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California Pizza Kitchen Inc Q3 2008 Earnings Call Transcript

November 07, 2008 | about: CPKI

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California Pizza Kitchen Inc. (CPKI)

Q3 2008 Earnings Call

November 06, 2008 4:30 pm ET

Executives

Rick Rosenfield - Co-Chief Executive Officer

Larry Flax - Co-Chief Executive Officer

Susan Collyns - Chief Financial Officer

Analysts

David Tarantino - Robert Baird

Brian Moore - Wedbush Morgan

Matthew Difrisco - Oppenheimer

Bryan Elliott - Raymond James

Mitch Speiser - Buckingham

Larry Miller - RBC Capital Markets

Tom Forte - Telsey Advisors

Steve Anderson - MKM Partners

Conrad Lyon - Global Hunter

Ronald Schmelzer - JP Morgan

Presentation

Operator

Good afternoon. My name is Tamaqua and I will be your conference operator today. At this time I would like to welcome everyone to the California Pizza Kitchen third quarter earnings conference call. (Operator Instructions) Mr. Rosenfield, you may begin.

Richard Rosenfield

Thank you, operator and good afternoon everyone. Thanks for joining us on our third quarter 2008 earnings call. I’m Rick Rosenfield, Co-CEO of California Pizza Kitchen and with me on the phone today is Mr. Co-CEO Larry Flax; and Susan Collyns our Chief Financial Officer.

Before we begin, I need to remind everyone that part of our discussions this afternoon will include forward-looking statements. They are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our operating results, performance and financial conditions.

Basically, we had an inter line quarter despite generating comparable sales that were slightly lower than our original forecast. Comp sales fell 2.4% versus our expectation of down 2%, while EPS was $0.20, which was at the high end of our August 7 guidance of $0.18 to $0.21. Overall our performance while gratifying under the circumstances, certainly underscores the difficulties of today’s economic environment.

Today total revenue grew 7.4% to $174 million including 34% plus growth from the combination of our Kraft alliance and our franchising business. We are especially pleased with the performance of these ancillary revenue streams which are more important than ever to our bottom line and we believe they’ll continue to play a vital role in developing the CPK brand with minimal investment, capital and risk on our part.

The single serve pizza product for one had a successful launch in the second quarter and we will be following up with our first CPK branded non-pizza product with Kraft early next year. I’d like to remind you that our Kraft pizza is in all 50 states, District of Columbia, and in 17,000 locations. This visibility as well as Kraft’s required advertising spend are important components of our brand positioning and awareness. With this arrangement, our brand advertising expenditures are dramatically increasing with no effect on our P&L.

In assessing our comparable sales, it’s interesting to note that the consumer was particularly distracted during the third quarter by a divulge of noteworthy events which further undermine they are already challenged spending patterns. Some were certainly expected like the Summer Olympics, which were immediately followed by both national, political conventions. All three of these events garnered significant TV viewer-ship and decreased rate of dining out.

Other events were clearly not expected like hurricanes Gustav and Ike, the ensuing gas shortages of the southeast as well as the ongoing financial turmoil on Wall Street which continues to dominate headlines and making consumers extremely tentative.

With regard to the calendar itself, we were negatively impacted by the July 4 flip which caused us to start the period at a disadvantage and trends did not improve from there. As Sue will discuss shortly, comps actually weakened as the quarter progressed with late September particularly affected by negative headlines from Wall Street to Main Street.

Comp sales in California, which is home to about 42% of our comp base as measured in units, were down 3.5% during the third quarter against the positive 1.9% from last year. As we have always emphasized comparisons in California in addition to the particular challenges in that market, are deliberately made more difficult in view of our long held strategy of accepting some cannibalization to achieve our larger and more impactful goals of EPS growth and achieving high ROIs.

Average weekly sales and EBITDA margins in California are consistently higher for us than in any other part of the country and since we take dollars to the bank, not comps, we are obviously more focused on profitability than on year-over-year comparative sales trends. With the ongoing gyrations in the market we are as cautious as ever with regards to expenses and capital deployment. Of course we’re restaurant operators, not economic forecasters, but it is clear that we’re in un-chartered territory with the macro environment right now.

We believe that our conservative stance is the best way to achieve the highest possible return for our shareholders over the long run and in fact we currently have ongoing weekly discussions with our regional directors to identify where we can realize savings both at our restaurant support center and in the field.

Overall, we feel very confident with our brand as well as our relative positioning in the industry. I’d like to take a moment to focus on one of our competitive advantages in this or any other economy and that is the long time emphasis we place upon our family business, including our children’s menu.

An interesting validation that is more anecdotal of our strength families appeared in yesterday’s New York Times, that points out that one of the things that Ms. Obama will have to give up is her regular Saturday lunches with her long-time friends and their children at California Pizza Kitchen. I’d be happy to point out that when they arrive at the White House, there is a California Pizza Kitchen quite nearby on Connecticut Avenue.

There is also justifiably a lot of attention being given to capital structure these days and we want to reiterate that we have a very solid and conservative balance sheet. We’ve used it to buy back almost $55 million in stock this year including $50 million for our accelerated repurchase. We have also been authorized by our board of directors in August to repurchase an additional $50 million over the next two years of which we have already purchased $9.1 million through October. However, we intend to be very prudent in this regard going forward.

You may recall that back in April we expanded our credit line to $150 million, including a $50 million accordion feature with the syndicate of five lenders, Bank of America, J.P. Morgan, Wells Fargo, Rabo Bank of the Netherlands and Union Bank of California. We believe the terms we secured are far more favorable than could have been negotiated today, both on the rate and length of the facility which now runs through 2013.

We’re also diversified with our lending group which offers us added flexibility in this market. While our current debt level is above our historic average, we are well within our covenants and foresee no issues with regard to liquidity. In addition, we have no involvement in the financing of our franchise partners. So, while we believe they’re all solvent enterprises we have no exposure if they were to have credit issues.

In phase of the heavy competition in our industry, I do want to comment on the casual dining industry’s current discount strategy. There is certainly a lot of blatant couponing and discounting going on right now and it may become even more pronounced in the months ahead. While consumers might gravitate towards these specials in the short run, it is our belief that discounting slowly deteriorates the brand itself.

Since our inception, we have generally taken a different approach as our target customer is in a higher income demographic and historically less promotionally driven. We prefer to reach the consumer by providing a quality offering including service, ambience and interesting and cravable foods, essentially all the touch points to build brand equity and address our value proposition.

To that point, earlier this week, we rolled out our new menu, which includes Four Cheese Ravioli, Asparagus Soup, Chicken Pesto Pizza, and for desserts Sticky Toffee Pudding and a Kid’s M&M Sunday. We have always prided ourselves on making our dining at CPK a creative experience where there’s always something new to try for the first time. Our guests have all appreciated this cornerstone characteristic of our brand.

In the third quarter we added four full service restaurants; Albuquerque, New Mexico; Baton Rouge, Louisiana; Novi, Michigan, which is a suburb of Detroit; and Roseville California. This completes our 12 full service CPK restaurants this year. Three of these locations utilize the smaller, less expensive build out format of between 4200 and 4500 square feet and we’re achieve our ROI objectives with them at this early stage.

In addition, our franchise partners added full service restaurants in three different locations; Seoul, South Korea; Mexico City, Mexico; and Tumon Bay, Guam. We are on track to open nine international franchises locations in 2008 up by three units from where we first forecasted this year.

Finally, HMS Host will also be opening two new airport locations in the fourth quarter, actually one of which already opened in Raleigh on October 26 and the second is due to open next week in Las Vegas international airport. This Las Vegas unit is actually a full service CPK which could open up the opportunity for other full service franchise restaurants.

Two weeks ago we opened our second L.A. Food Show, Grill & Bar in Beverly Hills, just up the street from our original CPK location. L.A. Food Show is in the heart of the premium shopping district, North of Wilshire, East of Rodeo Drive in what’s known as the platinum triangle.

Now, the menu ranges from burgers and specialty sandwiches to salads, lobster fries and featured dishes such as Barbecue Baby Back Ribs, Miso Black Cod, Seafood Enchiladas, Homemade Meet Loaf and Butter Battered Fried Chicken & Waffles and children’s menu is also available. We are really gratified by the early customer response and expressed excitement over this new concept and we see it as a great validation of the brand. We do invite you to take a look at the L.A. Food Show menu on our website to browse through the extensive menu.

Moving on to a subject that I know you’re all interested in, I’ll give you a peek on how the fourth quarter is unfolding so far. Simultaneous to the financial crisis and the weakening of consumer confidence to record lows, we saw a deceleration in our comps. There has been an additional circumstance which was Halloween occurring on Friday compared to a Wednesday last year, which you could appreciate had a very negative impact, which we estimate cost us $300,000 in lost sales or 25 basis points to comps so far this quarter.

As of the end of October we’re running at negative 7.3 comp with the most pronounced de-leveraging continuing to be in California, Arizona and Florida. For us, it’s noteworthy that the higher end retailers are experiencing significant comp pressure as well, as we noted in the October retail sales release this morning. Many retailers, including the higher-end retailers, are experiencing significant comp pressure and the decline in retail traffic is now taking its toll at us since the vast preponderance of our locations are associated with retail centers.

On the other hand, what gives us confidence is our experience that people will come to these retail centers for the purpose of entertainment, often including a trip to the movies, and irrespective of how much they shop and how much they spent, they do still have to eat. Based upon our experience, this is where our price points, value proposition and family friendliness has always and continues to give us a competitive advantage.

I might add that one bright spot is that many retailers and restaurants are dramatically scaling back on their growth and I can tell you that we are being offered some excellent quality sites that previously were being offered to others. We will of course proceed cautiously with these opportunities and will build approximately five restaurants next year. Going forward, we have no hesitation whatsoever in acquiring and building quality sites.

Turning to our current actions, while we’re doing everything in our power to spur additional sales, the consumer state of mind is clearly not what it was even a few short months ago. With that said, we have a number of drivers that we will expect will generate improved results for our business in addition to our new menu items. Please note we are also facing our easiest comparison of the year in Q4, plus 1.8% comps.

Turning to those measures, we have strengthened in our relationship with Blackhawk, which manages our CPK gift card program and have increased the number of distribution points by a factor of three times compared to last year. For every $100 gift card purchase, the buyer receives a $20 reward card which will be valid January 15, 2009 through March 31, 2009. So there is a clear incentive to be generous to family and friends.

Second, we launched online ordering through cpk.com website, for curbside regular takeout service as well as catering. Customers can now enjoy their favorite meals with an easy to navigate menu, a user-friendly interface and an option that lets diners choose the day and time of pickup. Diners can also customize all orders by adding and removing options as well as including further special instructions for preparation or handling.

We’re proud to be one of the first upscale casual dining restaurants to make our full menu available for online ordering and the feedback so far on our seamless, user-friendly process has been extremely positive.

The rest we’re experimenting with our marketing program to include some web-based advertising and are building partnerships with some well-established internet players to better ranch our targeted audience. We are at an early stage in this, so it is too premature to offer more details, but we do want to point out that it’s an incremental $250,000 of spending this year and with that, I’ll turn it over to Sue.

Susan Collyns

Thanks Rick and good afternoon everyone. Total revenue for the third quarter increased 7.4% to a $174 million and that consisted of restaurant sales growing at 7% to $170.8 million, royalties from Kraft increasing by approximately 46% to $1.9 million and franchise revenue from both domestic and international growing at approximately 20.2% to $1.3 million.

Our third quarter comp sales as Rick mentioned fell 2.4% and included 3.6% of price, negative 5.7% in traffic and negative 0.3% in mix. You might recall that our pricing for the back half of this year falls to around 3.4% from around 5.2% in the front half of 2008, so there was definitely less pricing to positively impact our overall same-store sales result.

Our monthly comps break down as follows. July was down 1.3% which was on top of a positive 3% last year, August was down 2.2% compared to a positive 4.7% last year and September was down 4% versus positive 3% in the third quarter of last year. Company wide our full service CPK restaurants delivered a WSA of 66,718 which was down 3.3% from the prior year of 68, 972.

Our food, beverage and paper supplies for the quarter were 24.8%, which was 40 basis points higher than last year. Sales de-leveraging due to our low comparable sales results coupled with higher grocery costs, fish and produce and fuel surcharges were the primary drivers of the variance. We’re currently locked in on around half of our dairy in the fourth quarter and assuming that cheese prices de-leverage around $1.22 per pound, which is 13% better than last year’s fourth quarter of approximately $1.98 per pound.

While we’re clearly benefiting from a hedging practices this year, which we’ve enabled us to place below spot market rates on many key commodity items, we will be facing higher costs on a relative basis next year as we begin to lock in commodities. In other words, pressure will not be going away any time soon and we’ll stay diligent with our cost of goods best practices.

Our labor expense was up 60 basis points to 36.6% of sales and was the result of two key drivers. First, the decrease in comp sales and associated de-leveraging of fixed costs and second, higher minimum wage rates in now all 27 states with the Federal Minimum Wage moving from $5.85 to $6.55. We estimated that this cost us an incremental $450,000 in the third quarter over last year.

Direct operating and occupancy cost rose by about 60 points to 21.2% of sales compared to the prior year. We saw pressure in utilities and repairs and I know you understand the math goes against us when comps are negative as many of these cost items are fixed, such as rent and therefore margins are negatively impacted as comps decline.

Our G&A expense expanded by 40 basis points to 7.7% of total revenue and this includes 6.7% of what we call core G&A and 80 basis points of stock option expense which totaled approximately $1.6 million. We did incur higher T&E and legal fees this quarter with ongoing litigation that’s typical in our industry. More importantly T&E is expected to decline in the fourth quarter and we do anticipate a flat to marginally down G&A expense in the fourth quarter of this year.

Our depreciation rose 50 basis points to 6.3% of sales as a result of sales de-leveraging and an additional 19 new stores since the third quarter of last year. This along with the conservative starts we take on depreciating assets with the initial term of the lease which is generally ten years for us generated the 50 basis point increase.

The absolute dollar amount of depreciation expense did rise from its sequential quarter in line with depreciation on the $15.8 million of CapEx we spent during the quarter as well as some accelerated depreciation on 21 mini remodels that we completed in the third quarter.

Our pre-opening costs totaled $1.1 million compared to $2.4million last year and included four full service restaurants that we opened in the third quarter compared to six last year, as well as approximately $288,000 in phantom rent charges. We are actually very pleased with this number. We’ve made some real progress in 2008 managing and containing pre-opening charges. The average pre-opening expense now is around $275,000 to $300,000 per store compared to $350,000 previously which is a 15% to 20% improvement. So we’re making real progress here.

Moving on to interest, we incurred interest expense to $447,000 this quarter compared to $42,000 in the third quarter of last year. We ended the third quarter with around $15.6 million of cash and $63 million of debt and as Rick alluded to that debt’s funded by the $150 million line of credit that we secured earlier this year, which also has a $50 million accordion feature and has been place until May of 2013.

Our income tax expense totaled $2 million and represented an effective tax rate of around 29% which is in line with our expectations and reflects the quarterly true-up for year-to-date number of around 31%. All of this resulted in our third quarter EPS of $0.20, which was $0.15 ahead of last year. In terms of share repurchases we repurchased and retired approximately 367,000 shares in the third quarter at an average price of $12.41 under our new $50 million buyback authorization.

Our third quarter capital expenditure totaled $15.8 million as I just mentioned and that included around $8.6 million for new restaurants, $3 million for remodels and freshening in 20 stores, with the remainder related to maintenance in our existing locations.

The remodels of both defensive and offensive and we’re determined to protect our market share by offering an enticing proposition to the guests with an updated ambience while also driving check averages, beverage consumption and customer satisfaction scores all the time. Our total CapEx projected for the full year including new stores and remodels and capitalized maintenance is around $56 million before TI and the TI number that we’re estimating right now is around $7.6 million.

In terms of the fourth quarter, we’ve elected to use a negative 7% comp for the baseline for the entire quarter which is reflected in our full year guidance. Modeling at negative 7% and assuming the trends don’t improve in November and December, we do anticipate an EPS of between $0.06 to $0.09 and that’s based on a diluted share count of approximately $24.1 million shares. This factors in one additional Food Show, which we’ve already opened, one HMS airport location which we are actually due to open next week and one more international store, again due to open in November.

Now, the holiday period will be the next peak period this quarter and with the five week rather than six week sprint from Thanksgiving to Christmas, it really comes down to two things between now and then, consumer confidence and weather. Given that these two factors are wildcards I’ll tell you that every 1% in comp sales equals approximately $0.150 EPS.

In terms of 2009, we’ve taken a different approach to budgeting this year. What we have done is divide the process into two phases; first of which is moving along right now, setting in place items like capital expenditures for new and remodeled stores, marketing plans, labor levels by store and G&A expenses.

The second process, the traditional financial modeling has actually been postponed until the first week of January when we hope to have better visibility in terms of what the consumer’s been doing and how sales are falling out. Due to this change, we’ll not be providing an EPS range for 2009 on this call. We’ll do it on our fourth quarter call earlier next year.

One final comment before I turn the call back to Rick. This dials back to the fourth quarter for a minute, and as we’ve announced before, we currently have nine company-owned ASAPs and have actually ceased further development of the concept. While some existing ASAPs are being evaluated for conversion opportunities to full service restaurants within CPK, we expect to examine the remaining net book values associated with some of these stores and may decide to impair them in the fourth quarter.

This would be a non-cash charge; however, I do want to make it clear that we have not reflected any write down associated with ASAPs or any other store in our EPS guidance of $0.60 to $0.63, which we outlined in the press release today. We’ll comment on the likelihood and magnitude of this when we announce our year-end results in February of 2009.

Despite discontinuing company-owned ASAPs, we are moving ahead with HMS Host at the airport and other franchise ASAPs and in fact opened in Raleigh a few weeks ago, and as I mentioned before we’re opening a full service CPK at Las Vegas Airport with a host next Tuesday and we’re really excited about that.

With that I would like to turn the call back to Rick for closing comments. Rick.

Richard L. Rosenfield

Thanks Sue. I’d like to make it clear that despite our concern for the consumer and broader economic issues, we do have a clear plan. First, our credit position is strong. We’ve cut back on development and will only open approximately five stores in 2009. We’re focused on managing costs and generating cash flow. Our wireless curbside, new menu items, gift card promotional program, loyalty program, online ordering, online marketing and mini remodels are all long-term strategies that defend and protect our formidable brand.

On a short-term basis, we’re reviewing costs of goods and labor everyday with our operators. I’m confident that not only will we survive, we will secure increased market share and the combination of our price point, value proposition and consistent comp results over the past four years reinforces that our success is not an accident.

We draw support from our Kraft in the franchise business and this support has never been more important. We are working as a team and Sue, Larry and I are in constant communication with the field to ensure that we maximize shareholder value on every touch point. With that, I would like to open the line for questions. Operator.

Quarter-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Tarantino - Robert Baird.

David Tarantino - Robert Baird

Rick, could you give us some context on the Q4 comps to date; specifically are you seeing weakness in particular regions or has it been broad based and also has the weakness been concentrated in your mall based locations, specifically?

Rick Rosenfield

That I think David, it sort of speaks not only for itself and we commented, it’s the same markets that we’ve been talking about pretty much all year; it’s California, Arizona, Florida. We have seen some wider weakness across the other markets than we had previously and I think the reason I referred as I did today to the retailers because in the terms I think of somebody from the international shopping center convention described October’s retail sales in one word, awful! and what it really says is we’re not immune from that.

On the other hand, as we discussed I think we have some insulation. Again because it isn’t so dependent on shoppers, but I think again the way we’ve always thought of our positioning in retail centers as we do and as you know it’s generally the higher end, certainly our best stores are in the higher end retail centers.

We’ve always felt that that traffic that we get from that shopper is incremental. We know we have a certain amount of destination business and a certain amount of incremental business and it’s pretty obvious to us that when you see these kind of numbers coming out of retail reports that we’re just not immune from that and I think that’s apparent.

David Tarantino - Robert Baird

As you look out to the balance of the quarter, it looks like you’re assuming similar trends to what you’ve seen so far in the balance of the quarter despite the calendar going against you with the shorter holiday season. Sue, could you give us an idea of how the shorter holiday season has impacted your sales in the past and how you’ve embedded that in your guidance?

Sue Collyns

Sure. Well, you probably remember that last year November and December comps got a little bit easier for us. We did 1.7% in November and December we did 0.7%, so we are thinking we would be lacking against easier comps.

The other thing that happened in the month of December was really bad weather in various states that we’re in, so we’re hoping we’re going to see some kind of benefit from that, but it was really the month of October’s numbers of negative 7.3 and then adjusting for the Halloween that we think cost us around 25 basis points that got us to the starting point of 7%, and thinking that that was the right baseline.

The real truth is David that we’re not sure where it’s going to end up. This week there’s obviously a lot of noise in there with the election together with the flip of Veterans’ Day and what for us is week 45, versus week 46 and so that’s why we gave that 1% in comp for the quarter is actually around $1.2 million of revenue around $.150 EPS and it’s worthwhile you just having that sensitivity. It’s certainly a sensitivity that we’re looking at and that EPS would move depending up on where the final comp numbers shook out.

Rick Rosenfield

And just I’ll add a thought David is that before this economic meltdown people used to ask me or when people would ask what I worried most about, I would always say weather in winter and reminding you that last year, we hit very bad weather in the holiday season on the weekends and while we obviously have no ability right now to see out there is we also would just hope for better weather on the weekends than last year and that might be an upside point for us.

Sue Collyns

Yes, I think last year in Q4 we had six days where we closed because of holiday, because five in California and another 18 related closure days due to weather in various stores across the country.

Operator

Your next question comes from Brian Moore - Wedbush Morgan.

Brian Moore - Wedbush Morgan

I guess the first question’s on commodity; is it possible to frame the level of inflation you’re see at this point versus ‘09 versus ‘08.

Sue Collyns

We will give guidance on the next call, but I think it’s fair to say right now that we’re moving towards locking in our commoditities for 2009, literally in the fourth quarter. Right now we’ve locked in around 60% and plan to give more color on the specifics, the line items, the seafood, meat, grocery, dairy, etcetera on that fourth quarter call.

I will say that I think I commented last quarter that we thought the cost of goods pressure could be around a 7% range and there’s a bit of moderation that I’m anticipating right now based on my conversations for that hit of procurements, so it might be closer to that 6% range, but it’s a pretty steep increase overall and wouldn’t be surprised if that cost of goods line got knocked up around 50 basis points next year.

Brian Moore - Wedbush Morgan

Okay and then I guess on the Kraft business and I know you can’t give too much color, but is there any way on the new product we could understand the category you might be entering in terms of the size of that category or their markets or opportunity relative to your pizza product?

Rick Rosenfield

I’m sorry Ryan, I can’t comment on it yet for I think whether apparently, obvious competitive reasons. We’ll be introducing it early next year and we’re excited about it.

Brian Moore - Wedbush Morgan

How about I take it another way; if I look at the growth, I think this year maybe that Kraft and licensing stream, about $4 million to $4.5 million; I think you’re approaching $12.5 million in that line for fiscal ‘08 in terms of revenue. As we look towards fiscal year ‘09 is there any reason we shouldn’t see a similar level of nominal growth?

Sue Collyns

I mean that sort of gets into the guidance for next year. The whole ancillary revenue stream whether its Kraft or host or international just performed very, very well in double digits, so we actually expect a similar double digit increase next year and we’ll give you those specifics the fourth quarter call.

Rick Rosenfield

I do think as is quite apparent, this is a major focus for us and for Kraft. I mean they’ve been very pleased as we’ve continued to have this kind of growth rate and that’s why the whole emphasis, not only on new products that are outside of pizza, but on new pizza products, as you can see and know that CPK for one has been extremely successful. Sort of as we anticipated it would be. It’s a great product.

Brian Moore - Wedbush Morgan

Final question and I appreciate that. It is a forward-looking question, but Rick perhaps, given your comments about competitive discounting and couponing and some expectation by some that there might be a sustained downturn, is there anyway for you to sign a probability or willingness to do a second Thank You Card program in the near future?

Rick Rosenfield

I guess I would say sort of this. As you all know, it was very successful and the guests loved it and while I wouldn’t want to make any comments at this time I would say it’s fair to say we’re certainly considering it.

Operator

Your next question comes from Matthew Difrisco - Oppenheimer.

Matthew Difrisco - Oppenheimer

Can you give us a little bit of detail on the pricing factor that you have embedded in that; somewhat of a conservative assumption for the negative seven comp for the remainder of the quarter?

Sue Collyns

Well, I hope they’re conservative enough and the pricing we’ve got in there Matt is 3.4%. We just rolled on around 2% pricing and I think 2.1% rolled off from last year.

Matthew Difrisco - Oppenheimer

And then also in the quarter, does the fourth quarter have a large amount of stores that come into the comp versus the third quarter?

Sue Collyns

I think about the same on a relative basis. The last couple of years we’ve tended to open up stores and been backend loaded and we have an 18 month comp period, so last year we did 17, the year before 15, the year before 12; so I think it’s roughly around the same.

Matthew Difrisco - Oppenheimer

I’m just wondering if the month of October, was part of that drag any of the new stores that came on and then what are you seeing in your latest stores as far as trends coming down from our honeymoon periods.

Sue Collyns

The class of ‘07 and ‘08 like all the stores in every state are being impacted, but there’s still strong stores at the class overall. I will tell you Matt, one of the old topics we haven’t brought up for a long time, but we tracked it internally here are those classes of 2002 and 2003 that were challenged for quite some time and we put a lot of time and money in resources in turning those around, but candidly they still de-leverage the group in total because their WSA are in 40s and I think as I looked at those numbers this quarter if I strip out the class of ‘02 and ‘03 they cost us around 30 basis points. So it’s worth just keeping that in the back of your mind. That to me is more of a driver than the new stores in the class of ‘06, ‘07 or ‘08.

Matthew Difrisco - Oppenheimer

Just to clarify, when you said the class of ‘02 and ‘03 in the 40s it’s actually I believe the class of ‘03 not ‘02?

Sue Collyns

In terms of underperforming so that was what we were focused on.

Rick Rosenfield

What’s happened is and I think it’s a worthy point and as Sue said we haven’t talked about in a while; we took a look and saw particularly this class of ‘03 was a troubled class for us when we first came back, Larry and I five years ago and those are in some of our weakest markets and weakest stores, some of those restaurants. Then as this consumer issue has occurred, they have hurt us even worse, so they sort of reared their ugly head again and principally the class as I said of ’03, even though ‘02 is a weaker group as well.

Matthew Difrisco - Oppenheimer

Can you give us a little bit of greater detail? I guess the prospectus drop you had into October, it is larger than some others have commented. Are you seeing it more so in the mall-based? This is where we start to see over the last couple of years people shopping earlier and earlier for Christmas or is there something going on where you saw something you can define whether it was the election or something just causing people in your markets to just stop and fall off potentially a little faster than some others.

Rick Rosenfield

Again, I’m not sure I agree with the first statement that ours is greater than others, because I think there’s other that are greater than ours and many who haven’t reported what their October is as yet. So we’ll sort of see where that shakes out, but there’s no question; we are in sort of un-chartered grounds and there’s clearly been a CNN call it effect here with the elections and the high interest in election, the high emotion and the financial crisis. So I don’t know where it ends and where it begins and frankly that obviously gives us a lack of visibility.

Commenting again about the malls, predominant of our centers are associated with either malls or retail environment, so it’s not only the big retailers, but it’s all retailers and again when I look at it as it came out this morning, it sort of validated what my suspicions were when we looked at the retail sales and I note also that the international shopping center convention said the negative sales in October were the worst. If I recall correctly they said it’s the biggest monthly drop, since they started measuring at it in 1969.

Where I think again we benefit is that we’re not just dependent on shoppers, but that falloff in traffic is obviously affecting us now. It’s unparalleled falloff in traffic and we’re feeling it. As the consumer environment hopefully improves we would expect to improve.

Sue Collyns

I would agree with that and I think it’s a combination of looking at whether it’s a retail sale or some of the forecast reports I saw today talking about the month of October with the US economy potentially shedding 250,000 jobs on top of the consensus estimate of 200,000. All the unemployment rate, which is likely to move towards 8% over the course of the next 12 to 18 months, consumer confidence just isn’t there yet.

We’ve got negative GDP, whether it’s Cisco’s numbers yesterday or the unemployment rate that we look like we’re going to face; there just isn’t a lot of good news out there and the consumers reacting accordingly.

Operator

Your next question comes from Bryan Elliott - Raymond James.

Bryan Elliott - Raymond James

Just a quick clarification question here; thinking about ‘09 you mentioned about five stores and just wondered if you could refresh our memory on kind of what that average capital is for a new store and importantly whether you’re hearing, expecting any change in TI allowances as developers are financially pressured as well, whether that’s changing that dynamic on the handful of new unit?

Rick Rosenfield

I’m not sure it’s affecting TI. One of the things we’re also seeing is a number of these big developers are feeling their own financial pressures right now. So where I do feel it will be benefited is in the overall economics that we make and as mentioned before, to drill down a little more there’s two specific locations that we’re looking likely to do in 2010 that were previously offered not to restaurants, but other retailers in first class locations.

I think what’s happening is we’re going to be offered a lot and are being offered a lot of terrific locations and the other thing going forward and I think it’s clearly going to be 2010 and thereafter while we’re finding, because I’ve had some discussions myself with some of our larger developers. They are very enthusiastic about this new smaller format. We like that for a lot of reasons in this or any other environment.

Bryan Elliott - Raymond James

And of the five that you’re thinking about for ‘09, how many would be you think in that smaller footprint?

Rick Rosenfield

Actually none of the five for ‘09 are in that footprint. One of the five is about 5200 and one’s about 54; the other two are around 6. A couple of those deals have been made as you know because of the ramp up time.

Operator

Your next question comes from Mitch Speiser - Buckingham.