reflect this.

We are maintaining our estimate for full year 2011 diluted earnings per share at between $1.55 and $1.70 in spite of about $0.05 in higher cost of sales now expected this year than what we anticipated when we provided our initial 2011 outlook in October.

We were able to absorb this pressure by actively managing our cost structure, including ongoing improvements in labor productivity and tight G&A controls .

Our earnings estimate for the full year is based on an assumed comparable sales range of between 1% and 3%, which reflects both guest traffic and average check growth.

Our business remains strong and stable continuing the trend from last year.

For the first quarter of 2011, we estimate diluted earnings per share of between $0.29 and $0.33.

We expect year-over-year food cost pressures to be significantly heavier in the first and second quarters of 2011, and then to moderate on a comparative basis in the fourth quarter.

Our earnings per share estimate for the quarter is based on an assumed range of comparable sales between flat and 2%.

This sales range for the quarter is consistent with our full-year comparable sales assumption of 1% to 3%, after taking into account the record snowstorms in the Northeast and the recent storms in the Midwest impacting the first quarter.

We expect our tax rate to be between 28% and 29% for both the first quarter and full-year 2011.

Our projection for capital spending in 2011 remains at $70 million to $90 million in support of our planned 6 to 9 new restaurant openings in 2011 as well as expected early 2012 openings.

We are targeting at least $100 million of our free cash flow toward share repurchases in 2011 which will support earnings per share growth.

Some of these are expected to be repurchased in the open market, and the remainder will be purchased under a 10b5-1 plan that was approved by our Board yesterday.

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 re-queue with any additional

(Operator Instructions) Jeffrey Bernstein, Barclays Capital.

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

In terms of the question, I know commodity costs were a little bit more onerous this quarter than they have been, and it sounds like at least in the first half of '11 that is going to continue.

I'm just wondering whether you can give some color on perhaps what percentage of your goods are locked for the full year '11, and at what year-over-year levels those are at.

And for whatever is not necessarily locked, what type of assumption are you are making for that floating portion.

And then just the follow-up or clarification relates to, on that commodity front, when you think about the pricing versus margins, I know you said you've got a 1%, close to 1.5% pricing, but can you just talk about the desire the maintain or grow the margin in '11 through price, or whether you'd opt for perhaps less pricing in an effort to sustain the traffic?

Sure.

First of all, with respect to what we have under contract, we currently have around 60% of our food items under contract, and virtually all of our proteins are under contract.

Based on our forecast for the entire year, taking into account non-contracted items and contracted items with estimating and forecasting the non-contracted items, we would expect food cost inflation currently to be at 3% for us for the year.

With that falling a lot heavier, as we said, in the first half of the year, with 4% in the first half of the year and around 2% in the second half of the year.

So, you would see more food cost inflation in addition to being in the first quarter, you will see some more food cost inflation in the second quarter.

By the fourth quarter though, we expect some of these costs to abate that are not under contract, and also, we're expecting to have a lap a lot of very high dairy costs from 2010.

So, with respect to the commodities that we're seeing or expecting to come down in the second half of the year, the primary ones that are not contracted for are dairy, fresh fish and some of our cheese.

With respect to pricing, let me say this, as we stated, we have 1.4% of pricing in our menu right now.

If cost of sales pressures were to worsen from here, we have the ability and we have the willingness to be more aggressive with menu pricing when our August menu price change comes around.

We believe we have pricing power.

The question would be, when would be the best time to use that power in a more significant way, and we've done I think a very good job in the past of balancing cost pressures with what with what guest traffic would bear, but we are looking to improve our margins in 2011despite the cost of sales pressure.

So we've been willing to take steps in the past to protect our margins, including taking pricing and we would be willing to consider that for the August menu change.

As the year goes along, I would say we'll be in a better position to consider bigger menu price increases, but I think that in this area, we would rather be a follower than a leader, and to take menu pricing once we're seeing others do more of it, and once it's noticed more by the consumer in the supermarket and other places where they buy food.

Great.

Thank you very much.

John Glass, Morgan Stanley.

Doug, on the labor line, could you first quantify some of those one-time things you identified to get down to what the underlying labor rate was, or percentage, and if it's really changing?

And you talked about some of the savings I think in labor on an ongoing basis.

What are those?

And is it meaning that labor falls, or are these just anti-inflationary measures such that you can keep labor at current percentage of sales rates in 2011?

Sure.

With respect to the 120 basis points of a decrease in labor, about 90 bp to 100 bp was due to what I'll call some one-time things.

The HIRE Act, which is the FICA tax holiday that allowed us to not pay FICA tax for workers that we had hired that had previously been employed, and lower equity compensation.

We had an increase, or a change in our forfeiture rate, but about 30 basis points or so, was due to us managing our labor rates.

We are doing a good job, I believe, of managing labor.

In fact, labor productivity, which we measure by sales and guests per labor hour was pretty steady with last year, and we continue to hold the line on the average hourly rate.

So we made some pretty good progress, and we have got some sales leverage, even from a very small increase in comparable store sales in the quarter on the labor line.

Looking forward to 2011 and what kind of additional savings we can have on the labor line, I think the magnitude of that is going to depend obviously on what comp store sales are.

At the higher end of our range, we should be able to sustain some improvement in the labor line.

At the lower end, it's going to be a little more challenging.

While total labor for 2011 might look, on a comparative basis, like it's not a significant improvement over 2010, we are expecting to offset a lot of expected pressures on the labor line such as from health insurance, such as from minimum wage increases in the state of New York, New Labor regulations in places like New York, and in addition, we're going to be lapping around the HIRE Act and the lower equity compensation that I talked about earlier.

We've enjoyed the benefit of those in the fourth quarter this year.

So, on a comparative basis next year, there would be less of a comparative benefit.

Brad Ludington, Keybanc Capital Markets.

Thank you.

Doug, I think you all said on the last conference call that it would not be as significant as what we've seen, but you would probably have some new cost savings initiatives lined up for 2011.

Can you comment on whether you've identified any, and maybe what those are?

Sure.

We're in the process of developing between $3 million and $5 million in additional cost management initiatives that we hope we'll be able to realize in the second half of the year for sure, but perhaps before that.

A number of these initiatives have been identified, and you could look at this $3 million to $5 million as representing really potential upside to our annual earnings per share guidance, or you could choose to look at them as a hedge.

Our guidance assumes that our food costs are going to moderate on certain items, as I mentioned, in the second half of the year based on projections for non-contracted items.

But the commodity market is very dynamic.

So, we are going to identify an additional $3 million to $5 million in additional cost savings that will happen, but -- what do you call it upside, or earnings guidance or a hedge against what cost of sales may do in the second half of the year is up to you.

And just briefly, it's not in the guidance, can you say what line item those savings would impact if they do come through?

They would be mainly on the other operating expense and the labor line items.

Destin Tompkins, Morgan Keegan.

First of all, I just wanted to follow up on the commodity question.

I heard another restaurant company express some concern over produce in the near term, and I just wondered, is that something you're seeing near term or in the first half of the year?

Is that part of that higher pressure, or more food inflation you're seeing in the first half?

Probably some of that is.

We are able to contract some of our produce, so we do have some of our produce under contract, more than half.

So, that's maybe mitigating that sum.

The good news about produce and a produce top crop and what hazards that happen to that if they can be grown rather quickly.

So, it's more of a short-term issue.

And then just in terms of the top line, can you just update us on some marketing initiatives or new menu plans you may have in place for 2011?

Sure.

With respect to the menu, we, I think, are one of the best innovators of menus in the casual dining business, if not the best.

And we continue to innovate across our menu, including our bar menu as we always do, and the menu changes coming out in February and March includes some changes this winter, in addition a 0.7% increase.

We're committed not to give any of our new menu ideas out until the menu comes out.

So, we wouldn't go into specifics.

There was an article in USA Today about skinny drinks, which have certain of our best-selling cocktails available at 150 calories or less.

We've had a lot of press on that, but other than that, you'll just have to wait until the menu comes out.

So, no further comments about the menu items, but with respect to marketing, the sales drivers in the first quarter really is a redemption of the Slice of Joy cards that were distributed in the fourth quarter.

And if you'll remember, for every $25 gift card purchase, whether it be in-store or online through the new e-gift program, for every $25 gift card purchased, there was a Slice of Joy card given that was redeemable in the first quarter for a cheesecake, a slice of cheesecake in our restaurants.

So, that will be a sales driver in the first quarter.

We're also involved in the first quarter with a social media guest engagement driver associated with Facebook program that's tied with Valentine's Day that's going on right now.

But in marketing, as you know, our primary focus is in gaining publicity and increasing guest engagement with us with many ways, but social media is one of the big ways, and we've significantly increased our number of Facebook fans and opt-in e-mails over the last year.

So, we've been successful with that, and our objective is to continue to utilize those mediums.

Great.

And then just lastly, you mentioned weather impact in the fourth quarter.

With what you've seen so far in the first quarter, I don't know if I missed it, but did you comment on any weather impact in the first quarter to date?

I did.

We would say, in the first quarter, if you look at it as the net weather impact because there are a couple of days that are few and far between where there's actually a positive comparison because last year had bad weather.

But the net weather impact for the first quarter is right around 1%.

Keith Siegner, Credit Suisse.

A quick question on the bakery.

Maybe I ask this question a lot, but it actually has a big impact on a number of different line items that we talked about today from COGS all the way down to tax rate.

So, given the strength in sales of bakery, given that butter prices have moved so dramatically, I was wondering if you could talk a little bit about what your expectations are for bakery, what your thoughts are about pricing for bakery against high butter prices, or where your contract is on butter?

I just ask since the cost items are all bucketed together.

I'm trying to get an understanding of how we should try to think about influences on those various cost line items, including taxes, given a particular outlook for bakery.

Yes.

Let's talk first about the sales side for bakery.

Obviously, the fourth quarter was very good, and fourth quarter is typically the bakery's highest sales quarter.

It was again, and they exceeded a high sales quarter by 22%, and as David mentioned, we saw a really good response to the product development that we've done in the bakery.

Looking forward to 2011, we expect to see some of this momentum continue from a sales standpoint in the bakery; however, with that said, the bakery sales, we don't really think are going to represent more than 5% of our overall sales, which is what they have been for many years, so not a huge impact on the total.

But you're exactly right that the bakery does impact a number of line items.

It's interesting how really a penny or two if you count that taxes there were a couple of pennies worth of bakery influence in this quarter if you count the production deduction that we get at the bakery.

When looking at cost, bakery is -- looking at those, similar to the way the restaurants are.

If we need to take pricing, we're going to take pricing.

We can perhaps be, in a way more aggressive with pricing in the bakery, and in a way not more aggressive with the pricing in the bakery.

Bakery sales are very dependent on a few customers.

So, we have to be very cognizant of that, but generally, in the long run, we're certainly going to price our bakery products so that we don't deteriorate our cost of sales at the bakery.

With that said, with higher bakery sales, they do generate higher cost of sales for the Company overall.

Does the manufacturing tax deduction that benefited you in the fourth quarter, does that linger into 2011?

It will if bakery sales, if bakery production, it's not really bakery sales but they are linked.

If bakery production is higher than what it was in the previous year, it would be helpful.

Okay.

One last question for me, and this one is a little bit more strategic.

We know what the unit growth targets are for 2011.

We know it's all Cheesecake Factory.

We haven't heard about RockSugar in a while.

And for Grand Lux, you've talked about how you might get back to some growth there in the future, but at this point, is this effectively a one-concept chain?

Would you like to have more concepts?

Would you think about acquiring a new concept that you could put some capital behind given how much free cash flow you have, or do you really think about this as a one-concept company, primarily?

No.

As we've said, we're hoping to get a new smaller-size Grand Lux open.

We're hoping to do that this year.

We'll see if that makes it this year, but we have a lot of changes there and a lot of plans.

We want to make sure we're revitalizing Grand Lux for the right-size markets and the volume that it's doing.

So, we're hopeful.

Obviously, if we did not have that, then that's something we might want to consider.

Remember, we think we can double the size of our Company just on Cheesecake Factory alone.

RockSugar, we will do another RockSugar, but with all of our work on Grand Lux, and the economy and so on and forth, we're just taking our time owning and perfecting RockSugar.

We will grow it, but we're not in a rush.

So, I think you should think of us as we are today, but certainly down the line M&A is something that could happen, but we're putting our energies into Grand Lux.

Thank you very much.

Mitch Speiser, Buckingham Research.

A few questions.

First, can you give us an update on the 2 smaller-sized formats that are open, how those sales trends are going versus your expectations?

Sure.

We have 3, actually a fourth just opened recently, in fact, 3 days ago or whatever Monday was.

In Houston, we just opened in Memorial City, and that was an 8,000 square-foot format.

So, out of the 3 that have opened so far, obviously way too early to talk about the Houston restaurant, we've been very pleased with the results, and the returns on investment that we're getting because we invested significantly less capital in those restaurants, but they're still carrying the same kind of sales volume and sales volume potential as the bigger ones, which bodes very well for return on investments.

So, that's one of the reasons we're very optimistic about being able to double our footprint with The Cheesecake Factory.

It's because these smaller footprint restaurants will be able to go in more locations than the bigger.

Got it.

And Doug, on the first quarter guidance, which I believe is flat to down earnings on a year-over-year basis, more in the flattish range, I would say, is that primarily due to the up-front food cost issues that you talked about?

Are there any other things to consider, as to why the earnings growth guidance is roughly flattish?

Yes.

It is primarily due to exactly what I talked to you -- I would steer everybody to really think about the whole year because we've done a complete analysis of the whole year.

We're comfortable with our guidance for the year.

We didn't change that guidance, but the timing in the first quarter is impacted by, I don't know if you want to call it seasonality of the food costs issue or not, but we expect food cost inflation to be much heavier in the first half.

But it's also impacted some, a penny or two, by the weather in the first quarter, and the lower expected sales resulting from that weather is certainly impacting earnings some in the first quarter as well.

Okay, and on food costs or costs in general, I believe in the third quarter, you mentioned for 2011, cost pressures of 1.5% to 2%.

I think that included billed labor and utilities.

Given that framework, where do you see the cost guidance in 2011 including labor and utilities as well as food?

I think we would have to, from the 1.5% to 2% that we said at that time, would have to say 2% to 2.5% at this point in time.

Again, that includes cost of sales at around 3% and labor at 1.5% or a little bit less, and then the utilities are in there as well.

But our assumption regarding cost of sales inflation, has gone up by more than a full 1% since October when we talked about our commodity basket, which is what you're referring to as being 1.5% f to 2%.

Thanks, and my last question is in general on this more movement to wellness.

Can you give us a sense of, in terms of organic products that you offer, naturally raised products that you offer, do you intend to move into this category more aggressively?

Is there enough supply for you to get into this area of wellness?

I think that more supply is coming along.

We certainly have enough now that all of our salad greens are organic, and more and more are coming available all the time.

I'm not sure that people are really just demanding organic.

I think they want a high quality.

I think that they do want to all the naturally raised meats.

We now offer brown rice as well as white rice as a choice, which people appreciate, salad instead of fries.

At Cheesecake Factory, we have sweet potato fries instead of regular fries.

All of these things are appreciated by sort of the whole foods group that is out there, and I think growing.

We're not going to jump in and just change all of our menu items, but as usual, we will add items to the menu that I think people can come in, know they can have choices, know they can get a great meal at a great price at the calorie count that they want.

But just remember, at this point, we probably are in 12 different places where all of the calories are already on the menu, and there's been virtually no change in what people are buying.

They're not buying less desserts.

They're not switching what they're buying.

So, when people go out to eat, they really want what they want.

It's a different experience than at home.

Having said that, we will have great choices for everyone, and most likely more this year.

Great.

Rachael Rothman, Susquehanna.

Hello.

This is Jake Bartlett in for Rachael.

I have a question just on the benefit you got from the HIRE Act.

Is that something that you think restaurants across the space are going to be benefiting from?

Is there anything in particular about what you've done or your model that made you benefit more?

And I know you mentioned it was about 90 basis points to 100 basis points along with the low equity comp.

If we can try to break out the HIRE Act impact, that would be great.

HIRE impact was about half of that.

Let's just say 40 basis point to 50 basis points.

The HIRE Act required a lot of work.

I would assume that it would apply to everyone.

I don't know why it wouldn't, but it does take work to go back and determine every employee that was hired during the year, and whether or not they qualified for this or not.

So, we did a good bit of research and scrambling to be able to get that HIRE Act credit, but I don't see why other companies would not be getting it as well.

Okay.

So, a concept that had a little more turnover.

Maybe more unit openings could get more of a benefit from that?

They could.

You had to hire workers that were not employed.

Interestingly enough, the intent was to try to incentivize people to hire workers who were unemployed.

It actually didn't do that at all.

We just hired who we were going to hire any way.

If they happened to have been unemployed before, we got the HIRE Act credit.

And I had a question on your development.

You're maintaining the 6 to 9 stores.

I wondered if you can give us any more color on the weighting on a quarterly basis for your openings?

We had the one.

The others are going to open between the third and fourth, and we don't have that locked down yet.

There will be some in the third, some in the fourth quarter.

I don't think any in the second.

Okay.

And just a question.

I noticed that the store you opened in Houston was I think about a 15 minute to 20 minute drive from your other Cheesecake Factory there, a very old one, as well as a Grand Lux.

Just wondering how you feel about sales cannibalization.

Is that something that you factor in?

Are you expecting much?

You're probably factored that in as you do your hurdle analysis and such?

We do.

The store in the Galleria is one of our highest grossing and best restaurants, and we believe that although we may have a little cannibalization for 60 to 90 days, it will be back.

It was the same when we opened others.

We're right across the street with Grand Lux, and within the 60 days, the business came right back, actually in more.

This last year was a great year there.

So, although it is a little close even for us, we felt that they were 2 distinct markets, and the business in the Galleria, with all of its tourism and so on will be back, but we do watch for cannibalization.

In this case, we thought it was very prudent that we could open it.

Great, and then last question.

Just on what you're seeing in terms of availability of sites, of negotiations with landlords, are you more optimistic now or less so than you have been in the recent past?

Any changes to the development environment?

Actually I would love to tell you that it was better, but I don't think it is.

I think it's still tough out there.

There's still not a lot of new construction.

I think something that helped us and that I will continue is when a Marshalls goes out or a large big box that happened to be attached to a high-end shopping center and they redo that, and they put in 3 or 4 concepts, we've gotten a number of those, and there are still a number out there that we're looking at.

So, that's been helpful, but there's not a lot of construction, and I think everybody is still being very prudent.

It's tough when you are looking at the level we're looking.

It's not as plentiful as we would like it; however, we look all the time, and it's not just malls, but there's in-line, street, specialty centers that we are looking harder at now.

Great.

Thanks very much.

Joe Buckley of Bank of America.

Just a couple of questions.

You talked about the sales levels and the investment in these 4 stores.

From an operational standpoint, are there any changes good or bad, from an operating cores perspective with the smaller prototype?

We're working on that now.

We have several tests going in the $8 million range that we think will allow us to save some money, and move it around a little bit.

And so far, our tests have gone well.

I think there will be a little bit more, and then I think we'll be able to make some changes and lock down some savings.

So, that is a test that we're pretty happy with.

I don't have all the details yet, but I know that our OPS team is excited about it.

That would be about 25, 30 stores that we might be able to make some changes in.

Okay.

And can you say like what part of the operations and changes would occur?

Is it labor primarily?

Yes, it's labor and things that back up management in that size store.

You can really operate it differently.

So yes, you would see it more on the labor.

Okay.

And then you mentioned a couple of regions that were particularly strong in sales.

You I don't know if you mentioned California or not.

Could you give us an update on how California was in the fourth quarter?

California fourth quarter, first of all, we saw strength in key geographies, like Texas and the Midwest and Florida and the Southeast.

It's hard to measure California in the fourth quarter because we had a period of time where it rained nonstop for 9 days in a row.

So, that impacted our sales in the fourth quarter.

If you just total up the year, and I know you're asking about the fourth quarter, we were positive in every one of our geographies except California.

I call it flattish because it was right at a tenth down.

So, that was our worst market at just barely down for the year, and the fourth quarter was certainly impacted by weather.

Okay.

Thank you.

Matt DiFrisco of Oppenheimer.

Thank you.

I apologize.

I jumped on a little late.

I was on someone else's call also.

I picked up on your discussion about the higher quality food, and I'm curious if longer term or even in the near term as you roll that out, have you factored that into your cost of goods sold?

You've historically had obviously one of the industry-leading lowest relative food costs, and I would assume higher quality food, you might not want to take in-step pricing to offset that as well.

So how would you look at that as your earnings model?

We've had the fries, the organic greens for 1 or 2 quarters now.

So, we've already been running with that, and I think that you have to be careful.

I think people want higher-quality food, and I think that our food is incredibly high in casual dining, but we're certainly not going to go out there and buy certain brands of chicken that are very nice or heirloom.

I don't think our guests want to pay the money for that, but we have heirloom tomatoes in Grand Lux, and really, we're paying the same as we are for regular tomatoes.

So, the farmers that we deal with and the producers know what we're looking for.

They know what we're willing to pay, and many of them are working on getting ready for our volume.

And so then therefore, we can offer either more organic or heirloom varieties, and really it's on and on.

We've improved a lot of things at no extra cost.

As more restaurants want them, they'll be able to produce cheaper, and people will be the beneficiary of that.

And then also this is the time of year when you -- last year I think you did your menu rollout.

Are we also getting a new menu rollout?

Sorry if I missed that.

Yes.We always do that.

Whether we put 1 item or none or 15, we always do it.

We raise prices if with we're going to take off a few items.

So, yes, the one is actually coming out any day now, and then there will be another one in August.

Is it as meaningful, I think you called it out this time last year as far as being maybe a little bit of an impact to labor.

Is there anything drastically changing that you might think adds a little something to the back of the house as far as preparation?

No, Matt.

I think this time it was lighter than that because we felt that we made so many changes the last time.

We're integrating that, and there will be some more changes on the middle one.

So, I think that it will either be helpful in labor or certainly even, but not more.

And then just the last question.

With respect to the January weather, Doug you said 1%.

Do you mean 1% to date, or 1% for the quarter, or are we correct in assuming that the Dallas region is where you're feeling most of the effect from the weather?

The Midwest, Dallas, the Northeast.

We're seeing it all over the place, as everyone else is, I would assume, but 1% is quarter to date.

So, we're assuming that whatever bad weather happened last year, for the rest of this quarter, that the exact same bad weather happens this year.

Okay.

And then did you give the mix and the price in the mix that you were carrying through the fourth quarter?

We didn't talk about that specifically, but traffic was 0.4% of the 0.9%, and the price was 0.5%.

So, as we expected our average check improved sequentially from what we reported in the second and third quarters, primarily because both our incident rate, and the price point for nonalcoholic beverages continued to show some year-over-year improvement.

We got to keep some of our menu pricing when that hadn't happened for a quarter or two.

And going back over numbers you probably had given already.

I apologize.

Did you also talk about anything about as far as with respect to your timing of openings for the quarter, per quarters when they're going to open?

Yes.

We talked about being back-end loaded.

Yes, third and fourth quarter.

Nothing in the second.

We just opened one in the first.

Nicole Miller, Piper Jaffray.

I think I asked a few quarters ago, and I just wanted to go back to any license opportunity.

So can you give us an update, for example, the cheesecakes obviously in the grocery aisle.

Is there more of a door opportunity there, and then what other products might you entertain in the future in the grocery aisle?

Thank you.

For the most part our products have been too expensive in the grocery aisle with all of the mark ups.

That's why we haven't done so well in the warehouse clubs, and their markup is very low, and our products sells for a great price and we're selling $30 million to $40 million or more through that channel.

So, we may have products that will be in mainstream grocery stores, but there's none that is imminent that you -- certainly I don't think we'll have any in for this year, although we introduced new products in the warehouse clubs and general restaurant wholesale and done very well with them.

David Tarantino, Robert W.

Baird.

Just bigger picture question on your comps outlook for this year.

Perhaps if you could talk about your view on the consumer, and what you're embedding in your traffic assumptions because the cycle may be a little tougher comparisons this year than you've been cycling over the last four quarters.

What gives you the confidence that you are going to be able to hit the range that you've laid out?

Well, I think that most of the news that I'm reading about the consumer and most of what I'm seeing, shows some more optimism for 2011 than what we saw in 2010.

Did you hear this morning that nose jobs are up and that bodes well for spending in the future?

I heard that this morning.

(Laughter)

So, nose jobs are up.

But generally I think that there's more optimism for this year, but with that said, unemployment is still high.

Housing is still out there, and all we're assuming really in our comp sales guidance is that we can keep the same type of comp store sales.

The midpoint of that range is exactly what we ran for 2010.

So, we're looking at 1% to 3%, and we are trending at about 2%, So, that's still a solid range for us.

And maybe a follow-up on that, Doug.

On the mix side of the equation, that's been an offset to your pricing for the last four quarters, looks like it got better in the fourth quarter.

Could you expect that to start to flatten out and capture more of the price increase that you have embedded in the menu?

I would, yes.

We expected it to happen in the fourth quarter, and it did, and I would expect it to get a little better going forward.

Yes.

And when would you expect to flatten out or not --

Well, it started to flatten out already.

It already happened in the fourth quarter.

It's going to continue, as I would expect, as we see the incident rates for nonalcoholic beverages.

When we talk about nonalcoholic beverages improving, we're not selling more alcoholic beverages.

The rate of decline over the year, last year, has become less and less steep, and continues to get less and less steep, and it hasn't become zero yet, but it's getting less steep.

So, to the extent that that continues and as we lap around, we should be able to get additional average check.

Makes sense.

Thank you very much.

Operator, I think we have time for two more questions.

Bryan Elliot, Raymond James.

I apologize for this, but missed the beginning of the call as well.

The guidance is not in the press release, Doug, so just really briefly re-go over the guidance that you gave on the call that's not in the press release.

Yes.

Reiterating the full-year guidance, which is the most important point, at $1.55 to $1.70 based on same-store sales assumptions of 1% to 3%, and, Bryan, doing that, despite the fact that since we initially gave that guidance, we have encountered at least $0.05 more of cost of sales pressure, and then we've talk at length about how we thought we were making that up.

And then, in the first quarter, we said that our earnings per share were going to be between $0.29 and $0.33, and that the cost pressures insurance that we're seeing from a cost of sales standpoint were very front-end loaded in the year.

And that we expected to see that mitigate and really reverse itself in the fourth quarter, particularly after we lap around very high dairy costs that we experienced in the fourth quarter of this year, and we based that first quarter earnings on a comp store sales assumption of between flat and 2%, which is consistent, we think, with the 1% to 3% that were given for the entire year, if you factor in that we've had a net weather impact so far during this quarter, of about negative 1% .

So some margin pressure from the weather volatility, but the bulk of it in Q1, some weather volatility through the income statement, but most of it food-cost related?

Yes.

Okay.

And pricing going to stay around 2%?

Pricing is 1.4%.

1.4%.

Okay.

For Q1?

Yes.

You're going to have to listen to the replay because we gave some really good detail.

Okay.

I'm trying to get to your new restaurant.

I'm in Houston.

I want to get out to the new restaurant before it closes at 11.00 Central.

You got to see it.

I suggest that you get with all of the other CFOs in the restaurant business, and let's have everybody report on the exact same night, and everybody do a 5.00 Eastern conference call.

We're going to rectify that next quarter.

All right.

Thank you.

Thank you.

John Ivankoe.

JPMorgan.

This is [Kamode Gautam] on for John.

Just a couple quick questions.

One you talked a little bit about acquisitions as well as repurchases.

Just want to find out where potential for instituting a dividend falls within your priorities for using cash.

And then secondly, on the tax rate guidance for 28% to 29%, does that embed the manufacturing tax benefit that you get from higher bakery sales?

It does.

It embeds in everything that we think we know about what our bakery sales are, which are based on the budget for our bakery sales.

So, we put in there what we can, and the tax rates are always difficult to be honest with you because you never end up really being right.

It seems like something always goes on, and with respect to the acquisition front and capital allocation and dividends, dividends certainly have been discussed for awhile in this Company.

I think that we will ultimately be a dividend payer.

Obviously, when you go down that path -- we have got the capital to really be able to do what I would describe as do it all, we could build all the restaurants that we want to build, to repurchase enough shares to offset our equity delusion, and to pay a dividend.

The only thing is when you pay a dividend, it's got permanency to it, and you have to be sure that you're ready to commit to it and to increase it over time.

So, we will do that, and it has been and continues to be discussed within the walls.

We don't know when we'll do it, but it's certainly something that we do think about.

All right.

Terrific.

Thanks so much.

All right.

Well, thank you, everyone.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

Now disconnect, and have a great day.