Cheesecake Factory Inc (CAKE) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 The Cheesecake Factory earnings conference call.

My name is Alicia 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 call 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.

Good afternoon and welcome to our second-quarter fiscal 2011 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 and the Company undertakes no duty to update any forward-looking statement.

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 outlook for the rest of the year.

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

Now I'll turn the call over to David.

Thank you, Jill.

Our strong business momentum continues with our sixth consecutive quarter of positive comparable sales.

We saw gains across the board.

Guest traffic increased as we continued to take market share.

Menu mix improved again in the second quarter, which allowed us to effectively capture our menu price increases.

Geographically, we saw strength across a number of key markets, including California, Florida, the Midwest, the Southeast and Texas.

These are regions where we have a significant presence, and each one delivered at or above average comparable sales.

As we saw in the first quarter, all day parts were up again in the second quarter with the mid-afternoon and late-night shoulder periods continuing their considerable increases.

We also saw significant sequential improvement in comparable sales at the Grand Lux Cafe.

Overall, trends in our business are strong and consistent.

Our outlook for sales in the second half of the year is on track.

The popularity of our brands, the innovation and the relevance of our menu, our relentless focus on quality and service, and commitment to delivering an exceptional guest experience, these are the sales drivers that we continually focus on.

They are also the reasons behind our nearly $10 million in average unit volumes and our ability to maintain a favorable competitive position.

In the category of things we can't completely control is the current volatility and rise in food prices.

But what we can do and what we are doing is managing our business to offset these pressures without sacrificing quality.

Our team is the best in the business and they did an excellent job of managing our cost structure, both at the restaurants and at corporate, to deliver earnings that were again above plan.

We opened our newest Cheesecake Factory restaurant in Short Hills, New Jersey earlier this week.

It's a premier location and one that we've been interested in for quite some time.

It's the second of seven openings that we are planning for this year.

Looking forward, we've got a good number of sites in the pipeline for 2012 that we are currently working on.

It's too early to get into specifics for next year except to say that our goal is to increase the number of new openings.

As always, we're focused on A-plus sites that can deliver our required returns.

One of the many constants about our company over the years is our ability to generate a significant level of cash.

This year will be no different and we are confident in our outlook.

As a result, we are significantly increasing the targeted amount of cash that we are returning to shareholders through share repurchases this year.

Doug will get into the details, so at this time, I'll turn the call over to him.

Thank you, David.

Total revenues at The Cheesecake Factory for the second quarter increased 3% to $431 million.

Restaurant revenues reflect the 1.2% increase in total restaurant operating weeks due to the opening of two new restaurants during the trailing 15-month period plus a 1.7% increase in average weekly sales.

Overall, comparable sales at The Cheesecake Factory increased 2.3% and were flat at Grand Lux Cafe.

Guest traffic was positive and our average check was up over 1%.

We are implementing an approximate 1.25% menu price increase at The Cheesecake Factory in our Summer 2011 menu change, lapping a 0.7% menu price increase from the summer of 2010.

The new menu will begin rolling out in August, giving us about 1.9% in menu pricing as we enter the fourth quarter.

At the bakery, external sales were $14.2 million, about flat versus the prior year.

As expected, cost of sales increased 100 basis points to 25.5% of revenue for the second quarter of 2011.

We continued to experience higher food costs related to certain non-contracted items, particularly dairy and fresh fish, in addition to pressure from shrimp and a number of grocery items.

Labor was 32.4% of revenue for the second quarter, down 10 basis points from the prior year.

Our direct restaurant operating labor was about 20 basis points better than the second quarter of last year due to overall productivity gains.

Other operating costs and expenses were 24% of revenues for the second quarter, flat with the second quarter of last year.

G&A expenses were 5.6% of revenues for the second quarter, as we leveraged G&A by about 10 basis points.

Depreciation expense for the second quarter of 2011 was 4.1% of revenues, down 20 basis points from the prior-year period.

The favorability stemmed primarily from the faster rate of depreciation on corporate and IT investments over the past few years.

Pre-opening expense was $1.1 million in the second quarter of 2011 versus $0.6 million in the same period last year in support of a higher number of expected openings in the third quarter of this year relative to last.

Net interest expense was $1.1 million in the second quarter of 2011, down significantly from $10.5 million in the second quarter of last year.

Interest expense in the second quarter of last year included a $7.4 million payment to unwind an interest rate collar on our revolving credit facility.

Interest expense is also lower this year because we had zero funded bank debt.

Our tax rate for the quarter was 27.4%, in line with our expectations.

Our liquidity position continues to be strong with a cash balance of about $59 million at quarter end.

Cash flow from operations for the first six months of the year was approximately $94 million.

Net of roughly $30 million of cash used for capital expenditures, we generated about $64 million in free cash flow through the end of the second quarter.

We used our free cash flow to repurchase about 1.5 million shares during the quarter at a total cost of approximately $44.4 million.

Year-to-date, we've returned about $95 million in cash to shareholders through share repurchases.

That wraps up our business and financial review for the second quarter of 2011.

Now I'll spend a few minutes on our outlook for the balance of the 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.

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.

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

Our assumptions for the full year reflect this.

For the third quarter of 2011, we estimate a range of comparable sales between 1.5% and 3%, consistent with our trends in the first six months of the year.

Based on this assumption, our estimate for diluted earnings per share is between $0.36 and $0.39.

There are a couple of factors that influence our third-quarter earnings estimate.

We expect four new restaurant openings during the third quarter, impacting the timing of preopening expense charges, as well as pressure from increases in food costs, which will persist as expected into the third quarter, contributing to total cost of sales being up 70 to 90 basis points higher than the third quarter of 2010.

We continue to believe that food costs will moderate on a comparative basis in the fourth quarter and expect total cost of sales to be 35 to 55 basis points lower in the fourth quarter of 2011 versus the prior-year period.

This moderation is predicated on three things -- first, mitigation of dairy costs on a comparative basis from the peaks that we experienced in the fourth quarter of 2010; secondly, that we'll get a full quarter's benefit from the higher summer menu pricing that we are putting in place now; and lastly, that there will be less impact from higher bakery cost of sales since bakery sales are expected to be a lower percentage of total sales in the fourth quarter.

Our cost of sales expectation for the fourth quarter will contribute to estimated diluted earnings per share between $0.50 and $0.55 based on an assumed comparable sales range of between 1.5% and 3%, consistent with our results and expectations for the first nine months of the year.

While we usually don't give specific guidance for the third and fourth quarters, the fourth quarter is implicit at this point in the year, and with the volatility in the commodities markets, we think it's important to provide you with as much information as possible to help you better understand our business.

For the full year 2011, we expect diluted earnings per share to be between $1.62 and $1.70.

This includes our assumption that total cost of sales for the year are expected to be about 45 to 65 basis points higher than 2010.

Food costs are at their highest point in more than 20 years and no one is immune to the cost pressure.

The related impact to our total cost of sales will affect our earnings per share this year by about $0.11 relative to 2010, yet our full-year earnings guidance has not changed.

In fact, we've brought the midpoint up again this quarter.

We are able to absorb this pressure by actively managing our overall cost structure, by increasing our efficiencies through $3 million to $5 million in planned cost savings, and through the higher menu price increase taken this summer.

Our outlook for comparable sales growth in the second half of the year has not changed.

Our run rate is strong and stable and we are confident about a 1.5% to 3% range for the next six months, consistent with the first half of the year.

As a result, our assumed comparable sales range for the full year is between 1.5% and 2.5%, which reflects both guest traffic and average check growth.

We now expect our tax rate to be between 27% and 28% for both the third quarter and for the year.

Our projection for capital spending this year is now $75 million to $85 million in support of our planned seven new restaurant openings in 2011, as well as expected early 2012 openings.

As noted in our press release today and as David mentioned earlier, we are increasing our target per share repurchases in 2011 to a range of between $125 million and $150 million.

We have executed very well on our share repurchase program to date, completing about $95 million in repurchases already this year.

As I'm sure you'll recognize, there's a benefit to repurchases that are made earlier in the year, so we're pleased that we are just about achieved our original goal and have been able to expand our target to return even more cash to shareholders this year.

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 questions.

(Operator Instructions).

John Glass, Morgan Stanley.

If I could ask a question on the commodities and the outlook; I guess it's a two-parter for one question total.

One is what is your gross food cost inflation, Doug, now for the year?

Sort of not with the pricing but just what's the gross basket up now, and what did you think it was up last quarter?

The second part of that is I guess your guidance last quarter was -- stands if you kind of held the pricing that you were lapping rolls off and you're going to take the 70 basis points.

Now you're taking an incremental, say, 50 basis points, and your guidance has only changed to the upside.

So have you actually raised your food cost inflation assumption this quarter versus last quarter, or being conservative?

Maybe if you could answer that.

Thanks.

Sure, I'll be glad to.

Our cost of sales inflation we now would think would be around 4% for the year.

So we previously, in April, thought it was 3.5%, which we said would be 2.5% in the back half of the year and 4.5% in the front half of the year, so 3.5% blended.

So, it's ticked up a bit.

The reason that we were trying to focus -- in order to help you frame I guess the impact on the P&L, we gave you an expected range of pressure on the cost of sales line in our prepared remarks, which I'm sure you heard.

Now, with respect to the pricing that we are currently implementing, 1.25%, which is about 0.5% higher than what we're replacing, that's included in the guidance that we gave.

It's what's helping to offset the cost of sales pressure that has been -- is a little bit higher, as I mentioned, than what we had originally thought in April.

Really, it's offsetting $0.11 of drag on earnings per share this year.

So despite that drag, we've been able to continuously raise the midpoint of our annual earnings per share guidance range, and at the midpoint, we now expect 17% earnings per share growth as compared to the prior year.

But that's baked into the guidance that we gave for the year.

Thank you very much.

Jeffrey Bernstein, Barclays Capital.

Great, thank you.

Just one follow-up on that question, and then a separate one.

The follow-up relates to the pricing.

I'm just wondering how much you've tested in particular markets and perhaps what you think it would -- I mean you gave some color around the food costs, but what that pricing will do in terms of further leverage on the labor line which you've managed to still drive in this quarter.

If you could give some color on the labor outlook for the back half and what the total restaurant margin forecast would be, assuming that increased pricing.

Then the other -- the follow-up question was just on the unit growth.

I know, David, you mentioned I guess seven units this year.

Just wondering whether you can give some color in terms of the slight challenges, whether those prevailed.

It sounded like you have a more favorable outlook as we look to '12.

I know you don't have anything locked but if you can give some color in terms of how many perhaps your team could handle in 2012, and what type of acceleration you might expect based on what you see at this point, that would be great.

I don't know that the market is changing, meaning that landlords are really starting to build.

I think that still we're being told is '13.

The sites that we've gotten this year and the sites that we are looking at next year, we are looking at 19 at this moment.

I'm sure -- I don't think we'll do 19, but we believe that we'll do more than we have this year.

We are doing very well, but until we get a little further along in our process, I don't want to throw out a number.

But we are anticipating more than we have this year.

There are some good sites coming up and changes and stores going out and then landlords looking for new tenants and so on and so forth.

It's not so much brand-new construction.

So, in terms of what we can handle, we can really pretty much handle what we want.

If we really wanted to do 20, we have the capabilities and I'd have no problem doing them, but we are not going to do 20s.

But certainly I'm hopeful for double digits.

Back to your question about pricing and the effect on labor and really other operating expenses I think was your question, the margin, we would expect for the year that our labor line could be -- will be leveraged and will be leveraged in the third quarter as well.

So, we would expect labor cost to be lower in the third quarter, but probably -- will be higher in the fourth quarter but lower for the year, and will be higher in the fourth quarter primarily from -- you have to remember last year we had some one-time benefits from the Hire Act and from lower equity compensation due to higher forfeiture rates that are impacting labor for the fourth quarter.

But at the midpoint -- here is the way to look at the margins for the year.

At the midpoint of our guided range for the third and the fourth quarter, we will see some improvements in our overall operating margins for the year, despite the fact that we expect higher cost of sales by about 50 basis points and despite the fact that we will see higher preopening costs by 20 basis points.

We still should see some improvements in margins at the midpoint of our cost of sales or some small improvement in margins overall.

That is also taking into account this year-over-year improvement that's muted or mitigated some by the fact that we have these one-time labor cost savings in the fourth quarter last year.

Great, thank you.

David Tarantino, Robert W.

Baird.

Good afternoon.

Just a quick clarification on the traffic and check in the quarter -- could you give us those metrics?

And then I have a follow-up.

Sure.

The comps were up 2.1% for the quarter.

The traffic was up 0.9%, which was improvement over where we were in the first quarter.

The average ticket was up 1.2%.

So, we were real pleased about the continued expected increase in the average ticket especially.

That was really due -- we've talked about non-alcoholic beverage sales in the past, and both our incident rate and our sales dollars for non-alcoholic beverages continued to show improvements in the second quarter, continued stabilization, as expected.

That's what's helping to drive that average check higher, as we expected it would, and helping us to capture now almost all of what pricing we've put into the menu.

Great, that's helpful.

The follow-up question is just really perhaps if you could give some color on the pace of traffic or comps during the quarter and maybe how you exited the quarter, and just generally how pleased you are with the run rate you're on.

I know positive traffic is nice, but the pace of the recovery seems pretty steady.

So I was just wondering your overall thoughts on that and maybe if you could comment broadly about the state of your consumer and what you're seeing out there and if you're seeing any hopeful signs that things could get even better from here.

First of all, month by month during the quarter, there really wasn't a lot of variability within the month for the quarter.

June was the strongest month, which is similar I think to comments that maybe other restaurant operators are making.

It was our easiest -- it was the easiest comparison, at least for us, but there wasn't a whole lot of variability.

What we really like about our comp store sales trends is exactly what you said, David, is that they've been steady.

They've been steady in this range that we've had for I would say six or eight months.

Just to give you a little bit of perspective on our comp store sales and what they do to drive our profitability, with respect to a 2% comp store sales gain for us at a $10 million average unit volume, if you did the math on that, you would get that that's a $50,000 increase for every restaurant for the quarter.

So it's a material increase.

If our average unit volumes were, say, $3.3 million, it would take 6% comps to get to that same $50,000 increase.

So I guess the point I'm trying to make is that $50,000 is a big sales increase at 2% comp, and it's maybe part of the reason why we get overall better margin leverage on comp store sales, like 2% or even lower than 2%.

Okay.

That's helpful, thank you.

Larry Miller, RBC Capital Markets.

Hey, guys.

My question was sort of a tangent to that prior question.

Really I wanted to look at it a different way.

I would think this sounds a little bit like the historical Cheesecake Factory, that we're starting to get to that point where you guys are thinking about comps really only equaling price.

But it seems to me that there would still be some opportunity to recapture some capacity.

Am I thinking about that right?

Then I'd also like to hear a little bit about the other side of the P&L, if there's any more cost save opportunities, more than that $3 million to $5 million over the next couple years that we might be able to work into the earnings model.

Thanks.

Larry, I think you've got to look at the last six quarters.

We've had pretty decent traffic growth in each of those quarters.

It's not 3% or 4%, but it's close to 1%.

It's somewhere between 0.5% and 1%.

So the fact that we're able to get that and we're able to increase our average check because guests are managing their checks less and starting to maybe buy non-alcoholic beverages and other things more than what they were.

But all of our dayparts were up, and that's part of what's helping us being able to drive guest count.

Shoulder periods were actually up the most.

In fact, shoulder periods, which we call the mid-afternoon and the late-night, are up more than twice the percentage of our comp store gains for the entire system.

So that speaks to the fact that guests are moving out of peak periods into shoulder periods, which is good for our ability to continue to grow traffic.

So, we are not making the statement we don't think we can continue to grow traffic.

I think we would look to be able to grow traffic over the next number of years by -- pretty easily, by -- certainly the capacity is there to be able to allow us to grow traffic by a decent amount in the continuing future, as well as get our average check.

And then the other part of the question (multiple speakers)

It was about cost savings.

Incremental cost savings.

Okay, so we are just now starting to implement the $3 million to $5 million.

We talked about it being a second half of the year mainly, so it's starting to go into effect now.

It's on track.

There are certainly other things that we can do to save costs, but they won't be big.

There are always things that we can do to get better, but specifically what we've unidentified today is $3 million to $5 million.

Thank you very much, guys.

Destin Tompkins, Morgan Keegan.

Thank you.

I wanted to follow up on your comments around the shoulder periods.

It sounds like you still see a lot of opportunity there and you're obviously seeing some success.

What would you attribute the most to your success there?

Kind of how would you relate where the shoulder periods are today compared to maybe where they were four and five years ago?

The shoulder period is still up as your prime time waits get longer.

So it really -- if you are on an hour and a half wait rather than 45 minutes, you'll be busier for a half hour longer in the evening.

And it's really the same at lunch.

If you're running a longer wait in the heart of lunch, you'll have more people in your restaurant at 2.30 and 3.00 rather than an empty restaurant at 2.00.

So it really is as more people come into the restaurant, it naturally -- they'll naturally stay longer or they'll come a little early to avoid the wait.

That's just naturally there.

We are not back to where we were in terms of the length of the waits.

Obviously, many restaurants have very long waits, but if you look at the whole system, we still have room to be busier.

So that's what we work on and we work on that in all the ways that you know people bring in and have repeat business in a restaurant.

Yes, I think that we -- when guest counts have fallen off over the last couple of years, other than the last six quarters, before that when they fell off, it mainly came out of shoulder periods.

You've never gone into our restaurants at seven o'clock on Friday night and seen an empty restaurant.

So, it's always been the shoulder periods where we've lost this.

That's where we will be making it up, so that's why we focus on that primarily.

As David said, it's the longer waits during the peak periods that help us do that.

I guess I was thinking more along the lines of Happy Hour programs and different promotional activities.

Is there anything specifically beyond just having longer waits that you're doing to drive those periods?

We have a Happy Hour.

We've had one for almost a year now.

It's not a huge Happy Hour because we are not a sports bar, and we only draw a certain crowd in, so we do have that and that might've been a little help.

We always had a bar program.

Now we have an official Happy Hour program.

We're doing a little better with that than the previous program.

We don't do any promotions.

We don't do a late-night happy hour.

We do lots of things on the Web but it isn't daypart specific.

It's just trying to do more business in general.

Then just one clarification, if I could.

Doug, on the fourth-quarter cost of sales commentary, one stipulation was mitigation of dairy.

Are you anticipating that dairy would come down from an absolute basis, or is that more based on a year-over-year inflation?

It's mostly year-over-year inflation, yes.

You know, on an absolute basis, we would assume it's coming down a little bit, but the majority of it is year-over-year.

Thank you.

Matthew DiFrisco, Lazard Capital Markets.

Thank you.

Doug, I just had a couple of questions, first just to clarify some guidance.

I think you said the tax rate was in line with expectations.

Are you now looking at for the full year sort of a 27.5% or so?

I thought the prior guidance was between 28% and 29%.

It was, so we're looking at right now between 27% and 28%.

Okay.

Then also as far as -- can you give us some color as far as the seven stores when we're all said and done?

Are they all Cheesecakes or are they going maybe one RockSugar, and what about maybe one Grand Lux?

All the seven for this year are Cheesecake Factory.

We will be planning Grand Lux for next year, and we haven't made up our mind about RockSugar yet.

Okay.

Then is there -- can you give us some detail as far as the size of those stores still to come?

Any -- I saw the Short Hills Mall being 10,000 square feet.

I was curious on the future ones.

Are they closer to the 8,000?

They are a mix.

We don't really keep track -- in my head.

But they are mostly 8500, there are some 10,000.

As we've said, we've tried -- we are trying a 7200 in a market this year that will open in August.

If we like that and if it's balanced, there might be other markets that are excellent, but -- that we only can project 7.5 million.

That's great, okay.

Then last question -- there was a comment about the guidance for the fourth quarter.

Part of the COGS outlook also incorporated bakery being, I believe, less of a mix.

I'm curious why do you expect bakery to be less of a mix in the fourth quarter?

That's a good question.

It is a good question, because -- it's bakery cost of sales are higher than restaurant cost of sales, so you just have to understand that in general.

So while we don't expect bakery sales to be down in the fourth quarter -- third-party sales, we actually expect them to be up a little bit -- it's really primarily due to the extra week of restaurant -- the extra week in the fourth quarter where restaurant sales are very robust in that extra week and bakery sales are more normal or really aren't impacted very much.

So that's causing about a 1% shift in bakery sales as a percentage of total sales.

That's helpful.

Thank you.

Brad Ludington, KeyBanc Capital Markets.

Thank you.

Most of them have actually been asked already, but I wanted to touch on the August menu rollout.

Are there going to be any new categories you're looking at or any surprises or is it just kind of maybe changing out some menu items on small plates and the regular menu when that comes out?

We have a policy that we don't talk about new items before the menu is rolled out because we are probably the most copied casual dining restaurant out there.

There will be some new things as well as some items that we've taken on and put off the regular menu.

So it's coming up, wait and see.

All right.

Thank you very much.

Joe Buckley, Bank of America Merrill Lynch.

Good afternoon.

Doug, could you elaborate a little bit more on the fourth-quarter cost of goods sold outlook?

I know you said it was more year-over-year than absolute changes, but talk about what happened last year in the fourth quarter with dairy costs.

Are you a little bit more covered this year?

How much -- I guess I'm asking how much visibility there is into the fourth-quarter cost of goods sold outlook.

Well, the dairy costs are not contracted, so they spiked and were extremely high in the fourth quarter last year.

That's why we are confident when we lap around this year that we won't have as big a spike as what there was last year in the fourth quarter.

So it's mostly that.

Okay.

Then -- so all the other non-contracted items, we have to use the same kind of thought process that we've been using.

It's very difficult because this is a very volatile cost of sales and food cost market, as you know, and so we are using our best estimate for non-contracted items.

We are looking at spot prices.

We're looking at futures prices.

We're using forecasts from our purchasing group.

That's pretty much all you can do with respect to non-contracted items.

Then you come up with your cost of sales based on that.

That's what we did in the second quarter, and we were spot on, maybe being a little under what we thought the increase in cost of sales would be in the second quarter.

So, we've been pretty close on our cost of sales prognostications.

Is there anything more that's covered by contract at this point than there was in April, or is that pretty much the same?

Not really; it's pretty much the same.

Okay, thank you.

Sharon Zackfia, William Blair.

I had a quick question on the average weekly sales lagging the comp growth.

I was wondering if that was a function of the smaller format Cheesecakes that you've been opening, and if that's a trend we should expect to continue.

No, I think it's purely a function of the fact that some of the restaurants that we've opened recently have lapped around a year.

They are off of the honeymoon sales volume, although still doing very good volume, but off of this honeymoon sales volume.

They are not yet in the comp store sales base because they've only been open just over a year as opposed to over 18 months.

So, I think that's the -- there's not much difference there but that would make up almost the entire difference, because I asked that exact same question.

Is that something that we should expect to continue, or is there something that was really strong about (multiple speakers)?

No, I think that, as you build more restaurants, that could become something that people will ask about, because our restaurants do generally open to very high volumes.

The idea would be that when the dust settles and the honeymoon period is over, obviously it settles into volumes that are providing you the returns that you're looking for.

So -- and that's what's happened on these restaurants, but they typically, when they lap around a year, unless they didn't open strong, they are going to be down.

Okay.

Great, thank you.

John Ivankoe, JPMorgan.

Thanks, this is [Omo Goudomon] for John.

A couple of quick ones.

One, could you just talk more about how you arrived at the decision to take pricing of 1.25%?

Given your brand positioning, I would think you probably could take a little more and not have to bite the COGS pressure in the third quarter.

Then second and unrelated to that, how much cash do you feel you'd be comfortable with for working capital purposes on your balance sheet?

I think that the answer to that is somewhere around $50 million.

So I don't -- I think, just to be sure that we could pay all of the bills every day, somewhere between $40 million and $50 million.

So we are maybe just a little bit above that today.

I always start off conversations about pricing by emphasizing that we are trying to achieve a balance when we look at pricing, balances between capturing more guest traffic and offsetting cost pressures.

It's an art and not a science, because you really never know how guests are going to react to higher prices until you go through that process and put them in the menu.

But we did see our cost of sales going up.

We knew we needed to have more price to better protect our margins, and we felt that we had pricing power and we felt that we should -- that we were aggressive as we wanted to be without being overly aggressive.

Is there more pricing power there for us?

Sure, but I think that our desire is always to be followers rather than leaders when it comes to pricing.

We allowed the news of higher food costs that I think are fairly mainstream now to sink in with consumers, so they're seeing higher prices at grocery stores.

That's why we felt comfortable with taking 1.9%.

We would rather not have been aggressive on pricing.

You never stimulate guest counts by taking more pricing.

So we took the pricing that we thought we needed.

We were able to increase the midpoint of our range of earnings for the year.

We are going to have good earnings growth for this year despite the fact that we have higher food costs, but the most important thing is we're going to have a very strong and healthy business as we enter future years.

Okay.

If I could just slip one more in, the ending second-quarter share count, given the share repurchase?

Yes, are you asking what it is?

Yes.

The diluted shares outstanding for the quarter were --

The diluted ending shares outstanding, not the weighted-average.

We can get that to you offline.

I'd have to get back to you on that, yes.

Okay, thanks.

Steve West, Stifel Nicolaus.

A couple of kind of outlooking questions here.

I know international business isn't a big impact yet and [it will] be some time, but can you give maybe an update on that and how that's going?

Are you seeing any delays with all the civil unrest in the Middle East?

As a follow on kind of to what Brad was asking on the menus, maybe not specifics, but with the healthcare plan to add calorie counts to menus here at some point probably later this year, how are you guys thinking about that and do you feel you need to do anything reactionary for that?

Thanks.

I can cover the calories.

We have calorie counts on about six or seven cities right now, and there has been really no change.

Desserts have stayed strong; they haven't even moved around the menu.

So again we feel when people go out to eat, it's very celebratory, and they are eating -- the foods they enjoy at home, they will eat more lo-cal foods.

Having said that, we really have some very low-calorie items on the menu already, and I think people who want to eat that food find it very easily at The Cheesecake Factory.

So we're not concerned about that.

If every area in the country would be -- have the same rules on that, it would actually be easier for us.

Actually too, to add to that, we allow any substitution you want to do.

So if you would rather have broccoli than french fries, we'll do that.

The fact is most people would rather have french fries.

So, we do substitutions all the time.

With respect to international development, that's going along as we had planned.

We have five sites that have been identified for buildout.

We don't know the exact timing of these buildouts yet, but certainly by sometime in the middle of next year, you'll see the first sites in the Middle East.

I think that's exactly what we expected.

So that's going along fine, as is the discussions with a number of other potential partners, none of which we have announced any kind of transactions with.

But we are having discussions currently with potential, very highly qualified partners in other parts of the world as well.

Okay, thanks.

That's very helpful, especially on the calorie counts.

Thank you.

Bryan Elliott, Raymond James.

Thanks.

Since you let John Ivankoe ask two, I'm asking two.

Okay, well, go ahead (inaudible) (multiple speakers) (inaudible).

Hopefully they'll be the last two.

Just actually two clarifications.

One, just wanted to make sure I got the pricing right.

So pricing in this quarter before the August rollout was what again?

We had about 1.4% in the menu.

Okay.

And we are going to be at about 1.9% by the fourth quarter.

What's the weighted mix?

What do you expect for Q3?

We'll start rolling it out soon but it takes a number of weeks for us to get this menu in every restaurant.

So there will be some impact in the third quarter but not a big one.

So maybe 1.5%, 1.6%, something like that?

Okay.

Yes.

And the average check you mentioned has been driven -- I think I heard this -- that non-alcoholic beverage has been the main factor in allowing you -- the average ticket to get closer to menu price?

The improvement in non-alcoholic beverage mix, right, yes, the improvement.

It's still not positive year-over-year.

(multiple speakers) it's close to being flat year-over-year, which is allowing us -- so since it's not going down and every other menu category -- well, desserts in particular are still going up.

We had higher percentage of sales, dessert sales this quarter than we did last year in the second quarter, but the fact that the rate of decline of non-alcoholic beverage sales is decreasing is helping our average ticket.

Okay.

Then lastly, did you -- I don't think we heard any preopening commentary.

What kind of preopening numbers are embedded in the guidance now, given the timing of openings for Q3 and Q4?

They would be heavier -- it's four in the third quarter and two in the fourth quarter.

So there might be some shifting around that people would have to do if they had 3 and 3.

So that's the shifting you'd do.

So -- but with that, will it be about even -- through the third and the fourth, it will look close?

Or the third will be higher?

I think the third would be higher for sure.

Okay.

All right.

Thanks.

Keith Siegner, Credit Suisse.

Thanks.

Just a quick question on Grand Lux.

So Grand Lux has been doing okay, but clearly not as good as The Cheesecake Factory.

So in thinking about opening a unit next year, I'm just curious.

The reason to open a unit next year, how are returns on a new unit, or what do you anticipate as returns on the new Grand Lux versus a new Cheesecake?

Does that take away the opportunity to open a Cheesecake?

then kind of tying this together, the move to make Grand Lux a little less grand, any updates on that will be helpful too.

Do you want to do that or --?

We are designing a restaurant that will open next year on the East Coast, and that's exactly what we're doing.

We're bringing it down to 8500 square feet.

We're bringing down some of the investment costs.

We're making it a little more approachable.

That's what we're planning on doing.

We're hoping the returns will be equal or very, very close but we'll have to get that restaurant open in order to verify that.

But that's what we are working on; that's our goal.

All we said was most likely with where Cheesecake is that a Cheesecake would open in an area before a Grand Lux.

That might not always be the case, but usually Grand Lux would be the second in an area.

But with all The Cheesecake Factories, that's going to be sort of the way it will be anyways.

And what -- was there more (multiple speakers)?

No, I think that was it, unless there are more (inaudible).

But the return expectations for Grand Lux that we would set for ourselves and part of the reason we are making some of these modifications is that we get the same kind of returns.

We certainly have high volumes out of Grand Lux.

If you took the average volume of Grand Lux's, we're somewhere right at what Cheesecake Factory is.

So very high-volume concept.

Currently, the current ones don't have the same overall returns.

Some of them have much higher but some -- overall we don't have the same returns, so we are working on why that shouldn't be and we think we can get there.

Okay.

That's very helpful.

One quick follow-up if I can?

In terms of Grand Lux variance across the units, are the trends relatively similar or are you still seeing more weakness in particular locations?

Well, I think we said last quarter that it was only 13 units.

The potential variability is very great quarter-to-quarter with only 13 units in the base.

There is certainly a disproportionate impact from our very high-volume locations, and certainly the two in Las Vegas are very high-volume locations.

We saw improvement in those locations this time, and so really if you take those two locations out of the mix, Grand Lux for the other 11 restaurants in the system were up the same pretty much as what Cheesecake Factory was.

Okay, thank you.

Mitch Speiser, Buckingham Research.

You gave us some information on geography and the comps by geography.

Were there any areas that were a little bit soft and any reasons why they were soft?

If I could just maybe throw in a second question just on the dairy cost outlook again for the fourth quarter.

Are you expecting your overall dairy to be down on an absolute basis year-over-year or just less inflation?

No, We're expecting that to be down year-over-year.

But that was not because we expect a huge falloff now.

That's because it was so very high in the fourth quarter last year.

As far as markets go, we talked about the markets that were strong and particularly we're really happy with the fact that California was well above the system average.

That's good for us because we have a lot of restaurants in California.

But markets that we've talked about before like the Southwest continue to be a little more challenging, obviously way below the average of the 2.1% for the system.

That's just a weaker economic environment.

I don't -- I think that most operators you talk to are having more trouble in the Southwest.

Okay, thanks.

Nicole Miller Regan, Piper Jaffray.

Thanks.

This is Josh on for Nicole.

Kind of a quick one, but just any update to the thoughts or kind of the strategy or philosophy around eventually getting some Cheesecake Factory items into the grocery channel?

I know you guys do the cheesecakes in kind of the big club stores, but just kind of updated thoughts around there.

I know quality of food has always been kind of the number one focus on that.

It still is, Josh.

We don't feel that the processes to freeze and to lengthen the shelf life, they won't meet our quality expectations.

So at this point, there's been no change, and we have no plans on creating something for the grocery store shelf.

Great, thank you.

All righty.

Thank you all.

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

This concludes the presentation.

You may now disconnect.

Have a great day.