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The Cheesecake Factory F3Q07 (Qtr End 10/02/07) Earnings Call Transcript

October 23, 2007 | about: CAKE

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The Cheesecake Factory (CAKE)

F3Q07 Earnings Call

October 23, 2007 5:00 pm ET

Executives

Michael Dixon - CFO

David Overton – Chairman and CEO

Analysts

John Glass – CIBC

Jeffrey Bernstein - Lehman Brothers

Ashley Woodruff – FBR

Larry Miller – RBC Capital Markets

Sharon Zackfia – William Blair

Matt DiFrisco - Thomas Weisel Partners

Nicole Miller - Piper Jaffray

Joe Buckley - Bear Stearns

Bryan Elliott - Raymond James

Steven Kron - Goldman Sachs

Paul Westra - Cowen & Company

John Ivankoe - J.P. Morgan

Dustin Tompkins - Morgan Keegan

Presentation

Operator

Good day, ladies and gentlemen and welcome to The Cheesecake Factory's third quarter 2007 earnings conference call. (Operator Instructions) I would like to turn the call over to Mr. Michael Dixon. Please proceed, sir.

Michael Dixon

Hello, everyone. I'm Michael Dixon, CFO of The Cheesecake Factory Incorporated, and welcome to our quarterly investor conference call which is also being broadcast live over the Internet.

Also with us today is David Overton, our Chairman of the Board and Chief Executive Officer who is actually joining us from Tukwila, Washington -- just outside of Seattle -- where we will open our 134^th Cheesecake Factory restaurant later this week. Joe Peters, our Vice President of Investor Relations, is also with us.

Before we get into the details, let me briefly cover our cautionary statement regarding risk factors and forward-looking statements in general. Throughout our call today 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 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.

We have a lot to cover today. In addition to reporting results for the third quarter of fiscal 2007, we also announced our growth plan for fiscal 2008 today. Our agenda for this call will be as follows:

First, we'll discuss our financial results for the third quarter of fiscal 2007 which ended on October 2nd, 2007. We will refer to that quarter as the third quarter in our comments today. We'll also give some color on our expectations for the remainder of the year. After that, we'll discuss our growth plan and performance targets for fiscal 2008. Finally, we'll open the call to questions and we'll be happy to answer as many questions as time allows. We'd like to finish up this call in about 45 minutes.

Before I get into the details of the quarter, let me take just a minute to formally welcome Russ Bendel to The Cheesecake Factory family. As we announced in early September, Russ joins us as President and Chief Operating Officer of The Cheesecake Factory restaurants. Russ brings with him a wealth of restaurant industry experience and we look forward to him taking our operations to an even higher level. As we speak, Russ is well into his orientation program. Again, we're very happy to have Russ on board.

So with that, let's get on to the quarter's results. Total revenues at The Cheesecake Factory for the third quarter increased 15.4% to $375.5 million. Our revenue growth this quarter was comprised of an approximate 16% increase in restaurant revenues and a 4% decrease in bakery revenues. I'll talk more about the bakery business in a moment.

The 16% increase in restaurant revenues represents an approximate 18% increase in total restaurant operating weeks resulting primarily from the openings of 27 new restaurants during the trailing 15 month period, coupled with an approximate 1.4% decrease in average sales per restaurant operating week. Overall comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased 1.2% for the quarter. By concept, comparable sales increased approximately 1% at The Cheesecake Factory restaurants and increased 4.8% at the Grand Lux Cafes.

While we're pleased to report positive comparable sales again this quarter, the environment for most casual dining operators continues to be challenging. That being said, although we generally expect comparable sales to be in line with our menu price increase, we are still a little bit behind that as traffic has not yet returned to normal levels. We remained about a percent or so off in traffic with approximately 2.2% of price in our menu during the third quarter. This trend has been fairly consistent throughout the first nine months of the year.

In our summer menu change which we finished rolling out in mid-August we took an additional 1.5% effective menu price increase to help offset known cost pressures, primarily related to minimum wage, janitorial and dairy costs. As a reminder, we are not lapping any menu price increase from last summer.

Returning to the third quarter, average weekly sales at The Cheesecake Factory restaurants decreased about 1.1%, which is still slightly behind the change in comparable restaurant sales. As we've said many times in the past, there are a couple of factors that generally can impact this comparison. First, the timing of new restaurant openings and the associated honeymoon sales period will always have an impact on the gap between comparable sales and average weekly sales. When we open in existing markets we generally do not experience, nor do we expect to experience, the honeymoon sales trends of roughly 130% of sustainable volumes that we often see in new markets.

16 of the 21 Cheesecake Factory restaurants opened since the third quarter of last year are in existing markets. The strategy of capturing additional profitable market share in areas that we know very well and where our brand recognition is high has worked well for us and we will continue to maximize this opportunity in the future.

Second, the restaurants we've opened in the last 18 months are considerably smaller on average than those opened prior to that time period. The average number of productive seats is about 5% less at those restaurants not in the comp base compared to those restaurants in the comp base. This is a function of opening restaurants in great markets as preferred sites become available and appropriately fitting the restaurant size to those markets. Most importantly, the average returns at these locations are in excess of our cost of capital and deliver a fully capitalized return in excess of our 25% threshold.

Lastly on a more specific note, four of the 20 Cheesecake Factory restaurants that opened last year were built smaller, as they are in slightly smaller markets, and consequently delivered average weekly sales below our company average. While these locations will still deliver initial annual sales of $7 million or so, and will continue to grow as these markets mature and the retail developments are built out, they do account for a large part of the gap between our comp sales and average weekly sales. Excluding these locations, average weekly sales at The Cheesecake Factory would have increased approximately 0.1%.

We continue to be very pleased with sales at our Grand Lux Cafes. Comparable sales at Grand Lux increased 4.8% in the third quarter. On a two-year basis, Grand Lux Cafe has delivered comparable sales of 11.5%. We continue to view this as an incredibly strong performance, particularly in light of the soft operating environment the industry has experienced for nearly two years and for a young concept with no advertising or promotions. The sales volumes continue to increase at Grand Lux. We will continue to leverage operating costs and improve this concept’s restaurant level margins. Grand Lux Cafe is a strong, viable second concept for The Cheesecake Factory.

Longer term, we feel very confident that there is plenty of profitable growth ahead for both The Cheesecake Factory and Grand Lux Cafe. With only 143 restaurants opened to date, the majority of our expected revenue growth for the next few years will continue to come from openings of new restaurants. Our longer term expectations for annual comparable restaurant sales growth remains in the range of menu price increases, or about 1% to 2%.

For 2007, our overall revenue growth target, including both restaurant and bakery sales, is 15% to 16%, which translates into approximately 15% growth in the fourth quarter. This is a little bit lower than our previous guidance and reflects the slightly softer sales we experienced in the second half of September and through the first couple of weeks of October. Overall comparable sales through the first three weeks of the fourth quarter are tracking between flat and a positive 1%.

We are on target to achieve our goal of opening as many as 21 new restaurants, including five Grand Lux Cafes. As we discussed on our last quarterly conference call, 20% to 25% of these openings will be in new markets with the remainder representing opportunities to return to those markets we have been very successful.

In addition, a large number of our targeted 2007 openings are in the Northeast, which has proven to be a very strong geographic area for us, with a number of high volume restaurants already operating in this region, with certainly enough population density to support several more.

As we noted in our press release, the new restaurants that we have opened to-date in the Northeast have delivered average weekly sales in excess of $250,000 since opening, consistent with our expectations for high volumes in this region. In particular, our location in Braintree, Massachusetts, which opened in late June, continued its strong performance with average weekly sales of over $280,000 during its 15 weeks in operation.

We opened six Cheesecake Factory restaurants and one Grand Lux Cafe in the third quarter, in line with our stated guidance. To-date in the fourth quarter, we've already opened two The Cheesecake Factory restaurants in Peabody and Natick, Massachusetts, and a third opening will follow later this week in Tukwila, Washington, a suburb of Seattle, as I mentioned earlier. We expect to open five more Cheesecake Factory restaurants and three Grand Lux Cafes in the fourth quarter, for a total of 11 new restaurants this quarter as originally planned.

As a reminder, there are risks to achieving our opening schedule as we currently lease all of our restaurant locations, many of which are in newly constructed or to-be-constructed retail developments such as shopping malls, entertainment centers, cityscape strip centers and so forth. As a result, we rely heavily on our landlords to deliver our leased spaces to us according to their original commitment so that we can build them out in a timely manner.

Our locations are upscale and highly customized, which helps to create the non-chain image that we enjoy with consumers and which we believe represents a significant competitive advantage for us. But that also creates some unique design and permitting challenges. Once we get the space from the landlords and obtain our building permits, our construction and pre-opening processes are typically consistent, usually taking four to six months to complete on average.

So as a result of these factors, it's not uncommon to have planned openings move a few weeks or even a month due to various factors outside of our control. Having said that, we have consistently achieved our stated opening targets. We have an incredible development team that consistently manages through these challenges to deliver restaurants on time and an equally talented operations team to get these restaurants open and running like a Cheesecake Factory from day one.

I will remind our investors that it takes 90 to 120 days on average for our new restaurants to work through their normal grand opening inefficiencies and for food and labor costs to reach their targeted operating profit margins.

Now moving to our bakery operations. Bakery sales, net of inter-company bakery sales, decreased 4% in the third quarter from the year-ago period to $13.1 million versus $13.7 million in the prior year. The decrease is due primarily to lower sales to the warehouse clubs, which is our largest sales channel for outside bakery sales. Clearly, the macro pressures impacting dining out occasions are affecting dessert purchases as well.

Our plan for third party bakery sales continues to focus on generating consistent and predictable sales and contribution margins. Based on our current outlook for warehouse club sales and other outside sales channels, we expect bakery sales to be approximately flat to down 1% in fiscal 2007 compared to the prior year. While slightly lower than our earlier expectations, I remind investors that this is a small part of our business.

While we remain optimistic with respect to opportunities to steadily build our bakery sales volumes over time, bakery sales are not as predictable as our restaurant sales. Our ability to predict the timing of bakery product shipments and contribution margins is very difficult due to the nature of that business and the purchasing plans of our larger customers, which may fluctuate from quarter to quarter.

In our view, the bakery's most impactful role to our business will continue to be its service as a dependable, high quality producer of desserts for sale in our own restaurants which will sell approximately $200 million of desserts made in our bakery production facilities during fiscal 2007. Approximately 15% of our restaurant sales consist of dessert sales, which is a much larger percentage than achieved by most other casual dining restaurant concepts.

That covers our top line performance for the third quarter and the update on our restaurant opening plan for the fourth quarter. Now I'll briefly review the individual components of our operating margins for the third quarter. Cost of sales decreased to 24.7% of revenues for the third quarter compared to 25% in the same quarter last year and 24.7% in the June quarter. The 30 basis point improvement over the prior year is attributable to favorable year-over-year pricing for produce, seafood and general grocery items, partially offset by the continued pressure from higher dairy costs.

As a reminder, fluid dairy commodities are one of the only areas in which we are unable to contract price, and as most of you know, dairy costs have risen significantly this year. This has a meaningful impact on us due to the amount of manufacturer cream we use in making our fresh whip cream at the restaurants.

The principal commodity categories for our restaurants include fresh produce, poultry, meat, fish and seafood, cheese, other fresh dairy products, bread, and general grocery items. We have contracted with suppliers for those expected commodity requirements for fiscal 2007 that can be contracted, and where possible, we have extended certain of our contracts through 2008. As of today, we have contracted for a number of our 2008 commodity requirements, including all of our poultry and beef requirements through 2008 at flat or slight increases to current prices.

We have not yet contracted our cream cheese requirements for 2008, but I will note that the contractible price has come down quite a bit over the past few weeks and we will continue to monitor this and lock in a price at an appropriate level.

Based on the contracts we have in place and our current expectations for those items that we cannot contract, we expect cost of sales as a percent of revenues to be approximately 20 to 25 basis points lower for fiscal 2007 compared to fiscal 2006.

Total labor expenses were 32.2% of revenues for the third quarter, down from the 32.3% in both the prior year and sequential quarters. This is a little better than we anticipated and especially impressive in light of the slightly softer sales. Our operators did a great job managing labor during the quarter, which resulted in a 10 basis point improvement year over year. For fiscal 2007, we still expect labor expenses to be approximately 40 basis points higher than the prior year.

Other operating costs and expenses were 22.9% of revenues for the third quarter, a slight increase from the 23.7% reported in the same quarter last year and the 22.9% in the sequential quarter. The increase from the prior year period was a result of higher insurance costs, primarily worker's compensation and the deleveraging of fixed costs to operate our restaurants as a result of the slightly lower sales this quarter. We expect other operating costs as a percent of revenues to be 30 to 40 basis points higher for the full fiscal year relative to fiscal 2006, due to the higher janitorial and insurance costs. Now this translates into a 120 to 140 basis point increase in Q4 versus the prior year, as we benefited last year from some very favorable adjustment to our self-insurance reserves.

G&A expenses for the third quarter were 5.3% of revenues, down from the 5.7% in the prior year and better than the 5.4% in the sequential quarter. The decrease relative the year ago quarter was primarily due to about $1 million of professional fees incurred in the prior year related to the stock option review. In addition, we continue to effectively manage our overhead costs in line with our revenues and look aggressively for cost saving opportunities.

Our G&A expenses consist of two major components: the cost for our corporate, bakery and field supervision support team, which should grow at a lesser rate than revenues; and the cost for our restaurant management, recruiting and training program, which should grow at a rate closer to our unit growth rate. During the remainder of fiscal 2007 we will continue to add resources to the corporate support, training and field supervision activities of our business to properly support our restaurant and bakery operations for the planned 21 new restaurant openings.

Our expectation for total G&A expenses as a percent of revenues for the fourth quarter is a 50 to 60 basis point improvement compared to the prior year as we lapse some of the option investigation costs incurred in 2006. For fiscal 2007, we expect G&A to be flat to a 10 basis point improvement compared with the prior year.

Depreciation expense was 4.2% of total revenues for the third quarter, compared to 4.1% for the third quarter of the prior year and 4.2% for the sequential quarter. For fiscal 2007, our expectation for depreciation expense as a percent of revenues continues to be in the 4.2% to 4.3% range based on our expected growth and investment plans. Actual pre-opening costs incurred during the third quarter were approximately $8.7 million compared to $5.4 million for the same quarter last year. This was a bit higher than we expected due to higher costs in general, which I'll discuss in a moment, and a couple of locations moving forward in the fourth quarter new restaurant opening schedule which resulted in higher pre-opening costs in the third quarter.

We opened six Cheesecake Factory restaurants and one Grand Lux Cafe in the third quarter of this year compared to three Cheesecake Factory restaurants and one Grand Lux Cafe in the year-ago quarter. We usually incur most of our pre-opening costs in the two months before an opening and the month of a restaurant’s opening. As a result, the timing of restaurant openings and their associated pre-opening costs will always have an impact on our quarterly earnings comparison.

Our expectation for fiscal 2007 total pre-opening costs is $24.5 million to $25 million in support of as many as 21 new restaurant openings during fiscal 2007, including five Grand Lux Cafes. This is in the same range as we previously guided to, even though much of the pre-opening costs will move into fiscal 2008. Our back ended opening schedule, which requires us to hire managers a little earlier than desired in order to have the appropriate number of trained managers in place to support our openings, combined with the increased costs for staff relocation have pushed pre-opening expenses a little higher than originally planned. Again, based on the information we have as of today, we plan to open eight Cheesecake Factory restaurants and three Grand Lux Cafes in the fourth quarter.

To wrap up our operating margin expectations, we expect operating margins to be 35 to 45 basis points better in the fourth quarter but 30 to 40 basis point lower for the full fiscal 2007 versus the prior year, as the slightly lower sales volumes combined with the ongoing dairy cost increases, minimum wage and other margin pressures we've already discussed offset much of the benefits of our effective menu price increase.

That covers our review of the major line item components of our operating margins for the third quarter. Again, please refer to the full discussion of risks and uncertainties associated with our forward-looking statements, including in our filings with the SEC.

Included in interest expense net is $2.3 million of interest expense and $150 million in outstanding debt we have under the revolving credit facility during the quarter. We have an interest rate collar agreement on the outstanding revolver balance that mitigates the risks from interest rate variations, and keeps our LIBOR rate within a range of 4.6% to 5.4%. We also pay a bank margin on top of LIBOR which will vary based on our debt to EBITDA ratio. Our current interest rate on $150 million balance is approximately 5.9%, which translates into approximately $2.2 million of interest expense for the fourth quarter of fiscal 2007.

Our effective tax rate for the third quarter was 29.5%. We continue to plan an effective tax rate of 30% to 31% for the full fiscal year 2007.

Let me provide a brief recap of our stock-based compensation expense for those investors who are tracking it as a separate line item. Our total stock-based compensation expense reflected in the income statement for the third quarter was approximately $4.7 million, of which $1.8 million was charged to labor expenses and $2.8 million was charged to G&A expenses.

For fiscal 2007 we continue to expect stock based compensation expense to be approximately $18 million to $19 million, of which about $8 million will be charged to labor expenses and approximately $11 million will be charged to G&A expenses. As a percent of revenues, this amount is fairly consistent with fiscal 2006.

Lastly, before I move off the income statement, let me provide some comments on the $200 million accelerated share repurchase, or ASR, that we entered into in the first quarter of this year. We completed the ASR in September and retired an additional 1 million shares for a total of 7.7 million shares repurchased under this program. We anticipate a weighted average outstanding share count for the fourth quarter of between 72 million and 72.5 million shares.

As we've discussed, we expect the impact from the ASR to be neutral to fiscal 2007 earnings per share with the benefit from the new share count offset by the interest expense. The transaction will be accretive to fiscal 2008 and beyond.

Our share repurchase authorization from our board of directors is currently 16 million shares, of which there are approximately 4.7 million shares remaining, net of the shares retired this year. The authorization does not require us to purchase any shares and may be terminated at any time.

Our liquidity position and financial flexibility continue to remain very strong. As of October 2nd, our cash and marketable securities on hand were approximately $60 million. Our cash flow from operations through the third quarter was approximately $86 million and our cash and accrued CapEx for the third quarter approximately $144 million, which includes construction in progress for upcoming 2008 openings.

Our estimated cash CapEx for fiscal 2007 is in the range of $195 million to $205 million. This includes the cost for the five Grand Lux Cafes included in our targeted 21 openings, a large percentage of planned openings in the Northeast which generally have higher than average constructions costs, and a portion of the cost of our Asian test concept. Based on our current expansion plans and current expectations of the operating environment, we expect to be able to finance our CapEx requirements for fiscal 2007 through expected operating cash flow, agreed upon landlord construction contributions and our cash on hand.

We have $150 million in funded debt in our capital structure, as I mentioned earlier, and currently do not anticipate a need for additional funded debt or any other external financing during fiscal 2007 other than landlord construction contributions to meet our fiscal 2007 growth objectives.

We do have $50 million available under our credit facility for backup liquidity purposes and to support standby letters of credit for our insurance arrangements.

To wrap up our business and financial review for the third quarter, both total revenues were somewhat lower than we expected, we did an effective job at controlling costs, and delivered a 50 basis point year-over-year improvement in operating margin before pre-opening costs. Relative to the data points provided by a number of other casual dining operators during the past month, we believe we're delivering competitively strong results.

As always, our primary focus remains the long-term healthy growth of The Cheesecake Factory and the continued enhancements to our productivity and profitability. Delivering a great guest experience is our number one priority and we continue to be pleased with the progress of our productivity initiative such as the Kitchen Management System, which we believe will allow us to more effectively and efficiently deliver a better experience to our guests. We anticipate having KMS in approximately one-half of our restaurants by year end and in all of our restaurants by the end of fiscal 2008.

In addition, we have completed the roll out of our labor scheduling tool, which enables our managers to spend less time on scheduling and more time on the floor with guests and developing and training staff members.

On the growth side, we will achieve our stated goal to open 21 new restaurants this year. We continue to believe there is room for approximately 200 Cheesecake Factory locations of our current size and scope and as many as 150 Grand Lux Cafe locations. We also believe there are an additional 130 to 140 Cheesecake Factory locations that can deliver annual revenues between $8 million and $10 million. Our development group has designed a restaurant at an investment cost that is appropriate for this expected volume, so that we can grow our business at steady or increasing rates of return.

With only 143 restaurants open as of today, we believe that our business has a sustainable period of profitable growth ahead of it for several years to come. Our strong financial position provides us with capital resources and flexibility to continue executing our growth plan with great confidence.

Along those lines, I'd now like to focus on our growth plan for fiscal 2008 which we also announced this afternoon. We are targeting revenue growth of approximately 14% to 15%, not much different than our revenue growth for the past few years. Net income growth of 17% to 19%, and estimated diluted earnings per share growth of 22% to 24%.

Let me tell you how we intend to achieve those goals. Our plan consists of three key objectives:

(1)Expand our restaurant base with high quality locations at a rate that is healthy and manageable for our business.

(2)Use our free cash flow to return cash to stockholders through share repurchases; and,

(3) Improve our operating margin by 30 to 50 basis points.

Our expansion plan for 2008 is to open as many as 17 new restaurants, including as many as three to four Grand Lux Cafes and one Rock Sugar Pan Asian Kitchen, our newest concept. The 2008 plan targets approximately four fewer restaurants than we will open in 2007. This decision is not driven by a lack of great locations or inability to successfully open a high volume restaurant. As you know, we are the landlord’s tenant of choice and are offered thousands of sites every year. We are also confident that our development department is capable of opening at least 25 restaurants per year.

However, we have a long-term view of our business and as such we're going to slightly recalibrate our opening schedule. Investors who have followed us for awhile know that the types of locations that we choose -- that is, selecting only great locations -- historically resulted in a back end loaded development schedule. We locate many of our restaurants in newer retail centers where developers target completion before the holiday season, so having an opening schedule in the second half of the year has been a fact of life for us.

We have a full pipeline of quality sites in 2008. By targeting 17 openings, we will position ourselves for a more balanced opening schedule in 2009 and beyond. This will allow us to reaccelerate our growth in 2009 and to continue to target revenue growth in the mid-teens for the next several years.

We have identified 60 to 70 potential Cheesecake Factory locations with expected average annual revenues over $10 million, and between 130 and 140 locations with estimated annual revenues of approximately $8 to $9 million. Clearly, we have an ample number of locations to choose from, which makes our near and longer-term growth objectives very achievable.

Also, with only 13 Grand Lux Cafes in operation by the end of this year we have significant site selection opportunities for this concept as well. At least one of our 2008 locations will be specifically targeted at the 130 to 140 potential locations we've talked about with projected revenues of $8 million to $9 million. We will test our ability to build a slightly smaller-sized restaurant at an appropriate investment cost and still deliver new restaurant ROIs that are among the best in the industry.

The additional objective of our growth plan for fiscal 2008 are increased share repurchases, funded by a lower level of CapEx spending, and improved operating margins in an otherwise difficult margin environment. Let me spend a minute on each of these areas.

We anticipate total cash capital expenditures in fiscal 2008 to be between $160 million and $170 million, an approximate20% decrease from fiscal 2007. The savings comes from building fewer new restaurants and also from building more efficient, less capital intensive Grand Lux Cafes. Many of you will recall from our analyst meeting earlier this year we established an objective to reduce Grand Lux investment cost per square foot by $75 to $100. We've identified the changes necessary to achieve this target without sacrificing the guest experience and those changes are factored into the Grand Lux design plans for next year.

We expect that the reduction in cash capital spending will enable us to generate free cash flow of between $60 million and $70 million, which we intend to use in support of an active share repurchase program. We have approximately 4.7 million shares available under our current repurchase authorization and our board may consider the opportunity to increase share repurchases in the future.

On the margin front, we expect that the lower pre-opening costs and increase in G&A leverage will allow us to improve our operating margin by approximately 30 to 50 basis points. In light of the expected industry-wide pressure from commodity and labor costs, we believe this is a competitively solid margin improvement.

In summary, we're very expected about our ability to achieve our growth plan for 2008 and beyond. Our expansion goals position us to open successful, high quality restaurants more evenly throughout the years to come. It is both an achievable plan and one that will enable us to deliver significant diluted EPS growth while returning value to stockholders through meaningful share repurchases.

That wraps up our prepared remarks and at this time we'll be happy to answer your questions. In order to accommodate as many questions as possible in the time we have left in this call, please be courteous and limit yourself to one question and then re-queue with any additional questions. If we aren't able to get to your question on this call, please feel free to give us a call at our offices after the call.

Question-and-Answer Session

Operator

Your first question comes from John Glass – CIBC.

John Glass – CIBC

Mike, I get the reduction in The Cheesecake Factory growth given the pressures you have, et cetera, but why slow the Grand Lux as well? I thought you were in an expansion mode, maybe you were going to continue to swap out more Cheesecakes for Grand Luxs, you could still do that within the confines of a lower absolute growth this year. Could you maybe talk about the thought process behind slowing down Grand Lux Cafe as well?

Michael Dixon

I think – and David can chime in on this – really, we are not looking to slow down Grand Lux, it is really just getting the right spots and having them available at the right time. The locations that we have looked at for 2008 for Grand Lux locations, just getting the right spots, the number that are available in the areas we want to go to is just a little bit lower. We are not intentionally trying to slow down Grand Lux Cafe. It is a function of the space available, at the right time.

John Glass – CIBC

Do you think that over time those will always be a little bit harder to get? What gives you confidence you can grow that at a faster clip if you are having difficulties now just trying to open three to four?

David Overton

I don't think it's a matter of difficulty. Again, it's just finding the exact right site where we want to go following the growth pattern that we have with The Cheesecake Factory. There's lots of sites all over the country, but we are very particular about how we're growing it and building our reputation with cities, going in and the sites we are looking for are incredible sites in incredible cities. We have a lot of them planned. We have sites that are planned for '09 and '10 that are the absolute best in Boston, the best here and there. But they are all over the board in terms of when we going to get those very special sites we are looking for, for Grand Lux.

Operator

Your next question comes from Jeffrey Bernstein - Lehman Brothers.

Jeffrey Bernstein - Lehman Brothers

Just a question on traffic trends. It looks like pricing would now be running in the 3% range for both brands, slightly above your historical averages. I was wondering if you could talk about any noticeable impact to sales, traffic or mix? You said you saw a slowdown back in September, early October. I was wondering if that was attributable to macro or if there is any issue from a near term pull back on pricing? If not, I am wondering if you may consider maintaining those levels closer to the 3% range in future years, given the fact that the consumer is giving you a lot of credit for your value scores?

Michael Dixon

Jeff, I think the answer to the first part of your question is, I believe it is still due to the macro trends. You hit on it. We did see traffic slow down in the second half of September and continuing in the first couple weeks of October which is again reflected in the guidance we gave on revenues for the full year.

Our average check is really still tracking right along the lines of our menu price increases. So I don’t feel that we are being impacted there. Having said that, I don’t think that we will change our pricing strategy. I think we will continue to price what we need to do to effectively offset some of the margin pressures. It is still obviously a very competitive environment, and we want to be very careful with the guest out there.

Jeffrey Bernstein - Lehman Brothers

I think you had mentioned that Grand Lux was running 2% to 3% pricing, and you took the 1% increase in the spring. Is now the point in time that you would take the full menu roll out, I am wondering where pricing is going to end up for Grand Lux.

Michael Dixon

You are right on the current pricing on Grand Lux. Grand Lux is just undergoing a menu change with I think slight menu price increase, if I am not mistaken, David?

David Overton

Right. We are right at about 1 point.

Jeffrey Bernstein - Lehman Brothers

So 1 point now, in addition to?

David Overton

In addition to what is in there.

Jeffrey Bernstein - Lehman Brothers

So what would it be running in total, going forward?

Michael Dixon

I think it is still going to be between 2% and 3%.

Operator

Your next question comes from the line of Ashley Woodruff – FBR.

Ashley Woodruff – FBR

Just a question on your comments on 2008. The 22% to 24% EPS growth goal seems especially ambitious, given what you've seen recently in terms of your same-store sales trends and traffic weakening.

When you are looking into 2008 what are you expecting to reach that? What do you need to see in terms of your same-store sales trends?

On that 30 to 50 basis point improvement in margins, are you expecting that other line items like cost of sales, bakery and restaurant, are you expecting those are flat?

Michael Dixon

From a big picture perspective, Ashley, I think relatively flat on all of those line items. As I mentioned, we should get a little bit of G&A leverage. Obviously we will get some fairly good pre-opening expense leverage with just the fewer openings, which will drive that operating margin growth that I talked about.

I think the real leverage you get from that net income down to the earnings per share is just the benefit of the share repurchase program that we have just completed, as well as additional share repurchases that we contemplate going forward.

Ashley Woodruff – FBR

Is that premise of same-store sales similar to what you have seen recently, or improving in 2008?

Michael Dixon

I think it is relatively similar to what we have experienced lately. We are not being overly aggressive in assuming that the traffic is going to resume.

Operator

Your next question comes from Larry Miller – RBC Capital Markets.

Larry Miller – RBC Capital Markets

Thanks. If I could follow up on John’s question, does that mean that going forward it would be something like 10 to 12 Cakes and then you would think to reaccelerate Grand Lux, given the opportunities, and that is how we should think about planning the model, not necessarily the 17 stores per year?

Michael Dixon

I think that is a reasonable assumption, Larry. I think as David indicated, we want to accelerate the growth at Grand Lux, but we also want to be right about picking the best spots. So our goal would be to continue to ramp up Grand Lux Café growth. We are targeting the 17 total openings for 2008 and then we will ramp up again from that in 2009, and I would expect the Grand Lux Cafes will play a bigger part in that growth.

Larry Miller – RBC Capital Markets

I get how you can get to 14%, 15% revenue growth by balancing out fiscal 2008 relative to 2007, which only had a few openings in the first half of the year. Wouldn’t that necessarily normalize in fiscal ’09 and beyond, and therefore you wouldn’t get the big productivity adjustment? Muted opening or capacity growth at that point?

Michael Dixon

I think you will see certainly in the first half of ’09, once you get that far out, you will see some of the lower growth in ’08 will have an impact on the first half of ’09. I still think that there are opportunities for us to continue to drive that revenue growth into the mid to high teens number with comparable EPS growth.

Certainly we get a benefit on that EPS growth in fiscal 2008 just from the slowdown or the lowering of the pre-opening costs.

Larry Miller – RBC Capital Markets

Does that mean then that you are expecting traffic growth? Normally you have said that you wouldn’t be able to grow sales ahead of pricing. I guess I am confused on how we get to 14% in the out years.

Michael Dixon

Well again, we can target the revenue growth from the new store openings. We feel we have plenty of opportunities to grow more restaurants than 17 beyond 2008.

Larry Miller – RBC Capital Markets

I see. I misunderstood. Thanks a lot.

Operator

Your next question comes from Sharon Zackfia – William Blair.

Sharon Zackfia – William Blair

Mike, you commented on the last couple of weeks of September and October slowing. I don’t think anyone asked, but has that been a national slowing, or have you seen any geographic concentration there?

Michael Dixon

I would say that we have seen California slow quite a bit, more so. A little bit of slowing everywhere, but I would say California has slowed more so. I think interestingly enough, the Southwest area has slowed down as well. So both California and Southwest have led the charge in the slowdown from mid-September forward.

Sharon Zackfia – William Blair

Separately, I am assuming, based on your language in the press release, that the weightings for the restaurants next year will still be back end weighted, and it is really ’09?

Michael Dixon

That is correct. The idea is to really slow the pipeline in ’08 so that we have anywhere from 20 to 24 places to choose from; only open the 16 or 17 that we talked about, and then move the rest into early ’09.

Sharon Zackfia – William Blair

Just circling back once again on what you have seen in October, I think you gave the comps for the first three weeks. Was October pretty similar to your full quarter comps last year, or was it markedly different?

Michael Dixon

I don’t know the answer to that off the top of my head, sorry

Operator

Your next question comes from Matt DiFrisco - Thomas Weisel.

Matt DiFrisco - Thomas Weisel

Thanks. This is a follow-up on Larry’s question earlier. I think there was a presumption being made by all of us that you will be more balanced in ’08. Can you give us a little bit of how the quarter might look -- how the quarters might look as you break out and open up those total 17 stores?

And then, can you update us on what your estimates are for the CapEx contribution from the Rock brand?

Michael Dixon

2008, as I think Sharon just kind of alluded to, will still be back-end loaded. It just won’t be as -- there just won’t be as many restaurants to open in the third or fourth quarter because we are going to open fewer in total, so it is still -- 2008 is still going to be a back-end loaded schedule, but the idea will be to move some of those that we would have tried to open late in ’08 into the first half of ’09 to make ’09 more of the balanced opening schedule.

As for the capital costs for Rock Sugar, I don’t have a final number on that so I’m not ready to give that out.