Jill S. Peters - Vice President of Investor Relations W.

Douglas Benn - Chief Financial Officer and Executive Vice President David M. Overton - Chairman, Chief Executive Officer and Chairman of Enterprise Risk Management Advisory Committee

John S. Glass - Morgan Stanley, Research Division Jeffrey Andrew Bernstein - Barclays Capital, Research Division Joseph T.

Buckley - BofA Merrill Lynch, Research Division David E. Tarantino - Robert W.

Baird & Co. Incorporated, Research Division Matthew J.

DiFrisco - Lazard Capital Markets LLC, Research Division Sharon Zackfia - William Blair & Company L.L.C., Research Division Michael Kelter - Goldman Sachs Group Inc., Research Division Keith Siegner - Crédit Suisse AG, Research Division Will Slabaugh - Stephens Inc., Research Division Nicole Miller Regan - Piper Jaffray Companies, Research Division Mitchell J. Speiser - The Buckingham Research Group Incorporated Bryan C.

Elliott - Raymond James & Associates, Inc., Research Division Larry Miller - RBC Capital Markets, LLC, Research Division Peter Saleh - Telsey Advisory Group LLC John W. Ivankoe - JP Morgan Chase & Co, Research Division Stephen Anderson - Miller Tabak + Co., LLC, Research Division Jake R.

Bartlett - Susquehanna Financial Group, LLLP, Research Division

Good afternoon, and welcome to our first quarter fiscal 2012 earnings call. I'm Jill Peters, Vice President of Investor Relations.

On the call today is David Overton, our Chairman and CEO, who is traveling in Asia and joining us by phone; and Doug Benn, our Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call, items may be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available in the Investors section of our website at www.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission. All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements.

Doug will start off the call today with our business and financial review, He will then provide our outlook for the second quarter of 2012, as well as the full year. Following that, David and Doug will take your questions.

Before I turn the call over to Doug, I will note that we will be at the Baird Growth Stock Conference in Chicago on May 8, with both David and Doug presenting on behalf of the company. And with that, I'll turn the call over to Doug.

Well, thank you, Jill. The first quarter marked our ninth straight quarter of positive comparable sales with strength across geographies and day parts.

And we had the best guest traffic levels that we've seen in more than a year and an increase of 1.9%. Our guest traffic was consistently better than the industry average for nearly the entire quarter based on the data we track.

On a 2-year basis, comparable sales are a healthy 4%. Our sales growth has been very consistent, and we are confident about our ability to deliver steady, dependable sales growth in the future.

Importantly, manager retention in our restaurants is at near record levels. The tenure of our managers and our operations leadership teams directly impact the productivity of our restaurants.

Retention also plays a crucial role in guest satisfaction. Our ongoing focus and investment of time and resources in training and development are clearly having a positive impact.

As to development, we are on track to open as many as 7 to 8 new restaurants in the U.S. this year.

Our first opening of the year was in March in downtown Salt Lake City. The restaurant is doing very well with weekly sales averaging over $250,000 since its opening.

Our next Cheesecake Factory opening is coming up in June, followed by the Grand Lux Café in New Jersey, opening in July. Our international expansion continues to be on track.

The first of 3 planned Middle East openings by our licensee is currently slated for late summer. Now let's review our financial results for the first quarter and our thoughts about the remainder of 2012.

Total revenues of The Cheesecake Factory for the first quarter increased 4.1% to $435.8 million. Revenue growth reflects an overall comparable sales increase of 2.4%.

Comparable sales increased by 2.6% at The Cheesecake Factory and 0.3% at Grand Lux Café. In addition, we had a 4% increase in total restaurant operating weeks due to the opening of 8 new restaurants during the trailing 15-month period plus a 0.7% increase in average weekly sales.

As we discussed at our last earnings call in February, a high-volume week was replaced with an average week in the first quarter 2012 because our big holiday week was captured as the 53rd week of last year. This reduced revenues by about $8 million in the first quarter of 2012, impacting our average weekly sales in the quarter.

At the bakery, external sales were $10.8 million, down about $1 million from the prior year. Cost of sales decreased 30 basis points to 24.7% of revenue for the first quarter.

We experienced better-than-anticipated favorability primarily from dairy and produce costs. Labor was 32.8% of revenue in the quarter, flat from the prior year.

We are able to offset higher payroll taxes and deleverage from the loss of the big sales week, both of which we expected with lower group medical costs. Other operating costs and expenses were 24.3% of revenues for the first quarter, down 40 basis points from the first quarter of the prior year.

We saw a reduction in debit card transaction fees, as anticipated, as well as favorability from lower utility costs. G&A was 6.6% of revenues for the first quarter, up 80 basis points from the prior year.

About 20 basis points of this increase was due to a revaluation of our CEO's retirement benefit, triggered by the extension of his employment agreement. The remainder of the increase came primarily from a higher corporate bonus accrual versus last year and slightly higher equity compensation cost in the first quarter of 2012.

And depreciation expense for the first quarter 2012 was 4.2% of revenue, flat from the prior year period. Preopening expense was $2.1 million in the first quarter of 2012 versus about $1.8 million in the same period last year.

And our tax rate this quarter was 28.7%, slightly higher than the first quarter of last year, but within our expected range. In summary, we had a strong quarter.

Guest traffic was solid, and we delivered higher year-over-year four-wall operating profits despite the shifting of the big holiday sales week to 2011. We exceeded our targeted range on earnings per share in a high-quality way.

Moving on, our liquidity position continues to be solid. Cash flow from operations for the first quarter of 2012 was approximately $41 million.

Net of roughly $17 million of cash used for capital expenditures, we generated about $24 million in free cash flow in the first quarter of 2012. During the first quarter, we used our cash to repurchase about 1.4 million shares of our common stock at a total cost of $40.9 million.

That wraps up our business and financial review for the first quarter of 2012. Now I'll spend a few minutes on our outlook for the second quarter of 2012 and an update on the full year.

As we've done in the past, we continue to provide our best estimate for earnings per share ranges based on realistic comparable sales assumptions. These assumptions factor in everything we know as of today, which includes quarter-to-date trends, what we think will happen in the weeks ahead, the effects of any impacts associated with holidays and known weather influences.

For the second quarter of 2012, we estimate diluted earnings per share of between $0.47 and $0.49 based on an assumed range for comparable sales between 1.5% and 2.5% as we lap a healthy 2.1% in comparable sales from the second quarter of last year. With respect to the full year 2012, we are raising the high end of our diluted earnings per share assumption to a range of $1.83 to $1.91.

This reflects the flow-through from our better-than-expected performance in the first quarter. Our earnings growth expectation of 12% to 16% this year is in line with our longer-term mid-teens earnings per share growth objective and is based on an assumed comparable sales range for the year of 1.5% to 2.5%.

Our food cost expectations have moderated some, and we now expect food cost inflation of between 2% and 2.5% for 2012. Our corporate tax rate is expected to be between 28.5% and 29.5% for this year.

We also continue to expect to reduce our outstanding share count with approximately $100 million targeted for share repurchases this year. With that said, we'll take your questions.

[Operator Instructions]

Doug, maybe you could just help us understand the cadence of the earnings growth for the year since first quarter, you had that unfavorable shift from the extra week last year, second quarter you've given some pretty precise guidance of -- maybe that's low to mid-teens, and in the fourth quarter, you got to lap the extra week. So is that sort of back into a very, very strong third quarter, maybe you could help us to sort of figure out if there's any anomalies in earnings growth in the back half of the year we should be aware of.

I think I would look at the third quarter as being a very strong earnings quarter for us, and the fourth quarter at being less of a strong earnings growth. If you remember the fourth quarter year-over-year anyway, John, because the fourth quarter of last year contained that extra week and the associated leverage with that extra week.

So if you look at cadence, and I would put a greater proportion of getting to the annual guidance that we've given in the third quarter year-over-year as compared to the fourth.

And any color in terms of margin progression that get you there, not just -- and I presume you're speaking of the sales cadence because of the fourth quarter. But is there anything in almost in the way that commodities unfold in the back half, for example, or something else in the P&L?

I would say that we would expect for the year that we're going to get some pretty good leverage on our P&L that we'll improve our margins for the year somewhere. If you take that guidance range between 40 and 70 basis points, and if you look at the third quarter piece of that versus the fourth quarter year-over-year, the third quarter is going to be a greater proportion on the bottom line as well.

Just a question on the comp and revenue trends that you're seeing and your expectation. Wondering if you can give any kind of color in terms of cadence throughout the quarter.

I think that the industry was kind of seeing a slowdown in March, and it looks like you guys came at the lower end of that precise dollar range of guidance that you had given. So wondering kind of what you are seeing for the quarter.

And how do you really -- how do you guys internally best assess the industry recovery we're seeing when trends seem to be so volatile? I don't know if there's anything that gives you comfort based on your internal numbers.

I know you talked about consecutive quarters traffic or whatnot or whether there's any specific macro data that you see strong correlation to. Just trying to get a feel for confidence of 6 months from now you think the industry will be better versus worse at this point.

Yes. It's a little difficult to predict, right?

Jeff, I think that I would tell you that our assumption with respect to this year is that the overall economic environment, including our industry, is just slightly better but pretty much the same as last year. That's our assumption.

Our assumption going forward with respect our sales incorporates that. In other words, we're -- we've had very steady and predictable sales.

If you look at what they've been, they've been really within a pretty narrow range. Our comp store sales are up roughly 2%, if you want to say what they've been over a period of time and do some averaging.

If you want to look at month-to-month within the quarter, like many restaurant operators, we had strong start to the quarter. We think that was due, obviously, in part to weather.

It was due to the fact that we have a -- had our easiest comparison in January. February was our most difficult comparison with the prior year, but we were still solidly positive in February.

And then in March, our comp store sales were about, on average, with what we had for the whole quarter. So in March, especially with respect to traffic, our data would show that we were well above the industry, in general, particularly in the month of March.

And is there you're seeing from a geographic standpoint or anything to kind of explain away, whether it's week days, weekends? Just trying to get a read for trends through the quarter.

Geography, we saw some pretty broad-based strength across the country. Our strongest markets continue to be California, Texas, the Southeast and the Midwest, but it was pretty broad-based strength.

If you look at day parts, our day parts have been very stable. When in fact, all of our day parts: Lunch, dinner, mid-afternoon, late night, all of the day parts are up.

The shorter periods continue to be strong, but we saw strength across all day parts. So there is -- our results are very consistent and in line with what we expected to see.

Could you talk about the check experience versus the price increase during the quarter? It sounds like the bulk of your same-store sales were traffic driven, which is terrific.

But you may have realized a little bit less of what I think was about a 2% year-over-year price factor than I might have guessed. So can you just talk a little bit about that and how that played out?

Yes. And just to clarify just a little bit, you're about right on 2% of where -- we had about 1.8% of pricing in our menu in the second quarter -- I mean the first quarter, coming out of the first quarter going on the second quarter, it will be just a little over 2%.

Let me just start off by saying that with respect to menu mix, it certainly ebbs and flows over time. And as we said in recent quarters, we are still seeing lower incident rates on nonalcoholic beverages, which is impacting almost all restaurant operators.

It continues to impact our mix some. So that's a factor.

In addition, as we've also talked about in the past, with our -- that our menu changes twice a year, and sometimes those changes to our menu are substantial or they're entirely new menu categories. And with that almost always causes at least some movement in mix or some shifting around of the menu items ordered as guests try new items or find new favorites.

And in the past, I mean, that's not a new phenomenon. When menus change, there's some shifting around, and you don't know exactly where the shifting is going to be until you make the change.

I think the key point is that what we're doing right now, we believe, are the right things with the menu by providing guests with many options, and it's working for us. We're driving higher guest counts.

We're driving those higher guest counts with full margin sales. We're increasing our four-wall margins, our restaurant level margins, and we're retaining our competitive advantage in menu innovation.

All those things are definitely a part of our strategy and our growth plans -- and by the way, our check average is still growing as it always has been.

Were there unusual number of lower-priced options on this menu change?

No. I wouldn't say that.

I would say that go back 1.5 years or 2 years and even go back to the specials menu, Small Plates & Snacks, it's SkinnyLicious. What we are doing with some of those menus is giving guests a lot of options, and that's why those menus are so successful.

And we do adopt our menu strategy and changes to our menu to the current consumer environment and guests are probably a little more price-sensitive right now.

Joe, one thing I'll add to Doug's comment is that, while we are giving guests more options, we're doing it at full margin sales. So we're not discounting to attract the guest.

We're increasing the set of options in our menu, bringing on items that are relevant to them that they substitute their lifestyle in doing it to drive full margin sales.

Right. And that's why we're increasing headcount.

Just a question on the broader development outlook, maybe an update on how the pipeline looks as you look past 2012 into 2013. I know you must be working on deals already.

Is the pipeline looking strong and what type of unit growth might we expect looking at next year?

Yes, I'll be happy to talk about that. David, do you want to respond to that?

Well, as you know, we're working on DFCs [ph] in 2014, so they're certainly coming along. We've had a great record of every one of our restaurants that have opened in the last couple of years have been great, strong beyond our expectations.

I think it's too early to really tell you exactly what '13 is going to look like, but we're certainly looking at many deals and we've -- I don't know if that's the least [ph] approved over 10 sites in the Middle East. And they'll open between '12 and '13, in addition to what we have domestically.

Go ahead, Doug.

I think that's exactly right. I think we continue to domestically -- is to really look to approve every site that we think is an A+ site, and we've done an excellent job with that.

As David said, our average weekly sales of restaurants that aren't in the comp base are above the average weekly sales, 4 of the restaurants as a whole. So we're doing a great job of that, and I -- you really can't downplay the international piece because that is a big part of how we look at development going forward.

So I think the answer for '13 and '14 is that we're going to do as many sites as we can possibly find that meet the return criteria that we've set for ourselves.

Great. And just on the domestic side, just to clarify, you're thinking that the number could be similar or more than what you're doing this year -- the 7 to 8 that you're doing this year, I guess I'm not clear on that.

What we're trying...

We would -- go ahead, David.

Go ahead, Doug.

We'd certainly hope that it would be more. And I think we would hope that we would have more than 7 to 8 this year.

So we will certainly try to have more than 7 to 8. There is nothing holding us back from doing that.

Lazard, actually, not yet Cheesecake Factory, I guess. Looking at the outlook there for the comments, I guess, what we were talking about with G&A and the onetime in nature, it appears, just to clarify, were those sort of onetime in nature in 1Q?

Or are we going to see some accruals associated with that competition carrying over into the next couple of quarters?

Well, some of it's onetime. Obviously, the revaluations of the CEO retirement benefit is onetime.

Here is what -- while we expect overall operating margins for the year to improve by 50 basis points or so, we expect the G&A line for the year to come in just a little higher than last year, and there is really a couple of reasons for that. One relates to having a full bonus accrual for the year.

We did not have a full bonus accrual in last year's numbers, so that's at least a year-over-year difference. A little bit higher equity compensation we expect.

And then the third thing from a percentage standpoint is really lapping the leverage in the fourth quarter of 2011 that was provided by that extra very big volume week. So those things in combination will call the G&A line to be slightly higher for the year, but the overall operating margins we would expect to be better for the year by, depending exactly where the cost of sales come in between 40 and 70 basis points.

Okay. And then also looking at just the preopening.

I guess since it is somewhat of a choppier year of openings, a lumpy year of openings, can you give us some handholding on the preopening sites since it does probably influence the cadence of the quarter EPS?

Yes, it does. It will impact the second quarter for sure because we're going to expect more preopenings in the second quarter certainly than we had last year.

So there is, I think only $1 million in preopening last year. This year is going to be more in the neighborhood, probably, $2 million to $3 million.

And then just looking forward for the rest of the year, I think that if you look at the year in total since we are opening about the same number of restaurants last year, preopening costs in total for the year are going to be, as a percentage of sales, pretty similar to what they were last year.

And then a little -- but part of the 2Q, I guess, is one of the reasons why you have a little bit more -- or slower EPS growth, you said $2 million to $3 million, correct?

Yes. We'll have deleveraging from a -- on the income from operations line in the second quarter from preopening costs.

The overall income from operations line will not be deleveraged, but the preopening piece will be.

Doug, I had a really quick question. Your comps were kind of in the midpoint of what you expected for the quarter.

I apologize if I missed this, but your revenues were on the lower end. Was that just really the bakery being weaker than you expected and not to pick on the third-party bakery, but it's the second consecutive quarter where we've seen pretty material declines in that year-over-year?

Is there something going on there that we should be more conservative in our modeling for the bakeries?

Well, I think part of the reason why we were at the lower end, it is the bakery, but I think we've said this a number of times, but external bakery sales are always more unpredictable because the bakery has a very small amount of customers. And this quarter it's really the timing of orders as a result of customer needs and existing inventory levels that were coming out of the fourth quarter.

The difference is only $1 million. I would say that looking forward, again, very difficult to predict, but it doesn't have a tremendously material impact on our overall results.

If you look at the bakery for the first quarter on a standalone basis, that includes sales to our restaurant, their sales for the quarter were about flat or actually up a little bit and operating profit was up nicely. So while the sales are -- external sales are difficult to control and predict, the profitability is something under our control, and we did a good job with that.

Okay. And the bigger corollary probably to my question was just to make sure that the non-comp units hit your plan in the first quarter in the restaurant side of the business.

Yes. The non-comp units did hit our plan for the quarter.

They -- average weekly sales for the quarter, comps were up 2.4%, and average weekly sales were only up 0.7%, but that had nothing to do with restaurants that weren't in the comp phase. That had more to do with the shifting of the big week from the fourth quarter last year to the first quarter of this year.

And that $8 million I talked about, if you do the rough math, $8 million over the $425 million of sales that we had for the quarter really accounts for about 1.9% of the difference between average weekly sales and comp store sales, which really means that the impact from the productivity of new restaurants actually helped.

I wanted to ask about the international development and just get an update on -- I know you have the, I guess, 3 coming in the Middle East in the back half of the year. Any update on how that's coming along?

And then more broadly, any additional deals maybe percolating behind the scenes?

David, you want to address that one?

Yes. As I said, we think 3 -- we know 3 will open this year.

There's a fourth that will come very quickly in next year. We have approved 6 or 7 other deals that we'll open in '13 and '14.

Some of these malls there are just being built now. So that's why the delay.

As you know, we've been speaking to people in South America, Mexico, Asia, and we have lots of conversations going and lots of possibilities going. So for me it looks very, very good.

We're excited about getting our first restaurants opened. We have lots going on to prepare for that.

So to me, I think, we have a bright future, especially in the Middle East with Australia, and I think, although they signed up for 22 restaurants, I don't doubt that they'll at least double that over the years.

And just a quick follow-up on a question from earlier on G&A. You said it would be up a little bit versus a year ago.

I guess, are you suggesting that you guys are max accrued for your bonuses if you hit your EPS target for the year? And therefore, rest of the year, be up maybe low to mid-single like a normal year, or is that not an accurate statement?

I want to understand a little more about the cadence of how that will play out through the year, if you don't mind.

Well, I would say that any time that we're exceeding what our guidance was and report that there's a higher bonus accrual that's going to be required to account for that. So the way that we do -- I don't know how other countries do it, the way we do our bonus accrual is we set a budget at the beginning of the year, and we assume we'll make that budget, and if we make that budget, then we'll have 100% bonus accrual.

If we're ahead of that budget, then we'll have to accrue a little bit more. So really -- a really -- an easy way to answer is it is if we're exceeding the expectations that we set for you, then generally, we're going to higher bonus accruals required.

I'm going to ask a different question about the bakery. And really just looking at the intercompany bakery sales, I mean, this is a really strong quarter despite losing the strong week, you had the second highest intercompany sales you've ever had, practically, as high as the third quarter, which is a much stronger seasonal quarter.

Is this -- was this related to like where you'd contracted commodities? Or is this like really strong intercompany sales?

Are your desserts mixing higher? Help me understand like how this is growing solid double-digit well above the overall revenue growth for the retail stores.

Well, the dessert sales have been very strong for a very long period of time. And so we're still well over 15% of our sales are dessert sales.

So I assume you're referring to the bakery sales and profitability. So if you look at the bakery's revenues from the quarter, they were up overall, not just external or external, internal, they were up compared to the previous year period.

And that was all driven by the sales of cheesecakes in the restaurant, the primary customer of the bakery. But the bakery also benefited during the quarter, as the restaurants benefited during the quarter from lower commodity costs this year, which really helped them with the profitability piece.

But at least on the sales front, looking intercompany bakery sales, it seems like cheesecake's must be mixing consistently higher, and is that a fair statement?

They have been, yes. This particular quarter, I think the incident rates were about flat, but most of the last 4 or 5 quarters, incident rates of Cheesecake Factory sales have been up.

On the lower 2% or 2.5% inflation guidance for the year and then also taking into account the nice year-over-year drop you saw this quarter, I wonder if you could talk about how you expect that to play out over the year. And then on the back of that, if there would be any reason you can see as of today, at least, how the cost of goods would move up materially as a percent of sales from where we are here in 1Q.

Okay. So I would tell you that the lower food cost inflation expectation or food -- or commodity expectation lowering it to 2% to 2.5%, we got a lot of that in the first quarter.

So if we look out, we don't have a lot more of that reflected in the out quarters that we didn't already have reflected before we experienced a little better, a little lower inflation on non-contracted commodity items. So if you look forward the rest of the year, we're going to see our food cost in every quarter, assuming we're about -- we're 60% contracted, we're pretty much fully contracted today for us, which is at the 60% level.

So the non-contracted items if they come in, we're thinking that they will come in today, we'll see some nice benefits on the cost of sales line in every quarter of the year compared to last year.

Could we please get an update, and I'm not sure how you want to segment it on, but percent of sales or mix as it relates to Small Plates, the SkinnyLicious rollout kind of new menu items? And then part b, when you originally brought this to market, it seems they might have been more labor intensive than a typical pricier rollout.

And I'm wondering now that you're up and running and also very sustainably in positive comp territory, are you seeing any leverage that's different than you saw when you first rolled out these items?

Yes. The first part of the question, Nicole, we look at the SkinnyLicious and particularly Small Plates & Snacks as just being part of the regular menu.

And SkinnyLicious, for instance, does have some overlap of items that are on it-- and on the regular menu. So we're not looking at breaking that out or talking about specific percentages, but I will say that SkinnyLicious is doing extremely well for us.

I don't know about the labor intensity that you're talking about. I don't think that, that's a true statement.

I think that when we rolled out SkinnyLicious, there were certainly a lot of training that had to be done at the restaurant level in order to learn how to make all of these new items and to make them properly and to get them to the table quickly and have them taste delicious like we want them to. So I'm sure that as time has passed that we've gotten better at that.

But I don't know that there's any big additional labor that was part of the new menu rollout other than that.

I would just like to ask about the comps' components again. And it seems like the menu mix was down about 1.1% or so.

It sounds like it is driven by lower nonalcoholic beverage sales, which you've talked about. It did get though a little bit more pronounced this quarter, and is it -- and it looks like the dessert sales were good.

So is it safe to say that there's just been some general trade down to lower-priced items in the menu? Is that an accurate statement?

No, I would say -- I don't know if you're on the call earlier when I talked about the evolution of our menu on our twice annual menu changes. But as our menu evolve and guests have more choices when they look at our menu, we generally see, and it's natural to assume that there's going to be at least some shifting around on the menu of menu preferences as guests, again, as they try new items, as they find new favorites.

And we think that's okay. The goal that we set for ourselves is to get more guests on the door without discounting to attract them, without losing any margins.

And guest traffic is growing, so we know we're giving guests what they want. Over time, I think we -- and if you look back historically, you'll see the our menu changes, over time, have resulted in us growing our check, our average check at a rate that's closer to our menu price increase, and over time, we think we'll get back to having menu mix, we'll call it, stabilize, which what I mean by that is capturing more of our price increases that we put in the menu.

But our guidance, Mitch, for comp store sales hasn't change. We're still expecting to grow guest traffic for the year, and we're still expecting mix for the year to be somewhat negative.

Okay. And maybe just a technical question on traffic.

If a customer goes into a Cheesecake Factory just to get a dessert, and leave just say, is that considered a customer for traffic, or is it just a dine-in customer?

We count that as a guest, yes.

Okay, great. And separately on Grand Lux, can you comment on the comps trends there?

It did come in at 0.3, I know a year ago maybe, I think it had some mismatches versus 2 years ago. I'm just wondering your thoughts on the Grand Lux comp, was there any particular reason for the softness there are -- not that many stores in the base?

Just in general, any comments on the Grand Lux comp and if hit or did not hit your internal targets.

Okay, yes. I think you've hit on it, Mitch.

We only have -- there's only 13 units, so variability is a great location-by-location and quarter-to-quarter and the sales performance at higher volume locations, of which Grand Lux has 3 very high-volume locations, obviously has a disproportionate impact on what drives comp sales for the quarter for the concept as a whole. So it's -- we would say that the Grand Lux, while we'd like to have the comp be up, you could see them up 5% pretty easily if you had some of the big restaurants being up, great, so we didn't have -- some of the bigger restaurants were not up quite as much they had a little bit softer comp.

So I guess that's what I would say about that.

I wanted to circle back to the cost of goods. I understand that I'm on the road, missed the beginning of the call.

But if I heard correctly, you said [indiscernible] that most of the cost of goods improvement relative to prior guidance has been seen in Q1. I just wondered what drove that Q1 surprise?

Well, it had to be not contracted items. And for us, that was mainly dairy and produce.

Okay. So your expectations for the outquarters, fundamentally, haven't changed?

They haven't changed by near as much as the first quarter. I would say that most of it is reflective.

I wouldn't say they haven't changed. I would say that it wouldn't be as dramatic a change.

We would have expected cost of sales in the first quarter to be higher than last year in February as we gave our guidance and they were lower. So a bigger portion of it is first quarter-related.

Okay. And dairy typically, for you guys means cream cheese, and you often contract that.

Refresh our memory on where you are with your cream cheese.

We're partially contracted, I would say, for cream cheese.

Okay. So the spot came in and helped, okay...

It's not only cream cheese. It manufactures cream.

It's other things other than just cream cheese, other dairy products as well.

I just wanted to go back to traffic for a second, and get a sense for the store level capacity in aggregate, if you could. And, Doug, what I'm trying to get at is how far would you kind of say you're off from peak capacity?

And I'm sort of thinking about it in terms of what comp traffic could be in aggregate if the economy recovers, or really, are we back essentially to where you were historically, and comps are getting close to the level of pricing. Can you give me some sense for that?

Yes. I don't think we're anywhere close to back to where what our guests were at the peak, so that's how I look at it.

At the peak sales levels, we were, say, at roughly $11 million averaging of volumes. And today, we're at roughly $10 million, a little over $10 million averaging of volumes.

So that difference, since our check average every year has increased, that difference of, let's say, that 10% roughly, and that is entirely guest count-related. So increase in our guest counts by 1% to 2% over time can happen for quite a while longer before the same amount of guests -- before we meet those get back to those peak levels of guests..

Just 2 questions, one on the share count. Looks like you bought back 1.4 million of shares this quarter yet the share count really didn't budge all that much.

So how should we be thinking about the share count, I guess, in the second quarter on a go-forward basis?

Well the share count, actually, if you compare it to the previous year, the prior year quarter, we're somewhere about 60.4 million WASO, fully diluted weighted average shares outstanding. In this quarter, we're at 55.7 million, so it's a good numbers of millions of shares, what is that, 4-plus million shares lower.

So when you're doing the weighted average shares outstanding calculation, the shares you buy in the actual quarter you're buying them aren't helping that calculation too much because it's a weighted average. So we bought those shares in the middle of the quarter or throughout the quarter.

So that they're not reflected as much in the first quarter WASO, amount of shares outstanding, as they will be in future quarters when they're no longer outstanding for the full quarter. Does that make sense?

Yes. So the second quarter will have a, I guess, a lower share count, consistent with what you bought.

Yes. Peter that's just a result.

Yes, as a result of what we bought in the first quarter, but also as a result of what we've been buying for the fourth quarter of last year, the third quarter of last year and the second quarter of last year. So all of those will impact the second quarter weighted average shares outstanding this year compared to what they were in the second quarter last year.

Got it. And then a quick question on pricing.

Now that you're seeing some moderation and some of the commodities or the inflation pressures easing a little bit, how should we be thinking about your pricing on a go-forward basis as we go out throughout the course of this year? Are you still planning to maintain that 1% to 2% pricing or should we think that, that's going to go down from here?

I would say that we're going to continue to do what we're doing, which is a game that requires a judgment, and there's not a right or wrong answer. But the desire is to be able to balance our need to protect our margins with our even greater desire to grow our guest count.

So if we don't have to take price to protect margins or as much price, we'll certainly take less price. If we have to take price to protect margins, then we will consider taking more.

But we'll always try to achieve that balance. So I don't know if I'm specifically answering your question, but I would say to you that we would like to take as little price as we can, but we're going to take some kind of price twice a year.

I think that's the answer. And all of that depends on where we think our particularly variable cost of the commodities' environment ends up being.

The question is on international development, if I may. David, if you're still with us, I think you kind of laid out what you think the Middle Eastern opportunity might be.

And if I heard you right, that Alshaya, excuse me, one day might be able to do over 40 stores. Assume I'm still on.

But I mean, that sounds like it's a fairly big number. So I was wondering if you could as you've began to study the models of other competitors, or maybe just partners that you may had in various other markets around the world, how you might size the Cheesecake opportunity in Asia?

I'm trying to understand where you are including China, maybe even Japan, Philippines, Indonesia what have you, Korea, and Latin America. In other words, I mean, could this be a 100, 150 maybe 200 unit brand internationally?

I mean, just thinking very long term in terms of what the partner capabilities are and what the ultimate consumer demand might be?

David are you there? I think David might have fallen off the call.

So let me address what you're talking about, John. First of all, with respect to Alshaya, they have 19 countries that they do business in.

Our contract with them is currently to build 22 restaurants over the next 5 years in 5 countries. They operate around 60-plus other brands, not restaurant brands.

Some of them restaurant brands, but they're a lot of retail brand. So they would like to have a broader territory with us and certainly have the capability to take us to areas of the world far outside of just the Middle East, for instance, in Egypt or Lebanon or Eastern Europe.

Those were areas where they could take us over time. And we just are -- we're walking before we run with them with respect to contractually giving them the rights.

And right now, they have 5 countries, so that's where that stands, but the ability and the potential for Alshaya to do many more than what is in that current agreement is certainly there. Now we're just assessing the other markets, the Asian markets.

We made as David said, a trip to Asia. The good news is that we have a number of partners that we've met in major Asian areas such as Hong Kong and Korea and in Japan that are very interested in having further discussions with us and determining how to -- they're very interested in bringing The Cheesecake Factory brand to their part of the world.

That's the great news. As soon as we announced our contract with Alshaya, we had many inquiries from other potential partners in other parts of the world that were interested in partnering with us to build our brand in those parts of the world.

So some of them were highly qualified and some of them weren't. But we have some highly qualified big companies bigger than us in some respects that are interested in having further discussions with us, and we are having those discussions.

Just wanted to clarify something with regards to menu mix. Given some of the warmer-than-usual temperature particularly in the Northeast and Midwest, you may have seen -- I don't know if you've seen there's any increase in terms of dessert or snack sales that may have -- may be pushed your product mix down as a percentage of sales.

I just wanted to see if you could comment on that.

Yes. It's pretty difficult to really know what the impact from the weather is.

It's difficult to know. I think that some would say that the warmer weather really helped drive their sales because the weather were so much better this year than last year.

And I would say to you that to some extent, the opposite is true. When the weather is really nice in Boston, Massachusetts in March, people are getting the opportunity to cook out in their yards and do things together that might impact their visits to restaurants.

So it's just very difficult, I think, to really segment weather in that way. When we look at the weather impact whenever we say anything about what kind of the impact we thought the weather had, it usually has to do with either store closings or partial store closings in one year versus -- as compared to another year.

Just touching on the weather comment. Some of your competitors have talked about 200 basis points benefit from weather.

Would you say that you're -- I mean, you're not giving us specific amount, but would you say it's much less than that, just given that you're in malls and that sort of thing? You estimate that it's much less than the 200 basis points we have seen elsewhere?

Yes. Again it's difficult to estimate.

There's no real way of knowing what the impact of warmer weather is. But we think the positive weather impact in the first quarter, based on the way that we always look at weather impact and how we calculate that, is somewhere around 50 basis points.

So much less than 2%.

Okay. And I want to understand, I might have misheard you, but in terms of your COGS leverage in the back half of the year, did you say expected leverage, I would have expected some deleverage given that the inflation of 2%, 2.5% is a little bit above, pricing is probably going to be higher in the back half of the year that for the full year.

So maybe just to clarify the COGS leverage in the back half of the year.

Well, we would expect to see cost of sales for the back quarters, which was incorporated into our guidance when we originally gave it in February and it is reiterated that today in the reflective in the annual guidance, that the cost of sales versus last year will be a benefit. So you can't -- last year, we had about 4% to 4.5% commodity cost inflation, and we did see an impact on that line because we took only 1.8% pricing.

But you can't look at only pricing as -- when we have -- if we have years in the future when commodity costs are up less than 2%, we're going to be able to have run lower cost of sales even with moderate pricing.

Right. But it seemed like inflation is above pricing in the back of the year here.

But maybe it would make it -- it would be clearer if you could give us what inflation actually was in the first quarter.

I don't have that number. 2% to 2.5% for the year.

Okay. And then just a question on development in the environment and what you're seeing, I know you've mentioned before that deals are just taking longer to get done.

Could you just comment on whether that's still true, whether you think landlords are a little quicker to act on these days? And also what are some of the big box closings that we've been hearing about let's say, Sears and Blockbuster, and what -- Best Buy, whether that's creating some opportunity for you.

I think that there is opportunity with some of those closings, but it has to be, obviously, a [indiscernible] centers and not B and C malls. I think things are taking a little bit longer these days as we said before.

I think the banks have more involvement with some of the real estate than they used to have, so it just takes a little longer. Otherwise, in terms of what we get the place to play at the mall, the importance of having a Cheesecake Factory in a center or in [indiscernible] center I think it's still important and still very favorable for us.

Okay. And would you characterize your guidance for store openings in the high single digits in last year and this year as more of that stores were pushed further out or do they fall off of your pipeline because of some factor?

90% of the time, they just get pushed out. They don't fall off.

So every once in a while, something will happen but not too often. Don't forget we mostly deal with the top 4, 5 landlords in the country.

And we have excellent relationships with them, and once we get going, usually it gets -- it goes to fruition.

It's been a number of years since you've opened a Grand Lux, and if I heard you correctly, you are opening one this summer, and the last one was still large-format. So what is this new and look like if you changed the format substantially?

And is it a test case to understand how you can proceed with this brand?

I think it's smaller. It has a, let's say, more the calmed down decor, not quite so Venetian kind of [indiscernible] to what we were really trying to do at the beginning with Grand Lux.

So we think it's more approachable in the suburbs. Some of our stores -- the stores in Chicago, they're both doing in the $17 million range, 5 blocks from each other.

So you can see that Grand Lux can do great numbers, if you took the heart of Grand Lux and took out the Vegas [ph]ones and bottom ones and the comps were much better than they were, so we're happy with the food. And we're happy with the service.

We felt we needed a little smaller unit. And one that -- where people wouldn't say I'll come back when I'm just dressed.

And we were getting some of that in the suburban stores. But we wanted to make it more approachable for the suburbs, and I think that's what you'll see in our Cherry Hill store in July.

Okay. And then just as a related question, the average square footage of a Cheesecake Factory class of '11 was about 8,500 square feet, if I do the simple average.

It was 9,300 the year before, it was about 10,000 the year before. What do you think the class of '12 is in terms of square footage?

Well, I think it's the same. We still build the 3 size stores.

We have 7,200, 8,500 and the 10,000 foot one. So although it doesn't matter to us, what we're doing, would just again we're looking at real estate and putting our best guess as to what it will be and then building the square right footage for the right investment.

So it's hard to say how it will fall out, but I would say the 8,500 is probably a good guess, maybe a little more, maybe a little less.