Cheesecake Factory Inc (CAKE) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Cheesecake Factory earnings conference call.

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

(Operator Instructions)

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

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

Please proceed, ma'am.

Good afternoon and welcome to our fourth-quarter FY14 earnings call.

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

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 will 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 the factors detailed in today's press release, which is available on our website at investors.

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 the call today with a discussion of our longer-term strategy, which we believe positions us well to increase shareholder value in the future.

Next, Doug will take you through our operating results in detail.

He will also provide our outlook for FY15, both the first quarter as well as the full year.

And finally, David Gordon will discuss our near-term strategy, outlining a number of initiatives we have in place to drive comparable sales and strengthen restaurant level margins in 2015.

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

One final note.

We are providing a PowerPoint slide on our website to summarize the financial take-aways from our longer-term strategic discussion today.

This slide is available at investors.theCheesecakeFactory.com.

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

Thank you, Jill.

Although we delivered another year of positive quarterly comparable sales in 2014, within our anticipated range, I think it's fair to say that the year did not live up to our expectations.

And while much of what impacted us last year was beyond our control, our objectives are to drive guest traffic, more effectively manage our four-wall costs and grow our earnings.

Today, we're a $2 billion global Company.

We've been a long-standing leader in casual dining with the highest AUVs in the industry, which were 10.5 million last year.

The Cheesecake Factory celebrates its 37th anniversary this month and our concept is still relevant across a broad demographic with a strong brand name.

We are a growth company and we will remain one.

We will continue to operate with a focus on excellence and menu innovation and food quality, as well as service and hospitality.

These areas are key differentiators, competitive advantages and areas in which we have deep expertise.

They form a strong foundation from which we can successfully grow our Company in the years ahead.

We see our growth coming primarily from four drivers.

The first is continued high-quality domestic growth of The Cheesecake Factory.

Our target remains 300 Company-owned locations.

With 177 restaurants in operation today, we're only about 60% into the growth potential of our core concept.

Our site standards are high and we remain focused on A+ sites in both new and existing markets.

This is an effective strategy as the new restaurants we opened in the past three years continue to deliver 10% higher sales per square foot relative to our Company average.

We will fit the size of the restaurant to the demographics of the market and the specifics of the site in order to achieve our targeted returns.

We are opening between 10 and 12 new restaurants each year domestically and this is a reasonable expectation going forward.

The number of openings each year is governed by the availability of premier sites, not by capital or infrastructure constraints.

Second is comparable sales growth consistent with our annual range of between 1% and 2%.

We want to grow traffic from current levels, which will allow us to reach the upper end of this target.

Given our high volumes, an incremental 1% increase in annual guest traffic at The Cheesecake Factory equates to about 14 additional guests per restaurant, per day, which is achievable.

We have a number of initiatives to increase traffic this year and we feel good about our ability to do so.

Third, we're looking at options in addition to The Cheesecake Factory restaurants to support meaningful growth into the future.

We're open to new concepts, whether internal or external, and ways to leverage the power of The Cheesecake Factory brand.

We are actively working on these efforts in a thoughtful and highly selective way with the goal of having at least a couple of opportunities primed within the next few years.

Ultimately, we're looking for these additional growth drivers to contribute enough incremental revenue and associated margin growth for us to remain a mid-teens EPS grower.

The final driver of our growth plan is the continued development of The Cheesecake Factory brand internationally.

It plays a key role in our margin improvement in the future.

We have three international licensing agreements in place today that we believe can provide for four or five new restaurant openings each year.

Our current agreement specifies for as many as 42 additional restaurants, representing a long runway of growth.

Additionally, at least one of our licensees continues to expand in countries beyond our initial agreement and has asked us to evaluate these opportunities.

Our licensing agreements require no capital investment in our part, limiting our risk yet providing us with a high flow through royalty stream as well as revenue stream for our bakery.

Before I wrap up, I'd like to comment briefly on Grand Lux Cafe.

The scheduled opening of the newest Grand Lux Cafe is in the King of Prussia Mall, is planned for early this summer.

It is an excellent location in an expanded part of one of the premier retail centers in the country.

We know King of Prussia well, as we have a high-volume Cheesecake Factory restaurant there.

Given the location and potential sales volume, we feel good about this restaurant's ability to deliver our targeted returns.

In conclusion, we have multiple avenues for top-line growth and a solid opportunity to recapture peak operating margins.

And with our continued plans to return a significant amount of capital to shareholders through share repurchases, we believe we can generate dependable and sustainable EPS growth.

Taking our dividend into account, our longer-term strategy is to deliver total shareholder returns in mid-teens-plus range.

The strength of The Cheesecake Factory brand, our focus on great guest experience and our operational tenure and talent all contribute to our confidence in executing our plan for growth.

We are energized about our future and we are committed, as ever, to increasing shareholder value.

Now I'll turn the call over to Doug for the financial review.

Thank you, David.

Total revenues at The Cheesecake Factory for the fourth quarter of 2014 were $499.7 million.

Revenues reflect an overall comparable sales increase of 1.4% at The Cheesecake Factory restaurants.

Beginning with the fourth quarter, our discussion of comparable sales on our earnings press releases and on our quarterly conference calls will focus solely on The Cheesecake Factory restaurants.

Our quarterly and annual filings with the SEC will continue to include a brief discussion of comparable sales for Grand Lux Cafe.

This change allows us to focus our discussion with you on the key driver of our business, since The Cheesecake Factory restaurants currently generate about 90% of our total revenues.

This is also consistent with our segment reporting in breaking out The Cheesecake Factory as a separate segment.

External bakery sales were $17.4 million in the fourth quarter, up slightly from the fourth quarter of 2014, as expected.

Cost of sales increased 90 basis points in the fourth quarter of 2014 at 25.3% of revenues versus 24.4% in the prior-year quarter.

The variance in the fourth quarter was primarily attributable to the impact from higher dairy prices -- that higher dairy prices had on our restaurants and our bakery, as we expected.

Although dairy prices were off of their peak in the fourth quarter, they were still quite higher year over year.

Labor was 32.5% of revenues, up 90 basis points as compared to the fourth quarter of the prior year.

We continued to see unusually high group medical claims activity relative to the prior year, which represented the majority of the increase.

The remainder of the pressure in labor stemmed primarily from higher wage rates.

G&A was 5.8% of revenue in the fourth quarter, down 40 basis points from the same quarter of the prior year, primarily related to a lower corporate bonus accrual, partially offset by higher equity compensation costs.

As we have noted in the past, our equity compensation expense has increased due to lower-priced options dropping off of our expense calculation.

Pre-opening expense was $5.5 million in the fourth quarter of 2014, versus $4.9 million in the same period last year.

We opened five new restaurants in the fourth quarter of 2014.

In the same period in the prior year, we opened six new restaurants including three locations -- three relocations, which had lower pre-opening costs.

For the full year our tax rate was 26.9%, in line with our expected rate of about 27%.

Cash flow from operations for the full year 2014 was approximately $240 million.

Net of roughly $114 million of cash used for capital expenditures, we generated about $126 million in free cash flow for the year.

During the fourth quarter, we repurchased approximately 3,000 shares of our common stock at a cost of about $156,000.

For the year, we repurchased approximately 3.1 million shares of our common stock for $140.5 million.

Together with dividends, we returned $170.8 million in cash to shareholders.

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

Now I'll spend a few minutes on our outlook for the first quarter of 2015 and an update on the full year.

As we've done in the past, we continue to provide our best estimate for earnings per share ranges based on realistic comparable sales assumptions and the 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 effect of any impacts associated with holidays and known weather influences.

For the first quarter of 2015, we estimate diluted earnings-per-share of between $0.47 and $0.50, based on an assumed range of comparable sales of between 3% and 4% at The Cheesecake Factory restaurants.

The key cost assumptions associated in our -- assumptions considered in our earnings-per-share sensitivity for the first quarter of 2015 include group medical insurance cost pressure of between $2 million and $3 million.

We begin to lap the majority of the cost pressure from 2014 in the second quarter.

And overall wage inflation of $3 million to $4 million, including about $1 million in higher minimum wages, mostly driven by the California minimum wage increase in July of 2014.

I will note that while we are expecting to pay more for group medical and labor costs, with a comparable sales assumption of 3% to 4% we do not expect labor to be higher as a percentage of sales compared to the first quarter of 2014.

For the full year 2015, we are currently estimating diluted earnings per share in a range of $2.08 to $2.20, based on an assumed comparable sales range of between 1.5% and 2.5% at The Cheesecake Factory restaurants.

We continue to plan for the opening of as many as 11 domestic restaurants this year.

Our total capital expenditures are expected to be between $120 million and $130 million.

Internationally, we continue to expect as many as four restaurants to open this year under licensing agreements.

As to comparable sales, The Cheesecake Factory, as well as the casual dining industry overall, saw a strong start to the quarter during the past six weeks.

This is reflected in our first-quarter comparable sales assumption.

However, our 2015 earnings per share range is based on the assumption that we return to our historical norm of comparable sales of between 1% and 2% for the remaining three quarters of the year.

Mathematically, this results in a 1.5% to 2.5% comparable sales range for the year.

In terms of food cost inflation, there's no change to our thinking in that we are modeling between 2% and 3% for the restaurants and between 1% and 2% for the total Company, including the recapture of about three-quarters of the bakery dairy pressure from 2014.

Our food cost inflation reflects measurably higher costs for beef and, to a lesser extent, chicken, partially offset by year-over-year favorability in dairy and seafood costs.

In labor, we continue to believe that group medical insurance cost will be approximately flat year over year as a percentage of sales in 2015.

In addition, we expect overall wage inflation of $10 million to $12 million, including about $4 million in minimum wage increases.

As to our corporate tax rate, we expect it to be in a range of between 27% and 28% for 2015.

In keeping with our practice of consistently returning our free cash flow to shareholders, we plan to plan to do the same in 2015.

Our earnings-per-share sensitivity range for the year assumes that we will utilize our free cash flow for share repurchases and dividends.

That wraps up our financial review.

And I will now turn the call over to David Gordon.

Thank you, Doug.

Let me give you some context to help you think about how we achieved the financial targets for this year that Doug just outlined.

From a sales standpoint, we have an opportunity with respect to guest traffic at The Cheesecake Factory.

It was down about 1% last year and recapturing that traffic will enable us to achieve the high end of our comparable sales range in 2015.

When we stacked-ranked our restaurants by changes in guest traffic in 2014, a significant percentage of our restaurants had positive guest traffic.

Those that didn't were geographically concentrated in the Northeast and the mid-Atlantic, and looking at industry data, we know that this is an issue across casual dining.

We are conducting market research with a focus on the Northeast and the mid-Atlantic to understand this dynamic better, which will inform us of our opportunities in these regions and what steps we need to take to capture those opportunities.

Another industry data point tells us that for our segment of casual dining, guest satisfaction scores were down on average between 1% and 2% last year.

At The Cheesecake Factory, we did better than the industry and maintained our high scores.

But we're not satisfied with that.

Our goal is to get better and drive high performance.

When we measure guest satisfaction, two of the key drivers that we focus on are speed of service and server friendliness and attentiveness.

Speed of service is all about throughput and wait times.

The Cheesecake Factory is the highest-volume concept in the industry.

Nearly 90 million guests dined our restaurants last year, which can result in long weight times.

At these levels, every minute matters.

We are implementing this process to revitalize our managers' focus on running every shift in a way that increases throughput while maintaining our high standards, excellence in food quality, service and hospitality.

We believe that running shifts with a specific and conscious focus on throughput and assessing performance at the end of each shift can lead to further improvements.

In addition to what I just shared with you, we have three other comparable sales-driving initiatives in place for this year.

First, we are redesigning our server training with an enhanced focus on what today's guests expect, higher level of service that is tailored to their needs.

One of the differentiators at The Cheesecake Factory is our excellence in service and hospitality.

Our scores with respect to server friendliness and attentiveness improved last year, but we know we can get even better.

In addition, we are also implementing the use of iPads to deliver restaurant server staff training.

We tested the use of tablets last year and the results showed the technology to be more effective method of teaching, resulting in faster training times and a better retention of the material.

Next, we are continuing to build on the success of our gift card program.

In each of the past two years, our gift card sales increased an average of about 25%, which demonstrates the affinity that consumers have for our brand.

We will continue to capitalize on the strength of the brand to expand both digital and physical gift card buying opportunities.

And third, as we discussed with you last year, we're evaluating a number of ways that technology could be used in our restaurants that adds to the guest experience.

This year we are moving forward in piloting a technology for mobile payment in our restaurants.

We are building a mobile app branded for The Cheesecake Factory and guests will be able to use a number of different payment systems.

We're excited about this initiative and the learning opportunities it affords us, as well as its potential to provide a service to our guests and continue to incrementally improve our speed of service that I talked about earlier.

In addition to improving guest traffic, we are also extremely focused on improving our margins.

There are a number of ways that should help us progress in this area.

First, you may remember that we installed a back-of-the-house cost management system with substantial capabilities across production planning and inventory management a few years ago to help us analyze usage and waste.

We are now leveraging the system to more efficiently manage the daily production in our restaurants.

With our industry-leading high volumes, our ability to reduce waste by even a small percentage can yield significant savings across the brand.

We have this new functionality in pilot today and based on its continued success, we intend to roll it out Company-wide later this year.

Also with respect to cost of sales, we've enhanced our processes for managing commodity costs.

With the pressure that we saw from dairy and shrimp last year, we're evaluating different approaches to limiting our risk, getting the lowest cost and having more predictability at the same time.

Our approach for many years was to enter into volume-based contracts.

While we will continue to do that, we are now also considering and supplementing our contracting with strategies such as direct hedging for certain products and diversifying the length of our contracts to more effectively manage our exposure.

Third, moving on to labor, it is a well-covered topic across the restaurant industry that labor costs are a potential headwind for operators this year.

One approach we're taking is to provide our field operations teams with increased visibility on labor wages by position compared to local market rates to help ensure that we pay an appropriate wage rate.

This should help us to maximize productivity and remain the employer of choice as well is a great place to work.

I

n addition, we are rolling out a new exception-based tool within our business intelligence system to our field leadership.

This tool will provide predictive analytics, enabling our area directors to work with their restaurants to identify labor opportunities before they arise.

Proactively managing labor this way can help increase labor productivity by helping operators flex labor appropriately relative to the fluctuations in guest traffic.

The fifth and final area I want to spend a moment addressing is one aspect of our sustainability initiative.

While this is not just a four-wall initiative, much of our initial work is focused on our restaurants.

One of the first projects involves installing new equipment at our back-of-the-house operations this year to both lower our energy usage and reduce costs.

This is just a beginning, with more to come in this area.

The initiatives that I shared with you build on where we are already best in class.

We know that we have the knowledge, a talented tenured team to continue to execute well and deliver an exceptional guest experience.

The actions we're taking this year will help to support our long-term strategic plan as well as continue to grow our Company and produce sustainable mid-teens earnings-per-share growth.

With that said, we'll take your questions.

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

(Operator Instructions)

Jeffrey Bernstein, Barclays.

Just two questions, I guess, one on the guidance Doug gave for 2015.

It seems like at the midpoint, you've lowered at least the bottom line earnings per share by what looks to be $0.30 or so.

Wondering if you could help bridge that for us, because it seems like the comp you're assuming modestly higher, even if it slows the rest of the year and unit openings are in line and the cost of sales seem to be in line, group medical in line.

I was wondering what are the biggest deltas that led to that reduction?

And then I had a follow-up.

Sure.

The majority of it, Jeff, is really just the shortfall from the fourth quarter of 2014.

So we're working off of a lower 2014 earnings-per-share base than we expected to when we gave the initial guidance for 2015 in October.

So that's the majority.

Higher labor costs relative to what we expected is most of the rest.

Wage rate increases are a reality, not just for us but, if not yet, soon to be across the industry.

Our guidance for 2015 assumes $10 million to $12 million in overall wage inflation, about $4 million of that coming from minimum wages.

In October our assumption was for $7 million to $9 million in wage inflation.

So another $3 million, I guess, in wage inflation expectation since we gave our initial guidance.

So basically, we were assuming that -- for years we had wage inflation for about the last five years of about 1%.

In October we assumed for 2015 that wage inflation would be about 2%.

And now based on what we're seeing in the fourth quarter and what we expect to see this year we would expect to see wage inflation next year of about 3%.

So those are the differences.

Got it.

It looked like based on the guidance that you've came in -- on the fourth quarter, at least, you came in maybe $0.12 below the midpoint so the differential being the $0.18, you're saying the biggest component would be that labor side and then some other smaller thing?

Yes.

Okay.

And then the other question was just on the comp, the guidance for the first quarter up 3% to 4%.

Like you said, it seems like the industry maybe is talking more favorably about the first quarter thus far.

I don't know whether you could opine upon how much you'd attribute, if anything, to gas or weather our perhaps why you wouldn't assume some of that uptick was sustainable.

What are you seeing that leads you to be so cautious to assume that reverts back?

Thanks.

Okay.

Sure.

Let me see if I can address all of those things.

A couple of things that we factored in for the first quarter comp are really things that happened already.

For instance, the New Year's holiday shift was a benefit to the first quarter of about, say, 25 to 30 basis points because New Year's shifted into 2015 from 2014.

I'll explain how that can happen later.

Then we had some slight negative weather impact in the first quarter so far, and then our assumption for the rest of the first quarter with respect to weather is that the remainder of the quarter weatherwise will be about the same as the weather was last year, which if you'll remember, wasn't so good.

So I guess if there was better weather the rest of the quarter there's some upside there.

There are also other factors, but they're probably a wash.

For instance, Valentine's Day is shifting from a Friday to a Saturday.

That's not a positive for us but the Easter holiday is earlier this year, but it stays in the second quarter of 2015 so we may get a little bit of benefit from that in the first quarter.

Our comp store sales assumption for the quarter of 3% to 4% really -- it represents the highest quarterly comp store sales for Cheesecake Factory in the last five years.

So our quarterly best in the last five years, I looked it up, was positive 2.9% in the third quarter of 2010.

And given our high volumes of 4% comp on a $10.5 million average unit volume is over a $100,000 increase per restaurant for one quarter, so that's a lot more dollars spend and a lot more guests in the door so we are seeing more sales vibrancy in the first quarter.

And then you asked about the rest of the year and that's a tough one to answer, because of the answer regarding rest of the year is, we really don't know.

But in the absence of any additional information that gives us confidence that we expect the first quarter bump in sales to be sustainable, we believe it's prudent to estimate a range for the remaining three quarters of the year that's more consistent with our historical performance.

I would think we'd want to see more sustained trend than a few weeks to increase our comparable sales assumptions beyond the 1% to 2% range for the rest of the year.

We're just trying to set realistic expectations.

Understood.

Thank you.

John Glass, Morgan Stanley.

First, I just wanted to make sure I understand the change on wages.

Last year we talked about the medical claims being the variant for most of those quarters.

Now we're talking about wages.

Can you break it down between, as you think about it, is it the ambient wage inflation, maybe a better economy?

How much of this is minimum wage?

Maybe is there a component of this that's you're less efficiently your labor?

Is there any piece of it where labor hours per 100 guests or however you measure it is also getting worse?

You're talking about productivity there on the last thing, John, and I would say that we have some -- that might have slipped slightly but that's not what we are concerned about at all with respect to wages.

It's more the wage rate.

Just to give you -- as I said, we're expecting $10 million to $12 million of wage rate inflation in 2015, including about $4 million that's coming from minimum wages.

We're -- David Gordon talked about one of the things that we're going to try to mitigate and manage wage inflation.

First, that we are providing our management team with more rich data around pay rates in their specific marketplace to allow them to have better information, to pay more appropriately for each position and to not over react and pay too much or to not pay enough and potentially risk losing someone.

So that makes wage rates more manageable.

In addition, I think we're going to have to consider taking additional pricing.

So looking forward to the second half of the year, while we're always trying to balance capturing guest traffic and offsetting cost pressures, protecting our margins is certainly a priority and we would consider taking more pricing than normal, or more than what we have done historically, later in the year in light of the cost headwinds, particularly labor wage rates.

And in light of, I'll say industry behaviors, which we see other restaurant operators that look like they're willing to take a little more pricing than what they normally have.

But in general we believe restaurant companies, including us, will have to consider more pricing in this cost environment as the pace of the economy accelerates.

And can I sneak in one more?

When you look at this five-year view that you're presenting, what would that say about the ultimate operating margin goal of the business?

At one time, correct me if I'm wrong, it was sort of a 9% goal.

You are below that now.

Is that no longer obtainable?

How do you think about where the margin structure's going to be in the business going forward, given what you just talked about?

I hear you.

We're thinking about that a little bit differently.

We're still confident that we can get to those 9% margins you're talking about.

I believe it's in 9.5%.

But we will get there primarily through the flow through from international royalties and not because we're going to get more efficient running labor or that the other costs that we manage through our P&L are going to be that much lower.

We're hoping for initiatives that we put in place, such as sustainability and other things that we're doing, to be able to offset cost pressures, from whether it be wage rate or commodity cost inflation or whatever, and that the driver of the margins will be primarily from flow through on international royalties.

Thank you.

Sharon Zackfia, William Blair.

Doug, on the group medical, which was an issue most of the year, can you -- I think you are self-insured, if I'm not mistaken.

Are there more efficient ways to take care of your medical insurance needs going forward?

Have those been explored?

And secondarily on dairy, can you fill us in?

Are you contacted on that?

I know dairy is round-trip so little surprised to hear it's not a little bit more of a benefit than you originally expected in 2015.

So maybe help reconcile that for us?

Yes.

With respect to group medical, we have looked extensively at how to insure ourselves and the self-insured route is, certainly over the long-term, would almost always prove out to be less costly.

What you don't have is certainty.

You don't have certainty from quarter to quarter and you pay something for that lack of certainty.

You might say it might be worth paying that, but just to give you an idea of what transpired in 2014, with respect to high-cost claims -- we define, Sharon, a high-cost claim as anything above $50,000 and in 2014, we saw almost 50% more high-cost claims than in 2013.

And additionally, the dollar amount of those -- each high-cost claim was more than 80% higher.

Now, our consultants are telling us that they are seeing some increase in high-cost claims in the market overall, but they do believe that what we experienced last year is unusually high.

But given that group medical is a difficult thing to forecast, because of this impact of high-cost claims.

We've seen this before.

It happened maybe a lesser extent but it certainly, we saw spikes in 2009 and in 2011.

What we factored in for this year, and I can't tell you if it's right or wrong but I can tell you what we factored in, we factored in the same group medical expenses as a percentage of sales for 2015 into our guidance, which really means we've increased the dollars, because are sales are going up.

We are increasing the dollars.

So we're expecting the same level as the bad level of high-cost claims, if you will, for 2015.

I don't know if that's going to end up being right, but I'm just telling you what we did assume.

And then with respect to dairy, David talked some about what we're doing to manage commodities in general a little more closely, and certainly dairy.

We formed a group internally that's comprised of finance and purchasing people that evaluate commodity movements and opportunities regularly.

We are very actively evaluating opportunities for either longer-term fixed pricing agreements that we can enter into that we haven't been able to enter into in the past or we thought that we couldn't, so maybe being able to contract for more.

Today I think we're making progress on what we're doing with dairy costs and commodities.

We're about twice the amount contracted today than we were last year.

We're about 42% contracted on our dairy and we were only 22% contracted at this point in time last year.

We're looking to bring that up to the Company average of between 60% and 65%.

Okay.

Thank you.

Joseph Buckley, Bank of America.

I'd like to ask two questions, one of David.

When you were outlining the components of your targeted mid-teen percentage growth, the third initiative you mentioned additional growth drivers and things that -- I'm wondering if that includes things like Grand Lux Cafe or if there was some other additional initiatives that you may have been referring to or thinking about?

So maybe I'll start with that one and then ask my second question after if that's okay.

Okay.

As we said, we're evaluating both internal and external concepts and we've been doing that for a while.

We like to keep abreast of what's going on out there, what are the possibilities?

Whatever we do will be in fast casual, whether it's in casual dining, whether it's regular casual dining or fast casual.

Certainly, we're working very hard on getting Grand Lux to have more profitability, so it will be a better vehicle if we choose to do that, but it's really anything and everything within our strengths of casual dining that we are considering to bolster our sales into the future.

Okay.

I guess from your comments obviously that could include acquisitions?

It could.

We certainly are open and looking at those things.

Okay.

And then a question, and this may be for more for Doug.

Just on the pricing and the labor and the margins, you talk about the margins now on a Company basis, which the international earnings are going to boost, but on a restaurant-level basis, how are you thinking about margins?

I know you mentioned maybe taking a little bit of incremental pricing this year, but would you consider regional pricing, to match prices with the cost of doing business in the various parts of the US?

We have some regional pricing in place today.

Would we consider expanding that to -- more broadly to have more targeted regional pricing?

I would just say maybe.

I would say anything would be open to looking at from a pricing standpoint today.

So I don't know.

You have anything to add to that, David?

No.

Just that when we do change our pricing, most of it is based on labor, on whether there is tip credit for tipped employees or a higher minimum wage.

When we change the menu that way, it's really because of the cost we're incurring.

Okay.

Thank you.

Keith Siegner, UBS.

Just a very simple question for Doug when you talked about some of the tech.

I know I've asked this other quarters in the past but I want to ask it again.

Have you thought about server handhelds?

Every minute counts and can really help with the traffic counts, especially during peak hours, have you thought about server handhelds in certain stores as an option and could that be done quickly as a way to maybe help resolve this a little more quickly?

Thanks.

Keith, this is David Gordon.

We have talked about what type of technology makes the most sense for us, and although it may sound like a handheld at the table is something that could be done simply and easily, at Cheesecake Factory, nothing is going to be that simple and/or that easy.

Driving hospitality and service through really what our guests expect from a server and that service experience, the entire experience that they want, is just not about throughput.

Throughput is an important part of driving traffic and making sure that at our peak times we're operating as fast as we can, but there's also the experience and ensuring that the guest experience is right for the brand and right for Cheesecake Factory.

That doesn't mean that we aren't looking at every opportunity and look at technology, but the complexity of the menu also makes it very challenging to do something as what sounds as simple as the handheld at the table when guests are requesting to change the food in many different ways, which is wonderful for us.

If something that we're able to do and we want to do, but the complexity of a handheld can make it even more challenging.

Then I would also add that it is a significant cost structure as well.

If we're going to add that type of level of technology to every restaurant and the size of our restaurants with the amount of servers that we have, is also something we would clearly have to understand.

So right now we're --

Maybe if I could clarify one thing.

What I meant in terms of maybe enhancing the experience and increasing throughput, what about just for a payment option?

Like a server handheld for payment?

In my opening remarks I did say that this year we are currently in the process of piloting a mobile payment option.

So if all goes well, we'll start that pilot in the second quarter of this year and if we're happy with those results and the success of those results, we would be looking forward to rolling that out Company-wide if all goes well throughout the year for mobile payment.

Thanks.

David Tarantino, Baird.

First, a clarification, Doug.

Can you give us the breakdown between traffic and ticket for the fourth quarter?

Sure.

For The Cheesecake Factory, this is just The Cheesecake Factory concept, the comp was 1.4%.

Traffic was minus 1.2%.

Price was up 2% and mix was positive 0.6%.

Thank you.

The question I have then is, is that traffic spread or gap versus the industry seems to have slipped to being negative after a lot of quarters of positives.

Just wondering what your thoughts are on what drove that a difference and where Cheesecake Factory might be maybe on a relative disadvantage?

Is it some of the internal guest metrics scores that you're looking at or is there anything else that you think might be driving that?

I think, David, historically we haven't seen as big a moves up and down as the industry has seen.

We are pretty steady in delivering comp sales on a range somewhere between 1% and 2% and the traffic has been pretty steady as well.

Our goal is obviously to get to the higher end of that 1% to 2% so that we can accomplish our growth targets and David talked about some of our initiatives in that area.

We've typically seen the gap versus the industry compress when the economy or the consumer confidence is stronger and widen when times are a little tougher.

Which is really fine, because actually we like to see the industry going better because it's good for everyone.

But as you know, the Knapp-Track reported negative comps each quarter for almost two straight years and until 2014, the end of the year, and during that timeframe, The Cheesecake Factory was performing pretty consistently positive each quarter.

With respect to gas prices, people talk about those a lot, they certainly don't hurt when they are low, but we've said before whether gas prices are going up or going down that we don't think that they have that much of an impact on us, but they do appear to help other restaurants more than they help us, which probably accounts for at least some part of the narrowing of the gap.

And just as far as service metrics, I think, David, you also asked that we've sustained our high-end service metrics over the past two years.

I think as I said earlier, we're not satisfied with that.

We want to do more.

We want see those scores move in an upward trajectory.

But we have, with the rest of the industry moving in the negative direction, we have been able to sustain the scores, which are all-time high scores, for the past couple of years.

Got it.

Maybe just a follow-up to that, Doug, it seems like your comments imply that you didn't think weather was helping in the first quarter, at least with your first-quarter outlook.

What would you attribute the strength to if it's not weather?

What do you think is driving that?

I don't know what exactly to attribute it to other than I would think -- I think that what we have seen is that there's been just -- looks like a more vibrant economy.

It looks like more guests are coming in the door.

There's some weather impact.

There is some noise in the quarter, of course.

There's a shifting of the New Year's holiday.

But I think in general, at least through the first six weeks of the quarter, we just feel that the consumer's stronger and better.

The other thing I will mention, too, is gift cards.

I think David mentioned in his remarks 25%.

This is sort of a -- this is really a great indication of how strong our brand is.

I think that gift card sales across the industry are not generally up.

Ours, in 2013 versus 2012 and in 2014 versus 2013, were up 25%.

That is -- and as you probably know, gift card sales, the majority of them happened in the months of November and December.

So part of what's happening in the first quarter has to do with gift card redemption.

Gift card redemption has been very strong and stronger than what we've seen in prior first quarters.

I will add that gift card activation has also been strong, at least in January.

It's not a big month for gift card sales so it's sort of a nice increase over a small number, but it's still -- the activations are very good.

So our ability to drive gift card sales is helping us as well.

Great.

Thank you.

Will Slabaugh, Stephens.

Given the cost pressures we've seen recently, what is the comp you think needed to expand margins in 2015?

And then if we can look beyond into what may look like a more normalized playing field as far as labor is concerned, as far as maybe not inflating quite as much, what might that comp need to be to be able to expand margins then?

I think what I tried to do is talk to that earlier when I said that we're not looking at -- if our goal is mid-teen earnings-per-share growth and the component of that, that is comp store sales is 2%, we're not looking at that being driver of margin enhancement.

We're looking at being able to keep margins intact with that, maybe having to use other initiatives such as sustainability or other things focusing on labor productivity or food efficiencies, those things that we always focus on in order to keep that part of the margin flat.

So I don't -- it probably takes between -- somewhere between 1.5% to 2% to get some kind of leverage on sales, but not a lot until you get over 2%.

I would -- especially in this cost environment, because I think that this wage inflation, it's 3% wage inflation, which is what we've included in our 2015 guidance, is not that unusual.

If you go back to the go-go years, I remember from my past, we had 3% or 4% wage inflation, but the economy was very good.

And what came with that 3% to 4% wage inflation was generally a -- in the more vibrant economy was, the comp store sales were better, too.

So right now in our guidance, we've not factored in, and I talked about the last three quarters of the year, any kind of improvement in comp store sales over what we normally run of 1% to 2% because we really don't know.

But the signs in the first six weeks of the year are good.

Got it.

Quick follow-up if I could on labor.

Just to be clear, you are anticipating labor to be up as a percentage of sales in Q2 through 4Q, correct?

I would say that -- what's the answer to that, Jill?

I don't know.

I would say that probably not.

Probably not because we're getting -- if we get -- dependent on whether you're talking about the high end of the range or the low end of the range.

If we talk about the high end of the range, I wouldn't think that labor as a percentage of sales would necessarily be higher.

Thank you.

Joshua Long, Piper Jaffray.

I was wondering if we might be able to talk a little more about the unit opening expectations for this year in terms of cadence and then maybe also in terms of the opportunity for relocations and what that might do to the pre-opening number or expectations for pre-opening costs for the year?

Okay.

First of all, we don't have any relocations planned.

So relocations, we've done four of those.

They've all worked out very well.

We'll do them on a select basis.

We don't see a lot of relocations that are coming up.

Certainly none this year.

And then with respect to the 11 openings we are anticipating, they're going to be backend loaded like they normally are, so I would say anywhere between 2 and 3 in the first half of the year and the rest in the second half of the year.

Great.

Thank you.

That's very helpful.

On the consumer facing technology aspect, on mobile payments or mobile ordering, just trying to think about the thought process of building it versus buying it and any sort of rollout timeline that you might be willing to discuss?

We are not completely building it in house, so we do have a partner that we're partnering with.

We are not doing all of the work on our own.

That's a great partnership.

We worked actually for about a year looking for the right partner to roll out mobile payment and that is allowing us to do it as quickly as we can.

Great.

Thanks so much.

Matt DiFrisco, BRG.

I apologize if this was already asked, but did you specify what price you have assumed in both the first quarter and the full year of 2015 as a base?

And then I guess have you -- when was the last time you took price?

Can you tell us the cadence of anything might be rolling off?

I'm curious specifically why you haven't maybe taken price sooner, considering you are seeing traffic and you even mentioned the economy getting stronger, why wait to defend margins?

Okay.

I think that's an excellent question.

What's in the menu is what's always been in the menu, or has been at least for the last year or so, is about 2%.

We are in the process right now today of rolling out a new menu that includes a 1% price increase and a 1% price increase is rolling off.

But it's a good question on why we wouldn't have put that in.

We already made the decisions with respect to that menu and they're already moving forward and being printed.

Here's the way we look at the pricing.

First of all, factored into our guidance, I mentioned that we didn't -- we really -- I didn't mention this.

So we haven't really factored in any pricing in our second menu change of the year which happens in the August type of time frame, in the summer, July/August.

We haven't factored in any more pricing than the 1% that's rolling off.

But we have said that we would consider that and I think we're still considering how much more that should be.

I think I lost my train of thought.

I guess what my question is rooted in, then, incremental pricing would be incremental to the earnings growth as well, going forward, if all else stays constant as far as the commodity picture and what you're seeing as far as labor?

That's right.

That's right.

Exactly.

Okay.

And if I could fit in a second one, is there anything unique going on in the other operating expense line?

That seemed -- even though you did north of 1% comp or in line with your guidance on the comp side, that seemed to have missed on a degree of leverage.

You weren't getting as much as you might have gotten in years past.

I would assume all of the healthcare cost, group health care costs, are all embedded in benefits and labor, not necessarily in that line.

Is there something else going on in that other operating expense line that's maybe utilities or something that was either one-time in nature or (multiple speakers) higher?

The only thing I can point to is that really, last year we had a utility cost credit.

We had a benefit, a water, some benefit on a water credit that we got that we didn't have this year.

So that's part of it.

That's really the only thing that I see unusual going on there.

Excellent.

Thank you, guys.

Steve Anderson, Miller Tabak.

You've mentioned in your remarks that you see getting to 90% operating margins through the continuation of the international licensing channel.

Do you see yourselves at a point where you want to break out those sales so as to provide additional clarity on that line item?

We will.

What we want to do is protect the competitive nature of our -- the confidential nature, I should say, of our agreements with our licensee partners.

We will do that when we feel that it won't be -- you won't be able to determine, say, what the royalty rate is for any particular transaction.

We will break that out.

It probably won't be this year but maybe it'll be next year.

We'll think about that for next year.

And then the goal is not 9%, it's 9.5%.

Okay.

Thank you.

You're welcome.

Paul Westra, Stifel Nicholas.

Just had a follow-up question on your pricing comments already, Doug, if you could just mention.

Just to clarify, what is your pricing assumption for the first half of the year and what is in your guidance in the second half of the year, assuming you take no additional pricing?

Our guidance for the second half of the year assumes that we're only going to take the pricing we normally assume, which is, on an annualized basis, 2% a year.

In the menu for the first half of the year is 2% and our assumptions for the first half of the year is 2%.

But again, we have said that we will -- not included in guidance is our additional thought that we would consider taking greater pricing than that normal amount.

Great.

Thanks.

A little confused there.

One last one on dairy, then.

I know your guidance said you're going to claw back about three-quarters of that 2014 headwind.

Could you quantify when you expect dairy to be down, your (inaudible) to be down on a year-over-year basis?

As soon as it laps around.

We expect dairy -- our assumption for dairy -- I don't know if they are down in the first quarter.

They're probably about flat in the first quarter but they will certainly be down in the second quarter.

Okay.

Great.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Thank you, and have a very good day.