Cheesecake Factory Inc (CAKE) 2013 Q2 法說會逐字稿

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

My name is Patrick and I'll be your coordinator for today.

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

We will facilitate a question-and-answer session toward the end of the conference.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes.

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

Please proceed.

Thank you.

Good afternoon welcome to our second-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 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 statement.

David will start off the call today with some opening remarks.

Doug will then take you through our operating results in detail and provide our outlook for both the third quarter of 2013 as well as the full year and then we will open the call to questions.

With that, I will turn the call over to David.

Thank you, Jill.

The second quarter marks our 14th consecutive quarter of positive comparable sales and it was another quarter where our sales outperformed the casual dining industry.

We believe that the heat waves and heavy rain during the quarter impacted us, as the weather limited our ability to utilize patio seating.

Importantly, we grew sales at full margins without discounting to attract guests.

This contributed to a year-over-year increase in our operating margins as we continue to progress toward returning to peak margin levels.

As for the development, our plans are on track to open as many as 8 to 10 Company-owned restaurants this year.

We had a successful opening in Knoxville recently, which opened to long waits and high sales volume.

This is one more example of the strength of our brand and tells us that focusing on A-plus premier sites is the right strategy.

In the third quarter, we plan to opened three new restaurants including two in new markets, Michigan and Puerto Rico, where the anticipation for the openings is already quite strong.

Internationally, sales at the three Cheesecake Factory restaurants in the Middle East continue to be very strong.

The first location in Dubai has been open about a year and the ongoing popularity of our restaurant gives us confidence about the demand for our concept outside the US.

In terms of expansion in the Middle East, we now expect one new location to open this year based on the current information we have.

As we have said in the past, we do not control the timing of international openings and opening dates can move for a number of reasons.

The sites remain in the pipeline but the timing of new mall construction is impacting when we expect those sites to open.

Ultimately it is in our best interest to focus on the quality and success of openings rather than the pace, similar to our approach with the Company-owned restaurants.

As to Mexico and Latin America, we have identified the first site in Mexico City and work is underway.

We remain confident in the strength of our brand and in our Business over the long term, which leads to two important steps in our commitment to increasing shareholder value.

First, our Board approved an increase in our quarterly dividend, equating to 17%.

Second, we are allocating a significant amount of capital to repurchase our shares during the second half of the year, as much as $125 million.

With that, I will turn the call over to Doug.

Thank you, David.

I will review our financial results for the second quarter and then provide an update on our outlook for the rest of the year.

Total revenues at The Cheesecake Factory for the second quarter of 2013 were $470.1 million.

Revenues reflect an overall comparable sales increase of 0.8%.

As a reminder, in the first quarter 2013, we benefited from a timing shift due to earlier Spring Breaks and Easter.

As a result, roughly $2 million in sales or about 50 basis points, moved into the first quarter from the second on a year-over-year basis.

Comparable sales increased at both concepts during the second quarter was a 0.9% increase at The Cheesecake Factory and a 0.1% increase at Grand Lux Cafe.

The strength of our two Las Vegas locations drove Grand Lux Cafe's overall performance.

At the bakery, external sales were $11.7 million, about flat with the prior year.

Cost of sales was 24% of revenue in the second quarter of 2013 versus 24.4% in the prior-year quarter.

The favorability stemmed primarily from general grocery costs with wheat and corn prices down from their year-ago highs, benefiting items such as pastas and oils.

Labor was 32.2% of revenue in the quarter, up 10 basis points from the prior year with higher payroll taxes and other labor-related expenses partially offset by favorable group medical costs.

Other operating costs and expenses were 24.2% of revenues for the second quarter, up 30 basis points from the second quarter the prior year.

There are a number of factors that impacted this line item, including timing of marketing and other operating costs, which benefited us in the first quarter of this year, higher natural gas costs, up from their lows last year, both of which were offset to some degree by higher production in our bakery facilities.

G&A was 5.9% of revenues for the second quarter, up 10 basis points from the prior year, as we expected.

Depreciation expense for the second quarter of 2013 was 4.1% of revenues, flat with the prior-year period.

As noted in our press release, we recorded a $1.5 million charge during the second quarter relating to the planned relocation of two Cheesecake Factory restaurants.

Pre-opening expense was $2.5 million in the second quarter of 2013 versus about $3 million in the same period last year with one new restaurant opening in the second quarter of both years.

Our tax rate this quarter was 28.4%, within our expected range.

Cash flow from operations for the first six months of 2013 was approximately $89 million.

Net of roughly $38 million of cash used for capital expenditures, we generated about $51 million in free cash flow through the second quarter of 2013.

During the second quarter, we repurchased 87,000 shares of our common stock at a cost of approximately $3.3 million.

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

Now I will spend a few minutes on our outlook for the third 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 third quarter of 2013, we estimate diluted earnings per share of between $0.51 and $0.53 based on an assumed range of comparable sales between flat and up 1%.

There are several factors impacting our comparable sales assumptions in the third quarter.

We are lapping our most difficult comparison of the year, a 2.5% comparable sales increase in the third quarter of last year.

Our comparable sales have outpaced the industry by a healthy margin for at least the past 18 months and we expect that trend to continue.

However, we have to be realistic and consider the near-term industry environment.

That being said, the magnitude of the effect is small, with our third-quarter comparable sales range being less than 1 percentage point off our historical trend.

Importantly, our full-year outlook suggests that we expect sales to stabilize in a normal range for us in the fourth quarter.

On a full-year basis, we now expect diluted earnings per share of between $2.10 and $2.15, representing 12% to 14% pro-forma growth off a base of $1.88 in 2012.

This earnings per share sensitivity is based on an assumed range of comparable sales between 1% to 1.5%.

There is no change in our expectations for operating margin improvement in 2013, with 50 basis points of improvement anticipated for the full year.

As we have discussed previously, operating margin growth in 2013 will be driven by a number of factors.

A big driver is international growth with the initial three Middle East locations delivering higher-than-planned volumes, plus one additional location expected to open this year.

In addition, we expect cost of sales to be incrementally a little better than what we previously anticipated driving some of the margin improvement.

We are now planning for about 2% commodity cost inflation in 2013, down 50 basis points from our previous forecast in April.

The reduction in our food cost outlooks comes primarily as a result of favorable dairy prices.

We now expect total capital expenditures to be between $100 million and $110 million, primarily driven by planned 2013 openings of between 8 and 10 new restaurants, as well as expected openings in early 2014.

As to our corporate tax rate, we expect it to be approximately 29% for 2013.

As David mentioned, we are increasing our quarterly dividend quite significantly, one year after initiating it.

Our thinking with regard to the dividend was to initiate it a reasonable level, allowing room for it to grow meaningfully over time.

In addition, we are targeting as much as $125 million in share repurchases during the third and fourth quarters of this year.

As a result, we expect to return as much as $200 million in cash to shareholders for the full year in the form of 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 requeue with any additional questions.

(Operator Instructions)

John Glass, Morgan Stanley.

Doug, first if you could just clarify if the earnings guidance you are providing includes that buyback activity or excludes it and what assumptions underlie it?

And then the other question is just really about the sales patterns you experienced this quarter.

It seems that you are blaming it more on the weather and maybe if you can quantify that and what is your view in the third quarter -- it seems that macro has gotten into at least the industry trends more.

Are you experiencing that as well or are you just seeing this as an ongoing experience you've had in the second quarter, which is more maybe weather related or something idiosyncratic to you?

Okay, yes.

First the buyback activity.

The guidance that we gave does include the buyback activity.

We said as much as $125 million.

If you followed what we've done before, we've usually bought a vast majority of that so a good portion of that is included in the assumption for earnings per share for the year.

With respect to the weather, it is very difficult to quantify the impact of the weather especially when we didn't really have any restaurant closures as a result of the weather.

What we do know is that when we have restaurants that are as busy as ours are, we're -- and we are not able to fully utilize patio space, sometimes for days at a time, it impacts our sales.

So we are just saying anecdotally, without quantifying it, that the weather didn't deal us a particularly good hand in the second quarter and that is primarily because we are dependent upon our patio business in the summer and more so than most.

With respect to your question about the third quarter and our guidance for the third quarter, we talked about basically in the prepared remarks that we are lapping a difficult comparison and that we are considering industry factors in determining what we should guide to in the third quarter.

With that said, the magnitude of what we are factoring in is pretty small.

It is about 1% so our comparable sales we would expect to be able to continue to outpace the industry by a healthy margin.

We have been doing that for a long period of time, we continue to do that in the second quarter of this year but we can't ignore the fact that in the month of June there was some softness in the industry as a whole.

Our sales were positive in the month of June and were significantly better than the industry but they were still softer than they were in May.

Okay.

Thanks, Doug.

Joe Buckley, Bank of America Merrill Lynch.

You sort of answered this -- was June the softest month of the quarter?

Did most of the rain and heat impact occur in June?

Well our sales were flat to positive throughout the months of the quarter.

Our weakest month was actually April because that is the month where the Easter and Spring Break shift happened.

Our strongest month was May and our sales performance in June was solidly positive in the industry for June.

The numbers we have, at least, say the industry was down about 2%.

Okay and then a question on the relocations -- the two relocations.

Could you fill that out a little bit?

Is that included in the 8 to 10 openings and when will they occur if you are comfortable discussing the markets that would be interesting as well?

The relocations are -- we are going to do two to three is what we said.

These first two are definitely going to happen and we are taking this charge this quarter relating to them not because those restaurants are closed yet but because the accounting rules dictate the timing of when you have to take a charge to write off the remaining book value on restaurants that you're going to close prior to reopening the others.

So we would expect the new restaurants associated with those two particular restaurants that we had write-offs associated with to open in very close proximity to the time of when the others are closing so that there would be very little gap between that time and the time the new ones opened.

As far as where they, we could say that, right?

Yes.

Sure.

Okay, so why don't you--?

One is in Los Angeles and we found what we thought was a better site, in not a business park but in heavy retail and we like that.

And then the other one is in the Boston area where the center we were in was really sold and is becoming a medical building and we were lucky enough to get into a great retail center across the street.

So those are really some of the various reasons why we would even consider going out of one restaurant and going in another.

Normally we would just renew the lease but there are special circumstances and these two were two of them.

Sounds good and are those 2 included in the 8 to 10 openings?

Yes.

Okay, thank you.

Jeffrey Bernstein, Barclays.

One follow up on the comp question and then a separate question on unit openings.

First in terms of the comp, any more color you can provide?

It seems like, like you said, more recently you have seen a slowdown in trend in June and perhaps it is continuing into July.

I'm just wondering what you attribute that to and within the comp color you offered I was wondering if you could tell us about geographically trends or the price traffic and mix trends within that, any incremental color and then I had a question on your net growth?

Okay.

All right.

Really, this is the overall comment about the second quarter is that nothing has changed in our business -- guest satisfaction scores are still high, our retention of people still remains very high, our restaurant-level execution is still very good and the restaurants we are opening are doing very well.

The ones we've opened over the last three years are still delivering about 10% higher sales metrics.

Just with that said, the environment did slow in June.

It is evident from any casual dining data, as well as in retail sales.

And we are not completely immune to that but I am very confident that we can maintain our continuing positive gap in comparable store sales between us and the industry.

So by example, I said this earlier, that our comparable store sales in June were up and the industry was down about 2%.

What was the second part of the question?

Well just geographical and on price traffic mix?

Yes, so price traffic, we had a 0.8% comp sales increase as traffic was down 1% and check average was up 1.8%.

So basically we had about 1.7% of pricing so we had a little bit of a positive menu mix.

Geographically, most regions were flat to positive.

We had areas of strength in Texas, the southwest, the Great Plains, California was pretty strong as well.

We are not seeing anything geographically that concerns us or alerts us.

Got it.

But you are assuming at this point that trends rebound in the fourth quarter based on your current assumptions?

We are and there is good reason for that.

I believe one of the things we talked about that impacts our third-quarter guidance is a very difficult comparison -- our third-quarter guidance impact is a very difficult comparison.

In the fourth quarter we have got the opposite of that.

We've got a lot easier comparison so that is part of what gives us confidence about the fourth quarter.

And then most economic indicators are moving in the right direction.

Unemployment is down, hiring has been at a rather steady state of 200,000 jobs or so a month being added, the housing market continues to recover, and the stock market is up.

So the economists still believe the overall economy will pick up in the second half of the year and I believe in the second quarter from -- if you look at what GDP growth was in the second quarter it will be an unspectacular say 1.5% and most economists anticipate faster growth in the fourth quarter than that, up to 2.7% and we'd expect our sales to benefit from that.

Perfect and then just, David, is there any color on next year, being that we're in late July I'm guessing you have pretty good visibility on the unit side of things?

This year, you'd say there are six to eight then new units ex the relocations -- how would you size up '14 relative to the six to eight?

Well it is hard to say how many will actually come through.

We are certainly looking at trying to get into double-digits and we are off to a very good start so far.

We are also looking for a good year in '14 for international growth.

I wish I could give you a number.

Usually by the third quarter, we are able to give you a little more definite color on that.

I would say that our strategy of being selective with respect to development, to our development choices is certainly working, because we picked all winners over the past three-plus years and we are going to continue to move forward on all sites that we believe are extremely high quality A-plus sites.

Thank you.

Michael Kelter, Goldman Sachs.

You guys guided to 0% to 1% same-store sales for the third quarter.

In light of the casual dining weakness we are seeing at the industry level in July, can you confirm if you are within their range, that 0% to 1% range quarter-to-date or if you are counting on a pick-up later in the quarter to hit the guidance range?

We do not want to talk about -- we never have, this isn't germane to this quarter but we do not talk about quarter-to-date comps because in at least 50% of the time it would be extremely misleading to do so.

So we don't do that.

What we do instead is factor in everything that we know as of today, which includes quarter-to-date comps into the guidance that we give for the third quarter.

I tried.

And then, moving internationally, you had two things there, one, I wanted to check in on the performance of the locations -- the initial locations in the Middle East, they started exceptionally strong.

Have they maintained that level or have they come down a little bit as the newness wears off?

And that is part one.

And then part two, the Middle East moving from three new units to one new unit this year, even if they are still in the pipeline, it would be great to just get an update from you on your expectations for 2014 and beyond and whether you think this actually slows down the trajectory you originally were planning on if it really just moves some things, let's say, from fourth quarter to first quarter and everything else is on track.

Okay, so with respect to the operations of the restaurants in the Middle East, they continue to operate at very high volumes.

In fact, the sales volumes in a couple of the restaurants are growing, so.

Yes.

They have had record-breaking days just in the last quarter and they weren't special days so we are very, very happy with how the popularity is growing.

And with respect to next year's development, it is -- not trying to be vague but we really don't know.

We know that there are a number of sites that are in the pipeline that they are going to be working on that are even include sites that could perhaps be outside of the initial countries that we signed up with for them.

So these sites that move for various reasons and this particular -- these two that are moving now are mainly mall construction related.

But next year -- here is what I would say, the number of sites that will open next year, the way that we see it right now from an international development standpoint will be sufficient to be able to fund the international royalty piece of our growth plans such that, that won't be jeopardized.

Thank you very much.

David Tarantino, Robert W. Baird.

I wanted to come back to the discussion around some of the industry weakness you referenced, Doug.

And you also mentioned a lot of the positives in the economy so I am wondering what your thoughts are on why the industry is seeing the type of weakness we've seen in June and into July here?

So what are the factors that you think are driving some of the retrenchment in the consumer so to speak?

It is a good question and one that obviously we ask ourselves because the economic indicators, the stock market, the housing market, just what the economists in general are saying don't seem to jive with what happened or at least what the announcement was about comp store sales in June in the industry.

It appears that consumers at least temporarily are cautious about spending their discretionary dollars, at least for now, so -- however they are buying cars, they are buying houses.

It is just that it looks like -- we think it is more of a blip so it's not -- we are not going to overreact to anything that we see going on in the industry in the short-term.

And the follow-up I had was related to that.

Is there anything that you are planning for the second half to maybe spur a little bit of traffic?

I know you don't do a lot of traditional advertising but you do have the ability to do direct marketing and things of that nature so is there anything you have planned on the initiative site that might help the comp trend improve?

I would say that our strategy is going to remain focused on where we are best-in-class and that is what we have always done.

We are building the brand for the long-term.

Not to rule out that we might look at marketing as a -- reallocating marketing dollars so that we did something that was more direct associated with driving sales but that's -- the economy would not be the reason that we would do that.

We would do that because we think that is the right long-term thing for our Business.

We do not want, again, be overreactive to the short-term blips at the expense of our long-term success.

We think we can retain our increases in market share.

We are definitely growing market share if we are doing better than the industry and we will do that by continuing to do the things that we have always done, which is to differentiate ourselves through menu innovations.

You all know about SkinnyLicious -- small plates and snacks -- now we have got a gluten-free menu that is coming out.

We will differentiate ourselves through high-quality food and through service excellence and driving compelling dining experiences that increased guest satisfaction.

So that's -- we are very committed to that, we're doing a very good job of that today and I am confident that when we do that and get a little bit of help externally from the economy that we will be right back on track with respect to comp store sales.

Great.

Thank you.

Nicole Miller, Piper Jaffray.

I was hoping you could talk a little bit about pricing in terms of the competitive environment and what kind of pricing power do you think you have for the back half of this year, next year -- will it essentially be in the same 1% to 2% range that it has been historically?

Yes, we -- our pricing that we've already decided and are rolling out the new menu for the last half of the year and it contains about a 1% price increase that is lapping over -- 0.8% or something was rolling off -- so roughly the same kind of pricing we're putting into the menu, roughly 2% of pricing will be in the menu the second half of the year.

And similar for next year.

And then--

Operator, we might have lost her line so if you could move on.

Will Slabaugh, Stephens Incorporated.

I wonder if you could talk about the move to move -- to allocate more cash for share repurchases for the back half of this year and then considering your willingness to aggressively buy back stock, just wondering what you think about taking on any level of debt to do that given your net cash position?

Well we are buying back -- we are being more aggressive in the second half of the year for a couple of reasons but one being that our 10b5-1 formulaic share repurchase plan that we had in place in the first half of the year did not strategically purchase the shares that we had hoped that it would purchase.

Because the good news is the stock ran up some and our plan worked as designed and bought fewer shares when the stock ran up.

So we are very confident in allocating in stepping up our share repurchases.

There is not a need to borrow any money.

Our free cash flow for the year will be somewhere between $105 million to $115 million and additionally we are seeing a lot of stock option exercises, which gives us a lot of additional cash that we can use to return to shareholders.

So if we complete the share repurchases -- $125 million in the second half of the year -- and get to that full amount, we will have done more share repurchasing this year than we have ever done in our history.

So we're being very aggressive with it and there's not a need to borrow to do that.

Great.

And as a quick follow-up to the international comments, wondering if you could give us any idea on plans or licensing you may have in Mexico and Latin America over the next couple of years?

I know it's -- a lot of that being out of your hands similar to the Middle East, but any idea for that trajectory of growth there would be helpful?

Well, we -- as we said we would expect that the first restaurant to open in Mexico City and it would be in the first half of next year some time, perhaps as early as the end of the first quarter but it is certainly the first half of next year.

And then after that, I can't specifically say but I would say that they are going to be -- they are very accomplished restaurant company.

They open restaurants all the time and I don't know why they wouldn't be able to open up a couple of restaurants the year after that.

Great.

Thanks, Doug.

Sharon Zackfia, William Blair.

Doug, you mentioned that one of the components for occupancy and other going up was a shift in the timing of our marketing.

Can you delve into that?

Was it -- are you testing anything different with marketing or is it just purely timing in the quarter?

Well part of that marketing spend had to do with, if you will remember, last year we, for the first time did some more traditional, for the first time in a while anyway, did some more traditional advertising that included billboard and outdoor and in-mall advertising.

And we did that in the third quarter of last year in one market.

In the first quarter of this year, we -- and bleeding some into the second, we spent -- basically in the second quarter of this year, we did that same thing in two additional markets.

So we basically didn't spend marketing dollars in the first quarter and spent them in the second quarter so that part of it's timing but it also is related to this more traditional advertising in two markets.

And just to refresh our memories, that more traditional advertising, is that print, is that broadcast, what are you referring to there?

It is billboard and outdoor and in-mall advertising, basically.

The campaign was pretty unique.

It was focused purely on brand awareness, there was no offer, no call to action, really no copy on the ads, and we saw -- we did see a sales lift in both markets.

Certainly saw a sales lift and as a result we believe the campaigns did help to drive brand awareness, which we were in those markets.

So we were very pleased to have achieved our objectives there and we continue to evaluate just the overall effectiveness of this type of marketing of our brands.

Did the marketing give you a tail as well after the campaign ended?

It does to some extent, yes.

And then just for some help on pre-opening cadence in the second half of the year, is there anything you can tell us about how we should think about that?

Yes, I would say that roughly evenly split was a little bit more of it in the fourth quarter so somewhere between $4 million and $4.5 million or something is a number that is in our model for the third quarter and a little bit higher than that in the fourth quarter.

Thank you so much.

Matthew DiFrisco, Lazard.

Most of my questions were answered and asked but just had a couple of follow-ups here as far as the guidance.

Are you using a $0.54 or a $0.52 number from the current quarter in your to $2.10 to $2.15 for the full year?

We are using the $0.54.

So that we are carving out the impairment charge.

Thought so.

Okay.

And then as far as, can you talk about -- you talked about the year-ago to 2.5% being the tougher among the quarterly comps but how did that look throughout the quarter?

Is July the toughest year-ago compare within the three months or is a pretty even 2.5% throughout the quarter that you are lapping?

As I remember, September was the best month, is that right Jill?

That is when we did our marketing -- I'm not saying it is really that but that is when we did the marketing and September is the best month of the quarter.

Okay.

So presumably above 2.5% and you don't have any plans to do similar marketing to offset that or to meet that?

We don't currently, no.

And I wouldn't bank too much on what the marketing did for that last year.

That is just -- that is the quarter it happened in and it affected some like five restaurants.

Okay and then as far as anything unique in G&A that we should consider in the back half of the year or are there any initiatives that you're looking at to do or any investments or anything to consider in that or is that just pretty much standard as the comp goes, if the comp is better, you're going to have a little bit higher compensation -- comp misses you're going to have a little bit lower compensation being the biggest variable?

That is one of the biggest variables.

I would tell you that when all the dust settles on the year, we are expecting G&A as a percentage of sales to be higher for the year primarily because of the investment we are making for the first time in an international department, if you want to call it that, three-person department.

But for -- really the key to remember for the year with respect to margins and just outside of G&A is that we expect to see another 50 basis point improvement in margins, overall operating margins for the year, so every line item pretty much other than G&A, certainly cost of sales, labor, and other operating expenses, we would expect to be better for the year than last year and have 50 basis points of overall improvement despite the fact that G&A will be somewhat higher as a percentage of sales than last year.

Okay and then lastly, David, just looking at the comment I appreciate you saying that you're looking for that goal to get back to double-digits would be ideal.

Is the governor still the overall economy, providing those A-sites or is it something else out there that you think that you just want to -- maybe the comp -- you want to deal with what you have now and get the comp of the 170 before you start going ahead of -- I'm just curious what might be the governor to getting to 10-plus stores in 2014 if there is one?

It is purely the economy, finding what we believe is an A-plus site and even though Louisville -- no, excuse me, Knoxville -- it is where our smaller unit, we build -- that was about 8,000 square feet.

We have been doing over $250,000, that won't last -- but in that small restaurant.

So again, we are picking communities and areas that need us, that we think we will do well in, that the landlord was willing to add square footage onto their center and we came into a huge success.

So really it is just still -- it's having landlords build or expand their projects.

As we've said many times, we know where all the circles are on the map, where we can do $8 million, $9 million, $10 million, $12 million, it's just waiting for a project to be built in those areas and then we are always successful.

If that doesn't come around or if the economy doesn't come around, and it is looking like that for the next couple of years, what would you, would you consider the question prior which was earlier in the call about leveraging up and maybe getting more aggressive with buying back your stock and using not only your cash flow but also using your cash flow to finance higher levels of debt to buy in more shares?

I don't -- can't see us really not leveraging in a big way to repurchase shares.

I would think that we will have the levers that we need to pull.

Right now, if you look at mid-teens earnings per share growth as our goal and what is supplying that growth -- the margin growth has been a big piece of it.

Share repurchases have certainly been a piece of it but the pace of domestic development has been slower than what we want and if there's--

It's still better than what it used to be.

Better than what it used to be but slower than what we want.

But we are still going to be able to accomplish the goal because there are other things -- international development is contributing more in royalties than what we need it to contribute in order to achieve that mid-teens earnings per share growth.

So if we don't get it in domestic development and frankly the difference between growing 8 to 10 new restaurants next year and, just making up numbers, 10 to 12 new restaurants next year is not that big as far as the earnings per share that certainly, that it will generate next year but not that big really looking forward.

So the fact that we are a little bit behind where we would like to be, our model would say on domestic development, that is not impacting whether or not we are able to achieve the goals that we're setting for ourselves.

Correct, I'm just wondering about the capital allocation and optimizing your capital allocation that is all?

I wouldn't see us borrowing money in large amounts to repurchase shares.

Understood.

Thank you.

Andy Barish, Jefferies.

Two quick ones -- with some time under your belt now for SkinnyLicious, can you give us an update in terms of what that's mixing and some impacts -- is it -- I assume it's gross margin positive but what it's may be doing on check mix and then secondly on the relos, are there -- those are couple of your older units.

Are there a couple of more leases coming due maybe next year and do the relos to in the comp base when you move them so close in a trade area?

That is a good one.

So why don't I answer that one first.

I don't know that I can remember all the questions but here is what we plan on doing with respect to the comp base.

We don't plan to include relocated restaurants in the comp base.

Primarily because it is very hard to know how comparable the new restaurants will be.

The size of the restaurant could be different, the trade areas, while better, are different, too.

Given that we are only talking about a very small handful of restaurants, it really doesn't have a material impact one way or another whether we include it in the comp base or not so we have decided not to included it in the comp base.

With respect to the mix of SkinnyLicious, we have never specifically talked about what the mix of the SkinnyLicious menu is.

The popularity of the SkinnyLicious menu -- we know that there are more and more orders coming off the SkinnyLicious menu.

We are innovating and continually making changes to that menu, as we would with respect to the menu as a whole.

Clearly we are appealing to a different customer -- Baby Boomers, people that want to eat lighter or are watching their calories.

And so we are the great celebration restaurant, we are the great, lots of calories for really incredible, delicious food.

So having SkinnyLicious really attracts a different guest and it is important going into the future that we have it.

It is doing well and many people, again, especially Baby Boomers that still go out to restaurants quite a bit really appreciate it because they can't eat the kind of portions they used to.

And the items are priced on that menu, Andy, to yield full margins for us.

So we are indifferent whether they order off of our regular menu or our SkinnyLicious menu.

We just want them to come in and be highly satisfied with their dining engagement.

John Ivankoe, JPMorgan.

The question is on the industry but maybe specific to Cheesecake, as well -- David, I've heard you talk about it in the past about how The Cheesecake Factory customers is particularly affected by things like stock market values, maybe even home prices, that they are a little bit more focused on their balance sheet than necessarily employment than some customers are.

I don't mean to paraphrase you poorly with that?

No, that is exactly right.

But when we -- so can you -- one, can you compare this current environment relative to other environments that you've seen and, given the fact that you do have more of a balance sheet-focused customer, to use of the term, why you think there has been a slowdown in your business at all?

If there is some macro effect that is out there?

I still believe that it is exactly what you said in terms of our customer and what allows them to come in and when they feel like they can spend their money in restaurants.

And so I really can't tell you what this little slow down or whatever we want to call it, I do not know if you have any idea of what is happening just in this month but we -- I couldn't tell you exactly what it is.

Obviously, there was a lot of sports games, there was many things that happened during the quarter but I can't give you an exact reason.

Doug, do you have any?

No, I would say that -- I wouldn't -- what we are talking a lot about this and our guidance for the third quarter is lower than maybe what you had expected it to be but it is not that much lower.

This is -- we are talking about something here that is representing more like 1% than we are talking about some big dip in consumer demand.

So the fact that we can't exactly put our finger on that, what we can put our finger on and what we can measure relatively accurately is that when business does improve, that we do better than the industry does because we've done it quarter after quarter and I don't see any reason why that won't continue.

And if I can ask, especially with your co-tenants or the mall developers or developers in general, are you seeing some reallocation in spending towards other retailer durables or anything?

Are you hearing anything anecdotal from any of your co-tenants in the properties where you are located of whether they are doing better or worse relative to what they thought over the past 45 days, obviously without mentioning anyone specifically?

We have not heard any of that.

We are too competitive to hear much.

Well not necessarily in restaurants but just other retailers for example that you share these A-plus spaces with?

I'm sure we could ask but we haven't heard anything other than looking at the general news that fashion and retailers are down a little bit, too.

So again, I don't know, I can't answer that, I'd love to.

And no, I do not have an answer to your question, which is why I ask -- it's something that we are all struggling with now.

Yes.

Me, too.

Thank you.

Bryan Elliott, Raymond James.

I would like to focus on relocations for a bit.

And I always love it when people ping me right when I get on the question.

So, Doug, a technical question, is -- are the -- we took the write-off here but are the assets depreciated for tax purposes and so there is no tax cash benefit from these relocations?

All the assets are depreciated differently for tax purposes.

Right, so I'm assuming they're all fully depreciated for tax purposes so this isn't a tax event?

This is not a tax event.

Yes.

Okay.

And then looking forward, obviously given the timing of the emergence of -- and early rounds of growth for the brand that we're going to be hitting the 20-year mark on increasing number of restaurants over the next few years, would you expect similar write-offs for those that you choose to relocate rather than re-up the lease?

Well there is always going to be furniture fixers -- part of the decision that is made as you're getting into an older property is how much investment do you make in that so you have to plan out whether or not you are planning to stay or are you planning to leave?

You wouldn't probably want to buy a brand-new piece of equipment six months before your lease was going to expire.

So -- but you cannot do that perfectly.

It's not a perfect thing so there's always going to be some kind of write-off associated with closing a restaurant.

With that said, looking forward to say just through next year, I see at most two more of these that we could have, we could be quote relocating.

At most.

A year or in the whole portfolio?

For the whole portfolio.

Oh, okay.

We know when leases are expiring.

And next year there's really I would say between now and the end of next year, probably two more.

Okay, when we think about immediate-term growth, so should we think about a couple closures for relocations as part of the store count growth and that part of the algorithm?

I don't think that is going to be a material amount so if you factor in one closure a year and say that whatever you're going to put in your assumptions for new unit development, if you want to say one of them is a relocation, you got to keep in mind that that is not like -- it is a little bit like a new opening.

If we make a decision not to renew a lease or not to take an option on a lease, it is because we think we can do a lot better in some other location that is nearby where we would call it a relocation.

So it is not a -- that we lose all the profitability from one place and we don't gain more than that in the other.

So it is a little bit like a partial opening, you can look at it that way.

Yes.

I'm just thinking of selling space growth rate, that sort of thing.

But a modest impact is the net on that.

Maybe a bad attempt at a little levity.

So you said you can't foresee the Company borrowing money to repurchase shares.

If you ended up all of your free cash flow going into share repurchase could you envision borrowing money to open highly profitable and high-return restaurants?

Yes.

Let's go back to capital allocation from the beginning -- step ABCs of capital allocation.

Our number one thing that we want to do is to build new restaurants.

So if we found 20 locations that we thought were A-plus and we spent the majority of our cash that year on doing new locations then that is what we would do.

And that would lower -- we wouldn't change our dividend -- that would lower whatever -- the only other thing that is left to lower, which is the amount of our share repurchase that year.

So that is the way we look at it.

First allocation to capital is to invest in these high returning assets, then after that the remaining cash flow, making decision on what portion of that should be allocated to shareholders in the form of dividend or share repurchases.

If you look historically at what we've done over the last four or five years, we have returned 100% of our cash to our shareholders.

We don't keep it any cash on the balance sheet that is building up.

All right.

That's helpful clarification.

Thanks.

Paul Westra, Stifel.

Couple last ones -- one on the commodity cost, can you add in a little bit more on where you saw the benefits and [heard the initiative] and maybe some preliminary thoughts on '14 or at least comment maybe on [how you see] with corn, [saw] and wheat -- is there anything that should stop this believing that '14 wouldn't be a relatively benign outlook.

'14, from what we know today, is shaping up to be a good year from a commodities standpoint for us.

Your question -- you were cutting in and out just a little bit, what was it Jill?

It was just more on this year's commodity costs -- you reduced your outlook for the year at little bit here -- where did that come from versus your prior?

It's mostly coming from dairy, Paul.

Oh, is that what he's asking.

Okay.

Sorry.

So now we're expecting about 2% food cost inflation versus the 2.5% where we were in April -- majority of that is driven by dairy.

And we benefited a lot from that in the first half of the year, we will benefit some from it in the second half of the year.

And we expect overall cost of sales for the year to be lower than they were last year.

Okay and then maybe just wrap up with one final question on [volume, you talked a lot about sixty in these] categories.

Hopefully [will be] drop-off.

It sounds like [maybe a clear version of these] as level-headed as you are about it, are you seeing some competitive knee-jerk reactions [coming some from the maybe the walk in the persons] of what, maybe the rest of the group feel [terribly]?

Paul, we cannot really understand your question.

You are going in and out so it is very hard for us to understand what you are really asking us.

I don't--

I apologize for the bad reception.

Just are you seeing any --

Oh, there you go.

Are you seeing a reaction, a knee-jerk reaction from the current softness [or flipping] environments from your peers are you seeing more level-headed reactions like yourselves?

I can't really comment on what they are doing -- it is such new news, I don't really have a comment about that.

You're not seeing any near-terms spiking in price promotion activity or any of other shorter-term efforts from your -- in the marketplace?

I would say most of the casual diners really haven't even reported yet.

As far as casual dining goes that we are the first casual dining restaurant Company to report.

I know Panera and some others that are in fast casual reported but we're the first ones.

So we will be interested to hear what others are saying.

Okay, thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.