The Cheesecake Factory Incorporated's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.19.11 | About: The Cheesecake (CAKE)

The Cheesecake Factory Incorporated (NASDAQ:CAKE)

Q3 2011 Earnings Call

October 19, 2011 5:00 pm ET

Executives

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

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

Jill S. Peters - Vice President of Investor Relations

Analysts

Phan Le

Brian Vaccaro - Raymond James

Nicole Miller Regan - Piper Jaffray Companies, Research Division

John S. Glass - Morgan Stanley, Research Division

Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division

Paul Westra - Cowen and Company, LLC, Research Division

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

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Mitchell J. Speiser - Buckingham Research Group, Inc.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

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

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 The Cheesecake Factory Earnings Conference Call. My name is Stacy, and I'll be your conference moderator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today to Ms. Jill Peters. Please proceed.

Jill S. Peters

Good afternoon, and welcome to our third quarter fiscal 2011 earnings call. I'm Jill Peters, Vice President of Investor Relations. With us today are David Overton, Chairman and Chief Executive Officer; and Doug Benn, Executive Vice President and Chief Financial Officer.

Before we begin, let me quickly remind you that during this call, items may be discussed that are not based on historical fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available in the Investors section of our website at www.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission. All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements.

David will start off the call today with some opening remarks. Doug will then take you through our operating results in detail and provide our outlook for the rest of the year and 2012. Following that, we'll open the call to questions. Now I'll turn the call over to David.

David Overton

Thank you, Jill. The third quarter was our seventh consecutive quarter of positive comparable sales with The Cheesecake Factory and Grand Lux Café both positive. Geographically, there's ongoing strength in places such as California, Florida and Texas, our 3 largest markets. Each of these delivered significantly above-average comparable sales.

Importantly, from a profitability standpoint, we are managing our business well. Normalized for commodity cost, profit margins are healthy as we effectively leveraged cost across our P&L. We are competitively well positioned, maintaining high guest satisfaction scores and delivering margin improvement in labor, other operating expenses and G&A.

In September, we completed our summer menu rollout, including the introduction of our new SkinnyLicious menu. Innovation is a big differentiator for us. It helps us drive guest traffic with full margin sales across a broad range of options and price points to remain relevant to consumers' wants and needs. Our development plans are on track for this year, with one more opening tomorrow and the final opening in early December for a total of 7 new Cheesecake Factory restaurants in 2011. These 7 new restaurants are quite diverse in their geography: California, Texas, Florida and the Northeast. Our development strategy continues to be location-specific, focused on premier sites that can meet our sales target of about $1,000 per square foot, fueling strong returns.

In reality, the restaurants that we've opened over the past 3 years are averaging sales that are above our system average. As a result, our returns are exceeding our expectations. We have a significant runway for growth as we take The Cheesecake Factory from 150 to 300 anticipated units and position Grand Lux Café for future growth.

Looking ahead to 2012, it looks to be a solid year. We're currently expecting to open as many as 7 to 10 new restaurants next year, including a new Grand Lux Café. The pipeline for high-quality sites is strong and more robust than we've seen in quite some time.

In addition to our domestic openings, our initial 3 international locations are scheduled to open in the Middle East next year. Our plans are in line with our longer-term objectives, including increased new restaurant development, international expansion and earnings per share growth in the mid-teens.

In addition, we plan to continue to return a sizable amount of cash to our shareholders. Doug will get into the details, so with that, I'll turn the call over to him.

W. Douglas Benn

Well, thank you, David. Total revenues of The Cheesecake Factory for the third quarter increased 3% to $430 million. Restaurant revenues reflect a 1.9% increase in total restaurant operating weeks due to the opening of 6 new restaurants during the trailing 15-month period, plus a 0.6% increase in average weekly sales.

Overall, comparable sales increased 0.8% at The Cheesecake Factory and 0.9% at Grand Lux Café. We did see some impact from Hurricane Irene, which impacted overall comparable sales by about 40 basis points. Absent this, comparable restaurant sales increased 1.2%. We implemented an approximate 1.25% menu price increase at The Cheesecake Factory in our summer 2011 menu change, lapping a 0.7% menu price increase from the summer of 2010.

The new menu finished rolling out in early September, so we'll now have about 1.9% of pricing in the menu until our menu change in the winter of 2012. At the bakery, external sales were $17.1 million, up about 12% from the prior year.

Cost of sales increased 10 basis points more than expected to 25.4% of revenue for the third quarter. We continue to experience higher food costs related to certain non-contracted items, particularly dairy, as well as some grocery and produce items.

Labor was 32.3% of revenue in the quarter, down 50 basis points from the prior year, primarily as a result of favorable medical insurance costs. Other operating costs and expenses were 24.7% of revenues for the third quarter, down 20 basis points from the third quarter in the prior year, due primarily to the timing of marketing expenses.

G&A was 5.5% of revenue for the third quarter as we were able to leverage G&A by about 20 basis points. And depreciation expense for the third quarter of 2011 was 4.1% of revenues, down 20 basis points from the prior year period. The favorability on this line item continues to stem from the runoff of costs associated with corporate and IT investments over the past few years.

Pre-opening expense was $4.3 million in the third quarter of 2011 versus $1.5 million in the same period last year, in support of a higher number of openings in the third and fourth quarter of this year relative to last.

Net interest expense was $1.2 million in the third quarter of 2011, down from $1.7 million in the third quarter of last year. Interest expense is lower this year because we have 0 funded bank debt. Our tax rate for the quarter was 29.2%, slightly higher than we expected, which impacted earnings per share by about $0.01, and was due to nondeductible losses on our investments in variable life insurance contracts used to support our deferred compensation plan.

Our liquidity position continues to be strong. Cash flow from operations for the first 9 months of the year was approximately $121 million. Net of roughly $50 million of cash used for capital expenditures, we generated about $71 million in free cash flow through the end of the third quarter.

We used our free cash flow to repurchase about 1.8 million shares during the quarter at a cost of approximately $50 million. Year-to-date, we returned about $145 million in cash to our shareholders through share repurchases, in line with our prior communicated range.

That wraps up our business and financial review for the third quarter of 2011. Now I'll spend a few minutes on our outlook for the rest of the year, and our initial thoughts on 2012. 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, known weather influences and the effect of any impacts associated with holidays. As a reminder, 2011 is a 53-week year for us, with the extra week falling in the fourth quarter. Our assumptions reflect this.

For the fourth quarter of 2011, we estimate a range of comparable sales between 1.5% and 2.5%, consistent with our recent trends. Based on this assumption, our estimate for diluted earnings per share is between $0.51 and $0.53. Food costs are not moderating on a comparative basis quite as much as we expected them to, and we are now projecting cost of sales to be flat to only slightly better versus the prior year in the fourth quarter. That impacts the fourth quarter by about $0.01 in earnings as compared to our prior expectations.

We expect our tax rate to be between 27% and 28% for the fourth quarter. Our projection for capital spending this year is now $75 million to $80 million, in support of our planned 7 new restaurant openings in 2011, as well as expected early 2012 openings.

As noted in our press release today, we are increasing our target for share repurchases by $20 million in 2011, to a range of between $145 million and $170 million. Our restaurants generate a healthy amount of cash, and we are using the majority of our free cash flow to buy back our shares.

With respect to 2012, our initial thoughts on the year are as follows: As David mentioned, we plan to open as many as 7 to 10 new domestic restaurants next year, as well as 3 internationally. Our total capital expenditures are expected to be between $105 million and $125 million. For the full year 2012, we are currently estimating diluted earnings per share in a range of $1.80 to $1.90, based on an assumed comparable sales range of between 1% and 2%, extending the trends we see in 2011.

Our earnings per share estimate assumes that we will use the majority of our free cash flow for share repurchases. This represents the best estimate that we have at this time and incorporates everything we know as of today.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Joe Buckley with Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Just a couple of questions, if I could. What kind of price factor or effective price factor did you have in the third quarter? I know you mentioned the menu rollout kind of extending into September.

W. Douglas Benn

Yes, we had about 1.4% in price in the menu entering the quarter and about 1.9% leaving the quarter. So roughly, on a weighted-average basis, about 1.6%.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Okay. And could you talk about the different day parts? I know your weekend, weekday business. These things sound like they weakened a little bit in the third quarter. Based on your fourth quarter guidance, it sounds like things might have picked up again more recently. If you could just kind of talk about the flow of sales through the quarter and into October?

W. Douglas Benn

Yes. The flow of sales was fairly steady, Joe. It was, if you take out the impact of Hurricane Irene, which definitely impacted August and add it back, it was pretty much the exact difference. So if you -- July, August and September were roughly the same. One thing to remember about the third quarter is, we're going against our toughest comparison from last year, where our sales were up 2.8%, and that was all guest count-related. And in the fourth quarter, we're going up against our easiest comparison of the year when we were up only 0.9%. So we're really looking at trends that we have going now continuing and that we're -- one thing about our sales is they're very steady and they're very predictable now, with not a lot of fluctuation.

Operator

Your next question comes from the line of John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

Two questions on your initial views on 2012. Just in first, in terms of unit development of 7 to 10 in the U.S., I was under the impression you guys were thinking at least of double-digit, meaning sort of a bottom of 10, but it sounds like it's a little less than that potentially. So have you changed your view on developments since the last call? Or is there a site availability issue or did we maybe -- or did I just maybe misperceive growth of maybe over 10. That's question one. And question two is, can you talk about what you think food costs are doing to your 2012 margins or what do you think your initial expectations for food inflation is, I guess said more simply, for 2012?

W. Douglas Benn

Yes, let's talk about the first one first, the guidance for 7 to 10. I think that we have not changed our outlook on what we plan to do from a development standpoint. We plan to open as many A sites as we possibly can. Our pipeline or our list of potential sites is in better shape, as David mentioned, than it had been. Some of those that are on that list are 2013 openings, not 2012 openings. So we have some 2013 openings that are already starting to shape up for us, but we feel comfortable right now saying that the restaurants that we believe can open in 2012 are somewhere between 7 and 10. Now just to talk about 2012 guidance overall, the earnings per share results that we expect for 2012 are primarily driven as a result of our assumptions and expectations on 2 things: one is comp store sales growth, and the second is what you mentioned, cost of sales inflation. And with respect to cost of sales inflation and commodity costs, our contracts are generally on a calendar year basis. So our purchasing team is right in the middle of contracting for next year right now. At this point, we are where we think we should be with respect to 2012, and we've locked in a number of our key products. Our cost inflation assumption for 2012 is that the cost will be up about 4%. Could we do better than that? Sure, maybe, we could. But right now, our best guess is 4%. So we've taken to consideration the overall volatility of the commodities market, supply and demand dynamics and how the future's market looks to us right now, and that's what we're factoring in. That's what we factored into our guidance.

Operator

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

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Two things. On the comp store sales for the current quarter, can you remind us as you progressed through this quarter, do the comparisons from last year get easier or more difficult?

W. Douglas Benn

Month-by-month in this quarter?

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Yes.

W. Douglas Benn

Do I have that? I don't know if I know month-by-month. I think it was fairly stable last year. I think the main thing to say, Nicole, would be that our comps for this -- for the third quarter, our comparisons are much tougher than they will be in the fourth quarter. And I don't think I have month-by-month in front of me, but we can get with you off-line on that.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Perfect. And bakery sales were up a strong 12%. Can you talk about what you attribute that strength to? And is there going to be a potential down the road to put other items through the grocery channel?

W. Douglas Benn

Well, bakery, as you know, we're very much in locations outside of our restaurants with our bakery products. And I think that the bakery has done a good job. It's very difficult actually to forecast sales in our bakery because we have large sales to just a few number of customers. Where we have 75 million customers in our restaurant, we have much fewer than that in the bakery. And they did a good job this quarter of being able to grow their sales compared to last year with respect to those customers.

Operator

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

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

I think two just pretty quick ones. First, Doug, you called out, I think, lower health insurance costs helping your labor line. If you could quantify that and talk about whether that's one-time or perhaps continuing if you've made some few changes to the plans. And secondly, what are you seeing on the mix side of the business? I mean, are you seeing your customers kind of maintaining the similar entrées year-on-year, beverages, desserts? I mean, what's happening with customer order preference?

W. Douglas Benn

Sure. With respect to medical expenses, we -- it's difficult to forecast that. What we experienced in the third quarter was much better claims activity. We're largely self-insured, so the claims activity and the amount of claims activity directly impacts our medical cost. So we saw better claims activity, we saw lower cost inflation. Looking forward, there -- in our fourth quarter guidance and our 2012 guidance, there's neither a favorability nor downside on group medical that's built into the future guidance for those periods of time. With respect to the mix, we had, as I mentioned earlier, about 1.6% on a blended basis of pricing in the quarter, and our comp store sales were up 0.8%, and that was largely check average-driven. So we did have about 0.8% of negative menu mix shift. Our incident rates and our sales for nonalcoholic beverages are still declining some year-over-year. They're stable. They're not declining any faster. But furthermore, our dessert sale incident rates for the third quarter were about flat, still very strong, but not up so that there was no check average absorption from increasing dessert sales as there had been in the past that would absorb lower nonalcoholic beverage sales, if that makes sense. Said in another way, dessert sales did not mask as much nonalcoholic beverage sale, and we had about a 0.8% negative menu mix.

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

Understood. And given the trend, when do you think menu mix stabilizes year-on-year?

W. Douglas Benn

Well, it was starting to stabilize, and I would say that we would certainly hope to get the menu mix shift back in track, so that there's no negative impact on check average. And I think that will happen when nonalcoholic beverage sales stabilize year-over-year. But I think it's prudent to plan, and the way that we've reflected our guidance is that it doesn't stabilize. And if it does, that's upside.

Operator

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

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

A couple of questions actually to follow up on the mix question. I was just curious whether the SkinnyLicious menu impacted mix at all, to the negative in the quarter? And then when you talk about beverages and I think it's a pervasive problem in nonalcoholic beverages. Is there any kind of innovation that you can do or any kind of inserts to try to encourage maybe nontraditional nonalcoholic beverage sales of any kind?

W. Douglas Benn

Well, we are doing a lot of things from a menu perspective to try to entice guests to buy more alcoholic and nonalcoholic beverages. So we're not really particular as to where it comes from. If we can get them to buy some of the new drinks that we have on our menu that are alcoholic, that would be fine as well. So we are doing some things there. Milkshakes, we put some new milkshakes, they're nonalcoholic milkshakes and alcoholic milkshakes. But nonalcoholic milkshakes on our menu that could also help drive that. With respect to SkinnyLicious, it's pretty early on to say anything. We don't think it's having any negative impact on our check average though.

Operator

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

Phan Le

This is Phan Le in for Matthew DiFrisco. I just had a quick question about the smaller store formats and specifically the productivity of those stores. I think in the past, you had mentioned that the Bridgewater store had averaged around $1,100 per square foot. I'm wondering if you can provide a little bit more color whether those trends are holding, and if they apply equally to the Bridgewater location, as well as some of the newer locations, such as in Danbury Fair Mall?

W. Douglas Benn

Well, our productivity per square foot, our goal is to have $1,000 in sales per square foot because we know that produces great returns on investment. So if you take the average of the restaurants that we've opened over the last 3-year period of time, including the ones you mentioned, including Danbury. Specifically, I'll say Danbury is doing very well. The productivity is higher than that. So we have productivity of higher than $1,000 per square foot in our new restaurants.

Operator

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

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

I wanted to start up just quickly on the quarter. Can you comment on how many days or weeks were impacted from closures with the hurricane? And was there any business interruption insurance that will be coming? I think there was one that was closed for an extended period of time in New Jersey.

W. Douglas Benn

Well, we don't want to talk about specific days of closure, but we did have restaurants that were closed for full days. We did have restaurants were closed for partial days. We do have business interruption insurance. There's a deductible associated with that, that's a period of time, so we might have received some insurance proceeds related to one restaurant, but not much else.

Brad Ludington - KeyBanc Capital Markets Inc., Research Division

Okay. And then just briefly, Doug, on the labor this quarter, was that negatively impacted like it was last June in the third quarter from higher-than-expected bakery sales? And just also in the fourth quarter guidance, what are you factoring in EPS from the extra week?

W. Douglas Benn

The extra week in EPS in the fourth quarter is pretty material for the quarter. It's about $0.03 for the entire year. So the quarter, the fourth quarter, you'll see -- you'll conclude at $0.51 to $0.53 is significantly higher than we what we made in the fourth quarter last year, and that's primarily as a result of the extra week, some as a result of higher expected sales. And then the labor costs were not negatively impacted by the bakery. Bakery increased sales will generally negatively impact cost of sales more so than labor.

Operator

And your next question comes from the line of Paul Westra with Cowen and Company.

Paul Westra - Cowen and Company, LLC, Research Division

Can you talk a little bit more about 2012 on your, I guess, what range at least maybe your same-store sales assumption and what your pricing assumption might be in your forecast?

W. Douglas Benn

Sure. When we looked at comp store sales, again, there's 2 primary drivers of next year's earnings per share: comp store sales growth and cost of sales inflation. I talked about cost of sales inflation. But with respect to comp store sales, we have assumed an economic environment in 2012, Paul, that is very similar to 2011. An environment where we can, I think, we can grow our guest count some, and an environment where we think the menu mix shift will still be somewhat negative. In 2010, we delivered 2% annual comp store sales growth. In 2011, if you allow us to take out the impact of weather, we'll be right around 2% again. And given our sales stability and predictability in 2012, we expect to be in that range again. So we've said 1% to 2%. Now if we have a better economic environment in 2012 than we had in 2011, we could do better than that. But I will remind you that at 2% comp store sales growth for us, that's about on an average unit volumes of $10 million, about $200,000 a year. And that's a big number and that's what really, I think, allows us to be able to leverage our margins better than most at comp store sales growth of 2% or even 1%.

Paul Westra - Cowen and Company, LLC, Research Division

Okay. But officially, you said between 1% and 2%, I mean, I guess I just missed that.

W. Douglas Benn

I did, yes, 1% to 2%.

Paul Westra - Cowen and Company, LLC, Research Division

And then the pricing in that, it looks as though you run the model up to $1.85. Just roughly, you're looking for store margins about flat next year, and obviously, you'll have some pressure in cost of goods sold as you do get a basket above 4. And where -- is that right to assume you do expect some leverage in the labor and other occupants [ph] line?

W. Douglas Benn

We do. We would expect that we would have slight margin -- operating margin improvement for the year, even with whatever happens with cost of sales. And from a menu pricing standpoint, I mean, we said it before that we're really going to continue to try to do a very good job of balancing our desire for offsetting margin pressures with our equal desire to grow guest traffic. So we were a little more aggressive in our recent menu price increase, where we took about 0.5% more than what we had rolling off. And we'll look at it again in February of next year, but we've not made any decisions with respect to that. But the assumption is that we'll roughly replace or maybe increase by a little bit what's rolling off in February.

Paul Westra - Cowen and Company, LLC, Research Division

Okay. And the last question, we've had a few calls coming in about -- questions about geography performance, especially in California. Can you give us much update as you can on if there's any...

W. Douglas Benn

Yes, we're doing well. The trend -- and California is one of the stronger markets now. California, Florida and Texas are our 3 strongest markets. And our softest markets now are the Northeast and the mid-Atlantic, which seems to be in line with what we are hearing other restaurant operators saying that they are seeing.

Operator

Your next question comes from the line of Brian Vaccaro with Raymond James.

Brian Vaccaro - Raymond James

I just wanted to clarify one thing. On the extra week, Doug, did you say that was $0.03 of benefit you were expecting?

W. Douglas Benn

$0.03 for the year, yes, right. Then I guess it's $0.03 for the quarter too.

Brian Vaccaro - Raymond James

Yes. Okay, I just wanted to make sure I heard that clearly. And then, as we think about the margins last year and offsetting some of the COGS inflation that you're going to see, are there any incremental explicit cost savings initiatives that you're thinking about? Or is it just kind of, we're going to get leverage for the 1% to 2% comp, and then there's natural leverage in some of those semi-fixed and fixed cost lines?

W. Douglas Benn

The second part more heavily than the first. I mean, we have gone through our P&L. We have pulled out a lot of the -- pretty much all of the fat that we see, so there might be some areas where we can -- you'd get a small amount. But primarily, we can get back to margins that we had when we had -- if you go back to our peak margin years. We can get back to those peak margin years simply by growing our comp store sales and the leverage that's created by that comp store sales growth. So most of the margin improvement on line items other than cost of sales next year is really based on comp store sales growth.

Brian Vaccaro - Raymond James

Okay. And then one more. On the international franchise development, are there any upfront kind of territory fees or anything that are included in that 2012 guidance on those 3 stores that are going to be built?

W. Douglas Benn

We don't talk about specifically the timing of that because it happens at different times, it doesn't happen necessarily right when they open, but we -- our primary compensation is a royalty from our license partner there. But we also do receive other upfront fees that are part of the -- they are part of the guidance. If we think we either have received -- if we have received them or we will receive them -- what's going to happen is we'll receive fees associated with future openings next year, not necessarily just right in line with the 3 openings that we expect.

Operator

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

Michael Kelter - Goldman Sachs Group Inc., Research Division

I wanted to follow-up on the geography question. It sounds like traffic was roughly flat for the quarter, and California and Florida and Texas were up, and that implies you're losing guest count in the Northeast and mid-Atlantic. I guess I'm just curious, I know it's kind of common right now what's going on in the marketplace. What specific kind of active things might you guys be able to do to turn around for yourselves?

W. Douglas Benn

Well, I think that we'll continue to do the things that we've done to get to where we are today. We'll try to provide guests with even better dining experiences than they have. We'll continue to innovate our menu and provide them with choices. Those are the -- that's the way that we will generally approach that. We, from a marketing standpoint, we use social media. We have 1.1 million Facebook fans -- Facebook fans, is that what you call them? Okay. Facebook fans that allow us to directly communicate with them, some of those are in the Northeast, so we'll use that and our opt-in e-mails, we have many people on opt-in e-mail. So we'll -- operationally, our approach is we are restaurant operators providing great value to our guest, continuing to try to do a better job of that, particularly in areas where we would be struggling the most from, with respect to sales.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then a follow up. It seems like some of the other casual dining restaurants that are facing similar kind of traffic trends are resorting to price promotions to get people in the door. How would you guys approach that, if it does get increasingly intense? Is there any kind of a way you would try to match the value in some form that's in the right Cheesecake message form? Or is that something you just wouldn't ever approach, it's just not your model?

W. Douglas Benn

Well, we're very focused, as you know, on driving full margin sales, but we try to do that at a range of price points. From Small Plates & Snacks to full dinner portions, we have the broadest options on our menu that we've ever had, and they're at varying price points giving guests choices to spend less if they'd like. And so that's more the way that we would approach that. The only thing that I would call discounting that we've done in the past is we have, on occasion, offered guests in our restaurants a free slice of cheesecake if they came back during periods of time, like Sunday through Thursday where we wanted them to come anyway because those were the less busy periods of time and they spent $30 or more and we got them to try what we want them to try, our signature product. So we have done that, but other than that, discounting is not something that we're looking at.

Operator

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

Mitchell J. Speiser - Buckingham Research Group, Inc.

First on the cost outlook for 2012. Is it safe to say that the outlook is a little more front-end loaded, meaning the cost outlook is higher in the first half versus the second half?

W. Douglas Benn

I don't think that -- no, I wouldn't look at it that way. I would look at it more as throughout the year.

Mitchell J. Speiser - Buckingham Research Group, Inc.

Okay. And on share repurchase and your cash balance, I think your cash balance ended under $20 million. You probably have enough cash in terms of cash flow to hit the top end of your repurchase target. But would you be willing to take on some debt to accommodate that share repurchase? Or is it all through internally generated cash flow?

W. Douglas Benn

We wouldn't be looking to borrow money. We're looking to do it with internally generated cash flow. And we would expect with even with the incremental $20 million share repurchase that we just announced for the fourth quarter, that we would end the fourth quarter with somewhere between $35 million and $45 million in cash.

Mitchell J. Speiser - Buckingham Research Group, Inc.

Okay, great. And on the fourth quarter comps guidance, 1.5% to 3%, I believe you had a -- 1.5% to 2.5%, rather. It was 1.5% to 3%, I guess, what you said in the second quarter call. Is that just fine-tuning the top end due to that menu mix trend which is kind of a little more negative than what you think?

W. Douglas Benn

Well, I think we're basing it on everything that we know, right? So we're looking at the quarter-to-date trends. We're looking at our 2-year stacked comp and the fact that it's against 0.9%. It's just -- we just felt that as the year goes by, you have greater visibility with respect to each coming quarter, and our visibility today would tell us that we would think that our comp store sales can be in that range of 1.5% to 2.5%.

Mitchell J. Speiser - Buckingham Research Group, Inc.

Great. And my last question is on that extra week. I think $0.03 would assume that extra week is a normal week. But it does come in, I guess, during that New Year's week. So when you think about it, wouldn't it be maybe a little more weighted that extra week or is it just considered a normal week, which does equate to about $0.03 a share?

W. Douglas Benn

Yes, it's not a normal week. It's a very high end week. So $0.03 a share, I haven't really fully thought through the impact of it on the fourth quarter. I've only really thought through the impact of it on a full year, which I know is about $0.03. In the fourth quarter, it may be greater than $0.03, I'm not sure how the math on that actually works. But it's one of the best weeks of the year.

Operator

Your next question comes from the line of Steve Anderson with Miller Tabak.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Yes. Just a question on the restaurant, on pre-opening expenses. For 2011, how do you consider the opening schedule for next year? Do you see easily weighted or front or back-end loaded with this year?

W. Douglas Benn

More back-end loaded. So out of 7 to 10, I would say roughly 1/3 of them in the first half of the year and 2/3 in the second half of the year.

Operator

Your next question comes from the line of Jonathan Komp with Robert W. Baird.

Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division

Doug, just kind of more of a broad-based question on the Q4 outlook. Even if I back out the contribution from the extra week, implied year-over-year earnings growth is pretty substantial after you just did a slightly down earnings quarter. So I'm just wondering if you could help walk through some of the moving pieces on why the earnings growth will improve in Q4?

W. Douglas Benn

Well, I think the biggest thing is, first of all, the comps -- there's 2 things mainly in the fourth quarter that are driving earnings growth. One is a whole extra week, right, a whole extra week. So maybe I'm not -- I probably misstated when I said it's a $0.03 benefit because the whole extra week, that wasn't even in the fourth quarter last year. So that -- and that week is more impactful than 1/14 or 1/13, however you do the math on that. The other is our assumption for comp store sales of 1.5% to 2.5%, the midpoint of that range is 2%. So If you pick 2%, that's much better and provides $0.02 to $0.03 of benefit versus last year at 0.9%, so that's roughly where it is.

Jonathan R. Komp - Robert W. Baird & Co. Incorporated, Research Division

Okay, that's helpful. And then just on the commodity outlook for next year, one more question. Can you give us any sense the degree that you might be contracted today, and then maybe what's on the biggest moving parts are as you look out for the year?

W. Douglas Benn

Well, we're contracted today where we think we should be based on at the end of October. We normally wouldn't -- we will end the year more than likely where we always are, which is about 70% contracted. So we're not 70% contracted today, but we're not going to say exactly where we are or certainly not what specific products we've contracted for, but we're where we normally would be at this point in time or where we think we should be at this point in time.

Operator

Your next question comes from the line of Jeff Matthews with RAM Partners.

Jeffrey Matthews

I just wondered if there have been any significant trends plus or minus in labor cost this year?

W. Douglas Benn

Well, we're leveraging our labor cost very well. What we have done -- labor costs are really composed of 2 things: the rate and the number of hours. So what we have done with respect to the rate is done just an excellent job of managing that. That is up less than 1% for the year. And then with respect to productivity, the number of hours, we've also done a very good job of improving our productivity. So as measured by sales per labor hour that we would -- we've done a good job of that. So our labor cost, when the dust settles on 2011, are going to be down as a percentage of sales compared to the last year. And really, that's despite the fact that in the fourth quarter last year, I don't know if everybody recalls, but we had some extremely good one-time benefits in the fourth quarter last year from the HIRE Act and from equity, some forfeiture of some decrease in equity compensation. So we're overcoming that and again when all the dust settles, labor cost as a percentage of sales should be down in 2011 compared to '10.

Jeffrey Matthews

Okay. And I take that to mean then that you also haven't had any dramatic change in turnover?

W. Douglas Benn

No, not any dramatic change in turnover. We still have very good retention rates.

Jeffrey Matthews

Okay. And then just in terms of your consumer, your customer's behavior, say, to this point versus a year ago, what have been the major changes, if any, in their behavior?

W. Douglas Benn

Well, I don't know -- their behavior, I measure that by what our sales are, right? So I would tell you that I think that consumer confidence now is certainly not improving at a fast pace. But again, our sales remain very stable. They're predictable, we're not seeing a lot of volatility week-to-week. And we're doing that in an environment where our sales growth is at full margin sales that were not driven by any discounting. So I would say that the consumer is impacted a lot by the external factors and that our sales are remaining steady with whatever's going on with the consumer.

Operator

Our final question comes from the line of Joe Buckley with Bank of America Merrill Lynch.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Just 2 follow-ups actually. Could you talk about the timing of the international openings next year? And Doug, you talked in the past about sort of the EPS contribution per store. Do you mind revisiting that topic? And then secondly, just the CapEx budget. Seems like it's up a lot relative to the increase in unit openings, so maybe if you could address the CapEx budget for 2012 a bit, that would be helpful.

David Overton

Okay. Joe, we think we can get the 3 stores open between June and September of next year.

W. Douglas Benn

So they'll be second half weighted, Joe, and basically, just a rough rule of thumb to use is that for each year -- for each year that an international restaurant is opened, it provides us with about $0.01 in earnings per share. So that's a real rough rule of thumb, but it's something that is -- that you can work into a thought process. So if there's 3 of them in the second -- the last third of the year, that you might get 3 quarters of a or to 1 whole year of opening.

David Overton

We don't know what the volumes will be yet. We think they'll be strong, but we don't know.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Of course. I'm sorry. I was just going to ask on the CapEx budget.

W. Douglas Benn

Yes, the CapEx. The majority of it is for new restaurant openings, the 7 to 10. And part of maybe what you're missing is that we also have an estimate in there for early 2013 openings. None of it has anything to do with the 3 international locations because we don't make the capital investment in those. The rest is maintenance CapEx and corporate and bakery CapEx. We are spending some money putting a second bakery line in the East Coast bakery and so that's some of it. But I don't know how much you think you're missing on what's high, but that's a few million dollars.

Operator

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.

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