Cheesecake Factory Inc (CAKE) 2012 Q2 法說會逐字稿

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

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

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

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

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

I would now like to turn the conference over to Ms. Jill Peters.

Good afternoon, and welcome to our second-quarter fiscal 2012 earnings call.

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

On the call today are David Overton, our Chairman and CEO, 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.

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 will open the call to questions.

And with that, I will turn the call over to David.

Thank you, Jill.

We've now had 10 straight quarters of positive comparable sales.

And this was another quarter where we experienced strength across geographies and day parts.

We lapped a very healthy 2.1% in comparable sales from a year ago.

Maintaining our two-year trend of about 4%.

Our business continues to perform at levels that are healthy, stable and predictable.

Our guest traffic continues to grow as we increase our market share.

In contrast, multiple industry data points show that guest traffic has been declining for almost a year.

In addition, our comparable sales were pretty steady throughout the quarter in contrast to somewhat volatile industry trends.

Trends like these validate our strategy of differentiation through menu innovation, food quality and superior service.

These are the levers that we use to drive sales, and they are sustainable.

We don't believe that we need to discount to attract guests.

And our results demonstrate that discounting from others isn't negatively impacting us.

The strength of our business leads us to an important step in our commitment to increasing shareholder value.

Today we announced that we will pay our first-ever cash dividend.

We are confident that the significant amount of cash that our restaurants generate affords us the opportunity to both a growth company and also enhance returns for our investors through a dividend.

Finally, as to development, we continue to expect to open as many as seven to eight new restaurants in the US this year.

I know many of you are interested in an update on Grand Lux Cafe, with the newest location having opened two weeks ago.

The restaurant looks great, with a completely redesigned interior and patio that makes the restaurant more approachable for guests.

And at about 8,700 square feet, the restaurant is also quite a bit smaller in size than our existing locations.

Based on what we have seen during the initial couple of weeks, the concept is being accepted by guests.

And we are also doing some local restaurant marketing to help build the awareness of this concept.

We will continue to evaluate the results from Cherry Hill and look for sites that would be appropriate for future Grand Lux Cafe locations.

Internationally, the first of multiple planned Middle East locations is on track for opening in mid-August in Dubai Mall.

Discussions with other potential partners around the world are also progressing.

So we continue to feel good about the opportunity for expansion of our brands overseas.

I am enthusiastic about The Cheesecake Factory becoming a truly global brand and the role international expansion will play in our future growth.

Now I will turn it over to Doug.

Thank you, David.

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

Total revenues at The Cheesecake Factory for the second quarter increased 5.6% to $454.7 million.

Revenue growth reflects an overall comparable sales increase of 1.7%.

Comparable sales increased by 2.1% at The Cheesecake Factory.

And declined 2.9% at Grand Lux Cafe.

In addition, we had a 4.4% increase in total restaurant operating weeks due to the opening of eight new restaurants during the trailing 15-month period.

Plus a 1.9% increase in average weekly sales.

At the bakery, external sales were $11.8 million, down about $2.4 million from the prior year.

In spite of this, the bakery's profitability was up solidly as compared to the prior year period.

Cost of sales decreased 110 basis points to 24.4% of revenue for the second quarter.

We continued to experience better than anticipated favorability, primarily from non-contracted dairy and produce, as well as some benefit from fish.

Labor was 32.1% of revenue in the quarter, down 30 basis points from the prior year.

In a continuation of what we experienced in the first quarter, we saw favorability from lower group medical costs, in part due to lapping high costs in this area last year.

This was partially offset by higher payroll taxes, which we expected and discussed on previous conference calls.

As well as other labor-related costs.

Other operating costs and expenses were 23.9% of revenues for the second quarter, down 10 basis points from the second quarter of the prior year.

We saw a reduction in debit card transaction fees, as anticipated.

As well as favorability from lower utility costs.

Partially offset by higher repair and maintenance costs.

G&A was 5.8% of revenues for the second quarter, up 20 basis points from the prior year.

The majority of the increase stemmed from a higher corporate bonus accrual versus last year.

And depreciation expenses for the second quarter of 2012 was 4.1% of revenues, flat with the prior year period.

Pre-opening expense was $3 million in the second quarter of 2012 versus about $1.1 million in the same period last year.

We had one new restaurant opening during the second quarter of this year, and none in the comparable period last year.

Interest and other expenses reflected approximately $419,000 in proceeds we received from a life insurance contract related to our deferred compensation plan.

Our tax rate this quarter was within our expected range at 29.2% versus 27.4% in the second quarter of last year.

In summary, we had a very good quarter.

We outperformed the industry on comparable sales and guest traffic growth.

We executed well and delivered 140 basis point improvement in four-wall operating profits, leading to a 21% growth in earnings per share.

Moving on, our liquidity position continues to be solid.

Cash flow from operations for the first six months of 2012 was approximately $74 million.

Net of roughly $36 million of cash used for capital expenditures.

We generated about $38 million in free cash flow through the second quarter of 2012.

During the second quarter, we used our cash to repurchase 543,502 shares of our common stock at a total cost of approximately $16.7 million.

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

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

As we have 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 influence.

For the third quarter of 2012, we estimate diluted earnings per share of between $0.47 and $0.49, based on an assumed range of comparable sales between 1.5% and 2.5%.

This is consistent with our performance in the first half of this year, as well as our expectations for full-year comparable sales.

With respect to the full year 2012, we are raising our diluted earnings per share assumption to a range of $1.87 to $1.93.

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

Our earnings growth expectation of 14% to 18% this year is in line with our longer-term mid teens earnings per share growth objective.

And is based on assumed comparable sales growth for the year of between 1.5% and 2.5%.

Now a few comments on commodity costs.

Our food cost expectations have moderated a little more since our last earnings call.

And we now expect food cost inflation of between flat and up 1%.

With menu price increases of around 2% factored into our earnings per share sensitivity range for the full year, and taking into account the impact from bakery cost of sales, we would expect to see leverage on the cost of sales line of somewhere between 60 and 80 basis points in fiscal 2012.

As to our corporate tax rate, we continue to expect it to be between 28.5% and 29.5% this year.

Before we move on to your questions, I would like to spend a few minutes talking about capital allocation.

As David mentioned, we took a significant step with the initiation of a dividend.

We are confident that our cash flows can fund our objectives, which include the continued investment in new restaurant openings and returning capital to shareholders in a balanced way through dividends, as well as through share repurchases.

We can achieve these goals without incurring debt and while maintaining a comfortable cash balance.

The first dividend payment of $0.12 per share will be made on August 21, 2012 to shareholders of record at the close of business on August 8, 2012.

On an annualized basis, a quarterly payment of $0.12 per share equates to a payout of approximately 25% of our net income for fiscal 2012.

We believe this is a meaningful starting point and our goal is to grow our dividend over time.

As noted in the press release the dividend represents an incremental return of capital to shareholders.

We continue to target about $100 million in share repurchases for this year.

Lastly, I will note that our CapEx expectations for the year have come down a little bit to a range of between $95 million and $105 million.

With that said, we will 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) Joe Buckley of Bank of America.

Could you talk a little bit in more detail about the same-store sales increase?

You referenced traffic being up a couple of times.

And I think you were running about a 2% price factor.

So was mix somewhat negative?

Just fill out some of the details on that, if you could, please.

Certainly, Joe.

Our traffic for the quarter was up 0.5%.

Our average ticket, our average check, was up 1.2%.

Our average check did improve this quarter.

It was up 0.5% in the first quarter and, again, it's up 1.2% this quarter.

With respect to the traffic, I think that the way that we look at that, we take somewhat of a macro view when looking at our traffic results.

And relative to multiple industry data points, I think David mentioned, casual dining overall really had guest traffic decline.

And we are pleased to be able to continue to increase the number of guests coming to our restaurants.

And we know that we are continuing to take share.

So, I think that we maintained or perhaps even expanded slightly the gap between our traffic growth and that of the industry in the second quarter.

Okay.

And them maybe just one more, if I could.

You commented favorably on the food cost outlook for this year.

Obviously the crop news from the Midwest is in the headlines every day.

Can you extend some coverage early into 2013?

Or how are you thinking about 2013 from a food cost perspective?

I think we can -- we are doing -- we're constantly negotiating and talking with our suppliers.

In order to put any numbers around that at this point in time it's really too early to say anything definitively.

Certainly the droughts that have happened will not help.

But we are constantly working with our vendors on what we can do to potentially extend some contracts that we have.

And if we think that is a smart thing to do, we will.

Okay.

Thank you.

John Glass, Morgan Stanley.

Two perhaps related questions.

One is, there is seemingly an improving gap between average weekly sales and comp.

Or improvement, I should say, relative to prior trends.

Can you talk about some of the new stores that have opened the last 15-month period and performance.

Particularly some of the smaller format stores.

And have you seen trends improve even more in the last couple of openings you have done.

Can you also talk about Grand Lux.

I know there is a new one opened now but in the context of what happened to the comps.

Is it one of the big stores that were down and so it's really not representative of the comp base?

Or how do you look at the existing base of Grand Lux in the context of that negative comp?

Thanks.

Sure, the first question had to do with --?

New store productivity.

The new stores.

I don't know that there is any change from what we have said before about our new stores.

The restaurants that we have opened over the last three-year period of time, which includes the smaller format restaurants, are all doing well.

And on a productivity sales per square foot basis, about 10% higher than the average of all the other restaurants.

So, the new restaurants are performing better.

And that's probably why you are seeing that average weekly sales change compared to comp store sales.

With respect to Grand Lux, and we've talked about this before, and I think you were walking down the right path there, John.

With only 13 units in operation, variability is obviously greater location by location and quarter to quarter.

The sales performance at the higher volume locations, such as in Las Vegas, obviously, have a big impact on what drives comp sales in any particular quarter for the entire concept.

The way that we look at this, I would guide you not to look too closely at just one quarter.

We look at a longer-term horizon.

And if you look back over the last 12 months, the Grand Lux comps have been basically flat.

We look at that as right on industry trend.

And this isn't meant to be a knock to Grand Lux, but almost no concept, including Grand Lux, has the brand awareness that The Cheesecake Factory has.

And The Cheesecake Factory is performing at levels that are well above average.

So it's really not too fair a comparison to be their sister company.

But Grand Lux comp store sales results in the trailing 12 months, I think, have been more in line from what you are seeing in the industry.

And Cheesecake Factory's have been higher.

Thank you.

Will Slabaugh, Stephens.

I just wanted to dig in a little bit more on the trends you have been seeing as far as the menu mix goes.

Just in particular on beverages, desserts, how that's played out over the past year or so.

And more curious what sort of negative menu mix you have been lapping versus what you think you will be lapping here going forward.

Like we talked about, the average check did improve this quarter.

There was a significant improvement in the menu mix, and hence the check average.

I will reiterate what I said before, I think I said before, about menu mix.

Is that it certainly will ebb and flow over time.

And perhaps this quarter, since we didn't have as significant a menu change in February, there might have been less shifting around of the menu and more of a settling in.

And enabled us to get more of our menu pricing that we had taken.

But with that said, lower incident rates on nonalcoholic beverages, we are still seeing some of that.

And we do, as you know, make menu changes to our menu twice a year.

Sometimes they are extensive.

Sometimes they are entirely new menu categories such as SkinnyLicious.

So it's natural to see that there's going to be some movement or shifting around in the menus as guests try new items or find new favorites.

So, we are very happy that the menu mix improved some this quarter.

But what we are really focused on, and as we've said many times before, is continuing to take market share and growing our guest counts.

And the menu mix will eventually take care of itself.

Thanks.

If I could squeeze in a quick follow-up.

Just wondering how the smaller plates and SkinnyLicious items you introduced last year play into that.

Is that something we should expect you to expand or bring in?

Or if you are still very comfortable around how they are performing.

We are real comfortable around how SkinnyLicious is performing.

You are very aware, as you mentioned in your question, that we differentiate ourselves through menu innovation.

And SkinnyLicious has been in effect now, or we have had it out for nine or ten months, and it continues to do well.

I think the guests love the menu, they love having more options.

Will we do more of that?

I don't know if we have an entirely new menu category on the horizon for the next number of months.

But we are certainly continuing to make changes to our menu twice a year.

And there will be a new menu change that goes out next month that we'll put more new items on the menu and take a few items off.

That is what we do and what we are known for and what's differentiating us.

Thank you.

Jeffrey Bernstein, Barclays.

First question just related to the unit pipeline, just based on how long it takes for you to build these sites.

As you have some early indication on 2013, obviously without too much granularity, I'm just wondering directionally versus the seven to eight you are seeing in the US in '12, should we expect more of a meaningful uptick just being in the US Or is perhaps the fact that you are so prudently selective in terms of your approach, is it difficult to see a path to meaningful reacceleration with real estate site selection the way it is?

I would say that we are still going to be selective and we still have the high desire to want to build more restaurants because that's our number one -- we initiated a dividend today, but the number one way we want to allocate our capital is to build great high probability of high-return restaurants.

So, we are looking constantly at that.

We are seeing some more building.

Right now there are four new malls and several remodels that are happening.

So, I think we are seeing landlords start to slowly pick up.

And that will bode very well for us.

We probably have as many signed up for 2014 as we do for 13.

But, we are still trying to fill '13 in and take every site that we can.

Is there a ballpark estimate relative to the seven to eight as to how many we should think about in terms of acceleration?

It's too early to give you that.

We will when we can.

Okay.

And on that same path, international.

I know you mentioned the first unit in the Mid East, I believe you said in August.

Are we still on track?

I think it was supposed to be three in the back half of the year.

It's possible.

Again, the construction is not in our control.

They are building.

I know the one will open on their date, which I believe is going to be August 16h or something, or 17.

And the other two are under construction and we will just have to see if they keep up.

Building there is much different than building here.

And our partner is the one who is building them.

But if it doesn't hit exactly, it will be very close because all three are under construction.

But then there is the path 2013, is an uptick from what you hoped to be three in '12.

Is that safe to say?

I believe so.

Again, you are dealing with things that we will understand better as we go along.

But in terms of the deals that we've okayed -- so, for instance, we are at least drawing the plans for Beirut.

I don't know if they've signed it.

There are other cities that we have gone to visit and other people that we are negotiating with.

So, it's hard for me to give you a number right now.

But I do believe you will see an uptick from this year.

If I could just ask one more question.

The marketing spend, it seems like some of your higher-end peers are starting to spend more on marketing and to pursue different channels.

I know you guys do one-offs.

But I'm just wondering what the spend is for this year and perhaps what do you think the biggest initiative or opportunity to drive traffic through marketing might be.

The spend this year is not any more for us than what it has been in prior years.

It represents about 0.5% of sales.

We don't use marketing in the same way that most other companies do.

We use marketing as really a support and a building block for our brand.

Our marketing is not offer driven.

Many marketing efforts you see from other companies is very offer driven.

And any promotion that we do is unique to us.

And is done in a way that we feel is appropriate for our brand.

So, we use a lot of social media.

We have been increasing that nicely.

We now have 2.7 million Facebook fans.

We try to get publicity.

An example of that is local TV network morning show cooking demos that were on.

Jimmy Kimmel Live.

Some other nationally syndicated shows.

Those are some things that marketing is doing for us.

One of the other things that marketing has worked on, has been very successful with, is expanding our distribution of gift cards, particularly as the holiday season will be upon us before we all know it.

And expanding the distribution of gift cards into the drug and mass merchant retailers where we didn't have any presence before.

So, we will see how that does with respect to gift card sales in the holiday season.

And then the last thing I will mention, that I know that you all have your calendar marked with a big X on July 30, which is National Cheesecake Day.

Where we are rolling out our brand-new cheesecake that day, the Oreo Dream Extreme cheesecake, which we think is going to be a nice seller for us.

Our Facebook fans get to come in and enjoy that at half price on July 31.

Those are the things that our marketing is doing.

I will mention one other thing.

2.7 followers.

Yes, 2.7 million Facebook fans.

But we are also testing a little bit of traditional marketing in one of our markets that has four or five restaurants, just to see whether that actually moves the needle.

We don't have any results for that.

In fact, it hasn't eve started yet.

Great.

Thank you.

Michael Kelter, Goldman Sachs.

One of the things that you said in the opening remarks which struck me was your comment that you wanted Cake to become a truly global brand.

My question is, if this is where a lot of the future growth is to come from --.

It looks like his line was dropped.

Should we go to the next party?

Yes, please.

Matthew DiFrisco of Lazard.

I just want to circle back and get some clarity on the 2Q same-store sales.

I think you came into the quarter -- and I didn't hear you specifically say what the price was in 2Q as part of the 1.7% average check.

We had a little over 2% of price in our menu.

So then you had a negative mix effect, I presume?

Yes.

Less negative mix effect than we had been having.

But, yes, it was negative mix effect.

Because I'm looking at the intercompany bakery sales.

And it looks like you had one of the largest increases in a long time, $4 million more than you did in 2Q of last year.

That would imply about a 1% same-store sales boost as far as just purely from the Cakes.

Is there something that offset that?

Or is it a migration to lower average check products that you are marketing?

Intercompany bakery sales are ones -- we had changed, first of all, the way that we're distributing our Cakes.

So some of that inventory is inventory now that is with a third party that is en route to the restaurants, if you will.

So there's inter-Company sales.

I see what you are trying to do, Matt, but it doesn't work out that way directly in any particular point in time because intercompany sales are just that, they represent really inventory.

Okay.

So, it's not a proxy then for dessert sales.

It's not a proxy for dessert sales.

But I am not trying to imply that dessert sales are not very strong.

Dessert sales are very strong.

Okay.

And then can you help us with the pre-opening?

It looks as though that was a large amount for only one store in the quarter.

Obviously you opened the Grand Lux days within the third quarter.

Can you help me and maybe spoon feed what the pre-opening could be in the third quarter, given that so much of it looks like it fell in the second quarter?

Yes, I certainly could do that.

I think you latched right on to it because you have to keep in mind that there's other factors that can impact pre-opening in any one quarter.

For example, when openings are incurring in subsequent quarters, relocation expenses.

Any managers that we're putting on our bench to build our bench strength go into pre-opening costs.

So it's not perfectly just related, obviously, to the number of openings in any particular quarter.

But I think if you look out in the third quarter and the rest of the year, pre-opening roughly in the neighborhood of $2.7 million is what we would expect in the third quarter.

And in the fourth quarter about $3.7 million.

Beautiful, thank you.

Michael Kelter.

Sorry about that, guys, not sure what happened.

You were right in the middle of a good question.

Start again.

I forgot what it was, though.

Your comments earlier about becoming a truly global brand.

And if that is where a lot of the future growth may come from, and your number one priority for free cash deployment towards new unit development, is there any intent to build the Company on units outside of the US?

Or at least take an equity stake so you could participate in the future growth of the Cheesecake brand economically?

Or is this really going to be just a franchise effort over time?

The first one is a licensing effort, as you know.

So any subsequent agreements that we reach, we certainly wouldn't rule out the possibility of being a joint venture partner.

I don't think, as David has said before, that we really wanted to be a joint venture partner in areas of the world that we would consider volatile, like the Middle East or maybe Mexico.

That are more volatile.

In other areas of the world, if it worked out to where our partner was agreeable, we could do that.

But our model and I think our primary desire is to license.

Now, let's just take Canada or Puerto Rico or maybe some other areas where we might actually operate the restaurants in those areas without a partner.

We probably would.

Singapore.

We've been to Singapore.

We might operate the restaurant there ourselves.

So, there could be places where we don't have partners and we do have our capital involved.

And that would be just one of our restaurant openings that we would put in our development schedule.

Thanks.

And then the other thing I wanted to ask, just a little more insight into your thinking as it relates to the dividend.

The comments in the prepared remarks were that you plan to grow the dividend over time.

Is that in dollars or do you intend to tease up the payout ratio over time from the initial 25% to some higher percentage?

How are you thinking about it?

We are thinking about growing that in dollars in some way, along with the way that our net income grows over time.

So I think I want to say, we are growing it, we're looking mainly at growing it in dollars.

I'm sure that maybe the net income payout ratio could change a little bit over time, but the thought is that we would pay out increases over time in real dollar terms.

Thank you very much.

Brian Bittner from Oppenheimer.

Most of my questions have actually been answered here.

But just a housekeeping question.

You might have already said this, but did you give an outlook for the full year as G&A as a percentage of sales?

No but let me tell you how we have talked about -- we haven't on this call, I don't think.

We are looking, if you look toward the operating margins in general for the year, we would expect that we would see better operating margins this year by somewhere around 60 to 80 basis points.

Most of that would come from better expected cost of sales.

So, if you break down the other line items, they all net out when we would expect a little bit better labor, a little bit better other operating expenses.

We expected to have a little higher pre-op and a little higher G&A than we had last year.

Last year I think for the year we had G&A of somewhere around 5.5%.

We would project to be somewhere in the neighborhood of 20 to 30 basis points higher than that.

What is really driving that?

A number of things.

One is, probably the most significant, is a higher anticipated bonus accrual.

So we would expect that to be a bigger part.

And also equity compensation being a little bit more.

And then, if you remember, last year we had a 53-week year and a 14-week fourth quarter.

And lapping the leverage in the fourth quarter of 2011 from that extra week is also going to have some pressure on the G&A line.

Okay.

And just another quick question, on the dividend.

Obviously the cash flow generation of your unit base is very powerful.

But just trying to understand the timing of the dividend.

Is this something that has been thought about for a while?

Or is this something that has come up more in the shorter term.

I'm just trying to understand the timing of the dividend announcement a little bit more.

Sure.

We have been considering whether we should pay a dividend for quite a while.

And this has been discussed at the board level for probably the last year to year and a half.

What we wanted to do before we initiated a dividend was to make sure that we didn't have other uses of the cash.

That we would be able to continue the dividend indefinitely.

And that we felt that we would be able to grow it over time.

So, all of those things factored into the timing of when to do the dividend and the amount of the dividend.

Really, we wanted to start off with a significant amount but not an amount that was so high where we couldn't have a good opportunity to be able to grow that dividend with some materiality at over time.

That makes a whole lot of sense.

Thanks a lot.

David Tarantino from Robert W. Baird.

Good afternoon and congratulations on nice results.

First a clarification on the guidance.

I just wanted to confirm that you are using $0.52 for Q2 in your annual guidance.

We are using $0.51 in Q2 for our annual guidance.

We had a lot of internal discussion about that, even calling out that small amount there.

But we did it the last time we had this so we did it for consistency purposes.

That's the, quote, non-GAAP number.

The GAAP number would be $0.01 higher.

Okay, thank you.

And then I wanted to ask a bigger-picture question on how you are viewing the health of the US consumer, your customer.

You mentioned the traffic in the quarter was up 0.5%, which is a little lower than you were trending in Q1 and Q4.

I'm just wondering how you are viewing that.

The slight deceleration, while good on a relative basis, do you think the consumer is starting to slow down?

Or maybe any thoughts that you could give on the trend line with respect to the economy would be helpful.

Yes.

I would tell you that we are not seeing anything really significant there.

The only thing -- we don't spend too much time with the macro economy other than to read the same news that you do.

What we concentrate on, obviously, is the things that we can control.

I know that the things under our control, we have done a very good job of making happy guests.

We have our guest satisfaction scores, I believe, in the last month were as high as they have ever been.

So, we are doing a great job with the guests that are coming in our restaurants.

And our retention rates are very high.

Our managers and our staff retention is very good.

We are really well-positioned to be able to continue to take market share.

I think that's important, that we are in an environment where guest accounts are not growing for many of the restaurants in our competitive universe.

They are still growing for our concept.

And just the slight deceleration this quarter, I don't see that much different in the macro environment that's causing me concern.

I think it has been and continues to be, and probably will continue to be for a while, a very sluggish and slow recovery.

Okay.

Thank you.

Mitch Speiser, Buckingham Research.

On the cost of goods line, which was down 110 basis points or so, with bakery down a bit, can you give us a sense of how much that line was affected by lower bakery sales?

I would say probably 10 basis points or less.

So, not too much.

Great.

Thank you.

My next question just on Grand Lux.

Can you give us a sense, of the 13 stores, maybe how many of them did comp negative in the quarter?

I know maybe about a year ago or so, I think there was maybe some talk about maybe some closures.

If you could maybe give us an update on the Grand Lux portfolio.

I don't have any update on any closures.

As you know, we have written down, had some write-downs associated with three under-performing Grand Luxes.

The Grand Lux volumes, average unit volumes, are still very high, and some of the highest in casual dining.

Almost as high as Cheesecake Factory.

With that said, there is two very big volume locations.

The majority, I would say, at least out of that 2.9% down, half of that or more was created from the Las Vegas locations.

And we had a mixed bag with the rest of the locations as far as whether their comps were up or down.

Okay, thanks.

And I think my last question is just on the 50 basis points of traffic growth in the quarter.

Was that for the entire system or was that for just The Cheesecake Factory brand?

That's the entire system.

The Cheesecake Factory brand was up more than that.

Okay.

Because you usually share the components just on The Cheesecake Factory brand.

Could you share those now or are you just talking for the entire system?

No, we usually only share the results for the entire system.

We don't break it out.

But The Cheesecake Factory brand, you can get an idea of what their traffic was based on their comp store sales were 2.1%.

Which was, obviously, above the average of the two combined at 1.7%.

So, that difference is roughly what you can look at for traffic growth for The Cheesecake Factory in addition to the combined.

Okay.

Thank you.

Nicole Miller, Piper Jaffray.

I wanted to know where you were at on the technology curve.

I know there is always a longstanding of back-of-the-house initiatives.

I'm wondering how you might interface with the consumer in terms of technology opportunities?

Some of your peers have different things on the table, or for ordering, things of that nature.

So I just was wondering what you might be considering in that arena.

Thank you.

We aren't doing anything or have any particular plans, particularly with respect to ordering.

I don't know that we will ever get there with respect to ordering.

Our menu is so complex and has so many modifiers.

The things that we are doing technology-wise in the restaurants is we are looking carefully at putting in online to-go ordering.

That is something that we would consider doing and are strongly considering that now.

We are looking at whether we should have wireless available in every restaurant that might allow us to do things like close checks.

But that's the future.

We are looking at all the same things you are hearing about, Nicole.

The ones that we think will work for us we will move forward.

But right now we are still in a look and let's see mode.

Okay, great.

And just one quick one, since you mentioned it on to-go.

Could you talk about what that is as a percentage of sales and how it's been trending?

Yes.

I don't know of any significant change in trends.

About 10%.

Okay.

Thank you.

Sharon Zackfia, William Blair.

Two questions.

One on the comp guidance for this quarter.

I remember last year I think you had a hurricane that dampened results in the September quarter.

I think it was 40 basis points.

So just wondering if you're assuming that trends get better as you lap that?

Or whether you're within that comp range right now.

And then, secondarily, I think earlier the point came up that this year's margin expansion will almost entirely be from cost of goods sold.

And that probably won't happen again next year.

So if you could walk us through the longer-term margin drivers on a 1.5% to 2.5% comp.

Okay.

Let's start off with our expectations.

So we said 1.5% to 2.5% for the third quarter.

That reflects our expectation of continued stable sales trends from what we have seen so far this year.

And we go through a very thorough in-depth forecasting process, week by week, restaurant by restaurant.

We know exactly what every restaurant did on every day last year and that would factor in the weather.

And this year we would factor in anything else that we think would matter, like shifts of holidays or whether we thought the Olympics were going to impact our results of this quarter.

And when we factor all that in, what we are comfortable with now is that range that we gave for the third quarter of 1.5% to 2.5%.

So, yes, we factored in whatever happened with hurricanes last year into this thought.

And then longer term margin drivers.

This year, just to clarify what you said, Sharon, was that we are going to expect to improve margins this year on the labor line in addition to cost of sales.

And on the other operating expense sales in addition to cost of sales.

But you are right, net-net it's mostly coming from cost of sales because of the offsets from G&A and pre-op.

Going forward, I think that there are -- if you look at where we are going to end up the year -- basically the gains in cost of sales this year are -- food costs are not low, by any stretch of the imagination.

And our gains are just getting back a little bit of what we had to battle to keep last year.

The way that we look at margins going forward is, let's take a normalized food cost environment, whatever that is.

If this year is normal, is next year normal, was last year normal.

Last year was much more aggressively higher.

But in a normalized environment, we would expect to be able to get our margins back over time to our peak margin levels as our comp store sales continued to grow and we gained leverage off of those comp store sales, as we have shown that we can do.

Over the last four years, our margins have improved by almost 300 basis points.

It's hard to take any year in isolation of what is happening with respect to cost of sales in any one year.

Looking forward, one of the things that makes us feel optimistic about our ability to be able to get back to peak margin levels, is that the volumes that we are at today, we have higher margins than what we had when we were at these volumes before.

So, the cost savings initiatives that we put in place a couple of years ago are allowing us to have a leaner cost structure.

And we have been able to leverage that to higher margins and would expect to be able to continue to do that as our sales grow.

A follow-up on that.

If we assume a stable food cost environment, which never actually occurs, but if we actually assume that, a 2% comp, would that be on average a 20 to 30 basis point margin expansion every year?

It seems like it would be a little less than the 60 to 80 we're seeing this year.

I'm just trying to figure out what the normalized would be.

That's a good point.

That is a good point.

One of the things -- and we have said this a number of times -- 2% for us is $200,000 because we have $10 million unit averages.

So we can get more leverage from 2% comps than a lot of other restaurant companies might be able to get.

But that's probably still somewhere in the neighborhood of 20 basis points.

Okay, great, thank you.

Bryan Elliott of Raymond James.

Just a couple.

One, I missed pricing.

You gave us traffic and mix but what was the actual price factor in Q2?

A little more than 2%.

Okay.

And you mentioned the Olympics, but just refresh our memory on what you have seen in past years for the summer Olympics, what kind of behavior change, if any, you all have experienced.

Not behavior change.

I just threw that out there as something you could consider when you were going through your comp store sales, the thought process.

Fair enough.

Thanks.

Robert Derrington, Northcoast Research.

Doug-- or maybe David, this question is probably a little bit better for you.

When we look at this year you are opening a Grand Lux, which is a little bit smaller prototype.

When we look at Cheesecake longer term, particularly as we look out to next year, do you envision that we will begin to see some stores that are a little bit smaller, similar to what you have done with Grand Lux?

Actually we patterned Grand Lux after Cheesecake.

These last stores we have opened in the last three years have been about either 7,200 or 8,500 because we have moved into some smaller markets.

That's worked very well for us.

Those are the ones that are about 10% higher.

That is really what we patterned Grand Lux after.

Doug, does that relate to the slightly lower CapEx spend for this year?

Does that fit in, in any way?

Or can you explain to us why it's a little bit lower?

It's only lower relative to our last guidance.

Okay.

So it's not substantial?

No.

Okay.

Very good.

Thank you.

Peter Saleh, Telsey Advisory Group.

Just wondering if you could elaborate a little bit.

I know you had mentioned you were testing some traditional marketing or media and the market.

Could you just elaborate on that?

Is that TV or is that something else?

Yes.

We have chosen one market that has four to five restaurants in it to do a more traditional marketing like radio, billboards.

But not television.

But not television.

Oh -- he asked about television.

He asked in general but I just wanted to make sure.

It's not television.

There's not enough restaurants in the market to do that.

Right.

So, the way that we will evaluate that is we will look at the trends that those restaurants had coming in to the test, if you will.

And then what kind of impact the tests have.

And then we have even divided the restaurants up to where some of them are getting billboards, some of them are getting more radio, some of them are getting in mall events that we are doing.

And we will be able to measure not only the overall marketing, whether that worked well for us.

But within that which parts of it worked best.

And we will just see if that moved the needle enough to justify the cost.

Great, thank you very much.

Steve Anderson from Miller Tabak.

Good afternoon.

I know you talked about on the restaurant side you're not seeing much of a macro impact.

But on the bakery side where you sell through the wholesale clubs, have you heard anything about them, about any slowdown in sales on that channel?

Certainly, a large percentage of our external bakery sales are to the wholesale clubs.

And they make evaluations constantly on how much product they're going to buy or not.

We haven't heard of any slowdown of their business.

It's more of a negotiation on how many of our products they want versus how many of somebody else's products they want.

So, some of the bakery results that were a little bit lower than what they were last year had to do with wholesale clubs but there's not any macro trends there that I know of.

Okay, thank you.

That concludes the Q&A session.

And this concludes the conference call.

Ladies and gentlemen, thank you for your participation.

You may now disconnect.

Have a great day.