Cheesecake Factory Inc (CAKE) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 The Cheesecake Factory earnings conference call.

My name is Jeremy 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).

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 first-quarter fiscal 2012 earnings call.

I'm Jill Peters, Vice President of Investor Relations.

On the call today is David Overton, our Chairman and CEO, who is traveling in Asia and joining us by phone; and Doug Benn, our 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 facts, 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.

Doug will start off the call today with our business and financial review.

He will then provide our outlook for the second quarter of 2012 as well as the full year.

Following that, David and Doug will take your questions.

Before I turn the call over to Doug, I will note that we will be at the Baird Growth Stock conference in Chicago on May 8, with both David and Doug presenting on behalf of the Company.

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

Well, thank you, Jill.

The first quarter marked our ninth straight quarter of positive comparable sales, with strength across geographies and dayparts.

And we had the best guest traffic levels that we've seen in more than a year and an increase of 1.9%.

Our guest traffic was consistently better than the industry average for nearly the entire quarter, based on the data we track.

On a two-year basis, comparable sales are a healthy 4%.

Our sales growth has been very consistent, and we are confident about our ability to deliver steady, dependable sales growth in the future.

Importantly, manager retention in our restaurants is at near-record levels.

The tenure of our managers and our operations leadership teams directly impact the productivity of our restaurants.

Retention also plays a crucial role in guest satisfaction.

Our ongoing focus and investment of time and resources in training and development are clearly having a positive impact.

As to development, we are on track to open as many as 7 to 8 new restaurants in the US this year.

Our first opening of the year was in March in downtown Salt Lake City.

The restaurant is doing very well, with weekly sales averaging over $250,000 since its opening.

Our next Cheesecake Factory opening is coming up in June, followed by the Grand Lux Cafe in New Jersey opening in July.

Our international expansion continues to be on track.

The first of three planned Middle East openings by our licensee is currently slated for late summer.

Now let's review our financial results for the first quarter and our thoughts about the remainder of 2012.

Total revenues at The Cheesecake Factory for the first quarter increased 4.1% to $435.8 million.

Revenue growth reflects an overall comparable sales increase of 2.4%.

Comparable sales increased by 2.6% of The Cheesecake Factory and 0.3% at Grand Lux Cafe.

In addition, we had a 4% increase in total restaurant operating weeks, due to the opening of eight new restaurants during the trailing 15-month period, plus a 0.7% increase in average weekly sales.

As we discussed in our last earnings call in February, a high volume week was replaced with an average week in the first quarter of 2012, because our big holiday week was captured as the 53rd week of last year.

This reduced revenues by about $8 million in the first quarter of 2012, impacting our average weekly sales in the quarter.

At the bakery, external sales were $10.8 million, down about $1 million from the prior-year.

Cost of sales decreased 30 basis points to 24.7% of revenue for the first quarter.

We experienced better-than-anticipated favorability, primarily from dairy and produce costs.

Labor was 32.8% of revenue in the quarter, flat from the prior year.

We are able to offset higher payroll taxes and deleverage from the loss of the big sales week, both of which we expected, with lower group medical costs.

Other operating costs and expenses were 24.3% of revenues for the first quarter, down 40 basis points from the first quarter of the prior year.

We saw a reduction in debit card transaction fees as anticipated, as well as favorability from lower utility costs.

G&A was 6.6% of revenues for the first quarter, up 80 basis points from the prior year.

About 20 basis points of this increase was due to a revaluation of our CEO's retirement benefits, triggered by the extension of his employment agreement.

The remainder of the increase came primarily from higher corporate bonus accrual versus last year, and slightly higher equity compensation costs in the first quarter of 2012.

Depreciation expense for the first quarter of 2012 was 4.2% of revenues, flat from the prior-year period.

Pre-opening expense was $2.1 million in the first quarter of 2012 versus about $1.8 million in the same period last year.

Our tax rate this quarter was 28.7%, slightly higher than the first quarter of last year, but within our expected range.

In summary, we had a strong quarter.

Guest traffic was solid, and we delivered higher year-over-year, four-wall operating profits despite the shifting of the big holiday sales week to 2011.

We exceeded our target range on our earnings per share in a high-quality way.

Moving on, our liquidity position continues to be solid.

Cash flow from operations for the first quarter of 2012 was approximately $41 million.

Net of roughly $17 million of cash used for capital expenditures, we generated about $24 million in free cash flow in the first quarter of 2012.

During the first quarter, we used our cash to repurchase about 1.4 million shares of our common stock at a total cost of $40.9 million.

That wraps up our business and financial review for the first quarter of 2012.

Now I'll spend a few minutes on our outlook for the second quarter of 2012 and an update on the full year.

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

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, the effects of any impacts associated with holidays, and known weather influences.

For the second quarter of 2012, we estimate diluted earnings per share of between $0.47 and $0.49, based on an assumed range for comparable sales between 1.5% and 2.5%, as we lap a healthy 2.1% in comparable sales from the second quarter of last year.

With respect to the full-year 2012, we are raising the high end of our diluted earnings per share assumption to a range of $1.83 to $1.91.

This reflects the flow-through from our better-than-expected performance in the first quarter.

Our earnings growth expectation of 12% to 16% this year is in line with our longer-term mid-teens earnings per share growth objective, and is based on an assumed comparable sales range for the year of 1.5% to 2.5%.

Our food cost expectations have moderated some, and we now expect food cost inflation of between 2% and 2.5% for 2012.

Our corporate tax rate is expected to be between 28.5% and 29.5% this year.

We also continue to expect to reduce our outstanding share count with approximately $100 million targeted for share repurchases 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.

Doug, maybe you could just help us understand the cadence of the earnings growth for the year, since first quarter, you had that unfavorable shift from the extra week last year.

Second quarter, you've given some pretty precise guidance, maybe that's low to mid-teens.

And then the fourth quarter, you've got to lap that extra week.

So does that sort of back into a very, very strong third quarter?

Maybe you could help us just sort of figure out if there's any anomalies in the earnings growth in the back half of the year we should be aware of.

I think I would look at the third quarter as being a very strong earnings quarter for us, and the fourth quarter at being less of a strong earnings growth.

You remember the fourth quarter year-over-year anyway, John, because the fourth quarter of last year contains that extra week and the associated leverage with that extra week.

So if you look at cadence and I would put a greater proportion of getting to the annual guidance that we've given in the third quarter year-over-year as compared to the fourth.

Any color on in terms of margin progression that gets you there?

Not just -- I mean, I presume you're speaking of the sales cadence because of the fourth quarter.

But is there anything almost in the way that commodities unfold in the back half, for example, or something else in the P&L?

I would say that we would expect for the year that we're going to get some pretty good leverage on our P&L that will improve our margins for the year somewhere.

If you take that guidance range between 40 and 70 basis points, and if you look at the third quarter piece of that versus the fourth quarter year-over-year, the third quarter is going to be a greater proportion on the bottom line as well.

Okay.

Thank you.

Jeffrey Bernstein, Barclays.

I have a question on the comp and the revenue trends that you're seeing and your expectation.

I'm wondering if you can give any kind of color in terms of cadence throughout the quarter that the industry was kind of seeing a slowdown in March.

And it looks like you guys came in at the lower end of kind of that precise dollar range of guidance that you had given.

So wondering kind of what you were seeing through the quarter?

And how do you really -- how do you guys internally best assess the industry recovery we're seeing, when trends seem to be so volatile?

I don't know if there's anything that gives you comfort based on your internal numbers.

I know you talk about consecutive quarters of traffic or whatnot, or whether there's any specific macro data that you see strong correlation to.

Just trying to get a feel for confidence at six months from now, you think the industry will be better versus worse at this point?

Thanks.

Well, it's a little difficult to predict.

Right, Jeff?

I think that I would tell you that our assumption with respect to this year is that the overall economic environment, including our industry, is just slightly better but pretty much the same as last year.

That's our assumption.

Our assumption going forward with respect to our sales incorporates that.

In other words, we've had very steady and predicable sales.

If you look at what they've been, they've been really within a pretty narrow range.

Our comp store sales were up roughly 2%, if you want to say what they've been over a period of time and do some averaging.

If you want to look at month-to-month within the quarter, like many restaurant operators, we had a very strong start to the quarter.

We think that was due obviously in part to weather; it was due to the fact that we have had our easiest comparison in January.

February was our most difficult comparison with the prior year, but we're still solidly positive in February.

And then in March, our comp store sales were about on average with what we had for the whole quarter.

So in March, especially with respect to traffic, our data would show that we were well above the industry in general, particularly in the month of March.

Is there anything you're seeing from a geographic standpoint?

Or anything to kind of explain away whether it's weekdays, weekends?

Just trying to get a read for trends through the quarter.

Geography, we saw some pretty broad-based strength across the country.

Our strongest markets continue to be California, Texas, the Southeast and the Midwest, but it was pretty broad-based strength.

If you look at dayparts, our dayparts have been very stable.

In fact, all of our dayparts -- lunch, dinner, mid-afternoon, late-night -- all of our dayparts are up.

The shoulder periods continue to be strong, but we saw strength across all dayparts.

So there is -- our results are very consistent and in line with what we expected to see.

Joe Buckley, Bank of America Merrill Lynch.

Can you talk about the check experience versus the price increase during the quarter?

It sounds like the bulk of your same-store sales were traffic-driven, which is terrific.

But you may have realized a little bit less of what I think was about a 2% year-over-year price factor than I might have guessed.

So can you just talk a little bit about that and how that played out?

Yes, just to clarify, just a little bit, you're about right on 2%.

We had about 1.8% of pricing in our menu in the second quarter -- I mean the first quarter.

Coming out of the first quarter and going into the second quarter, it will be just a little over 2%.

Let me just start off by saying that with respect to menu mix, it certainly ebbs and flows over time.

And as we've said in recent quarters, we are still seeing lower incident rates on nonalcoholic beverages, which is impacting almost all restaurant operators.

It continues to impact our mix some.

So that's a factor.

In addition, as we've also talked about in the past, with our -- that our menu changes twice a year.

And sometimes those changes to our menu are substantial, or they're entirely new menu categories.

And with that, almost always -- there almost always causes at least some movement in mix or some shifting around of the menu items ordered.

And the guests try new items or find new favorites.

And in the past, I mean, that's not a new phenomenon.

When menus change, there's some shifting around, and you don't know exactly where the shifting is going to be until you make the change.

I think the key point is that what we're doing right now, we believe, are the right things with the menu by providing guests with many options.

And it's working for us.

We're driving higher guest counts.

We're driving those higher guest counts with full margin sales.

We're increasing our four-wall margins, our restaurant level margins, and we're retaining our competitive advantage in menu innovation.

All those things are definitely part of our strategy and our growth plan.

And by the way, our check average is still growing, as it always has been.

Were there an unusual number of lower-priced options on this menu change?

I wouldn't say that.

I would say that -- go back a year and a half or two years, and even go back to the specials menu -- small plates and snacks, SkinnyLicious -- what we are doing with some of those menus is giving guests a lot of options.

And that's why those menus are so successful.

And we do adopt our menu strategy and changes to our menu to the current consumer environment, and guests are probably a little more price-sensitive right now.

Joe, one thing I'll add to Doug's comments is that, while we are giving guests more options, we're doing it at full margin sales.

So we're not discounting to attract the guests; we're increasing the set of options in our menu, bringing on items that are relevant to them that they -- that suit their lifestyle, and doing it to drive full margin sales.

Right.

And that's why we're increasing guest count.

David Tarantino, Robert W.

Baird.

Just a question on the broader development outlook, maybe an update on how the pipeline looks as you look past 2012 into 2013.

I know you must be working on deals already.

Is the pipeline looking strong?

And what type of unit growth might we expect looking at next year?

Yes.

I'll be happy to talk about that.

David, do you want to respond to that?

Well, as you know, we're working on DOCs in 2014.

So they're certainly coming along.

We've had a great record of every one of our restaurants we've opened in the last couple of years have been great, strong beyond our expectations.

I think it's too early to really tell you exactly what '13 is going to look like, but we're certainly looking on many deals.

And we've -- I don't know if that's got the lease approved, over 10 sites in the Middle East, and they'll open between '12 and '13 in addition to what we have domestically.

Go ahead, Doug.

I think that's exactly right.

I think that we continue to -- domestically is to really look to approve every site that we think is an A+ site, and we've done an excellent job with that, as David said.

Our average weekly sales of restaurants that aren't in the comp base are above the average weekly sales for the restaurants as a whole.

So we're doing a great job of that.

And you really can't downplay the international piece, because that is a big part of how we look at development going forward.

So I think the answer for '13 and '14 is that we're going to do as many sites as we can possibly find that meet the return criteria that we've set for ourselves.

Great.

Just on the domestic side, just to clarify, you're thinking the number could be similar or more than what you're doing this year, the 7 to 8 that you're doing this year?

I guess I'm not clear on that.

(multiple speakers) Go ahead, David.

(multiple speakers) Go ahead, Doug.

We'd certainly hope it will be more.

And I think we would've hoped that we would've had more than 7 to 8 this year.

So we will certainly try to have more than 7 to 8.

There's nothing holding us back from doing that.

Okay, helpful.

Thank you.

Matthew DiFrisco, [Cheesecake Factory - sic].

Thanks -- Lazard, actually, not yet Cheesecake Factory, I guess.

(laughter) Looking at the outlook there for the comments, I guess what you were talking about with G&A and the one-time in nature it appears.

Just want to clarify -- were those sort of one-time in nature in 1Q?

Are we going to see some accruals associated with that compensation carrying over into the next couple of quarters?

Well, some of it's one-time.

Obviously, the revaluation of the CEO retirement benefit is one-time.

Here's what -- while we expect overall operating margins for the year to improve by 50 basis points or so, we expect the G&A line for the year to come in just a little higher than last year.

And there's really a couple of reasons for that.

One relates to having a full bonus accrual for the year.

We did not have a full bonus accrual in last year's numbers.

So that's at least a year-over-year difference; a little bit higher equity compensation we expect.

And then the third thing from a percentage standpoint is really lapping the leverage in the fourth quarter of 2011 that was provided by that extra, very big volume week.

So those things in combination will cause the G&A line to be slightly higher for the year, but the overall operating margins we would expect to be better for the year by -- depending exactly where cost of sales come in, between 40 and 70 basis points.

Okay.

And then also looking at just the pre-opening.

I guess since it is somewhat of a choppier year of openings, a lumpy year of openings, can you give us some hand-holding on the preopening sites, since it does probably influence the cadence of the quarter's EPS?

Yes, it does.

It will impact the second quarter for sure, because we're going to expect to have more preopenings the second quarter certainly than we had last year.

So there is, I think, only $1 million of preopening last year.

This year is going to be more in the neighborhood probably of $2 million to $3 million.

And then just looking forward for the rest of the year, I think that if you look at the year in total, since we're opening about the same number of restaurants last year, preopening costs in total for the year are going to be as a percentage of sales pretty similar to what they were last year.

And then a little -- but part of the 2Q I guess is one of the reasons why you have a little bit more -- or slower EPS growth, you said $2 million to $3 million.

Correct?

Yes.

We'll have deleveraging from a -- on the income from operations line in the second quarter (multiple speakers) -- from preopening costs.

The overall income from operations line will not be deleveraged, but the preopening piece will be.

Excellent.

Okay, thank you.

Sharon Zackfia, William Blair.

Hey, Doug.

I had a really quick question.

Your comps -- the comps were kind of in the midpoint of what you expected for the quarter.

I apologize if I missed this, but your revenues were on the lower end.

Was that just really the bakery being weaker than you expected?

And not to pick on the third-party bakery, but it's the second consecutive quarter where we've seen pretty material declines in that year-over-year.

Is there something going on there that we should be more conservative in our modeling for the bakery?

Well, I think part of the reason why we were at the lower end, it is the bakery.

But I think we've said this a number of times.

But external bakery sales are always more unpredictable because the bakery has a very small amount of customers.

And this quarter is really the timing of orders as a result of customer needs and existing inventory levels that are coming out of the fourth quarter.

The difference is only $1 million.

I would say that looking forward, again, very difficult to predict.

But it doesn't have a tremendously material impact on our overall results.

If you look at the bakery for the first quarter on a standalone basis, that includes sales to our restaurants, their sales for the quarter were about flat -- or actually were up a little bit, and operating profit was up nicely.

So, while the sales are -- external sales are difficult to control and predict, the profitability is something under our control.

We did a good job of that.

Okay.

And the bigger corollary probably to my question was just to make sure that the non-comp units hit your plan in the first quarter?

Oh, the non-comp (multiple speakers) --

(multiple speakers) In the restaurant side of the business.

The non-comp units did hit our plan for the quarter.

Average weekly sales for the quarter, the comps were up 2.4% and average weekly sales were only up 0.7%.

But that had nothing to do with restaurants that weren't in the comp base.

That had more to do with the shifting of the big week from the fourth quarter last year to the first quarter of this year.

And that $8 million I talked about, if you do the rough math, $8 million over the $425 million of sales that we had for the quarter, really accounts for about 1.9% of the difference between average weekly sales and comp store sales, which really means that the impact from the productivity of new restaurants actually helped.

Okay, great.

Thank you.

Michael Kelter, Goldman Sachs.

I wanted to ask about the international development and just get an update on -- I know you have the, I guess, three coming in the Middle East in the back half of the year.

Any update on how that's coming along?

And then more broadly, any additional deals maybe percolating behind the scenes?

David, do want to address that one?

Yes.

As I said, we think three -- we know three will open this year.

There's a fourth that would come very quickly next year; we've approved six or seven other deals that will open in '13 and '14.

Some of these malls there are just being built now, so that's why the delay.

As you know, we've been speaking to people in South America, Mexico, Asia, and we have lots of conversations going and lots of possibilities going.

So, for me, it looks very, very good.

We're excited about getting our first restaurant opened.

We have lots going on to prepare for that.

So, to me, I think we have a bright future, especially in the Middle East with Alshaya.

And I think although they signed up for 22 restaurants, I don't doubt that they'll at least double that over the years.

And then just a quick follow-up on a question from earlier on G&A.

You said it would be up a little bit versus year-ago.

I guess -- are you suggesting that you guys are max accrued for your bonuses, if you hit your EPS target for the year?

And therefore, rest of the year be up maybe low to mid-singles like a normal year?

Or is that not an accurate statement?

I want to understand a little more about the cadence of how that will play out through the year, if you don't mind.

Well, I would say that any time that we're exceeding what our guidance was for, there's a higher bonus accrual that's going to be required to account for that.

So the way that we -- I don't know how other companies do it, but the way we do our bonus accruals, we set a budget at the beginning of the year and we assume we'll make that budget; and if we make that budget, then we'll have 100% bonus accrual.

If we're ahead of that budget, then we'll have to accrue a little bit more.

So really, an easy way to answer it is if we're exceeding the expectations that we set for you, then generally, we're going to have higher bonus accruals required.

Thank you very much.

Keith Siegner, Credit Suisse.

I'm going to ask a different question about the bakery.

Really just looking at the inter-company bakery sales.

This is a really strong quarter.

Despite losing the strong week, you had the second highest intercompany sales you've ever had, practically as high as the third quarter, which is a much stronger seasonal quarter.

Is this -- was this related to like where you'd contracted commodities?

Or is this like really strong intercompany sales?

Are your desserts mixing higher?

Help me understand like how this is growing solid double digits well above the overall revenue growth for the retail stores.

Well, the dessert sales have been very strong for a very long period of time.

So we're still -- well over 15% of our sales are dessert sales.

So I assume you're referring to the bakery's sales and profitability.

So if you look at the bakery's revenues for the quarter, they were up overall, not just external, external/internal, they were up compared to the previous year period.

And that was all driven by the sales of cheesecakes in the restaurant, the primary customer of the bakery.

But the bakery also benefited during the quarter, as the restaurants benefited during the quarter, from lower commodity costs this year, which really helped them with the profitability piece.

But at least on the sales front, looking at intercompany bakery sales, it seems like cheesecakes must be mixing consistently higher.

Is that a fair statement?

They have been, yes.

In this particular quarter, I think the incident rates were about flat.

But most of the last four or five quarters, incident rates of Cheesecake Factory sales have been up.

Okay.

Thank you.

Will Slava, Stephens.

On the lower 2% to 2.5% inflation guidance for the year, and also taking into account the nice year-over-year drop you saw this quarter, I wonder if you could talk about how you expect that to play out over the year?

And then on the back of that, if there would be any reason you can see, as of today at least, how that cost of goods would move up materially as a percent of sales from where we are here in 1Q?

Okay.

So I would tell you that the lower food cost inflation expectation or commodity expectations lowering it to 2% to 2.5%, we got a lot of that in the first quarter.

So if we look out, we don't have a lot more of that reflected in the out quarters that we didn't already have reflected before we experienced a little better -- a little lower inflation on non-contracted commodity items.

So if you look forward the rest of the year, we're going to see our food costs in every quarter -- assuming we're about -- we're 60% contracted; we're pretty much fully contracted today for us, which is at the 60% level.

So the non-contracted items, if they come in where we're thinking that they will come in today, we'll see some nice benefit on the cost of sales line in every quarter of the year -- compared to last year.

Great.

Thank you.

Andy Barish, Jefferies & Company.

All my questions have been asked and answered.

But I figured I get on and say cadence, because that seems to be the popular word of the day.

(laughter) That is very popular.

All right.

Thanks.

Nicole Miller, Piper Jaffray.

Could we please get an update -- I'm not sure how you want to segment it on, but percent of sales or mix as it relates to small plates to SkinnyLicious rollouts, kind of new menu items.

And then part B, when you originally brought these to market, it seems they might have been more labor-intensive than a typical, pricier rollout.

And I'm wondering now that you're up and running, and also very sustainably and positive comp territory, are you seeing any leverage that's different than you saw when you first rolled out these items?

Thank you.

Yes.

The first part of the question, Nicole, we look at SkinnyLicious and particularly small price and snacks, as just being part of the regular menu.

SkinnyLicious, for instance, does have some overlap of items that are on it and are on the regular menu.

So we're not looking at breaking that out or talking about specific percentages, but I will say that SkinnyLicious is doing extremely well for us.

I don't know about the labor intensity that you're talking about.

I don't think that that's a true statement.

I think that when we rolled out SkinnyLicious, there were certainly a lot of training that had to be done at the restaurant level, in order to learn how to make all of these new items, and to make them properly and to get them to the table quickly, and have them taste delicious like we want them to.

So I'm sure that as time has passed, that we've gotten better at that, but I don't know that there's any big additional labor that was part of the new menu rollout, other than that.

That's what I meant to ask, so that's a great clarification, thank you.

Mitch Speiser, Buckingham Research.

I'd just like to ask about the comps components again.

And it seems like the menu mix was down about 1.1% or so.

It sounds like it is driven by lower non-alcoholic beverage sales, which you've talked about.

It did get, though, a little bit more pronounced this quarter.

And is it safe -- it looks like the dessert sales were good, so is it safe to say that there has just been some general trade-down to lower-priced items in the menu?

Is that an accurate statement?

No, I would say -- I don't know if you were on the call earlier when I talked about the evolution of our menu and our twice-annual menu changes.

But as our menu evolved and guests have more choices, when they look at our menu, we generally see -- and it's natural to assume that there's going to be at least some shifting around on the menu of menu preferences, as guests -- again, as they try new items, as they find new favorites.

And we think that's okay.

The goal that we set to ourselves is to get more guests in the door without discounting to attract them, without losing any margins.

And guest traffic is growing, so we know we're giving guests what they want.

Over time, I think we -- and if you look back historically, you'll see that our menu changes over time have resulted in us growing our check, our average check, at a rate that's closer to our menu price increases.

Over time, we think we'll get back to having menu mix -- we'll call it stabilize, which what I mean by that is, capturing more of our price increases than we put in the menu.

But our guidance, Mitch, for comp store sales, hasn't changed.

We're still expecting to grow guest traffic for the year, and we're still expecting mix for the year to be somewhat negative.

Okay.

Thanks.

Maybe just a technical question on traffic.

If a customer goes into the Cheesecake Factory just to get a dessert and leaves, just say, is that considered a customer for traffic?

Or is it just a dine-in customer?

We count that as a guest.

Okay.

Okay, great.

Thank you.

And separately, on Grand Lux, can you comment on the comps trends there?

It did come at a [0.3].

I know a year ago, maybe, I think it had some mismatches versus two years ago.

I'm just wondering your thoughts on the Grand Lux comp, was there any particular reason for the softness?

There are not that many stores in the base.

Just in general, any comments on the Grand Lux comp and if it hit or did not hit your internal targets?

Okay.

Yes, you know, I think you hit on it, Mitch.

We only have -- there's only 13 units, so variability is great location by location and quarter to quarter.

And the sales performance at higher volume locations of which Grand Lux had three very high volume locations.

Obviously has a disproportionate impact on what drives comp sales for the quarter for the concept as a whole.

So it's -- we would say that Grand Lux -- that while we'd like to have the comps be up -- you could see them up 5% pretty easily if you had some of the big restaurants being up, great.

So we didn't have -- some of the bigger restaurants were not up quite as much, so they had a little bit softer comps.

So I guess that's what I would say about that.

Okay.

Thank you.

Bryan Elliott, Raymond James.

Wanted to circle back to the cost of goods.

I understand that I'm on the road and missed the beginning of the call.

But if I heard correctly, you said definitely that most of the cost of goods improvement relative to the prior guidance has been seen in Q1.

I just wondered what drove that?

Q1 surprise?

Well, it has to be non-contracted items.

And for us, that was mainly dairy and produce.

Okay.

So your expectations for the out-quarters fundamentally haven't changed?

They haven't changed by near as much as the first quarter.

I would say that most of it is reflective -- I wouldn't say they haven't changed; I would say that it wouldn't be as dramatic a change.

We would have expected costs to sales in the first quarter to be higher than last year in February, as we gave our guidance and they were lower.

So a bigger portion of it is first quarter-related.

Okay.

And dairy typically for you guys means cream cheese, and you often contract that.

Refresh our memory on where you are with your cream cheese.

We're -- well, partially contracted, I would say, for cream cheese.

Okay.

So the spot came in and helped.

Okay.

Thank you (multiple speakers) --

It's not only cream cheese, it's manufacturer's cream, it's other things other than just cream cheese, other dairy products as well.

Okay.

Helpful.

Thanks a lot.

You're welcome.

Larry Miller, RBC.

I just wanted to go back to traffic for a second and get a sense for the store-level capacity in aggregate, if you could.

And Doug, what I'm trying to get at is, how far would you say you're off from peak capacity?

And I'm sort of thinking about it in terms of what comp traffic could be in aggregate if the economy recovers.

Or really, are we back essentially to where you were historically and comps are getting close to the level of pricing?

Can you give me sense for that.

Thanks.

Yes.

I don't think we're anywhere close to back to what our guests were at the peak.

So that's how I look at it.

At the peak sales levels, we were, say, at roughly $11 million average unit volumes.

And today, we're at roughly 10 million, a little over 10 million average unit volumes.

So that difference, since our check average every year has increased, that difference of, let's say, that's 10% roughly.

And that is entirely guest count-related.

So increase in our guest counts by 1% to 2% over time can happen for quite a while longer, before the same amount of guests -- before we meet those -- get back to the peak levels of guests.

Okay.

That's helpful.

Thanks.

Peter Soleil, Telsey Advisory Group.

Thanks for taking my question.

Just two questions, one on the share count.

It looks like you bought back 1.4 million shares this quarter, yet the share count really didn't budge all that much.

So how should we be thinking about the share count I guess in the second quarter and on a go-forward basis?

Well, the share count, actually if you compare it to the previous year, the prior-year quarter we were somewhere about 60.4 million [weights] full diluted weighted average shares outstanding, and this quarter we're at 55.7 million.

So it's a good numbers on millions of shares -- was that 4-plus-million shares lower.

So when you're doing the weighted average shares outstanding calculation, the shares you buy in the actual quarter you're buying them aren't helping that calculation too much.

Because it's a weighted average.

So we bought those shares in the middle of the quarter, or throughout the quarter.

So they're not reflected as much in the first quarter [of weight so] amount of shares outstanding as they will be in future quarters when they are no longer outstanding for the full quarter.

Does that make sense?

Yes.

So the second quarter will have I guess a lower share count?

(multiple speakers) Depends on what you bought.

Yes, Peter, that's just a result -- as a result of what we bought in the first quarter, but also as a result of what we've been buying for the fourth quarter of last year, the third quarter of last year and the second quarter of last year.

So all of those will impact the second quarter weighted average shares outstanding this year compared to what they were in the second quarter last year.

Got it.

And then just quick question on pricing.

Now that you're seeing some moderation in some of the commodities or the inflation pressures easing a little bit, how should we be thinking about your pricing on a go-forward basis as we go out throughout the course of this year?

Are you still planning to maintain that 1% to 2% pricing?

Or should we think that that's going to go down from here?

I would say that we're going to continue to do what we're doing, which is a game that requires judgment and there's not a right or wrong answer.

But the desire is to be able to balance our need to protect our margins with our even greater desire to grow our guest count.

So if we don't have to take price to protect margins, or as much price, we'll certainly take less price.

If we have to take price to protect margins, then we will consider taking more, but we'll always try to achieve that balance.

So I don't know if I'm specifically answering your question, but I would say to you that we would like to take as little price as we can, but we're going to take some kind of price twice a year.

I think that's the answer.

And all that depends on where we think our particularly variable cost of the commodities environment ends up being.

Thank you very much.

John Ivankoe, JPMorgan.

The question is on international development, if I may, David, if you're still with us.

I think you kind of laid out what you think the Middle Eastern opportunity might be.

And if I heard you right, like, that I'll say Alshaya one day might be able to do over 40 stores?

And I assume I'm still on.

But I mean that sounds like it's a fairly big number.

So I was wondering if you could -- as you've begun to study the models of other competitors or maybe just partners that you may have in various other markets around the world, how you might size the cheesecake opportunity in Asia -- I understand where you are, including China, maybe even Japan, Philippines, Indonesia, what have you, Korea, and Latin America.

In other words, I mean, could this be a 100, 150 maybe 200 unit brand internationally?

I mean, just thinking very long-term in terms of what the partner capabilities are and what the ultimate consumer demand might be?

David, are you there?

I think David might have fallen off the call.

So let me address what you're talking about, John.

First of all, with respect to Alshaya, they have 19 countries that they do business in.

Our contract with them is currently to build 22 restaurants over the next five years in five countries.

They operate around 60-plus other brands -- not restaurant brands -- some of them restaurant brands; but they're a lot of retail brands.

So they would like to have a broader territory with us, and certainly have the capability to take us to areas of the world far outside of just the Middle East.

For instance, in Egypt or Lebanon or Eastern Europe.

Those are areas where they could take us over time.

And we just are -- we're walking before we run with them, with respect to contractually giving them the rights.

And right now they have five countries.

So that's where that stands.

But the ability and the potential for Alshaya to do many more than what is in that current agreement is certainly there.

Now we're just assessing the other markets, the Asian markets.

We made, as David said, a trip to Asia.

The good news is that we have a number of partners that we've met in major Asian areas, such as Hong Kong and Korea and in Japan, that are very interested in having further discussions with us, and determining how to -- they're very interested in bringing the Cheesecake Factory brand to their part of the world.

That's the great news.

As soon as we announced our contract with Alshaya, we had many inquiries from other potential partners in other parts of the world that were interested in partnering with us to build our brand in those parts of the world.

So some of them were highly qualified and some of them weren't.

But we have some highly qualified big companies, bigger than us in some respects, that are interested in having further discussions with us.

And we are having those discussions.

Okay, that's helpful.

Thank you.

Steve Anderson.

Just wanted to clarify something with regard to money mix.

Given some of the warmer than usual temperatures, particularly in the Northeast and the Midwest, may have seen -- I don't know if you've seen any increase in terms of dessert or snack sales that may have maybe pushed your product mix down as a percentage of sales.

I just wanted to see if you have any comment on that?

Yes, I -- you know, it's pretty difficult to really know what the impact of warmer weather is.

It's difficult to know.

I think that some would say that the warmer weather really helped drive their sales, because the weather was so much better this year than last year.

And I would say to you that, to some extent, the opposite is true -- when the weather is really nice, in Boston, Massachusetts in March, people are getting the opportunity to cook out in their yards and do things together that might impact their visits to restaurants.

So it's just very difficult, I think, to really segment weather in that way.

When we look at the weather impact and whenever we say anything about what kind of impact we thought the weather had, it usually has to do with either store closings or partial store closings in one year versus as compared to another year.

Okay.

Thank you.

Jake Bartlett, Susquehanna.

Yes, just touching on the weather comment, some of your competitors have talked about -- about 200 basis points benefit from weather.

Would you say that you're -- you're not giving a specific amount, but would you say it's much less than that, just given you're -- that you're in malls and that sort of thing?

Would you estimate that it's much less than the 200 basis points we've seen elsewhere?

Yes.

Again, it's difficult to estimate and there's no real way of knowing what the impact of warmer weather is, but we think the positive weather impact in the first quarter, based on the way that we always look at weather impacts and how we calculate that, is somewhere around 50 basis points.

So, much less than [2%].

Okay.

I want to understand, I might have misheard you, but in terms of your COGS leverage in the back half of the year, did you say you expected leverage?

I would have expected some deleverage, given that the inflation of 2%, 2.5% is a little bit above -- pricing is probably going to be higher in the back half of the year than for the full year.

So maybe just to clarify the COGS leverage in the back half of the year.

Well, we would expect to see cost of sales for the back quarters, which was incorporated into our guidance when we originally gave it in February, and is reiterated today and reflective in the annual guidance, that the cost of sales versus last year will be a benefit.

So you can't -- last year, we had about 4% to 4.5% commodity cost inflation, and we did see an impact on that line because we took only 1.8% pricing.

But you can't look at only pricing as -- when we have -- if we have years in the future when commodity costs are up less than 2%, we're going to be able to have -- run lower cost of sales even with moderate pricing.

Right, but it just seemed like inflation is above pricing in the back half of the year here.

But maybe it would make it -- it would be clearer if you could give us what inflation actually was in the first quarter.

I don't have that number -- 2% to 2.5% for the year.

Okay.

And just a question on development in the environment, that what you're seeing.

I know you've mentioned before that deals are just taking longer to get done.

Could you just comment on whether that's still true?

Whether you think landlords are a little quicker to act these days?

And also whether some of the big-box closings that we've been hearing about, with, say, Sears and Blockbuster, and what -- Best Buy -- whether that's creating some opportunity for you?

I think (technical difficulty) malls.

I think things are taking a little bit longer these days.

As we said before, I think the things have more involvement with some of the real estate that they used to have, so it just takes a little longer.

Otherwise, in terms of what we get, the place we play in the mall, the importance of having a Cheesecake Factory in a center or in a -- we then center, I think, is still important, and still very favorable for us.

Okay.

And would you characterize your guidance for store openings in the kind of high single digits, and last year and this year, as more -- that stores were pushed further out?

Or did they fall off of your pipeline because of some factor?

90% of the time they just get pushed out.

They don't fall off.

Every once in a while something will happen, but not too often.

Don't forget we mostly deal with the top four or five landlords in the country.

And we have excellent relationships with them.

And once we get going, usually it gets close to fruition.

Great.

Thank you very much.

John Glass, Morgan Stanley.

It's been a number of years since you've opened a Grand Lux.

And if I heard you correctly, you are opening one this summer, and the last one was still large-format.

So what does this new one look like?

Have you changed the format substantially?

Is a test case to understand how you can proceed with this brand?

I think it's smaller.

It has a -- I'd say a more calmed-down decor, not quite so Venetian carnival, which is what we were really trying to do at the beginning with Grand Lux.

But we think it's more approachable in the suburbs.

Some of our stores, you know, the stores in Chicago, they're both doing in the $17 million range, five blocks from each other.

So you can see that Grand Lux can do great numbers.

If you took the higher of Grand Lux and you took out the Vegas ones and the bottom ones, and the comps were much better than they were.

So we're happy with the food, and we're happy with the service.

We felt we needed a little smaller unit, and one that where people wouldn't say I'll come back when I'm dressed.

And we are getting some of that in the suburban stores.

But we wanted to make it more approachable for the suburbs, and I think that's what you'll see in our Cherry Hill store in July.

Okay.

And then just as a related question, the average square footage of a Cheesecake Factory Class of '11 was 8,500 square feet, if I do the simple average.

It was 9,300 the year before; it was about 10,000 the year before.

What do you think the Class of '12 is in terms of square footage?

Well, I think the same.

We still build the three size stores.

We have [7200, 8500] and the 10,000 foot one.

So although it doesn't matter to us what we're doing, we're just -- again, we're looking at real estate and putting our best guess as to what it will do, and then building the right square footage for the right investment.

So it's hard to say how it will fall out.

But I would say the 8500 is probably a good guess; maybe a little more, maybe a little less.

Thank you.

Our last question comes from Matthew DiFrisco with Lazard.

Please proceed.

Actually all my questions have been asked and answered.

Thank you.

Okay.

Thanks, Matt.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may (technical difficulty).