The Cheesecake Factory's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: The Cheesecake Factory Incorporated (CAKE)
by: SA Transcripts

The Cheesecake Factory Incorporated (NASDAQ:CAKE)

Q4 2013 Earnings Conference Call

February 12, 2014, 05:00 PM ET

Executives

Jill Peters - Vice President, Investor Relations

David Overton - Chairman and Chief Executive Officer

David Gordon - President

Douglas Benn - Executive Vice President and Chief Financial Officer

Analysts

John Glass - Morgan Stanley

Michael Kelter - Goldman Sachs

Joe Buckley - Bank of America Merrill Lynch

Jeffrey Bernstein - Barclays

David Tarantino - Robert W. Baird

Jeff Farmer - Wells Fargo

Brian Bittner - Oppenheimer & Company

Nicole Miller - Piper Jaffray

Andy Barish - Jefferies

Sharon Zackfia - William Blair

John Ivankoe - JPMorgan

Matthew DiFrisco - Buckingham Research

Bryan Elliott - Raymond James

Karen Holthaus - Credit Suisse

Stephen Anderson - Miller Tabak

Will Slabaugh - Stephens Inc.

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 The Cheesecake Factory earnings conference call. My name is Jackie, and I will be your coordinator for today. (Operator Instructions) I will now like to turn the presentation over to Ms. Jill Peters. Please proceed.

Jill Peters

Thank you. Good afternoon, and welcome to our fourth 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; David Gordon, our President; and Doug Benn, our Executive Vice President and Chief Financial Officer.

Before we begin, let me quickly remind you that during this call, items may be discussed that are not based on historical fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available in the Investors section of our website at 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 Overton will start-off the call today with some opening remarks. Doug will then take you through our operating results in detail and provide our outlook for both the first quarter of 2014 as well as the full year. Following that we will open the call to questions.

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

David Overton

Thank you, Jill. As we think about the fourth quarter and 2013 overall, there are some key points that I want to highlight.

First, we've just completed our fourth straight year of delivering positive quarterly comparable sales at full margins without discounting. And we outperformed the casual dining industry nearly every quarter during this time period, including in the fourth quarter of 2013. Excluding the weather impact, our comparable sales in the fourth quarter were within our expected range, despite the softer retail sales in the malls this holiday season.

Second, we grew operating margins by about 40 basis points in 2013, as we make ongoing progress toward our goal of recapturing peak operating margin levels. Third we continue to expand in 2013 with the opening of nine company-owned restaurants, including two restaurants with record setting opening week sales and three relocations that are delivering higher sales volume than their previous locations were.

In addition, the Cheesecake Factory entered a new country last year with the opening of a restaurant in Saudi Arabia, under a licensing agreement. The restaurant opened to long waits and huge demand. And finally in 2013, we returned over $210 million in cash to shareholders through dividends and share buybacks.

Overall, 2013 was a solid year. Our business is healthy, we are competitively well-positioned and our execution remains strong, translating into dependable performance. We achieved a significant milestone to start-off 2014, being recognized by Fortune Magazine as one of the 100 best companies to work for. We are honored by this and I am personally very gratified.

We have the best talent in this business and our leadership position in casual dining is made possible by more that 33,000 people who work here. The recognition from Fortune acknowledges the hard work and commitment of our team, and we believe that this will help us to continue to attract and retain the best talent in the industry.

This year, we expect to open as many as 10 to 12 company-owned restaurants in a mix of new and existing markets, including one relocation consistent with the plans we shared with you in October. Our first new restaurant of the year opened yesterday in Syracuse, New York. The timing of international openings is subject to change for a number of reasons. However, we continue to expect as many as three to five restaurants open in the Middle East and Mexico, under licensing agreements.

We anticipate that 2014will be a solid year for us with a nice acceleration in both our domestic and international expansion plans. In addition, we're looking for continued comparable sales out performance relative to the industry, growth in earnings per share and again returning a healthy amount of cash back to shareholders.

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

Douglas Benn

Thank you, David. Total revenues at the Cheesecake Factory for the fourth quarter of 2013 were $475.1 million. Revenues reflect an overall comparable sales increase of 0.9%, which includes a significant impact from severe winter storms that affected our restaurants, primarily in the Northeast as well as the Midwest.

The inclement weather reduced comparable sales by approximately 70 basis points. We believe a better measure of the underlying strength of our business is to look at our comparable restaurant sales without the weather disruption, which reflects an increase of 1.6%.

Comparable sales increased 1.1% at the Cheesecake Factory and declined 1.1% at Grand Lux Cafe. The Cheesecake Factory continues to outperform the industry, while Grand Lux Cafe's sales performance is more in line with the industry. External sales at the bakery were $17.1 million for the quarter.

Cost to sales was down 140 basis points in the fourth quarter of 2013 at 24.4% of revenues versus 25.8% in the prior year quarter. The favorability stemmed primarily from a mix shift between bakery and restaurant sales as well as continued lower grocery costs with favorable wheat and corn prices benefiting items, such as pastas and oils.

Labor was 31.6% of revenues in the quarter, 30 basis point higher than the fourth quarter of the prior year. Labor productivity was impacted by reduced efficiencies brought on by the winter storms, which was partially offset by the benefit from a bakery sales mix shift.

Other operating cost and expenses were 24% of revenues for the fourth quarter, up 10 basis points from the fourth quarter of the prior year. We did a pretty good job of managing other operating expenses, again considering the winter storms with workers compensation costs a little bit higher.

G&A was 6.2% of revenues for the fourth quarter, up 40 basis points from the prior year. The increase was expected and was driven primarily by higher equity compensation cost. Although we granted fewer shares of equity this year, our expense is starting to increase because lower priced options are now dropping off of our equity expense calculations.

Depreciation expense for the fourth quarter of 2013 was 4.3% of revenues, up 20 basis points from the prior year period. The increase was driven by timing of depreciation expense on IT asset replacements as well as some deleverage on lower bakery sales.

As noted in our press release, we recorded a net pre-tax benefit of $3.8 million during the fourth quarter related primarily to the relocation of two Cheesecake Factory restaurants. In connection with the early termination of one of our leases, we received financial consideration from the landlord in the amount of $4.9 million. This was offset by $1.1 million of asset impairment and accelerated depreciation expense.

Pre-opening expense was $4.9 million in the fourth quarter of 2013 versus $4.8 million in the same period last year. We had six restaurant openings in the fourth quarter of 2013, including three relocations versus four opening in the same period of the prior year.

For the full year our tax rate was 26.9%, better than our expected rate of about 28%. The primary reasons are significant gains on our investments used to support our deferred compensation plan, which are non-taxable and lower state income taxes than expected.

In summary, the fourth quarter was solid relative to industry trends and within our expectations. Weather disruptions present many challenges for restaurant operators and our team prudently managed their restaurants. The winter storms cost us approximately 70 basis points in sales, equating to roughly $0.02 in earnings per share.

Cash flow from operations for the full year 2013 was approximately $205 million. Net of roughly $106 million of cash used for capital expenditures, we generated about $99 million in free cash flow for the year.

During the fourth quarter, we repurchased 1 million shares of our common stock at a cost of $48.1 million. For the year, we repurchased 4.5 million shares of common stock for $183.7 million, together with dividends we returned $211 million in cash to shareholders.

That wraps up our business and financial review for the fourth quarter of 2013. Now, I'll spend a few minutes on our outlook for the first quarter 2014 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 associate with holidays and know weather influences.

For the first quarter of 2014, we estimate diluted earnings per share of between $0.48 and $0.50, based on an assumed range of comparable sales between flat and up 1%. Bear in mind, the following items with respect to our comparable sales assumption range. First, we estimate that approximately 50 basis points in sales will shift from the first quarter to the second quarter of 2014, due to Easter and the surrounding spring breaks taking place in April this year versus March last year.

Second we've seen a significant impact from the storms effecting the Northeast, Southeast and Midwest quarter-to-date. As a result, we factored in a 90 basis points impact to our comparable sales assumptions for the impact of storms that have occurred through yesterday.

We are maintaining our guidance for the full year 2014 with estimated diluted earnings per share in a range of $2.29 to $2.41 based on an assumed comparable sales range of between 1% and 2%. We expect that our trend of comparable sales out performance relative to the industry will continue and while the high end of our range assume to comparable sale accelerate relative to 2013, we believe it is reasonable and achievable.

Our outlook for food cost inflation in 2014 has improved relative to where we were last October. We're now planning for between 3% and 4% inflation in 2014. Our expectation for higher shrimp and salmon cost hasn't change much, but we are anticipating lower cost in a number of other categories.

With the downward revision in food cost inflation, we're now planning for menu price increases for this year of about 2%, in line with our historical practice as we try to balance our need for protecting margins with our desire to grow guest traffic.

As to our corporate tax rate, we expect it will be about 29% in 2014. As we noted earlier, we saw a substantial gains on our investments used to support our deferred compensation plan in 2013. We are not assuming a repeat of this in 2014, thereby reducing our expectation for non-taxable gains. In addition, the Work Opportunity Tax Credit has not renewed for 2014, so our estimated tax rate does not assume a benefit from this program.

Our total capital expenditures are now expected to be between $110 million and $120 million for planned 2014 openings as well as expected openings in early 2015. With respect to capital allocation, our earnings per share sensitivity range for 2014 assumes we will continue to use substantially all of our free cash flow for dividends and shareholder repurchases.

With that said, we'll take your questions. In order to accommodate as many questions as possible, please limit yourself to one question and then re-queue with any additional questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of John Glass with Morgan Stanley.

John Glass - Morgan Stanley

I'm going to try to finesse this just a little bit, Doug. Could you just clarify on commodities, they're more favorable than you thought, but dairy is probably the main one that's gone up significantly. So are you incorporating a view on dairy? And if you've locked in dairy, particularly cream cheese, or is that still a risk? That's the clarification. Just in terms of the traffic, there's been a lot of debate about mall versus non-mall performance. Can you, David or Doug, talk about the relative performance of your mall versus non-mall stores? Has there been any difference that would be notable?

David Overton

Yes. First of all, with respect to the commodity cost, they're better than what we thought they would be back last October, when we gave our guidance. And a few things have gotten better and that's what's allowing us to say that we're now planning for 3% to 4% inflation. Bread for instance, it's better than what we expected it to be, or some of our meat is better, some of our cheese is better, and some of our grocery items are better.

There is not any less risk, I don't think, associated with dairy. We are about a 50% contracted for 2014, which is consistent with how much we had under contract at this time last year. So the shrimp and salmon, we still expect right now, and based on what we know for to be, about what we thought it was going to be in October, but some other things have come down.

John Glass - Morgan Stanley

And then the mall versus non-mall stores?

David Gordon

This is David Gordon. We really didn't see any differentiation between the mall and non-mall. The majority of our restaurants are in mall locations, but for the most part, there really was no variability between the two.

Douglas Benn

You know, John, I think that a lot of people go window shopping and they go out to eat and they want to get out and it's an enjoyable evening. And then many of them will go back and order off the internet. So although sales might be down, many times there is a lot of people and they're really there to enjoy themselves eat and window shop. So we are really not noticing any difference even though mall sales have been down.

Operator

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

Michael Kelter - Goldman Sachs

I wanted to just continue that line of conversation around the shift to eCommerce. So are there things that you guys think about that you need to do differently if the current trends continue, whether it means proactively driving more people to your restaurants directly versus maybe relying on mall traffic? Or are there units you might need to relocate from maybe a B mall to an A mall elsewhere? Or anything else that you guys think about you need to do to adjust your business given the shift?

Douglas Benn

Not really. First of all, I don't think we're in any B malls, I think we're only in A malls. And we have our own door where we've always brought business to malls versus feeding off of there. It's nice to have shoppers there. It's nice to do at mid-afternoon, little extra business, but we're bus after the mall closes, we are busy with many, many people outside the mall.

So we don't really depend on malls. We like shopping, we don't like business parks, where lunch ends right at 2, but we're really a standalone restaurant. And when we chose a restaurant, Michael, we think of every -- we get parking, we get the door, we're looking for the outside area of the demographics and we really don't care that much, what the exact sales of the mall is.

Douglas Benn

I would even add that, even the times when the mall is not open, Sunday brunch we open at 10'o clock. The majority of our malls aren't open till 11'o clock in those days or late night when the mall is not open, but the traffic, the still destination traffic is still coming to see us, not necessarily mall traffic coming to shop within the mall.

Michael Kelter - Goldman Sachs

And then maybe the other side of the conversation on technology, one was the commerce threat that some perceive, and the other is the benefit. Just kind of curious to hear from you guys, a lot of restaurants are starting to talk more and more about loyalty apps, mobile payment, tabletop tablets; different things for different concepts. What does technology mean for Cheesecake?

David Overton

I think we're going to be careful when it comes to technology. The core of our business is wonderful hospitality and delicious memorable food. And our strategy is to improve in those two areas continually, as we have every year for 35 years. Where technology can add value to the guest experience, we'll be very careful and analyze that, something as simple as whether or not we would text paging in the market versus actually handing out pagers. But right now we don't have a roadmap that talks specifically about adding technology for the sake of adding technology.

David Gordon

And I doubt very much that we're going to do tablets. I think that's great for Chili's in that level, where people are coming in for one experience, but for us they're coming in for a different experience. And I think they want to waited on and serve. So there might be some things out there, but a lot of the things that people are talking about right now, I don't think will be right for our concept.

Operator

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

Joe Buckley - Bank of America Merrill Lynch

This may be obvious based on some of your comments, but did sales tail off as the quarter progressed? Was December noticeably weaker than the prior two months?

Douglas Benn

The answer to that is yes, October and November were the two strongest monthly sales that we've seen really throughout all of 2013. In fact, at the end of November, we not only had strong positive sales, but we had positive guest traffic as of the end of November. Obviously, with some help some lapping Hurricane Sandy from last year and December was soft due to the winter storms and we were also lapping our toughest comparison of the year in December, so that's kind of how the month-by-month within the quarter shook out.

Joe Buckley - Bank of America Merrill Lynch

And one more if I can. Would you comment on the relocations? I guess you have three of them now. And I don't know when they were done in the quarter, but most curious, I guess, on the sales lift you're experiencing?

David Overton

We're pleased with the sales lift we've seen in all three of them. They were spread out a little bit, one was at the beginning of the third quarter, the other two were in the fourth quarter. And all three of them have seen greater average weekly sales within their previous location, and they're all in terrific mall destinations within a mile to three miles of their previous location, and guest have been receiving them very favorably.

Joe Buckley - Bank of America Merrill Lynch

Can you clarify at all the sales lift, or is it too early?

David Overton

A little too early.

Operator

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

Jeffrey Bernstein - Barclays

Just two questions as well. First, following up from a comp perspective, you mentioned in the press release just about your particular strength in California. Just wondering if you can talk a little bit about whether you think that is a strengthening market in California specifically, or whether for some reason you're taking share in that market, and whether you can provide any other markets that skewed stronger or weaker?

It just seems like that even if you add back the weather, your comp for the full quarter would have been, I guess a 1.6%. And your guidance for the full quarter, that would be at the very low end. So just trying to figure out ex the weather, what might be some of the other drivers have been and what particular markets might be impacted in that? And then I had a follow-up.

Douglas Benn

As you'd expect the regions that were impacted the most by the winter storm were the softest, that's the Northeast, the Mid-Atlantic, the Mid-West. But California has been an area of strength for us for quite a number of quarters in a row now. So that's our largest market. So they were up. The Southeast was very strong as well as was Florida. So we didn't really see any big changes geographically, other than for the weather than what we've been seeing in general during the fourth quarter.

Jeffrey Bernstein - Barclays

But do you think its Cheesecake specifically in California doing something different? I don't know if the whole market is just getting better and all your peers are seeing the same thing, or whether you think you're taking share from those competitors.

Douglas Benn

I think we're talking share from competitors in California.

Jeffrey Bernstein - Barclays

And the fact that I guess later on in the quarter, I think that the comp was kind of at the low end of the range. I didn't know whether you attribute that to anything in particular, other than the weather, because I know you've kind of guided us last quarter based on what you knew through that date. It seems like it might have slowed; I wasn't sure if there was anything else to attribute that to?

Douglas Benn

I don't have anything specifically to attribute it to, if we take out the weather, it was within the range, and so we would like for it to be at the high-end of the range, but I don't know that I have anything in particular to attribute that to.

Jeffrey Bernstein - Barclays

And then just the other question was at the international, I guess it's still 3 to 5 units and you kind of mentioned that it's very difficult for you guys to forecast it, being that you're not the person opening those units. But I know your first few units were so much stronger than most people would have anticipated, whether these units are similarly going to be on the corner of Main & Main, and therefore pushing closer to $0.02 per unit to earnings rather than kind of your run rate due to some longer-term or more like a $0.01 per unit per year in opening?

Douglas Benn

I would say that the way that we've modeled it, is we don't model it as if there going to be a $0.0150 or $0.02, but we are, when we open an a new market like Saudi Arabia, we are getting one of the best locations in this markets and we are doing substantially higher volume. So could that continue? Yes. I mean, we have opened our first restaurant in Mexico.

We don't really think right now, that Mexico is going to be a stronger market as Dubai was, but we don't really know. So it's a brand new market. When it's a brand new market, we're very well known, and there is some pre-soldness if you will to our coming there and some anticipation. So they could open up higher, but we model it as if they do average about what they average in the United States.

Operator

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

David Tarantino - Robert W. Baird

Doug, just a couple of clarification questions. First on the comps, when you quantify the weather impact, is that just the weather impact from the storms in December, or did you net out the benefits from cycling Hurricane Sandy?

Douglas Benn

No, we didn't net out the benefit. We included that benefit into the guidance that we gave of 1.5 to 2.5, so we did that and so that was incorporate in the guidance. And so what we did it was just add back the negative weather for December.

David Tarantino - Robert W. Baird

And then could you break out the check and traffic? I might have missed that, but did you give those two components?

David Overton

No. I didn't give it yet, but that I can do that no problem. So the traffic was down about 1% and price was up about 2%, so mix was about flat, just slightly negative mix. Mix has been about flat for four or five quarters in a row now. So that's a good trend. So get traffic back to closer to flat will have a very strong comp store sales.

David Tarantino - Robert W. Baird

And then one question to help reconcile the earnings for the quarter. If my math is correct and adjusts for the tax rate, it looks like earnings came in about $0.04 below the low-end of your guidance, again adjusted for the tax rate, and weather issues, you mentioned were $0.02 of that. And I'm just wondering what the rest of it might've been. And then possibly was it related to bakery sales or other factors that are outside the restaurant?

Douglas Benn

Some of those were related to bakery sales. All those numbers that you threw out, that they're estimates, what I would say that that the roughly the lower tax rate offset the negative from the weather, but we also did have a few other things that were higher from a timing perspective than what we originally thought that would be.

For an instance, in G&A, legal and professional fees we're a little bit higher this quarter and G&A was up more than what we anticipated on. So with respect to that, that was maybe 10 basis points, so there is some other smaller things in there, but generally the quarter, you could say that the tax rate of change offset the impact of the weather, because the weather might have been a little more than $0.02. I mean there some rounding in there too.

Operator

And your next question comes from the line of Jeff Farmer with Wells Fargo.

Jeff Farmer - Wells Fargo

Just following-up on the earlier international question. As you guys pursue additional development in new markets, do you have an opportunity to leverage that existing infrastructure you have in Calabasas or do you expect to add, I guess, incremental investment sort of lockstep as you enter those new markets? I'm really just trying to get a better read on how much leverage there is on this international business as you continue to expand?

Douglas Benn

We sort of did a step function increase in our international investment in 2013, when we set up an international department. So as we add new restaurants, where we have to add additional people international, but certainly not initially. There is people throughout the company that are in purchasing and other areas of the company that involved international that that impacts their day jobs, if you will, and there is some headcount that has already been added or might be added associated with that, but the majority of international G&A was put on board this year.

Operator

And your next question comes from the line of Brian Bittner.

Brian Bittner - Oppenheimer & Company

Just a clarification question, Doug. Is the 90 basis points that you have assumed have been lost from weather in the first quarter. Is that what's been lost so far just based on storms that have happened or does that anticipate further lost sales from potential storms that could arise like the one coming now?

Douglas Benn

As I said in my prepared remarks, what I said was that that incorporates all of bad weather through yesterday. So we didn't factor in any extraordinary weather events that hadn't happened yet through yesterday. So I guess what another way of saying that we're assuming a normal winter weather pattern for the rest of the quarter. Not that there would be no weather but it will be a normal weather winter weather pattern.

Operator

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

Nicole Miller - Piper Jaffray

For the 10 to 12 stores this year, can you talk to us about the cadence by quarter, and then also where they will be geographically?

Douglas Benn

On the back quarter, we would expect more restaurant openings in the first half of the year of this year than we did last year, so maybe two or three of them opening in the first half of the year. We already opened the one in Syracuse, as we said start. Geographically, the mix is all over the place.

Nicole Miller - Piper Jaffray

So we just want to adjust, obviously, our pre-opening then accordingly, right, but there will be more in the first half this year?

Douglas Benn

Yes, I would. I'd adjust the pre-opening. Obviously, part of what's impacting year-over-year earnings per share in the first quarter is the fact that we had more pre-openings expense in the first quarter of this year than we had in 2013. So yes, you would need to front-end load it just a little bit more I wouldn't go overboard on that, because out of the ones opening at the second half of the year, I'd probably put more of them in the fourth quarter than in the third quarter.

Nicole Miller - Piper Jaffray

And then just real quick on the comps. If you look at January, February, March of last year, can you give us an idea of what was the easiest and what makes the most difficult compare as you cycle through this quarter, please?

Douglas Benn

Well, March is definitely the most difficult compare. I'm trying to find exactly where that is in my notes here, but March is definitely the most difficult compare. Hold on just a second. Because if you remember last year in March is when Easter happened and spring break happened, and that is a big benefit for us, when those things happen, is doesn't seem to be the same or as a big a benefits for others, but it's a big benefit for us.

So we know that we're going to be down in March relative to last year more than likely because we're not going to have spring break to rely on in March this year, we'll have it to rely on in April. So we would expect April would be up compared to last year. So basically March was by far the best month in the first quarter last year.

Operator

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

Andy Barish - Jefferies

Should we kind of think about '14 as a pause in your margin progress back to peak margins, just given some of the commodity inflation and some of the labor stuff that you've talked about in the past?

Douglas Benn

Well, as you've said, we've done a good job of improving operating margins in the past five years and 40 basis points since 2013. In 2014, we are still modeling that we're going to get a slight improvement in operating margins this year. Maybe a-tenth, maybe two, but not as big as what it was.

We're expecting an increase on the cost of sales line, because that inflation is more than the menu pricing that we're going to take. We're expecting G&A to be up, but we're expecting to have higher margins, lower costs on the other line items in the P&L such that we'll get, I would think by the end of the year a slight benefit.

Operator

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

Sharon Zackfia - William Blair

Doug, maybe you could kind of expand upon what the California minimum wage increase in the back half of the year, it sounded like maybe you were expecting labor to be favorable this year. Are you going to take more priced in California, when you think about that? And then I think on the last call you had kind of left open the question as to whether or not you would price shrimp and salmon kind of more aggressively this year. And I'm not sure if you kind of commented on that specifically?

Douglas Benn

So let me talk about that first, we are in an environment now where we're expecting lower commodity cost inflation than we expected in October. So with that we've decided the go more back toward our historical pricing of taking 2% pricing. When we were talking about pricing to shrimp and salmon we've ever talking about just a little bit more pricing, two in a quarter percent or so.

Well, in the environment that we're in and the sort of sluggish consumer environment, we would rather not raise prices anymore than we have to. And so we're going to go as opposed to still doing that more heavy pricing, we're not going to do that, we're more going to go to historical pricing. And then, the first question, again, remind me.

Sharon Zackfia - William Blair

California, minimum wage.

David Overton

Yes. The minimum wage, it obviously is going up in California. This year we factored that in to our guidance. It goes up on July 1. Right now we factored in between $2 million to $3 million in pressure for minimum wage increases, mostly in California. And we've factored that in and that's in the guidance that we gave.

Operator

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

John Ivankoe - JPMorgan

Actually, just a question on weather, and there's been kind of a lot of talk about it, and I just wanted to ask something slightly differently, and hopefully not too nitpicky. With a lot of the West Coast having record dry and record warm weather, we used to talk a lot about patio sales that either benefited or were perhaps negatively impacted, if there was a lot of rain for example in those markets. Were you able to look at like things like productive patio seating, especially during some of the weeks like in December, when you were the most busy when arguably the weather was the best or I guess the most abnormal?

Douglas Benn

John, in California, the weather has been pretty consistent for the past two to three years, so our patio capacity has been pretty stable for the past two or three years. So I don't really know that we had any real benefit, because we just didn't lose it. And 2013 I think was the least amount of rain on record in California, but the year before was probably the record before that. So we didn't really lose any weather and we used those patios to their full capacity as much as we could.

John Ivankoe - JPMorgan

And then secondly, if I may, really quickly on bakery sales, obviously, I mean that's always kind of volatile. So is there a good outlook in 2014, does that continue to grow? And if I may, how much did what looks like less bakery sales in the fourth quarter, how much did that affect COGS and labor, so I know that the movement in that line affects other lines around your P&L?

Douglas Benn

So the mix of restaurant sales to bakery sales, so bakery sales were down, restaurant sales were up. So the mix skewed more heavily toward restaurants. And that out of the 140 basis points of cost of sales benefit compared to the previous year helped by about a 100 or 110 of that. So it was a pretty big piece of the cost of sales improvement. Now there were some other reasons cost of sales improved as well, but that was the biggest.

With regard to bakery sales, for the last few quarters there has been a decline in external bakery sales and that we have talked about, stems from lower sales to warehouse clubs. And our bakery team has been working to identify additional distribution channels with a better mix between sales volume and profit.

You could say that we're migrating to a broader sales portfolio with less concentration and higher profit margin. So if we broke out the profit associated with the bakery, it's not down anywhere near in line with what sales are. In fact, profitability in many aspects is improving. So we would expect this approach, this broader sales approach with less concentration, higher profit margins will help stabilize, and we expect year-over-year bakery sales by certainly about the second half of 2014 to be much more stable.

Operator

And your next question comes from the line of Matthew DiFrisco with Buckingham Research.

Matthew DiFrisco - Buckingham Research

Just have a couple of clarifications and I do have a question. I know how you love to talk about the same-store sales in-depth here about the guidance. I don't mean to be harping, but as far as what you took into account, I just want to clarify. I would assume Valentines moving to a Friday from a Thursday, something like that impacts comps in the outlook as well as something the nor'easter last year, I think it started in February 8 and ended around 11 or 12. So I am curious, all those factors are included sort of in that 0.9 drain or weight on the comp guidance?

David Overton

Let me answer them one at a time. So we have factored in the shift of Valentines Day into our comp guidance. That's obviously not a positive. Valentines Day obviously the busy holiday and it's shifting to an already busy day in the week. So that's in guidance. And you mentioned there are other nuances as well in the guidance that we gave, all of which has been incorporated. For instance, we were lapping 60 basis points approximately. And bad weather impact from last year that helps our comparison this year, and we've already benefited from a lot of that in the quarter, some more to come. But that's all factored into the guidance that we gave of the 0% to 1%.

Matthew DiFrisco - Buckingham Research

And then, as far as your guidance, I heard in the CapEx, it sounded like you lowered that on the high-end by $10 million, the CapEx. I didn't hear free cash flow. Did you improve your outlook for free cash flow as well?

David Overton

We think free cash flow is going to be about $120 million for the year, and I think we just tightened up our capital expenditure thoughts for the year and that's why the top-end of the guidance came down.

Matthew DiFrisco - Buckingham Research

And the last question I have I guess, with respect to the smaller store formats, you've had a couple of stores now open, the 8,000 square foot store for approaching about a year or so now and/or a little over a year. Stores like in Tennessee, are you seeing the similar type of consumer? Is there any difference in that consumer when you open up in smaller markets? Is it in income-wise on a relative basis to that region? Is the brand being used any differently or is there any sort of physical appearance you think that is making the brand get used differently with a smaller format versus the more grand-looking stores?

David Gordon

I think even though those restaurants are smaller format, they are still just as grand. When you walk inside, they are still beautiful and the guest feedback is tremendous. I'd say that those guests are behaving, acting and purchasing just the same way that all of our guests have in all the other locations, and that's really positive. Those are some of the best openings that we've had over the past few years or in those markets. And Syracuse continues to be another one. We're off to a great start there as well.

Matthew DiFrisco - Buckingham Research

Doug, just clarifying, when you relocate a store are those new stores? Are they included in the comp base or are they left out of the comp base?

Douglas Benn

They are left out of the comp base. It's hard to know how comparable the new restaurant would be, the size could be different, the trade areas as well better or they're different too. And given that we're only talking about a handful restaurants, really doesn't make a material impact one way or another.

Matthew DiFrisco - Buckingham Research

I'm just trying to figure out average weekly sales versus same-store sales and the gap there. I would assume you're taking out underperforming, not underperforming, but softer versus the store that's replacing it, which isn't in the comp base. So in theory your average weekly sales would potentially outpace your same-store sales?

Douglas Benn

Yes, it will. So this quarter average weekly sales were up 2.4%. So they are outpacing same-store sales. But the reason for that, remember we discontinued the operation of three underperforming Grand Lux restaurants in the first quarter of 2013, and that's not part of this year's average weekly sales calculation. And I think really in addition, the performance of newer restaurants and the sales metrics associated with newer restaurants, including relocated restaurants has been strong, certainly above average. And that contribute some to that gap as well.

Operator

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

Bryan Elliott - Raymond James

And this is tongue-in-cheek, Doug, but did you factor in Atlanta being iced in for the next three days in your guidance?

Douglas Benn

I see you have power.

Bryan Elliott - Raymond James

We're ahead of expectations. I figured I had until maybe 2 o'clock this afternoon before one of the trees would take out my power, but it hasn't yet. But I expect to wake up in the dark tomorrow for sure. But anyway, I did want to ask about the bakery to clarify your comment there. Did I hear you right that you said the bakery profit was actually up year-on-year, despite the sales decline?

Douglas Benn

I didn't say that the bakery profit was up or down. What I said was the bakery profit, it was slightly lower, but it was not anywhere lower compared to the -- it was not commensurate with the decrease in sales by any means.

Bryan Elliott - Raymond James

So the margins were up.

Douglas Benn

Yes.

Operator

And your next question comes from the line of Karen Holthaus with Credit Suisse.

Karen Holthaus - Credit Suisse

Actually, another question on bakery. So in the first quarter it was profit dollars down, but not commensurate to revenues as we think about that through the balance of the year, is it a drag on profitability for another quarter or a drag on profits for another quarter? And then more EBIT neutral after that or is the drag going to continue into the back half?

Douglas Benn

We wouldn't expect there to be a drag on profit for the bakery in 2014. We would expect that we're doing other things in the baker with respect to sales, with respect to infrastructure to have it, so that there is at least past the first quarter not a drag on profitability.

Operator

And your next question comes from the line of Stephen Anderson with Miller Tabak.

Stephen Anderson - Miller Tabak

I remember last quarter you broke out the results for the Grand Lux Cafe and specifically for two of the locations in Las Vegas. Have you seen any improvement out of Las Vegas as that pertains to the entire system? And do you see opening any additional units this year? I think you mentioned that in the last call as well.

Douglas Benn

So Grand Lux was sort of down and more in line with the industry, and again there is only 10 restaurants in the comp base, the Las Vegas restaurants are the biggest ones. I don't think we gave specifics last quarter on Las Vegas, except we'd say that they were just a slight -- this quarter Las Vegas restaurants are down about 1%. So that's contributing, yes, its part of it.

But other restaurants are down because of the severe winter storm impacted them, and there is only 10 restaurants in the comp base. So they get affected more by events like winter storms. It's only down 1.1%. And we could say that 1% of that or so was attributed to Las Vegas, and then the rest are winter storms.

David Gordon

Three of those others are in the Midwest and the Northeast, so still significant.

Stephen Anderson - Miller Tabak

That's good. In terms of the comp base, you're talking about maybe having an additional Grand Lux opened this year, is that still going to be the case?

David Overton

We are hoping to make it. Right now, we are planning on it. It could go into first quarter of '15. But we're working diligently and hopefully it will be prior to '14, but I can't guarantee it.

Operator

And with that, the last question will come from the line of Will Slabaugh with Stephens Inc.

Will Slabaugh - Stephens Inc.

Had just one quick one and then a follow-up. On the geographic breakdown in sales, you mentioned the strength in California. I wonder if you would breakdown how the rest of your regions were during the quarter.

Douglas Benn

We generally don't give any specifics about that. We tell which regions are soft and then we tell which regions are the strongest. So the softest ones are ones that are impacted by the weather. And when I say soft, our comps were up 0.9%, and again I think we said this in prior quarters, there is not a big difference between the best performing geographic regions and the worse performing geographic regions. So it's not like, oh, my goodness, this region is way down. I think our worst region even including weather was down 1%.

Will Slabaugh - Stephens Inc.

Then a quick follow-up on international, if I could. I know that it's obviously hard to predict, but is there any reason you could point to now that the acceleration that we were expecting at least in '14 with regard to international unit shouldn't continue beyond that 3 to 5 type range going forward? And then a follow-up to that, is there any update on Asia?

Douglas Benn

So there's sort of related to each other. So one of the things I'll say, not specifically with respect to Asia, but you could imply that we're talking about Asia. But we continue to talk with other potential partners, and again focusing on established operators of multi-brand retail and restaurant brands that have the infrastructure to operate a restaurant like the Cheesecake Factory.

So if we get an additional licensee partner, signed up, then we'll have three in place. And the more operating licensee partners that you have in place, the more likely that not any one of them in any one year is impacted by whatever is going on in their region and that we should be able to continue to build somewhere in the three-plus international locations a year.

Operator

Ladies and gentlemen, with that I would like to thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. And have a great day.

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