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California Pizza Kitchen, Inc. (NASDAQ:CPKI)

Q1 2009 Earnings Call Transcript

May 7, 2009 4:30 pm ET

Executives

Rick Rosenfield – Co-Chairman, Co-President & Co-CEO

Sue Collyns – COO, CFO & EVP

Analysts

Matthew DiFrisco – Oppenheimer & Co.

Brad Ludington – KeyBanc Capital Markets

Jonathan Coppin [ph] – Robert W. Baird

Mitch Speiser – Buckingham Research

Destin Tompkins – Morgan Keegan

Nicole Miller – Piper Jaffray

John Ivankoe – JP Morgan

Bryan Elliott – Raymond James

Thomas Ford [ph] – Delphi Advisory [ph]

Steve Anderson – MKM Partners

Operator

Good afternoon. My name is Robin and I will be your conference operator today. At this time, I’d like to welcome everyone to the California Pizza Kitchen first quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Rick Rosenfield, you may begin, sir.

Rick Rosenfield

Thank you, operator. Good afternoon, everyone. Thanks for joining us today on our first quarter 2009 earnings call. I'm Rick Rosenfield, Co-CEO of California Pizza Kitchen, and with me on the phone today is my Co-CEO, Larry Flax, and Sue Collyns, our Chief Financial Officer and Chief Operating 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 the filings with the Securities and Exchange Commission for a more detailed discussion of the risks they may have that may have a direct bearing on our operating results, performance, and financial conditions.

And now let’s review our first quarter results. I think you will agree that we had a rather strong three months on an operations basis, considering the macro environment and comparable sales results that remained under pressure at negative 5.9%. We saw strength on the bottom line as diluted EPS was $0.11. This was $0.06 above the high end of our original $0.03 to $0.05 guidance for the first quarter of ’09 and $0.02 above the year-ago period.

What we are most proud of for the period is that although our top line revenue was actually down 2.2% year-over-year or $3.6 million, we were still able to generate higher profits. Larry and I credit the outstanding accomplishments of our operations team. They have pulled together and are moving our organization forward in a tough economy by identifying opportunities that take costs out of the business in a manner that does not negatively affect our customer. I’ll talk more about this in a moment.

With regard to our comp trends between Q4 2008 and Q1 2009, we saw sequential improvement in our top six states, which in aggregate represent two-thirds of the company restaurant base. California restaurants improved marginally from negative 7.7 to negative 7.6. However, we saw a significant improvement in other markets such as Texas, Illinois, New York, Florida, and Colorado.

And in April, 21 of our 30 states are enjoying improved comps from March. Overall, we are very pleased with our market position and quite confident in our strengths. Our most loyal customers are generally higher income and better educated. And while they have also cut back on their spending, they still have more discretionary income than other demographics. And dining at CPK is certainly affordable to them.

Ultimately people are still going to malls and lifestyle centers. And even if they are reducing discretionary purchases, they are still eating at restaurants, although as the numbers suggest, not on par with last year. While we are seeing what we are seeing the most softness is in developments that were built in anticipation of a continued housing boom.

Although our restaurant sales fell by $4 million compared to the first quarter last year, due mostly to the decline in comparable sales, our franchise and other revenues grew by 20% to $2.3 million. Our ancillary revenue streams are an important and growing component of our business model, as they enable us to leverage our brand equity through high margin relationships with premier operators and at minimal investment on our part.

Domestic franchise sales slipped modestly for the period, which we attribute to fewer flights and a decline in airline travel, while international franchise sales rose 35.1% due to restaurant expansion outside of the US, in Mexico, South Korea, and Dubai. Kraft royalties were once again very strong, growing 32% to $1.2 million, including a modest ramp from our Flatbread Melts, as these new non-pizza items were just launched in March, so they had a limited benefit in the first quarter. Our CPK branded Kraft products can now be found in 20,000 locations in 50 states.

So in addition to a wider array of frozen CPK products than ever before, they are also now more convenient. Our increased presence in the frozen section of the grocery aisle is particularly relevant these days, as consumers are very cautious about their spending habits and eating at home more often, although not necessarily cooking themselves. We are certainly experiencing the benefit of this nesting in our frozen sales.

During the first quarter of 2009, we opened one company-owned full service restaurant in Wellesley, Massachusetts. And in line with lease requirements, we located one in Natick, Massachusetts. In addition, our franchise partners opened full service restaurants in Dubai, United Arab Emirates, and Lomas Verdes, a residential suburb of Mexico City, Mexico. Our franchise partner has since opened a second restaurant in Guadalajara – excuse me, a restaurant in Guadalajara, Mexico in the second quarter.

Similar to what we have done in prior years, we are rolling out our spring menu later this month, with new menu items that are designed to keep us fresh and propel our brand ahead. It consists of two new pieces, one new appetizer, salad, entrée, and kid’s pizza, although we cannot communicate the specific items until the actual rollout in June.

While we have generally taken pricing in conjunction with every new menu introduction, we don’t have plans to take any significant pricing this year given the fragile state of the consumer. We will have 2.5% rollover pricing in 2009 from the prior year, which is a little higher on a relative basis in the first half and a little lower in the second half. Instead of trying to hold our margins through modest price increases, we are working even harder on containing the cost side of our business.

As we mentioned on our last call, in the second quarter we reinstituted our very successful Thank You Card Program, which began on April 13. As a reminder, this is how it works. After dining at any of our full service restaurants, our guests are given the Thank You card in a sealed envelope, which contains a guaranteed prize, ranging from 10% off a meal to a deluxe trip for two to up to $50,000 in cash. The key here is that the envelope can be opened only by a CPK manager upon the guest’s return visit, which has to be before June 30. Given the magnitude of this campaign, we estimate that approximately 2.7 million cards will be given out and every card is a winner.

I know that you are all interested in our current results, and I can tell you that we were down 6.6% in comps in April, but two-thirds of our restaurants improved from March. Before Sue reviews our quarterly financial results, I’d first like to briefly touch upon some operating initiatives. We are protecting our margins by focusing on a series of operational and waste elimination efficiencies.

As I’ve mentioned before, our strength is that we have 33 regional directors with an average tenure at CPK of 14 years, terrific store-level management teams, and of course many very committed people here at our restaurant support center. We have leveraged their combined experiences to adapt in real-time so that we can manage our business for the current environment.

The suggestions from these team members have been most helpful to us and demonstrate a passion and results orientation for our business. Specifically and in regard to leveraging food costs, we had previously asked one of our exceptional regional directors with proven expertise in this area to work with Larry, Sue and me to implement a whole series of theoretical to actual food cost initiatives that we are in the process of rolling out companywide. These systems are designed to close the gap between actual and theoretical food costs.

So far, we have been able to narrow the gap and reduce waste, which is always important, but even more critical today. We are also implementing best practices on our labor line, as Sue will explain further, by improving transparency and how we track time managements of our hourly employees and allocate management oversight to particular restaurants. We’ve put in place a number of energy initiatives that should reduce our usage and price paid for utilities in key markets compared to prior years. Additionally, we have centralized the management of our repair and maintenance expenses and anticipate solid cost management and cost avoidance in this as well.

In short, we are trying to eliminate waste from the business and focus on all the basics that make us great restaurateurs. It’s worth noting that none of the cost-saving measures we have or will implement have impeded the guest experience in any way, and in fact, our surveys support this assertion. Our internal guest satisfaction scores are the highest they have ever been. Given the downturn in the economy, we believe that consumers who are still dining out have every reason to be even choosier in the restaurants they frequent and have even higher expectations for a great dining experience.

We are confident that we are meeting and exceeding our expectations of CPK. We focus heavily on the quality of foods, service and atmosphere, and capital investments. Moreover we believe this strength of our culture bolsters our employee satisfaction and retention, and our numbers reflect this.

And with that, I’ll turn it over to Sue, our Chief Operating Officer and CFO.

Sue Collyns

Thanks, Rick. And good afternoon, everyone. Our total revenue for the first quarter fell 2.2% to $161.1 million. And that consisted of a 2.5% decrease in restaurant sales to $158.7 million. Our royalties from Kraft increased by approximately 32.1% to $1.2 million, and our franchise revenue from international grew 35%, while domestic franchise revenue from reduced airport traffic actually declined 5.5%.

Our first quarter comp sales fell 5.9%, and that included 3.4% of price along with negative 9% of traffic and negative 0.3% of mix shift. In fact, we were actually very pleased to see our traffic improve sequentially from the first quarter to the first quarter. And in fact, when off-premise traffic is stripped out, the traffic number is further improved for the first quarter from negative 9% to negative 7.9%.

Moving on to monthly comps, January was down 2.8% and that was on top of the positive 1.1% in the previous year. February was down 6.6% compared to a flat comp in February of 2008. And March was down 8.8%, but negatively impacted by the Easter shift, which cost us around 40 basis points. And that’s versus the flat comp in the same period of 2008.

Companywide, full service CPK restaurants delivered a weaker sales average of $61,308, which was down 6.4% from the previous year of $65,489. Our food, beverage, and paper supply for the quarter was 23.9%, which was 50 basis points better than the previous year. Anticipating the falloff in aggregate demand across all the channels, we implemented a number of initiatives in the first quarter, as Rick alluded.

We worked on improving our actual and theoretical food costs and started to make real progress on this front in addition to benefiting from favorable commodity tailwinds in cheese, which incidentally was down by around 31% in price over last year at around $1.33 per pound. And we also enjoyed some favorable price movement in the produce category.

At the end of the day, approximately half of our improvement in our cost of goods over last year came from better management and half with some better pricing and fuel surcharges. We’re continuing to see good results in the second quarter despite the fact that we are hedged on cheese, which as you may recall is at an average price of around $1.80. But that compares to the second quarter, which was around $1.88 per pound last year. So we are enjoying some positive price movements on that front.

We are confident that at the end of the day it’s this continued focus on behavioral changes, measuring results in the initiative system that we’ve actually wrapped around the cost of goods initiative that we viewed continued benefit throughout the year, and we are very pleased with the initiative to date. Our labor expense increased 30 basis points to 38.5% of sales and was the result of two key drivers.

Firstly, the decrease in comp sales and associated deleveraging of the fixed cost. And second, the higher minimum wage rates in all 27 states, with the federal minimum moving from $5.85 to $6.55, definitely affected the hourly labor. Similar to the cost of goods initiatives, we are working hard to address a number of productivity improvements on a go-forward basis that really began in the second quarter, and we expect to mitigate the full impact of these two items by managing our exempt and non-exempt labor more efficiently.

Additionally, effective April we are now able to better manage our hourly labor activity and effectively cost manage meal breaks. In addition, we have also introduced a nominal $1 per meal charge to employees who previously did receive a free meal, which is at the low end of common practice in the industry. The combined effect of this new technology and the $1 meal charge is estimated to save us approximately $350,000 per quarter. We have also become more in-depth at allocating management resources to individual stores and ensuring that the number of managers per restaurant is properly aligned with their associated revenue.

Moving on to the direct operating and occupancy costs, those costs did rise by 160 basis points to 21.9% of sales compared to the prior year. And that’s a function of our decision to move depreciable assets from 10 to 15-year life, which we spoke about in last quarter’s call, which caused us to recalculate the amortization of occupancy charges to include rent escalations that extended to that five-year time frame.

Other key drivers in savings made this quarter that weren’t related to that accounting change included savings in utilities. We saw some nice movement in janitorial and delivery fees. And our percent rent also decreased in line with reduced sales. The one other area we are particularly proud of was in securing over $100,000 of reduced CAM [ph] charges from proactive CAM orders that we conducted.

Toward the back end of the first quarter, we also launched a companywide energy program, which includes a series of behavioral changes on how we manage our energy usage, energy audits and better securing rights across the country. Finally, we also turned up the evaluation and transparency on repairs and maintenance via new repairs and maintenance tool that we designed internally, and we developed in March. It gives us hind visibility in accountability on this important $11 million line item and we are working very hard on managing it.

Our G&A was $13 million this quarter, or roughly $70,000 better than last year and includes $11.4 million of what we call core G&A. And that was $217,000 lower than the prior year. And $1.6 million of stock option expense, and that was $147,000 higher than the previous year. The $217,000 saving in our core G&A was driven largely by savings in our manager in training program and lower turnover that we’re enjoying right now, as well as aggressive management of T&E and all other discretionary expenditures.

Moving on to depreciation, that ended up at $9.4 million and improved 80 basis points to 5.8% of sales due to the accounting trends that I described a few moments ago. And that was offset by the addition of eight new full service stores that have been out since the first quarter of last year. Our pre-opening cost ended up totaling $729,000 compared to $1.7 million last year and included approximately $225,000 in phantom rent charges.

Moving on to interest, we did incur interest expense of $309,000 this quarter compared to $501,000 in the first quarter of last year. And the lower interest rate as well as the lower debt level were responsible for that improvement. Our effective tax rate ended at 31.9% for the first quarter, and that was 90 basis points higher than last year, but in line with our expectations for 12-month period. And our net income ended at $2.6 million or $0.11 per share, which was of course significantly above our original guidance for the period and slightly above the high end of our more recent expectations of $0.09 to $0.10 per share.

In fact, we do estimate that you might remember we referred to the fact – we did have two remodels during the quarter and that cost us around ten weeks of store closures. And those 10 weeks cost us around a penny and a half in the first quarter, but we previously included that in our estimates. We ended the quarter with $19.4 million worth of cash and $67 million worth of debt. And our debt is funded by the $150 million line of credit that we secured last year, which also has a $50 million accordion feature, and that's in place until May the 7th of 2013.

In the first quarter alone, we paid down $7 million worth of debt. And as of today’s call, we have actually paid down another $7 million and are at a $60 million debt level and expect to make further progress as we continue throughout the year. Once again, we have a very solid and conservative balance sheet. And we are well within our debt covenants. In fact, our first quarter capital expenditure totaled $9 million that included approximately $7.1 million for the five new restaurants in progress and two full remodels that we completed; one in Natick, Massachusetts, and the other one that Rick and I saw recently at the credential center in Boston, Massachusetts.

While we are planning modest capital expenditures for this year, in line with our limited number of new store openings. But we expect CapEx to be between $28 million to $30 million. And that balance should be further improved by roughly $1.5 million of tenant improvement allowance that we should receive as those new stores are opened this year.

In terms of share repurchase, we did not repurchase any shares during the first quarter, although we do have a $50 million buyback authorization and we have around $40 million of that remaining and obviously intend to be very cautious in the immediate future. Similar to the last call, we will continue our practice of providing forward-looking updates during our conference call for the prospective quarter only.

So if we think about the second quarter, we are modeling negative 5.5% comp to negative 6.5% comp. And that includes a positive effect from out Thank You Card program that we anticipate seeing. We expect that this will result in an EPS of between $0.18 to $0.20. And it does factor in three full service CPKs opening as well as one international store opening. And in fact, that store opened last Saturday in Guadalajara, Mexico, as Rick mentioned.

In terms of international openings, I guess I have one final comment, and that is that due to recent events in Mexico and economic events that are affecting Korea, we are lowering our international new store openings from eight to five stores. And even though this will have an effect on royalty income for the full year, we are not reducing our overall ancillary revenue projections because of our confidence in our other ancillary revenue streams.

Before I conclude my remarks, I’d also like to make one final comment. Clearly, the unprecedented economic environment has had a significant effect on demand, not just to CPK but across the entire industry and outside the industry. And as a result and notwithstanding our current programs to drive revenue and eliminate waste out of the business, if demand continues to decline for a prolonged period, some of our stores may begin to move closer to triggering impairment calculations under FAS 144.

We have a practice of reviewing it on a quarterly basis with auditors and we will obviously continue to do that. However, we may take some charges toward the second half of the year if necessary. And I guess I’d just like to make it clear that we don’t have a number wrapped around this at this stage, but it’s simply providing direction that solely depends on demand in broader economic sectors. And we will be better able to make a decision in the second half of the year.

That concludes my financial update. And now I’d like to turn the call back to Rick for closing comments. Rick?

Rick Rosenfield

Great. Thanks, Sue. We conclude our formal remarks today with the following thoughts. I cannot emphasize enough that we are confident of CPK’s market position and strategy. Our price points, interesting and varied menu, first rate service, and strong culture, which continued to be recognized and rewarded by our guests underscore the value proposition of our brands.

We have moderated our restaurant developments and limited our capital expenditures to only five new full service CPK locations and we've halted all but the most essential remodels. This, coupled with our ancillary revenue stream growing at 20% this quarter and our continued focus on expanding these revenue streams, provides a balanced approach, which should enable us to maximize free cash flow. This will protect our balance sheet and further lower our already manageable debt levels.

Ultimately it’s our flexibility, imagination, and one of a kind brand that allows us to make progress in 2009, and we look forward executing on a plan that is already delivering results. I’m thankful to be working with such a dedicated team who are both willing and able to roll up their sleeves and take the steps that are necessary to do right with all our stakeholders; our shareholders, vendors, customers, and employees. This distinct founder-driven culture that Larry and I maintain at CPK is enabling us to weather these difficult times and make us equally well poised when the economy ultimately recovers.

And with that, I’d like to open the line for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Matthew DiFrisco.

Matthew DiFrisco – Oppenheimer & Co.

Thank you. I guess just looking at your comp guidance for the second quarter of – that range of 5.5, 6.5, how do you incorporate in there the discounting of the price? I’d assume that you are expecting it equally successful or do you think in the current economy that it might be even taking advantage of more and more of your traffic might be discount oriented than what you did last year? How are you incorporating the possible mix effect of more people coming back and really redeeming the 10% than did last time?

Sue Collyns

Well, it’s hard to predict what consumers are going to do this year. It’s obviously an unusual time in a broader sense. What we do know last time is that the comps we launched during the second quarter of last year and the month of May and the month of June didn’t see tremendous level of redemptions. And of the activity and the comps were really driven in the month of May. So we are obviously at the early stages of that, too early to say.

Rick Rosenfield

I think you may have misspoke – I think you may have said May and June to start – it's April and June.

Sue Collyns

April and June, and the month of May is when we saw the redemptions and generated a 4.1% comp. We have allocated the distribution of the 10%, 20%, 50% along the same proportions that we did last year statistically. I think we would assume that they would come in and be redeemed at around the same level. The question is though, what will the ultimate redemptions be. It’s obviously an important program for us. We know our guests like it. We are very happy with the redemption rate that we are seeing so far this quarter. And we’ll let you know what the results are on our next earnings call.

Rick Rosenfield

And I think it’s also as we look at the competitive environment, it’s challenging because there is a lot more discounting and couponing and competitive activities than there was a year ago.

Matthew DiFrisco – Oppenheimer & Co.

Okay. And then just a last question on the G&A side, looking at the direction of that, is there an ability to cut that a little bit or in the out quarters? How should we view that? Is that going to grow or pretty much hold the line on absolute dollars and get a little bit delivered in this current comp environment that you are in?

Sue Collyns

We are working hard on all areas of the P&L. Basically that has a number on it. It has a microscope on it. And every employee in our company knows that we worked hard on T&E. We saw some nice movement in managers in training. We are starting to see continued progress in that regard in the second quarter. Right now, though, it is a 53-week year, so we do know that Q4 should see a higher G&A number in an absolute sense. But I think in terms of modeling, if you were to model second quarter at around the same level of the first quarter, that would be a good starting point.

Rick Rosenfield

One other aspect we are seeing, I guess the silver lining in this cloud is that we are in all-time low for management and hourly turnover. As you can imagine, this environment would dictate.

Sue Collyns

That’s right. And we think that coming through on the management and on the hourly line, as Rick mentioned, normally our hourly turnover tracks at around 75%. The industry is much higher than that. Right now we are seeing – or as of the end of the third quarter, we saw 51% level of turnover. And on the management line, again our numbers are more favorable than the industry in general. We usually track some way between 25% to maybe 27%. As of the end of the first quarter, we were at 16%. So that’s definitely benefiting every store. It’s definitely benefiting guest satisfaction. You have your best people at all the stores as opposed to training management teams the new stores. And we are pleased with the results.

Matthew DiFrisco – Oppenheimer & Co.

Okay. And then actually one last question. Did you mention the date when the launch of the Flatbread Kraft product is going to be introduced to the grocery store?

Rick Rosenfield

It was – it is being introduced now. It was introduced in March and started in early March selling it.

Sue Collyns

Right. In fact, I mean, in terms of thinking about it and the royalty number for the fourth quarter, it represented a very small percentage of that, given that it was only rolled out for one of the three months.

Matthew DiFrisco – Oppenheimer & Co.

Okay. Sorry I missed it. I will make a note of it and try it out. Thank you.

Sue Collyns

It’s a great product. Enjoy it.

Operator

Our next question comes from the line of Brad Ludington with KeyBanc Capital Markets.

Brad Ludington – KeyBanc Capital Markets

Good afternoon. Thanks. I wanted to ask on your guidance, I guess the 2% to 3% commodity inflation is still intact?

Sue Collyns

I think that’s probably a bit heavy right now. In fact, we are still looking on 70% of our meat category and we saw an increase there as well as our grocery category, we looked in 50% on that to the end of the year as well. So those are the two key drivers, but we are obviously seeing significant abatement in cheese and some other areas. Bread and dough have come up recently as well. And we are at a contract on those now. So I’m posing that it’s going to be closer to that 1% to 2% level than 2% to 3% range. I think more importantly than price though, it's the productivity improvements that we're working on in terms of actual to theoretical that will help drive our results for the second quarter and the back end of the year.

Brad Ludington – KeyBanc Capital Markets

Okay. And then looking at the cheese, excluding the 50% contracted in the next few quarters, do you have an estimate for what you expect cheese to be for the year on the spot rate?

Sue Collyns

I think I have one [ph]. I don’t think I have it in front of me. I do actually have it. I mean, it’s obviously significantly less than last year, but I don’t know it out of top of my head. I’m sorry, Brad.

Brad Ludington – KeyBanc Capital Markets

No problem. I also wanted to ask – I think you just said 70% of meat is contracted. Did I hear that right?

Sue Collyns

Yes, that’s right.

Brad Ludington – KeyBanc Capital Markets

Okay. So, is there exposure to chicken if that happens to go up in the back of the year?

Sue Collyns

There would be, 30% of the category.

Brad Ludington – KeyBanc Capital Markets

Okay. And then I just have one more question. What did you say the – was it $360,000 per quarter that you expected to save from the shift meal charge and the better wage management?

Sue Collyns

Yes, around $350,000, Brad.

Brad Ludington – KeyBanc Capital Markets

$350,000. Okay. Well, thank you very much.

Sue Collyns

You’re welcome.

Operator

Our next question comes from the line of Jonathan Coppin [ph] with Robert W. Baird.

Jonathan Coppin – Robert W. Baird

Hi. This is Jonathan Coppin for David Tarantino. A quick question on your comps guidance for Q2. I know you are going to be running the bounce back promotion a few weeks longer than you did last year. Did your guidance include any additional benefits from the few extra weeks?

Sue Collyns

The way the program works this year, you’re right, it is running for an extra two-week period. The comps will all be given out up to and including the same point of last year, which was basically the end of May. But instead of closing it down middle of June as we did last year, it runs to June the 30th. And that is – again, I think Rick mentioned in his prepared remarks that comps are currently tracking negative 6.6%. And so given that we have given a range of negative 5.5% to negative 6.5%, we obviously expect to see a pickup. We anticipate that being in the month of May, and we will see what happens in June as well. So we have incorporated the best estimates we can at this point.

Jonathan Coppin – Robert W. Baird

Okay, that’s helpful. And then on the April comps at down 6.6%, can you quantify the impact from Easter on that?

Sue Collyns

Well, we know Easter cost us around 40 basis points in general in the first quarter. Actually I think 0.36 would be that number, but around 2.4 obviously.

Jonathan Coppin – Robert W. Baird

Okay. And then also just the pricing or the average check growth that you have in that number?

Sue Collyns

I think the average check this quarter is around $14.30.

Jonathan Coppin – Robert W. Baird

Excuse me, I’m sorry. Just, the year-over-year, to try to get an underlying traffic number for April?

Sue Collyns

Average pricing that we have in place would obviously escalate down during the back of the year. Let me try to get that quickly. Pricing should be around 2.9% in the month of – in the second quarter of this year.

Jonathan Coppin – Robert W. Baird

And was that a little bit higher in April and trailing off through the end of the quarter?

Sue Collyns

We don’t break it down month-by-month. We just really reflect on our quarterly.

Jonathan Coppin – Robert W. Baird

Okay, that’s fine. Thank you. And then one last question, on some of the cost saving initiatives that you have, putting in place like the theoretical food costing and labor scheduling, can you quantify what percent of the system that’s currently rolled out to and if it’s going to be a greater percent going forward sequentially, or how to think about that?

Sue Collyns

We rolled out a number of these programs in the month of March. And so in some cases you saw a little bit of traction like we saw some traction with food cost very rapidly. But a number of the labor initiatives didn’t really roll out until the end of March because we rolled out those sequentially during the month. So we hope to see some nice improvement in the month of April and May and June. The forecast that we’ve given of $0.18 to $0.20 really reflects what we are starting to see and where we think it will unfold.

Jonathan Coppin – Robert W. Baird

Okay, thank you.

Sue Collyns

No problem, Jonathan.

Operator

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

Mitch Speiser – Buckingham Research

Thanks very much. First off, Sue, just with the accounting change, is there any net benefit to earnings in ’09? And can you quantify that?

Sue Collyns

I think we said that on an aggregate basis anticipated depreciation being around maybe – originally I’d say flat because I wasn’t quite sure, but maybe there is $1 million worth of benefit this fiscal year as a result of that change.

Mitch Speiser – Buckingham Research

Okay. So the net $1 million to earnings?

Sue Collyns

Yes, across the whole year. And really what gave me the confidence to provide that estimate is just the way in which the first quarter unfolded.

Mitch Speiser – Buckingham Research

Okay. Moving along, for Kraft, I believe that last year you gave a revenue growth guidance kind of in the north of 20% or so range. Do you have a Kraft revenue growth guidance for ’09?

Sue Collyns

I think we talk about the Nielsen result. And it’s obviously grown nicely over time. Last year we came in at $6.5 million in – almost $6.6 million actually in Kraft revenue. And this year we expect to move up closer to $8 million. So you can back into what that might be.

Mitch Speiser – Buckingham Research

Okay, thanks. And just on the earnings guidance, in the first quarter your comps were down 5.9% and you grew earnings about 11%. This quarter the middle of your comps guidance is about the same. Yet you are looking for earnings down in the 30% or so range. Is that due – or can you reconcile that for us?

Sue Collyns

Sure. I mean, we basically got lucky on some line items in the first quarter. And we also did a lot of good work in the first quarter. The items we got lucky on were interest and pre-opening because we have, as you know, opened up one store in the first quarter of this year compared to five stores in the first quarter of 2008. But the areas that we worked really hard on and started to see some nice improvement was obviously that 23.9% cost of goods number. Also we worked hard on the labor line, but as I mentioned, because we only started to roll out a number of the initiatives in the month of March, we didn’t see the full effect of that. So those were some of the key drivers there as well as G&A.

We first started [ph] that energy program and the repairs and maintenance program in the first quarter and saw a little bit of the benefit in the first quarter, but hope that will extend. In the second quarter, things are a little bit different. We’ve got three new store openings that we planned compared to two last year. And so the pre-opening number jumps up quite a bit there. So I think that’s really the main difference. It’s pre-opening and the fact that comps are down, and again it’s difficult to know exactly what the margin is likely to look like. But again we feel pretty good about that $0.18 to $0.20, and that’s where the forecast is currently falling out.

Mitch Speiser – Buckingham Research

Okay. And on the Easter shift, that’s 40 basis points or so, is that just for March or was that for the entire first quarter?

Sue Collyns

I believe it was for the first quarter.

Mitch Speiser – Buckingham Research

Okay. So then I guess the March impact would be more or like in the 100, 150 basis point range or so? I mean –

Sue Collyns

No. You know what, no, it must be for the month of March. I beg your pardon. I think I’m misspeaking. It is the month of March.

Mitch Speiser – Buckingham Research

Okay. And you mentioned in April – I think Larry mentioned in April or Rick really that two-thirds of the markets actually improved from March. Can you maybe just give us a little more detail, maybe if some of the highlights and maybe some of the low lights, which ones got worse in April?

Sue Collyns

Yes. I mean, the group of six that really represents two-third of our business is California, Texas, Illinois, New York, Florida and Colorado. And basically all of them improved to April from the month of March. And so we were happy to see that improvement. And that’s what Rick was referring to.

Mitch Speiser – Buckingham Research

Okay. Does that exclude the Easter shift noise do you think or is that just the reported numbers or –?

Sue Collyns

No, that’s on an absolute basis. That’s not adjusting for any Easter.

Mitch Speiser – Buckingham Research

Okay, got it.

Sue Collyns

I just want to correct what I said before about the Easter number. I’ve got the report in front of me now that 0.36 basis points is for the quarter, not for the month. So what I said originally was correct.

Mitch Speiser – Buckingham Research

Okay. That would imply maybe I guess well over 100 basis points of shift in March?

Sue Collyns

That’s right.

Mitch Speiser – Buckingham Research

Okay, got it. Thanks. And can you quantify the fuel surcharge benefit in your cost of goods sold?

Sue Collyns

Yes. It was around $80,000.

Mitch Speiser – Buckingham Research

Got it. Great. And my last question is just on your international comps. You gave us a sense that they were – if they were positive, how positive or what markets are better than others?

Rick Rosenfield

We are seeing weakness on the comp line in international markets for sure. I think there is a global recession and our international markets are feeling it. And then of course, we were necessarily affected by swine flu down in Mexico, as you can imagine. Those stores were closed. And just right before the calls today that they are all open, all doing business and it appears actually back to the road more rather quickly I guess.

Mitch Speiser – Buckingham Research

Great. Thanks very much.

Operator

Our next question comes from the line of Destin Tompkins with Morgan Keegan.

Destin Tompkins – Morgan Keegan

Thank you. My first question too is on the same-store sales. Just want to get a little bit of clarification on your commentary. It sounds as though there would have been an Easter benefit to April if March was negatively impacted. And if I remember correctly, you did launch the Thank You Card promotion a little earlier. And so as we go forward, I think May is a little bit tougher comparison. You mentioned the redemptions rates were I think higher in May last year. So, was there anything else that affected April this year that maybe gives you confidence that trend is going to improve more into your guided range? Can you help me out there?

Sue Collyns

Well, I think it’s just the fact that we look at the sales every day. We look at every single state. And we are obviously tracking the redemptions on a daily basis compared to the same day last year. So based on what we are seeing, negative 5.5 to negative 6.5 is where we think it will fall out. We will ultimately see if that’s right or not.

Rick Rosenfield

And just another commentary too is that I know some of our peers or competitors are seeing the same, and that is that we are seeing relative weakness early in the week and then we see good strength, relative strength on the weekends, which is not particularly bad news considering that in our business you always count on the weekends. And so therefore it makes it just a little more difficult than what’s visible to us in early in the week in any given week and then we seem to have very solid weekends, both on a revenue and then better on a comp basis than early in the week.

Destin Tompkins – Morgan Keegan

Okay. And on the lower cheese prices, is there any opportunity to take advantage of locking in the additional portion you’re unhedged on at these low prices or even farther into the future, given that the price is so attractive here?

Sue Collyns

Well, I think there is always the possibility. We discuss that with our procurement department on an ongoing basis. And I’m not in a position to flag that at this point, but just know that we are doing everything that we possibly can to maximize shareholder value on whether that’s through pricing or whether it’s through operational initiative, we are working hard every day. So I wouldn’t rule anything out.

Destin Tompkins – Morgan Keegan

Okay. And then lastly, are there any lost operating weeks in Q2 from the remodeled stores?

Sue Collyns

No. The two that we had that were the big ones were remodeled in the first quarter. I don’t think we have any remodels in Q2, and then we have a couple in Q3 and I think specifically in the month of September.

Rick Rosenfield

You know, it is interesting. In one instance where we remodeled in Natick, that restaurant is sort of in the hiatus where it's not in the remodel any longer, it’s open. But it’s still a huge construction zone out in front of us. And I think that is finally ending this week and the new wing where we're next to the American Girl where we will be fully open. So that will help because we had just – again, not highly material, but we have been negatively impacted by that.

Sue Collyns

We had some significant construction in one of that stores at Santa Anita.

Rick Rosenfield

Santa Anita, yes, that’s our – that does impact us in a number of stores.

Sue Collyns

Right. In this quarter, though, in another store I think on the East Coast in September, as I mentioned.

Destin Tompkins – Morgan Keegan

Great, thank you.

Rick Rosenfield

Sure.

Operator

Our next question comes from the line of Nicole Miller with Piper Jaffray.

Nicole Miller – Piper Jaffray

Good afternoon. I just wondered if we could get some color on the two markets, Florida and California specifically, and the magnitude of improvement into the second quarter – into April, and has that been sustained in May?

Sue Collyns

Well, let’s see here –

Rick Rosenfield

While Sue pulls out her sheets, I’ll give you my anecdotal look at it. California I think is not – it's sort of flattish where it is. And South Florida is relatively improving. Orlando is still weak for us. And I think that’s a result of the travel. And I think in general it’s pretty clear that we were impacted and continue to be impacted by the travel industry and the harm that Florida is suffering there. But again, it is definitely improving sequentially. And Sue, if you have something there?

Sue Collyns

Yes. I guess I’d preface the numbers by saying that it's all relative and that they have moved from being negative to less negative in all cases. But California, which obviously represents plus 40% of our base, in the month of March, which I guess is what I’ve found here, we were down double-digit actually, around 10%. And in the month of April, we were down only negative 8.1%. So you did see improvement there. And Florida, which was our mixed figure state, with Illinois actually in the month of March, we were down over 11% and in the month of April we were down 6.8%. And in Illinois, where we also have around –

Rick Rosenfield

Sorry, I missed it. Once again, that is where I'm referring to that Easter flip matters. When you get Easter break and travel –

Sue Collyns

Right. Illinois was roughly flat. But Texas, where again we have over 5.4% of our base, in the month of March, we were down 3.3% and we were down 2.7% in April. So directionally you start to see some nice improvement across those states, for example.

Nicole Miller – Piper Jaffray

And then just my last question, can you talk to us about what Kraft is doing with the marketing dollars on your behalf? Is TV an opportunity? And I know that you have a lot of new products that are very new. But is there anything else in the lineup we should know about or the pipeline?

Rick Rosenfield

Nothing that we can yet talk about. And in terms of – as you know, there is a required spend that they have, Nicole, and that is becoming an absolute dollar significant amount of money. And as we grow and as they grow, it is certainly a potential to get into TV advertising, cable advertising. We are not there yet.

Sue Collyns

And I think for competitive reasons, frankly in the call, I don’t think we are in a position to talk about where they are planning to allocate their expenditure this year.

Nicole Miller – Piper Jaffray

Okay. And then really the last question. Is Kraft the strength in the first quarter? And is that carried over into April and May?

Sue Collyns

We certainly anticipate it. And we have the benefit of moving up that royalty sort of threshold. So we are obviously broken through that first $15 million threshold or I think add to it in the first quarter, if you back in and do the math, then we’ll be moving up to that 4% royalty payment. So by definition, we’d expect to see some nice growth in the second quarter. Plus we will have a full quarter of the Flatbread Melts activity, and we’ll see how that does.

Rick Rosenfield

And yes, you know, they are very aggressive in creating new products and expanding our line, and then Larry and I worked with them quite often quite frankly in these developments.

Nicole Miller – Piper Jaffray

Thank you.

Rick Rosenfield

Sure.

Sue Collyns

Sure, Nicole.

Operator

Our next question comes from the line of Steven Rees with JP Morgan.

John Ivankoe – JP Morgan

Hi. Actually it’s John Ivankoe for Steve. I was wondering if there is a reason why food and beverage is paper and paper as a percentage of revenue would change sequentially from the first quarter. I understand last year you kind of bounced around and the first quarter was the low point. How do you feel about 2009?

Sue Collyns

In terms of guidance for the full year, is that what you are asking, John?

John Ivankoe – JP Morgan

Not guidance in – well, if you want to call it that. But I mean, food, beverage and paper is I believe 23.9 in the first quarter versus 24.4 last year.

Sue Collyns

That’s right.

John Ivankoe – JP Morgan

Is there a reason that that number 23.9 would change sequentially as we move throughout 2009 or should we be able to really benefit from your comparisons versus 2008?

Sue Collyns

Well, I think two main things drove that in cost of goods that I mentioned sort of 50/50, good management and good luck. Right? We had good luck on the fuel surcharges and on cheese, and we didn’t have any cheese hedged. And cheese I think was around $1.33 a pound or something when it all shook out. So we saw a nice pickup there. We also saw a nice pickup in produce. I guess avocados in general we saved over $100,000 there on that line item. And again, that’s seasonal. It depends on is there a drought, is there a flood, is there a hailstorm. And so they can all affect a number of items there. And we don’t have any of the produce hedged.

The good management side of it is something that I’d like think we could continue, because if we put this incentive programs around that actual to theoretical food cost anchor, we’re working hard to make that part of our culture and part of the behavioral set of practices around that. So I think to model out 23.9 for the full year would be aggressive. But they are your numbers. So just bearing that in mind, hopefully that will give you a good frame work for you to think about.

John Ivankoe – JP Morgan

Okay. And I’m sure, as you know, cheese prices have dropped since I think the first quarter average, but maybe something else offsets that as you move throughout the year. And secondly, if you – if you’ve quantified it, I missed it. I apologize. How much did the D&A change in basis points affect direct operating and occupancy negatively in the first quarter?

Sue Collyns

Well, I think we saw a pickup – I'm estimating now around a pickup of around $1 million and depreciation for the full year. And we saw an improvement in depreciation on an absolute basis of around $1.6 million. But in the first quarter of last year, we had a disproportionate additional depreciation charge. And I think if you back that out, it was probably only a $1 million pickup, not $1.6 million. So I think it’s around the same number on that direct operating and occupancy line.

John Ivankoe – JP Morgan

Okay, all right. That’s fine. Thank you.

Sue Collyns

Sure, John.

Operator

Our next question comes from the line of Bryan Elliott with Raymond James.

Bryan Elliott – Raymond James

Good. Good afternoon. Just a couple of clarifications. I apologize; I missed a couple of your comments. But – March versus April, we have 1.5 point roughly, maybe 1.25 point on a monthly basis hit in March. March was worse by something over 100 BPs because of Easter? And April therefore, would that not have benefited by about 150 also or 120, whatever it was the range you gave? And so, aren’t we looking at a pretty consistent run rate when you adjust for the Easter shift?

Sue Collyns

I think that’s a fair way to look at it. On a normalized basis, it kind of evened itself out.

Bryan Elliott – Raymond James

Because a lot of – you went through some states and all, and that’s right, I kind of got interrupted for a moment, so I didn’t get all the details there. But the improvements were kind of the calendar shift rather than anything underlying?

Sue Collyns

Well, I think if you are – I don’t know if I agree with that entirely because I think – if a state is improving by more than 100 BPs or something else potentially going on.

Bryan Elliott – Raymond James

But again, I guess my real question is which you confirmed a moment ago though is, the impact is about 100 – is north of 100 BPs in each of the two months. Right? March was hurt by over 100 and April was helped by over 100 because of the calendar shift.

Sue Collyns

Right. But both in the case of Florida and California, you have more than 100 to 150 BPs of movement between March and April. And that’s where I was saying –

Bryan Elliott – Raymond James

Okay, okay. That’s where the confidence comes from, okay.

Sue Collyns

Yes.

Bryan Elliott – Raymond James

And then following up on John’s question, the deltas from Q1 to Q2 in COGS, obviously cheese is going up a lot because you’re going on to a contract that’s above market now. Right?

Sue Collyns

That’s right.

Bryan Elliott – Raymond James

And then what else is moving, and help us understand the magnitude of that? Would that be something like 50 to 75 BPs sequentially alone or is that too much?

Sue Collyns

Yes. I mean, I think what you’re really asking, Bryan, is what’s a good number to think about from modeling that cost of goods then. You know, the starting point is obviously 23.9, given the cost of goods is truly variable. And as you say, we had some pickup. But we do have a new menu introduction and that’s going to have an impact in the second quarter and that starts rolling out in a number of test stores in the month of May as well as going live across the whole country in the month of June. So we see some ways that was perhaps a little bit disproportionate there as well.

Bryan Elliott – Raymond James

Okay. And then there is certainly an impact from the program, the Thank You program.

Sue Collyns

That’s right.

Bryan Elliott – Raymond James

Would that be a 100 BPs sequentially in that magnitude?

Sue Collyns

Yes. We’ve actually seen that – yes, it could be at that level.

Bryan Elliott – Raymond James

Yes, okay. And last question, help me with the timing on the price lapse. You’re not taking any price this menu and I think you told that second quarter you’re looking at 2.9 and so really starting late June and for the rest of the year you’d be at – I believe it was 2.4. Is that right?

Sue Collyns

Yes, I think it’s around 2.5. There were some small changes in some alcoholic beverages in certain states, and I think that cost us 10 basis points. I think my original average was 2.4 for the full year. It’s now 2.5, if I lay that in, but it’s nominal. We just basically have rollover pricing in 2009, and Q2 is meant to be coming at around 2.9, Q3 is closer to 2%, and Q4 should be around 1.3.

Bryan Elliott – Raymond James

Okay, very good. Thank you.

Sue Collyns

Sure.

Rick Rosenfield

Sure.

Operator

Our next question comes from the line of Thomas Ford [ph] with Delphi Advisory [ph].

Thomas Ford – Delphi Advisory

I also had a clarification question and then I had a real estate question. For the clarification, it was my understanding that comparing this year versus last and the Thank You Card promotion that this year it was mid-April to the end of June and last year it was mid-April to mid-June. Is that correct?

Sue Collyns

Correct. That’s in the end of – yes.

Thomas Ford – Delphi Advisory

Okay. So the two-week addition is at the end of June and not –?

Rick Rosenfield

It’s an additional two weeks of redemption period.

Thomas Ford – Delphi Advisory

Okay, great. And then on real estate, can you talk about your lead-time in general from picking a site to adding a new location, and then what your thoughts are on 2010 new unit growth and then also if you had an opportunity to renegotiate existing leases or leases that are about to expire at more favorable rates?

Rick Rosenfield

Okay. Let’s see if I can get those in order. In terms of the lead-time, I generally use it as a rule of thumb. It’s a one-year lead-time literally. It doesn’t take us – from the time we see a site and approve the site, and by the time it worked its way through, it could be nine months and it could be 14 months. It is longer for a free-stander than it is for a midline. In terms of 2010, we haven’t really pinned it down yet. There is a number of sites at which we are in discussions and negotiations at a number of sites. What I think I would say is, without giving you a number, it’s unlikely to be substantially more aggressive than this year.

Now, when it gets to renegotiating leases, I have to say I think it’s – from my experience, it’s overblown in terms of what our ability to go in and renegotiate leases because of the economic environment. Frankly, we’ve always been able to renegotiate – I shouldn’t say always. We are often able to renegotiate leases in underperforming stores. We are not going to be able to renegotiate leases in well-performing stores. Over 50% of our restaurants are already in percentage rent. So dealing with these landlords, the idea of going in a highly successful store where you’re paying percentage rent and asking for a reduction because of the economy is sort of a non-starter.

And then when it comes up to where we definitely have negotiating power is, if we have an underperforming store that we have a kick-out provision, because we do negotiate those and certainly we have been for a little while now, is where if we don’t meet a sales threshold, we can leave, while that is the ultimate negotiating power for us. So it’s not different as – at the end of the day, it’s still not different than the real world is, depending on negotiating power. If a lease is up in a high-performing store and the landlord knows we are not going anywhere, we don’t have the leverage. And that’s our real world.

Sue Collyns

And I’d actually love to add two comments to that. One is that, again, in the real world, in terms of renegotiating the leases, it’s unlikely, and in fact we (inaudible) developer or he was speaking at a conference last week that we were all at, and they reflected on the fact that unless a concept is close to bankruptcy, they are not terribly enthusiastic about having a conversation that would cause at least renegotiation. And even if they did, for them or for us, by the time you end up straight lining the benefit over the term of the lease, it can be a very marginal improvement to your P&L.

The second comment I would like to make is that because we realize that marginal benefit and we know that we have over 50% of our leases are already in percentage rent, and the cash – and our stores in general are cash flow positive, again, subject to variations in the economy right now. We actually think there is more upside going after landlords on CAM orders. And as what we’ve mentioned in our prepared remarks, we were very successful in the first quarter. That dialog actually started with them at the back end of 2008, we secured over $100,000 of savings from CAM orders in previous years and actually have a number of other CAM orders in the pipeline right now. We don’t have a number to put around that yet. So, it’s not something we can really model out, but that’s an area of opportunity for sure.

Rick Rosenfield

Without getting too long-winded, I don't want to create the wrong impression. In those cases where we have leverage and it makes sense to renegotiate we are of course talking to the landlords.

Thomas Ford – Delphi Advisory

Great. Thank you very much.

Operator

Your next question comes from Larry Miller with RBC. Larry, your line is open.

Larry Miller – RBC Capital Markets

Yes. My question was asked and answered. Thank you.

Rick Rosenfield

Thanks, Larry.

Sue Collyns

Do we have any further questions, operator?

Operator

Your next question comes from Steve Anderson with MKM Partners.

Steve Anderson – MKM Partners

Is there any change in the number of Thank You Cards that will be distributed this year versus last year?

Sue Collyns

Yes. The number this year I think is around what 2.7 million –

Rick Rosenfield

2.7 million as opposed to 1.8 million.

Sue Collyns

1.8 million last year, yes. And that’s in line with the new store openings as well as the extended two-week period, Steven.

Steve Anderson – MKM Partners

Okay, thank you.

Sue Collyns

Sure.

Operator

(Operator instructions) There are no further questions at this time.

Rick Rosenfield

Thank you all. We’ll look forward to talk to you on our next call.

Sue Collyns

Thank you, everyone.

Operator

This concludes today’s conference call. You may now disconnect.

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