Cheesecake Factory Inc (CAKE) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to The Cheesecake Factory Q3 2012 earnings conference call.

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

We will conduct a question-and-answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Miss Jill Peters.

Thank you.

Good afternoon and welcome to our third quarter fiscal 2012 earnings call.

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

On the call today are David Overton, our Chairman and Chief Executive Officer, and Doug Benn, our Executive Vice President and Chief Financial Officer.

David is joining us by phone as he is traveling today.

Before we begin, let me quickly remind you that during this call, items may be discussed that are not based on historical fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release which is available in the Investor section of our website at 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 both the fourth quarter of 2012 and our initial thoughts on 2013.

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

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

Thank you, Jill.

Our business continues to be healthy, stable, and predictable.

We've now had 11 consecutive quarters of positive comparable sales, and this was another quarter where we experienced broad-based strength with positive comparable sales in every geographic region and sales increases in every day part.

As we reflect on the quarter, there are a few takeaways.

We delivered comparable sales that were at the high end of our expectations.

We made meaningful gains in guest traffic during the quarter and September was strong.

This is markedly different from the volatility in the casual dining industry where multiple data points show another quarter of comparable sales that were about flat in guest traffic declines.

Our determined focus on driving sales, even during the busiest shifts, and maintaining high quality in food and service are key success factors.

People want a consistently good experience and they know they can depend on us to deliver it.

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

We have two openings slated for November and another two locations planned for December.

The restaurant openings to date include a new Grand Lux Cafe in Cherry Hill, New Jersey.

I know many of you are interested in hearing an update.

As we've talked about it in the past, this location was completely redesigned to make it more approachable for guests and about 8,700 square feet, it's quite a bit smaller in size than our existing locations.

Guests are responding well to the new design and to the menu, which we have put a lot of innovation into over the past year.

Not only at this location, but across the entire Grand Lux Cafe concept.

The results from Cherry Hill give us confidence to move forward with Grand Lux in different markets using this current format.

We are building our pipeline of new sites and we have a couple of locations for Grand Lux that we are considering.

Internationally, the first Middle East location operated by our licensee opened in Dubai Mall in August.

The restaurant is in a prime location in the mall opposite an aquarium that draws enormous crowds.

The opening was much anticipated and the demand for the brand is tremendous with long wait times.

We expect this location will be very successful.

Our global expansion is off to an excellent start.

The next opening in the Middle East is currently planned for November in Kuwait, and a second Dubai location is expected to open by the end of this year.

In addition to the Middle East, discussions with other potential partners around the world continue to progress.

We are both optimistic and excited about the opportunity for expansion of The Cheesecake Factory brand overseas.

Looking ahead to 2013, we currently expect to open as many as 8 to 10 new company-owned restaurants.

This includes 2 or 3 relocations as we capitalize on opportunities to optimize where our restaurants are located as leases expire.

Real estate dynamics change over time and there are some restaurants that we can relocate to better sites in more vibrant trade areas.

In addition, we expect as many as four locations to open internationally based on the current information we have at this time.

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

Thank you, David.

Now let's review our financial results for the third quarter, talk about our thoughts for the remainder of 2012, and take an initial look at 2013.

Total revenues at The Cheesecake Factory for the third quarter increased 5.4% to $453.8 million.

Revenue growth reflects an overall comparable sales increase of 2.5%, driven by increases in guest traffic of 1.5%.

Comparable sales increased by 2.9% at The Cheesecake Factory and declined 2% at Grand Lux Cafe.

In addition, we had a 4.5% increase in total restaurant operating weeks due to the opening of 10 new restaurants during the trailing 15-month period plus a 1.4% increase in average weekly sales.

At the bakery, external sales were $15.9 million, down about $1.2 million from the prior year due in part to lacking a significant increase in third-party bakery sales in the prior year.

Cost of sales decreased 80 basis points to 24.6% of revenue for the third quarter.

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

In addition, we saw a mixed shift benefit at the bakery.

Labor was 32.1% of revenue in the quarter, down 20 basis points from the prior year.

In a continuation of what we experienced in the first half of the year, group medical costs were lower in the third quarter.

In addition, bakery labor was favorable.

These line items were partially offset by higher payroll tax costs which we expected and as we have discussed in past quarters.

Other operating costs and expenses were 25.1% of revenues for the third quarter, up 40 basis points from the third quarter of the prior year.

This was driven by higher workers' compensation expense resulting from an increase in claims activity, slightly higher repair and maintenance expenses as well as the timing of marketing expenses, some of which shifted into the third quarter from the first half of the year.

These were partially offset by lower debit card transaction fees.

G&A was 4.9% of revenues for the third quarter, down 60 basis points from the prior year.

The majority of the decrease stemmed from legal costs recoupment, which we expected and appropriately considered in our third quarter guidance.

Pre-opening expense was $2.4 million in the third quarter of 2012 versus about $4.3 million in the same period last year.

We opened two new restaurants during the third quarter of this year and four in the comparable period of the prior year.

Interest and other expenses were higher by $500,000 due to market changes impacting investments used to support our deferred compensation plan as well as a slightly higher retirement rate of restaurant assets.

Our tax rate this quarter was 27.8%, keeping the year-to-date rate within our expected range of 28.5% to 29.5%.

In summary, we had a solid quarter.

Another where we outperformed the industry on comparable sales and guest traffic growth.

And we managed our cost structure to leverage our sales growth and deliver 36% growth in earnings per share.

Moving on, our liquidity position continues to be strong.

Cash flow from operations for the first 9 months of 2012 was approximately $127 million.

Net of roughly $68 million of cash used for capital expenditures, we generated about $59 million in free cash flow through the third quarter of 2012.

During the third quarter, we used our cash to repurchase 530,450 shares of our common stock at a total cost of approximately $17.4 million, and we used $6.4 million to make our first dividend payment.

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

Now I'll spend a few minutes on our outlook for the fourth quarter of 2012 and our initial thoughts on 2013.

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 effect, if any, impacts associated with holidays, and known weather influences.

For the fourth quarter of 2012, we estimate diluted earnings per share of between $0.50 and $0.53.

I will remind you that there was an extra week in the fourth quarter of 2011, which was a big earnings week for us.

Our earnings per share range is based on an assumed range of comparable sales between 1% and 2%.

We are lapping a very strong 2.7% comparable sales increase from the fourth quarter of last year.

We are also expecting the debates and election day to have an influence on sales.

That being said, the midpoint of our comparable sales sensitivity range represents an acceleration on a two-year basis and puts our full year 2012 comparable sales at about 2%.

Our earnings range for the fourth quarter will contribute to overall earnings per share growth expectations of 14% to 16% in 2012 as compared to 2011, which was a 53-week year.

This level of earnings per share growth is in line with our longer term mid-teens earnings per share growth objective.

Importantly, we expect to continue growing our operating margins in 2012, making further progress toward recapturing our peak margins.

Based on the earnings per share sensitivity we've provided, operating margins should increase between 60 and 70 basis points in 2012.

We maintain our food cost inflation expectations of flat to up 1% for fiscal 2012, and we continue to expect our tax rate to be between 28.5% and 29.5% for the year.

Our capital expenditures for the year are now in a range of between $85 million and $95 million and our share repurchases are expected to be in a range of between $90 million and $100 million.

With respect to 2013, our initial thoughts on the year are as follows.

As David mentioned, at this time we plan to open as many as 8 to 10 new restaurants next year.

Our total capital expenditures are expected to be between $115 million and $125 million for planned 2013 restaurant openings as well as expected openings in early 2014.

Internationally, we expect our licensee to open as many as four new restaurants in 2013, which require no capital investment on our part.

For the full year 2013, we are currently estimating diluted earnings per share in a range of $2.10 to $2.18 based on an assumed comparable range of comp store sales of between 1.5% and 2.5%.

We delivered annual comparable sales increases of about 2% each year for the past three years.

Importantly, these comparable sales increases have had a strong guest traffic component.

Our current sales expectations for 2013 are consistent with this stable, healthy performance.

In terms of food cost inflation, we're planning for between 3% and 5% inflation in 2013.

As to our corporate tax rate, we expect it to be in a range of between 29% and 30% for 2013.

We anticipate the majority of our free cash flow after capital expenditures to be used for dividends and share repurchases.

With that said, we'll take your questions.

In order to accommodate as many questions as possible, please limit yourself to one question and then requeue with any additional questions.

(Operator Instructions)

John Glass, Morgan Stanley.

Thanks very much.

It's a two-parter.

Doug, just first on the unit openings, 8 to 10 units.

But you said that included two to three relocations.

So it's really a net of six to seven, or whatever.

First of all, is that correct as you think about it?

And is that going to be a pattern going forward as the store base ages that you are going to have start to doing the relos and you are going to count those as kind of openings?

That's part one.

And then part two is if you look the new store productivity or the gap between comp store sales are 2.5% and average weekly sales of 1.5% or 1.4%.

That gap is negative and it hasn't been that negative in the past.

Is that just a function of a closure or some specific item?

Or is that more indicative of the stores you have opened recently?

Thanks.

Okay.

Sure.

So next year we see, as David mentioned and I talked about, 8 to 10 A sites that meet our criteria.

At least that's how many we have right now for next year.

And that's after opening eight restaurants this year.

We just so happens that two or three of those sites are in areas where we have an opportunity to optimize our portfolio and relocate a restaurant.

So you can look at openings on a net basis, as you described.

But if you do, keep in mind that any time we choose not to renew a lease and to relocate a restaurant, the economics are always accretive to us so that -- so, in a way, it's similar to opening a new restaurant or is at least a partial -- at least it's like a partial opening from an earnings per share perspective.

Just to give you a little more color, the strength of our brand gives us this opportunity to optimize our portfolio from time to time when real estate dynamics change.

We're looking at leases that are coming up for renewal and making a decision as to whether there is an opportunity to be seized, to relocate a restaurant that could do even better and have far more productivity perhaps in a more vibrant trade area that now exists.

With respect to your other question about average weekly sales and comp store sales growth, I'm glad you asked it in that manner because that's the way I generally think about it when there is that kind of gap, is that what I want to know is what is the performance of the newer restaurants that are not in the comp store sales base.

And our newer restaurants that are not in the comp store sales base that have opened over the last three years, which represents about ten locations, are doing very well.

In fact, looking at the new restaurant openings during that period of time, they're doing about 10% higher in sales per square foot and sales per seat than the average restaurant.

So the difference between comp store sales growth and average weekly sales growth is not attributable to the performance new restaurants.

The gap is driven by the difference in operating versus fiscal week comparisons.

It goes back to the fact that those two things are different than each other because of the 53rd week last year, which is shifting the calendar some by one week.

So the revenue number used for an average weekly sales growth calculation is a fiscal period number.

But in order for the comp store sales to be truly comparable, that number for comp store sales purposes is an operating week number, comparing like operating weeks.

So when you look at average week of sales and comp store sales now, you are comparing really apples to oranges because -- and that's the reason comp store sales growth is greater than average weekly sales growth, because of that shifting of a week.

If you remember, in the first quarter that occurred also but to an even greater extent than this difference.

But it was the opposite.

It was that the fiscal week growth, the average weekly sales growth was greater than the comp store sales growth.

Great.

Thank you.

This is David.

The number we gave you is where we are today.

We did want to give a number on this call.

We are still working on more sites and we really have as many sites for '14.

We're probably juggling 10 sites even at this time for '14 because landlords are starting to remodel and build more.

So it's taking them a while to gear up.

But we're seeing positive signs from the real estate community that will be very good for us.

Okay.

Great.

Thank you.

Joe Buckley, Bank of America Merrill Lynch.

Hi.

Thank you.

Thanks for the color on September sales and the regional and day part strength.

The traffic increase was pretty impressive.

Can you talk about what drove that (technical difficulty).

Are you starting to fill in some of those shorter periods that we have spoken about in the past?

Yes.

Well, yes.

When you look at our day parts, Joe, we have four day parts that we measure, lunch, dinner, mid afternoon, and late night.

So the two shoulder periods, mid afternoon and late night, the growth rate in sales for those are greater than the lunch and dinner growth and sales.

All four day parts were up, but the shoulder periods were up a little bit more.

And you mentioned a marketing shift into this quarter.

Did you do anything unusual to drive that traffic?

And how will that year-over-year marketing spend look in the fourth quarter?

I think in the fourth quarter I would say we'd be back more to a normalized spend rate for marketing.

We did -- and we mentioned before that we did a test in marketing this fall in one of our markets and it was a unique campaign in that it was purely focused on brand awareness.

There was no offer.

No call to action.

No real copy in the ads.

The ads were very much in big bold Cheesecake Factory style and we used primarily radio and billboard, outdoor.

We did some in-mall advertising for a couple of months in one market just to see how customers would respond to that.

So that's where the money was spent.

And it's really not any more for the entire year.

It was just more of a shift from the first half of the year into the third quarter.

And we learned that a branding campaign like this can definitely move the sales needle.

But we're still evaluating which parts of the campaign worked best in determining how to move forward with respect to possible future campaigns of this type.

Okay.

Thank you.

You are welcome.

Jeffrey Bernstein, Barclays.

Great.

Thank you.

Just two quick ones.

First just on the follow up on the unit growth, the pipeline for 2013.

I am wondering if we can get more colors in terms of whether it be new versus existing or how many of those are the smaller footprint you have talked about in the past and whether you are getting any better receptivity or worse perhaps from landlord allowances, whatnot.

I am just trying to figure out what the limitations are to perhaps accelerating that number.

And then separately, I was just looking for a little color on the commodity basket and [they set] for '13, up 3% to 5%.

I was just wondering the degree of visibility you have on that.

Perhaps what percent is locked or how much pricing you think you would take within that comp to offset it.

Thanks.

I can -- the first half would be most of the stores are 8,500 square feet.

A few 7,200.

A few larger ones.

But 8,500 seems to be a good number as we move into the suburbs.

Those are all -- some are in brand-new cities.

A couple of them are in other cities.

But the, you know, the hard number is the hard number.

And we are getting the same kinds of deals from landlords since we're still the highest grossing casual dining restaurant out there, and I think we still play an important role.

In many sites we're considered a mini anchor.

Did that answer it or did I leave something out?

So it sounds like you're saying most of those, other than the relocations, most of those are in new cities?

(multiple speakers) I don't have my list right in front of me, but a number are in new cities.

But, you know, it doesn't -- it doesn't really matter that much to us whether they are new or old.

But we are starting to go into some -- you know, we do have Sarasota.

I think we have green -- I forget now.

Is it Greensboro or is it the other green?

Greenville.

A site in South Carolina.

But we have some new cities and some second sites in old cities.

These are all the smaller -- most of them are the smaller footprint --

Well, again, we don't really think about that much any more because, as we said many times, the 8,500, most of them do close to $10 million.

So it really, you know, it's not like they're doing $15 million.

But they can do quite a bit more than $1,000 a square foot.

So unless there is a really a major reason, that's really the size that we build.

We do have that 7,200 to go in even smaller locations.

They have actually done extremely well.

So, but yes.

That is what we are building.

And there might be one 10,000 square-footer in there.

And in terms of just the commodities.

Yes, on the commodity cost piece, as we said, we expect the food cost inflation at this time, and it's based -- to be up 3% to 5% next year.

And we're taking into consideration the -- obviously the volatility of the commodities market.

We know what we're contracted for already.

Supply and demand dynamics.

All those things that you take into account.

Our contracts are generally on a calendar year basis so our purchasing team is right in the middle right now of contracting for next year.

And at this point, with respect to where we are on contracting, we think we are where we should be at this point in time and some products have been locked in.

With respect to pricing on the menu, we're going to walk that fine line of balancing the desire to offset costs with our equal or greater desire to continue to have that gap between us and the industry with respect to guest traffic growth.

So pricing will probably be next year in the neighborhood of 2%.

So we wouldn't expect it to entirely offset the expected costs, the sales inflation.

However, in spite of the expected cost of sales and inflation and its impact on the cost of sales line, we believe we can continue to make progress toward growing overall margins next year.

And we would see that overall margins incorporated into our guidance is somewhere of 10 basis points, a 20 basis point improvement in overall margins despite the fact that we would think that cost of sales as a percentage of sales would be higher.

Doug, just to clarify, did you say in the prepared remarks -- I know you said September was strong and I know you often say the fourth quarter guidance is based on what you know today.

Has there been any change in trend line of note in October?

We have heard others talk about a decelerating trend for the industry.

I was just wondering if you are seeing anything along those lines?

Well, we have incorporated anything that happened in October to the guidance that we gave for the fourth quarter of 1% to 2%.

Some of the trend -- some of the things that I did mention, I mentioned the presidential debates and those are already over.

So we know the exact impact of those and people -- when 50 million viewers are watching the presidential debate, that might help you if you sell pizza or chicken wings maybe but not full-service restaurants.

So we've incorporated all of that into the guidance that we gave.

Thank you.

You're welcome.

Michael Kelter of Goldman Sachs.

Yes.

So I guess two things.

The first, your prior 2012 guidance was $187 million to $193 million.

And the implied new guidance is toward the bottom of that range.

Can you talk about specifically what's changed or what didn't necessarily happen that would have gotten you to the top end as of the last time you spoke?

And then, separately, as you look forward into the fourth quarter and more importantly into 2013, what are the major initiatives or new products that you see as meaningful, you know, traffic drivers from here?

Okay.

Let's talk about the difference in the guidance.

The primary difference in the guidance -- well, first of all, we've been experiencing for most this year a tailwind with respect to the cost of sales.

At least as they compare to last year.

But most of the benefit of that lower cost of sales inflation came in the first half of the year.

The biggest difference between the guidance we gave now for the fourth quarter and the implied guidance for the fourth quarter that we gave a few months ago when we had our conference call then is primarily dairy cost inflation versus our plan for the fourth quarter is higher than what we originally projected.

That's the primary difference.

Dairy costs are down for the year as a whole, but starting in August, they began trending up year-over-year.

So that's what I would say with respect to that.

And, you know, as far as initiatives go, you know, David can talk to this some.

But our strategy has and continues to be to continue to differentiate ourselves through menu innovation, food quality, service standards, and the high level of environment and ambiance that we provide to our guests.

Those are the sales levers that we're using and we're using them to drive full-margin sales.

So we don't have an initiative around discounting or any of that.

So based on our -- what I would call outperformance of the industry, especially when it comes to traffic growth, we believe this strategy is successful.

We know we're making guests happy.

We know guest counts are growing.

And we're maintaining the increases in guest satisfaction scores that we've enjoyed.

So I would say for next year, looking at comp store sales expectations, we're expecting next year to be a lot like this year from at least a macroeconomic standpoint.

And our business has been healthy and our trends have been strong and we're confident that we can steadily grow our business.

Yes.

I agree, Doug.

That is truly our plan.

Well, the guest satisfaction scores that you reference and referenced in the release as well, what specific attributes are consumers rating you more highly on now and where are there scores that are still maybe an opportunity for you to improve?

Well, I would say to you that the scores that we talk about are the overall guest satisfaction scores.

And then we have lots of detail beyond -- behind that as far as taste of food, levels of service, all kinds of different areas where we're evaluated.

And that allows us to create initiatives at the specific restaurant level.

It's not the same everywhere, right?

So if there is one restaurant that is consistently receiving low scores with respect to some particular metrics, because we -- we do enough of these survey results from guests that they're statistically significant.

We get a lot of guest feedback.

And so we know that if there's a particular restaurant or region that is struggling with the greet at the front desk or --

Pace of service.

Yes.

Pace of service or whatever, then we can focus on that.

So it's not an overall Company focus so much that we're seeing any one thing that we need to work on, but it's more specifically tailored to the individual restaurants.

Thank you very much.

You're welcome.

David Tarantino, Robert W. Baird.

Hi.

Good afternoon.

Doug, just a quick clarification on your Q4 comps guidance.

I think if I have my math correctly you might be losing a little bit of pricing benefit moving from Q3 into Q4.

So, one, could you confirm the level of pricing you'll have?

And then, secondly, I guess you pointed out a few negatives to start the quarter here.

I'm wondering, you know, what are some of the positives you're seeing that gives you confidence that you will be able to deliver that as you look against a tougher comparison on the traffic side?

Right.

So the pricing is a little over 2% of pricing was in the menu in the first half to two-thirds of the year.

And then during the last one-third of the year, including the fourth quarter, there is a little less than 2% of pricing in the menu.

So we are lapping a tough comparison with last year.

But we -- what we do when we do our comp store sales guidance is we go through every day of the year, compare it with the previous year.

Whatever known weather influences we have or other things that are impacting our sales, and we know what our trends have been.

And that's how we have always come up with whatever comp store sales guidance we're given.

So, you know, it's as you -- when you are 3.5 weeks or whatever into the quarter, you know what you have done so far so that's a given.

You know what that is and you factor that in as well as, you know, what the last 10 weeks of the quarter on a detail restaurant by restaurant basis are with your best estimate.

So when we do that math, we come up with 1% to 2%.

Okay.

Fair enough.

And then maybe a big picture question on Grand Lux and the performance of the recent opening there.

Perhaps, David, can you talk about kind of what the consumer feedback has been, you know, relative to what you have seen in the past?

And if you could maybe give us a sense for the types of returns that the new design might deliver versus what you have seen in the past and what makes you comfortable looking for new sites going forward?

Yes.

I think people think it's an extremely comfortable, very, very pretty restaurant.

You know, very modern.

We are really getting raves on the decor package itself.

It has fireplaces.

And so they like it and there is none of this, you know, old fashioned or too fancy or I can't bring my kids.

I think we're getting just the kinds of response that we want.

Doug, what have we come up with potential profits?

Yes.

We would expect, David, that the Grand Lux concept produced similar returns to the Cheesecake Factory concept.

And the real key is $1,000 per square foot in sales.

So when we look at an 8,700 square foot restaurant and we make the comment that the restaurant is doing well, what we mean by that is that our projection for a full year -- so it's a little tough.

Again, you ask about the comp store sales estimates for the fourth quarter.

Well, this restaurant has, you know, the softer time of the year starts in September when people go back to school.

But if we put together a whole 52 weeks for this Grand Lux restaurant, we would think it's going to roughly do $1,000 a square foot.

So with that, it ought to have returns that are commensurate with The Cheesecake Factory.

Great.

And then just one quick one.

Do any of the 8 to 10 that you are planning for next year, are any of those Grand Lux or are they all Cheesecake Factory?

One might be.

Otherwise, they should open early the next year.

We're still working on a number of those.

Great.

Thank you.

Matthew DiFrisco, Lazard.

The question I have is just one of the follow ups.

First is with respect to that calendar shift, Doug, impacting the average weekly sales and same-store sales, was it 2Q then that benefited or will 4Q benefit as far as having now the 2012 beneficial calendar shift?

Well, the first quarter -- no.

Let me get this right.

Well, the third quarter just now had it.

There was a difference there, but it wasn't worth mentioning.

And the fourth quarter will benefit.

The fourth quarter will benefit.

Okay.

Because I was going to say if you are doing a 10% bigger volumes on a year-over-year basis on the eight or so stores that aren't in the comp base, that was a rather meaningful average weekly sales hit from the calendar shift then?

10% higher sales per square foot and sales per seat.

Okay.

[Not] 10% higher volume.

There is a difference, right?

Got it.

Because restaurants are generally 10,000 or 11,000 square feet.

Then that's -- there is a different expected volume out of that size restaurant and so I'd just be careful with that calculation.

Okay.

But it will be a positive -- what we should anticipate is a positive gap it looks like just on a pure calendar shift basis in 4Q?

Yes.

Yes.

How big, Jill?

It's not --

It's should definitely narrow by the fourth quarter.

It should definitely narrow.

Okay.

And then --

We'll be glad when the effect of the 53 week year goes away.

Right.

Okay.

I just wanted to make sure that is a positive one, a shift.

Moving over to '13 and looking at the comp guidance, I think you said that you would expect somewhere in the realm of about a 2% price increase being carried through '13.

Given your traffic trends I would think it wouldn't be overly optimistic to say you would remain somewhat positive.

I guess are you considering -- are you estimating then that this negative average check will persist through 2013 or are you just being somewhat conservative this early on looking into '13 as far as your 1.5%, 2.5% aggregate same-store sales number?

I would say that we're -- what we've accomplished over the last three years is roughly 2% comps plus or minus every quarter for about three years.

That's what's happened.

And we see the environment next year, the macroeconomic environment, as being very similar to 2012 where we can continue to grow our guest counts.

I don't know if it's going to be 1.5% a quarter.

I wouldn't be as bold as to write that number down for expected guest count increases for a whole year.

But an environment where we can continue to grow our guest counts and where the mix is still in a state where it's somewhat offsetting the price that we're taking.

So, you know, when we look at history, you look at the stability of our sales and what they've been over the last three years and you factor in all that, what, I think we're comfortable in saying right now is 1.5% to 2.5%.

I think that that's as accurate we can get and neither conservative or the other way.

I'm just trying to figure out if you are anticipating an average check, a negative average check throughout all of '13 for any particular reason.

No.

That's really my question.

The average check has never gone down that I know of.

Not in years.

So, no, we are not considering a negative average check.

Okay.

I meant mix.

Sorry.

But okay.

Thank you.

Brian Bittner, Oppenheimer & Company.

Thanks a lot.

I was wondering if you could just walk us through the economics for these relocations.

I think you said that they are accretive turning.

I just want you to help me try to understand exactly why.

And then kind of the second part of the question is just in general, I mean, how do you view these net returns on using this incremental capital to build a store to replace a store that, I guess, you already have a significant amount of capital invested in?

I think you'd go through the same calculation that we go through.

What we look at, we look at it exactly that way.

There's a sunk cost in the original store, and then there is a brand-new investment to make in the new store.

So if the original store is one where -- that has been open for 15 or 20 years and its sales have begun to wane a little bit or the trade area around that store is not one where -- that is -- where we would look forward and we would say it is a very vibrant trade area.

But we would look very carefully at whether we could recover this additional investment that we're making.

But we look at it, to some extent, as being the expansion or the allowing our brand to be in areas that are the vibrant trade areas.

I think that that's an important consideration as well.

So, you know, we look at all of those things and make a decision on what does the next 10 to 15 years look like, and would rather make significant investments maybe in the current restaurant or would we rather spend a little bit more and have a brand-new restaurant in the new vibrant trade area?

That's how we look at it.

That makes sense.

And I guess the EPS accretion is because of the higher sales you get?

Higher sales.

Higher profitability from those sales.

Sure.

Got it.

Okay.

Thanks.

Sharon Zackfia, William Blair.

Hi.

Good afternoon.

I just had a couple quick clarifying questions.

Doug, you mentioned, I think, some legal reserve or recoupment that helped in the G&A line.

Could you let us know what that was and how much that dollar amount was?

I will just tell you that we had some legal costs that we had spent in prior quarters that we were able to recover some of those costs and it amounted to in the neighborhood of $2 million.

Okay.

And then on marketing, you know, as you are spending or experimenting a little bit more, I mean, how should we think about that on a kind of cadence basis going forward?

Kind of really thinking about it as a percent of sales.

Because it feels like maybe you're spending a little bit more and getting deleverage on it.

So I am trying figure out what the -- how you're assessing the return on your marketing.

Yes, there is no deleverage on it.

There might be in this quarter, but there is no deleverage overall.

In fact, we would look at marketing as we're spending about 0.5% of sales.

I don't think we are going to make a decision to spend more than 0.5%.

I think that what this test that we did in this market, what it did for us was help inform how we should spend the marketing dollars in future years that we've decided to spend as opposed to whether we're going to spend more marketing dollars.

As you know, we use marketing as a -- to support and to build our brand and we use primarily social and digital media to engage with our guests and to reach them directly and our following on sites like Facebook are growing exponentially.

We have over 3 million Facebook fans today.

And importantly, we have a high degree of engagement with those people.

So social media is a big part of our marketing.

And then publicity is a big part of our marketing.

We have had lots of publicity recently.

Lots of local network morning show cooking demos, other nationally syndicated shows.

David's done an interview on the radio that was very good.

We had an article in the New Yorker magazine that maybe you saw that compared the efficiency of The Cheesecake Factory and suggested it was a model for how the healthcare industry should be run.

So digital media and publicity, and then deciding how to spend the rest of our marketing dollars and did this test that we do, that helped inform those decisions.

But it's not a decision to spend more on marketing.

Okay.

Thank you.

Bryan Elliott, Raymond James.

Thanks.

A couple things, Doug.

One, I missed the breakout I think you usually give, you know, traffic, mix, pricing for Q3, the breakout of the same-store sales.

Yes.

2.5% comps.

Traffic is 1.5%.

Average ticket is increase was 1%.

And the menu pricing was about 1.9% in the quarter.

So the mix, while improving slightly, sequentially for the last two quarters was negative 0.9%.

I'll also add that those are the blended numbers.

For The Cheesecake Factory their traffic was up -- Cheesecake Factory concept alone, their traffic was up almost 2%.

About 1.9%.

Okay.

All right.

And somebody asked about the economics of moving the stores, relocating stores.

Could I ask about the accounting for that?

Is there going to be write-offs, you know, to buy out the rest of the lease?

Depreciation bumps or how should we think about that as we model '13 and beyond?

We've factored that in.

It's on a case-by-case basis.

Generally, the stores that we have decided to relocate, or restaurants we have decided to relocate are ones that we have had for a while.

So the book value is not as big a deal.

But I would say that we factored in all that into the guidance as we looked at it.

Okay.

And then back to the food cost a bit.

So you talked about dairy starting to move up.

Have you been able to contract dairy at all, cream cheese in 2013 yet, or is that still maybe an uncertainty?

I think this year the reason it moved up on us was the fact that we, you know, the only reason -- the only way it can move up and impact the fourth quarter like I talked about is because we weren't contracted.

So we weren't fully contracted on a lot of our dairy last year because it was so outrageously high.

So we will evaluate when looking at dairy to determine whether or not it should be contracted for or whether we should buy it more on a spot basis or, if it is contracted for, what portion of it should be contracted for.

Okay.

And refresh my memory.

Cream cheese does correlate pretty tightly with raw milk prices, which are pushing $20, right?

I think so.

Butter more so than raw milk prices

Have you used current spot in, I guess -- I guess milk is up a third in four or five months.

And so if it stays there, and it seems likely to, would that -- let me ask the question that way.

If milk stays at $20 or goes a little higher, will that create a high likelihood that you will be at the top end of your food inflation guidance range?

I don't know the answer to that because -- I would say not necessarily because, you know, while dairy is one of the bigger components of our costs of sales, we sell so many different things and we have so many SKUs that no one SKU is that big a percentage of the overall total.

Okay.

Fair enough.

Thanks a lot.

John Ivankoe, JPMorgan.

Just a couple of follow ups if I may as well.

Firstly, David, I think you said in the prepared remarks that you were driving, you know, through put at peak day parts.

Let me know if I heard that right and if there is anything, you know, structural or even tactical I guess as it might be that you are doing to you know kind of drive day parts or drive traffic in day parts that you are already full.

I think we were just saying that each of our day parts were up.

Each of the geographical areas that we measure in the country were up so that everything was up.

I think that's just overall from overall efforts not from any focused effort on any one day part.

Fair enough.

Thank you for that.

And then secondly, I know we have been talking a lot about relocations, but I am curious if maybe the pre-opening around those relocations might be much less than a normal opening of a unit in a completely different market?

I think that's a great point.

It should be, right, because the restaurant is being relocated and even the people movement.

We might be able to just say don't report here, go over here.

And so I would think the pre-opening should be significantly less.

Could you help us with maybe a pre-opening in dollars and a G&A in dollars next year on that basis?

Not right now, I can't.

We could do that off line.

Okay.

Understood.

Thank you.

Will Slabaugh, Stephens.

I heard you mention that geographically everything was up.

I was just wondering if there is anything worth noting as far as differences go geographically, especially just given the gas price fluctuations that we've seen across the country or if you're seeing something similar like you've mentioned previously such as the strength in California, Texas, et cetera.

Go ahead, David.

No.

I was going to defer to you on that.

Okay.

So, you know, all 11 of our geographies that we measure were positive.

And most of our markets were strong, including our biggest market, which is California, where if gas prices are high anywhere, and I can guarantee you they're high here.

So that is sort of -- the gas price correlation or the -- that you're talking about there doesn't really seem to hold a lot of water.

You know, Texas was very strong for us.

I mean, we were -- we were strong across the board.

Of course, there is an average so that some are higher than others.

But California was a very good market for us and it has high gas prices.

Great.

Thanks for that.

And a quick follow up on the share count and the movements there.

So you've repurchased $75 million quarter, I'm sorry, year-to-date, and the share count actually hasn't moved a lot.

So wondering what the movements are going on are there.

I know you added some stock comp in there as well.

Just wondering how we should expect that to move into Q4 and into 2013 as well.

Yes.

You know, you've got to be able to tell me the answer to the question on what were our stock price trade for to know the exact answer to that because this quarter our stock for about a third of the days was over $35.

And when the stock is higher, there are a couple things that happen.

There are more option exercises which create dilution because -- and under the treasury stock method of accounting, as the stock price increases, there's more shares that have to be included in the denominator so that causes dilution as well.

So the answer to that question is we've assumed in our calculations some kind of stock price, and I am not even sure exactly what we assumed.

We probably didn't assume it was going to go way up or down.

We probably assumed we would stay in some kind of tight range, which the range was pretty tight but it was generally higher in the third quarter than what it had been.

So the fourth quarter on a [weigh so] basis I can tell you that roughly -- well, we have a range in our guidance that I'm looking at here.

But it's only a 200,000 share range.

So right around 55 million shares is what we think weigh set is going to be at the end of this -- or not the end.

The average weigh so for the quarter that we use for EPS purposes.

Thank you.

Steve Anderson, Miller Tabak.

Good evening.

Taking a look at one of your line items on the interest and non-operating lines, it's been a -- it's a bit higher last quarter than it was in previous quarters.

Is there any -- what can we attribute that to?

Yes.

It was a little bit higher.

One of the things I've said in my prepared remarks is that we had, you know, the -- we have an executive savings plan that's non-qualified deferred compensation plan and market swings impact that in some -- in a small way.

And last year I believe we had about $100,000 plus of income associated with that in the third quarter and this year we had $100,000 plus of expenses associated with that.

So that's $200,000.

The other difference that I mentioned was that we had a little bit of a spike this quarter in retirements of restaurant assets so that there was write offs of some remaining book value of restaurant assets that we replaced in our existing restaurants.

And that was the remainder.

Okay.

And then looking at the -- you know, as you open up more franchises is there any time in the future you think you will be able to break out that line for international franchising income?

We will for sure.

We will for sure.

When that becomes a more meaningful number, it's just not a meaningful number yet, we will definitely break that -- we will break royalty income out on a separate line.

Great.

Thank you.

Mitchell Speiser, Buckingham Research.

Thanks very much.

Doug, could you just clarify, did you say that you expect about 55 million shares as the fully diluted average share basis for the fourth quarter?

For the fourth quarter, right.

Okay.

Thank you.

Next, just a couple questions about the fourth quarter and the calendar shift.

You know, just because there is that one less week, can you maybe give us a sense of what your revenue or what your -- what the revenue guidance is implied from the earnings guidance?

I know in prior quarters you have given us some sense of where you think revenues are going to come out.

Yes.

We have -- I think we did that in the first quarter when this was kind of like sort of a hard to understand little issue.

I would say that in the fourth quarter that revenues somewhere in the neighborhood of $462 million to $470 million.

Okay.

Thank you.

That's helpful.

And are there any holiday shifts to take note of in the fourth quarter just given how Christmas and New Years fall versus a year ago?

Not a lot.

Christmas is slightly favorable.

Okay.

Thank you.

And I think my last question is just on, David, I think you mentioned 2014, you are already working on sites.

Maybe up to 10 or so.

Are there any relocations that are likely in 2014?

I don't think so.

I can't tell you right now.

You know, we're not talking about very many anyway.

Half the company is, what, less than 10 years old, Doug?

Yes.

Something like that.

So -- but, you know, some of the sites that we've had since the early '80s.

Because usually we -- especially after we got going we only signed 20-year leases.

There is only a few that we could actually get out of when they came up.

So I can't tell you at this moment.

But we're not talking a very big, you know, number here that people have to worry about.

And that's just where we are in '14 right now.

We're still working on even other things.

So I was just letting you know that not only do we have these, you know, 10 sites where we're juggling in '13, we have just as many in '14.

Thanks.

And my final question is on Grand Lux.

Just given the negative comp, was it driven by those particularly large stores?

I think one is in Vegas.

Or was it more of a broad-based decline?

You know, I think you can chime in, Doug, but I think it's still the large stores that we have where when there's -- when they don't do well, we really can't do well.

Do you have any more on that, Doug?

Yes, you know, the variability.

The large restaurants do, obviously, have a very big impact.

You know, I would just say to you that you really wouldn't -- I wouldn't look just at one quarter.

I'd look at a longer time horizon.

If you look at the past 12 months, for instance, Grand Lux comps are down about a little more than 0.5%.

And the two-year trend is improving some.

The other thing to keep in mind about Grand Lux is I think it's more a performer closer to the industry average as compared to its sister concept that is doing so much better than the industry average.

So, you know, I would -- that's how I would couch looking at Grand Lux.

I think that the awareness of the Grand Lux concept is not the same as The Cheesecake Factory for sure, but it should build over time as we build more units.

Okay.

Thank you.

Keith Siegner, Credit Suisse.

Just one quick one from me.

The Cheesecake closure at the end of the third quarter, just wondering if that part of a relocation program?

Is that an actual closure?

So are you going to replace it or have you already replaced it?

And then the second question.

When we think about kind of modeling the relocates into next year, do you -- how should we think about the timing?

Do you hope to, say, close the one store and open the relocate very soon thereafter?

Will there be overlap?

Will there be some drag between the two?

Anything along those lines will be helpful.

Thanks.

Yes.

I think with respect to when we do -- I think that the way, Keith, that we would look at that is try to close and open the restaurant in as close a proximity of time as we could.

You know, there are so many other considerations that are non-financial considerations that would have to go into that.

But that would be -- to have one close one day and one open the next day would be the best thing that could happen.

So that's what we would try do.

With respect to the restaurant you're talking about, our lease in Brentwood, which is in California, expired and we made the strategic decision not to renew it.

Is it -- we're not calling it a replacement yet.

Real estate dynamics have definitely changed.

That restaurant opened in 1993, and we really see an opportunity to get a very premiere site in that trade area and, as we always do, we're looking for that site.

So that one's not called out as a relocation.

We've talked about it in our 10-Q, about the fact that we made the strategic decision not to renew that lease.

Really, that decision is immaterial to our results, immaterial to our comps, immaterial to the P&L in any event.

So we will find another great restaurant site in that trade area that more clearly reflects the vibrancy that we're looking for in that trade area after this one that was 20 years old as we've chosen not to renew the lease.

Thank you.

Bob Derrington, Northcoast Research.

Doug, could you help on a couple of points?

One, it looks like CapEx has come down each of the last three quarters.

I think early in the year it was roughly $100 million to $110 million in April.

Next conference call is $95 million to $105 million and now it's $85 million to $95 million.

Can you kind of give us a little bit of color on as to what's going on within that line?

We get more and more visibility as the year goes on.

We don't ever want to give a number at the beginning of the year that we're going to overspend.

And we brought it down as we had more visibility into the -- we built the number of restaurants that we said.

At least in our revised estimate of seven to eight, which I think we said back in -- maybe it was February when we said seven to eight.

We are doing eight.

It's not that we're building less restaurants.

So, you know, we just have better visibility as it goes on as to what exactly CapEx is going to be and that's why it's changing.

I just didn't know, Doug, whether it had something to do with either the capital outlay that was required for each restaurant or the give back from landlords or, you know, how those things played into it.

No.

We've got that pretty much down to a science.

We know what basically within a pretty tight range what we're going to spend and we know what the landlord allowances are because that's what allows us to approve the deal at the economics that we need.

Got you.

And then as we look into 2013, did you give us any kind of color on the direction of operating week growth in the new year?

I didn't give you any of that, no.

Will you?

Yes.

I don't have that right here now.

But I would say that if you were to model out 8 to 10 new restaurants, I would put about a third of them in the first half of the year and two-thirds of them in the second half of the year.

Okay.

Thanks for your help.

I appreciate it.

Matthew DiFrisco, Lazard.

Hey, Doug.

I got your favorite type of question.

All my questions have been answered already.

Thank you.

Okay.

No problem.

Thank you.

Ladies and gentlemen, that does conclude your conference call for today.

You may now disconnect.

Thank you again for joining and do enjoy the rest of your day.