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The Cheesecake Factory Incorporated (NASDAQ:CAKE)

Q2 2013 Earnings Call

July 24, 2013 5:15 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

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

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

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Will Slabaugh - Stephens Inc., Research Division

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

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

Andrew M. Barish - Jefferies LLC, Research Division

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

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter Cheesecake Factory Earnings Conference Call. My name is Patrick, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Jill Peters. Please proceed.

Jill S. Peters

Thank you. Good afternoon, and welcome to our second quarter fiscal 2013 earnings call. I'm Jill Peters, Vice President of Investor Relations. 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 the 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 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 statement.

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 third quarter of 2013, as well as the full year. And then we'll open the call to questions.

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

David M. Overton

Thank you, Jill. The second quarter marks our 14th consecutive quarter of positive comparable sales, and it was another quarter where our sales outperformed the casual dining industry. We believe that the heat waves and heavy rain during the quarter impacted us, as the weather limited our ability to utilize patio seating.

Importantly, we grew sales at full margins without discounting to attract guests. This contributed to a year-over-year increase in our operating margins, as we continued to progress toward returning to peak margin levels.

As for development, our plans are on track to open as many as 8 to 10 company-owned restaurants this year. We had a successful opening in Knoxville recently, which opened to long waits and high sales volume. This is one more example of the strength of our brand and tells us that focusing on A-plus premier sites is the right strategy.

In the third quarter, we plan to open 3 new restaurants, including 2 in new markets, Michigan and Puerto Rico, where the anticipation for the openings is already quite strong.

Internationally, sales at the 3 Cheesecake Factory restaurants in the Middle East continued to be very strong. The first location in Dubai has been open about a year and the ongoing popularity of our restaurant gives us confidence about the demand for our concept outside the U.S.

In terms of expansion in the Middle East, we now expect 1 new location to open this year based on the current information we have. As we have said in the past, we do not control the timing of international openings, and opening dates can move for a number of reasons. The sites remain in the pipeline, but the timing of new mall construction is impacting when we expect those sites to open.

Ultimately, it is in our best interest to focus on the quality and success of openings rather than the pace, similar to our approach with the company-owned restaurants.

As to Mexico and Latin America, we have identified the first site in Mexico City, and work is underway.

We remain confident in the strength of our brand and in our business over the long term, which leads to 2 important steps in our commitment to increasing shareholder value. First, our board approved an increase in our quarterly dividend equating to 17%. Second, we are allocating a significant amount of capital to repurchase our shares during the second half of the year, as much as $125 million.

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

W. Douglas Benn

Thank you, David. I'll review our financial results for the second quarter, and then provide an update on our outlook for the rest of the year.

Total revenues of The Cheesecake Factory for the second quarter of 2013 were $470.1 million. Revenues reflect an overall comparable sales increase of 0.8%. As a reminder, in the first quarter of 2013, we benefited from a timing shift due to earlier spring breaks and Easter. As a result, roughly $2 million in sales or about 50 basis points moved into the first quarter from the second on a year-over-year basis.

Comparable sales increased at both concepts during the second quarter, with a 0.9% increase at The Cheesecake Factory and a 0.1% increase at Grand Lux Café. The strength of our 2 Las Vegas locations drove Grand Lux Café's overall performance.

At the bakery, external sales were $11.7 million, about flat with the prior year. Cost of sales was 24% of revenue in the second quarter of 2013 versus 24.4% in the prior year quarter. The favorability stemmed primarily from general grocery costs, with wheat and corn prices down from their year-ago highs, benefiting items such as pastas and oils.

Labor was 32.2% of revenue in the quarter, up 10 basis points from the prior year, with higher payroll taxes and other labor-related expenses partially offset by favorable group medical costs.

Other operating costs and expenses were 24.2% of revenues for the second quarter, up 30 basis points from the second quarter of the prior year. There are a number of factors that impacted this line item, including timing of marketing and other operating costs, which benefited us in the first quarter of this year; higher natural gas costs, up from their lows last year; both of which were offset to some degree by higher production in our bakery facilities.

G&A was 5.9% of revenues for the second quarter, up 10 basis points from the prior year, as we expected.

Depreciation expense for the second quarter of 2013 was 4.1% of revenues, flat with the prior year period.

As noted in our press release, we recorded a $1.5 million charge during the second quarter, relating to the planned relocation of 2 Cheesecake Factory restaurants.

Preopening expense was $2.5 million in the second quarter of 2013 versus about $3.0 million in the same period last year, with 1 new restaurant opening in the second quarter of both years.

Our tax rate this quarter was 28.4%, within our expected range. Cash flow from operations for the first 6 months of 2013 was approximately $89 million. Net of roughly $38 million of cash used for capital expenditures, we generated about $51 million in free cash flow through the second quarter of 2013.

During the second quarter, we repurchased 87,000 shares of our common stock at a cost of approximately $3.3 million.

That wraps up our business and financial review for the second quarter. Now I'll spend a few minutes on our outlook for the third 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 effect of any impacts associated with holidays and known weather influences.

For the third quarter of 2013, we estimate diluted earnings per share of between $0.51 and $0.53 based on an assumed range of comparable sales between flat and up 1%.

There are several factors impacting our comparable sales assumptions in the third quarter. We are lapping our most difficult comparison of the year, a 2.5% comparable sales increase in the third quarter of last year. Our comparable sales have outpaced the industry by a healthy margin for at least the past 18 months, and we expect that trend to continue. However, we have to be realistic and consider the near-term industry environment.

That being said, the magnitude of the effect is small, with our third quarter comparable sales range being less than 1 percentage point off our historical trend. Importantly, our full year outlook suggests that we expect sales to stabilize in a normal range for us in the fourth quarter.

On a full year basis, we now expect diluted earnings per share of between $2.10 and $2.15, representing 12% to 14% pro forma growth off a base of $1.88 in 2012. This earnings per share sensitivity is based on an assumed range of comparable sales between 1% and 1.5%.

There is no change in our expectations for operating margin improvement in 2013, with 50 basis points of improvement anticipated for the full year. As we have discussed previously, operating margin growth in 2013 will be driven by a number of factors. A big driver is international growth, with the initial 3 Middle East locations delivering higher-than-planned volumes, plus 1 additional location expected to open this year.

In addition, we expect cost of sales to be incrementally a little better than what we previously anticipated, driving some of the margin improvement. We are now planning for about 2% commodity cost inflation in 2013, down 50 basis points from our previous forecast in April. The reduction in our food cost outlook comes primarily as a result of favorable dairy prices.

We now expect total capital expenditures to be between $100 million and $110 million, primarily driven by planned 2013 openings of between 8 and 10 new restaurants, as well as expected openings in early 2014. As to our corporate tax rate, we expect it to be approximately 29% for 2013.

As David mentioned, we are increasing our quarterly dividend quite significantly, 1 year after initiating it. Our thinking with regard to the dividend was to initiate it at a reasonable level, allowing room for it to grow meaningfully over time.

In addition, we are targeting as much as $125 million in share repurchases during the third and fourth quarters of this year. As a result, we expect to return as much as $200 million in cash to shareholders for the full year in the form of 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 with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

Doug, first, if you could just clarify if the earnings guidance you're providing includes that buyback activity or excludes it, and what assumptions underlie it. And then, the broader question is just really about the sales patterns you experienced this quarter. It seems that you're blaming it more on the weather, and maybe if you can quantify that. And what is your view in the third quarter? It seems that macro has gotten into at least the industry trends more. Are you experiencing that as well? Or are you just seeing this as a kind of an ongoing experience you've had in the second quarter, which is more maybe weather related or something that are idiosyncratic to you?

W. Douglas Benn

Okay. Yes, first, the buyback activity. The guidance that we gave does include buyback activity. We said as much as $125 million. If you've followed what we've done before, we've usually bought a vast majority of that. So a good portion of that is included in the assumption for earnings per share for the year. With respect to the weather, it's very difficult to quantify the impact of the weather, especially when we didn't really have any restaurant closures as a result of the weather. What we do know is that when we have restaurants that are as busy as ours are, we're -- and we're not able to fully utilize patio space, sometimes for days at a time, it impacts our sales. So we're just saying, I guess, anecdotally without quantifying is that the weather didn't deal us a particularly good hand in the second quarter, and that's primarily because we're dependent on our patio business in the summer, and I think more so than most. With respect to your question about the third quarter and our guidance for the third quarter, we talked about, basically, in the prepared remarks that we are lapping a difficult comparison and that we are considering industry factors in determining what we should guide to in the third quarter. With that said, the magnitude of what we're factoring in is pretty small. It's about 1%. So our comparable sales, we would expect to be able to continue to outpace the industry by the -- by a healthy margin. We've been doing that for a long period of time. We continued to do that in the second quarter of this year. But we can't ignore the fact that, in the month of June, there was some softness in the industry as a whole. Our sales was positive in the month of June and were significantly better than the industry, but they were still softer than they were in May.

Operator

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

Joseph T. Buckley - BofA Merrill Lynch, Research Division

You've sort of answered this, I guess. Was June the softest month of the quarter? Did most of the rain and heat impact occur in June?

W. Douglas Benn

Well, our sales were flat to positive throughout the months of the quarter. Our weakest month was actually April because that's the month where the Easter and spring break shift happened. Our strongest month was May. And our sales performance in June was solidly positive. And the industry for June, the numbers we have at least, say the industry was down about 2%.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And then a question on the relocations, the 2 relocations. Could you fill that out a little bit? Is that included in the 8 to 10 openings? And when will they occur? If you're comfortable discussing the markets, that would be interesting as well.

W. Douglas Benn

The relocations, we're going to do 2 to 3, is what we've said. These first 2 are definitely going to happen. And we're taking a -- this charge this quarter relating to them, not because those restaurants are closed yet but because the accounting rules dictate the timing of when you have to take a charge to write off the remaining book value on restaurants that you're going to close prior to reopening the others. So we would expect the new restaurants associated with those 2 particular restaurants that we had write-offs associated with to open in very close proximity to the time of when the others are closing, so that there'd be very little gap between that time and the time the new ones open. As far as where they are, I guess we could say that, right?

David M. Overton

Yes, sure. One is in Los Angeles, and we found what we thought was a better site in, not a business park, but in heavy retail, and we like that. And then the other one is in the Boston area, where the center we were in was really sold and is becoming a medical building and we were lucky enough to get into a great retail center across the street. So those are really some of the various reasons why we would even consider going out of one restaurant and going in another. Normally, we would just renew the lease. But there are special circumstances, and these 2 were 2 of them.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And are those 2 included in the 8 to 10 openings?

W. Douglas Benn

Yes.

Operator

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

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

One follow-up on the comp question and then a separate question on unit openings. First, in terms of the comp, any more color you could provide? It seems like, like you said, more recently, you've seen a slowdown in trend in June and perhaps that's continued to July. I was just wondering what you attribute that to. And within the comp color you offered, I was wondering if you could tell us about geographical trends or the price, traffic and mix trends within that, any kind of incremental color. And then I had a question on unit growth.

W. Douglas Benn

Okay, all right. Really, this is -- the overall comment about the second quarter is that nothing has changed in our business. Guest satisfaction scores are still high. Our retention of people still remains very high. Our restaurant level execution is still very good. And the restaurants we're opening are doing very well. The ones we've opened over the last 3 years are still delivering about 10% higher sales metrics. Just with that said, the environment did slow in June. It's evident from any casual dining data as well as in retail sales, and we're not completely immune to that. But I am very confident that we can maintain our continuing positive gap in comparable store sales between us and the industry. So by example, I think I said this earlier, that our comparable store sales in June were up and the industry was down about 2%. What was the second part of the question?

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

It is geographical and then the price, traffic mix.

W. Douglas Benn

Yes. So price, traffic mix, we had 0.8% comp sales increases. Traffic was down 1% and check average was up 1.8%. So basically, we had about 1.7% of pricing, so we had a little bit of a positive menu mix. Geographically, most regions were flat to positive. I mean, we had the areas of strength in Texas, the Southwest, the Great Plains. California was pretty strong as well. We're not seeing anything geographically that concerns us or alerts us.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. But you're assuming at this point that trends rebound in the fourth quarter based on your current assumptions?

W. Douglas Benn

We are, and there's good reason for that. I believe one of the things we talked about that impacts our third quarter guidance is a very difficult comparison. I mean, our third quarter guidance impacts is a very difficult comparison. In the fourth quarter, we've got the opposite of that. We've got a lot easier comparison. So that's part of what gives us confidence about the fourth quarter. And then most economic indicators are moving in the right direction. Unemployment is down. Hiring has been at a rather steady state of 200,000 jobs or so a month being added. The housing market continues to recover and the stock market is up. So the economists still believe the overall economy will pick up in the second half of the year. And I believe in the second quarter from -- if you look at what GDP growth was in the second quarter, it will be an unspectacular, say, 1.5%. And most economists anticipate faster growth in the fourth quarter than that, up to 2.7%, and we'd expect our sales to benefit from that.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Perfect. And then just, David, is there any color on next year? Being that we're in late July, and I'm guessing have pretty good visibility on the unit side of things. I guess, this year, you'd say there's 6 to 8 new units x the relocations. How would you size up '14 relative to the 6 to 8?

David M. Overton

Well, it's hard to say how many will actually come through. We're certainly looking at trying to get into double digits and we're off to a very good start so far. We're also looking for a good year in '14 for international growth. I wish I could give you a number. Usually, by the third quarter, we're able to give you a little more definite color on that.

W. Douglas Benn

I would say that our strategy of being selective, with respect to development -- to our development choices is certainly working. Because we've picked all winners over the past 3-plus years and we are going to continue to move forward on all sites that we believe are extremely high quality, A-plus sites.

Operator

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

Michael Kelter - Goldman Sachs Group Inc., Research Division

I guess, you guys guided to 0% to 1% same-store sales for the third quarter. I guess, in light of the casual dining weakness we're seeing at the industry level in July, can you confirm if you're within that range, that 0% to 1% range quarter-to-date, or if you're counting on a pickup later in the quarter to hit the guidance range?

W. Douglas Benn

We don't want to talk about -- we never have. This isn't germane to this quarter, but we don't talk about quarter-to-date comps because in at least 50% of the time, it will be extremely misleading to do so. So we don't do that. What we do instead is factor in everything that we know as of today, which includes quarter-to-date comps, into the guidance that we give for the third quarter.

Michael Kelter - Goldman Sachs Group Inc., Research Division

I tried. And then moving to internationally. Two things there. One, I wanted to just check in on the performance of the locations, the initial locations in the Middle East. They started exceptionally strong. Have they maintained that level? Or have they come down a little bit as the newness wears off. And that's part 1. And then part 2, the Middle East moving from 3 new units to 1 new unit this year. Even if they're still in the pipeline, it would be great to just get an update from you on your expectations for 2014 and beyond and whether you think this actually slows down the trajectory you originally were planning on? Or if it really just moves some things, let's say, from fourth quarter to first quarter and everything else is on track?

W. Douglas Benn

Okay. So with respect to the operations of the restaurants in the Middle East, they continue to operate at very high volumes. In fact, the sales volumes in a couple of the restaurants are growing. So...

David M. Overton

Yes. They've had record-breaking days just in the last quarter and they weren't special days. So we're very, very happy with how the popularity is growing.

W. Douglas Benn

And with respect to next year's development, it's -- not trying to be vague, but we really don't know. We know that there are a number of sites that are in the pipeline that they're going to be working on, that even include sites that could perhaps be outside of the initial countries that we signed up with for them. So these sites move for various reasons. And this particular, these 2 that are moving now are mainly mall construction related. But next year -- here's what I would say. The number of sites that will open next year, the way that we see it right now, from an international development standpoint, will be sufficient to be able to fund the international royalty piece of our growth plan such that, that won't be jeopardized.

Operator

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

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

I wanted to come back to the discussion around some of the industry weakness you referenced, Doug. And I guess, you also mentioned a lot of the positives in the economy. So I'm wondering what your thoughts are on why the industry is seeing the type of weakness we've seen in June and, I guess, into July here. So what are the factors that you think are driving some of the retrenchment in the consumer, so to speak?

W. Douglas Benn

It's a good question and one that obviously we ask ourselves. Because the economic indicators, the stock market, the housing market, just the -- what the economists in general are saying, don't seem to jibe with the -- what happened or at least what the announcement was about comp store sales in June in the industry. It just -- it appears that consumers, at least temporarily, are cautious about spending their discretionary dollars, at least for now. So however, they are buying cars. They are buying houses. It's just that it looks like -- we think it's more of a blip. So it's not -- we try -- we are not going to overreact to anything that we see going on in the industry in the short term.

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

And I guess, maybe the follow-up I had was related to that. Is there anything that you are planning for the second half to maybe spur a little bit of traffic? I know you don't do a lot of traditional advertising, but you do have the ability to do direct marketing and things of that nature. So is there anything you have planned on the initiative side that might help the comp trend improve?

W. Douglas Benn

I would say that our strategy is going to remain focused on where we are best in class, and that's what we've always done. We're building the brand for the long term. Not to rule out that we might look at marketing as a -- reallocating marketing dollars, so that we did something that was more direct associated with driving sales. But that's -- the economy would not be the reason that we would do that. We would do that because we think that's the right long-term thing for our business. We don't want to, again, be over-reactive to the short-term blips at the expense of our long-term success. We think we can retain our increases in market share. We're definitely growing market share if we're doing better than the industry. And we'll do that by continuing to do the things that we've always done, which is to differentiate ourselves through menu innovation. You all know about SkinnyLicious, Small Plates & Snacks. Now we've got a gluten-free menu that's coming out. We'll differentiate ourselves through high-quality food and through service excellence and driving compelling dining experiences that increase guest satisfaction. So that's -- we're very committed to that. We're doing a very good job of that today, and I'm confident that when we do that and get a little bit of help externally from the economy, that we'll be right back on track with respect to comp store sales.

Operator

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

Nicole Miller Regan - Piper Jaffray Companies, Research Division

I was hoping you could talk a little bit about pricing in terms of the competitive environment? And what kind of pricing power do you think you have for the back half of this year and next year? Will it essentially be in the same 1% to 2% range that it has been historically?

W. Douglas Benn

Yes. We -- our pricing that we've already decided and are rolling out the new menu for the last half of the year, and it contains about a 1% price increase that's lapping over a, I think, 0.8% or something was rolling off. So roughly the same kind of pricing we're putting into the menu, roughly 2% of pricing, will be in the menu in the second half of the year.

David M. Overton

And similar for next year.

[Technical Difficulty]

Jill S. Peters

Operator, I think we might have lost her line, so if you could move on.

Operator

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

Will Slabaugh - Stephens Inc., Research Division

Wondered if you could talk about the move to allocate more cash for share repurchases here for the back half of this year. And then considering your willingness to aggressively buy back stock, just wondering what you think about taking on any level of debt to do that given your net cash position.

W. Douglas Benn

Well, we are buying back -- we are being more aggressive in the second half of the year for a couple of reasons. But one being that our 10b5-1 formulaic share repurchase plan that we had in place in the first half of the year did not strategically purchase the shares that we had hoped that it would purchase. Because the good news is the stock ran up some and the -- our plan worked as designed and bought fewer shares when the stock ran up. So we are very confident in allocating and stepping up our share repurchases. There's not a need to borrow any money. Our free cash flow for the year will be somewhere between $105 million to $115 million. And additionally, we're seeing a lot of stock option exercises, which gives us a lot of additional cash that we can use to return to shareholders. So if we complete the share repurchases, the $125 million in the second half of the year, and get to that full amount, we will have done more share repurchasing this year than we have ever done in our history. So we're being very aggressive with it, and there's not a need to borrow to do that.

Will Slabaugh - Stephens Inc., Research Division

Great. And as a quick follow-up to the international comments. Wondered if you could give us any idea on plans, your licensing you may have in Mexico and Latin America over the next couple of years? I know it's -- a lot of that's being out of your hands, similar to the Middle East, but any idea for that trajectory of growth there would be helpful.

W. Douglas Benn

Well, we -- I think as we said, we would expect that the first restaurant to open in Mexico City, and it would be in the first half of next year sometime, perhaps as early as the end of the first quarter but certainly in the first half of next year. And then after that, I can't specifically say but I would say that they're going to be -- they're a very accomplished restaurant company. They open restaurants all the time, and I don't know why they wouldn't be able to open up a couple of restaurants the year after that.

Operator

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

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

Doug, I think you mentioned that one of the components for occupancy and other going up was the shift in the timing of marketing. Can you kind of delve into that? Was it -- did you -- are you testing anything different with marketing? Or is it just purely timing in the quarter?

W. Douglas Benn

Well, part of that marketing spend had to do with -- if you'll remember, last year, we, for the first time, did some more traditional -- for the first time in a while, anyway, did some more traditional advertising that included billboard and outdoor and in-mall advertising, and we did that in the third quarter of last year in 1 market. In the first quarter of this year, we -- and bleeding some into the second quarter, we have -- we spent -- basically, in the second quarter of this year, we did that same thing in 2 additional markets. So we basically didn't spend marketing dollars in the first quarter and spent them in the second quarter, so that -- that part of it's timing, but it also is related to this more traditional advertising in 2 markets.

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

And just to refresh our memories, that more traditional advertising, is that print? Is that broadcast? I mean, what are you referring to there?

W. Douglas Benn

It's billboard and outdoor and in-mall advertising, basically. The campaign was pretty unique. It was focused purely on brand awareness. There was no offer, no call to action, really no copy on the ads. And we saw -- did see a sales lift in both markets, certainly saw a sales lift. And as a result, we believe the campaigns did help to drive brand awareness, which we were -- in those markets. So we were very pleased to have achieved our objectives there, and we continue to evaluate just the overall effectiveness of this type of marketing of our brand.

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

Did the marketing give you a tail as well, after the campaign ended?

W. Douglas Benn

Yes. It does. To some extent, yes.

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

Okay. And then just for some help on preopening cadence in the second half of the year, is there anything you can tell us about how we should think about that?

W. Douglas Benn

Yes. I would say that roughly evenly split, with a little bit more of it in the fourth quarter. So somewhere between $4 million and $4.5 million or something is a number that is in our model for the third quarter, and a little bit higher than that in the fourth quarter.

Operator

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

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

Most of my questions were answered and asked. But just had a couple of follow-ups here as far as the guidance. Are you using a $0.54 or a $0.52 number from the current quarter in your $2.10 to $2.15 for the full year?

W. Douglas Benn

We're using the $0.54. So we're carving out the impairment charge.

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

Thought so, okay. And then as far as, can you talk about -- you talked about the year-ago 2.5% being the tougher among the quarterly comps. But how about -- how did that look throughout the quarter? Is July the toughest year-ago compare within the 3 months? Or is it pretty even 2.5% throughout the quarter that you're lapping?

W. Douglas Benn

As I remember, September was the best month. Is that right, Jill? That's when we did our -- this marketing. I'm not saying it's really that, but that is when we did the marketing. And I think that September is the best month of the quarter.

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

Okay. So presumably, above 2.5%. And you don't have any plans to do similar marketing to offset that or to meet that?

W. Douglas Benn

We don't currently, no. And I wouldn't bank too much on what the marketing did for that last year. I mean, that's just -- that is the quarter it happened, and it affected something like 5 restaurants.

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

Okay. And then just as far as anything unique in G&A that we should consider in the back half of the year? Or I guess, are there any sort of initiatives that you're looking at to do or any investments or anything to consider in that? Or is that just pretty much standard as the comp goes -- if the comp's better, you're going to have a little bit higher compensation; comp misses, you're going to have a little bit lower compensation being the biggest variable?

W. Douglas Benn

I think that's one of the biggest variables. I would tell you that when all the dust settles on the year, we're expecting G&A as a percentage of sales to be higher for the year, primarily because of the investment we are making for the first time in an international department, if you want to call it that, 3-person department. But for -- really the key to remember for the year with respect to margins and just outside of G&A is that we expect to see another 50-basis-point improvement in margins, overall operating margins for the year. So every line item, pretty much, other than G&A, certainly cost of sales, labor and other operating expenses, we would expect to be better for the year than last year and have 50 basis points of overall improvement, despite the fact that G&A will be somewhat higher as a percentage of sales than last year.

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

Okay. And then lastly, David, I guess, just looking at the comment, I appreciate you saying sort of that you're looking for that goal to get back to double digits would be ideal. Is the governor still sort of the overall economy providing those A sites? Or is it something else out there that you think that you just want to, maybe the comp -- you want to deal with what you have now and get the comp up to 170 before you start going ahead. I'm just curious what might be the governor to getting to 10-plus stores in 2014, if there is one.

David M. Overton

It's purely the economy, finding what we believe is an A-plus site. And even though Louisville -- no, excuse me, Knoxville, it would seem -- it's where our smaller unit we build. I think that one there's about 8,000 square feet. We have been doing over 250,000. That won't last, but in that small restaurant. So again, I think we're picking communities in areas that need us, that we think we'll do well in, that the landlord was willing to add square footage onto their center, and we came in to a huge success. So really, it's just still, it's having landlords build or expand their projects. As we've said many times, we know where all the circles are on the map, where we can do 8 million, 9 million, 10 million, 12 million. It's just waiting for a project to be built in those areas, and then we're always successful.

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

If that doesn't come around or if the economy doesn't come around, and it's looking like that for the next couple of years, what would you -- would you consider the question prior, which was, I guess, earlier on the call about leveraging up and maybe getting more aggressive with buying back your stock and using not only your cash flow but also using your cash flow to finance higher levels of debt to buy in more shares?

W. Douglas Benn

I don't -- can't see us really -- not leveraging in a big way to repurchase shares. I would think that we will have the levers that we need to pull. Right now, if you look at mid-teens earnings per share growth as our goal and what is supplying that growth, the margin growth has been a big piece of it. Share repurchases have certainly been a piece of it. But the pace of domestic development has been slower than what we want, and they're still...

David M. Overton

Still better than what it used to be.

W. Douglas Benn

Better than what it used to be, but slower than what we want. But we're still going to be able to accomplish the goals because there are other things. International development is contributing more in royalties than what we need it to contribute in order to achieve that mid-teens earnings per share growth. So if we don't get it in domestic development -- and frankly, the difference between growing 8 to 10 new restaurants next year and, just making up numbers, 10 to 12 new restaurants next year, is not that big as far as the earnings per share that certainly that will generate next year, but not that big, really, looking forward. So the fact that we're a little bit behind where we would like to be or our model would say on domestic development, that's not impacting whether or not we're able to achieve the goals that were set for ourselves.

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

Correct. I'm just wondering about the capital allocation and optimizing your capital allocation. That's all.

W. Douglas Benn

I wouldn't see us borrowing money in large amounts to repurchase shares.

Operator

Your next question comes from the line of Andy Barish with Jefferies.

Andrew M. Barish - Jefferies LLC, Research Division

Two quick ones. With some time under your belt now for SkinnyLicious, can you give us an update in terms of what that's mixing and sort of some impacts? Is it -- I assume it's gross margin positive, but what it's maybe doing on check mix. And then secondly on the relos, are there -- those are a couple of your older units. Are there a couple of more leases coming due maybe next year? And did the relos stay in the comp base when you move them so close in a trade area?

W. Douglas Benn

That's a good one. So why don't I answer that one first. I don't know that I can remember all the questions. But here's what we plan on doing with respect to the comp base. We don't plan to include relocated restaurants in the comp base, primarily because it's very hard to know how comparable the new restaurants would be. The size of the restaurant could be different. The trade areas, while better, are different, too. Given that we're only talking about a very small handful of restaurants, it really doesn't have a material impact one way or another whether we include it in the comp base or not. So we've decided not to include it in the comp base. With respect to the mix of SkinnyLicious, we've never specifically talked about what the mix of the SkinnyLicious menu is. I think the popularity of the SkinnyLicious menu, we know that there are more and more orders coming off of the SkinnyLicious menu. We are innovating and continually making changes to that menu, as we would with respect to the menu as a whole.

David M. Overton

Clearly, we're appealing to a different customer, the baby boomers, people that want to eat lighter or are watching their calories. And so we're the great celebration restaurant, we're the great -- lots of calories for really incredible, delicious food. So having SkinnyLicious really attracts a different guest. And I think it's important going into the future that we have it. I think it's doing well. And many people, again especially baby boomers, that still go out to restaurants quite a bit, really appreciate it because they can eat the kind of portion they're used to.

W. Douglas Benn

And the items are priced on that menu, Andy, to yield full margins for us. So we're indifferent whether they order off of our regular menu or our SkinnyLicious menu. We just want them to come in and be highly satisfied with their dining occasion.

Operator

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

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

The question is, I guess, on the industry but maybe specific to Cheesecake as well. David, I think I've heard you talk about in the past about how the Cheesecake Factory customer is particularly affected by things like stock market values, maybe even home prices. That they're a little bit more kind of focused on their balance sheet than necessarily employment than some customers are. And I don't mean to paraphrase you poorly with that.

David M. Overton

No, I think that's exactly right.

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

But when we -- so can you -- I mean, one, can you compare this current environment relative to other environments that you've seen? And given the fact that you do have more of a balance sheet focused customer, I guess to use that term, why you think there's been a slowdown in your business at all? I mean, if there is some macro effect that's out there?

David M. Overton

I still believe that it's exactly what you said in terms of our customer and what allows them to come in and when they feel like they can spend their money in restaurants. And so I really can't tell you what this little slowdown or whatever we want to call it, I don't know if you have any idea of what's happening just in this month, but we -- I couldn't tell you exactly what it is. Obviously, there was a lot of sports games. There were many things that happened during the quarter. But I can't give you an exact reason. Doug, do you have any?

W. Douglas Benn

No. I would say that I wouldn't -- I think that we're talking a lot about this. And our guidance for the third quarter is lower than maybe what you had expected it to be, but it's not that much lower. This is -- we're talking about something here that is representing more like 1% than we are talking about some big dip in consumer demand. So the fact that we can't exactly put our finger on that, what we can put our finger on and what we can measure relatively accurately is that, when business does improve, that we do better than the industry does. Because we've done it quarter after quarter, and I don't see any reason why that won't continue.

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

And if I can ask, I mean, with your co-tenants or the mall developers or developers in general, I mean, are you seeing just some reallocation in spending towards other retail or durables? Or anything -- I mean, are you hearing anything anecdotal from any of your co-tenants in the properties where you're located, whether they're doing better or worse relative to what they thought over the past 45 days, obviously without mentioning anyone specifically?

W. Douglas Benn

We have not heard any of that.

David M. Overton

We're too competitive to hear much.

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

Not necessarily in restaurants but just other retailers, for example, that you share these A-plus spaces with.

David M. Overton

I'm sure we could ask but we haven't heard anything other than looking at the general news is that retail -- fashion and retailers are down a little bit, too. So again, I don't know. I can't answer that. I'd love to.

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

And no, I don't have an answer to your question, which is why I ask. I think it's something that we're all struggling with now.

David M. Overton

Yes, me too.

Operator

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

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

I'd like to focus on relocations for a bit. The -- and I always love it when people ping me right when I get on the question. So Doug, a technical question is are the -- we took the write-off here, but are the assets depreciated for tax purposes and so there's no tax cash benefit from these relocations?

W. Douglas Benn

All of the assets are depreciated differently for tax purposes.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Right. So I'm assuming they're all fully depreciated for tax purposes. So this isn't a tax event?

W. Douglas Benn

This is not a tax event.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Yes, okay. And then looking forward, obviously, given the timing of sort of the emergence of and early rounds of growth for the brand, that we're going to be hitting the 20-year mark on an increasing number of restaurants over the next few years. Would you expect similar kind of write-offs for those that you choose to relocate rather than re-up the lease?

W. Douglas Benn

Well, there's always going to be furniture fixtures. Part of the decision that's made as you're getting into an older property is how much investment do you make in that. So you have to kind of plan out whether or not you are planning to stay or you're planning to leave. You wouldn't probably want to buy a brand-new piece of equipment 6 months before your lease was going to expire. So -- but you can't do that perfectly. It's not a perfect thing. So there's always going to be some kind of write-off associated with closing a restaurant. With that said, looking forward to say just through next year, I see at most like 2 more of these that we could have -- we could be "relocating."

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

At most. A year or in the whole portfolio?

W. Douglas Benn

For the whole portfolio. I mean, we know when leases are expiring. And next year, there's really, I would say, between now and the end of next year, probably 2 more.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Okay. And I guess, when we think about sort of intermediate-term growth, so should we think about a couple closures for relocations as part of the sort of store count growth and that part of the algorithm?

W. Douglas Benn

I don't think that's going to be a material amount. So if you factor in like 1 closure a year and say that whatever you're going to put in your assumptions for new unit development, if you want to say one of them is a relocation. Now you got to keep in mind that, that's not like -- it's a little bit like a new opening. If we make a decision not to renew a lease or not to take an option on a lease, it's because we think we can do a lot better in some other location that is nearby, where we would call it a relocation. So it's not a -- that we lose all the profitability from one place and we don't gain more than that in the other. So it's a little bit like a partial opening. You can look at it that way.

Bryan C. Elliott - Raymond James & Associates, Inc., Research Division

Yes. I'm just thinking about sort of selling space growth rate, that sort of thing. But -- so a modest impact is the net on that. Maybe an attempt at -- a bad attempt at a little levity. So you said you can't foresee the company borrowing money to repurchase shares. If you ended up all of your free cash flow going into share repurchase, could you envision borrowing money to open highly profitable and high-return restaurants?

W. Douglas Benn

Yes. Let's go back to capital allocation from the beginning, step a, b, c in capital allocation. Our number one thing that we want to do is to build new restaurants. So if we found 20 locations that we thought were A-plus and we spent the majority of our cash that year on doing new locations, then that's what we would do. And that would lower -- we wouldn't change our dividend, that would lower whatever -- the only other thing that's left to lower, which is the amount of our share repurchase that year. So that's the way we look at them. First allocation of capital is to invest in these high-returning assets. Then after that, the remaining cash flow, making a decision on what portion of that should be allocated to shareholders in the form of dividend or share repurchases. I think if you look historically at what we've done over the last 4 or 5 years, we've returned 100% of our cash to our shareholders. We don't keep any cash on the balance sheet that's building up.

Operator

Your last question comes from the line of Paul Westra with Stifel.

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

A couple of last ones. One, on the commodity cost, can you just dive in a little bit more on where you saw the benefits and it's probably next year [ph], and maybe some preliminary thoughts on '14? Or at least comment maybe on the [indiscernible] corn, soy and wheat [ph]. And is there anything that should stop us from believing that '14 wouldn't be a relatively benign outlook?

W. Douglas Benn

I think that '14, from what we know today, is shaping up to be a good year from a commodity standpoint for us. Your question -- you were cutting in and out just a little bit. What was it, Jill?

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

It was just more on this year's commodity cost, you reduced your outlook for the year a little bit here. Where did that come from versus your prior?

Jill S. Peters

It's mostly coming from dairy, Paul.

W. Douglas Benn

Oh, is that what he's asking? Okay, sorry.

Jill S. Peters

So now we're expecting about 2% food cost inflation versus the 2.5%, where we were in April, which [indiscernible] dairy.

W. Douglas Benn

And we benefited a lot from that in the first half of the year, we'll benefit some from it in the second half of the year. And we expect overall cost of sales for the year to be lower than they were last year.

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then maybe just to wrap up with one final question on the environment on [indiscernible] categories. [indiscernible] Hopefully, [indiscernible] drop off. It sounds like maybe you're clear [indiscernible] you guys are about it? Or are you seeing some like competitive knee-jerk reactions to some of this stuff [indiscernible] that's been out there? I mean, maybe offer indication as to what maybe the rest of the group feels about that?

David M. Overton

Paul, we can't really understand your question. It's -- you're going in and out, so it's very hard for us to understand what you're really asking us. I don't know...

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

I apologize for all the distractions. Are you seeing a reaction, a knee-jerk reaction from the current softness or flippy [ph] environments from your peers? Or are you seeing more levelheaded reactions like yourselves?

W. Douglas Benn

I can't really comment on what they're doing. It's such new news. I don't really have a comment about that.

Paul Westra - Stifel, Nicolaus & Co., Inc., Research Division

You're not seeing any near term spiking in price promotion activity or any other shorter term efforts from your -- in the marketplace?

W. Douglas Benn

Yes. I would say most of the casual diners really haven't even reported yet. I think as far as casual dining goes, that we're the first casual dining restaurant company to report. I know Panera and some others that are in fast casual reported, but we're the first one. So we'll be interested to hear what others are saying.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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