Cheesecake Factory Inc (CAKE) 2013 Q3 法說會逐字稿

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

My name is Crystal and I will be your operator for today.

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

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

(Operator Instructions).

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

I would now like to turn the conference over to your host today, Miss Jill Peters.

Please proceed.

Good afternoon and welcome to our third-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 facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available in the 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 fourth quarter of 2013 as well as our initial thoughts on 2014.

And then we will open the call for questions.

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

Thank you Jill.

The third quarter marks our 15th consecutive quarter of positive comparable sales, lapping our most difficult comparison of the year.

We continued to outperform the industry and widen the gap this quarter.

Importantly, we continued to increase our market share through full margin sales, not through discounting.

Utilizing menu innovation and high service standards to attract guests are fundamental sales drivers at the Cheesecake Factory, and we remain true to that.

We had two very successful openings during the third quarter in Novi, Michigan, and San Juan, Puerto Rico, that set Company sales records.

Both restaurants generated over $400,000 in their respective first week sales, which is incredibly strong performance.

The extent to which consumers are willing to wait in line to experience The Cheesecake Factory speaks to the affinity and awareness people have for our brand.

It also validates that we are building our restaurants in the right sites.

To that point, we expect to open as many as nine Company-owned restaurants this year with opening dates about evenly split between November and December.

We expect to end the year with 168 Cheesecake Factory restaurants, and we still have ample runway toward our ultimate target of 300.

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

The next opening in the Middle East is currently planned for Saudi Arabia, which is scheduled to open December of this year.

Looking ahead to 2014, we currently expect to open as many as 10 to 12 Company-owned restaurants, including one relocation.

In addition, we expect as many as three to five restaurants to open in the Middle East and Mexico under licensing agreements based on the information we have at this time.

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

Ultimately, we are focused on the quality and success of these openings rather than the pace, which has been crucial to our success with Company-owned restaurants.

We remain confident in our ability to execute and drive consistent financial performance.

Our cash flow generation is both predictable and strong and we remain committed to returning excess cash to shareholders.

As such, we are allocating an additional $300 million in capital for repurchases in the fourth quarter, contributing to full-year repurchases of up to $200 million.

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

Thank you David.

Total revenues at The Cheesecake Factory for the third quarter of 2013 were $469.7 million.

Revenues reflect an overall comparable sales increase of 0.8%.

Comparable sales increased 1% at The Cheesecake Factory and declined 2.6% at Grand Lux Cafe.

We have said for some time now that The Cheesecake Factory is outperforming the industry, and Grand Lux Cafe is performing more in line with the industry.

And this continued to be the case in the third quarter.

External bakery sales were $12.2 million for the quarter.

Cost of sales was down 60 basis points in the third quarter of 2013 at 24% of revenue versus 24.6% in the prior-year quarter.

The favorability stemmed primarily from general grocery costs with lower wheat and corn prices continuing to benefit items such as pastas and oils.

In addition, we experienced favorable dairy costs as well as a benefit from a bakery mix shift.

Labor was 32.1% of revenue in the quarter, flat relative to the third quarter of the prior year.

Other operating costs and expenses were 24.3% of revenues for the third quarter, down 80 basis points from the third quarter of the prior year.

There were a number of factors that impacted this line item, including timing of certain expenses such as marketing and other operating costs, higher production in our bakery facilities, and leverage on rent expense.

G&A was 6.1% of revenues for the third quarter, up 120 basis points from the prior year, as expected and considered in our third-quarter guidance.

The biggest driver was lapping a $2.3 million benefit from recouping legal costs in the third quarter of last year.

In addition, we made some investments in our G&A infrastructure, as we previously discussed, and also experienced some timing shifts with respect to relocation costs and our general managers conference.

Depreciation expense for the third quarter of 2013 was 4.2% of revenues, up 10 basis points from the prior-year period.

As noted in our press release, we recorded a pretax charge of $1.1 million during the third quarter relating to the planned relocation of three Cheesecake Factory restaurants.

Preopening expense was $4.2 million in the third quarter of 2013, as expected, versus about $2.4 million in the same period last year.

Although we had two new restaurant openings in both periods, there was a timing shift in the third quarter of the prior year that negatively impacted the comparison.

In addition, the timing and number of openings planned for the fourth quarter of this year also affected the comparison.

Our tax rate for this quarter was 27.5%.

Cash flow from operations for the first nine months of 2013 was approximately $150 million.

Net of roughly $68 million of cash used for capital expenditures, we generated about $82 million in free cash flow through the third quarter of 2013.

During the third quarter, we repurchased 2.1 million shares of our common stock at a cost of approximately $90.2 million.

Before we move on to guidance, I want to speak briefly to our filing yesterday regarding our amended $200 million credit facility.

There were two factors that drove this decision.

First, our strong financial performance allowed us to capture more favorable terms in this market, providing us with both increased financial flexibility and better pricing.

And we opportunistically extended these favorable terms for an additional three years through 2018.

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

Now I'll spend a few minutes on our outlook for the fourth quarter of 2013 and our initial thoughts on 2014.

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

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

For the fourth quarter of 2013, we estimate diluted earnings per share of between $0.57 and $0.60 based on an assumed range of comparable sales between 1.5% and 2.5%.

Not much has changed from a guidance standpoint since our last update in July except that we are now expecting lower external bakery sales in the fourth quarter, which adjusted our guidance by $0.01 on both the low and the high end of the range.

Our earnings-per-share range for the fourth quarter will contribute to full-year diluted earnings per share of $2.10 to $2.13 and an assumed range of comparable sales of between 1% and 1.5% for the year.

There is no change to our expectations for operating margin improvement in 2013 with 50 basis points of improvement still anticipated.

As we discussed previously, operating margin growth this year will be driven by a number of factors, most prominently international growth with the initial three Middle East licensed locations delivering higher than planned sales volume.

In addition, lower cost of sales will drive some of the margin improvement.

We expect our capital expenditures for the year to be about $105 million.

As noted in our press release, we are targeting as much as $65 million in share repurchases during the fourth quarter, an increase of $30 million from our previous plans.

This will contribute to full-year share repurchases of up to $200 million.

We announced the 10b-18 plan today which will allow us to repurchase shares on the open market for a period of time during the fourth quarter.

This 10b-18 plan, together with our existing 10b-51 trading plan, will provide the vehicles to execute on our targeted repurchases during the current quarter.

As to our corporate tax rate, we expect it to be approximately 28% for 2013.

As we look ahead to 2014, we plan to open as many as 10 to 12 restaurants next year, as David mentioned.

Our total capital expenditures are expected to be between $110 million and $130 million for these planned 2014 openings as well as expected openings in early 2015.

Internationally, we expect to open as many as three to five licensed restaurants in 2014 which require no capital investment on our part.

For the full year 2014, we are currently estimating diluted earnings-per-share in a range of $2.29 to $2.41 based on an assumed range of comparable sales of between 1% and 2%.

One the most significant considerations for us next year is food costs.

The limited availability and cost of shrimp has been fairly well-publicized across the restaurant industry in recent months.

We are not immune to this supply issue and expect the current higher cost from shrimp and to a lesser extent from salmon could impact our earnings-per-share next year by as much as $0.07 to $0.10.

We believe we will be able to offset some of this pressure with slightly higher pricing, balancing our need to protect guess traffic and protecting our margins.

As a result, we factored in a net of about $0.04 to $0.07 into our 2014 earnings-per-share sensitivity.

As to comparable sales, while the industry is still weak, we are outperforming on a relative basis and we expect this to continue in 2014.

Economic forecasts continue to show a slow rate of growth.

Nonetheless, we think it's reasonable to set the high end of our comparable sales range at 2%, which does represent a sequential acceleration from 2013.

In terms of food cost inflation, we are planning for between 4% and 5% inflation in 2014, driven primarily by shrimp and some by salmon, as I mentioned earlier.

As to our corporate tax rate, we expect it to be in a range of between 28% and 29% for 2014.

With respect to capital allocation, our earnings-per-share sensitivity range for 2014 assumes that we will use substantially all of our free cash flow for dividends and share repurchases.

With that said, we'll take your questions.

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

(Operator Instructions).

Jeffrey Bernstein, Barclays.

I have two questions.

First, I'm doing my math quickly here, the guidance you just gave for fiscal for 2014 would seem to imply earnings at the midpoint of roughly I guess 10%, 11% growth, which puts me below kind of that midteens target you guys target.

I'm just wondering whether the shrimp and salmon would be the biggest driver, or are there any other unusuals that might be in there?

And I would think maybe you'd have more pricing power to offset more of that.

Or would you contemplate taking more price to offset what would seem to be a pretty large hit to earnings?

Okay.

So, let's talk about that.

That represents the range I gave of somewhere between 8% and 14% earnings-per-share growth, so you might be right about the midpoint of the range.

And that obviously includes the pressure from the shrimp.

And we also talked about salmon of between $0.04 and $0.07 per share.

So, otherwise it would be, without that, somewhere between 11% and 16% earnings-per-share growth.

Let me say this about the shrimp and salmon pricing expectation and where that is for 2014.

This is an early estimate, and the estimate is that shrimp costs could rise next year by as much as between 30% and 60%.

But I should reemphasize that this is a very early estimate, and we will know more by the time we report our fourth quarter of 2013 results in February.

So our guidance today is based on the best information that we have available as of today.

The limited cost and availability of shrimp I think has been well-publicized, but we are focused on the long-term health of our business and as we always do, Jeff, balancing our need to improve guest traffic with our desire to protect our margins.

And we view the shrimp and salmon issue as a short-term issue, and we are really not looking to fully price for it.

We believe that too much pricing might impair our ability to grow guest traffic, particularly in what we see as a lackluster consumer spending environment.

Understood.

And then just the follow-up being on the unit guidance you guys offered for next year, I know last quarter, you mentioned getting into the double digits.

It seems like you're targeting that 10 to 12.

I was wondering if you can kind of qualitatively talk about the environment.

We are hearing perhaps real estate availability is opening up a little bit, maybe more development picking up.

I would think you guys are better experts than most others.

Any kind of insight you can provide in terms of that for 2014 and 2015 would be great.

I'll let David speak to that.

I think there are more -- there is some more construction going on, and their portfolios seem to be more open to the kinds of sites that we had.

So, we feel that the 10 to 12 is a nice kick-up.

And again, that's just as of today.

Hopefully, there could be some other things we're interested in.

So although it's certainly not the floodgates are opening, but I think it certainly is better this year and in 2015 than it was last year.

Got it.

The last question, you mentioned the highly promotional environment in your press release, and we've heard it from some of your peers.

I'm just wondering whether you've seen any kind of change in terms of that picking up a little bit with perhaps less commodity cost inflation, or have you seen anything rational or irrational more recently in terms of the trend from a comp perspective?

Not really.

We kind of look at the promotion discounting as something that's been going on for a number of years now.

There have been a lot of deals that have been out there, limited time offers, bundled offers that are available to consumers pretty consistently.

And in spite of this, we have been comping positive and we're taking market share if you think it's a zero-sum game.

So we've focused on driving full margin sales at a full range of price points and offering the guest options to spend less as opposed to discounting.

And by so doing, we haven't sacrificed our margin at the expense of sales, and we are protecting our brand for the long-term.

So, I don't know that we've seen really any significant change or impact from promotions that are different today than they were for the last couple of years.

Your comps were stable it seems like more so through the quarter then.

Yes.

Well, our sales throughout the quarter?

Just from a comp perspective, I don't know if it picked up.

Yes.

Our comps throughout the quarter were flat to positive throughout months of the quarter.

And as you know, the industry was negative during the quarter, but there's always things that happen that affect things that change between months in the quarter.

For instance, last year, we did the Dallas promotion during the third quarter last year.

So that was -- there was a shift of Labor Day out of one quarter into another, so some of those things.

But if you take all that into account, the trends were pretty consistent for the quarter, adjusting for known events.

Great.

Thank you very much.

John Glass.

Thanks.

First, Doug, what percentage of your cost of goods is shrimp and salmon?

I never thought it was that big a deal but obviously I was misinformed.

It's not a huge percentage, but we do sell a lot of shrimp and we do sell a lot of salmon.

But when you have a shrimp cost that's going up by 50%, that's not 10% or 5%, it's 50%, or 30% to 60%, that can have an impact.

I don't know if I know the exact -- now 10%, maybe?

Okay.

And as you think about your capital spending next year, it's going to be up 14% at the midpoint of the range you just gave, I think, and 14% at the high end of your earnings range, right?

So do you expect all this equal buyback activity next year, or given that you mentioned the fact that you've expanded your credit line, do you expect to use the credit line to kind of smooth out year-over-year kind of your ability to buy stock back regardless of maybe what is a temporary depressed earnings because of shrimp, or higher CapEx because of some pull-forward or whatnot?

That's a good question.

We are going to do $200 million worth of share repurchases this year.

I don't know that we will be at $200 million next year, but we are going to -- our earnings sensitivity range assumes that we are going to use substantially all of our free cash flow for dividends and share repurchases.

And that free cash flow would also include any cash we receive from stock option exercises, which this year we were pretty material.

They were over $70 million related to cash that we received from stock option exercises.

So we are executing on a substantial share repurchase program today without taking on debt to do it.

And we expect, again, to repurchase up to $200 million this year alone.

And looking forward, we don't really see the need to take on permanent debt to execute to the level of the share repurchases that we need over the longer term to drive our commitment for midteens earnings-per-share growth.

So, I would say not permanent debt.

Got you.

Okay, thank you.

Joseph Buckley, Bank of America Merrill Lynch.

Thank you.

I guess I will start with the fish comments.

If you strip shrimp and salmon out, what would that 4% to 5% inflation rate for your basket look like?

Or maybe another way to ask it is what are you thinking about some of the other major commodities?

I would say, without shrimp, it's 2%.

Shrimp and salmon, about 2%.

Okay.

And then I think you've completed your first relocation, and you mentioned three relocations with the charges.

Are there two more to be done this year, or is that the one you're planning for next year?

There's two more to be done this year, and the, next year we would look at one additional.

Okay.

Can you talk about your experience with the first one?

The first one was a restaurant here in the L.A. area that we basically just moved to a more vibrant trade area in the mall less than a mile down the street.

And we are not including relocated restaurants in the comp base, but in this case this restaurant from a sales standpoint is doing significantly higher volume than the one that we --

In a smaller box it's doing better.

So we are very happy with the outcome of the move.

Okay.

I know it's very recent, so you may not want to share the specifics.

Could you say how much more sales you're doing at the new location versus the old?

It is pretty early, but I don't know if honeymoon periods apply in this case like this, but over 20% more.

Okay.

Thank you.

Michael Kelter, Goldman Sachs.

First off, if you could just give the transactions versus check, that would be great.

Yes, sure.

So comps for the quarter were 0.8%.

Traffic was negative 0.9%.

Pricing that was in the menu was 1.8%, which makes the mix roughly flat or about 0.1% down.

And that was part of where I was going with it is your same-store sales have been positive for a while, and as you said you're outperforming the industry.

But traffic has been modestly negative now for I think three or four quarters in a row.

I'm curious if it's something you guys are looking at internally and concerned about, or if you feel like it's just the environment, it will pass, nothing for us to do.

We are always concerned about that.

I would say that if you look at the gap between us and the industry, the gap between us and the industry for comp store sales is widening, and the traffic piece of that gap is probably, is widening even more.

So, on a two-year basis, if I look at guest traffic, we are at 0.6% on a two-year stacked basis and I think the industry and my computation is minus 5.8%.

So, that's a pretty significant gap.

And so our strategy, we would like to get obviously back to positive guest traffic, and our strategy remains focused on where we are best in class.

And that's on food and on service and on providing a spectacular ambience for our guests.

And we are building the brand for the long-term, and we believe that we can retain and continue to increase our market share by differentiating ourselves in the way that we always have, through menu innovation, through food quality, and through service.

And these are the things that are our sales levers to drive full margin sales.

So we know we are making guests happy.

We know we have to even do a better job of that, particularly in an environment like this, if we want to get back to positive guest counts.

But the environment is not a great environment to grow traffic in.

And then one other quick one.

You mentioned a shift around the timing of marketing that benefited other operating expenses.

First of all, what was it?

And second, is it marketing that already happened earlier in the year or is this marketing that got shifted into the fourth quarter and there might be some sales driver coming that we should be thinking about?

Yes, the marketing happened in the second quarter, so there's not a sales driver in the fourth quarter but there's not an expense in the fourth quarter either.

So the timing of marketing shifted out of the third quarter into the second quarter.

Thank you very much.

Matthew DiFrisco, Lazard.

Thank you.

Doug, my question is with respect to guidance.

A couple of things, first on the seafood side and shrimp in particular in 2014, I just want to understand this.

Do you have that locked in, or is there an ability for it, if we see it come down in the spot market, that you might be proving conservative?

I don't know how you purchase, and if you're locking in shrimp and you know visibility that will be 3% to 4% hit or $0.04 or so of EPS hit.

How locked in is it?

What I said earlier was that -- and I'll reemphasize it -- this is a very early estimate.

So that would seem to imply, at least I'll tell you that it implies that we don't have it locked in.

So it's very early, and we are going to know more, but we know what we know today, and we will know more as the weeks and months pass.

But right now we don't have that locked in.

Okay, excellent.

I appreciate your conservativeness.

With respect to the comp, I think -- I'm dialing in remote here so I apologize for that.

It looks like, from your annual guidance, you are still implying a little bit of pick up on a one-year and a two-year basis in the fourth quarter.

Can you describe a little bit of what might be the pushes and pulls on that as far as unique to the fourth quarter that you might have that optimism for that acceleration?

Sure.

I guess our thinking, again, with regard to the fourth quarter and the comp store sales expectations, really hasn't changed from what we said in July.

The biggest thing is that, in the fourth quarter, our comparison is easier.

We had our easiest comparison of the year.

This is our easiest comparison of the year.

We had our lowest comp store sales quarter of 0.9% in the fourth quarter last year.

So we are lapping our easiest comparison.

We are lapping presidential debates last year.

We are lapping election day.

We are lapping Hurricane Sandy.

So that's the primary reason.

Economic indicators, are they moving in the right direction?

I think maybe slightly.

The housing market continues to recover.

The stock market is up.

There really doesn't appear to be any negative calendar issues or holiday shifts that are impacting the fourth quarter.

I think that Thanksgiving and Christmas, there is one less week between Thanksgiving and Christmas.

We don't really think that's going to impact us.

So, it's primarily because of the easier comparison.

That's very helpful.

Thank you.

Sharon Zackfia, William Blair.

Good afternoon.

Just two questions I guess.

On the commentary about price for next year, I think you implied you might take a little bit more than normal price, given the shrimp and salmon, but not fully offsetting it.

So can you give us your initial thought process on price for 2014, and whether you do that in the first menu change of the year?

And then secondarily, I know it's small, but Grand Lux was pretty weak in the quarter.

Is there any commentary on what happened with Grand Lux?

Okay, sure.

With respect to the pricing we will take next year, in the fourth quarter of this year there's about 2% in pricing and somewhere, 2% or a little less is what we have been taking, at least over the last number of quarters.

I would say next year we'll be somewhere in the 2% to 2.25% range.

So a little more pricing, not a lot more but a little more, enough to offset about $0.03 of what is really not totally known pressure from shrimp.

But we know there's going to be some pressure and that's enough to offset maybe about $0.03 of that pressure.

So where else was I going with that?

Okay.

Let's go to Grand Lux, and maybe I'll think of something else to say about that.

But with respect to Grand Lux, my main comment about that is going to be there are only 10 units in the comp base, and that means there's greater variability quarter to quarter.

We have three very high volume locations in the Grand Lux.

Two of them are in Las Vegas.

And the softer sales in Las Vegas was the primary driver of Grand Lux comps in the third quarter.

But remember that if you take Grand Lux's comps for the quarter and compare them to the industry, you'll find they are not any worse than the industry.

In fact, they are slightly better than the industry.

Okay.

Thank you.

David Tarantino, Robert W. Baird.

Hi, good afternoon.

Doug, I think you mentioned that part of your guidance for this year assumes lower bakery sales, and it sounds like bakery sales were pretty negative during the most recent quarter.

So could you give us some context on what's going on there, and whether that is a trend that you think is going to continue throughout the rest of this year and into next?

Yes.

We've seen lower external bakery sales, David, for some time now.

We believe the warehouse club customer is more sensitive to the current economic environment.

And as a result, it's prudent for us to plan around reduced external bakery sales.

So, the $0.01 reduction in the fourth quarter reflects that.

Any expectation regarding possibly lower third-party bakery sales for 2014 is incorporated into our guidance range.

But with that said, our bakeries are very busy, and they are having to increase their production of desserts for internal bakery sales to our restaurants.

Dessert incident rates in our restaurants are up.

Desert sales as a percentage of our total sales are up.

So our vertical integration of the bakery is resulting in producing very high-quality desserts that our customers love.

And that's really their primary mission.

And external sales are just expected to be somewhat lower in the near term.

Okay, that's helpful.

And then I guess one modeling question.

I think the tax rate came down for this year.

I was just wondering if you could clarify the driver of the tax rate being lower.

I think you lowered it by 1 point.

And then for next year, it seems like it's going to stay at that low level.

So just curious to know what is driving that.

No, I think the tax rate is within the range of what we thought it would be.

And at most, I think we gave a 1 point range, so it's within that range.

I don't even know with that kind of preciseness what really drove that.

Okay.

Maybe I had my notes wrong.

Okay, thanks a lot.

Brian Bittner, Oppenheimer.

Thank you.

With the 2014 guidance, is there anything else holding guidance back a little bit?

It seems like when I add back the $0.04 to $0.07 from the shrimp and salmon inflation, I'm still getting a number that's a bit below kind of what you guys talk about on a long-term basis in that mid double-digit range.

So is there anything else to point out about the year?

As always, there's so many more things to point out about the year.

Let me bring up a couple of other sort of pressure points that are factored into that guidance.

There are some pretty significant minimum wage increases slated for the year, especially in California where the minimum wage is going up from $8.00 an hour to $9.00 an hour in the middle of the year.

So right now with respect to minimum wage and incorporated into that guidance we gave is between $2 million and $3 million of pressure from minimum wage increases, and that's factored into that earnings sensitivity range.

And the other thing is we've had a couple of very good years of healthcare costs in our company, and they have come down over the last couple of years, which is a little unusual.

If you go back a full seven or eight years, we've had a couple of good years.

This next year, the Affordable Care Act is going to be in full force.

We're still working through our benefits and open enrollment right now and don't know yet what percentage of our employees will sign up for the healthcare coverage with us.

But one of the biggest uncertainties is our ability to estimate what choices our staff members are going to make.

And we worked with an outside consultant who provided us with actuarial assumptions about the potential impact on next year, which is factored into our earning sensitivity as well.

And it's higher than healthcare costs were this year.

Okay, thanks for that, Doug.

And two quick questions on G&A.

There was a huge bump up in the quarter.

I know you talked about some things on the operating expense line in the restaurant P&L that shifted.

Was there anything on the G&A that shifted for the quarter?

And then the second part of G&A is how are we supposed to think about G&A for 2014 and the investments behind it?

Sure, yes.

G&A for the quarter, the biggest piece, representing about 50 basis points of the increase, was the fact that we had this great benefit of this legal settlement last year.

So that was timing.

We have also, as we talked about before, made G&A investments this year primarily to accommodate international expansion, and that represented some of the increase year-over-year.

And then we did have some timing shifts.

We had higher than typical relocation expenses in the third quarter for some reason, but they were higher, and that was significant, about 35 basis points of shifting.

And our GM conference, the shift in the timing and the expense of the GM conference was also a timing item.

So there's a good bit of timing in the G&A number.

And when you look at next year from a G&A standpoint, we don't think we will be able to lever G&A next year in 2014.

We are still going to continue to be making appropriate investments in our infrastructure in order to support our growth.

With that said, when you look at next year and the overall operating margins, we expect them to be flat to slightly positive.

And that's despite a significant increase in cost of sales that we've been talking about.

So, that's kind of what I would say.

Okay.

And just that $0.04 to $0.07 of shrimp/salmon headwind, what's the inflate -- I know I guess you talked about 4% inflation or whatever.

You said 30% to 60% inflation.

Is that what that low and high end of the $0.04 to $0.07 is based on, 30% to 60% inflation in shrimp and salmon?

I couldn't say it's that precise necessarily.

I would just say that -- again, I'll say it again.

Our estimates on what we're going to pay for shrimp are very preliminary and they're early.

We know we are going to be paying more for shrimp; we don't know exactly how much more.

And you know, so I would just say hold tight on exactly where all that settles out.

Okay, thanks.

Will Slabaugh, Stephens Incorporated.

Thanks guys.

I wanted to ask you about your new restaurant openings that you mentioned that were so strong.

Number one, if there's anything in particular there that made those resonate so well.

And secondly, does that tell you anything else about the potential for Cheesecake Factories out there in the US, maybe in different types of markets that you hadn't thought about before or not?

Well, I think there is a lot of pent-up demand in Michigan because it's been so long.

And that's where I am from.

But it was incredible with hours and hours to wait to take cheesecake home and to dine with us.

And as we said, it's just a normal 8000 foot restaurant doing over $400,000 for its first week.

So, I do think there's a lot of demand in that size city, and we are moving into those.

That's a number of those that we will be doing next year and after that.

And that really opened us up to the 300 potential restaurants that we have a guesstimate as of this time.

So those are exactly the kind.

In terms of Puerto Rico, I think it goes right to the international brand that we have.

It was even busier than our Novi, Michigan opening, and it still remains extremely busy.

So, that just goes to, again, our reputation, the international demand that we have.

It's why we are doing well in the Middle East.

It's why I think we'll do very well in Mexico and so on is people know us.

They know us from either Orlando or they know us from New York and they number us from Miami and they know us from Houston.

And it's all those cities that have given us our reputation in Latin America and really the Caribbean too.

So I think that's what it goes to.

And David mentioned Novi and Puerto Rico.

We have had the other two openings.

We talked about the one relocation that's up, say, 20% better than the other restaurant.

And the fourth one that we've opened so far is in Knoxville, Tennessee, and it was extremely successful.

It wasn't $400,000 initial week, but it was a lot.

So there was pent-up demand and people waiting in line before we opened the restaurant to eat lunch there.

Great to hear.

Just a quick international follow-up if I could.

You gave us an update there that said the stores are still performing very well.

It sounds like those remain well above your prior expectations.

Any update on additional talks of current or future potential franchisees around development that maybe wasn't reflected in that three to five number for next year, primarily around any new sort of territories that we might see either in 2014 or beyond?

You know, those discussions are going on all the time is the way I would answer that.

Alshaya, if you remember, operates their concepts in I think 19 different countries --

Yes, 18, 19.

-- 18 or 19 different countries.

And we have license agreements like on five or six of those.

So they're constantly -- we are constantly in discussions about where else Alshaya just as a current licensee partner of ours can take our brand.

Same thing with Alsea in Mexico and Latin America.

They haven't opened the first restaurant yet but they do business in countries that aren't named Mexico and Chile, which is the two that we have the agreements with, including Brazil, which, you know, we are always in discussions about where else we can go with them and then we are in discussions with other potential licensee partners in other parts of the world that can bring the Cheesecake Factory there.

It takes a long time to put these deals together because obviously we want them to be done right with the right partner.

Thanks guys.

Bryan Elliott, Raymond James.

Thanks.

Just a couple clarifications, I guess.

One, you mentioned, Doug, the stock option exercise is pretty high this year.

As you look at the grant dates and the like, is it going to be materially down from the $70 million or so this year?

What should we think about that as a source of cash next year?

Maybe something (multiple speakers)

If I were estimating it and looked at our models, I would say don't use $70 million because I think that probably was an all-time high for us or close to it.

So I would use something closer to $40 million or $45 million.

Okay, all right.

It's a guess.

Sure.

If you tell me the stock is going to be a lot higher, then it will be more than that.

Understood.

Appreciate that help.

Also, as we are reaccelerating growth here, can you give us some sense of what the timing by quarter might look like on the opening schedule for 2014?

I think that we're going to have more of them in the first half of the year than we did this year.

That's typical, yes.

Yes, so we typically are opening our restaurants, as you've seen over the last few years, in the last half of the year.

So I would still say that I bet more than half of them will be in the last half of the year but we will get some open in the first half of the year too.

So maybe if you're saying 10 to 12, you might go four and eight for the first half of the year and the second half or --

Just a guess, right?

Just a guess.

Okay.

All right.

And then back up to the food cost discussion a bit, so the rest of the basket, ex-shrimp and salmon, have you yet locked much of that?

Our contract is on a calendar year basis.

Our purchasing team is always working on that and they are in the middle of contracting right now.

At this point, we are where we think we should be with respect to contracting, which is kind of a convoluted way of saying that we are contracted on some things but not on others, but we are where we always are in October.

Okay, fair enough.

Thank you.

John Ivankoe, JPMorgan.

Hi, thanks.

As you guys kind of see development opportunities opening up, and you obviously know a lot of markets very intimately as you've been in many of them for 20-plus years, how does a potentially either developed in-house or potentially bought new concept begin to enter your thinking over the next couple of years, from a development perspective and also that you have the free cash flow generation where you could easily justify it?

It's a great question and something that we think about a lot.

Our drivers of midteens earnings-per-share growth that we've outlined, there's five of them and there's not a sixth one today that says that we would acquire or do another concept.

However, I think that that's something we do look at, we do talk about internally.

It's not -- it's something that at least today we're more reactive on than proactive, but that's not something that I would entirely rule out because, as the years go by, there will probably to need to be another driver to be able to keep our earnings-per-share growth where we would like it to be.

We just have to make sure that we do that in the right way.

Okay, thank you.

Andy Barish, Jefferies.

One clarification and then a question.

Just on the fourth-quarter openings, I want to make sure it's five openings, but two of those are relos, so it's three net additions.

Am I right on that?

There's a total of six openings, one which already opened.

So one opened like the first or second day, which was one of the relocations, of the quarter.

And there will be five more.

So it six minus three.

And you really can't net it out like that.

You certainly can't net it out that way from a profitability standpoint, because -- so it's not really six minus three, but if you want to look at total number of units, it is six minus three.

Okay, thanks.

And then where have you guys been doing -- in marketing tests this year, has there been anything additional on that front, any thoughts or costs behind looking at and testing some things in 2014?

Well, we've kept marketing.

We continue to use marketing to strengthen our brand, protect our brand, retain our market share.

And our marketing team I think does a great job with that using social media, using -- getting is good publicity with respect to being on TV, using occasions such as National Cheesecake Day to promote a big presence, both digitally and within restaurant.

With that said, we have done, and we've talked about it before, some other campaigns that are more traditional advertising, and we did that this year.

So, we used billboard and in-mall advertising for a couple of months this spring in one market, and we also returned to the same market we used last fall for a follow-up campaign just to see how customers responded to it.

And the takeaways were that we saw a sales lift in both markets.

Even though there was no offer, no call to action, no copy on ads, we saw a sales lift in those markets.

We believe that the brands helped drive brand awareness, the advertising helped drive brand awareness, so we achieved our objectives.

We continue though, Andy, to evaluate the overall effectiveness of this type of marketing spend from an ROI standpoint.

So it's possible we would reallocate future marketing dollars to more of this type of campaign, but not necessarily increase our total marketing spend to do it.

Thank you.

Nicole Miller, Piper Jaffray.

Coming at you with a very boring one, but tell us about comps.

Anything by geography, dayparts, even food segment, alcohol versus food, anything you can share with us that we should know?

Geographically, we didn't see any material change.

Most regions were positive.

The areas of strength included California, Southwest, the Southeast.

Obviously, we had some markets that were a little negative and below average, but nothing that was materially negative.

From a daypart perspective, we saw growth again across all of our dayparts, four dayparts, lunch and dinner and then mid-afternoon and late-night.

And we call the mid-afternoon and late-night the shoulder periods, and those periods continue to be up more than the lunch and dinner shoulder periods.

So we know that's kind of where our business is growing the most.

However, the percentages are pretty small.

So, if that's up by a couple of percent more, the sales at mid-afternoon and late-night are already pretty small.

So it's not a big number, but they are up more on a percentage basis.

What else?

One more quick one.

The series of announcements you've had so far for the third quarter, there's been a lot of talk about remodels.

And it could be QSR, fast casual, casual dining, high-end.

But given the major investment you make from the get-go in your concepts and the degree of discipline around I guess annual maintenance, can you talk to us about then why you don't have to go into a major remodel every five to seven years like your peers?

We do it occasionally.

Right?

We do it on an as-needed basis.

And we have done a few major remodels, but we -- I think, yes, for older restaurants that were 20 years old.

We spend probably more than most of the people you're talking about -- I'm sure we do -- in building these restaurants, and they are built to last and then the expectation and the allocation of our capital on an annual basis and the expectation is that they look like new.

This restaurant that we just relocated that was in Southern California, it doesn't have the high ceilings and all the grandeur of some of the newer locations because it has been around for a very long period of time, but as far as just the look of the interior, it was kept up very well and it looked good to the guests.

So that's our expectation and that's what we do and we allocate a lot of capital to doing that.

So I think that's why.

And then if we need a major remodel, which we have done a few of them over the last few years, we will allocate the capital to do that.

Thank you very much.

Amit Kapoor, Gabelli and Company.

Thanks for taking my question.

Can you guys talk in more detail about the strength in international of the three locations open in the Middle East, and what that might potentially mean for other partners as they view that success overseas?

Thank you.

Yes.

The three restaurants that we have open are doing tremendously high sales volumes I think, as we've talked about.

And it never hurts when you open up international locations and you're talking to other potential licensee partners that the initial international locations are doing well.

So that doesn't hurt us, but we entered -- and David talked about it -- we enter these negotiations even without having opened a restaurant in the Middle East, say a year and a half ago, with already having very high demand for wanting to partner with us because our brand is already very well known.

And they already -- potential licensee partners already feel that they can do very high volume with this -- The Cheesecake Factory brand.

So, I would say the openings we've had so far are only adding more fuel to that fire, but there are many -- we have to be very careful about who we pick obviously as our partners.

But there are many people that want to partner with us, and there are only a select few that really can.

Okay, thank you.

Can you just refresh for us the potential geographic footprints that you might be looking at where there isn't an ongoing conversation but would be sort of ripe for expansion?

For international?

Correct.

Okay.

Yes, so the agreement we have in place now with Alshaya, they have agreed to build 22 restaurants, but their potential is far in excess of 22 restaurants, but that's the agreement we have in place today.

Agreement we have with Alsea is to build at least 12 restaurants.

But again, that doesn't even count if they, one day, want to go to Brazil and we agree to that.

So the way we look at international expansion is we go back to the premise that we are trying to drive midteens earnings-per-share growth.

And international is one of the levers that we have to pull to drive midteens earnings-per-share growth.

And it doesn't take 20 of these a year to do this.

So if we do the three to five next year and we keep somewhere between that range as we give more territories out or sign up additional licensee partners, we're going to be fine with respect to international growth contributing to our expectation for midteens earnings-per-share growth.

That's kind of how we look at it as opposed to how many restaurants can there be.

How many Cheesecake Factories could there be in China if we license China to a very highly confident licensee.

It could be more than the United States theoretically.

Right?

Right.

Okay, great.

Thank you.

Mitch Speiser, Buckingham Research.

Thanks.

And just another question on the international development.

Doug, you mentioned that one should open in the fourth quarter?

Yes.

In December?

Okay.

And you mentioned I think three to five in 2014.

Any thoughts on the calendarization of that, and maybe just the confidence level that you'll be in that range, or -- because obviously there's always delays and extraneous factors and the fact that I think you did have some delays versus your beginning of the 2013 guidance that took that number down.

It's awful hard to give guidance with respect to international.

We are not opening these restaurants; this is our international partner.

But the degree of confidence that we will have at least three is extremely high.

Could we get to five?

That's obviously that's higher than three, but our degree of confidence in having three to five is very high.

So that's how I would answer that.

And then as far as the cadence or when they're going to open, I don't know.

I would say that maybe --

We can have a few in the first half of the year.

We could have two or three in the first half of the year.

Okay, got it.

Thank you.

And a separate question, you mentioned the -- I think there is a week between Thanksgiving and New Year's, there's one less week.

You mentioned that it probably is not a factor for you guys.

Maybe you can just comment on the reasoning why it may not be a factor.

And just to get into calendar shifts, I believe Christmas and New Year's are on a Wednesday.

Is that a positive or a negative?

If you can just go through some of those shifts, that would be great.

Thanks.

Yes.

Thanksgiving, we don't think it's material for us because our big "holiday season" is really the weeks right before Christmas, during and after Christmas.

So, the fact that there's more or less weeks between Thanksgiving and Christmas, we really don't think that impacts us very much.

That's how I would answer that.

New Year's Day is shifting out of the fourth quarter of 2013 and into the first quarter of 2014 for us, but we don't believe that that's material either.

So, we've kind of gone through that thought process, and that's where we land.

Okay, thanks.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.