Cheesecake Factory Inc (CAKE) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 The Cheesecake Factory earnings conference call.

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

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

However, we will open it up later to conduct Q&A.

(Operator Instructions).

Just as a reminder, this conference is being recorded for replay.

I would now like to turn the conference over to your host for today, Matt Clark.

Please proceed.

Hello, everyone.

Good afternoon and welcome to our third-quarter fiscal 2014 earnings call.

I am Matt Clark, Senior Vice President of Finance and Strategy.

Joining me on the call today are David Overton, our Chairman and Chief Executive Officer; David Gordon, our President; 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 be materially different from those stated or implied in forward-looking statements as a result of 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 Overton will begin today's call 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 2014 as well as our initial thoughts on 2015.

Following that we will open the call to questions.

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

Thank you, Matt.

The third quarter represented a continuation of our consistent and predictable trend of delivering positive comparable sales and outperforming the casual dining industry.

Over the last 19 quarters we raised our already leading average unit volumes to over 10.5 million and captured meaningful market share while doing so.

The hallmarks of our brands have always been to pursue absolute guest satisfaction while managing our business for the long term.

And we are accomplishing these goals, as evidenced by the ongoing strength of our new restaurant openings throughout the US and abroad.

Specifically with respect to development, we opened two new restaurants during the third quarter, one in Reno, Nevada and the other one in Trumbull, Connecticut.

We also opened a beautiful new restaurant in Sarasota, Florida to long lines of guests just last week.

The restaurants we opened over the past several years provide a very good measure of the demand for our brand as their sales metrics represent a solid lift over our Company average.

Our growth plan is being executed well with high-quality investment.

This year we continue to plan to open as many as 10 Company-owned restaurants including one relocation.

These locations are in a mix of new and existing markets with four more openings anticipated over the next several months.

Our international growth is also on track.

So far, two Cheesecake Factory locations have opened in the Middle East and one location has opened in Mexico during 2014 with one more planned in the Middle East in the fourth quarter.

In total, this year our licensee partners will have doubled the number of international Cheesecake Factory locations in operation.

In 2015 we currently expect to open as many as 11 Company-owned restaurants in the United States, including one Grand Lux Cafe.

In addition, we expect as many as four restaurants to open internationally under licensing agreements, based on the information we have at this time.

This would represent as much as a 50% increase for our overall international business and it continues to contribute as expected to our earnings per share growth.

Further, we anticipate that the first restaurant with our licensee in Asia will open in the first part of 2016.

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.

But with the three excellent licensees we are confident about the prospects for The Cheesecake Factory development internationally.

So, we feel quite positive about the top-line momentum we are generating, but it is also apparent that we are currently operating in a very challenging cost environment.

Specifically, butter prices reached an all-time high in the third quarter and our group medical claims experience has also been measurably unfavorable compared to 2013.

However, we do believe that this commodity cost volatility and medical insurance claim activity are both temporary in nature.

In fact, we have already seen the butter market start to correct over the last several weeks.

Looking forward, the strength of our brands and competitive positioning have us poised to sustain our long-running positive comparable restaurant sales trends as our best-in-class operators continue to focus on delivering a differentiated guest experience.

And by prudently managing our controllable costs, we should be able to leverage these sales increases to help expand our operating margin back toward peak levels over time.

As we execute on our strategy and deliver on our growth objectives, we remain confident in our ability to deliver on our target of averaging midteens earnings per share growth over the next five years while also providing continuing and meaningful dividends.

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

Thank you, David.

Total revenues at The Cheesecake Factory for the third quarter of 2014 were $499.1 million.

Revenues reflect an overall comparable sales increase of 1.8%, maintaining a continued favorable gap between our performance and that of the industry.

As noted in our press release, comparable sales increased 2.1% at The Cheesecake Factory and declined 2% at Grand Lux Cafe.

External bakery sales were $12.6 million in the third quarter, up slightly from the third quarter of 2013, as expected.

Cost of sales was up more than projected, increasing by 90 basis points in the third quarter of 2014 at 24.9% of revenues versus 24% in the prior-year quarter.

Overall, compared to last year our cost of sales variance in the third quarter was almost all attributable to the unprecedented increases we saw in the dairy market during the summer and the impact it had on our bakery and restaurants.

As David mentioned, we saw the price of butter, which is a good proxy for cream cheese and also indicative of the cost of many other dairy items, continue to rise throughout the third quarter.

In fact, it reached a new all-time high in September at over $3 a pound.

This was an increase of about 30% from mid-July and nearly 100% from the beginning of the year.

The impact to us in the third quarter alone from overall dairy pricing was approximately $4.3 million and $0.06 in earnings per share compared to the prior year.

Labor was 32.7% of revenues in the quarter as compared to 32.1% in the third quarter of the prior year.

Our operations teams maintained their high level productivity the quarter.

However, we saw a greater than expected increase in group medical cost as compared to prior year.

This was driven primarily by large claims activity coupled with somewhat higher participation rates.

Although the medical cost pressure of about 60 basis points over the third quarter of 2013 was 25 basis points more than previously estimated, we did see the trends stabilize from the second quarter.

I will also note that we have seen this type of fluctuation with our self-insured medical plans before.

For example, in both 2009 and 2011 our health insurance-related cost increases were on average similar to our experiences this year.

In both instances, however, we did see the activity revert back toward our historical mean over time.

Other operating costs were 24.7% of revenue, up 40 basis points from the prior year's 24.3%.

About half of the variance to prior-year was attributable (technical difficulty).

G&A was 5.9% of revenues in the quarter, down slightly from the third quarter of the prior year, primarily related to a lower corporate bonus accrual.

Depreciation expense for the third quarter of 2014 was flat to the prior year at 4.2% of revenues, and preopening expense was consistent with the prior-year third quarter at about $4 million.

We had two new restaurant openings, both in the third quarter of 2014 and in same period of the prior year.

Our tax rate this quarter was 26.1%, down from the third quarter of 2013 as we had better leverage from the FICA tip credit.

Cash flow from operations for the first nine months of 2014 was approximately $161 million.

Net of roughly $88 million of cash used for capital expenditures, we generated about $73 million in free cash flow through the third quarter of 2014.

During the third quarter we repurchased approximately 456,000 shares of our common stock at a cost of $19.8 million.

That wraps up our business and financial review for the third quarter of 2014.

Now, I will spend a few minutes on our outlook for the fourth quarter 2014 and our initial thoughts on 2015.

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 and most current input cost information we have at the time.

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

For the fourth quarter of 2014 we estimate diluted earnings per share of between $0.58 and $0.62 based on an assumed range of comparable sales of between 1% and 2%.

Our fourth-quarter earnings per share estimate reflects our current expectations for the cost of dairy and our self-insured medical coverage.

The impacts from each of these areas on a year-over-year basis are an estimated cost of $3.6 million and $1.3 million, respectively, for the fourth quarter.

Although negatively impacting our earnings outlook for 2014, it is important to remind everyone that neither of these cost factors are associated with our four-wall restaurant productivity, which continues to run at high levels.

Based on the first three quarters results coming in at 1.3% comparable sales and our expectations of 1% to 2% in the fourth quarter, mathematically that brings us to a full-year 2014 comparable sales estimate of approximately 1.5%.

Also, based on the assumed fourth-quarter earnings per share range, we would estimate diluted earnings per share in a range of $2.07 to $2.11 for the full year 2014.

Overall, our outlook for total company food inflation in 2014 is now over 4% for the year, inclusive of the pressure in cream cheese in our bakery and other dairy items, as previously noted.

As to corporate tax rate, we expect it to be about 27% for the full year of 2014.

Our total capital expenditures are still expected to be $110 million and $115 million for planned 2014 openings as well as expected openings in early 2015.

In total, we continue to expect a return, in addition to the continuation of our dividend, up to $150 million of cash to shareholders in the form of repurchases for the year.

As we look ahead to 2015 we plan to open as many as 11 domestic restaurants next year, as David mentioned.

Our total capital expenditures are expected to be between $120 million and $130 million for planned 2015 openings as well as expected openings in early 2016.

Internationally, we expect as many as four licensed restaurants to open in 2015, which require no capital investment on our part.

For the full year 2015 we are currently estimating diluted earnings per share in a range of $2.35 to $2.45, based on an assumed comparable sales range of between 1% and 2%.

Our earnings per share growth at the midpoint represents a 15% increase over our current guidance for 2014.

Two of the more significant considerations for us in providing our earnings guidance for next year are dairy prices and the expense associated with our self-insured medical plans.

Based on our full-year 2014 estimate, these two items will have accounted for year-over-year cost increases of $10.1 million for dairy commodities and $7.5 million in health insurance or about $0.25 in earnings per share in fiscal 2014.

So our assumptions with respect to these line items in our 2015 earnings per share guidance are, first, that dairy will revert back to a more normalized price structure and that we expect to recapture about three-fourths of the 2014 cost increases.

We are basing that on a combination of the current butter futures curve and indicative 2015 pricing we have already received on selected dairy products.

Second, our assumption is that the group medical insurance cost will be approximately flat year over year in 2015, reverting back to slightly above our historical mean.

In terms of food cost inflation (technical difficulty) 2% and 3% in 2015 for our restaurants.

Some areas such as beef are expected to be higher, whereas dairy we expect to be lower, as just noted.

As to comparable sales, while we were starting to see a modest recovery in the industry, we are basing the midpoint of our guidance for 2015 on our actual performance in 2014 and providing a range of one-half of 1% on either side.

We think this provides a reasonable framework to assess our earnings-per-share estimates when taken into conjunction with the information we have provided on some of our key cost inputs.

Regarding our corporate tax rate, we expect it to be in a range of between 28% and 29% for 2015.

And finally, with respect to capital allocation, our earnings-per-share sensitivity range for 2015 assumes that we will use substantially all of our free cash flow for dividends and share repurchases.

With that said, we will take your questions.

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

(Operator Instructions) Jeffrey Bernstein from Cheesecake Factory.

I work for Barclays, but waiting for that offer, David.

In the meantime, two questions, one just on the comp side of things.

It seems like I just think you just mentioned and I think we have all seen recently that perhaps there has been an acceleration in the comp trends in recent months although there has been some speculation that maybe that's being driven more by aggressive discounting driving that improvement, which I know you guys don't typically do.

So I was wondering if you have seen that sequential acceleration perhaps July, August, September, or perhaps maybe you didn't because you don't really compete with that aggressive discounting angle and therefore your customers maybe aren't drawn to it.

Just trying to get your take for the industry trend that you experienced through the third quarter.

And then I had one follow-up.

On a month by month basis within the quarter, Jeff, our sales trends were generally positive throughout the quarter.

If anything, they were somewhat higher near the end of the quarter, but I wouldn't say there was a big spike in September, by any means.

So, we really didn't see so much of that.

We feel good that our trends were stronger than the third quarter -- stronger in the third quarter than they have been in about a year and a half.

It's hard to know if one quarter means that we are in a different or a better operating environment.

But our guidance suggests that we think we will continue to see steady and predictable sales performance that you've seen from us.

Got it.

And I know you guys in the past have commented that regionally and weekday/weekend and lunch and dinner there was no anomalies there?

No.

Geographically, we could comment on that.

The markets were mostly positive.

There's a pretty tight distribution between the highest performing sales markets and the lowest performing sales markets.

That has been also the case with us.

Our strongest markets this quarter continued to be Texas, California, Florida, and the Southwest.

And I think from the data we have that others are seeing strength in those markets as well.

Jeff, I think that's one of the key points of our business is that we have continued with that steady, predictable performance, whether it's day part or day of the week or geography.

So we take that as a positive that there's not new news to present there.

I would add that those sales also continue to be on full-margin sales, to your point earlier, that there is no discounting that's driving those continued growth in comps.

Understood.

And then the one clarification was just on the cost side.

It seems like last year at this time we were talking about seafood and most people were surprised by how much seafood you sold.

But butter and dairy seems more down the center of the aisle for you.

Is there any ability to contract or maybe hedge, perhaps, so that if it swings violently in one direction or the other you can do some sort of financial contracting?

I'm just trying to figure out the -- I don't know if you can just recap what you said the magnitude of that hit was going to be.

Do you think you will recapture three-fourths of it?

Any incremental color would be great.

Sure.

I would tell you that yes, you can contract for some of the dairy that we use.

Certainly, cream cheese, which is a big part of what we use.

Typically, just to give you a little bit of background we would see, when we were looking at contracting we would typically see dairy prices fall in the spring, in the second quarter.

And we would generally complete our contracting by then.

That didn't happen this year and prices continued up.

And at that point, when we were in July, we didn't really want to get stuck with high-priced products and inventory that were really up for no other reason that we could see other than a true commodity bubble.

But we were wrong, they continued higher from there.

So they were around $2.40 or so a pound, butter was, is a good proxy in July, but it was over $3 a pound in September.

So increased significantly during that time and we do have a big mix of dairy.

So, I would say that the butter and dairy market has started to correct some over the last week or two.

So it's now in more the low $2 range, which is still historically high and we factored that into our fourth-quarter guidance that we gave -- our best guess at that.

But it's significantly (technical difficulty) $3-plus all-time high.

But if you got hit by $10 million in 2014, you think that next year will be presumably down by $7 million, $8 million year on year so you will have recaptured three-quarters of that?

Yes, I think if you think about the way that we are contemplating, Jeff, is that over the course of several years it's more normalized inflation.

Right?

So you are not going to get it all back because even if prices revert back then there would be some inflation in there.

But I think, to your point, we will look at how we can most effectively leg into some of those coverages, whether it's a more direct hedge on cream cheese or doing that more intermittent throughout the year as well certainly to protect against bubbles like this.

And we do have indicative pricing from some of our -- on some of our products that would help us to believe that we could certainly make a big impact on lowering our dairy cost next year.

Understood.

Thank you very much.

Joe Buckley from Bank of America.

Thank you.

A couple questions as well.

Doug, I couldn't hear the comment about the other operating costs.

I think you said half of that was attributable to something, and I didn't hear what that was.

Okay, yes.

Half of it was attributable to the timing of marketing spend.

Okay, okay, okay.

And then, feel we're going to belabor the commodity market here.

But have you essentially been buying spot for dairy during the second half?

Yes, Joe.

So for the most part that's true.

So we had -- is what we said in July -- we had contracted on the cream cheese for about 30% of the full year.

But then obviously you are on the spot market for the balance of that during the quarter.

And specifically, for any of the fluid milk products, they are difficult to hedge.

The cream that -- butter is indicative of pricing for that.

You really can't get a direct hedge for that.

So we would have been on the spot market there as well.

Okay.

And then (inaudible) on the seafood, from things we can monitor, it kind of looks like shrimp is down now year over year, but salmon is still up year over year.

Just kind of give us an update if that, they neutralize each other now on the seafood side?

I think what you said is exactly what I would say.

For our 2015 guidance we factored in that we are going to get somewhat better shrimp pricing for 2015 than we got in 2014.

But salmon is going higher, it's still going up.

So, we see the shrimp market improving but it's not all the way back yet.

So, I will say that our shrimp -- for our shrimp for next year we're about 60% contracted or booked for our shrimp already for next year.

Okay, thank you.

John Glass from Morgan Stanley.

If I could maybe just think of the commodity slightly differently, Doug, at the beginning of the year or late last year you thought commodity inflation might be 4% to 5%.

You gave an earnings forecast around that.

I understand dairy, but even with that I think you said it's going to be 4%.

So what's the difference?

Were there other pieces that didn't fall into place?

I'm trying to reconcile what you said at the beginning of the year, and you actually fell within that range.

And you missed the earnings forecast much more substantially.

So, was it really -- was it dairy?

Or was there other forecast -- and I'm just thinking about commodities now.

And then maybe you can talk about just overall forecasting of the business.

So, I think that the dairy piece was the driver that was the variance.

So what we said in Doug's prepared remarks was that actually we were over 4% for the year, so I think we came back within that 4% to 5%.

Midway through the first quarter it seemed like it might be more favorable and that was really driven by the grains.

So if you looked at corn and wheat and then the byproducts of those, whether that's pasta or oil seeds, those have been slightly favorable, so bread would have been slightly favorable, and pieces like that.

The other piece is that, as Doug said, in the fourth quarter we've started to see the shrimp come down.

We've gotten a little bit of a benefit versus where we expected there.

So the other pieces, I think were lining up more favorably overall.

But the dairy piece, because of the way that the bubble worked, really impacted the second half.

It peaked right at the end of September.

And that was -- really the sole driver there is almost 100% of the commodity variability versus expectations in prior year.

And just when you think about forecasting your business overall, right, the variability is much higher and you've hit the low end or in some cases missed forecasts in the last six or seven quarters.

When you think about 2015, have you been more contingency in there or maybe some cost savings initiatives?

So if some things don't go the way you think they are going to go you can still achieve your targets?

Or are you out there saying, look, this is what it is and if anything moves off of these forecasts we're going to end up having a shortfall?

How conservative are you now being?

I would say that we are being as conservative as we prudently can be.

There's not a perfect crystal ball, as you know.

So particularly -- so that's why we outlined exactly what we are doing with respect to the dairy assumption for next year.

Someone could second-guess us and say that they don't think that that's a good assumption to make.

That's why we are outlining that major (technical difficulty) to group medical expenses.

So I would say that we are not trying to be a more conservative or any more -- we're just trying to be as right as possible and give a wide enough range so that we can come within that range.

Okay, thank you.

Nicole Miller from Piper Jaffray.

Could you please talk a little bit about the Grand Lux?

I think you said it would open -- is it at the end of next year, potentially?

Is this opportunistic and is it a new or existing market and how did the opportunity come to you?

Well, we are always looking for great sites.

So this one in King of Prussia we thought was a great site.

It's the most successful malls in the country.

They were doing an expansion and we were able to get a great spot in that expansion.

So we are still perfecting Grand Lux.

We are still moving along.

Even though we have one in Cherry Hill it's probably an hour away, maybe a little bit more.

So I'm not sure I really would count it in the same market.

We're just going into an excellent site.

And it took a long time to negotiate and it was the site that everybody wanted but we got it.

I would just add -- Nicole, this is David Gordon -- that just as far as Grand Lux even in Cherry Hill continues to really out outperform when it comes to service and quality and guest expectation.

Could it be a little bit busier?

Yes, we would be happy if it was a little bit busier, but it's still outperforming all its competitors within that same market so we have confidence that the opening in KOP would be successful as well.

Thank you for that color.

Just a housekeeping question -- development for next year, is it going to be weighted like it always historically has been toward the back half?

Or is there differences visibility that you have?

It will probably be a little like this year.

Usually everything is in the last half.

We got some more in the front, so I would say maybe it could be as much as 20% in the front and the rest of it in the back.

These things move around like crazy for many, many reasons.

But we get them done within the year normally.

Thank you very much.

David Tarantino from Robert W Baird.

Doug, I was wondering if you could help to reconcile the variance in the EPS relative to your guidance.

It looks like comps came in towards the high-end of guidance but earnings came in $0.09 to $0.10 below the high-end of the guidance.

So I was wondering if you could just give the pieces that reconciles that gap.

Yes.

It was, I would say, $0.04-plus related to dairy, $0.04 versus guidance, $0.06 versus last year.

So we factored in some increase in dairy in the third quarter but not what happened.

$0.02-plus from group medical versus guidance.

And again, that was versus prior-year probably $0.04, so we in fact had some of that but not enough.

Then I would say that most of the rest -- there's a penny or two from electric and other miscellaneous expenses, none of which are big in individuality for any particular thing.

Thank you very much for that.

And are those the same factors that are causing Q4 EPS guidance to be below the prior-implied range that you had?

Yes, those are.

And then even if -- if you want to look at the implied range, the implied range for the dairy we have put another $0.03 versus the prior implied range into the fourth quarter of pressure and in group medical another $0.01 in the fourth quarter compared to the prior-implied guidance.

If you want to try to reconcile the year guidance that we last had with the current guidance, you could take all those things I said and you'll get about right there.

Great, that's very helpful.

And then one last one for me.

The unit openings for next year -- I appreciate that the numbers are going up by one opening.

But just wondering why not more?

It seems like a great return on investment.

Is it a real estate availability issue?

Maybe could you give some comments on why you can't push that number even higher.

Certainly, if we could, we would.

As those A-site locations become available we want to take them.

And I think if you look at our track record over the past three years we continue to pick sites that are exceeding even some of our own expectations.

So we are being very prudent and cautious and making sure they really are great sites.

As malls continue to be remodeled or new properties come on board, like the opening we just had in Sarasota, Florida, we look at all of those.

And we have the capacity, certainly, and the resources to open more.

But we're not going to take a chance, we're going to make sure it's a smart investment.

And that's helped us to be as successful as we have been in the past three years.

And it's really outlook even for next year.

Great, thank you very much.

Brian Bittner from Oppenheimer company.

Trying to think about the operating leverage in your labor model here.

When I strip out the $7 million headwind in medical costs this year I'm still getting flattish or some slight the leverage on that labor line.

And that (technical difficulty) just wondering going forward is that how we should think about labor, 1.5% comp, flat labor?

Or was there anything else going on there that you can maybe leverage it better in the future?

This is Matt.

Our full-year comp guidance of 1.5% -- we generally say that's about the point in time where we will start to see leverage.

So as we said, about $7.5 million in group medical.

And that's the incremental cost.

We've carved out the growth piece, so that's truly impacting the margin.

And then obviously we've seen some minimum wage pressure this year.

I think in reality what we've done well is be very productive and we've absorbed that in the right way while still protecting the guest.

But I think at 1.5% comp we feel good about that.

And we would look at a 1.5% comp to maintain our labor so that we can really thread the needle, balancing the guest with the profitability.

If you look at next year and you just consider the labor line and just pick the midpoint of the sales range again at 1.5% comp, we would probably get some kind of benefit on the labor line for next year as compared to this year, simply because the international openings will weigh in much more heavily on next year's labor line than they do this year.

We basically doubled the amount of international openings late in the year this year so that that revenue with great flow-through capabilities will help to improve margins some on every line for next year.

But when I use the labor expenses against just The Cheesecake Factory revenue line item, that obviously -- we are not incorporating international revenue into that type of modeling, though.

Correct?

Right.

Okay.

Have you talked about how many international units you expect to open or the cadence of the opening of international units in 2015?

We expect to open four.

I don't think we have talked about the cadence.

I don't know if we have a comment about that.

It's so far out of our control.

We have to do our best to estimate, to even come up with the fact that we will have four.

Okay.

Thank you.

Matt DiFrisco from Buckingham Research.

A couple questions and just one bookkeeping thing.

Did you mention the price increase?

I missed that -- what price was in the quarter and what you expect it to be ahead?

Price in the quarter is about 2% and we expect it to be about 2% going forward.

Basically this quarter a 1% price increase replaced the 1% price increase that was rolling off.

So you are basically flattish traffic right now at The Cheesecake Factory?

I can give you the breakout.

Actually, our mix is up.

Traffic was down about 0.8% for the quarter.

So the breakdown is comp of 1.8%, price of 2%, traffic minus 0.8% and mix positive 0.6%.

And then, just given your seasonality of the cheesecake and the bakery sales in the wintertime and the celebratory time, you normally get a sequential higher relative COG in the fourth quarter.

It's usually your highest.

In that environment that we are in with dairy now, are we going to see then a meaningful sequential step up?

Is that what's behind your guidance and lowering your number for 4Q?

That's part of it.

Part of what's in there, too, is that in order to sell some of these cheesecakes in the fourth quarter we have had to make a lot of them.

And they are in inventory now and they're in inventory now at high cost of dairy, and that cost also has to be spread through our P&L as those cakes are sold in the fourth quarter.

So that's part of what we factored into the in the fourth quarter as well.

On the modeling side of it, also, your G&A looked like it was managed pretty well in this last couple of quarters, somewhat lower than you have historically grown it.

Is that the pattern we should think about it on the year-over-year basis?

I know you had lumpy spending in quarters on G&A in 2013.

You been holding around a 3.5%, 3% rate now.

Is that model or behind the earnings assumptions, around a [3% to 5%] type growth rate for G&A?

If you're looking forward I would expect G&A to remain about flat for next year.

And the reason that you are -- we are managing very well, there's no doubt about that.

We are managing very well.

We almost are never over where we think we're going to be on G&A.

But in the last couple of quarters, particularly in this quarter, the results have caused us to bring the bonus accrual down.

So that has helped the G&A line, let's say that.

Flat meaning relative or absolute dollars?

Flat meaning relative -- meaning percentages.

And then I promise my last question -- with respect to the hedging comment you made about dairy or at least that you expect three-quarters of the dairy headwind to reverse, is it correct to assume that is not fully locked in and visible around pricing?

That is in anticipation of what the crystal ball is telling you now as far as the direction of things having to work a little bit still that are not unfolded yet for 2015?

That's exactly right.

There's nothing that -- we have based that on what the futures curve looks like.

So if you go out and look at butter prices in the futures curve, it would tell you butter prices, what, $1.80 or something?

$1.75.

So it's at $2 now.

So that's one thing we took into account, and then we also (technical difficulty) discussions with certain of our suppliers about certain products and what indicative pricing they would give us now if we won the contract today.

We know what those are and we know how they compare with this year.

Why -- with 2% to 3% food inflation, though, wouldn't you take the liberty of taking a 2% to 3% price increase for 2015, considering that that is what the market is putting on you and you are basically with flattish-type traffic?

Do you think you have that capacity to take 2% to 3% pricing or something telling you can't take 2% to 3% price?

Normally, just the balance of two conflicting priorities, right?

It's the desire to grow guest counts with the desire to protect margins and they conflict with each other.

And so you've got to achieve a balance of what is the right price increase to protect the margins in the short term with protecting guest counts in the long term.

Understood.

This is an art and not a science.

So there's nothing magic about 2%.

There's no reason it couldn't be 3% other than I think our belief would be that might be too much pricing to take from the guest perspective.

Understood, thank you.

Sharon Zackfia from William Blair.

I just have a few quick questions.

So I think if I recall correctly dairy used to be a low double-digit percent of your cost basket.

And I'm wondering where that's running now.

If you think about the combination of the restaurants and the bakery, then you are not that far off.

It's maybe about 15% of the total between the two.

Doug, on the occupancy and other, I appreciate I think half of that increase was the shift in the timing of marketing.

But I'm surprised you would have de-levered that absent that, on a 1.8% comp.

So was there something else happening there?

I think you mentioned electricity.

It's just hard to figure out what was material or if there's something that shifted where we should expect that to be a pressure point absent shifts in marketing.

There's no one thing on that line item that's too material outside of marketing.

The marketing timing -- there were a number of small trade-offs that impacted that line during the quarter.

But the biggest component of that, you said, that I mentioned earlier was higher electric cost, which was up about the equivalent in the quarter of $0.01 in earnings per share versus the prior year.

Okay.

Can you remind us what you spend on marketing now as a percent of sales?

About 0.5%.

I don't think it's really changed much over time.

Great.

Thank you.

Will Slabaugh from Stephens Inc.

I want to ask you about labor and what you are expecting going forward given what we seen with medical claims and the recent minimum wage increases, and then also the additional increases coming down the road.

Back to the pricing question, first of all, do you expect to be able to leverage labor going forward this year or looking into 2016 or beyond?

Secondarily, in those markets where you are having dramatic and wage increases, would it be on the table to look at, at least price increases in those markets?

Currently, we don't really do tier pricing.

We just do it to a very small extent.

So, I wouldn't say that's totally off the table.

We might think about that.

But as I said earlier, next year with respect to labor and even factoring in the known minimum wage increases, not any that haven't been legislated yet but the known minimum wage increases -- and California is the biggest one for us.

For the first half of next year we know that's going to impact us on a year-over-year basis because it didn't know it until July of this year.

So we factored that in.

With all of that said, for next year I think we can manage our labor productivity and then have the addition of a greater influence from the international or royalties such that we can have labor flat to slightly better.

That would be how we would see it right now for next year.

Great, thank you.

John Ivankoe from JPMorgan.

Hi, good afternoon.

It's Amod Gautam filling in.

A couple of questions on the capital allocation side.

The first one is, out of the $120 million to $130 million in CapEx, does that include any remodel CapEx?

And are we coming up to maybe a cycle where I think about 10 years or so you are probably growing at the highest level of absolute number of units domestically.

So going forward in the next couple of years, should we expect to ramp up in CapEx in terms of reinvestment?

Probably not.

We do an occasional remodel of a restaurant that's really old or a remodel of a patio.

We do things like that.

But our policy for CapEx and for keeping the restaurant running is a like-new policy.

So, we allocate close to $30 million every year in capital expenditures to keep these properties looking like new.

Additionally, there's another 2% of sales, $40 million plus, that is expensed through the P&L that can't be capitalized that might be painting or might be things that are also keeping these properties looking like new.

So (technical difficulty) in the look of the interiors in some of the newer restaurants.

But really, it's not that much different than the older restaurants such that there is a big need to remodel.

You have big remodel costs in the budget to renovate restaurants.

Some money in there, but it won't be a huge number.

Understood.

Okay.

Secondly, guys have talked about a long-term domestic restaurant target, I think of 300.

Obviously, you have got pretty robust cash flows and a balance sheet that could potentially support an acquisition or maybe another concept.

So is there a number of Cheesecakes maybe you are thinking about where you get to that number and then you more seriously approach the next leg of opportunity domestically?

And broadly, what are the things that you are considering about if there was an acquisition to be made in terms of fast casual versus casual dining as well as maybe the size of the concept?

There is a lot in that question.

I would say to you that we are considering and we look at what is available out there to be acquired, either acquiring a concept or developing one ourselves.

So when we look at the longer-term time horizon we recognize there will probably come a time when we will need to have another driver to keep our earnings per share growth where we want it to be.

We've looked at all the restaurants that have sold over the past, I would say, four or five years and those that have gone public.

There's no reason for us not to be informed about what's going on out there, so we have -- I couldn't say we were, like, quote, interested in any of them in particular, but we did look at the possibility of whether we would be interested in them.

So that's going on currently, but we are going to be very thoughtful about that process and extremely selective about what we would consider.

So hitting a certain number of openings domestically wouldn't be the driver of that decision.

It would be making the best decision for the business in the long run.

Okay, thanks for the color.

Keith Siegner from UBS.

Thanks.

Just a follow-up question on the marketing.

You've done in the job in the last few years of taking a 50-basis point sales spend and getting a lot of mileage out of it in really unique ways.

But as marketing across the sector evolves, especially with all the digital and other programs that are out there now, how do you see your marketing program evolving as we move forward?

Do you think the 50 basis points remains the appropriate spend?

Anything along those lines of either how you spend the marketing and what's the right amount as we move forward in this environment would be helpful.

Thanks.

I think we try to, as you said, to use marketing in a very strategic way to strengthen and protect the brand and retain and grow our market share.

And we are very involved in marketing now with using social and digital media to directly engage our guests.

We now have over 5 million Facebook fans, for instance, and over 250,000 Twitter followers.

We're on Instagram, we're on Pinterest.

So we are getting a lot of exposure, and social media is obviously evolving into a very visual medium, and that's a good thing for us because our food and our restaurants are very visual.

We also get a lot of publicity, exposure through TV, for instance local TV network, morning cooking shows.

We use special occasion such as National Cheesecake Day to have a big presence both digitally and in restaurants, so publicity is a big part of our marketing.

And so whether 0.5% is the right number or not, it has to do more with the return on investment of any additional marketing money that might be spent.

So to consider spending additional marketing money, you wouldn't want us to say that, that we are now spending 1.5% but we are making less money, our sales are better but we are making less money.

So that's part of the consideration, and we think right now that the current spend rate is what we should use.

That's helpful.

And maybe one follow-up -- one of the hallmarks to being a Cheesecake customer all these years is that you wait in a line more often than not.

There are some concepts that are started to toy around with various options to provide solutions for long lines in various concepts.

I'm wondering, as you think about these areas technological solutions out there, is that something you have considered?

Is there any optionality on that front or not?

Thanks for the question.

We answered this question a couple of times around technology.

We certainly want guests to have access to the restaurants as easily as possible.

So right now we're actually testing in quite a few restaurants text paging as an example.

Instead of having to wait in line and get a paddle pager and have a lot of people standing around the host stand and the restaurant maybe even appearing to be busier than it is, we are enabling guests to leave their phone number, travel around the mall, and relieve some pressure on the host stand in the restaurants.

We seen some pretty good success around that.

At the same time, that energy that's created -- people want to be where people are.

So that busyness in the restaurants and that buzz that happens at Cheesecake Factory is part of the attraction of the brand.

We don't want to lose that as well, so we have been very strategic and careful about how we're going use technology.

I think I've said before that we don't really see within our service model using anything at the table or tabletop devices.

That really isn't the type of ran that we currently are.

However, we can improve the guest expense, to your point, around long lines, we are continuing to experiment and we will continue to experiment throughout this year and moving into next year.

Thank you very much.

Andy Barish from Jefferies.

Just one on the international front.

I forget exactly how the deals are structured.

But with three openings in the third quarter, was there any material fees that were recognized through the income statement?

Not in the third quarter.

But are there opening fees associated with these stores or is that not the way the deals are structured?

Generally we don't have opening fees.

We do have development fees.

Okay.

And then just finally on the 2015 labor puzzle, how much Affordable Care Act costs are you baking in incrementally for next year?

For next year incrementally, not really -- we don't really think the Affordable Care Act is having that big an impact on our medical spend.

As we said, it's mainly, Andy, large claims activity, which by their nature -- if they are large claims there shouldn't be large claims all the time or they wouldn't be called large anymore.

So we've taken that into account but the Affordable Care Act -- we've had plans that have qualified under the Affordable Care Act available to our employees for a long time.

And it's not really having -- other than maybe a few more people on the plan, it's really not having that big an impact, certainly manageable for us.

Okay, thank you.

All right, great.

That seems to be all the time that we have for questions today so that does conclude our conference.

Thanks for your participation.

You can disconnect, and have a great day.