The Cheesecake Factory Incorporated Management Discusses Q4 2012 Results - Earnings Call Transcript

| About: The Cheesecake (CAKE)

The Cheesecake Factory Incorporated (NASDAQ:CAKE)

Q4 2012 Earnings Call

February 20, 2013 5:00 pm ET

Executives

Jill S. Peters - Vice President of Investor Relations

David M. Overton - Chairman, Chief Executive Officer and Chairman of Enterprise Risk Management Advisory Committee

W. Douglas Benn - Chief Financial Officer and Executive Vice President

Analysts

John S. Glass - Morgan Stanley, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Will Slabaugh - Stephens Inc., Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Sharon Zackfia - William Blair & Company L.L.C., Research Division

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Operator

Good day, ladies and gentlemen, and welcome to The Cheesecake Factory Fourth Quarter Fiscal 2012 Earnings Conference Call. My name is Chantalie, and I will be your facilitator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to your host for today, Ms. Jill Peters, Vice President of Investor Relations. Please proceed.

Jill S. Peters

Good afternoon, and welcome to our fourth quarter fiscal 2012 earnings call. I'm Jill Peters. On the call today are David Overton, our Chairman and Chief Executive Officer; and Doug Benn, our Executive Vice President and Chief Financial Officer.

Before we begin, let me quickly remind you that during this call, items may be discussed that are not based on historical fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available in the Investors section of our website at www.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission.

All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements.

David will start off the call today with some opening remarks. Doug will then take you through our operating results in detail and provide our outlook for both the first quarter of 2013 as well as the full year. Following that, we'll open the call to questions.

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

David M. Overton

Thank you, Jill. As we think about the fourth quarter and 2012 overall, there are a number of key takeaways. We've now had 3 straight years during which we delivered positive comparable sales in every quarter. And in the fourth quarter of 2012, we outperformed the casual dining industry in spite of the impact from Hurricane Sandy. We grew operating margins by 50 basis points in 2012, putting us a significant step closer toward recapturing peak margin levels. We grew earnings per share by 15% last year, consistent with our longer-term objective. And we returned $114 million in cash to shareholders through dividends and share buybacks.

Overall, 2012 was a good year. Our business is healthy and stable. We continue to perform at competitively strong levels and, operationally, we continue to execute very well, translating sales increases into profit.

Internationally, our expansion is progressing extremely well. In the Middle East, 2 new Cheesecake Factory restaurants opened during the fourth quarter, 1 in Kuwait and a second location in Dubai. The newest Dubai restaurant is nearly 23,000 square feet, with over 500 seats, the largest Cheesecake Factory restaurant worldwide. Sales in each of the 3 Middle East locations are very strong, with initial volumes quite a bit higher than we planned for, reflecting incredible demand for our brand.

In a continuation of our global expansion strategy, today we announced a licensing agreement with the premier restaurant operator in Latin America. Alshaya will build and operate our restaurants around Mexico and Chile, and the agreement has the potential to expand into 4 other countries: Argentina, Brazil, Colombia and Peru. We expect the first location in Latin America to open in early 2014 in Mexico City.

International growth is a significant opportunity for us and, in addition to the agreements already in place, we are continuing discussions with other potential global partners.

Before I move on to our specific development targets for this year, I'll take a moment to provide some color on Grand Lux Café. We made the business decision to discontinue operations in 3 of our Grand Lux Café restaurants because they were not delivering the necessary sales volumes to drive our required return.

However, this should not be viewed as a change in strategy. With the remaining Grand Lux Café averaging over $11 million in sales for the full year of 2012, we continue to position the concept for potential future growth. We are currently in discussions with landlords for sites and expect to open more Grand Lux Café's starting in 2014.

As the 2013 development pipeline, we anticipate opening as many as 8 to 10 company-owned restaurants this year, including 2 or 3 relocation. Consistent with the plans we shared with you last October, we're planning on 1 opening in the first half of this year and the remaining openings in the second half of 2013. Internationally, we now expect as many as 3 new locations to open based on the current information we have.

At this time, I'll turn the call over to Doug.

W. Douglas Benn

Thank you, David. I'll start by reviewing our financial results for the fourth quarter and then provide an update on our outlook for 2013.

Total revenues of The Cheesecake Factory for the fourth quarter of 2012 were $464.7 million. As a reminder, when comparing revenues to the fourth quarter of 2011, we had an extra week in the year-ago period. Revenues reflect an overall comparable sales increase of 0.9%, but we did see a pretty significant impact from Hurricane Sandy, which reduced comparable sales by about 60 basis points. We have a concentration of restaurants in the mid-Atlantic and Northeast, particularly the coastal areas most affected by the storm.

When looking at the underlying strength of our business, comparable restaurant sales increased by 1.5% absent the weather disruption. Comparable sales by concept grew 1.3% at The Cheesecake Factory and declined 3.2% at Grand Lux Café. Total restaurant operating weeks in the fourth quarter of 2012 represent 13 weeks as compared to 14 weeks in the fourth quarter of 2011. In addition the current-year quarter reflects the opening of 10 new restaurants during the trailing 15-month period.

At the bakery, external sales were $26.7 million, down about $2.7 million. However, the bakery's profitability was up substantially from the prior year. Cost of sales decreased 30 basis points to 25.8% of revenue for the fourth quarter. The majority of this stemmed from favorable bakery dairy cost as well as a bakery mix shift benefit.

Labor was 31.3% of revenue in the quarter, down 40 basis points from the prior year. In a continuation of what we experienced throughout the first 3 quarters of this year, group medical costs were again lower in the fourth quarter, accounting for most of the favorability.

Other operating costs and expenses were 23.9% of revenues for the fourth quarter, down 20 basis points from the fourth quarter of the prior year. This was driven by a variety of factors, including a favorable year-over-year comparison on our bakery operations and lower marketing costs, partially offset by lapping the leverage from the extra week in the prior year.

G&A was 5.8% of revenues for the fourth quarter, up 70 basis points from the prior year, primarily due to equity compensation and our corporate bonus accrual, both of which were lower in the fourth quarter of the prior year. In addition, we incurred some expenses related to supporting our international growth and we lapped the G&A leverage that we got from the extra week last year.

As we detailed fairly specifically in our earnings release, we recorded $9.5 million in impairment of assets and lease terminations during the fourth quarter. This included charges related to discontinuing operations of 3 previously impaired Grand Lux Café restaurants and impairing 1 Cheesecake Factory restaurant. Preopening expense was $4.8 million in the fourth quarter of 2012 versus about $3 million in the same period last year. We opened 4 new restaurants during the fourth quarter this year and 2 in the comparable period of the prior year.

Interest and other expenses were higher by approximately $419,000. On a comparable basis, the increase reflects the favorable settlement in the fourth quarter of 2011 of a lawsuit we filed against the IRS relating to the deductibility of certain executive compensation expenses.

Our tax rate for the quarter and year both reflect the impact of impairment and lease termination charges on pretax income. For the full year, our tax rate was 26.5%, quite a bit better than our normalized rate of 29% to 30%. The primary reason is that while our deductions and credit stayed pretty flat in absolute dollars, in 2012, they represented a higher percentage of pretax income due to the impairment and lease termination charges. In addition, we had a benefit from changes in our investments and variable life insurance contracts used to support our deferred compensation plan.

In summary, the fourth quarter was quite solid. The hurricane cost us about 60 basis points in sales, which equates to roughly $0.01 to $0.015 in earnings per share. Our operators managed their restaurants very well, contributing to an increase in restaurant-level margins of 90 basis points. This level of execution enabled us to deliver earnings per share within our stated range.

Moving on, cash flow from operations for 2012 was approximately $195 million. Net of roughly $86 million of cash used for capital expenditures, we generated about $109 million in free cash flow for the year.

During the fourth quarter, we repurchased approximately 800,000 shares of our common stock at a cost of $26.4 million, and made $6.4 million in dividend payment. For the year, we repurchased 3.2 million shares of our common stock for $101.4 million. Together with dividend payments, we returned $114.3 million in cash to shareholders, nicely ahead of our plan for the year.

That wraps up our business and financial review for the fourth quarter of 2012. Now I'll spend a few minutes on our outlook for the first quarter of 2013 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. These assumptions factor in everything we know as of today, which includes: Quarter-to-date trends; what we think will happen in the weeks ahead; the effects of any impacts associated with holidays; and known weather influences.

For the first quarter of 2013, we estimate a range of comparable sales between flat and 1%. This range is inclusive of 2 events, which on a combined basis, impacts comparable sales by roughly 95 basis points: First, the temporary closure of our restaurant in Hawaii due to a fire. This is an insured loss, so despite the impact on comparable sales, we are not assuming an impact to earnings per share. Second, our estimated range also reflects the impact from the storm that hit the Northeast earlier this month.

Based on our assumed comparable sales range, our estimate for diluted earnings per share for the first quarter is between $0.40 and $0.43. I will note that the impact from the February storm cost us about $0.01 in earnings per share. The diluted earnings per share range does not include an estimated $1 million in additional pretax charges we expect to record in the first quarter of 2013. These charges relate to Grand Lux Café restaurants whose operations we are discontinuing as of the end of March 2013.

At a high level, 2013 looks to be a very solid year, characterized by: Our fourth quarter of delivering consistent increases in compare -- our fourth year, excuse me, of delivering consistent increases in comparable restaurant sales; significant operating margin growth as we continue toward our goal of returning to peak operating margins; and achieving our mid-teens earnings per share growth objective.

Specifically for the full year 2013, we expect diluted earnings per share growth of 12% to 15% or a range of $2.10 to $2.18 based on an assumed comparable sales range of between 1.5% and 2.5%. Over the past 4 years, we've improved our operating margins by 260 basis points, including 50 basis points of improvement in 2012.

We expect to close the gap versus our historical peak margin levels by roughly another 30 to 40 basis points in 2013. Operating margin growth in 2013 will be driven by a number of factors, most predominantly, international growth, with the initial 3 Middle East locations delivering higher than planned volume and as many as 3 more locations expected to open this year.

In terms of commodity cost, food cost inflation should have a lesser impact on us than we initially expected. We are now planning for about 3% food cost inflation in 2013. In addition, we should see some benefit to cost of sales from planned efficiency gains and a bakery mix shift.

Our total capital expenditures are now expected to be between $100 million and $120 million, primarily driven by planned 2013 openings of between 8 and 10 new restaurants, as David mentioned, as well as expected openings in early 2014.

As to our corporate tax rate, we expect it to be in a range of between 29% and 30% for 2013. And we anticipate the majority of our free cash flow after capital expenditures to be used for dividends and share repurchases.

With that said, we'll take your questions. [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of John Glass of Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

Doug, I know you're not in -- you're only in the practice of providing specific guidance about comps during a quarter and you provided that range for the first quarter, which I appreciate. But at the same time, there's been some fairly extreme numbers thrown out in terms of current comp trends in the last several weeks. So could you just comment on, are you not -- maybe just, directionally or sort of generically comment, are you not seeing those kind of extremes? Or do you factor that in but think you get some back at the end of the quarter because this is really all just weather-related and it will get ironed out in the full first quarter?

W. Douglas Benn

Yes, John, I would say we would factor in everything that we knew today as -- so we know what's happened with the storms. We know what's going on with our Hawaii restaurant. We know what our comps are to date. And we know what we're facing for the rest of the quarter. So we factored that in. I just think it's very misleading to give any kind of really quarter-to-date comp store sales information because in many quarters in the past, the comp store sales that we would have given quarter-to-date would have been either misleadingly high or misleadingly low for what we thought we would achieve for the quarter. So if you -- if you've gone back over time, over the last number of years, we've been pretty close and within our range normally that we estimate comp store sales to be.

John S. Glass - Morgan Stanley, Research Division

Understood. Do you -- do comps have to materially improve from here, though, to achieve that range?

W. Douglas Benn

I won't comment on that because it's not -- it could be very misleading. I've -- we've had quarters before where we've said our comps would be, say, 1.5% to 2.5% for a quarter, when we had comps of 4% then, going into the call. So it's just it doesn't -- it's not something that I want to comment on.

Operator

Your next question comes from the line of Jeffrey Bernstein of Barclays.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

One, just a clarification and then a question. But just clarifying the earlier comments, your peers have obviously talked about delayed refund checks and higher taxes and gas spikes. I'm just wondering, directionally, whether those are things I'm assuming you would be feeling as well. I mean have you noticed anything within the comp in terms of sequential trend through the fourth quarter into the first, or anything regional or weekend or anything like that without talking specifically on the comp? But anything you're seeing to lead you to believe that there's some impact from some of these recent changes?

W. Douglas Benn

Well, not really that I can ascertain. I think that we have had -- we've had 3 years in a row where we've had roughly 2% comp store sales. And if you take into account the fact that we've got this Hawaii, we've got the storm that happened to us in the first quarter, we have really some of the toughest compares against last year's comp store sales. We're really saying that the first quarter comp store sales, we would expect them to be in the 2% range if it wasn't for those things.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. And then just -- the question being in the fourth quarter, you talk about how it was, I guess, roughly in line with your expectation. It seemed like the EPS of $0.51, it looks like there's a lower tax rate. So if you back that out, which looked like it was a few pennies, it's down into the higher 40s. You think Sandy was only $0.01 or so. So it seems like if you add it back, is it fair to say that come the normalized number for the fourth quarter was more in the $0.49 to $0.50 range and below what your guide was or...

W. Douglas Benn

That lower tax rate's created by the fact that there's a much higher tax rate that we apply when we do this non-GAAP adjustment for the lease terminations and the impairment charges. So our more normalized tax rate for the quarter was not significantly less -- in fact, the way that I would look at the -- our earnings for the fourth quarter is we made $0.51 a share and we were a little bit outside of our guided range of 1% to 2% in comp store sales. But we made our guided range because we managed our business well from a cost -- from a cost standpoint. And we're able to achieve that level of earnings per share within our range. I don't think the tax rate is the driver at all.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. So if you added back Sandy, which was $0.01 or so, the comp was right in the middle of your range and the EPS was kind of in that $0.52 range?

W. Douglas Benn

Yes, well, that's right. That's right. That's right.

Operator

Your next question comes from the line of David Tarantino of Robert W. Baird.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

One question, maybe as a follow-up to some of the other questions about the consumer environment. We have heard a lot of other brands talk about some significant slowness. So I'm just wondering maybe if I can tackle this from a different angle and ask you maybe if -- how do you see The Cheesecake Factory brand being positioned in today's environment? And why do you think the comps are either holding up better than what we're hearing from others or are expected to hold up better on an underlying basis in the first quarter?

W. Douglas Benn

My comment about that, David, wouldn't be any different today than it would be 6 months ago or 6 months from now. I think that there are many things that clearly differentiate our brand and that make us -- make our performance better than what the industry has been. So despite the fact, for instance, that our comp store sales for the fourth quarter were up 0.9%, there was -- that was still -- there's still a measurable GAAP between the industry, however, you measure the industry. Whether you measure it with Knapp-Track or whether you measure it with Black Box Intelligence, which we use internally. So the things that differentiate us; menu innovation, our facilities, our service standards, all of those things, the variety of our menu, the SkinnyLicious, all the things that we offer our guests are what differentiated us before and what continue to differentiate us now and will continue to drive our business.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Great. That's helpful. And if I could maybe squeeze one in for David. David, could you just maybe tell us what your overall thoughts are on Grand Lux and maybe what you learned about the locations that didn't work and how you're thinking about the growth opportunity for the brand going forward in light of the ones you're discontinuing?

David M. Overton

Sure. We're very happy that we're doing $11 million a year average sales at Grand Lux. So that's not easy to come by and it's a rarity in the industry. So that's why we're still enthusiastic. We opened -- when the market turned and these stores are in Scottsdale, they're in markets that were very, very weak to begin with. They weren't when we opened but they became that way. So we're not letting that take the wind out of our sails. We liked what we did in New Jersey and we're getting a lot of strong complements on the décor and on the feeling of the restaurant. So we still want to open a couple more of those. As we talk about that, we're still making menu changes for more differentiation, where there will be a menu change in Grand Lux coming out in the next few months. So again, we're still enthusiastic. We're still going to open some more. We think we have a better, more universal, more relaxed, more modern décor, and the food keeps changing and, again, I look at that $11 million and I say, we're sitting on something that can grow and be very good. So that's how we feel about it.

W. Douglas Benn

David, I would just add that for some time on our conference calls and our filings with the SEC, we've talked about the varying performance level at Grand Lux Café and, as David mentioned, we have some locations that are driving some of the highest sales volumes in our system, company-wide, and we have been looking at these 3 particular restaurants. We impaired them first in 2009. So this is something that, over the past 3 years, we've continued to monitor them. And so, as part of our ongoing assessment, we just made the decision at this point in time that they should have their operations discontinued.

Operator

Your next question comes from the line of Michael Kelter of Goldman Sachs.

Michael Kelter - Goldman Sachs Group Inc., Research Division

Yes, I was hoping to learn a bit more about the leverage you need for -- on written -- the same-store sales you need to generate leverage on rent and labor, given the uncertainty on comp trends and maybe the broader industry. For example, you're flat to plus 1% same-store sales number for the first quarter, is there a $0.40, $0.43 EPS estimate, assumed you can maintain or even lever your fixed costs, or is there some deleverage of that rate?

W. Douglas Benn

Well, it's a little hard to specifically answer that question. I think the answer to the -- what we would expect to see for margins in the first quarter for a number of reasons, some of which relate to the leverage question. I would say my general answer is 0% to 1%. We're not getting a lot of leverage. But we're going to have higher margins in the first quarter than we had last year for other reasons related to international development and royalties associated with international development. So I would -- and I've said this in the past, our -- anything over between 1% and 2% is a pretty high number for us. So we're averaging at volumes of $10 million. 2% over the course of the year is a $200,000 gain in volume. So anywhere between $100,000 and $200,000 gain in volume in a restaurant, there's a good chance that we would establish just a little bit of leverage on some of the operating cost. Just to comment also about your rent. Rent is a variable cost to us, generally. We negotiate leases that have -- like most leases, that have a fixed component and then a percentage rent component. And our volumes are such that we're almost always paying percentage rent. So we have -- generally, we don't get a lot of rent leverage from increases in comp store sales.

Michael Kelter - Goldman Sachs Group Inc., Research Division

That's very helpful. And then one other, right; recently, you guys announced that David Gordon would take over as President of Cheesecake. And I know he's been at the company for a long time, but I'm sure he has his own ideas on what he'd like to accomplish. What should we expect his might be on the role that's different than, let's say, the prior leadership?

W. Douglas Benn

I would say that one of the great things about our company is our depth of leadership and the talent that we have. And, as you know, superb execution, operational excellence, they're the keys to our success. And David Gordon is a -- he is a consummate operator. There's no one that knows our operations any better than he does. He's been in leadership roles for -- with our company for the past 20 years. He certainly understands our culture, our adherence to high standards and is keenly aware of how to use systems and processes to achieve excellence. So yes, he's very well suited for this role. I would say that the difference is that David is just -- we're an operational-based company as you know very well. We're not marketing based. We rely heavily on driving our results through great operations and that's where David is differentiated from anyone we've had in the past in this role.

Operator

Your next question comes from the line of Brian Bittner of Oppenheimer & Co.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

You talked about something being a $0.01 EPS headwind for the first quarter. Were you talking about the winter storm? And if so, what are you assuming that takes away from your comp by itself without the Hawaii issue?

David M. Overton

Okay, yes. So you want to know what really the impact of the storm is in Hawaii. So about a 1% impact, about 1/2 of that is -- I would say a little more than 1/2 of that is Hawaii. And so the impact of the storm, I would say, is right around 40 basis points and the costs of it is about $0.01.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Yes, and you said the Hawaii issue's no...

W. Douglas Benn

There's no cost on the Hawaii piece because it's insured.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Got it. You also -- you talked about lower medical costs in the fourth quarter, accounting for all of the labor leverage.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

When does that dynamic -- when does that dynamic end?

W. Douglas Benn

The majority's the labor leverage.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

The majority -- when does the lower medical costs end?

W. Douglas Benn

So we are largely self-insured from a medical perspective. And therefore, our -- any group insurance charge in any given quarter is dependent on the claims experience that we've had, and we've simply had lower claims experiences. It's difficult to know exactly why we've had lower claims experience. We have made some changes to our plans that might be driving some of it. Additionally, some of it might be based on -- if you talk to our health care consultants, they would talk about the rate of inflation on medical costs in 2012 was maybe more benign than it has been in past years. So I think those are some of the reasons. It's very difficult to know what kind of costs -- what kind of claims we're going to have in the future when you're predicting this. So I would just look at it as something that we would -- that's not going to be a benefit every quarter but it has been every quarter for this year.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Okay. And then lastly, just the 1.5% comp in the fourth quarter when you exclude the Sandy impact, what was traffic as a piece of that?

W. Douglas Benn

Okay. So the breakdown for the quarter was that our comp was up 0.9%, our traffic was negative 1%. So that -- our check average was up 1.9%. So on pricing, up about 1.7%. So we really had a positive menu mix that drove the comp this quarter.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Okay. And so traffic was down 40 basis points when you take away Sandy?

W. Douglas Benn

There's other -- that's true when you take away Sandy, but there's other impacts to the fourth quarter that we included in our guidance, such as there's probably another 15 to 20 basis points that we had. What was it? Four presidential debates and then election day; those were big down days for most people in the restaurant business. But we factored that into our guidance. But it did impact the comp for the quarter. And the only other comment that I would make is that some referred to like a holiday shift and we really didn't call that out because we're not sure exactly what the impact the holiday shift might have had. But there was maybe some impact there and then the final comment, I guess, is that there was a pretty tough comparison against the fourth quarter of last year. So all those things I think factored into the comp and the traffic piece because all those impacted traffic.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Well, the menu mix has been negative for a long, long time. Well, not a long, long time. But it's been consistently negative. Did that surprise you? Or was that what you expected? And why was it positive?

W. Douglas Benn

So we -- I think we said for a while that we would expect the menu mix to stabilize and allow us to capture more of our price increases that we put in the menu. People move around the menu. They try different items and that changes the mix. We obviously don't have a lot of control over that. But we saw -- what we saw happen in the fourth quarter although it's good, we do believe the mix will continue to ebb and flow from quarter to quarter, particularly as we make more changes to our menu. But over time, we would think that roughly that we would see the pricing that we put in the menu, that we're able to achieve that pricing level or close to it from a comp store sales standpoint. So it was good in the fourth quarter that, that happened, but I think we're going to see some more ebbing and flowing of that.

Operator

Your next question comes from the line of Nicole Miller Reagan of Piper Jaffray.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

I was hoping you could share a little bit about international performance. It seems to me that as that becomes a bigger piece of the puzzle, that's going to impact the P&L as much as this comp conversation. So I'm just more curious than anything, if you could talk about comp sales trends or sales trends overall, what kind of records are being set? Do these international joint venture stores look like their U.S. counterparts or how are they same? How are they different?

W. Douglas Benn

Yes. First, I would say, Nicole, you're absolutely right that when we talk about the drivers of our growth going forward, comp store sales are certainly very important. But our international development and as evidenced again, today, with the new announcement of our agreement with Alshaya, is going to be a bigger and bigger piece of our earnings per share growth, and it's certainly going to impact our margins significantly. One of the reasons that we're talking about increasing our margins and getting 30 to 40 basis points closer to our peak margin levels in 2013, is because of the leverage that's created on margins by international development. Just going back to the specifics of the restaurants that we have open internationally, as David mentioned in his comments, the sales volumes at each of the 3 Middle East locations are quite a bit higher than what we planned for, which obviously, has a very positive impact on royalties. And for some time, we've been referring to producing a $0.01 per share on earnings per share as a rule of thumb from each Middle East or each international restaurant that has been opened for a full year. And based on the volumes that those restaurants are producing, their earnings per share contribution, at least from the initial restaurants, in the Middle East, it's somewhat higher than that. So that's -- we're factoring that in. We're not predicting going forward that they're all going to be higher. But the average volume from restaurants that we've opened in the Middle East is quite a bit higher than what we had originally planned and what $0.01 per share is based upon.

David M. Overton

Yes. And in terms of comp store sales, the first store opened, I think, it was July or August. So we don't have any records. We all -- also, that's really our partners' world of the profit they're making in comp store sales. We're really just interested in helping them generate sales, where we will share in that royalty.

Operator

Your next question comes from the line of Matthew DiFrisco of Lazard.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

I just have a couple of questions here as far as clarification. I think you said, David, that Scottsdale was one of the markets and then I also see the Beverly Center, as far as one of the Grand Lux closings. Where is the third one? And then I'm just curious, are these all relatively close to other -- to Cheesecakes that potentially there could be a direction of sales as you maybe take a large restaurant out of the market?

David M. Overton

I don't know if the -- they're 5 miles apart in Scottsdale, one way, 5 miles; one the other way, 5 miles. It may be a possibility, but again, I don't think people will just automatically go to Cheesecake Factory because they can't go to Grand Lux. Although really one doesn't know. The third one's in Park Meadows, in the suburb in Colorado, and there is a Cheesecake Factory there. And again, The Cheesecake Factories in Los Angeles, there's -- one's 1 mile apart and the other's a couple of miles apart. So we'll see. It's possible to get a little business, but I wouldn't want to make that a strong statement to you at this moment.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

I've been to that one in Park Meadows and I think you have a cake in the same parking lot or in the same mall complex just up to them.

David M. Overton

Yes. It's on the other side of the mall, right.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Yes, great. Okay. Then also, Doug, as far as your comp guidance, again, I'm not going to go back and ask a different way the comp trends. But looking ahead, have you also factored in Easter in that it falls into 1Q, and I'd assume you'd get hurt on that Sunday of business?

W. Douglas Benn

The -- we have factored in Easter. We -- it is in the first quarter this year. And -- but it doesn't have -- the fact -- Easter Day is not what you factor in about Easter. What you factor in about Easter is the spring breaks that are associated with Easter. So spring break, while Easter Day may not be a great day for us, spring breaks are certainly great days for us. So we have factored in that spring breaks will probably be a little earlier this year. And so we've taken that into account in the best manner we can.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

That's good color. And then also looking at your guidance, it looks like you lowered your CapEx? Is that correct? I guess how are you -- where have you found the extra pennies? It looks like you shaved maybe $10 million off the low end and $5 million off the top end from previous guidance, yet you kept the number of units the same.

W. Douglas Benn

Yes, we're just building in a wider range for new restaurant openings. Historically, Matt, if you've listened to our conference calls over time, which I know you have, we refine our CapEx budget every quarter and as we have more visibility into our expected spending and that's all we're doing now.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Keep it going in that right direction, good. Last question, licensed stores or a follow-up to Nicole's here. I thought earlier in the call, there was a mention of about $11 million was the volume you saw in that international store. But I'm trying to back out the number out of the revenues. It looks like you're getting about 77k or when do you think we'll get some granularity? Will it be in the Q? How much royalties were in the restaurant revenue line? And am I correct to assume that 100% of that royalty, call it 70k or 80k or so is in the restaurant revenue line?

W. Douglas Benn

You're -- whatever the royalty revenue is in the restaurant revenue line. The $11 million you're referring to was the average unit volumes of the remaining Grand Lux Cafés that are open. Let's see, the other part of your question was...

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

The annual royalty, looks like it would come out to be 77k. So is 1/4 of that 77k in the revenue in 1Q '13 roughly?

W. Douglas Benn

I'm not going to -- whatever we estimate the volume -- here's how we do it. The estimated volume for the restaurants that are open at the beginning of the year, whatever we think they're going to do in the first quarter, multiplied by our royalty rate is the royalty that's in the first quarter. And we're not -- we've not discussed, ever, what our royalty rate is because we don't think that, that is what we should do.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Okay. So I was just curious if it was going to be broken out in the Q, just to look at restaurant, apples-to-apples restaurant.

W. Douglas Benn

No. We're not going to break it out. We're going to eventually break it out when it's impossible to determine what the royalties of our -- from any individual restaurants. If we get 10 or more restaurants open, then we may break out royalty income.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

How about another way just to put it; I mean, your quarterly comp was very -- your quarterly margin was strong. Is primarily all that driven by just organic leverage off of the restaurant or was there an abnormally large amount of royalties in the fourth quarter of '12?

W. Douglas Benn

Not an abnormally large amount. In fact, the third restaurant opened on the last day of the fourth quarter, so there was none for it. And the other one, I believe, opened like midway through the fourth quarter. So we had like a restaurant and a half of volume in the fourth quarter.

Operator

Your next question comes from the line of Joe Buckley of Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Can I throw out just sort of a bookkeeping question on the tax rate? I saw there's a lot of material in the release, but it looks like the normalized tax rate, x the onetime items, was about 24%. Does that sound right, Doug?

W. Douglas Benn

No, if -- for the quarter itself?

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Yes.

W. Douglas Benn

For the quarter -- so our -- for the quarter itself, our tax rate, without the -- you've got to -- it's a very complex calculation to do in that when we pull out on the non-GAAP table on the back and pull out those expenses that we think ought to be segregated for purposes of analyzing our results, we tax those at 40%. And our tax rate, obviously, is nowhere close to 40%. In fact, we estimated it to be between 29% and 30%. So I would say that our tax rate for the quarter was more in the neighborhood of a little less than 29% to 30%, on a normalized basis.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. So non-GAAP recognition, the -- like net -- what I was doing was taking the net income after-tax impact from the impairment of assets and lease terminations, and comparing that to the $9 million, whatever it was, $9.5 million pretax. Is that not going to do it, in terms of the tax benefit from the impairment?

W. Douglas Benn

I don't really have a response to that because I don't have that calculation in front of me. I don't know, maybe we can talk about it more offline. But I don't have that information. So I would say that you've got to -- I know that internally that we struggle with what the tax rate is when we have these onetime, or whatever, these carved out charges. So my understanding was that our tax rate was probably 1% or 2% lower than 29% to 30%. Do you have another comment, Jill?

Jill S. Peters

Joe, I think what complicates the tax rate also for the fourth quarter is that when you look at what our full-year tax rate should be and run through any adjustments to that full-year rate through the first -- the fourth quarter. So it skews that number a little bit. So I would direct you to look more at the full-year rate than just at the fourth quarter rate, which as Doug said, on a full-year basis, if you exclude the impact from the impairment and lease termination charges, would have been just a little bit below that normalized 29% to 30% rate.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. I mean -- more basic business question. Where are you in terms of new menu rollout at Cheesecake Factories? And also, I guess, last call you talked about some marketing tests including, I think, some TV in one market. Have you done anything more on that front or do you plan to do anything more in the new year?

W. Douglas Benn

Do you want to talk about the first part, the menu rollout?

David M. Overton

We're right in the middle of it, Joe. It takes some months to roll out Cheesecake Factory. We're already into, I think, the second or third month of this rollout. It will be done in a few months. And the Grand Lux rollout will begin in a couple of months. So we do the same thing every year and this year is no different in terms of new menu items. And then, Doug?

W. Douglas Benn

Then on the marketing piece, as you know, we use marketing to strengthen and protect our brand. We use it to defend our market share and we did a test, a pretty unique campaign that was purely focused on brand awareness. There was no offer, no call to action. There was really no -- even any copy in the ad. We used radio. We used billboard and outdoor, in-mall advertising in one market for a couple of months to see how customers would respond to it. And it was part of the brand building that we were doing. And we plan to continue to test, adding a new market this year and to further our learning, is what I would say about the -- what mediums like radio versus billboard versus in-mall, what moves the sales needle the most...

David M. Overton

And can it be sustained?

W. Douglas Benn

And then, can it be sustained? And we're still measuring the sustainability. We still have some residual sales from what we did in the test market. And ultimately then, looking at what level of return we can get from these types of campaigns. So we're happy with our test and we're doing some more.

Operator

Your next question comes from the line of Will Slabaugh of Stephens.

Will Slabaugh - Stephens Inc., Research Division

I wonder if you could just comment just briefly on the geographies and how those play out during the quarter, if you saw maybe any variability between California, Texas, the East Coast, et cetera, outside of the storms.

W. Douglas Benn

Yes. It's hard to say, really, outside the storms because I don't have it broken out by geography. But as you expect, the regions that were impacted by the storm was very volatile. I would say all other regions were positive to, I'll call it, approximately flat. The areas of strength included places like Texas and the Northwest and California.

Will Slabaugh - Stephens Inc., Research Division

Got you. And then just one quick follow-up here on cost of sales. I wonder if you could talk just a little bit more about the moving pieces there in the quarter. And then I realize what was down year-over-year, which was nice to see. But the sequential move was a little bit more maybe than I anticipated. So could you speak to kind of what was going on in that line item?

W. Douglas Benn

Yes. So cost of sales was -- just about 30 basis points less than last year. We had 2 things that primarily were driving that. One is we had favorability in the bakery, particularly with respect to dairy costs. So the bakery paid substantially less for dairy than they did in the previous year and that impacted the cost of sales line. We also had a bakery mix shift. So that's how we referred to it. What we mean is that the bakery sales as a percentage of total sales were lower, and that brings cost of sales lower because the bakeries cost of sales are higher.

Operator

Your next question comes from the line of John Ivankoe of JPMorgan.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

I think just a few follow-ups, if I may. Firstly, was there any preopening from the international units that was booked in the fourth quarter?

W. Douglas Benn

No. Higher preopening in the fourth quarter was mainly due to opening more restaurants in the fourth quarter this year than last year.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Okay. And, obviously, there was -- yes, so there's some timing in that -- in that number as well.

W. Douglas Benn

Sure, sure. You're right. Because it's not just the restaurants were opened specifically in the quarter. It's the restaurants that are opened in adjacent quarters.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Yes, of course. And secondly, could you quantify the margin savings from the closed Grand Lux on 2013? I mean, I assume it could be measurable.

W. Douglas Benn

It's 3 restaurants on a base of 180. So it's not really that big a deal.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

But I don't know, I mean, could margins be 20 points less or something at those units? I mean, I would assume you would keep them open if they weren't -- if they were making any cash at all.

W. Douglas Benn

Well, you can assume we did a thorough analysis and made a decision based on what cash they were or weren't generating. But I can tell you that the margin impact from closure of the Grand Lux is measurable but it's not that big a number.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Okay. And then finally, decisions on pricing and I'm sorry, if I may have missed this, decision on pricing for 2013, are we in the consumer environment where you kind of can continue at 2%-plus pricing throughout the year?

W. Douglas Benn

I think we're looking at 2%. I think for the first quarter, we're going to have about 1.8% in the menu. And then we have in the third quarter, rolling off about a 0.75%, so we'll see what we think we can do with -- up against that, but I would say that we should be, for the year, pretty close to 2% is what we see right now.

Operator

Your next question comes from the line of Sharon Zackfia of William Blair.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

Most my questions have been answered, but I was hoping you could update us on the performance of the small format Cheesecake Factories and how many of those are you planning for '13? And then you may have said this, but I think I must have missed which Cheesecake Factory was actually impaired this [indiscernible]?

W. Douglas Benn

We didn't say that and I'm probably not going to disclose that because I don't know that, that does anything for us. But I would say, with respect to the small formats, the restaurants that we've opened in the last 3 years are -- and this continues to be true and we've said this before, continue to perform better from the metrics of sales per square foot and sales per seat about 10% better than the average. And many of those restaurants were what you're calling the smaller format restaurant. So our newer restaurants, which include a big component of smaller format restaurants, are performing very well.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

I guess if you won't talk about which Cheesecake was impaired, is there anything you could tell us about what you think went wrong with that site? Is that a recent site? Is that an older site? Is there an area change?

W. Douglas Benn

It's a site that is about -- I think it's about 10 years old. Sharon, we just went through the same process from an accounting standpoint and analyzing this for as long as we have with other restaurants that we've impaired in the past. When we impair a restaurant, what we do is we estimate its future cash flows to determine whether we think we can recoup our investment. And this restaurant was what...

David M. Overton

This was a very high investment.

W. Douglas Benn

It was. That's right. The restaurant opened 10 years ago. It's one where we made a higher than a typical capital investment on, and the current sales level on our projection of future sales and the resulting cash flow from those didn't reflect our ability to recoup our investment over time, so we impaired the restaurant.

Operator

Your next question comes from the line of Mitch Speiser of Buckingham Research.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Doug, did you disclose the average weekly sales growth metric in the fourth quarter or can you, if you didn't?

W. Douglas Benn

I didn't. I can. It's a little bit confusing. We -- here's what I'll do. The average weekly sales growth was 1.8% and I think that what people are usually asking when they ask this question is trying to get at the performance of our newer restaurants that aren't in the comp base. And I just did comment on that and how well they're doing. The gap between the average weekly sales and comp store sales is really driven by the difference in the operating versus fiscal week comparison. And this is where it gets a little bit dicey and hard to understand. The revenue or the average weekly sales number is a fiscal period number. But in order for comparable sales to be truly comparable, that number is an operating week number comparing like weeks. It's the reverse of what we saw in the -- and we spent a lot of time explaining this, I remember. In the first quarter of the year, when average weekly sales trailed comp store sale, because if you remember, there's a big week of sales was captured at the 14th week of the fourth quarter of 2011. So this is just kind of the opposite of that. So I wouldn't say having 1.8% average weekly sales in the fourth quarter would give you any kind of indication of how new restaurants are doing, although that might say -- that might tell you, well that shows that they're doing well. Well, it really isn't showing that. I'm telling you they're doing well, but this particular comparison is not relevant because of this whole 52-, 53-week year which I really can't wait until we're beyond that.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Got it. No, I understand there's some noise in the numbers. My next question is on the international stores. The -- were there any upfront fees that you booked in the fourth quarter? And is there any lumpiness in 2013 in terms of any onetime fees as you build out the international stores?

W. Douglas Benn

I think there is lumpiness in international. And what happens is that we do have upfront fees. We have reimbursements. And often, the expenses associated with those -- we also have expenses associated with a lot of these reimbursements, and they will and have been happening in different quarters than each other. And I would expect that, that would continue in the future. So there's -- there will be lumpiness. And because we have -- our agreement provides for reimbursement of certain expenses, the design fees, as I talked about, maybe other reimbursements and site fees for instance. And these offset each other in many quarters and sometimes, there'll be a little more revenue in one quarter than another or a little more expense in one quarter than another. So it's hard to say.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Okay. And maybe if I could ask just a broader question on international. The -- or your guidance for 2013 has 30 to 40 bps of margin improvement. Can you give us a sense of how much of that might come from the international segment?

W. Douglas Benn

A good piece of it. I would say the majority of it, say 30 -- 20 to 30 basis points is coming from international. Of course, it depends what assumptions you made about international. We made the assumption where we know the volumes of the 3 restaurants that are open now and we have to assume or make an assumption of when the other restaurants were opened, which we're not in control of directly. And then how much volume they'll do. And so I would say up to 30 basis points of margin improvement can come from international development alone because there's not that much cost associated with that royalty stream. And so, as we get more and more international restaurants open and a signing of this new international partner in Alshaya is a big deal for us because we'll have a second partner that is opening restaurants internationally. And if you look forward at the mid-teens earnings per share growth that we have talked about many times, a lot of that growth is going to be driven by international development, and a lot of our margin improvement toward peak margin level is going to be driven by international royalty streams.

Mitchell J. Speiser - The Buckingham Research Group Incorporated

Great. And my last question, there will be a couple of closures of Cheesecakes this year. I guess relocations, which means you will be closing a few. Can you give us the timing -- the potential timing of these closures throughout the year?

W. Douglas Benn

Well, we plan on the closure and the reopening of the other unit to be in such close proximity to each other, it really doesn't matter.

David M. Overton

The lease not [indiscernible] one; make sure he understands it.

W. Douglas Benn

Yes. It's really that we have a chance -- we have leases that are getting old, getting close to expiration time. We have a chance to be able to relocate a restaurant and choose not to renew a lease. Because -- and we're only doing that because the economics are accretive to us. So while you might want to say that 8 to 10 new restaurants, 2 relocations, that you'd net those out, it's not entirely a netting because we wouldn't be doing this if we didn't think that the earnings per share that is going to be generated from the new restaurant are -- we expect them to be greater than the earnings per share that was generated by the old restaurant, perhaps significantly.

Operator

That concludes our conference for today. You may now disconnect. Have a wonderful day.

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