The Cheesecake Factory Incorporated
Q1 2010 Earnings Call Transcript

Published: 24 Apr 2010

[Operator:]

Good day ladies and gentlemen and welcome to the first quarter fiscal 2010 earnings conference call. My name is Kiana and I will be your operator for today. At this time all participants are on a listen-only mode. Later we will conduct a question and answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Ms. Jill Peters.

[Jill Peters:]

Good afternoon and welcome to our first quarter fiscal 2010 earnings call. I am Jill Peters, Vice President of Investor Relations. With us today are David Overton, Chairman and Chief Executive Officer and Doug Benn, Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call items may be discussed that are not based on historical fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results can differ materially from those stated or implied and forward-looking statements as a result of the factors detailed in today’s press release, which is available in the investor section of our website at www.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission (SEC). All forward-looking statements made on this call speak only of today’s date and the company undertakes no duty to update any forward-looking statements. David will start off the call today with some opening remarks. Doug will then take you through our operating results and details and provide our thoughts on the second quarter of fiscal 2010 as well as an update on the full year of 2010. Following that, we will open the call to questions. Without further delay, I will turn the call over to David.

[David Overton:]

We’ve seen improvement in our business and are pleased to report that comparable sales in the first quarter were positive for both the Cheesecake Factory and Grand Lux Café. Our comparable sales improvement was driven by better guest traffic. At the Cheesecake Factory all of our markets delivered positive, comparable sales, even in California, which was a softer market for us throughout the recession. With comparable sales being better than we anticipated it drove higher earnings per share, which grew 82% from the first quarter of last year. Clearly we have a lot of leverage in our business model. Just as we were negatively impacted during the recession as a result of cost being spread over a lower level of sales, we were able to effectively benefit when sales are on the up-swing by spreading what is now a lower cost structure over a higher level of sales. Capturing the leverage from improving sales drove significantly better operating margins in the first quarter. Going forward, our ability to generate continued improvement in comparable sales will play a key role in sustainably improving our margins and helping us to deliver earnings per share in the mid-teens range over the next five years. In addition, retaining the $27 million in savings that we realized in 2009 from our cost management initiative, as well as capturing nearly $6 million in planned additional savings in the first quarter of this year, also helped fuel our performance. Our operators are doing an excellent job running our restaurants efficiently, while still delivering a fantastic guest experience. Even the year after we started rolling out efficiency improvements in our restaurants, both our hospitality and technical guest satisfaction scores still remain high demonstrating a good balance between cost savings and the importance of the guest experience. On the development front, we opened two new Cheesecake Factory restaurants during the first quarter. Both locations opened to high-demand with long lines on their first day. It’s gratifying to see the affinity that consumers continue to have for the Cheesecake Factory brand even after all of these years. This demonstrates to us that we still have many years of profitable unit growth ahead of us. Our plans right now call for one more new restaurant opening in the back half of this year. We recently completed our new menu roll-out during the first quarter and guests are responding well to our new menu additions. Our marketing plans for this year will continue to focus on brand engagement to drive profitable comparable sales using a variety of tools. I hope you will have a chance to visit one of our restaurants during the next couple of weeks to see what’s new on the marketing front and try some of our new menu items. With that, I will turn the call over to Doug.

[Douglas Benn:]

Total revenues of the Cheesecake Factory for the first quarter increased to $405.4 million compared to the prior year first quarter; an increase of 3.2%. Restaurant revenues reflect a 1% increase in total restaurant operating [inaudible] primarily from the opening of three new restaurants during the trailing 15-month period, plus a 2.9% increase in average weekly sales. Overall comparable sales at The Cheesecake Factory and Grand Lux Café restaurant increased 2.8% for the quarter. By concept, comparable sales increased 2.7% and 4% at The Cheesecake Factory and Grand Lux Café respectively. At The Cheesecake Factory concept, we implemented an effective menu price increase of about 0.6% in our winter 2010 menu change, which gives us about 1.4% of price in our menu from mid-March until the next menu change this summer. Overall menu mix improved in the first quarter supported by dessert sales and the stabilization of alcoholic beverage sales this quarter. At the bakery, third-party sales were at $11.7 million down versus the prior year due primarily to lower sales to the warehouse clubs. Cost of sales decreased to 24.3% of revenue for the first quarter of 2010 compared to 25% in the same quarter last year. The 70 basis point improvement, which was driven largely by lower restaurant cost of sales. About one-half of the savings came from our cost of sales initiative. The other half came from pricing leverage on commodity costs. Total labor was 33.3% of revenue for the first quarter, down 60 basis points from 33.9% in the prior year. Our direct operating labor was about 70 basis points better than the first quarter last year due to overall productivity gains stemming from our operational initiative and leverage from positive comparable sales. Other operating costs and expenses were 24.5% of revenues for the first quarter of 2010 down 140 basis points from 25.9% reported in the first quarter last year. Lower worker’s compensation and general liability insurance savings from our cost management initiative and favorability from timing and marketing costs, as well as leverage from positive comparable sales, were the key drivers. I will note that we expect marketing costs to catch up in the second quarter of 2010. G&A expense for the first quarter was 5.8% revenue, up 30 basis points as compared to the first quarter of 2009. The majority of the increase was due to performance bonus accruals as the acquired accrual in the first quarter of last year was lower. Depreciation expense for the first quarter was 4.5% of revenues down 20 basis points versus the prior year period. This was due to the impairment charge we recorded in the fourth quarter of 2009 as well as positive comparable sales leverage. Pre-opening expenses incurred during the first quarter were $2.1 million, primarily in support of two new restaurant openings during the quarter. This compares to $1.7 million in the same quarter last year, namely due to the opening of one new restaurant during that period. Operating margins in the first quarter of 2010 improved 250 basis points to 7.1%, putting us on-track to achieve our intermediate term goal of returning to 2007 operating margin levels of 7.3%. While we originally thought that 2011, early 2012 time frame was a reasonable one for this target, we now expect to be closer to accomplishing this objective by the end of fiscal 2010 with operating margins for the year now expected to be between 7.2% and 7.5% depending on where we fall with our comparable sales range assumption. Interest expense was $2 million lower in the first quarter this year due to lower debt balances on our revolving credit facility. During the first quarter, we repurchased a little more than 487,000 shares of our common stock at a total cost of $12.5 million. While this reduced our weighted average shares outstanding, it wasn’t enough to offset the increase in weight though caused by option exercises and the additional diluted impact from unexercised options resulting from our higher stock price. Our liquidity position continues to be solid with a cash balance of $107 million despite using some of our cash flow to fund our share repurchases. Our revolving credit facility balance remains at $100 million. Cash flow from operations for the first three months of the year was approximately $46 million. Net of roughly $7 million of cash used for capital expenditures, we generated about $39 million in free cash flow in the first quarter. That wraps up our business and financial review for the first quarter of 2010. Now I would like to spend a few minutes on our outlook for the second quarter of 2010 and our current thoughts for the full year. As we have done in the past, we continue to provide our best estimate for earnings per share range based on a realistic comparable sales assumption. Our comparable sales assumption factors in everything that we know as of today, which includes quarter-to-date trends, what we think will happen in the weeks ahead, weather impacts, and the impacts of any shifts associated with holidays. As is generally our practice, we don’t plan to give any more specifics in second quarter to date comparable sales trends on this call. With that said, for the second quarter of 2010 we estimate diluted earnings per share between $0.34 and $0.36 based on an assumed range for comparable sales of between flat and positive 1%. As expected our first quarter comparable sales were positively impacted by about 1% from gift card sales in the fourth quarter of last year and from holiday shifts. Thus our real run rate coming out of the first quarter was about 1.5% to 2%. We anticipate comparable sales in the second quarter to be negatively impacted by the holiday shift as well as less menu pricing and slightly more difficult comparisons. We have considered these factors in arriving at our estimated range of comparable sales. In addition to these impacts earnings per share of the second quarter will be impacted by higher marketing expenses as there was a shift of expenses from the first quarter into the second quarter. We are also expecting slight pressure from commodity costs from the second quarter, mostly driven by higher dairy costs as compared to the low dairy costs that we saw in the second quarter of last year. For the full year 2010, we now estimate diluted earnings per share between $1.28 and $1.34 based on an assumed, comparable sales range between flat and positive 1%. This is the best read we have today of performance for the remainder of 2010 assuming no significant decline in the economy. It is hard to know what the next nine months will hold, although we are seeing some positive indicators of an economic recovery in terms of the consumer confidence in retail sales. Unemployment remains at 9.7% and it’s even higher in places such as California, which reached a new high in March hitting 12.6%. As a result it’s difficult to have a high degree of conviction in the strength of the economy and the pace of recovery. Our earnings per share guidance represents growth of about 20% to 25% off of a base of $1.07 in 2009. With about 60% of our commodities contracted for 2010, we still expect food costs inflation to be between flat and up 1% this year. This reflects lower contracted prices for our proteins, offset by slightly higher expected dairy and fish costs. We continue to expect our tax rate to be approximately 29% to 30% in 2010. Our projection for capital spending in 2010 is $45 million to $50 million. With that said, we will take your questions. In order to accommodate as many questions as possible, please limit yourself to one question and then re-queue with any additional questions.

[Operator:]

(Operator Instructions) Your first question comes from John Glass – Morgan Stanley

[John Glass:]

My question, Doug, really relates to margins that flow through this quarter because it’s the first quarter that we’ve seen the positive counts in quite a while. If you look at either operating margin or proxy for restaurant margin, it’s not that much different than it was in the last three quarters despite having a better comps and better averages with sales. Are we seeing that you have to add, for example in the margin a little bit of labor now that comps have come back? What is the dynamic that is going on? I guess we have a fair level of expectations for what the comp leverage is when you do see further improvement in same store sales.

[Douglas Benn:]

John, I’m seeing that we’re getting the flow through that we expected to get from the increased comps, actually greater flow through than we expected to get. Our guidance for comps for the quarter, we exceeded that by about $0.02. We have about a $0.06 upside on what our guidance was for earnings per share. We finished with very high operating margins at 7.1%. We saw actually about between 50% and 55% flow through on our additional sales. We feel like we got really good leverage on our margins. I would be happy to discuss that further with you, but I don’t see that we didn’t get flow through. We had 250 basis point improvements over where we were in the first quarter last year.

[John Glass:]

If I could just clarify the question. Let’s say that we use labor as an example. Labor ratio I think was about 33% of revenues this quarter. In the last three quarters it was at or below that level. Is that just the seasonality? Am I just looking at it because maybe seasonality and I shouldn’t be comparing that sequentially? I guess it’s hard to look at the first quarter of last year since you were just at the beginning of your cost management program. So that is why I am looking at the subsequent three quarters to compare this quarter to it. Is that not fair then?

[Douglas Benn:]

I think that you have to look too at what the average volumes were. I don’t look at it sequentially. That might be one way to look at it. I would have to look and see if I could understand exactly what you are talking about. I think I understand what you are talking about. I don’t know the answer other than to say that I think we’ve achieved fabulous leverage on our increased comps.

[Operator:]

Your next question comes from Jeffery Bernstein - Barclays Capital.

[Jeffery Bernstein:]

Two questions, one related to the cost savings you spoke about. I think you said $5.5 million in this quarter and you’re [lapping] $20 some odd million last year. I think last quarter you mentioned that you thought you’d find significant incremental savings. I just wonder whether this $5.5 million this quarter is indicative of whatever run rate we should assume for the full year and therefore a lot higher than the $8 million to $10 million you initially promised for this year? I was just wondering if you could give us an update on the cost saving outlook. Second, there’s been a few mentions of marketing, just kind of checking in the stores to see what’s new. I’m just wondering whether you can give us an outlook on what we should expect from marketing this year with the new recent CMO addition and perhaps percentage of spend. I think you said you’re going to catch up in the second quarter but perhaps what the second half looks like in terms of spend on that front.

[Douglas Benn:]

As far as the cost savings outlook, I think what we still feel comfortable with is the $8 million to $10 million of cost savings that is really coming over into 2010 from the 2009 initiatives. As you mentioned, we gad $27 million worth of cost savings initiatives that we implemented in 2009 and another $8 million to $10 million of savings expected in 2010. $5.5 million of that happened in the first quarter. We would expect another $1.5 million to $3 million of that to happen in the second quarter and the final say $1.5 million to happen throughout the third quarter and the fourth quarter. There are no announced incremental savings over and above that $8 million to $10 million. In fact, any other gains that we made on our margin line this time were made because of leverage on our comparable sales gains that we had. From a marketing standpoint, we still expect the spend for the year about 0.5% of sales on marketing, so that’s sort of the average. We only spent maybe 25 basis points in the first quarter and we expect to spend about 75 basis points in the second quarter. So the second quarter is being negatively impacted by a shift of somewhere between 25 and 30 basis points of marketing over and above what you might consider an average marketing. I don’t know if you were asking about the marketing programs, but I will comment that marketing continues to be focused on many of the same things that have been effective for us in the past. Our over arching principal is that our marketing efforts, we try to really remain on brand with our marketing which means that we don’t do the deep discounting that a lot of other people are doing. What our marketing efforts are focused on is really our guest engagement is one of the big things and in fact, we just announced recently or yesterday that we’ve got the Great Glamburger Challenge going on this quarter and it’s an opportunity for our guests to go online and be engaged by building their own Glam or Glamorous burger and the winning guests or the winning entry from that will have their burger put on our menu for a full year and they will also win one of their choice of six Glamorous vacations. So it’s a way that our marketing efforts are really trying to engage our guests. Additionally, our marketing efforts are really focused on gaining publicity for us and we’ve done an excellent job with this on the past. We’ve been on Dr. Phil a couple of times, Entertainment Tonight, Tyra Banks, and in fact, if you want to tune in tonight, it’s actually tomorrow morning at 12

[Jeffery Bernstein:]

Just to clarify one thing. The $8 million to $10 million in cost saves, that was incremental cost saves this year, that’s not necessarily a rollover from the annualized savings from last year. Is that right?

[Douglas Benn:]

No, it’s incremental to this year but it has to do with things that were identified last year.

[Jeffery Bernstein:]

But then there’s still some rollover form the $27 million depending on when you recovered those savings, when you annualize it, you’re getting some incremental flow through this year from last year’s cuts.

[Douglas Benn:]

I might be answering your question wrong. We identified cost savings last year. Some of them played out the entire amount during the year. Some of them only played out say half of a year last year and the other half is happening this year. What played out last year totaled $27 million and the remainder of them to play out this year is $8 million to $10 million.

[Jill Peters:]

If I can add, in aggregate, the cost savings initiatives that we put into place in 2009 will yield savings of a total of $35 million to $37 million of which we’ll capture $8 million to $10 million this year.

[Operator:]

Your next question comes from David Tarantino - Robert W. Baird & Co.

[David Tarantino:]

Congratulations on a great start to the year. Question for you Doug on the comps. Could you break out the mix and traffic components of the comps? I think you mentioned mix as positive but if you could quantify that, that would be helpful.

[David Overton:]

Mix wasn’t positive. Traffic was up 1.7% so sequentially traffic improved 3.4% because we were down 1.7% in the fourth quarter. 1.7% is traffic, 1.6% is price, and the mix was about negative 0.5% which is a little better than it has been. Alcoholic beverage sales as we mentioned are stabilizing which helped that mix. I wouldn’t say alcoholic beverage sales were up yet but they’re certainly stabilizing, and with respect to the price component of that, we took menu pricing during the quarter, we entered the quarter with about 1.8?% price in our menu and we exited the quarter with about 1.4% so that 1.6% is sort of a blend having taken a menu price increase of about 0.6%, somewhere around mid quarter.

[David Tarantino:]

A question about the guidance for the comps. I was wondering if you could mechanically take us through how you arrived at flat to up one. I know that you said Q1 was inflated by about a point by some factors that may not repeat but even if you adjust for that and the pricing, it looks like you’re guiding a little below what you did in Q1. Is it simply a function of the comparisons or is there something else in there that maybe I’m not thinking about?

[Douglas Benn:]

I’ll be happy to do that. You were focused on the right thing. The first thing you really have to do is determine what the right run rate is coming out of the first quarter, so we had 2.8% positive comps in the first quarter and about 1% of positiveness in the first quarter created by these holiday shifts that happened at the beginning and ending of the quarter and as well as redemptions of gift cards during the quarter. That was about 1%. So a real run rate coming out of the quarter is somewhere between 1.5% and 2% so then if you look at what’s going to go on in the second quarter, there’s that holiday shift that’s going to negatively impact us for the first few weeks of the quarter. There’s going to be less menu pricing in the second quarter, and we’re going to have slightly more difficult comparisons. I think if you add all that up, you’ll come to the conclusion that you’re right in the neighborhood of 0% to 1%. Now with that said, I will continue to remind people that when we give our sales range assumption, that’s meant to be more of a sensitivity then it is a prediction necessarily. It’s what we think we’re going to have for comparable store sales but if it allows you to know what earnings per share are anticipated to be at those sales ranges, 0% to 1%, and if you think that the sales ranges we’re actually going to have are going to be higher or lower than that, you have the information to adjust your earnings per share thoughts accordingly.

[Operator:]

Your next question comes from Nicole Miller - Piper Jaffray & Co.

[Nicole Miller:]

Understanding the price conversation, the 1.6% in the first quarter and positive comps, one of the questions I’ve been receiving lately is, does that give you and the industry more pricing power going forward, especially if commodities inflate?

[David Overton:]

Do we have more pricing power if commodities inflate?

[Nicole Miller:]

Yes, how much are you willing to extend that? How quick are you going to get back to your 2% to 3% run rate and [how many] price increases?

[Douglas Benn:]

I think it just depends. Really finding the right balance between pricing and what the guests will accept is always –

[David Overton:]

-- concern. Commodity pressure and you look at all three of those. We certainly would not want to fall behind. We did that many years ago and found that wasn’t productive. But we look at all three and then try to find the best balance we can.

[Douglas Benn:]

Our strategy really has been working with respect to what we’ve done. We’ve had improvements in guest traffic for 2 or 3 quarters in a row and it actually turned positive for this particular quarter and we feel like the pricing that we do have on our menu now, 1.4% in the second quarter, and [4] until we get to our summer menu change, is enough to offset what we think our estimated market basket inflation is going to be. When I say market basket, that’s cost of sales, wages, and utilities. We think those together are going to be up 1% so we’ve got that covered. If we were to have greater increases in commodity costs next year, probably not going to be this year, but next year, then we’d have to look more carefully at that, but still keeping balance between the pricing and traffic in mind.

[Nicole Miller:]

I know it’s a smaller piece of the puzzle, but the third party bakery sales, can you talk to us about what’s going on in that arena? I see a lot of your peers going into the grocery aisle, the frozen aisle. What’s the long term opportunity and do you see anything expanding for you on the horizon?

[David Overton:]

We’re looking at it carefully. Pizza is an easy product to sell in grocery stores and one that people are very comfortable with. We’ll see how… We’ve had many offers to take some of our items but right now we’re happy with our cakes and we have opportunities and we’re doing some TV tests with that but nothing with our food yet and again, I want to taste everything that’s out there to see if it really is representative of their brands.

[Operator:]

Your next question comes from Jeff Farmer - Jefferies & Company.

[Jeff Farmer:]

Just wanted to follow up on the earlier marketing question. I think you’re coming up on the one year anniversary of the small plates intro and I think you rolled out the guest card promotion in may and June, and you touched on this, but what’s the game plan as you anniversary both of those pretty big traffic drivers. I know you mentioned the Glam burger but is there anything more to it than that?

[Douglas Benn:]

We’re very innovative with respect to our menu and yes, there is lots going on on our menu and I don’t really want to get into the specifics of that other than the Glam burgers, but small plates and snacks and the specials are now a permanent part of our menu and they’re still a very attractive item that’s being very heavily ordered so… There’s new people coming in all the time discovering them. I don’t think we need anything to lap over that but we do have new menu innovations that are happening all the time and I would encourage you to go into our restaurants and see what we have going on.

[Jeff Farmer:]

Just in terms of the discovery aspect, I believe when you first introduced small plates as about 5% of mix, I could be wrong on that, but from that perspective, where is it now?

[Douglas Benn:]

We’re really not going to break that out any more and let me tell you why. It’s just part of the menu and what we said last time I think was that we didn’t expect it to change much and I think if we looked at the actual percentage now it would probably be about that but it’s not something that we really pay that much attention to because if you come into our restaurant, we really don’t care whether you order small plates and snacks or specials. We care that you came in and we want you to buy something. So buy anything on our menu and we’re just offering you greater choices now that we’ve created these small plates and snacks and specials.

[David Overton:]

It’s a broader group of people that come in for different purposes. We are not looking at it as some special thing anymore, it’s just one more thing on our menu and it’s a permanent piece of it.

[Jeff Farmer:]

Final question for me, just drilling down I guess on that return to positive traffic in the quarter, very difficult question to answer, but from your sense of your customer base, are you driving increased frequency from your existing customers or do you think you’ve been attracting new customers or potentially both over the last couple quarters?

[Douglas Benn:]

I would say that we’re driving increased frequency probably mainly.

[Operator:]

Your next question comes from Matthew DiFrisco - Oppenheimer & Co.

[Analyst for Matthew DiFrisco:]

This is [inaudible] in for Matt DiFrisco. Regarding your comps in the first quarter, did you see a monthly improvement and could you quantify any negative impact you saw from weather?

[Douglas Benn:]

It’s really hard to say month by month. There’s really noise in every one of the months, some positive noise and some negative. For instance, in January and March, those months were both very positively impacted by the holiday shifts and February, as you mentioned, was negatively impacted by weather. I don’t think weather hurt us a whole lot, that might have had, you have to say the weather that was worse than normal weather. So what was that? We would say maybe that’s 15 basis points or some pretty small number, so excluding those weeks where there was specific weather or holiday shifts, our comps were pretty steady throughout the quarter.

[Analyst for Matthew DiFrisco:]

Then also, you mentioned that 60% of your commodities are contracted for in 2010. Is cream cheese included in that?

[Douglas Benn:]

Cream cheese is largely contracted for, well over 75% contracted for.

[Operator:]

Your next question comes from Sharon Zackfia - William Blair & Company./

[Sharon Zackfia:]

David, I was hoping you could give us an update on the development front. I know that’s been more challenging with the lack of kind of new venues out there, so if you could maybe talk to us about the smaller format, what you’re kind of thinking about for 2011, and then maybe any kind of a bit on Rock Sugar and how that’s progressing.

[David Overton:]

As we’ve said, the new format is here to stay. We’ve built a couple of them and we’re very happy with the size, with the volume that they’re able to do, so we’ll move forward with that. We don’t have that many signed but I’m dealing with I would say 10 or 12 right now, whether some of that is 2011, will some move into 2012, I don’t know. But as we’ve said, Sharon, we’re looking at every great site and as many as we can get we’ll take. That includes building a smaller format for Grand Lux Café and bringing that down, bringing the décor down a little bit, because some of them are doing extremely well and we haven’t lost our enthusiasm for Grand Lux either. Then Rock Sugar, we’ve just come out with a new menu and we’re working on that. We’re looking but I’m only going to maybe look for one and it’s going to be a very, very special prime location because we have to build that brand in the right places. It’s not just one of those things that we’re just going to open in any mall at this particular time. But I’m anxious and as I said there’s a lot of things in the hopper and as we get them signed, we’ll let you know right away.

[Operator:]

Your next question comes from John Ivankoe – JPMorgan.

[John Ivankoe:]

A question on Grand Lux actually, if you could go through that very significant sequential improvement in comps, if there’s anything to read through there. I know it’s a relatively small geographic sample but if there’s anything operationally or menuwise or marketing that you did to allow that improvement?

[Douglas Benn:]

We did a little bit of direct marketing, but only on the two sites that weren’t, as we said, the two sites that weren’t doing as well as we would have liked. Other than that, no, I think it’s the same thing. It’s an improving economy. The guest has relaxed and had a little bit more money. We are one notch above Cheesecake Factory and because it got hit a little bit harder I think the comps came back a little more, but there was really nothing that we’ve done other than some local direct mail marketing in two markets.

[Operator:]

Your next question comes from Destin Tompkins - Morgan Keegan & Company.

[Destin Tompkins:]

Thank you. David, do you mind commenting on geographic variances you’re seeing in sales? Obviously the trends improved in Q1 sequentially. Are you seeing some of the harder hit regions come back quicker?

[David Overton:]

I’m going to let Doug speak to that but every single area improved in the country as we said, including California and Arizona, so we were happy but can you shed any more light on that Doug?

[Douglas Benn:]

Not only every area improved but every area that was positive. If you think we have 11 geographies. If you take Southern California and Northern /California as one geography, we have 11 and every market was positive including California, including the southwest, including the northwest, which were the three that were not doing as well during the recession. Probably the biggest mover of those three was the southwest, was the biggest improvement, sequential improvement for the fourth quarter.

[Destin Tompkins:]

Doug, do you mind coming in on commodities and kind of going out a little ways, the spot markets obviously showing a little bit more food cost, inflation currently and we don’t have a good insight on where your contracts are for the most part but if spot markets remain at this level, would you see significant inflation next year or do you have a sense? Is that even on your radar screen at this point?

[Douglas Benn:]

I think most of what I’ve seen is that there is going to be some commodity inflation next year and we are purchasing people or even starting to deal with that today where they can, maybe extending some of the contracts that we have. But I think that we probably will see some inflation in commodities. We’re fine for 2010. I think we feel very comfortable with the fact that we think our commodities are going to be up 0 to 1% and our food cost line, cost of sales line, will be somewhere right around flat to last year so we’re comfortable with 2010 and 2011 is pretty far off for now but we’ll have to take that as it comes to us.

[Operator:]

Your next question comes from Christopher O'Cull - Suntrust Robinson Humphrey

[Christopher O'Cull:]

My question is a follow up to the development one earlier. Would you provide some sales and investment cost statistics for these smaller units like the one in Annapolis? When you think about the development pipeline for ’11, do you expect most of the openings to be the smaller prototype?

[David Overton:]

I can’t tell you. You could say most of them. Certainly what we were building that we thought could do $10 million before and needed a 10,000 footer, now we’ll probably build an 8 because we know it can do $10 million. So in that, we should be able to save some investment cost and choose that size box, but each one we’ll look at depending on some we’ll have to build, some we’ll have to move into, some we just take the size the landlord has because that’s the size it is and we’re able to function in all those. We’ve gone through those cuts before but –

[Douglas Benn:]

An easy way to explain the unit economics is if we have an 8,000 square feet unit and a 10,000 square feet unit, basically at $1,000 per square feet, we’ll achieve our desired return on investment which is 18% to 20% cash return on investment. So the smaller unit costs $1.5 million about less to build and so if it at 8,000 square feet does $8 million a year, we’ll be very happy with it. I guess the thing that we have found out from Annapolis, and now we’ve opened in Christiana, Delaware which is not the same floor plan but is slightly bigger than that but still smaller than normal, and we’re doing great volumes there. So what we’ve proven to ourselves is that those smaller formats can do $10 million in say an 8,000 square feet box which is well over $1,000 a square feet so obviously we get our returns out of that. That’s roughly a kind of easy way of looking at it.

[Operator:]

Your next question comes from Brad Ludington - Keybanc Capital Markets.

[Brad Ludington:]

I want to ask about the commentary that alcohol sales have stabilized or maybe not back to normal levels but have improved. Can we assume that maybe appetite and dessert sales are starting to pick up some as well or is that just more focused on the bar at this point?

[David Overton:]

Appetizer sales have always been good. They were never down. Dessert sales started to improve a while ago and really the last piece there was that they were maybe buying one drink or one glass of wine rather than two, but now that is stabilizing and we think it’s starting to turn for alcohol. So the others have actually been good for a while.

[Douglas Benn:]

The dessert sales actually as a percentage of sales increased 0.5% this quarter so we were at 15.2% of sales were dessert sales and last quarter it was 14.7% so a big increase in dessert sales as a percentage of sales and in the incident rates of desserts being ordered, those were up as well and the thing that’s down from a mix perspective, alcoholic beverages some, but less than they were, but non-alcoholic beverages are still less than what they were last year.

[Brad Ludington:]

So still people, they’re not getting the bar drinks, just getting water instead of tea or Coke?

[David Overton:]

That’s right.

[Operator:]

Your next question comes from Mitch Speiser - Buckingham Research.

[Mitch Speiser:]

First on Grand Lux, and you did say comps improved pretty much across the board I believe, if I got that right. Did the Las Vegas store have a disproportionate affect on the Grand Lux comps?

[Douglas Benn:]

It could have a disproportionate affect because the volumes are so big. There’s two in Las Vegas, by the way. There’s two in pretty much the same hotel in Las Vegas, side by side hotel. But out of the 13 Grand Lux locations, I think every one of them was up. It might have been 12 up but most of the Grand Lux locations were up and I don’t think that… There was always some disproportionate thing that can happen with Las Vegas, but this was pretty broad across the board.

[Mitch Speiser:]

Also separately, on the comps gains at the Cheesecake Factory, is there any way to drill down… I guess in general, do you feel that your sales are driven by business activity at all and have you seen when you drill down to the traffic what type of customer may have been coming back, were it locals, transients, business activity related? Any demographic types of data as to what drove the traffic?

[Douglas Benn:]

I would tell you that I don’t think our traffic is very largely business driven. Whether business has increased or not, I don’t think that’s where we’re necessarily getting it. I think that it was brought across the many different varieties of people that use our restaurants and I don’t think that we have isolated any particular one group that we t thought moved a lot.

[Operator:]

Your last question comes from Keith Siegner - Credit Suisse.

[Keith Siegner:]

I’m going to apologize in advance for belaboring the marketing point just a little. What I was curious about, you gave us some good detail on the spending around marketing. I just wanted to clarify, is that also the case with the actual marketing efforts, in other words, second quarter is going to have substantially more marketing efforts in place than fourth quarter, not just the spend, and is that increase in efforts factored into the guidance that you’ll have so much more marketing in 2Q than 1Q?

[Douglas Benn:]

I wouldn’t say we’re going to have so much more marketing in Q2. I would say that in Q1… if you dial into it, in the fourth quarter of this year, we did some things that really from a marketing standpoint really benefited the first quarter, so therefore in the first quarter we chose not to spend marketing dollars in the first quarter to the same extent that we spent marketing dollars in the first quarter last year. They’re going to be spent… in the second quarter to drive these programs that we’re doing, but I wouldn’t lead you to believe that I think that the programs we’re doing in the second quarter are that much incremental to what programs we did last year. I think they’re very unique and I think that there’s something that can really move the needle for us but not incremental to last year.

[Keith Siegner:]

Testing the smaller footprint Grand Lux Café, I’m just curious, since it doesn’t have quite the name cache at the factory has, you don’t have quite the same marketing skills and efficiencies behind it, under what situations would you or why would you open a Grand Lux or where would you put a Grand Lux that you wouldn’t otherwise just put a Cheesecake Factory?

[David Overton:]

We answered that when we first started and that was that if there’s a new area, it’s always a Cheesecake Factory but Grand Lux works very well in areas where we have 5 mile radius restrictions and there’s other great spots to open in and that’s where Grand Lux really plays. Usually it would be the second concept in an area and we wouldn’t be going with it first. But there are so many of those areas that it leaves plenty of room to grow Grand Lux.

[Douglas Benn:]

Just a good example of that is on Michigan Avenue in Chicago, we could never have two $15 million restaurants if it weren’t for the fact of having Grand Lux because the Grand Lux is like half a mile –

[David Overton:]

Five blocks.

[Douglas Benn:]

-- five blocks from the Cheesecake Factory in Chicago. Same thing in Las Vegas. There’s two Grand Lux across the street –

[David Overton:]

From a very successful Cheesecake Factory.

[Douglas Benn:]

-- from a very successful Cheesecake Factory. So it allows us to put more restaurants in dense markets and pull a lot more volume out of that market.

[Operator:]

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