Cheesecake Factory Inc (CAKE) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cheesecake Factory Incorporated third fiscal 2015 earnings conference call.

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

Later, we will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions) As a reminder, this conference call is being recorded.

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

You may begin.

Thank you.

Good afternoon, and welcome to our third-quarter fiscal 2015 earnings call.

I am Jill Peters, Vice President of Investor Relations.

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 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 2015 as well as our initial thoughts on 2016.

Following that, we will open up the call to questions.

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

Thank you, Jill.

In the third quarter, we again delivered consistent and dependable results, with comparable sales above our historical range.

Our sales continue to exceed the performance of the industry.

This trend of quarterly outperformance has been pretty consistent during the past five years, leading to significant market share gains during that time.

We feel quite good about delivering significant earnings-per-share growth in spite of the wage inflation that is pressuring the restaurant and retail industries.

Solid revenue growth played a key role in driving margins and earnings, as did lower costs in certain areas that impacted us last year.

In addition, our operators did a very good job managing their restaurants, and we made incremental progress in areas such as food efficiencies and labor productivity.

At the same time, we maintained our guest satisfaction scores.

This is a key point, because the guest experience must remain one of our top priorities as we manage our business long-term.

With respect to development, we opened two restaurants during the third quarter, one in Austin, Texas, and the other in Memphis, Tennessee.

Both restaurants are doing well, and the Memphis restaurant is experiencing a particularly strong honeymoon.

We have five more openings planned for this year, including an opening in Santa Monica, California tomorrow, for a total of 11 domestic restaurant openings.

Internationally, we still expect as many as three restaurants to open this year under licensing agreements.

The first opening took place in Mexico City in March, and the two remaining locations are planned for Kuwait and Lebanon.

By the end of the year, we anticipate having 11 licensed locations operating in five countries.

Looking forward to 2016, we currently expect to open as many as eight company-owned restaurants, including one Grand Lux Cafe.

Our long-term objective with respect to development is to open restaurants in premier locations that can achieve our returns.

And we remain highly selective in order to continue to create value as we work toward our target of 300 Cheesecake Factory locations.

Internationally, we expect as many as five restaurants to open next year under licensing agreements, based on the information we have at this time.

Each of our three licensees has at least one opening planned, including the first Cheesecake Factory restaurant in China at the Shanghai Disney Resort.

We continue to be well-positioned both in 2016 and beyond.

The Cheesecake Factory is a premium brand that remains very differentiated in casual dining.

Our global growth continues with a significant increase in our international presence planned for next year, and we are making good investments allocating capital appropriately to drive the highest returns.

With that, I will now turn the call over to Doug for our financial review.

Thank you, David.

Total revenues at the Cheesecake Factory for the third quarter of 2015 were $526.7 million.

Revenues reflect a comparable sales increase of 2.2% at the Cheesecake Factory restaurants.

External bakery sales were $11.7 million in the third quarter.

Cost of sales decreased 100 basis points year-over-year in the third quarter of 2015 to 23.9% of revenues, driven primarily by expected favorability in dairy and seafood cost.

Labor was 32.7% of revenues, flat as compared to the third quarter of the prior year.

We benefited from ongoing year-over-year favorability in group medical expense this quarter, which was offset by a higher accrual for paid time off and an increase in wage rates.

Other operating costs were 24.4% of revenues, down 30 basis points from the prior year.

There were a number of factors that impacted this line item, including favorability and the timing of marketing expense, which we expect to spend in the fourth quarter of this year, and a continued benefit from natural gas prices.

Combined, these items were partially offset by higher Workers' Compensation costs during the quarter.

G&A was 6.3% of revenue in the third quarter, up 40 basis points from the same quarter of the prior year.

The variance primarily related to a higher corporate bonus accrual, as expected.

We recorded a $6 million pretax non-cash charge during the third quarter relating to the impairment of RockSugar Pan Asian Kitchen.

As is quite common with the initial locations of a new concept, we made a significant investment in the buildout of this flagship location.

The impairment represents the write-off of the value of the assets that we were carrying on our balance sheet.

Preopening expense was $4.3 million in the third quarter of 2015 versus $4 million in the same period last year.

We had two new restaurant openings in both the third quarter of 2015 and in the same period of the prior year.

Our tax rate this quarter was 25%, below our expected range, due to higher than anticipated tax credits, partially offset by nondeductible losses on our investment and variable life insurance contracts used to support our executive savings plan.

Cash flow from operations for the first nine months of 2015 was approximately $161 million, net of roughly $109 million of cash used for capital expenditures.

We generated about $52 million in free cash flow through the third quarter of 2015.

Also, as noted in our press release, we repaid the $25 million balance on our revolver during the third quarter.

That wraps up our business and financial review for the third quarter of 2015.

Now I will spend a few minutes on our outlook for the fourth quarter of 2015 and our initial thoughts on 2016.

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 the most current input cost information we have at this 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, and the effect of any impacts associated with holidays.

For the fourth quarter of 2015, we estimate diluted earnings-per-share between $0.50 and $0.53, based on an assumed range of comparable sales between 1% and 2% at The Cheesecake Factory restaurants.

While we are lapping an easier sales comparison in the fourth quarter, there are two unfavorable holiday shifts occurring in 2015, with Halloween falling on a Saturday and the combined impact from Christmas falling on a Friday, and December 30th moving into 2016.

Collectively, we believe these two holiday shift will negatively impact comparable sales by a range of 50 to 100 basis points in the fourth quarter.

As we'd previously discussed, we expect G&A costs to be higher this year.

As it relates to the fourth quarter, we are planning for G&A costs to be about 100 basis points above the fourth quarter of 2014.

The magnitude of this year-over-year comparison is driven by the fact that in the fourth quarter of the prior year, we had reversed the portion of the 2014 bonus accrual based on performance levels.

With comparable sales for the first three quarters of the year at 3% and our expectation for a range of 1% to 2% for the fourth quarter, mathematically, this brings us to a full-year 2015 comparable sales estimate with midpoint of approximately 2.7%.

The non-GAAP diluted earnings-per-share sensitivity associated with this comparable sales estimate is between $2.34 and $2.37 for the full-year 2015, representing earnings-per-share growth of roughly 19%.

Our planned openings of as many as 11 domestic restaurants this year will drive expected total capital expenditures of between $130 million and $140 million, an increase of $10 million as compared to our prior estimate.

This reflects an increase in the capital costs expected for new restaurant openings, including an opening expected in the first quarter of 2016.

In terms of food cost inflation, we continue to plan for a range of between flat and up 1% for the total company in 2015.

We are achieving one of our key objectives of having greater certainty regarding our commodity costs.

We are about 75% contracted for our dairy needs in the fourth quarter of 2015 versus about 10% for the fourth quarter of 2014 at this time last year.

And we are on track to recapture about 75% of the dairy cost increases that we experienced in 2014, as planned.

As to our corporate tax rate, we expect it to be around 27% for 2015.

We anticipate completing up to $105 million in share repurchases this year.

Together with our dividend, we plan to return capital of roughly $140 million to shareholders in 2015.

For the full-year 2016, we are currently estimating diluted earnings-per-share in a range of $2.56 to $2.68 based on an assumed comparable sales range of between 1.5% and 2.5%.

Fiscal 2016 is a 53-week year for us, and our estimates include the impact from the additional week.

Specific to comparable sales, we will be lapping our best annual comparable sales performance in the past decade, which we factored into our thinking about 2016.

We believe setting the range at a level that is consistent with our sales trends over the past six months is both reasonable and realistic.

On the cost side, we expect food cost inflation of about 1% in 2016.

Some areas, such as produce, are expected to be higher, whereas we currently expect meat and poultry costs to be lower.

We are also planning for wage inflation of approximately 4% to 5% in 2016.

To give you some context for this, about one-half of this increase is what I will call government regulated, including minimum wage and tip credit changes.

The government regulated piece represents about $12 million in incremental labor costs next year, which equates to about $0.17 in earnings-per-share.

We believe the increases in wage inflation are an ongoing cost that we will need to manage going forward through an appropriate mix of menu price increases and margin efficiencies.

Regarding our corporate tax rate, we expect it to be in a range of between 28% and 29% for 2016.

Our total capital expenditures in 2016 are expected to be between $95 million and $110 million for as many as eight planned 2016 openings, as well as expected openings in early 2017.

We have focused on high-quality A-plus sites and are committed to growth that produces targeted returns at the unit level, that is, fully capitalized return on investment of approximately 20%, which in turn supports achieving a company-level return on invested capital of approximately 15%.

Going forward, our domestic annual unit growth and comparable sales of around 2% combined with international growth, a robust share repurchase program, and our dividend, is a framework with high visibility and one that supports our financial objective of mid-teens total shareholder returns.

Before we begin the question-and-answer portion of the call, I will note that, as you refine your models for the first-quarter of 2016, please be mindful we are lapping a 4.2% comparable sales increase from the first-quarter of 2015, which was our best quarterly sales performance in the past decade.

With that said, we will take your questions.

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

(Operator Instructions) Jeffrey Bernstein, Barclays.

Just two things -- one, just on the unit growth, it looks like for next year, at least in the US, we are talking about eight versus the 11 in 2015.

I know your internal goal is to always open up as many as you possibly can that achieve the returns, as I guess you just mentioned.

But just wondering whether you can give some color on that?

Whether or not, first and foremost, the constraint is the real estate or whether you are finding a greater constraint to be people?

And any other color in terms of new versus existing markets for those stores.

And then I had one follow-up.

Okay.

I would say, first of all, that nothing -- as you sort of stated at the outset, Jeff, was -- nothing has really changed with respect to our thoughts about development.

We're -- we continue to be very selective.

We continue to be very focused on high-quality sites.

Our strategy has been consistent and it's been successful for us.

And we are opening -- we have -- our newer restaurants have higher sales metrics than the company average.

We are still targeting 300 restaurants.

So nothing has really changed, but the environment is dynamic.

And in some years, we have more sites in the pipeline, and in some years, less.

And as we said, the way next year is shaping up, it looks like as many as eight high-quality sites that we will be able to open domestically that meet our criteria.

And it's -- I think it's also important to point out then, in years where domestic development is more light, international development is in a good position where we have now three international licensee partners now opening restaurants to pick up the slack, as is happening in 2015, where we are opening five anticipated international openings, which is our most that we've ever opened.

Got it.

And then --

Do you want to talk about locations, David?

There are diverse locations around --

Yes, they are just like usual.

I don't know if there is -- there's some new smaller cities -- I think Greenville and Greensboro -- and the rest are just scattered around.

Got it.

And then just on the comp, I'm wondering if you can give a little bit more color, one, just in terms of the components?

I know you took more price.

I'm just wondering the breakdown of the comp.

And then whether there's any color -- I know in the past, you offered some color in terms of geography and day-parts.

Some of your peers are talking about geographical pressures maybe in the Texas region.

So any kind of color on that front in terms of the comp trends throughout the quarter would be great.

Yes, okay.

So if you break -- the comp was 2.2%.

So, that breaks down into around 2.1% price.

We did take more price, but most of it was near the end of the quarter so it didn't really factor in that much in this quarter.

And there was a positive mix of about 0.6%, which means the traffic was down about 0.5%.

On a month-by-month basis within the quarter, there was nothing really unusual.

It was pretty level, although we did have -- at least the way it worked for us, we had Labor Day that shifted back into September from August.

So, September and August were a little off from each other.

But if you take that out, they were -- the months were pretty similar to each other from a sales standpoint.

And then geographically, all of our restaurant markets were positive.

California and the Midwest and the Northwest continue to be our strongest markets.

The Northeast and Mid-Atlantic was -- were the weakest markets, and which is what we have been saying for a while, and I think others have too.

They were all -- both still slightly positive territory for the quarter.

And then the oil markets, like, I guess, primarily Texas -- Texas continued to be a good market for us.

Sales were still very solidly positive in the third quarter, but maybe a little bit off of where they were -- they had been.

But still solidly positive.

Thank you very much.

You're welcome.

John Glass, Morgan Stanley.

On the margin side this quarter, can -- Doug, is there a way to parse out what benefits you got maybe from the initiatives, the cost savings initiatives you've implemented versus just easier laps versus the medical care, for example, or the medical insurance?

And can you also talk specifically about that shift -- the third quarter, I think there was that shift in marketing spend?

How big was that?

And what is the recapture of that in the fourth quarter?

Yes, that shift -- I'll answer that one first -- was about a penny.

So, or shift -- so, part of the reason the fourth quarter is not a penny higher and part of the reason the third quarter was a penny higher was the marketing shift.

And then it's pretty difficult to parse out what caused what from a -- from the standpoint of initiatives that we put in place.

I do know that we have -- we had better food efficiencies; we had better labor productivity in the quarter.

So that the initiatives that we have around food efficiencies, for instance -- we have the auto par, where we are using the system to generate what kind of prep levels we should be doing -- that might be making a difference.

So -- but it's hard to say exactly how much difference.

I would say, in general, of all the operators, the auto par is in about 15% to 20% of our restaurants.

So, all the operators have had a strong focus on food cost efficiencies and we have seen improvement there in the third quarter.

And we did see some benefit from that.

And we -- as Doug did state, we did have pretty strong productivity across all the restaurants in all geographies.

And next year, you've got, I think, a fairly conservative view on earnings growth.

I understand there's fewer units; labor expenses are higher.

Are you just not modeling in pricing?

Or what's the missing piece on why you can't -- even with an extra week, you are getting a fairly low relative earnings growth, which you've experienced the last couple of years.

Well, the 53rd week benefits us, as you said, from an earnings-per-share growth prospective.

But we have some pretty big wage rate inflation to deal with that I talked about in my prepared remarks, 4% to 5%.

The government mandated piece of loan is $12 million.

It's $0.17 a share.

So we're overcoming some of that but we are not overcoming perhaps all of that.

And I don't -- we are going to need to manage that inflation, as I said, with an appropriate mix of menu price increases, which we've not exactly decided what we are going to do for the February menu change coming up, and with some margin efficiencies.

But we're going to probably not be able to do that all in 2016.

We would expect that the P&L impact of wage rate pressures will mitigate over time as we take additional pricing and absorb some of the changes, as well as become more efficient from a margin perspective.

In the meantime, in 2016, we think there is -- there will be pretty benign commodity cost inflation, which is also helping us to offset some of the labor pressure.

But the labor pressure is pretty extreme, and we don't feel that it would be a smart long-term decision to just decide to price to that.

So we will be looking for a combination of pricing and other cost savings opportunities.

Thank you.

You're welcome.

Sharon Zackfia, William Blair.

I guess, just a follow-up to John's question.

Doug, how are you getting the guidance for the 1.5% to 2% comp if you are really not sure what kind of price you're going to have next year?

Well, we factored in some kind of price in our assumptions.

And we put a little bit more pricing than normal in our assumptions.

Whether we will actually do that or -- here's what I would say.

The more cost savings that we can find in other places, the less we would be inclined to take pricing.

But I think there's about 2.5% pricing in the whole year for next year.

Okay.

And what are you running for the fourth quarter?

What we are running for the fourth quarter is 2.5%, is what's in the fourth quarter.

Okay.

That's what I thought.

And then when you talk about -- if I'm not mistaken, I think you are still on one pricing tier across the country.

Is that something that you are analyzing as well as you think about the potential price impact that you might have in 2016?

And then in terms of savings, what kind of buckets are you really looking at there?

I feel like you are pretty lean already.

Yes.

Well, let me -- you were asking about a regional pricing.

And I would say that we would (multiple speakers) -- we will certainly consider doing it.

We do some regional pricing now.

We do it in Hawaii; we do it in San Francisco.

However, since, as David said, the wage pressures are currently more regionalized, like in the state of California, we would maybe consider more of a regional pricing strategy in the future.

And then on your other question with respect to -- I don't think there are -- like you said, I think there's any big buckets of costs where we are going to find huge savings.

But I'm convinced that there are other smaller savings that we can get out of our P&L, which would allow us to be less aggressive with respect to price.

Okay.

And then just one last question.

The total revenues came in a lot lighter than we or The Street had for the quarter.

Is there any insight you can give?

I mean, the comp wasn't that far off.

So it looks like it might be, you know, productivity, when you back into it.

But I'm just curious if you have any insight into what the shortfall was versus The Street.

I don't.

Why don't we -- we'll go through that with you off-line.

Okay.

I think we might be able to find out.

But I don't really know right offhand what The Street was at from a revenue standpoint or why we would be behind that with about -- making about the comp store sales that we expect.

Yes.

Yes, it's unusual.

Okay, thanks.

David Tarantino, Robert W. Baird.

Doug, maybe a first question, a clarification on what drove the EPS upside in the quarter relative to your guidance?

Which lines like surprised you to the upside there?

Well, we had -- it was a little bit on a couple of lines.

One, there's a little bit on the --in G&A.

There's -- the marketing was obviously a shift from the third quarter into fourth quarter.

And then from the tax line perspective, there was -- we had a little bit bigger tax credits than we expected to have.

So I think when all the dust settles, if you take the impact of those things, that we made the earnings-per-share for the quarter that you would have expected us to make with the 2.2% comps that we produced.

We would have roughly made $0.56 if it wasn't for those items that I just mentioned.

Got it.

Thank you, that's helpful.

And then maybe to piggyback on Sharon's question.

If I look at the sales during the quarter relative to the comps, it does look like the -- at least by our estimation, that the average weekly sales for the Cheesecake Factory restaurants -- there was a bit more of a gap in the average weekly sales change relative to the comps change.

And it did look like maybe that would be either the timing of store openings or the productivity of those openings.

So is there any sort of thought on how the new units are performing relative to your expectation?

Or whether that was just a modeling error on our part?

(laughter) Well, they are performing well relative to our expectation.

So average weekly sales growth in the quarter was 1% and comp store sales growth was 2.2%, as we said.

So that gap is due mainly to opening primarily smaller-format restaurants.

So, the productivity, as we've said on our newer openings, on a sales-per-square-foot and sales-per-seat are better than the average for the Company as a whole.

But the fact that there are smaller square footage restaurants opening does not drive the biggest growth in overall averaging of volumes.

Got it.

And then last question --

It doesn't seem like that difference could make up a lot of revenue gap, but maybe it does.

Understood.

And then last question -- there has been a lot of talk about choppiness in industry trends in the early part of Q4.

And I was just wondering if you could give an update on how the quarter may have started for you?

We factored that into our guidance, David.

So we put whatever choppiness or not there was, we put into what we think our guidance should be.

We gave 1% to 2% for the fourth quarter.

Fair enough.

Thank you very much.

Nicole Miller, Piper Jaffray.

I was wondering if I had heard correctly five international stores for this year?

Just wanted to make sure I followed the earlier conversation correctly.

And then I think it was when you were talking about the eight stores for next year and how international can accelerate and pick up the slack.

So, I wanted to clarify 2015 and then understand if it's okay to model an acceleration for 2016.

Thank you.

Yes, so 2015 is three.

And then 2016 is as many as five.

And we feel with three international licensing workers today that the sort of the bumpiness of opening international openings will kind of smooth out a little bit, because if one of them doesn't open as many restaurants as we thought, another one will.

So, we would say as many as five.

So we will end the year with 11 international locations, and then next year we would expect to open, in 2016, as many as five.

So this is going to be -- this is shaping up to be the best development year from an international standpoint that we've had so far.

And then a couple of international stores, I guess, would be in the comp or technically close to having their own comp base, albeit just a couple.

But what can you tell us about the sales and profitability trends of those early stores that we could loosely define as comp stores now?

Yes.

I would say that from a profitability standpoint, I won't speak to that because we -- they are not our restaurants.

We are not getting P&Ls constantly with them.

But we are getting sales information, obviously.

And they have generally been comping up, you know?

The first, the Mall of Dubai restaurant, which does fantastic volumes, when it lapped around, it was -- basically been comping up.

And if I may, remaining share repurchase?

And then I'm done.

Thank you so much.

Well, this --

Just the authorization.

Yes.

Oh, the remaining authorization?

Yes.

I know you said you will complete [105 million].

Does that mean you would just complete --?

You know what I'm saying.

I'm sorry.

Well, we have plenty of shares authorized.

Do you have the number, Jill?

We have 4.8 million shares left in our repurchase authorization.

So there's a lot of shares left and we would act to do, like you stated, about [105 million] for this year, for 2015.

Thank you so much.

You're welcome.

Joseph Buckley, Bank of America.

Just a couple of questions.

Doug, can you clarify the EPS impact of the 53rd week, what you think that would give you within the full-year guidance?

Yes.

It's somewhere between $0.05 and $0.08 in earnings-per-share.

It's -- the week between Christmas and New Year's is a bigger than an average week for us.

Okay.

And then you mentioned the pricing on the show menu was a little bit later to impact the quarter fully.

Did you just implement it later?

Why did that occur?

Did you just roll it out a little bit slower?

No, we did what we always do.

So we would start a roll-out for the summer menu about maybe the middle of August, and it will take almost until the middle of September before it was in every restaurant.

And that's what we always do.

So the impact for the third quarter of the extra -- about 0.5% of pricing, where we would normally take, say, 1%, this being 1.5%, was only enough to make about 1/10th or so of difference in the third quarter.

But in the fourth quarter, we have to 2.5% pricing in the menu.

Okay.

And then a question on the international stores.

I think when you first got started with the international stores, you were suggesting each store could give 1.5 points of EPS.

And I think initially, at least, the stores were better than that.

Is that still a rough guideline as you open more stores in terms of the potential earnings impact from international?

Let me just -- let me restate what you said just a little bit.

So we said that we thought that international locations would generate about $0.01 in earnings-per-share, when in actuality, they're generating probably $0.015 or more so far.

And -- but looking forward, I would still say that -- well, at least -- I'll just put it this way, Joe.

We really don't know.

We put a penny in our forecast; that's how we go about forecasting what new international restaurants are going to do for us.

That might be some conservatism to that because we are opening up in new locations like Shanghai Disney, and I'd be really surprised if that just produced a penny, for instance, once that gets around for a full year.

But it's not going to open until sometime in the middle of the year next year.

And so it's not going to have a big impact on 2016.

But on 2017, it would.

So, I would say just a penny going forward is as good a way of looking at it as we have.

Also because in a market like Kuwait, we are about to open up our third location there, so.

So there's a little bit of -- so when we get a third restaurant in the market, that's -- you wouldn't think you could continue to do $15 million or $20 million.

Got it.

Yes, just one more, if I can.

The $12 million in government mandated labor increases, is that mostly around the tip credit wage for you?

And can you say how much that is in California alone?

Well, it's two things.

It's the New York tip -- mainly two things -- New York tip credit changes, and the fact that we have a large percentage of our restaurants in California.

Now that's -- do you know what the split-out is, Jill, between the two of those?

About half of it is the California piece and then about another 40% of it is the New York piece.

Okay, that's helpful.

Thank you.

Karen Holthouse, Goldman Sachs.

Actually just a quick follow-up to that question.

So when saying half of the minimum wage inflation is California and 40% is New York, is that half of all of the wage inflation or half of the government -- what you are considering the government mandated part of it?

About half of the government mandated portion.

So if it's 4% or 5% over all wage rate inflation, half of that is roughly the government mandated portion and the other part is just other wage rate inflation.

And then if we're looking -- thinking to unit growth next year, do you have an idea of what the rough mix of those you would consider sort of full-size versus smaller format sources?

They are all -- pretty much all more the smaller-format stores (multiple speakers) which is -- yes, between 8,000 and 9,000 square feet, let's put it that way.

And then as opposed to what was almost two years ago, which -- or three years ago, which might have been 10,000 square feet.

The years are flying -- four years ago.

All right, great.

Thank you.

Brian Vaccaro, Raymond James.

Just to follow up -- just a couple of questions for me -- to follow up on the third-quarter sales reconciliation, and kind of putting the pieces together, bakery and other, it looks like it might have been Grand Lux-driven.

Doug, can you give us what the comps were in the third quarter for Grand Lux?

Yes.

Do I have that?

That's -- they were down about 3.8%.

Okay, great.

Thank you.

And switching over to the food cost line, do you have what year-on-year food deflation was in the third quarter, Doug, kind of on a constant basis?

Yes, it was probably deflationary, very benign, maybe slightly lower.

Okay.

Okay.

And as you think about -- and somebody asked about parsing out sort of the food cost savings with the auto par efficiencies and the like, I think you said you are in 15% to 20% of the units at this point.

When should we expect that to be rolled systemwide?

We are anticipating it being rolled in the first half of next year.

Okay.

And starting to roll fourth quarter?

Or is it sort of a roll that accelerates in the first, say, first quarter?

It would start accelerating sometime in the first quarter.

Okay.

All right.

Thank you.

And then just quickly on G&A, Doug, I think in the third-quarter, you were originally expecting 70 to 90 bps.

It came in a lower than that.

Was there also some timing in that?

So, any more color on where the favorability there was on the G&A line?

We had some lower legal costs was basically what most of the rest of it was.

Okay.

All right, that's helpful.

Quickly, on the 16 openings, the cadence of openings -- can you give us any help on That?

you said one in the first quarter.

And then also, as we think about pre-openings, should we still be thinking low $1 million range per unit on average?

The cadence, I would say, what, one in the first order and a couple in the second quarter, and then the rest the second half of the year.

Sort of like we pretty much always do, is what I would say.

Okay.

So no change in there.

All right, all right, fair enough.

And then just one last one.

Can you just give a quick update on the Cake pay apps?

I think you've been testing one or maybe only a couple of units.

But maybe talk about how the consumer is using it and when that might be expanded further.

Sure.

The test is still in the one unit.

We just updated the app in the App Store.

We did our first update based on feedback that we had from guests and also just the user experience.

And that update went well.

We'd like to get it into two more restaurants year before the end of the year, and anticipate fully rolling that out as well, moving into next year.

We'd like to do that at the beginning of the year.

Very helpful.

Thank you.

Will Slabaugh, Stephens Inc.

First, a quick question on unit growth, just to kind of clarify your comments from earlier.

So as you move from 11 this year to 8 next year, should we view this as a slight step function down over the longer-term, where it may be tough for you to find 10 or more high-quality sites that meet your standards?

Or is this just sort of a -- this year, we didn't happen to find those sites and it could come back in 2017, et cetera?

I would say that we would try to still open as many restaurants as we could.

So I wouldn't look at it is permanent.

Got it.

And just one more quick one, if I could, on -- given the news on RockSugar, I wonder if you could give us an update on your thoughts around current concept portfolio that you have?

And then any new thoughts you may have on additional concepts, if you have looked at anything here recently?

Well, we -- RockSugar is one-of-a-kind, as you know.

And we will -- when you build the first restaurant in a brand, as I said, you tend to have to experiment and make some changes, and it costs you a little bit more.

So, when we looked at RockSugar, we just had to look at what the cash flow was and then how that compared with the investment that we had on our books.

So that's how that resulted.

Looking forward, with respect to new concepts or -- we're continuing to look externally at other restaurant concepts and staying informed about what's available, to see if there's anything might be the right fit for us.

But we will continue to be very selective.

We haven't really done any yet.

But we are really not dependent on another concept to achieve the mid-teens of total shareholder return goal that we have.

If we were to make an acquisition or investment, it would provide a upside to that framework.

Great.

Thanks, Doug.

You're welcome.

Matthew DiFrisco, Guggenheim Securities.

I had one bookkeeping question and one just to beat the dead horse on the growth also.

On G&A, I think the question was just asked about the 70 to 90 guidance, and you mentioned lower legal.

Yet fourth-quarter is 100 basis points.

Are you shifting some of that legal or some of the cost that didn't incur in third quarter that were implied in your guidance into the fourth quarter with that 100 basis point deleverage assumption?

No.

You know, what happened last year was, in the fourth quarter, we reversed a large portion of the bonus accrual, or a larger-than-usual portion of the bonus accrual.

So it's almost entirely that.

But then didn't you expect to have bonus accruals this year to drive the 70 to 90 basis points in the third quarter?

Yes, and we did.

Okay.

But we had lower legal costs than we expected.

Got it.

And then I guess just a couple of calls ago, I recall you coming back -- just when you returned back to opening double-digit store openings on a year, it took you a while to build back up that pipeline.

And I think it was either Doug or David that mentioned upwards of -- great sites, A sites you have in the pan of over 20 locations or so.

And we were all getting excited and running with big numbers.

And you kept saying, no, no, it's just going to be 12 or so out of the 20.

We're going to keep them for the future years.

What happened to that pipeline?

I mean, why only eight openings in [2016]?

Have things fallen out of the pipeline?

Or are we in a system where now zoning or something as far as getting those stores open are taking longer?

I'm just wondering if that pipeline -- you re-looked at it and you took out some of those stores that might have been planned for multiple years out?

No.

I think it's a question of some have moved to 2017; a few in the very end, we couldn't make the deal that we wanted to, so we had to pass on a couple.

There could be more than eight, but right now we are giving you that number because that seems pretty confident, we are pretty confident of that.

But there's been no major change in what we are doing or what we are trying to do or where we are going.

Okay.

Just looking at your last four stores, we've talked a lot about the smaller prototype.

Yet the last four store openings, and I think the next one in Liberty Township, are all over 10,000 square feet.

So, was there a bias --?

I don't think that's right.

No, actually, we just opened in Memphis, is about -- between 8,000 and 9,000.

Liberty Center is between 8,000 and 9,000.

One of the only bigger ones that's opening is Santa Monica.

And that's because that's what we had to take.

I don't know if you are including (inaudible) or what you are doing, but to us they are that same size that we feel is our standard today, which is somewhere between 7,500 and 9,000 square feet.

But don't forget, we -- sometimes that's just the size we have to take it.

That's what we are moving into.

Other times we have a choice of how many square feet we are going to take.

Understood.

Okay, thank you.

Brian Bittner, Oppenheimer.

Doug, can you just tell us again what your food cost inflation assumption is for 2016?

About 1%.

Okay.

So just, again, on the 2016 earnings growth being below how you kind of normally view where your normalized algorithm is, it sounds like you are attributing most of that to the labor costs.

Obviously, 4% to 5% wage inflation is heavy.

But isn't this somewhat or almost mostly being offset by a much lower than expected or normalized food cost inflation?

When you look at your overall inflation basket with food and labor, is it still well above normal with that kind of 1% food cost inflation in there?

Or what's kind of going on with that?

Well, we'd expect the food -- the line -- cost of sales line to leverage next year, to -- in other words, we are going to have -- we should be better than this year.

And labor is going to probably be, for the year, up 50 or 60 basis points for next year -- just everything that we know as of today.

You've got to keep in mind this is October.

We're not -- we don't have like the perfect crystal ball.

But we do know and can compute almost precisely what the government-regulated piece is going to be.

And $12 million is $0.17 a share.

So, if you just take that into account, assume we are offsetting some of it somewhere, which we are, some of it is coming from the cost of sales piece.

But if you add $0.17 to our earnings-per-share if we didn't have the government-regulated piece, we'd be -- we'd have a -- we would probably be way above what you thought we might be saying.

Yes.

No, I understand.

But the $0.17 a share, that's assuming you take no pricing, right?

The headwind that you talk about?

That's the cost of what -- that's what $12 million of additional -- you know, it's right off the top.

On January 1, we're going to be paying the equivalent, after the whole year is up, of $12 million more in labor, wage rate inflation, for minimum wage and the tip credit piece alone.

So we know what that is.

And we're still working on it.

And we're still looking at where we can have some savings or how much pricing we will take.

And so we have just made an assumption in our numbers with what that would be, because we think that that's the right long-term answer for the business, to continue to balance pricing with ability to protect margins or willingness to protect margins.

So that's how we're looking at it.

Thank you for that.

Appreciate it.

You're welcome.

John Ivankoe, JPMorgan.

I know your traffic -- same-store traffic was good relative to the industry, but it's still obviously slightly negative.

And as you think about ways of turning that slightly negative traffic into positive traffic, is there anything that you are thinking about other than standard Cheesecake Factory type of menu evolution that you do so well every year, in terms of putting more customers through your store?

I remember some time ago it was maybe just getting the server attention to focus a little bit more on peak hour throughput.

But if you could just talk about what you are thinking maybe for 2016 to maybe help a little on the traffic side?

And I have a follow-up as well.

Yes.

So I would say, first of all, that I would not pooh-pooh too much the strategy for building traffic that has got us to be the highest average unit volume concept around.

We are focused on where we are best-in-class -- menu innovation, food quality, service levels, and taking steps to get even better and make the dining experiences more compelling.

We have built this business through operational excellence.

Others have built their business through marketing.

Well, we've built it through operational excellence.

But we are also focused more on throughput, like you mentioned, as well as redesigning our server training for what guests want, which is a higher level of service, it's tailored to their needs.

We are building our gift card program.

We are filing the mobile payment system that we put, that we talked about.

And all that should help make incremental progress toward recapturing guest traffic.

And certainly, Doug, I was complimenting the strategy that got you here; just seeing what may have been new for 2016.

And then secondly, in the press release, you specifically pointed out that you ended the quarter with no funded debt on your balance sheet.

I just want to understand like how important is that for you, over time, to have no funded debt?

Obviously, you have a free cash generative company, very low borrowing rates, stock buyback is accretive based on where current interest rates are.

But just trying to see what -- see how that no funded debt really means strategically from this point going forward.

Or is that just something that happened to happen in the third quarter of 2015 that you wanted to point out?

Well, I would say that -- I think you're asking a good question that we think about a lot.

And we routinely review our capital structure, including sensitivities with respect to perhaps using debt to repurchase more shares.

And we just don't really -- the way that we look at this, we don't see a need going forward to take on permanent debt in order to achieve our growth targets for earnings-per-share and total shareholder return.

We like the flexibility of being opportunistic with respect to having the availability, borrowing availability, to be able to enter into M&A transactions and/or do share repurchases more opportunistically.

If the stock were to become lower, then we would give it more consideration.

But -- and it's always nice to have a little flexibility to weather business cycles.

So, I guess we were just stating the fact that $25 million was paid off and that we have a lot of opportunity and dry powder to do other things with.

Thank you.

You're welcome.

Keith Siegner, UBS.

Just a very simple one.

As you think about the next couple years and a lot of your competitive concepts, thinking about off-premise, and to-go, and delivery and all those things, have you started to think about possible strategies, maybe put some tests in place or come up with some tests to start to think through how CAKE might participate in those types of things?

Thanks.

Yes, actually, we have.

We've had ongoing discussions and some of them very recently.

So we are looking at it and discussing it, and want to make sure that when we do do it, that it is best-in-class.

And the guest experience, if it were be to delivery or enhanced to-go, is as great as that in-restaurant experience.

And what's the percentage of sales right now that's represented by the curbside to-go, et cetera?

To-go, in general, it ranges.

But it's generally between 8% and 10%, depending on the restaurant -- pretty strong.

Thank you.

Our last question comes from Paul Westra of Stifel.

Your line is now open.

Just maybe one more follow-up on the commodity cost outlook.

You talked a little bit about how you are contracted for next year.

I know you talked a little bit about your fourth-quarter purchases for your dairy needs.

Well, at this point in time, we're -- it's October, we are about as contracted as we normally are through October.

So, not very contracted, I would say.

You know, I would say that that's very normal, that we wouldn't have contracts in place.

The closer you wait to the start of the year, the more -- the less risk the supplier is taking with respect to entering into a contract with us.

So we are, right now, contracted about where we normally are, which is maybe, I don't know, what would it be, Jill?

20% maybe?

Yes.

About 20%.

Okay, great.

And maybe one more back last one on the labor mandated pressure.

The wages you think you are going to on January 1, 2017, the gap you have versus the minimum wage, I assume -- is that shrinking?

I'm trying to think how much cushion.

Are you going to sort of preemptively still sort of offer wages slightly above the minimum?

Or how should we think about how much potential future impacts of maybe future minimum wage hikes as we go into potentially 2017 and 2018?

If I understand your question, certainly the tipped staff members will continue to be paid, for now, at the minimum wage, whatever that minimum wage is in that state.

And we've always paid above minimum wage for the non-tipped staff, and we will continue to do that as we move into next year.

Okay, great.

Thanks.

That's all I had.

Ladies and gentlemen, thank you for participating in today's program.

This concludes today's conference.

You may all disconnect.

Everyone, have a great day.