Cheesecake Factory Inc (CAKE) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first-quarter 2013 The Cheesecake Factory earnings conference call.

My name is Tahisha 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 it over and over to your host for today, Ms. Jill Peters.

Please proceed.

Thank you.

Good afternoon and welcome to our first-quarter fiscal 2013 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.

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

Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available in the Investors section of our website at 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 second quarter of 2013 as well as the full year.

Following that, we will open the call to questions.

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

Thank you Jill.

The first quarter marks our 13 consecutive quarter of positive comparable sales.

We again outperformed the casual dining industry in spite of the impact from the storms in the Northeast, and we achieved the high end of our expectation.

On a two-year basis, comparable sales are a healthy 3.8%.

Our sales growth has been very consistent during the past few years, which is quite remarkable given the volatility that the industry experienced during this time.

Internationally, sales at the three Cheesecake Factory restaurants in the Middle East remain strong, a good indicator of the global demand for our restaurant brand and our opportunities for expansion outside the US.

Operationally, our execution is excellent.

We managed our cost during the first quarter contributing to significant year-over-year growth in operating margins.

Our business is steady and strong as we move another step closer in 2013 to recapturing peak operating margins.

In fact, all the key performance indicators that we track from guest satisfaction to manager retention, to food efficiencies, are at or above levels we have achieved over the past year, setting us up for another strong year.

We were honored to be named the Most Preferred Casual Dining Restaurant for the second year in a row by Nation's Restaurant News Consumer Picks report, a comprehensive study that rates restaurant chains based on customer preferences.

This award is voted on by our guests, and it's one more source of feedback that we truly are taking care of every guest every day.

Our 2013 development pipeline remains intact and we continue to anticipate opening as many as eight to ten Company-owned restaurants this year.

Our first opening is slated for June with the remaining openings scheduled for the second half of this year, consistent with past years.

As to international growth, we still expect as many as three locations to open based on the current information we have.

In summary, we are successfully executing against our initiatives from comparable restaurant sales to operating margins to domestic and international development and capital allocation to achieve our goal of midteens earnings per share growth.

And together with the dividend, we are driving shareholder value higher.

At this time, I'll turn the call over to Doug.

Thank you David.

I'll review our financial results for the first quarter and then provide an update on our outlook for 2013.

Before I get into the details, you'll notice we made a change to the financial table that accompanies the press release.

We are now reporting The Cheesecake Factory restaurants as a separate segment which is more aligned with the requirements of segment reporting.

Now on to the results for the first quarter.

Total revenues at The Cheesecake Factory for the first quarter of 2013 were $463 million.

Revenues reflect an overall comparable sales increase of 1.4%, but those results do include a pretty significant impact from storms in the Northeast which reduced comparable sales by about 60 basis points.

We benefited from a time shift in the first quarter of 2013 with spring breaks and Easter taking place earlier this year.

We factored this in, but in reality, sales were stronger than we expected.

Roughly $2 million in sales or about 50 basis points moved into the first quarter from the second in a year-over-year basis.

As we discussed on our last earnings call in February, there was a fire at our highest volume restaurant in Hawaii during the first quarter this year and we closed the restaurant for repairs for a period of about four weeks.

Subsequent to the guidance we provided in February, we made the decision to exclude this four-week period from our comparable sales computation.

We did this for two reasons.

We believe this reporting provides a more accurate read on the health of our business and, as importantly, also allows for better comparability of sales and earnings both this year and next year when we lap the closure.

As a result, comparable sales exclude an estimated $1.8 million in lost sales from this incident.

Comparable sales by concept grew 1.6% at The Cheesecake Factory and declined 0.9% at Grand Lux Cafe.

Total restaurant operating weeks in the first quarter of 2013 increased 3.6% due to the opening of eight new restaurants during the trailing 15-month period.

Average weekly sales increased by approximately 1.7%.

At the bakery, external sales were $14.2 million, up about $3.5 million due primarily to timing of shipments.

Cost of sales was flat versus the first quarter of the prior year at 24.7% of revenue.

Restaurant cost of sales was favorable with the key drivers being lower seafood and fish costs as well as better food efficiencies.

This favorability was offset primarily by a mix shift with bakery sales representing a higher percentage of total sales.

Labor was 32.6% of revenue in the quarter, down 20 basis points from the prior year, reflecting good overall labor cost management.

Other operating costs and expenses were 24% of revenue for the first quarter, down 30 basis points from the first quarter of the prior year.

About one half of the reduction was favorability stemming from the timing of marketing costs.

G&A was 6.2% of revenues for the first quarter, down 40 basis points from the prior year.

We are appropriately managing our infrastructure and additionally, we benefited from lapping the cost from revaluing our CEO's retirement benefit and also from a lower corporate bonus accrual in the first quarter this year versus the same period of last year.

Depreciation expense for the first quarter 2013 was 4.2% of revenues, flat with the prior-year period.

We recorded about $644,000 in lease terminations during the first quarter, representing the final costs related to discontinuing operations of three Grand Lux Cafe restaurants, as expected and as we previously disclosed.

Preopening expense was $1.3 million in the first quarter of 2013, versus about $2.1 million in the same period last year.

We had no restaurant openings in the first quarter this year and one in the year-ago period.

Our tax rate this quarter was 28.7%, within our expected range and consistent with our full-year expectations.

Cash flow from operations for the first quarter of 2013 was approximately $45 million.

Net of roughly $15 million of cash used for capital expenditures, we generated about $30 million in free cash flow in the first quarter of 2013.

During the first quarter, we used our cash to repurchase about 1.2 million shares of our common stock at a total cost of approximately $42 million.

That wraps up our business and financial review for the first quarter of 2013.

Now I'll spend a few minutes on our outlook for the second quarter of 2013 and an update on the full year.

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

These assumptions factor in everything we know as of today, which includes quarter-to-date trends, what we think will happen in the weeks ahead, the effect of any impacts associated with holidays, and known weather influences.

For the second quarter of 2013, we estimate diluted earnings per share of between $0.55 and $0.57 based on an assumed range of comparable sales between 1% and 2%.

The shift forward of comparable sales due to earlier spring breaks in the first quarter impacts us in the second quarter as we captured about 50 basis points of sales one quarter early.

We are raising the midpoint of our full-year 2013 diluted earnings per share expectations with our new range being $2.12 to $2.18, or 13% to 16% growth off a base of $1.88 in 2012.

The comparable sale sensitivity associated with this earnings per share range is 1.5% to 2.5%.

Over the past four years, we've improved our operating margins by 260 basis points, including 50 basis points of improvement in 2012.

We now expect to the close the gap versus our historical peak margin levels by roughly another 50 basis points in 2013.

Operating margin growth in 2013 will be driven by a number of factors, most prominently international growth with the initial three Middle East locations delivering higher than planned volumes and as many as three more locations expected to open this year.

In addition, we expect cost of sales to be incrementally a little better from what we expected in February, driving some of the expected margin improvement.

We are now planning for about 2.5% commodity inflation in 2013 compared to about 3% previously, with most of the incremental benefit captured in the first quarter of 2013.

We expect that total capital expenditures will remain between $100 million and $120 million, primarily driven by planned 2013 openings of between eight and ten new restaurants, as David mentioned, as well as expected openings in early 2014.

As to our corporate tax rate, we expect it to be approximately 29% for 2013, and we continue to anticipate the majority of our free cash flow after capital expenditures to be used for dividends and share repurchases.

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).

Jeffrey Bernstein, Barclays.

Hello?

Good afternoon.

Just actually I just wanted to clarify something you mentioned in terms of the comp for the quarter, and then I had a question.

The -- it sounds like the guidance you had given for the quarter I guess was flat to plus one.

I just want to make sure that incorporated what was already the bad weather you knew about and was probably reduced by 50 basis points or so because of the Hawaii closure.

So in reality, the guidance was probably more like 50 BPS to 150 BPS.

Is that -- so essentially came in at 1.4.

That would've been the high end of what you would've guided to ex-Hawaii?

Is that fair?

That's exactly right.

So 1.4 -- if you take out Hawaii, that's about 40 or 45 basis points.

So you take that out of the 1.4 and you really get that we were right at the high end of our range on an apples-to-apples basis, between 0% and 1%.

We are about 0.9%

Got it.

And then you did from an earnings perspective you guided $0.40 to $0.43.

You did $0.47.

So I'm wondering with the comp at essentially the high end of the range, was there anything unique that drove such a meaningful -- looking at the P&L, everything looks pretty clean, but I didn't know how the upside came about when the comp was really just at the high end of the existing range.

We had these sales that shifted -- we factored into our guidance that there would be a shift from spring break from the second quarter into the first quarter because we knew that spring break was happening earlier this year.

However, we had a greater shift than we factored in, really a greater shift and also just greater sales in the first quarter than we expected to have.

And that shift was about 50 basis points.

And associated with that shift was about $0.03 in earnings per share.

So $0.47 you could say that $0.03 of that was attributable to a shifting from the second quarter to the first quarter.

We still outperformed the high end of the earnings per share range, and that was primarily attributable to a little bit better cost of sales in the first quarter than what we anticipated.

Got it.

So just to clarify, it looks like, for the full year, you raised just the lower end by $0.02, but in reality you kind of pulled forward $0.03 into the first quarter, which probably reduces your second quarter by that same $0.03.

So that's the reason why you didn't raise guidance more?

That's exactly right.

Got it.

That's very helpful.

I'll step back in the queue.

John Glass, Morgan Stanley.

Thanks, and Doug, it's just the flip side of that as a clarification, your second-quarter guidance looks like it's around 10% growth on a 1 to 2 comp.

And again, you did a much better earnings growth on a lower comp.

So that's just because the value of those weeks was so high or is there something else the cost structure that changes from the first of the second quarter that might lead to the lower earnings growth rate in the second quarter?

No, I don't think there's anything else.

We talked about the spring break/Easter shift that benefited the first quarter, which was, again, about 50 basis points.

So absent that shift, our comp store sales sensitivity for the second quarter would have been in the 1.5 to 2.5 range instead of 1 to 2, and the earnings per share guidance in the second quarter would have been around $0.03 higher from the high to the low end of the range.

How meaningful now is the international business?

Maybe you could -- I know you are deliberately not disclosing it and changing maybe the way revenue is so it's even harder to figure out.

But how meaningful of a contributor was it, say, to the first quarter?

Were there any milestone payments that were reached such that you maybe got a one-time fee associated with it?

Are any those expected in the near future?

In the first quarter, we signed up our transaction with our second international partner, so there was a fee associated with it, but it was not -- it was not the big driver of the quarter.

I would say that, from an international perspective, that our brand is just doing extremely well in the three restaurants that we have open in the Middle East.

And for some time, we've referred to this $0.01 a share in annual earnings per share as a rule of thumb from each international or Middle Eastern restaurant that's open for a full year.

But based on the current volumes that we are doing there, the earnings per share contribution, at least from the initial three restaurants in the Middle East, is better than that.

So it's meaningful and becoming more meaningful as time goes on.

Okay, better -- can you quantify better than $0.01?

I don't want to say exactly what the restaurants are doing, but they are doing volumes that far exceed what we are doing in the United States.

Got you.

Thank you.

Michael Kelter, Goldman Sachs.

Just first off a quick follow-up, the international locations.

Are the second and third doing as strong as the first or is the first one particularly high because it was the perfect location and the other ones are good but maybe not as good?

We've got three of the primus locations you can have.

And our brand is such that we command the better location.

In fact, the first location we did across from the aquarium at the Dubai Mall, they actually moved some of the tenants that were there to allow us to go there.

The second location is very premier in the Avenues Mall in --

It's just a strong in Kuwait if not stronger with the best position in an expansion of the mall.

So we think all three are equal, but each one is a little different than the other.

And then also just another clarification.

So you beat by about $0.05 versus your prior guidance.

You raised the midpoint of your full-year only, you know, the midpoint and full year by about $0.01.

If effectively you took down the rest of the year by $0.04, even if we equate for taking in account the $0.03 from the timing shift, it actually still means you've taken down your guidance a little bit for the rest of the year.

And I just want to make sure I understand if there is some reason why you did that.

But me see if I can help you out here a little bit.

We beat the high end -- we gave -- our guidance was $0.40 to $0.43.

And we beat the high end of that range by $0.04.

We are saying $0.03 of that was the shifting out of the second quarter and into the first quarter.

The other $0.01 had to do with better cost of sales in the first quarter than we anticipated having when we gave our guidance.

We lowered our expectations about commodity cost inflation a little bit from about 3% to about 2.5%, but most of that lowering was captured in the first quarter.

For instance, our cost of sales in the first quarter reflected commodity cost inflation that was closer to, say, 1%.

So, we are really not lowering our guidance for the back half of the year at all.

In fact, we are raising the midpoint.

Thank you very much.

Joe Buckley, Bank of America Merrill Lynch.

Thank you.

You mentioned the $1.8 million in foregone sales because of the Hawaiian fire.

Was there any profit impact from that in the quarter, or did insurance cover it?

Yes, so, the reason we initially gave our guidance and we included Hawaii as part of what we are going to include that in our comp store sales.

The reason we decided not to include it and to report comp store sales absent Hawaii was for the exact reason you're talking about.

First of all, yes, we did have insurance proceeds, so the 1.4% comps more closely reflect what we should make off of 1.4% comps.

And then looking forward to next year, since Hawaii is out of the comp base, we won't be in a position next year where we are reporting like 0.4 or 0,5 higher comps and have earnings that are lower because those comps aren't real comps at that point in time.

So that's why we did it.

I don't know if that's clear or it's a little muddy on that muddy on that answer, but I think the real -- the real thing to say is that the Hawaii -- we just think it aligns better not including Hawaii as part of the comp base.

Yes, I think I understand the same-store sales thought process.

I guess I'm curious though.

Were there insurance benefits that flowed through the quarter?

Or --

Yes, yes, yes.

So we had business interruption insurance related to that Hawaii closure, so the P&L impact from having Hawaii closed was -- there was really not much P&L impact to us.

Okay.

There were insurance proceeds in the quarter that were accrued.

Okay.

G&A did better than we thought.

Did the insurance proceeds [help] you G&A by any chance?

(multiple speakers)

No, they don't flow through G&A.

the G&A is better than maybe what you expected it to be for really two reasons, one being the fact that, last year, we had an accrual related to the revaluation of our CEO's retirement benefit that we didn't have this time, so that's why it's lower than last year.

Also, our bonus accrual in the first quarter this year was lower than what it was in the first quarter last year.

So those are the two primary reasons that you are seeing G&A in the first quarter lower than what it was last year.

If you (inaudible) for it for the full year, again, from an operating margin perspective, we are expecting to have 50 basis points approximately margin improvement for the year.

But from a G&A perspective, once the dust for the year settles, we would expect G&A actually to be a little bit higher this year because of our investment in international and in being able to fund our international growth.

So, we would expect G&A to be slightly higher for the year, so that means that really the other line items on the P&L are improving by more to come down to a bottom-line operating margin improvement of 50 basis points.

Okay.

Just a question on the real business.

What are you seeing sales-wise?

Your traffic check and are you starting to build sales in those shoulder periods, again, to get the volumes as good as they look?

Yes.

We grew our sales in every -- every day part had sales growth again this quarter.

And the two shoulder periods that we call midafternoon and late night, those grew more than lunch and dinner, so that continues to happen and that's been true for a while.

Yes, because we were really full during lunch and dinner for years.

The only way you grow it is by getting better, having people come in earlier and late, waiting in line longer.

And that's the natural -- that just happens naturally, so it's always midafternoon and late night that will add to your sales volumes.

So our comp for the quarter was up 1.4%.

The breakdown of that is -- so we had 1.8% of price in our menu for the quarter, and traffic was negative 0.4% and mix was flat.

So that's sort of how it all adds up.

The way that I look at that traffic is that the loss that we had from the storms of 60 basis points was almost 100% traffic-related.

So absent those, we were roughly flat to slightly positive with respect to traffic.

But again, for the second quarter in a row though, we've been able to get all of our price increase because menu mix was flat.

Okay, thank you.

Will Slabaugh, Stephens.

Good afternoon guys.

I want to ask you another question about international.

First, if you could just talk a little bit about South America and what those plans may look like in the coming years to the extent that you could, just from a buildout standpoint.

And then as a follow-up to that, I know I'm looking down the road here but where we might see your partners build beyond either the Middle East or South America.

Okay, so, we recently announced that we signed an agreement with a partner in Mexico and Latin America.

And our current agreement with that partner is to build 12 restaurants over an eight-year period of time in the countries of Mexico and Chile.

So, Chile is a South American country, obviously, but there's the potential, as part of that agreement, to expand that agreement into other countries in South America such as Argentina or Brazil, Colombia and Peru.

So, those are -- that -- there's -- right now the first part of the agreement is Mexico and Chile for a minimum of 12 restaurants is what they've agreed to build.

With respect to negotiations underway, we are, as we have said before, in communication and discussions with other potential partners in other parts of the world.

We would like to have fewer partners rather than more, so really one of the ways that we are looking at international development, our first partner, Alshaya, we only have an agreement with them right now to operate in five countries, but they do business in many more countries than that.

So there's up in I think 19 countries.

So there's the potential to expand that agreement with Alshaya but in addition to that, we're also talking with other potential partners in other parts of the world such as Asia, and looking to see if there's a potential transaction for us to build Cheesecake Factories and partner with another partner.

Great.

Just a quick follow-up there, is there a time point where you think you might be more willing to share contribution there, or is it something for the foreseeable future you want to keep to your vest?

When you say contribution, if you mean the royalty rate, we are never going to share that because it's just -- there's not a reason for us to do that.

It puts us in a position where a potential competitive disadvantage when negotiating and talking to others, so that's just not something we're going to talk about is the specific terms of our agreement.

We will eventually, once we get more international restaurants open, disclose in addition to the line that says on our P&L now that says revenue, we will have two types of revenue, restaurant revenue and royalty revenue.

But that's sometime down the road or a year or more away.

Thanks Doug.

Matthew DiFrisco, Lazard.

Thank you.

Doug, I'm sorry to beat a dead horse here.

I'm just trying to understand the beat and the guidance and everything here.

As of what I've heard so far, the 1.4 comp you reported only excludes the Hawaii store.

It has in there the benefit of the earlier spring break, correct?

It has in there -- it's just a regular comp.

There's nothing unusual about it at all other than the fact that we had an earlier spring break, some of which we factored into that, the guidance we gave, and some of which we missed because it was greater than what we expected.

So, if you want to do just a quick reconciliation of what comps we reported to the guidance we gave, you would take out from 1.4% about 0.4% for Hawaii.

You would say, well, you didn't factor in -- you said you missed the spring break shift by 50 basis points.

You'd pull out maybe 50 basis points associated with that, and then the storms we said last time that we thought that would have a 40 basis point impact, but there were more storms.

And it seems like every morning I woke up, there was some storm somewhere that was carving up the -- so that was (technical difficulty) going the other way.

So roughly 0.7 or 0.8 up if you want to just put -- if you want to have full visibility on what our guidance was and an update on what it would have been had we had full knowledge.

Yes, okay.

So it does have that and you're basically guiding to the midpoint of your 2Q guidance for same-store sales to be what you just did, 1.4% -- you're guiding 1.5%.

So I guess I'm curious on why that EPS guidance doesn't imply greater margin leverage than what you've already got than what you just put up?

You just had 50 basis points of restaurant margin leverage where you were dealing with inconsistent sales from weather that impacted your traffic, adversely impacted your traffic.

So presumably you're going to a more consistent 1.5 predictable comp, which usually means better labor margins because it's not going to be as unpredictable as gyrations in weather.

I don't understand why you're not seeing somewhat of a $0.59 or a $0.60 outlook if you were to basically be 50 basis points up in the environment where you just and 50 basis points improvement.

Am I missing something from 2Q of last year where there's a benefit or something that we are not -- that we don't have recurring this year?

Otherwise, I would think your margin expansion would be the same.

First of all, it would never get to $0.59 or $0.60 because of the $0.03 that we said is a shift.

What is the $0.03 shift?

How does that show up?

You had a 1.5 comp.

Well, the 1.5 comp, right, so for the quarter, so that was aided by 50 basis points of shifting from the second quarter, and there's profitability associated with the shifting.

So, there's $0.03 of profitability that aided the first quarter that will be a detriment to the second quarter.

You did a 1.5 comp, so that extra 50 BPS is worth $0.03.

Well, approximately.

Yes.

But you're guiding to a -- so then, in theory, you're going to a 1.5 comp in 2Q.

And you're not going to have the weather gyrations of 60 basis points.

I'm guiding really to -- I'm really guiding to, on an apples-to-apples basis, a 1.5 to 2.5 in Q2 if it hadn't been -- if we didn't have that shift.

So, you know, you mentioned it, Matt, I think, that your year-over-year growth or not in margins has a lot to do with what was the growth or not in margins for the previous year.

And so I don't know of anything really unusual in the second quarter, but I do know that we have looked at the second quarter, looked at the whole year.

We're going to grow our margins by 50 basis points for the entire year.

I don't know what -- I don't really know if I fully understand the question.

One other thing to keep in mind is Doug talked about our food cost inflation coming down for the full year and the fact that we captured most of that incremental benefit in the first quarter.

If you look at what we would expect to see on the cost of sales line in the second quarter, we wouldn't expect it to be flat as it was in Q1.

I think the other thing to keep in mind was we did have some benefit on G&A in Q1, but as Doug mentioned, we are making some investment in G&A to help support our international business, and that will start to show up in Q2.

Understood, that's helpful.

Thank you.

Jeff Farmer, Wells Fargo.

Thanks.

A little bit more straightforward question on this one.

So you did touch on this but as you continue to deliver these sort of year-after-year 2% same-store sales, what are some of the common themes between some of the best and worst performing units?

I guess meaning things like trade area, market penetration.

Any color would be helpful, especially as you guys look out to 2013 and 2014 development.

The best and worst performing units -- so if you want to just look at the restaurants that we've opened recently, those have been producing better sales metrics, sales per square foot, sales per seat than the average overall.

We don't have -- so --

I'm not really looking for --

Are you asking geographically or what are you asking?

If you look at all your restaurants out there and the average restaurant is putting up a 2% comp, obviously there are some that are materially underperforming that number or underperforming it and I'm just curious -- or outperforming or underperforming.

I'm just curious.

If you were to look at that group of restaurants on either side, sort of standard deviation outside of that mean performance, what are some of the common themes?

Are they poor site selection?

Is it sort of a trade area?

Is there --?

We don't have that great a variance.

Really we've never responded to a question like that.

In fact, our -- for the quarter for instance, our -- we really didn't have a lot of -- a lot of variance.

We have -- obviously averages include strong areas and weaker areas.

And we were generally positive across our geographies.

Okay, I'll just come at it one little different way.

So if you look at 2013 and '14 development, would those restaurants be primarily located in markets that you have sort of deeper penetration or are they newer markets?

How should I think about that?

It could be both.

It's going to be both all over the board.

We are only going to open restaurants in markets where we feel the probability of reaching our return on investment hurdles is very high.

Okay, I'll leave it there.

Thank you.

David Tarantino, Robert W. Baird.

Hi, good afternoon.

Doug, I promise I won't ask you a question about the earnings growth outlook.

Doug, or actually David, I was wondering if you could maybe comment on the development outlook as you see it, as you look out to 2014 and 2015, and if you're seeing any glimmers of hope in terms of the new construction environment that might allow you to build more units than what you're planning for in 2013.

The answer is yes.

I don't have the number, but we already have potential deals with a number in 2014, probably more than we've ever had in a year in advance, because many that we haven't even opened this year have moved into next year, and there's all the sites we really feel great about.

2015, not so many.

But next year feels very, very good.

And we are seeing -- we are starting to see more centers being built and more remodels, and so it definitely feels better.

There's no question about it.

Each one of the major mall builders are starting to build.

We feel great about '14.

And we'll see -- and then of course we feel good about '14 and '15 international new stores as well.

Thank you very much.

Nicole Miller, Piper Jaffray.

Good afternoon.

Could I please confirm that the contribution from the international joint venture locations, that's in the Other Revenue line, the $50.5 million for the quarter?

That's right.

Okay.

And then I noticed that if you calculate the margin between those two segments, The Cheesecake Factory restaurant's is relatively the same year-over-year at 14%, but you get a 110 basis point improvement in other.

Is that mainly due to the flow-through from that international revenue?

I would think a lot of that is.

Let me tell you what's in Other.

Other includes the Grand Lux Cafe, RockSugar, international, and the bakery.

So, it's a little bit tough to put your finger on exactly, so I'm sure the bakery had better profitability from higher sales as well.

So some of it is international and some of it is the bakery, and then what impact did Grand Lux and RockSugar have on it.

And what would have been the impact, just generically, from Grand Lux and RockSugar?

Would they have been similar year-over-year like The Cheesecake Factory?

I would probably say maybe so, probably so.

Okay.

And then just a big-picture question.

If the -- the comp outlook that you have guided for, what are the biggest drivers of that outside of price, obviously?

And I see some of your -- and I use the term "peer" quite loosely here, but I see some of your peers doing things with catering and to-go and delivery.

Are those any of the methods that you would like to deploy?

I think our methods have been the same for quite a while, and they have been very effective.

And that's to really -- menu innovation is a huge competitive advantage for us, and continuing to improve our service standards and then our facilities.

So we are really operationally oriented, as you know, and we are not -- there's not really any tricks to what we are doing.

We are not discounting.

We are doing the nuts and bolts of the restaurant business and trying to do that better every year.

Nicole, we found that a lot of that business was disruptive.

We were very, very busy at lunch and dinner, and that's when to-go and catering comes in.

And we made a commitment to do the best job we can within the restaurant.

We thought that was the way to move our comps forward and have dependable service for our guests.

So right now, we are not big on it, and I think that's because we are very busy, we have very tight kitchens, and we don't want to disrupt our service when we are packed.

So, that's where we are at with that.

With that said, we do do a significant amount of to-go business today.

We've done 8% to 10% to go from the beginning.

But I meant in catering or in home delivery.

But we've always done great to-go business both in cakes and food, but that's different.

That's not an order for 30 or 40 where you can disrupt your whole kitchen.

That's very helpful.

Thank you very much.

Brian Bittner, Oppenheimer.

Hi, thanks.

This is Mike [Tamis] on for Brian.

I just wanted to ask about restaurant margins.

You're doing a nice job on the Labor and Other lines.

I'm just wondering if there's additional levers that you had to pull through the rest of the year to kind of get some incremental leverage there.

Thank you.

Well, we are pulling a lot of little levers.

A couple of years ago, we pulled some big levers and had some huge significant over $30 million worth of savings, but there are still smaller levers that we can pull.

One of the things, from a cost of sales standpoint, that we have as one of our initiatives this year is to improve our food efficiencies.

Said another way, that means to reduce waste if you want to boil it down to the simple.

And so that's a key initiative of ours, and that's where we are going to get expected cost of sales improvement for the year despite the fact that we are not raising our prices as fast as commodity costs are going up.

So if we take approximately 2% pricing, which is what we would expect and approximately what's in the menu now, and we have 2.5% commodity cost inflation, in order to have cost of sales as a percentage of sales be lower, we have to do some other things, and so that's one of the initiatives.

But there's a number of things like that, and that's why we are able to, on top of 260 basis points of margin improvement over the last four years, including 50 basis points last year, expecting to do another 50 basis point increase this year.

Keith Siegner, Credit Suisse.

All of my questions have been asked.

Thanks.

Bryan Elliott, Raymond James.

Good afternoon.

A quick clarification first.

So did I hear -- I think it was Nicole's question -- did I hear accurately that we can see the margins at The Cheesecake Factory?

And I'm out of the office.

I believe they were a little static.

I don't have the numbers right in front of me.

And second you said Grand Lux and RockSugar more or less static.

Is that -- did I hear that right?

Have you seen the press release, Bryan?

No, I'm sorry.

Okay.

So when you look at the press release, what you'll see is the segment information there.

In the segment information, there's only two segments that are reported.

One is Restaurants, and that's The Cheesecake Factory.

And the other is Other.

That's Grand Lux, RockSugar, the bakery and international.

So you can -- income from operations for the restaurants is reported, and revenues for the restaurants are reported and the same thing for Other.

So you can assume that the income from operations on restaurants is The Cheesecake Factory income from operations.

And the margin there was roughly static, correct?

At Cheesecake?

I would think it's better.

I don't have the percentages (multiple speakers)

Okay.

And -- all right.

And the 50 BPS margin assumption, or guidance, for the full year -- let me ask the question the other way.

You have, in the past, said you need a couple points of comps to create restaurant level margin.

Has anything changed in that view?

I guess food cost -- food inflation assumption has come down a bit, so that might bring that number down a bit, the breakeven point at the restaurant level margin.

(multiple speakers)

International is a bigger part of our margin expansion story than maybe what we thought it would be a year ago.

All right.

And the up to three international restaurants, do you have a sense of what's your best guesstimate as to which quarters they might open?

I think one is going to open in August, and then the other two at the end of the year, November, December.

Okay.

And -- okay.

That's -- oh, last question.

You had talked on previous calls about some Cheesecake Factory, some of the earlier stores hitting the end of their lease lives and possibly being candidates for relocation and that we should factor in some modest amount of existing store closure as we make our intermediate term forecast.

We didn't close any Cheesecakes here this quarter, but is that still -- I'm just -- I wouldn't see any reason why that would change.

I just wanted to clarify that.

That could happen, but right now there's no stores that we want to close.

Obviously, we will have to negotiate with the landlords, and some we know what they want and some we don't.

But at this moment, we have no planned closures, but it could happen.

So we've got -- our guidance is eight to ten -- eight to ten new restaurants, but two to three of those being relocations.

If you want to call them closures, you can.

Okay, that was my understanding.

Okay.

So, okay.

Thank you.

John Ivankoe, JPMorgan.

Hi, great.

Just two quick follow-ups for me.

Doug, I think I heard you say what bakery sales were in your prepared remarks.

Were they up something like $3.5 million year-over-year?

Yes, and that was -- the other comment I made, it was a very short comment, but a lot of that is timing related as well.

So part of the shifting into the first quarter is bakery had higher sales in the first quarter, and some of that is related to timing.

Okay.

Timing of shipment.

It's a little bit annoying of a question, but I'll ask it anyway.

Was it pulled out of the fourth quarter or pulled out of the second quarter?

Looking forward.

Okay, no.

That's very helpful and that actually may help to explain some of the things around earnings that we've been talking about.

And then secondly, if I can, just looking at the overall class of openings in 2013, would you expect those more or less to perform in line with the average unit volume, or might they be at some kind of discount?

Again, just for modeling purposes?

Sales per square foot, I would assume that they would be at or higher than the average.

That's the way we would model them.

And do you know the average square footage relative to --

I would say -- and Dave would probably answer that better.

I would tell you that there's more smaller ones than bigger ones being built this year.

So -- and that's probably going to be the case going forward, say, two-thirds one-third roughly.

Yes, but really we do so well in the lower square footage as well as the larger one.

There won't be that many, depending on if we have to take it, but our average site will probably be around 8500.

And that's really what we are opening and where most of the sites are coming up.

Sometimes we have no choice because that's how big the square footage is, and so we will take it.

But you're going to see -- I don't even look at smaller or bigger anymore.

We have a 7200 and 8500 and a 10,000 square foot building that we normally use, and it will be any one of those, but they'll average around 8500.

Thank you.

Mitch Speiser, Buckingham Research.

Great, thanks very much.

On the food cost outlook, Doug I believe you said 2.5% for the year.

Could you just -- if you gave us -- you might've given this number, what was the first-quarter inflation, and what do you expect the second-quarter food inflation to be?

Roughly 1% in the first quarter, and we didn't say for the second quarter.

We gave the year as approximately 2.5%.

But the first quarter you're saying is probably as good as it gets on the year-over-year inflation?

The first quarter was better than what we expected, and that's what brought the overall guidance down from about 3% to about 2.5%.

Okay, got it.

And a separate question -- on malls, could you give us a sense of how many of your stores at this point are in or adjacent to malls?

Probably all the new ones.

We find it perfect for us.

We like shoppers; that's where we get the midafternoon business.

And we tend to be a little more feminine than masculine, and so we prefer opening either near or next to shopping than a lunch location that you're done at 1:30 and you don't get any business until dinner.

Got it.

And just the overall system, I think numbers have been thrown out there maybe two-thirds in or near malls.

Is that a good range to work with?

It's probably higher.

Okay, got it.

Great.

And just one last stab on second-quarter guidance, it looks like the midpoint of comps of your comps guidance is 1.5% for second quarter.

And you're expecting about 7% to 10% earnings growth.

In the first quarter, you did about 1.5% comps and you to 27% earnings growth.

So is it more of a function of the food costs being a little worse in the second quarter, and maybe that bakery component is a factor for the -- for less of the flow-through and as Jill said, maybe some extra G&A in there second quarter versus first quarter?

We would expect, in the second quarter, to have a margin improvement again, but nowhere close to the 50 basis points that we got from restaurant margins or 100 basis points overall.

Some of that has to do with the fact that, as we said, we would expect G&A for the year to be higher because of our investment in international development.

As Jill said earlier, I think that's going to begin to impact the second quarter, so G&A as a percentage of sales is going to be higher in the second quarter than what it was in the first quarter.

And the others have to do with, for instance, some of the leverage came from preopening expense in the first quarter, a little bit of that 100 basis points.

That -- I wouldn't expect to have any of that in the second quarter.

We would expect to be spending money related to preopening expenses in the second quarter more in-line with what we spent in the previous year.

So those are two things that I can point to.

Can you think of anything else, Jill, that --

And some -- any kind of increase or change in margin year-over-year is highly dependent on obviously what it was last year.

So -- and there is seasonality and other things involved.

If you go back and look, we've never had quarters where we've had very consistent results, but we've never had quarters where we report the same percentage increase in margins quarter-over-quarter.

That's just not the way that our business works.

Thank you.

Larry Miller, RBC.

Thanks.

David, you said earlier in the call that all your key performance indicators were stable to improving.

What is it you're measuring?

I'd be curious if you could talk about the ones that are lagging?

I know you're focused on improving.

Thanks.

Sure.

I'll let Doug give that one.

Okay, so the key performance indicators, things that we look at, a big one is guest satisfaction scores.

So guest satisfaction scores over the past couple of years have risen significantly, and we have been able to keep them at that high level.

And we think that's one of the reasons why our sales performance and our gap between our sales performance and those in the industry has remained wide and by some measurements that we've used is the widest it's ever been right now today.

So that's one of them we look at.

We look at obviously traffic.

We look at, from a profitability standpoint, all kinds of key performance indicators, whether that be sales per square foot.

We look at productivity of labor.

We look at retention rates; retention rates have been very stable for us.

We have virtually no turnover at the general manager level, above the general manager level virtually no turnover.

And then our general manager and executive kitchen manager turnover is low, as well as our staff turnover.

So, those are -- I would say mainly guest satisfaction scores and retention are the two really key metrics for our performance over the longer term.

Okay, great.

So those are financial measures.

Do you also look at any consumer feedback measures like value and experience and things like that?

Are you seeing anything concerning on that front?

We measure that by the number of guests that come in our restaurants and the fact that we are gaining market share related to others.

It's also part of the overall guest satisfaction score that is factored in.

Okay.

That's in there.

Okay, thanks.

Sharon Zackfia, William Blair.

Good afternoon.

Instead of asking about the next quarter, I kind of wanted to ask a bigger-picture question.

I think, coming out of the recession, maybe some of us thought there was a big opportunity to recapture some of the traffic that was lost during the recession.

And clearly, you've held up way better than almost all of your counterparts.

But if you look at kind of the average restaurant today versus maybe 2006 or 2007, where is it weaker?

And do you think there is the opportunity to recapture that traffic that may have trailed off during the Windows around the peak hours or what have you?

I definitely think there is, in effect, except for the last quarter or two, we have been recapturing traffic.

So if you go back over the last couple of years, most quarters have positive traffic.

In fact, one of the -- this quarter we just finished, we are at negative 0.4% traffic.

We had some weather, but we were also up against 1.9% traffic improvement in the first quarter last year.

So, we are getting traffic back.

We are growing guest count.

That's a part of our comp store sales growth.

Roughly, our comp store sales growth, as you mentioned I think, has roughly been 2% per quarter.

But some portion of that generally has been traffic-related.

So I think we are moving more toward those peak margins.

The opportunity is that we can expand at our shoulder periods and be able to get those guests back.

So what's been done before can be done again, and we are doing the things that are making that happen.

One of the things, if you look at where our average unit volumes are today, which includes guest traffic, we are not -- if you look at where we when we -- when we were last at these average unit volumes and the last at these guest traffic levels, our margin is higher today at those lower -- those lower guest traffic levels and lower overall average unit volumes than when we last did that.

So, what we have is the opportunity to return to peak margin levels without even returning the whole way to what guest traffic levels we had before.

But the opportunity is there and we are, in general, doing that.

And also, because really the credit is dried-up, people are using cash, they are not living on credit that they think they are going to get out of their house, it may always be a little bit different unless that changes.

So to get your profit level up and to run your business well I think is more important than worrying about the peak traffic levels, because the economy has changed, especially for those people that are just hanging in there and would aspire to go to Cheesecake Factory, but today they might not be able to, or any other restaurant.

Can I follow-up on that?

Because I think, if you look at the last decade, almost all of the share gains in restaurants have been in quick-service.

And so as you think about full-service being maybe more challenged from the way people live their lives, I mean how do you think of CAKE kind of evolving and adapting to that over the next decade?

I think there's plenty of occasions that people want to dine well.

When they do make a choice, they want their money's worth.

They don't want to make a mistake.

They want to know what they're going to get.

They want consistency.

And there's plenty of opportunity and plenty of occasions for people to go to full-service.

They're going to pick the best because it just is a little more expensive for them, and people give up their favorites last, not first.

And so I think Cheesecake Factory, there's plenty of opportunity, and the way we are working on our bottom line versus worrying so much about every guest is the way to success of the future.

Okay.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.