Executives
Larry S. Flax - Co-Chairman, Co-President, Co-Chief Executive Officer
Richard L. Rosenfield - Co-Chairman, Co-President, Co-Chief Executive Officer
Susan M. Collyns - Chief Financial Officer, Senior Vice President - Finance, Secretary
Analysts
[Brad Levington – Keybanc Capital Markets]
Analyst for Matthew Difrisco - Oppenheimer & Co.
Destin M. Tompkins - Morgan Keegan & Co.
Mitchell J. Speiser - The Buckingham Research Group
[Thomas Fortay]
Nicole Miller-Regan - Piper Jaffray
Bryan Elliott - Raymond James & Associates
David E. Tarantino - Robert W. Baird & Co.
Conrad Lyon - Global Hunter Securities
Lawrence Miller - RBC Capital Markets
Steven Rees - J.P. Morgan
California Pizza Kitchen, Inc. (CPKI) Q2 2008 Earnings Call August 7, 2008 4:30 PM ET
Operator
Welcome to California Pizza Kitchen’s second quarter earnings conference call. (Operator Instructions) Mr. Rosenfield you may begin your conference.
Richard L. Rosenfield
I’m Rick Rosenfield, Co-CEO of California Pizza Kitchen, and with me on the phone today is my Co-CEO Larry Flax and Sue Collyns, our Chief Financial Officer.
Before we begin I need to remind everyone that part of our discussions this afternoon will include forward-looking statements. They are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our filings with the Securities and Exchange Commission for a more detailed discussion of the risks that may have a direct bearing on our operating results, performance and financial condition.
With that out of the way, we’re very pleased with our financial results for the period as they were substantially better than our original expectations. Comp sales were positive 1.4% versus our flattish outlook while EPS was $0.26 or $0.09 above the high end of our May 8 guidance. Total revenue grew 11.3% to $176.6 million including 43%+ growth from the combination of our Kraft alliance and our franchising businesses. In retrospect we are pleased to have placed strategic emphasis on these higher margin businesses upon our return as Co-CEOs and we remain very optimistic about our prospects in these areas.
At our full service restaurants we credit the thank you card program for driving incremental sales against our toughest comparison of the year. In addition to driving revenue it enabled us to further connect with our guests while promoting increased visits and fun for everyone involved. We estimate that absent our thank you card program our comps would have been down approximately 1%. Comp sales in California which is home to about 40% of our comparable base as measured in units were down only 0.2% during the second quarter. This was against a positive 3.6% last year and reflected a sequential improvement from our -1.9% result in the first quarter, but bear in mind that it benefited from the thank you card program.
I want to again emphasize that despite the comp sales softness in California that I just detailed California remains our strongest and most profitable market. Our California comp’d restaurants delivered average weekly sales of roughly $75,000 which was 16.8% higher than the rest of the country along with 100 basis points better EBITDA. Please bear in mind also as we have repeatedly emphasized, comp sales comparisons in California are made more difficult because of our intentional strategy of accepting minimal cannibalization to achieve our overriding goals of EPS growth and high ROI per shareholders. In California we benefit from a lack of seasonality, a strong labor pool and the powerful brand equity we enjoy.
We recently inaugurated our summer menu rollout which included Sonora Egg Rolls, Ginger Salmon, Buffalo Chicken Pizza, the reintroduction of our Pear and Gorgonzola Pizza as well as Asparagus and Spinach Spaghettini. Our menu continues to evolve and we’re quite excited about these new menu items as they widen our appeal and entice our most loyal guests to visit more frequently. As we’ve continually stressed our twice annual menu introductions are a mainstay of the CPK culture and in the absence of heavy marketing spend are critical to moving our sales trends forward especially during challenging times.
Turning to the development front, we added three full service restaurants in the second quarter. These were in Plymouth Meeting, Pennsylvania, Portland, Oregon and Chino Hills, California and we remain on track to build 12 full service CPK restaurants this year. Two of these restaurants are in the smaller 4,000+ square foot format and we believe this footprint with its less expensive construction costs and lower ongoing operating costs will provide additional real estate flexibility and growth opportunities. Importantly, at this early juncture we’re hitting our ROI objectives with this new prototype. Incidentally the new Chino Hills restaurant is in the heart of the Inland Empire in California, an area well known to be negatively affected by the current housing crisis. Despite these times this restaurant opened with the highest weekly sales of any restaurant in the history of CPK and still continues to average sales of about $100,000 a week.
With regard to ancillary revenues this was a stellar quarter for both our Kraft business and franchise royalty stream which are key components of our business model. In the second quarter we launched a single-serve pizza product called California Pizza Kitchen Pizza For One which is microwavable in under three minutes. During the second quarter franchise partners added full-service restaurants in Tokyo, Japan and Mexico City with these locations becoming our third in each country. South Korea also welcomed its second CPK restaurant, this time in the capital Seoul. Our Korean franchise just last week opened a third restaurant and we now expect to open at least nine international franchise locations in 2008, up by three units from where we first forecasted this year. And finally, HMS Hosts will also be building two new airport locations this year down from the four previously committed as these two slid into 2009. Both of these are located in Hawaii.
On a fun note we were gratified to recently hear that members of the US Olympic basketball team along with many of our other Olympic athletes recently dined in the CPK restaurant in Shanghai en route to Beijing.
Moving on to a subject that I know you all are interested in, I’ll give you a peek on how the third quarter is unfolding so far. As of now we’re running at -1.4% and we were definitely negatively impacted by the July 4 flip which caused us to start the quarter at a disadvantage without an apples-to-apples comparison. All in all what we continued to see is a deleveraging in our comps principally by California, Arizona and Florida with a relatively strong and encouraging offsetting performance in the rest of the country.
Before I turn the call over to Sue I wanted to update you on two action items. I know we’ve spoken in the past about the importance of our CPK culture and believe that our revamped bonus structure is the right motivator at the right time to best align operational with shareholder goals. Our solid performance has allowed us to pay significant bonuses to our managers despite these tough times and this is certainly a competitive advantage for us in the current market place.
Second, we are determined to allocate capital to its most productive uses which include focused development, investments in our menu and people, our franchise and Kraft businesses, and of course our own shares. Having completed our accelerated share repurchase program during the second quarter we have been authorized to buy back an additional $50 million worth of shares over the next two years. We believe these continued stock repurchases will play a part in our efforts to increase shareholder value over the long term.
And with that I’ll turn it over to Sue.
Susan M. Collyns
I’m actually going to go through the detailed P&L in a minute but I want to provide a quick reconciliation between the $0.17 in EPS that we’d originally forecast compared to the actual $0.26 that we reported. That different obviously is $0.09. The $0.09 in incremental EPS is basically explained as follows: We estimate that our thank you card program contributed around $0.06; G&A improvements helped us by around $0.02, while all other operational initiatives contributed about a penny.
We also had two items that you’ll notice on the press release that just went out that basically financially netted each other out. That related to an interest income pickup of around $800,000 as a result of adopting FAS 34 which was offset by a non-cash impairment charge for one full-service store totaling $839,000 you can see on the store closure cost line and thus resulting in no EPS impact for those two items.
Total revenue for the second quarter increased 11.3% to $176.6 million and this consisted of restaurant sales growing at 11% to $173.8 million, royalties from Kraft increasing approximately 42.2% to $1.5 million, and franchise revenue from both domestic and international growing at approximately 45% to $1.3 million. Our second quarter comp sales as Rick mentioned increased 1.4% and included 4.9% of prime, 3.3% of negative guest counts, and about -0.2% of impact to mix. Monthly comps broke down as follows: April with 0.2% which was on top of 6.5% the previous year, May was 4.1% compared to 4.8% last year and benefited most from our thank you card program, while June was 0.3% versus 4.8% in the second quarter of 2007. We attribute the fall-off between May and June comps to the conclusion of the thank you card program which ended on June 16.
Company-wide our full service CPK restaurants delivered a weekly sales average of $68,708 which was up 0.3% from the prior year of $68,535.
Our food, beverage and paper supplies for the quarter were 25% which was 50 basis points higher than last year.
Our grocery costs, dairy and fuel surcharges were largely responsible for the higher costs along with a 20 basis point impact from our thank you card program. We’re currently locked in on dairy. In fact we’re currently locked in on 33% of our dairy for the back half of the year and are now assuming that our cheese prices will average between $1.85 to $1.95 per pound for the months that we’re not locked in which is close to the last year’s second half period of approximately $1.97 per pound. So net net for us is a positive.
We’ve got commodity pressures showing no signs of abating; however we do continue to reinforce cost of goods best practices and continue to show promising results so far in the third quarter. I’m happy to report that.
Our labor expense was up 60 basis points to 36.9% of sales and that was driven by three key factors. First was again the thank you card program and that is estimated to have cost us around an extra 20 basis points in labor expense. Second we did have new store inefficiencies across 21 restaurants compared to about 16 restaurants in the same period last year. Third we do estimate that our higher minimum wage rate in nine states which represents about 60% of our store base cost us an incremental $500,000 over last year.
Direct operating and occupancy costs improved by 10 basis points to 19.6% of sales compared to the prior year and we credit our energy and smaller initiatives which enabled us to leverage this line item.
G&A expense improved by 30 basis points to 7.4% of total revenue and this includes 6.5% of what we call core G&A and 90 basis points of stock option expense which totaled approximately $1.6 million. The year-on-year leverage came from our core G&A number and we credit strong management of our recruiting and training programs as well very good T&E management this quarter.
Moving on to depreciation, it was 5.9% of sales and that makes it 20 basis points higher than last year’s second quarter. We accelerated depreciation on stores that we plan to remodel which also drove that number. You might recall also that we take a very conservative position on this line item depreciating our assets in accordance with the initial term of the lease which is generally 10 years for us and that contrasts with many of our peer groups who calculate the depreciation over not just the initial term but also the renewal option period which in many cases could be a 15-year period or more for them.
Our pre-opening costs totaled $958,000 this quarter compared to $852,000 last year and included three full-service restaurants that we opened in the second quarter compared to two last year as well as approximately $325,000 in phantom rent charges. We also incurred a Status 144 non-cash impairment charge that you’ll see on that store closure cost line of $839,000 related to an early lease termination opportunity we had for one full-service restaurant that had no early penalty kick-out cost.
Moving on to interest, we incurred interest expense and I’ll walk you through this line of $179,000 interest income here. We basically incurred interest expense of $593,000 this quarter but that was offset by us adopting FAS 34 and capitalizing $772,000 of interest expense which resulted in a net interest income number of $179,000. Until Q1 CPK had adopted the more conservative position of expensing out interest expense as incurred. However since the completion of our accelerated share repurchase and our debt position moving to $62 million which is far more material than what it had been, given that that is more material FAS 34 does require capitalization of interest and allocating it against productive assets.
Moving on to income tax, our income tax expense totaled $3.1 million in the second quarter and represented an effective tax rate of around 32.3%. That was in line with our previous estimates.
All of this resulted in our second quarter EPS of $0.26 which was a 24% increase over last year. I mentioned before it was $0.09 higher than the top end of our previous range that we guided to on May 8 and compares to $0.21 in the same period of 2007.
In terms of our share repurchases we repurchased and retired approximately 873,000 shares during the second quarter at an average price of $14.03 under our $50 million buy-back authorization which included the $46.3 million accelerated share repurchase. The repurchase was completed on June 19 and added around $0.03 to our EPS in the period so we were very pleased with that. Since August 2004 we’ve repurchased around 6.2 million shares of common stock for a total consideration of approximately $98.5 million or an average share price of $15.78 per share. Our Board recently authorized the repurchase of up to $50 million of common stock over the next two years, and similar to previous authorizations such repurchases would be made from time to time.
Moving on to our balance sheet, we ended the second quarter with $8.9 million of cash and $62 million of debt. That debt is funded by the $150 million line of credit that we secured in the second quarter which also has a $50 million accordion feature that matures on May 7, 2013.
Our second quarter capital expenditure totaled $11 million including about $10 million for new restaurants with the remainder related to maintenance in our existing locations. We did complete 15 mini remodels in the second quarter which was terrific so that means we have met our full-year goal of 20 to date and we have accelerated and intend to finish another 10 mini remodels over the course of the year along with one substantial remodel in the fourth quarter. We believe that in this economy we have an opportunity to protect our market share and provide additional value to consumers in terms of enhanced ambience which drives our check averages and guest satisfaction scores over time. Our total cap ex projected for 2008 including our new stores, the remodels and the capitalized maintenance is now about $58 million before TI which we estimate at around $6 million.
Moving on to the third quarter, we’re currently modeling -2% comp right now and will be opening up four full-service CPKs. One of those is already open in fact. And our franchise partners will be opening up three international full-service CPKs, and again we just opened up one in South Korea last week. These key drivers model out our EPS between $0.18 to $0.21 in the third quarter based on a diluted share count of around 25.7 million shares.
Despite our outperformance in the second quarter we are making only modest changes to our full-year guidance by raising our range to $0.65 to $0.70. The way we feel is until we see consistent upticks in traffic, we’ll remain cautious and believe that a -1% to 0% comp number for the full year is still the right range for us to forecast. A big driver of our comps for the back half of the year is the fact that our pricing falls to around 3.3% in the remaining six months from around 5.2% in the front half of 2008.
Before I turn the call back to Rick I’d actually like to underscore this point on pricing. We do intend to take additional pricing in November although we haven’t yet made a definitive decision on exactly what that percent will be. But as always we view our pricing strategy in the context of total value experience we provide our guests which encompasses more than just the food itself and includes internal factors such as a great ambience which is why our new prototype and our remodel programs are so important, superior guest service and new menu items. We also review external factors such as competitor pricing as well as feedback through commissioned research on pricing by menu item. Finally, we balance all of these data points against commodity and other margin pressures such as minimum wage increases. And it is this comprehensive multi-dimensional approach that leads us to a final pricing number.
So with that summary I’d like to turn the call back to Rick for closing comments.
Richard L. Rosenfield
In conclusion I’d like to once again emphasize that the way we see the current environment is that we’re demonstrating the strength of our brand in tough times. Despite the challenging comps our revenues and profits are strong and we’re building restaurants with excellent returns. Beyond full service we’re very gratified with our foresight to create these ancillary revenue streams which help insulate us from the volatility that we would have otherwise experienced. All in all we’re quite proud of our performance.
With that I’d like to open the line for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from [Brad Levington – Keybanc Capital Markets].
[Brad Levington – Keybanc Capital Markets]
I just wanted to clear up a couple of comments made in the beginning Rick. I think you said the same-store sales would have been without the thank you I believe down 1% for the quarter. Is that in total a -1% comp or down 1% to a positive 0.4%?
Susan M. Collyns
No, we’re saying that that would go from 1.4% down to -1%. We’re saying that the bounce-back contributed approximately 2.4%.
[Brad Levington – Keybanc Capital Markets]
Looking at the store closure, just to confirm, that wasn’t a relocation, that was the store that was just actually closed, correct?
Susan M. Collyns
We didn’t actually close it. It’s a store that doesn’t have any early termination kick-out penalty and was opportunistic. It’s a non-cash charge and we decided to take the charge given that we had the positive impact of the FAS 34 interest income coming our way and decided that those two were serendipitously netted off. So it was a happy mathematical coincidence that had one offset the other in fact.
Operator
Our next question comes from Analyst for Matthew Difrisco - Oppenheimer & Co.
Analyst for Matthew Difrisco - Oppenheimer & Co.
Just a clarity on the store closing, I thought I saw in the release that one full-service store was closed?
Susan M. Collyns
Oh yes, right. Good point. You might be getting at Harbor Place. It was a store in Baltimore. It was coming up for its 10-year lease expiration and we decided not to renew that particular store. So you’re exactly correct. That closed on June 29.
Analyst for Matthew Difrisco - Oppenheimer & Co.
And just a question about the capitalizing of the interest expense. That’s one time; kind of a catch up and just one time in the quarter; and going forward it’s more normalized as to how we model it?
Susan M. Collyns
You’re exactly right. It’s a catch up since the company took on debt which is what FAS 34 requires. So it basically takes it back to Q3 last year which is why it was such a big pickup in this quarter. But on a go forward basis it’s a much more nominal pickup, somewhere of maybe $100,000 a quarter compared to our previous interest expense; which actually leads to another good point that’s worth reinforcing for everyone on the call. Where previously we’d spoken about an interest expense number for the year of around $3 million, clearly the pickup in Q2 reduces that significantly to around the $2 million mark, so just bear that in mind.
Analyst for Matthew Difrisco - Oppenheimer & Co.
So it reduces it by almost $800,000 and then about $100,000 for the next two quarters each?
Susan M. Collyns
That’s right. That’s what I’m modeling.
Analyst for Matthew Difrisco - Oppenheimer & Co.
Could you share what your operating cash flow was for the quarter; what the level of operating cash flow was?
Susan M. Collyns
I don’t have that in front of me. I’m going to have to answer that in just a minute.
Analyst for Matthew Difrisco - Oppenheimer & Co.
We’ve heard some commentary from other concepts slowing growth and they’re citing the lack of A sites and just developments, some co-tenancy issues, a whole array of issues. I’m just wondering what you’re seeing on that front and how you’re combating it and maintaining new developments?
Richard L. Rosenfield
I think their experience is consistent with ours and that’s causing us to be more cautious in our filter which is one of the reasons we’ve scaled back development a bit as we sort through it. But we’re always careful about creating co-tenancy requirement sin the lease. Sometimes it’s based on specific co-tenants and always I think built on a certain percentage of the center opening. But in general I think we’re in a very good competitive position because we are willing to build and as we’re having some great conversations with our major developers these moments about their happiness that we are going forward in this environment when other people are not. And then last and quite importantly, this advantage for us is if I discuss as we look at this sort of 4,200 foot - 4,000+ foot prototype that’s adding our flexibility - we’re getting a lot more opportunity to screen sites that never would have come up on our radar screen before and feel that we have a competitive advantage there. So from a competitive advantage we feel very good about what’s available to us right now.
Analyst for Matthew Difrisco - Oppenheimer & Co.
Is the 4,000 square foot prototype more designed for markets outside of California?
Richard L. Rosenfield
No. You know what happened is it actually was based on the fact that we took a look here at what we did in our early years such as the original Beverly Hills restaurant is 2,800 feet doing about $3.5 million and we have a number of restaurants that are 4,000 feet and doing $1,000 more a foot. And we said, “Why shouldn’t we go and add that back into our mix in California or outside of California?” The two that I’m talking about that we recently opened that we’re looking at are both outside of California.
Analyst for Matthew Difrisco - Oppenheimer & Co.
You mentioned that your AUVs are 16% higher in California; your margins are 100 basis points better. I’m just wondering what that leads to, what your margins are outside of California or your returns are outside of California versus inside of California, on kind of new stores, how your model looks in that respect?
Susan M. Collyns
We don’t usually break that out. We just talk about the system in total from an ROI perspective. I think the reason Rick’s wanted to amplify the results in California is obviously because of the volatile macroeconomic environment right now and the concern that California doesn’t look like it’s going to recover any time soon. Even though right now we haven’t seen any material deterioration in comps, we don’t necessarily think there’s any great turnaround with any sustainable momentum that’s occurring, which is why we’re modeling the total company at -2%. But in terms of ROI we don’t really break it out by state.
Operator
Our next question comes from Destin M. Tompkins - Morgan Keegan & Co.
Destin M. Tompkins - Morgan Keegan & Co.
[Inaudible] At least looking at cap ex for this year, did that get revised lower from what you had from the previous guidance you had given?
Susan M. Collyns
You’re right Destin. It did get revised. There are a couple of drivers at work. One was the new store openings that Rick referred to; the smaller prototype that helped us a little bit. The other bigger driver was some of these major remodels that we had planned. We had three scheduled for this year. It turns out we’re only going to do one of the three. The other two are actually occurring in Q1 of next year so they slid a little bit and that’s what caused the pickup. On the other side in terms of the net cap ex number we did see a pickup from $4 million to $6 million on the TI. Some of those payments have been coming in more aggressively and we were happy to see that.
Destin M. Tompkins - Morgan Keegan & Co.
Does it have anything to do with maybe the plans for 2009?
Susan M. Collyns
Not necessarily. As I said it was really the smaller prototype and the major remodels being pushed out that caused those numbers to shift.
Destin M. Tompkins - Morgan Keegan & Co.
I also noticed it looked like debt came down a little bit from where it was last quarter. Can you kind of comment on how comfortable you are with using debt maybe for some of the share repurchases as we go forward?
Susan M. Collyns
The ASR was a tremendous success and as I mentioned contributed around $0.03 EPS on a net basis. So we were happy to see that. We are very comfortably in our leverage ratios and fixed charge ratios here; nowhere near the maximum or minimum allowances for them; so we feel good about that. But we have this other $50 million authorization that the Board of Directors just authorized in July and haven’t executed against that in any substantial measure at this point. We generally don’t flag whether or not we do. We just in the market from time to time but if there was an opportunity we would certainly seize that opportunity.
Operator
Our next question comes from Mitchell J. Speiser - The Buckingham Research Group.
Mitchell J. Speiser - The Buckingham Research Group
Can you quantify at all the July 4 shift impact on the comps quarter to date?
Susan M. Collyns
We actually think it’s probably 20 basis points or around $300,000.
Mitchell J. Speiser - The Buckingham Research Group
On the -2% comps target for the quarter you did mention comps running down about 1.4% or so. Is it due to just a more difficult comparison I think in the August period or any reason why you expect things to get a little slower?
Susan M. Collyns
In the second quarter part of the reason we did the thank you card promotion is because we knew it was the toughest quarter we were facing all year. As you point out, in the back half of the year certainly for the month of August comps do actually jump up. I think we’re lapping a 3% in July, a 4.7% in August and a 3% again in September. Those numbers right now certainly look pretty steep but we do have a number of initiatives in place: The new menu items, we’ve got commodities that are pretty well locked in, we’ve got good work with being done with the energy initiatives, and the mini remodels, and our ancillary revenue stream continues to grow nicely. So while we think we have plans in place operationally to protect our earnings, certainly the trends we’re seeing right now on a state-by-state basis seem to move us toward a -2% number being the right number even though right now in any given day we’re kind of seeing that 1.4%. But only time will tell and we’ll just have to see how the rest of the quarter progresses.
Mitchell J. Speiser - The Buckingham Research Group
On new store sales, it looked like the average weekly sales growth versus the comps growth kind of widened in the period. My direct question is how new store sales did in the second quarter?
Susan M. Collyns
The new stores are actually doing great. Rick, do you want to comment on some of those? I know you anecdotally pulled out our Chino Hills because that really does seem to be an aberration given it is the ground zero subprime rate now but is consistently stayed above that $100,000 mark for the last seven weeks in a row, which is phenomenal. Do you want to talk about the new stores?
Richard L. Rosenfield
Yes. Anecdotally, and Sue you have the exact draw down numbers, but we feel very good about the new stores opening and seeing some of the Eastern suburbs, one particularly in Philadelphia with extremely high volumes for us opening as well as the smaller prototype exceeding our expectations in the mainline in Philadelphia. So we feel very good about the real estate strategy and the restaurants that we’re opening.
Susan M. Collyns
In the second quarter they were doing around $65,000 a week so as a group doing pretty well and so far in the third quarter doing around $70,000 a week. So the new stores are doing well.
Mitchell J. Speiser - The Buckingham Research Group
Any differences in comps in your mall locations? And if you can comment maybe on dinner versus off-premise locations or weekday versus weekend? Any disparities that we should know about?
Richard L. Rosenfield
I don’t know that we’ve analyzed mall versus non-mall. What I do know is what we’re seeing is strong weekends and a fall-off in dinner traffic earlier in the week and that’s probably what’s causing a little deleveraging in the comps.
Operator
Our next question comes from [Thomas Fortay].
[Thomas Fortay]
I wanted to know what your thoughts were on the competitive landscape as far as whether or not you felt like you were seeing more promotional activity from the competition going into the second half of the year?
Richard L. Rosenfield
I think all of us are seeing across the board a lot more promotional activity on all ends of retail and restaurants. It’s just something that we with the exception of our thank you promotion we don’t do. We certainly don’t have any significant promotional marketing spend.
Susan M. Collyns
I think to add to Rick’s comments just as an interesting point, one other concept has actually directly taken our thank you card promotion and is using it actively this quarter. But for us we do think the market seems to be oversaturated right now with a number of discounting programs and we never really saw our thank you card program as a discount program because of the lottery element attached to it. It was just more fun than that. And for us that’s kind of why the back-end of my prepared remarks I made the comment about pricing because for us it’s about value rather than price. There is a lot of blatant discounting right now which consumers may be gravitating toward but it’s a well-known fact that it slowly erodes the value of your brand. So for us it’s really more about addressing the value proposition, the quality, the experience, the service, the ambience, the food and all of the touch points that really build the brand. So we don’t have any intention at this point to do another thank you card promotion certainly in the back end of this year. We feel there are a number of other drivers that are just great at CPK right now and will work toward us delivering our results to shareholders for the back end of this year.
[Thomas Fortay]
With the big success of the thank you card promotion, I wondered if you felt like there is any halo effect that helped traffic beyond the June 16 end date?
Susan M. Collyns
If anything, I think we might have seen a bit of bounce back fatigue to be honest. It was an interesting period because you had what we call bounce back fatigue and then lobbying straight into the 4th of July. But then happily we had the Trifecta result of the Batman, the Mama Mia and the Nordstrom sale occurring in early July as well which helped move our sales. We do have around 44% of our stores near theaters and we have another 30% of our stores right next to Nordstrom, so we’re benefiting from those two activities. But again that’s seasonal. Those sorts of things occur on an annual basis. You just never know when it’s going to occur or in what month. But we’re sure happy that we placed ourselves near the theaters.
Richard L. Rosenfield
If I can just amplify what Sue has said, I think most of those of you that I know know that I look at sales every day every restaurant. It impresses me that what we have, I guess I didn’t get to it the way I wanted to in my prepared remarks, but we have very strong revenues and very consistent revenues. Our revenues are not volatile at all. They’re very predictable across the board and then they change with seasonality, and that’s a real different issue than comps. So when I look at our revenues and our profits, I feel very, very good about the current state of our business. Even though we’re very cautious about the back half of the year and lack of visibility that we all have, that makes us conservative. When we got in this restaurant business, Larry and I, we learned you bank dollars; you don’t bank percentages. And CPK’s putting dollars in the bank.
Operator
Our next question comes from Nicole Miller-Regan - Piper Jaffray.
Nicole Miller-Regan - Piper Jaffray
I missed the April comps. Could you just give me that again Sue?
Susan M. Collyns
Sure. The April number was 0.2%.
Nicole Miller-Regan - Piper Jaffray
That was versus 6.5% last year?
Susan M. Collyns
That’s right.
Nicole Miller-Regan - Piper Jaffray
To me Kraft has always been the story. That’s like the higher margin business. So I was just wondering if we could get what those sales were in the quarter and get an update on how things are going there?
Richard L. Rosenfield
While Sue searches around for her numbers, they’re obviously going very well and what happens that really increases for us is as it ramped up this year, as you remember we have a tiered royalty, and because of this increase in sales we got higher in the tier faster and that’s in addition to great sales coming out of Kraft that’s what drove this increased royalties so significantly in the quarter and the first half.
Susan M. Collyns
The wholesale number for the second quarter ended up around $41 million and that was up over the $31 million last year. So it was a 32% increase in revenues for the second quarter but for us it actually translated to a 42% increase because of the tiered royalty stream that Rick just mentioned. We bridged beyond that 3% into the 4% category for almost $27 million of that $41 million. So that was a very nice uptick.
Nicole Miller-Regan - Piper Jaffray
What do you attribute these increases to?
Richard L. Rosenfield
It’s great products and a great partner. Kraft has wonderful quality control. We have a wonderful relationship with them. We’ve introduced great new products. The Pizza For One now which is a new one. We have new products coming for the future. So it’s just a lot of momentum in that business and the power of our brand and the growing awareness of CPK as a brand. And I’ll tell you, Nicole, you’re right. It’s a big part of our story and so is the ramp up in international franchising a big part of our story, all of which gives us a lot of comfort that we have that kind of growing ancillary revenue that’s very high margin in this tough time.
Nicole Miller-Regan - Piper Jaffray
I guess it just sort of begs the question. As you look forward do you think those ancillary sales are going to help you hold or even lift margins in an otherwise inflationary environment?
Susan M. Collyns
It’s absolutely key, the strategy of driving shareholder return and earnings per share for sure. No one’s asked the question but I’ll just put it out there that we increased a number of international stores to nine this quarter for the full year and next year’s lineup, even though we haven’t gotten into that number and we’re still nailing it down, looks very, very good and we’re very encouraged by that. Larry’s doing a lot of work with several people here with the team from Host and that continues to move in a very positive fashion and those sales are in the double-digit territory as well around 11% for the last three months. So that whole segment of our business is absolutely key and is what Rick and Larry spend a significant amount of their time doing.
Richard L. Rosenfield
Including obviously as we mentioned talking to other international franchisees that we would expect to bring on line.
Nicole Miller-Regan - Piper Jaffray
If I understand correctly, you executed on $50 million and then you have another $50 million remaining on the share repurchase. I’m just thinking, would you be willing to kind of pull back in 09 development and then use the savings in cap ex to be more aggressive on that repurchase?
Susan M. Collyns
We’re always looking at ways to maximum shareholder value and truthfully it’s generated a very attractive return for shareholders this year, way beyond the $0.02 that we originally estimated. We’ve already banked $0.03 of that for the front part of the year and depending on how the year progresses and our stock price in general, because I’m sure you all remember that diluted share number is largely driven by the share price of a company’s stock price in addition to obviously any share repurchases. We feel good about it being highly accretive this year but we can’t really build restaurants right now that generate that guaranteed return in quite the same was as buying back stock. So it’s a very nice driver and it’s one of those financing initiatives and strategies that we have employed in addition to comp sales, in addition to new stores, in addition to driving EBITDA that will help to drive our earnings per share. It’s one of the strategies we continually employ and that’s why the Board of Directors was so excited and did authorize the other $50 million.
Operator
Our next question comes from Bryan Elliott - Raymond James & Associates.
Bryan Elliott - Raymond James & Associates
Just an accounting question Sue. This is the first quarter in ages that depreciation actually decreased sequentially and I know we have a couple more remodels. As you look sort of intermediate term into 09 and 2010, are we kind of getting through the original group of stores major remodel program and depreciation might normalize some as a result?
Susan M. Collyns
The Q1 number you might remember Bryan was elevated by a bunch of stores that we decided not to move forward with. When we killed the number of stores in the pipeline earlier this year we did have some costs on those. So that’s why the Q1 number was elevated. I think the average number for 2007 ended up in Q1 was $8.4 million and jumped up to $10.3 million by Q4 so Q1 was disproportionately high. $10.4 million is right on target with where it should be right now and for the back end of the year I’m estimating an increase from that $10.4 million to $10.5 million to closer to $11 million in Q3 and Q4.
Bryan Elliott - Raymond James & Associates
Is that $10 million for here in this quarter a clean number from the sense of there’s no major remodel hit there? There are some minis but no major, right?
Susan M. Collyns
Yes. The mini models actually don’t trigger any accelerated depreciation so you’re right. To the extent there was some accelerated depreciation that would have been built into the Q1 and Q2 number but there’s no other noise in those numbers.
Operator
Our next question comes from David E. Tarantino - Robert W. Baird & Co.
David E. Tarantino - Robert W. Baird & Co.
A question Sue on the cost of sales line. How would you expect that to trend for the balance of the year? Do you expect it to stay in this 25% range given where you’ve contracted so far?
Susan M. Collyns
I said 25% last quarter and I’m going to stick to that right now. That’s where I have it modeled at David. As I mentioned again in the prepared remarks we have a bunch of things that the RVPs and Larry work with the regional directors on and we’re following up on that. If we achieve those results again, we might see some better numbers. But I’ll tell you, the other headwind is going in the wrong direction for us are the fuel surcharges. So depending upon where that moves to in the second half of this year, the work we’re continuing to do is just part of best practices but also to mitigate what we see as real headwinds. And we also got knocked around on grocery prices in the second quarter. I’m’ hoping we can hold this 25% number and if we come in better, then we’ll deliver a better number to you. We’ll let you know that in the third quarter call.
David E. Tarantino - Robert W. Baird & Co.
Given where you see commodities today, is there any initial take on what type of inflation you might see next year on that line item?
Susan M. Collyns
We’re actually just about to kick off our strategic planning and budgeting process so it’s really too early to say. I guess anecdotally I would just comment that I don’t see any drivers that make the cost of goods percentage increase attractive. At a minimum I think 5% is probably the right number today but I think it could easily go as high as up to 7% based on my conversations with our SVP of Procurement. But we’ll have more color on that obviously over the next couple of months. It really depends on a couple of key crops that come in in the next 30 days, specifically soy bean I’m told. So we’ll certainly have more color during the third quarter call.
David E. Tarantino - Robert W. Baird & Co.
And a question on the Kraft business. Is there an update related to the non-pizza products and where Kraft stands in developing those?
Richard L. Rosenfield
Actually no update yet and that’s for competitive reasons that we’re not going to comment on it. But as I mentioned earlier we are working on non-pizza products and they will be part of our future.
Operator
Our next question comes from Conrad Lyon - Global Hunter Securities.
Conrad Lyon - Global Hunter Securities
I want to ask a question about how sites are looking out there. Given that we’re seeing a lot of restaurants and some of your competitors having trouble, are you seeing good quality A type sites being more available to you that you’d like to get into and perhaps even more TI dollars on the horizon?
Richard L. Rosenfield
I don’t know where we’re exactly standing on TI dollars. I do know that we feel that we are clearly seeing more and more good sites. As you can imagine as our peers and competitors pull back and we have these long-term relationships with not only the majors as I mentioned but talking about the majors, they really respect sales and they respect as well what we do in providing quality experience. So they know that we are at the top of the industry and they know how we’re performing in their centers against our competitors and peers. I have to say we’re having a little bit of a love fest out there with them right now. And then as I added and I think is really important is this new prototype, the way I describe it very anecdotally is we would get one-page flyers from real estate brokers around the country for little one-off locations say in front of a Target or a Costco. And we wouldn’t have looked at those in the past but now we’re looking at them. And we’re looking at them because I really believe that this flexible smaller footprint where we have lower costs is a great opportunity for us in addition to our continuing desire to do all the A sites. But as I said if I sense anything, I sense clearly an uptick in the quality of the sites that we are being offered.
Conrad Lyon - Global Hunter Securities
I think you talked about some price rolling off. What was the actual menu price in the second quarter?
Richard L. Rosenfield
While Sue grabs that, if I just drop a [inaudible] on my last comment. Anecdotally we just received this week from our VP of Real Estate with one of our major developers a site that we have wanted in the Midwest for some time that they weren’t offering to any restaurant because they wanted to be a two-story retailer and now they’ve come and offered us this high quality site. We’re starting to hear things like that, so it’s not only competition from restaurants but it’s competition from retailers where they’re pulling back on their development that are making sites available for us that otherwise would not have been available.
Susan M. Collyns
Whether it’s people or whether it’s the developers, it’s still gravitating toward the brands with exceptional value and who also have the financial staying power and we certainly do. To move to your question, did you ask that Q2 or Q3 pricing Conrad?
Conrad Lyon - Global Hunter Securities
What it was during Q2?
Susan M. Collyns
It was around 4.9%. We ended up rolling on around 1.4% for the new menu pricing and we had around 3.1% roll off from the previous year so that’s how the average blended in at 4.9%.
Conrad Lyon - Global Hunter Securities
Regarding the loyalty program, it looks like it was very successful. Might you bring that back again at an earlier phase or is that something you may be put on the shelf for a little while?
Susan M. Collyns
The last time we did it was around nine years ago. It was really a long time between promotions. We haven’t announced when we might consider doing it again but we’ll keep you advised.
Conrad Lyon - Global Hunter Securities
Or let me maybe rephrase it this way. What’s your appetite like with respect to perhaps using similar type promotions or perhaps discounting and that type of thing?
Richard L. Rosenfield
As for discounting, we’re anti-discounting and have been for 23 years. We’ve done it very infrequently and we don’t see a huge redemption for it. So again I think as we target who our customer is, which again towards a higher demographic, a higher income level, a higher education level, I don’t think they’re as promotionally oriented nor is it something that we feel particularly great about. We feel far better about providing a quality experience as Sue said. I think we feel great about the returns we’re getting out of these remodels, mini remodels, refreshenings because we’re creating an environment that creates more value and what we talk about a lot is we want to create value; we don’t want to create discounts.
Susan M. Collyns
We do have marketing programs that go on in every market on a regular basis and that can be everything at the grass roots level to sponsoring the local baseball team or soccer team to a business-to-business program to several free-standing inserts promoting menu items and some of those may have offers on them and some of them may not depending upon the market and depending upon the competitive activity. And I know you’re in California Conrad; you might have seen it if you’ve been watching any of the games at Angels or Dodgers stadiums. With Kraft we have a co-marketing arrangement with them and received tremendous publicity on the back of the strike-out meter together with the back banner behind home plate there.
Richard L. Rosenfield
We call it the CPK strike-out meter.
Conrad Lyon - Global Hunter Securities
Yes, I’ve seen that.
Susan M. Collyns
We’ve been building frequency traffic in a way through those sorts of things, those brand building initiatives.
Richard L. Rosenfield
In addition of course is the required spend as Kraft ramps up its sales. They have a required advertising spend so that’s helpful to us as well. We love the ads that they do for us.
Susan M. Collyns
Right. And this year we are doing national print with them and exploring other exciting marketing campaigns for 2009. So again, not discount related; really about building the brand and the brand awareness.
Operator
Our next question comes from Destin M. Tompkins - Morgan Keegan & Co.
Destin M. Tompkins - Morgan Keegan & Co.
I just had one follow up. On your comments on commodities, specifically on dairy, you said 33% of your dairy is locked in and I think you assumed $1.80 to $1.95 per pound for cheese in the back half of the year. Just looking at recent spot market prices, it’s declined to about $1.70 per pound. If that holds, would that be a tailwind or are you guys locked in at a price in that $1.80 to $1.95 per pound range?
Susan M. Collyns
We’ve actually got a price in the low $1.70s for November and December and then as you correctly point out depending upon where the market settles in that could be a pickup which would be very nice.
Worth bearing in mind unfortunately though we do have minimum wage increases in 18 other states. The nine states that we had minimum wage increases in the front part of the year, that represented 60% of the base but we do have another 18 states that commenced in July unfortunately so I’m hoping that any pickup in cheese will help offset some of that.
Operator
Our next question comes from Lawrence Miller - RBC Capital Markets.
Lawrence Miller - RBC Capital Markets
Can you guys talk about that you think you’re check average is getting like $14.00 now and then that’s more in line with what we see at other casual diners today? How much pricing power - I know you had tried to get that check average up to be commensurate with the experience and the total value equation - how much more pricing power do you perceive in the brand? Are you hearing from customers that “I love CPK. It’s just getting a little bit too expensive these days.”?
Richard L. Rosenfield
Frankly we’re not hearing that. That’s one thing that we’ve always addressed from literally the day we started in business how much pricing power, and we’ve constantly had that kind of elasticity where we’ve been able to take it. And again I think that what we know for sure is that we measure the customer proposition and that customer value proposition is directly related to these new ambience stores. They get the substantially higher value ratings and that’s what’s led us to accelerate these remodels because we think that’s where value comes in. And again I think we pride ourselves as to what level of customer service we provide and darn right the quality of craveable food. We’re pretty proud of that. So we think we have plenty of pricing flexibility. The other aspect that we’re doing is we’re having very good success with these entrée items and we’re continuing to develop those items. And that’s a higher priced ticket item for us that has a good margin in it and I think provides a lot of value on the plate.
Susan M. Collyns
I think one of the comments made on Rick’s point is that we just continue to reassess and get feedback from guests on a regular basis on every single menu item. So the other thing is we are aware Larry of the pricing increase and that’s kind of why I spent the last commentary on my prepared remarks talking about price because it is a big topic of conversation here, price as it relates to value. So making sure that we look at each menu item and evaluate whether or not we are delivering, not just on the value point of the equation but all the metrics - the taste, the heat, all the metrics, I think there are 16 different metrics that we measure each menu item on - and for competitive reasons I don’t want to disclose what we’re doing but there are a number of initiatives that we’re moving down the path on to again increase that value perception. And not just perception, but also reality with that perception.
Richard L. Rosenfield
And Larry we do look at our competitors and our peers as to what they’re pricing and as we see it we are still at the low end of that price compared to the people we consider our competitors.
Susan M. Collyns
We’re certainly attractive compared to grocery stores right now in terms of percentage increases. So I think it’s that whole basket that we look at on a regular basis.
Lawrence Miller - RBC Capital Markets
And initially as you think about commodity inflation in 09 the 5% to 7%, what level of pricing if you have even thought about it at this point might you be comfortable with?
Susan M. Collyns
We haven’t really gotten there yet Larry. As I said we’re about to kick off our strategic planning process and you can rest assured that will be in the top three items of our debate as we evaluate all the strategies next year to continue to grow the business and drive earnings.
Lawrence Miller - RBC Capital Markets
Can you give us a glimpse at this point of what those new Kraft products might be and the timing? I know they got pushed out to it looks like 09 but any color there?
Susan M. Collyns
No. We actually can’t for competitive reasons. Sorry Larry.
Lawrence Miller - RBC Capital Markets
Did you say that you are ready to test national media in 2009?
Susan M. Collyns
We already have national print with Kraft this year and we will have the budget for some kind of television next year and the question would be what we might look at.
Richard L. Rosenfield
We are considering it and considering it also in conjunction and in discussions with Kraft.
Operator
Our next question comes from Mitchell J. Speiser - The Buckingham Research Group.
Mitchell J. Speiser - The Buckingham Research Group
You kind of alluded to 09 unit growth. I know you’re still going into the planning process, but I guess it takes about 12 to 18 months to open a store. So is the pipeline looking like it’ll be less unit growth in 09 versus 08 at this point or perhaps the same?
Richard L. Rosenfield
It looks like less because when we made that conscious decision to cut back, there is that lag period. We don’t have it locked and moded yet but if I were to give you a rough number, we think it’ll be about six full-service restaurants next year. That’s an approximate number at this point. So that will be a significant cutback for us and I think it’s in line with our desire to keep flexibility between what we think is a great return for shareholders and stock repurchases in this environment too.
Mitchell J. Speiser - The Buckingham Research Group
If I got it right, I think you said you’re expecting the share base in the third quarter average diluted at 25.7 million. I think that’s a little bit higher than the second quarter. Can you comment on that?
Susan M. Collyns
Stock price isn’t just part of the share count drivers are primarily company stock price as well as any potential retirement of shares. So I haven’t assumed any retirement of shares. I’ve just presumed that the stock price would be in excess actually of what we had in the second quarter and maybe that’s being optimistic. It’s a conservative number. You know that I’m largely conservative and that’s how I came up with that number.
Mitchell J. Speiser - The Buckingham Research Group
So that number does not include any share repurchase even though you do have the authorization?
Susan M. Collyns
Yes, that’s right.
Richard L. Rosenfield
That’s exactly it.
Susan M. Collyns
Q3 and Q4 do not assume any share repurchase at all. If we did repurchase, those numbers would change.
Operator
Our next question comes from Steven Rees - J.P. Morgan.
Steven Rees - J.P. Morgan
Most of my questions have been answered. I just wanted to ask if you’d seen any change in the to go or takeout mix over the last few months?
Susan M. Collyns
Not really Steven. It’s relatively flat. Clearly the competition is out there and CPK’s always had the lion share of the market before most other players. So I think competition has increased which is always healthy and we are maintaining our share. It’s our off-premise sales maintained around 18%.
Mitchell J. Speiser - The Buckingham Research Group
So would you say it’s holding up better than the dine-in sales or is it commensurate?
Susan M. Collyns
No, it’s not holding up better. I’d say it’s gotten knocked around a little bit but it’s stable.
Mitchell J. Speiser - The Buckingham Research Group
Any noticeable change of the lunch versus dinner mix?
Susan M. Collyns
Lunch I guess is holding up a little bit more solidly than dinner, and as Rick mentioned earlier it’s really that Monday to Thursday timeframe that people don’t seem to be treating themselves. They still seem to be going out and doing what they always do Friday, Saturday and Sunday so we’re seeing very solid results along that three-day period. It’s really just the Monday to Thursday.
Richard L. Rosenfield
But as I mentioned to you all earlier, it isn’t volatile. Other than seasonality the Mondays are the same, the Tuesdays are the same relative to the Tuesday before. That’s not bouncing around. Our revenues are good.
Operator
There are no further questions.
Richard L. Rosenfield
Thank you all for attending our call today and we look forward to talking to you at our third quarter call. Good day.
Susan M. Collyns
Thanks very much.
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