Jul 23, 2009
Executives
Jill Peters - Investor Relations David Overton - Chairman of the Board, Chief Executive Officer W. Douglas Benn - Chief Financial Officer, Executive Vice President Matt Clark, Vice President, Strategic Planning
Analysts
John Glass - Morgan Stanley Steven Kron - Goldman Sachs Joseph Buckley - Banc of America Matt DiFrisco - Oppenheimer Jeffrey Bernstein - Barclays Capital Jeffrey Farmer - Jefferies & Company David Tarantino - Robert W. Baird & Co.
Larry Miller - RBC Capital Markets Dustin Tompkins - Morgan Keegan Bryan Elliott - Raymond James & Associates Keith Siegner - Credit Suisse Paul Westra - Cowen & Company Nicole Miller - Piper Jaffray
Operator
Good day, ladies and gentlemen, and welcome to the second quarter fiscal 2009 earnings conference call. (Operator Instructions) I would now like to turn the call over to Ms.
Jill Peters. Please proceed.
Jill Peters
Good afternoon and welcome to our second quarter earnings call. I’m Jill Peters, Vice President of Investor Relations.
With us today are David Overton, Chairman and Chief Executive Officer; and Doug Benn, Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call, items may be discussed that are not based on historical 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 thecheesecakefactory.com and in our filings with the Securities and Exchange Commission. All forward-looking statements made on this call speak only as of today’s date and the company undertakes no duty to update any forward-looking statements.
David will start off the call today with some opening remarks. Doug will then take you through our operating results in detail and provide an update on our current expectations for the year.
Following that, we will open the call to questions. Without further delay, I will turn the call over to David.
David Overton
Thank you, Jill. Our results for the second quarter were better than we expected due to both higher comparable sales, as well as larger-than-anticipated benefits captured from our operational initiatives.
We saw an improvement in guest traffic again this quarter, about 0.5% from first quarter levels. While the magnitude of the improvement was less than what we experienced last quarter, we are pleased that guest traffic moved in a positive direction.
One of the factors that we believe contributes to our guest counts is guest satisfaction. Not only did we gain 6 percentage points year over year in our overall guest satisfaction score but we improved by a percentage point sequentially as well.
Improvement in the metric is important in an absolute sense but it’s also of particular interest because it indicates that we haven’t inadvertently traded off guest satisfaction for cost savings. We continue to focus on an innovative product development and we’ll being rolling out our summer menu in a week.
In an effort to bring more value to the menu, we are expanding the small plates of snacks category. The small plates of snacks and specials menus are proving to be successful ways for us to deliver great food at moderate prices with lower food costs.
As part of our summer menu change, we will be launching a new cheesecake, Stephanie’s Ultimate Red Velvet Cake Cheesecake, on July 30th, National Cheesecake Day. As you may remember, National Cheesecake Day was a huge hit for us last year.
We are gearing up for another big event with two in-restaurant promotions and the launch of this new cheesecake, which presents a great media opportunity. We are also planning an unprecedented national campaign in September around Hunger Action Month that will take our partnership with Feeding America to a higher level.
This event will incorporate both sales building and cause related elements in addition to driving a lot of exposure for us. As you may have seen, we launched the first phase of our new website this week, which provides visitors the same wow experience online that guests have in our restaurants.
We have a lot of marketing activity that we are working on which we believe are moving the needle in driving guest traffic and sales while elevating the visibility of our brands. Added to our in-restaurant sales effort is the recent addition of David Brod to our team.
David is our Vice President of e-commerce and is charged with increasing our online sales effort, which is a nice opportunity for us to expand. In addition to our focus on sales and guests, we are capturing the benefits associated with our operational re-engineering initiatives, which are contributing to our performance.
We realized over $6 million in savings during the second quarter for a six-month tally of over $10 million. We’ve also identified other cost savings opportunities that we expect will deliver another $8 million in savings this year.
As a result, we are increasing our total savings expectations for the year from a range of $14 million to $16 million to a range between $22 million and $24 million. We reached our goal of paying down $100 million of our debt balance about six months earlier than planned.
We expect to repay another $25 million by the end of this year while still maintaining a comfortable level of cash on our balance sheet. Finally, some comments on development -- at this point, it’s not likely that we will open another restaurant this year.
This site has moved into 2010, but we don’t view this negatively. The lower CapEx spending will go towards boosting our cash balance, further strengthening our balance sheet and increasing our future flexibility.
And we will have even more time and resources to focus on operations and execution at our existing base of restaurants. However, we do intend to resume our growth when the economy improves.
At this time, I will turn the call over to Doug to review our results and discuss our outlook for the rest of the year.
W. Douglas Benn
Thank you, David. Total revenues at The Cheesecake Factory for the second quarter were basically flat at around $407.9 million.
Restaurant revenues reflect a 4% increase in total restaurant operating weeks, primarily from the opening of eight new restaurants during the trailing 15-month period, offset by an approximate 3% decrease in average weekly sales. Overall comparable sales of The Cheesecake Factory and Grand Lux Café restaurants decreased 3.2% for the quarter.
By concept, comparable sales decreased 3% and 5.4% at The Cheesecake Factory and Grand Lux Café respectively. Comparable sales benefited by approximately 1% from Easter and spring break shifting into the second quarter this year.
At The Cheesecake Factory, the comparable sales pressure was still slightly more pronounced in the west, particularly in California, a continuation of the trends we’ve seen over the past year. We saw some moderation and softness in Arizona and an improvement in Florida, which delivered comparable sales that were above our overall average.
Our average check at The Cheesecake Factory was higher again this quarter -- although alcoholic beverage sales are still down, dessert sales continue to be positive and sales of non-alcoholic beverages also turned positive in the second quarter. In addition, we are still seeing a higher check average for guests ordering from the small plates and snacks menu.
While comparable sales in the second quarter at Grand Lux Café were similar to the first quarter, we do continue to see varying performance, with very high sales levels at some restaurants and sales levels well below average at other locations. We have specific marketing and other initiatives in place to improve performance at these lower volume locations.
We are closely monitoring these units and we’ll continue to evaluate their performance. Moving on to bakery operations, third-party bakery sales were about flat with the prior year at $14.4 million, but their contribution to our earnings was higher than in the second quarter of last year due to lower cost of sales and labor.
Consolidated cost of sales decreased to 24.3% of revenue for the second quarter of 2009 compared to 25.7% in the same quarter last year. The 140 basis point decrease was driven primarily by lower restaurant cost of sales.
We continue to capture cost savings associated with our small plates and specials menus, which accounted for over one-third of the costs of sales favorability in the second quarter. In addition, we experienced better commodity costs on spot market purchases of cheese, dairy, groceries and produce.
Our bakery benefited from its favorable year-over-year contracted price for cream cheese. The remainder of the improvement stems from our efforts in improving our supply chain through changes in vendor selection and consolidation and more efficient management in the size and frequency of our orders.
Total labor was 33.1% of revenue for the second quarter, up 40 basis points from 32.7% in the prior year. We experienced higher health insurance costs in the second quarter of this year and we lapped some favorable health insurance claims activity from the second quarter of last year.
In addition, we lapped a beneficial adjustment to our stock option forfeiture rate in the second quarter of last year. Absent these items, our direct operating labor was actually 60 basis points better than the second quarter of last year, as a result of our operational initiatives, which improved our overall productivity.
Other operating costs and expense were 24.3% of revenues for the second quarter of 2009, up 70 basis points from 23.6% reported in the second quarter last year. The increase was due to lower self-insurance reserves last year and higher marketing expenses this year, partially offset by favorability in utility costs.
G&A expense for the second quarter was 6.5% of revenues, up 150 basis points as compared to the second quarter of 2008. The majority of the increase came from the accrual for our founders retirement plan, as previously disclosed, as well as an accrual for corporate bonuses, which we did not have last year.
Interest expense included a $3.3 million charge to unwind one of the interest rate collars we have in place on the outstanding balance of our revolving credit facility. Other income reflected approximately $700,000 in proceeds we received from a life insurance contract related to our deferred compensation plan.
Our effective tax rate for the second quarter was 25.5%, in line with our expectations. Our liquidity position continues to be solid.
We increased our cash balance to $96 million at the end of the second quarter despite using $50 million during the quarter to pay down a portion of our revolving credit facility. After paying down an additional $25 million early in the third quarter, the balance on our five-year revolver now stands at $175 million.
We have repaid $100 million since year-end, which achieves our previously stated goal, and we still intend to pay down another $25 million by year-end. Cash flow from operations through the end of the second quarter was approximately $104 million.
Net of roughly $13 million in cash used for capital expenditures, we generated about $91 million in free cash flow in the first half of the year. That wraps up our business and financial review for the second quarter.
Now I’ll spend a few minutes on our outlook for the third quarter and for the remainder of 2009. Despite a continued low level of visibility for the rest of the year due to both last year’s volatility and the ongoing economic uncertainty, we will still continue to provide our best assumption for earnings per share ranges based on our comparable sales estimates.
As I’ve said in the past, earnings per share are highly correlated to our assumed levels of comparable sales. As a result, I continue to urge you to consider our guidance to be more of a sensitivity analysis than an absolute prediction.
With that said, for fiscal 2009, we now anticipate diluted earnings per share on a GAAP basis of between $0.80 and $0.86, based on the assumption that comparable sales will be in a range of negative 3% to negative 4%. Given the non-recurring items that we recorded in the second quarter, which cost us about $0.04 in diluted earnings per share, our guidance excluding these items on a non-GAAP basis is $0.84 to $0.90.
For the first quarter of 2009, we expect diluted earnings per share between $0.20 and $0.23, based on an assumed range of comparable sales between negative 4% and negative 5%. This range reflects the run-rate for the second quarter absent the 1% favorable holiday shift.
Our current expectation is for food cost inflation to be about 1% this year, down from the 1.5% to 2% projection we gave in April, reflecting a continued decline in commodity costs for some of our non-contracted items, particularly dairy. We expect food cost inflation to be offset by our efforts to improve our supply chain efficiencies and with the approximate price increase that we are taking with the summer menu change, we’ll have about 2.2% of pricing in the menu for the full year.
As a result, cost of sales as a percentage of revenues for 2009 should be about a full percentage point lower than 2008. Excluding a projected 50 basis point benefit from lower pre-opening costs, we expect our operating margin for 2009 to be lower by approximately 45 to 90 basis points as compared to 2008, depending on where we fall within our assumed range of comparable sales.
Our projection for capital spending is now estimated to be between $35 million and $40 million this year. 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, you can now open the line for questions.
Operator
(Operator Instructions) Our first question comes from the line of John Glass with Morgan Stanley.
John Glass - Morgan Stanley
How much of the $22 million to $24 million in savings have you captured so far this year and can you talk -- is this the kind of program that gets larger as the year progresses? So what’s the right run-rate to think about these savings are as you get into 2010?
W. Douglas Benn
Sure. We’ve captured around $10 million of the 22 to 24 so far, a little more than $4 million in the first quarter and somewhat less than $5 million in the second quarter, so right around $10 million.
And so we’ve got another $12 million to $14 million to go and we just found really what we are calling phase 2 of our cost savings initiatives. We’ve just really implemented that and that was the additional $8 million that brought our guidance on total savings for the year up to 22 to 24.
Now with that said, there will be some savings that roll over into 2010. This is just the estimate for 2009.
I don’t know if I have that number right here in front of me but it’s probably at least another $10 million next year, just from what we’ve identified so far.
John Glass - Morgan Stanley
And just to be clear, so by the fourth quarter, you might be saving say $7 million a quarter if you think about 12 to 14 in the back half, so that’s the run-rate and then layer on top of that maybe another $2 million to $3 million per quarter that could come from that extra $10 million? Is that the right way to think about it?
W. Douglas Benn
I think the $7 million a quarter is roughly the right way to think about it and the rest of the initiatives will probably run out earlier in 2010 as they lap around with what we’ve done in 2009, rather than just an even amount every quarter.
John Glass - Morgan Stanley
All right. Thank you.
Operator
The next question is from the line of Steve Kron with Goldman Sachs.
Steven Kron - Goldman Sachs
A question I guess first on the same-store sales front -- just trying to get a sense throughout the quarter, it seems like you had some stability. Can you comment how the quarter ended up versus how it began?
And given your guidance for the quarter, maybe just comment on how July is tracking? And then I guess secondly on those cost saves, maybe Doug, if you could just talk a little bit about where that extra $8 million is coming from as you guys kind of embark on this phase 2 -- where are the opportunities that you are seeing within the P&L?
W. Douglas Benn
Sure. Let’s talk about our overall trends -- our overall trends in comparable sales have been right at around 4.2% for quite a while and I know we ended the quarter at 3.2 but remember, there was this benefit at the beginning of the quarter from the Easter and spring break shift, so there was not a big change in comp sales during the month -- in other words, May was not dramatically different than April.
If you got a normalized week, it was somewhere in the neighborhood of an average of roughly 4.2% and looking forward into July, there’s really not much of a change to that. It’s still roughly running about the same amount.
Now with respect to the extra $8 million, it comes -- I would break it up into a couple of pieces, one being greater than expected cost savings from existing initiatives and then really some new initiatives. The greater than expected cost savings from the existing initiatives come really on the cost of sales side where we are getting some additional savings, more than what we expected from the specials menu rollout.
I don’t think we factored in quite enough initially for that as we rolled that out into 57 more restaurants in the second quarter. And frankly our efforts toward renegotiating contracts with certain of our vendors to get better pricing, we’re doing better than what we thought on that so we’ve raised what we think we can get out of that as well as labor.
We went a little bit further with our expo hours and eliminated some hours out of some higher volume restaurants that we really didn’t originally have in our estimate. And then there’s some new savings initiatives that are really part of the $8 million and it’s the number of labor, primarily labor initiatives to gain greater efficiencies, including some cross-training.
We are also requiring staff member contributions toward our group health plan to be a little bit higher. We are doing a number of things, a number of -- really the labor savings initiatives, each one of the new initiatives are rather small but they add up.
Steven Kron - Goldman Sachs
And so it’s not like front-of-the-house labor -- you are talking about other types of labor initiatives?
W. Douglas Benn
Some of it is front-of-the-house labor. Some of it -- but it is mostly other initiatives, yes.
Steven Kron - Goldman Sachs
Okay. Thank you.
Operator
The next question is from Joseph Buckley with Banc of America.
Joseph Buckley - Banc of America
Doug, you mentioned that direct labor was actually down as a percent of sales. Are there other wrinkles in insurance and the various items [inaudible] showing that favorability this quarter that we should think about in the second half of the year?
W. Douglas Benn
You cut out a little bit on me but I think I got it -- there was some noise in this quarter. We actually did improve but the noise in the quarter, I’ll call it, was higher medical costs this year and then some lapping of some very favorable activity next year, one of those being favorable medical claims activity and the other being an adjustment we made last year to our stock option forfeiture rate that was favorable.
And neither one of those I would -- they are not going to continue or certainly not continue to the same extent for the rest of the year, such that if I look at labor prognostications, if you will, for the third and the fourth quarter, I would expect the printed labor number without explanation to be lower in 2009 in the third and fourth quarter than it was in 2008.
Joseph Buckley - Banc of America
Okay, and then I’m hoping you can still hear me but on the small plates, you mentioned expanding that with the summer menu. Could you elaborate a little bit on what you are doing in terms of price points and maybe scope of product?
David Overton
Joe, the price points are the same. They are $3.95 to $6.95.
We’ve added about eight new items. We’ve taken off just a couple of the bottom sellers of the last one and then we also have added other new items onto the menu, some regular entrees and taking some off and putting some on.
But I would say that we have eight new items on the small plates of snacks still priced the same with excellent food costs.
Joseph Buckley - Banc of America
Okay. Thank you.
Operator
The next question is from Matt DiFrisco with Oppenheimer.
Matt DiFrisco - Oppenheimer
I just wanted to understand better I guess that comp guidance. Would it be correct to assume that looking back at 3Q08, that you started off stronger in that quarter and then tailed off towards the end, so your easier comp comparisons come later in the quarter?
I just want to understand the context that you are giving this somewhat conservative 4% to 5% comp guidance for 3Q down.
W. Douglas Benn
Sure. Again, 4.2, minus 4.2 is our trend and what you say is absolutely right.
In September, the comp sales got much worse last year but what really characterized last year and what makes giving any comp guidance for the third quarter this year somewhat problematic is the volatility last year, so we are having to factor in how we are going to do against that -- or we can actually -- I think in September last year, comps were down something like 6.5%. Are we going to be able to count on going up against that kind of volatility and match up really well with that, so it just -- it made it difficult but 4.2 is what our trend has been and our guidance is right -- just maybe a little bit higher than that.
Matt DiFrisco - Oppenheimer
Okay, and then Doug, I guess going back to Grand Lux Café, you mentioned that there’s some lower volume stores somewhat under review. It eerily reminds me of Bugaboo Creek a little bit here.
Are there any negative cash flow stories here with the Grand Lux concept?
W. Douglas Benn
Well, there are. Let’s go back to the beginning -- Grand Lux has some of the best performers in the entire system here, at least two or three of the top performers are some of the -- at lease from a sales standpoint, some of the highest performers in the country, or in both of our concepts put together.
Part of the reason I think for any under-performing Grand Lux locations have to do, at least in part, we can blame ourselves for when we open them and where we chose to open them, at what part of the economic cycle and it was -- so we do have some Grand Lux Cafés that we are keeping an eye on but -- and there is negative cash flow on a couple of them, yes.
Matt DiFrisco - Oppenheimer
Okay, and then lastly, understanding the COGS comment where you are talking about the plates being favorable as far as a percentage of the improvement on COGS came from the plates menu and the expansion of that, understanding that it came out sort of partially through the second quarter, will you then get a greater benefit from that shift in higher margin products in the third quarter and the back half of the year?
W. Douglas Benn
I would think maybe slightly. The question is how much, you know, when factoring in what you are going to write down on the cost of sales line, how much commodity cost favorability are you going to factor in because we -- if you take the 140 basis points of favorable cost of sales we had this quarter, maybe 50 to 60 of it has to do with those menu development initiatives, the specials and the small plates and snacks menu, but a good 50 plus basis points has to do with commodity cost benefits that we were able to capture because -- from mainly largely non-contracted items, cheese and dairy are two of them.
There might be slightly more benefit in the second half from that but it’s really going depend -- the total cost of sales benefit is going to be dependent on what commodity costs do as well.
Matt DiFrisco - Oppenheimer
Okay. I know I said it was my last question but I actually have one other one and then I’ll leave you guys to answer this -- looking at I guess no growth in the back half of the year, what contingencies do you do to hold on to the staff in the event that you do reignite growth in 2010 and presumably you will?
And are they working on a smaller prototype? Are they experimenting with ideas?
I mean, how do you rebuild the team or where are you directing their efforts and where are we seeing -- would there be sort of a cost-savings as far as bringing down the staff size permanently for a growth of a slower portfolio going forward?
David Overton
No, I think that -- yes, they are working on smaller prototypes for, several for The Cheesecake Factory and one for Grand Lux Café. The key positions, our main development people are still with us.
We’ve also given facilities over to development which -- where they are saving money, so we are able to convert temporarily some of the development people over to facilities, so that worked out very well so we could keep all of our very strong people there. And in terms of management, we take our strongest people and we convert them to normal managers rather than new opening and some of the people that may have been borderline can go and then we’ll have plenty of time to know what our growth rate is once we start to put these things back on paper and rebuild.
Matt DiFrisco - Oppenheimer
Excellent.
Operator
The next question is from Jeffrey Bernstein with Barclays Capital.
Jeffrey Bernstein - Barclays Capital
Thank you. Actually, just a couple of follow-ups on those prior questions -- in terms of the small plate detail, I’m just wondering if you can give anymore color in terms of whether it be mix or frequency or what the contribution is to sales.
I know you said that the average check is higher with a small plate order. I’m just wondering if we can get anymore color on how far the small plates have progressed in terms of contribution?
W. Douglas Benn
Well, if you take the small plates and snacks and specials menu category together, it represented in the second quarter and really in the first quarter as well about 5% of sales. So the cost of sales in general for the whole category, either of those two categories, is lower than the average cost of sales -- not lower by a lot but somewhat lower and so if you take 5% and figure in a lower cost of sales, that is where we are getting some of our cost of sales savings from.
Jeffrey Bernstein - Barclays Capital
So if I calculated that right, 5% of sales from the combination of those things and yet that contributed more than a third of the COGS favorability?
W. Douglas Benn
That’s correct. I think if you work through the math, you’d find that even if those items were only a percent or two lift that would drive COGS down from the 40 or 50 basis points we are talking about.
Jeffrey Bernstein - Barclays Capital
Okay, I’ll have to do that math. And then in terms of the question on unit growth and you say you’d like to reaccelerate it when things get better, no more planned for this year, when things do get better, what is the right level?
I know you said you’re not going to give 2010 until next quarter but if you were to think more big picture, can you reaccelerate it to the levels that you were at a couple of years ago or is there kind of a lower growth level that you think is probably more appropriate going forward when things do stabilize?
W. Douglas Benn
I think we are going to be prudent about that. I mean, one thing that we’ve often said is we’re not -- if we find an A location right now, we’re not turning down that location.
One of the issues obviously today is the developers are not able to -- there are not a lot of new developments coming out and some of the older developments are not being completed, so some of it is beyond our control. I don’t think certainly within the near-term you are going to see us building the types of restaurants we did, just the numbers percentage wise -- you just can’t do what we did before but you are going to see an acceleration.
So I think that looking forward at earnings per share growth, while if you go back five years ago, a great percentage of our earnings per share growth would come from new restaurants and a smaller percentage from same-store sales growth, we are still going to get earnings per share growth from building new restaurants but I would tell you that a larger percentage of our earnings per share growth is going to come from comparable sales increases.
Jeffrey Bernstein - Barclays Capital
Okay. If you look back to the middle of the decade, it seemed like you were doing 15 to 20 new units a year -- is that something that can ever be achievable again or are you more cautious just because it seems like the supply demand perhaps won't allow you to reaccelerate to that pace at any point in time?
W. Douglas Benn
I think we are going to have to take a look at that when we get closer to it. I think right now, we are -- you know, it’s hard to look out too far in this environment and if you were too look out and say just 2010 and 2011, you know, we would love to be able to have low-single-digit percentage growth in new restaurants, which could be anywhere from 5 to 10, maybe more, but not probably 15 to 20.
Jeffrey Bernstein - Barclays Capital
And then just lastly, are you seeing benefit from rent reduction? I know that’s been something you guys have been pursuing, whether it be co-tenancy clauses or just reductions -- any benefit from that?
W. Douglas Benn
There’s some benefit from that. Certainly we are vigorously pursuing anything in our lease that allows us to reduce our rents because of shopping centers not being full or co-tenancy provisions.
So it’s not a huge material amount but we are seeing some.
Jeffrey Bernstein - Barclays Capital
Great. Thank you.
Operator
The next question is from the line of Jeffrey Farmer with Jefferies.
Jeffrey Farmer - Jefferies & Company
Thank you. You touched on this but from a big picture perspective, how would you characterize the changes you’ve made to your marketing strategy?
And I guess more specifically, what should we expect moving forward on the advertising front?
W. Douglas Benn
Well, I think we’ve -- you know, marketing is brand new to us and I think we’ve done a really good job of -- the marketing has done a really good job of moving the needle for us in the second quarter. Probably out of our comps, maybe 40 to 80 basis points is a little soft in how you compute it was -- I contribute to our marketing campaign.
I think that for the amount of money that we are dedicating to marketing, that we get a great bang for our buck. We only are spending something between 40 and 50 basis points, half a percent on marketing and I think that our marketing team has done a fabulous job in being a good steward of that money and I am really excited about this third quarter campaign coming out.
It’s a little bit different than anything -- well, certainly a lot different than anything we’ve done in the past and I think that we are going to get a lot of really good publicity out of the things that we are doing around A, National Cheesecake Day and then the whole month of September, the National Hunger Month. We haven’t announced the specifics yet but there’s a very exciting and a big campaign that’s going to I believe do a good job of aiding our brand awareness.
David Overton
Yes, attracting a lot of media.
Jeffrey Farmer - Jefferies & Company
Having said that, is there media outside of the restaurants for the small plates and snacks menu?
W. Douglas Benn
Well, in the second quarter, part of our promotion was -- it wasn’t outside of the restaurant. Part of our promotion in the second quarter was when you came in during the distribution period, you received a flyer that had two cards in it -- one of the cards entitled you to come back and have a -- try a small plates and snacks if you ordered two entrees, so we did promote it in that manner but that’s the only promotion of that that we have.
Jeffrey Farmer - Jefferies & Company
Okay, and then just a quick follow-up on that -- you mentioned the 5% sales mix, what’s the progression been? How has that looked over the last several months?
Has that number continued to build for you guys?
W. Douglas Benn
It’s been about the same, it’s been pretty steady. In the second quarter, a little more of that 5% -- well, we got a little bit of lift with small plates and snacks because as I said, we promoted them, so we got a little lift there but it’s been roughly the same.
I wouldn’t say it’s deteriorating or picking up.
Jeffrey Farmer - Jefferies & Company
Thank you.
Operator
The next question is from David Tarantino with Robert W. Baird.
David Tarantino - Robert W. Baird & Co.
Good afternoon. Doug, could you -- just a quick clarification on the comp; could you break it down between pricing, mix, and traffic for Q2?
W. Douglas Benn
Sure, traffic was -- so minus 3.2 is the total comp, traffic was down 3.8, which was an improvement over the first quarter. The first quarter we were down 4.3, so we like seeing that.
It’s a little bit of an improvement there. And then check average increased somewhere between 0.6% and 0.7%, and if you kind of dive deeper into check average, pricing was about 2.2% or 2.3%, and then we had offsetting pricing, a little bit of a negative mix shift and the negative mix shift came primarily from alcoholic beverage sales, which are still down versus last year.
David Tarantino - Robert W. Baird & Co.
Okay, thanks. And then my question really is about the pricing that you are taking in the summer menu, first, what made you decide to take that pricing?
And second, how did you go through the thought process relative to your pricing power versus all the discounting that we are seeing in the industry?
W. Douglas Benn
I think in general -- we want to be very cautious anytime we take pricing because obviously when you are really battling with everyone else for guest counts, taking a price increase certainly does not have the impact of wanting more -- more people wanting to come to your restaurant, so part of it is there was a need to take price in order to stabilize margins and I think we did a very good job of balancing that with the fact that we don’t want to take too much price. Actually, we took about 0.9% I think somebody told me yesterday it was 0.88 actually, and we rounded it off to 0.9.
Do you have any other comments about the process on that, David?
David Overton
No, I think that we did it very carefully and I think we were comfortable and felt that this was not the time to fall behind, certainly not with our guests and where we are in the marketplace.
David Tarantino - Robert W. Baird & Co.
Just a quick follow-up for clarification -- was the pricing taken to improve margins or was it taken to offset some inflationary pressures? And if so, what are the pressures that you are offsetting?
W. Douglas Benn
I would think -- I don’t differentiate between the two very much. I mean, part of what David said I think is very true -- if you don’t take pricing a little bit all the time, you can never really catch it up, right?
It’s very difficult to catch it up. If you skip three 1% price increases that you might have normally taken, you really then can’t make up for that by taking a 3% price increase.
That’s almost impossible to do. So I think that we have cost pressures.
Right now we have favorable commodity costs but how long is that going to last, and our margins today are substantially less than what they were five years ago and substantially less than last year even. Still, we are making a lot of progress on the cost front.
I am really very pleased with that progress we are making but we still have extreme cost pressures.
David Tarantino - Robert W. Baird & Co.
Okay. Thank you.
Operator
The next question is from Larry Miller with RBC Capital Markets.
Larry Miller - RBC Capital Markets
Actually, I had two quick follow-ups and then a question -- so related to the development, that discussion that you had about the future development, what will be the timetable that you would need to be able to put people back in place, or put a development plan back in place? Is that 18 months or so, or more?
And then you talked about the small plates, that was my second follow-up question and what -- you said that check is higher. Can you give us some kind of magnitude on how much higher it is?
And then finally my question would be, Doug, related to that last thing you were just talking about, which is that margins are vastly lower than they were several years ago, in what scenario if any could you get back to that level? Thanks.
W. Douglas Benn
Sure. Let’s talk about that one -- do you want to go first?
David Overton
Well, on the development, there’s really not a matter of time. Everything we added on was modular.
We have all of our main people. If we got 10 restaurants tomorrow, we have the teams to open 10 restaurants tomorrow or begin that process to get them open.
So at this moment, there is nothing stopping us from regenerating our growth. All we need is the sites and the landlords to build and our confidence in the economy in terms of all these areas.
In the meantime, we are looking at many, many sites today and we will take all the A1s as soon as we feel confident. Doug.
W. Douglas Benn
What was the cost question again?
Larry Miller - RBC Capital Markets
First of all on the small plates, how much higher the check average might be?
W. Douglas Benn
Yeah, it’s pennies -- I mean, we’re not talking about 5% higher or anything. We’re talking about $0.05 or $0.10 higher.
Larry Miller - RBC Capital Markets
So really the way we should view it is that even though it’s smaller ticket, it’s not having a check average impact?
W. Douglas Benn
That’s right because that would obviously be the big fear, right? If you put in this menu that had three items that were $4.95, if somebody come in and order a glass of water and a $4.95 item and then their check average would be $4.95, which we couldn’t stand very much of that, so we’re glad that the check average remained flat and it’s slightly up.
Larry Miller - RBC Capital Markets
Sounds like you guys are watching me when I come in. And then on the margin side, what I was asking was if you -- under what conditions is it even possible that you might be able to get back to those or recapture that margin level of yesteryear?
W. Douglas Benn
Internally, the way that we are looking at it, we’re taking it one step at a time. If you go back to 2007 margins, operating margins they were around 8.5%, which is somewhere in the neighborhood of 250 to 300 basis points better than where we expect to end this year.
And the scenario to get back there, some of it is going to be this cost-cutting and the cost initiatives and we’ve made some great progress there but the real avenue to get back is we have to have a plus sign in front of comparable store sales. And until we do that, we’re not going to be able to get all the way back.
So step number one would be try to get back to the 2007 margins and then after that, I think that we can move toward the margins that we had in 2005. And the good news is I think that when comparable sales return, that our company and our cost structure is much leaner and meaner, if you will, than what it was -- not that we were overly fat before but everybody’s got some fat and now the fat is gone and we’re not going to add the fat back immediately when sales return.
Hopefully we’ll do a good job of never adding it back. But I think that margins will grow quickly when comparable sales get better.
Larry Miller - RBC Capital Markets
That’s what I was after. Thanks, Doug.
Operator
The next question is from Dustin Tompkins with Morgan Keegan.
Dustin Tompkins - Morgan Keegan
Thank you. Doug, you guys generated a lot of free cash flow in the first half of the year, and your cash balance is obviously pretty high.
Is there any reason why you couldn’t generate similar amounts in the back half of the year, given that CapEx is going to remain limited? And if so, would you look to pay down more debt than the additional $25 million, or would you just let the cash balance build?
How do you think about your use of free cash flow?
W. Douglas Benn
I think that’s a great question, it’s a question that we talk about a lot. One of the impediments to paying down debt past $150 million is that we have two hedges on -- one on $100 million of the 150 and one on $50 million of the 150, so those two interest rate hedges are in place and to take them away would cost some money.
And we paid $3.3 million this quarter to take off the hedge on the $100 million and these other two have -- it would on that second $100 million, it would be a bigger number right now today than $3.3 million. So I think that what we are going to do right now is do an analysis where we will look at what if we paid down debt -- we might even give at least consideration to whether or not we pay down debt and not take the hedge off.
You don’t have to take the hedge off but if you don’t take the hedge off, you are sort of playing in the interest rate derivatives market, which is obviously not the business that we are in. So we’ll have to look at that because taking the hedge off requires writing a check which is painful as well, so I would say that we’ll have to weight what the interest savings would be to have lower debt, because we’re not making very much money on our $90-plus million of cash.
We’ve got to invest it conservatively and conservative investments are not making very much these days, as you know. So we’ll weight that, what we are going to lose in interest income with what we will gain in lower interest expense and then weigh in the whole consequences of hedge accounting and make a determination.
I would like to pay it off. I know that’s a long answer but that’s sort of how I am thinking about it.
Dustin Tompkins - Morgan Keegan
Well, why wouldn’t you leave some of the debt on there until the hedges expire and maybe use some of that cash to repurchase shares?
W. Douglas Benn
Well, we could leave the debt on the -- the hedges expire in April 2012 so that’s -- you have to have some binoculars to see that from here. It’s a pretty long way off.
We could do that but what we have to do I think is develop more of a -- we’re in a period of time now where the economy has been like it has been for the last six to nine months. We need to revamp our strategic plan for how are we going to create value, whether it be repurchasing shares, paying a dividend, what is the appropriate permanent debt level -- there’s a lot of questions that we should be answering and that we will in the next three or four months and I’ll be able to respond to that better.
Dustin Tompkins - Morgan Keegan
Okay, and then one more, if I may -- do you have any initial thoughts on the commodity outlook into next year? I know it’s early but do you feel like it’s going to be flattish or do you think you might see some pressure on some of the commodity categories?
W. Douglas Benn
I have some information on one or two different commodities and how I think it will turn out but like you said, I think it is early. We may be able to give you something a little bit better in the third quarter but most of our annual contracts are calendar year and right now, the visibility into next year, it’s only July, is not that good.
Dustin Tompkins - Morgan Keegan
Great. Thank you, guys.
Operator
The next question is from Bryan Elliott with Raymond James.
Bryan Elliott - Raymond James & Associates
Good afternoon. Thank you.
Actually, just some clean-up items -- Doug, what kind of tax rate is implied in your guidance for the second half or full-year?
W. Douglas Benn
I believe it’s 24% to 25%.
Bryan Elliott - Raymond James & Associates
Okay. That’s full year?
W. Douglas Benn
Yes -- everybody is nodding their heads, so that must be right.
Bryan Elliott - Raymond James & Associates
Okay, and do you expect to book any pre-opening in the second half, if we’re not going to open stores?
W. Douglas Benn
You know, the answer to that is yes and it’s a funny answer. We have from an accounting standpoint what we have chosen to do, and it made a lot of sense during the years when we were opening a lot of restaurants, is to charge whatever manager bench we have to pre-opening.
So we have certain managers -- that bench is not zero now but it’s been greatly reduced. We have certain managers that can either move in to a new restaurant or back fill when there’s attrition at manager levels in restaurants.
They are not sitting on a bench but they are in a restaurant but we are charging them the pre-opening costs. So there will be some small amount of pre-opening in the back half of the year.
Bryan Elliott - Raymond James & Associates
All right and the 5% of sales you talked about on the small plates, is that -- or the 5% mix of small plate, is that a percent of sales or a percent of customers?
W. Douglas Benn
Percent of sales.
Bryan Elliott - Raymond James & Associates
Percent of sales -- so since -- but I guess if the average ticket from people who buy those things is pennies away from the normal, that it would be roughly 5% of customers as well? Am I think about that correctly?
W. Douglas Benn
I think you are thinking about that right -- sounds right.
Bryan Elliott - Raymond James & Associates
Okay, and last question I have just on the G&A line -- I know this quarter we had full bonus accrual against I believe it was none last year. Did we have none in the back half as well in ’08?
W. Douglas Benn
The answer for the whole year is zero.
Bryan Elliott - Raymond James & Associates
Yeah, that’s what I thought, I just wanted to clarify. All right, thank you very much.
Operator
The next question is from Keith Siegner with Credit Suisse.
Keith Siegner - Credit Suisse
I wanted to just follow-up on the Annapolis small box -- you know, we got some details on that last quarter. You sounded pretty enthusiastic, talked about possibly getting to a $200,000 average weekly sales number for that box.
Now that it’s been open a little longer, and granted I understand this is a strange environment, how is it doing now? Do you still feel as enthusiastic?
Is there anything else you learned from that that makes you feel either better or worse about additional smaller boxes?
David Overton
No, I think we feel great about it. It’s still performing very well.
The idea that that box can do $200,000, that we are moving forward on that. As we said last time, we really don’t think we are going tweak that much more.
We’re working on a 7200 square foot box for future smaller markets but it’s all still good and just what we said last time. No new news -- all good news.
Keith Siegner - Credit Suisse
Okay, and then one other question -- I just wanted to see how -- how do you measure the success of some of these days like a National Cheesecake Day? I know you are very on top of customer trends and things like that but is the success from a promotion like that a comp pick-up in the day, do you see repeat traffic?
How do you judge the effectiveness of those programs?
David Overton
Well, one of the ways we do it is to see how much PR, how much national media coverage and the people that we use actually put a dollar amount on what it would cost to get that if you were to go and pay for it, so that’s one of the methods we use, is are we getting $3 million or $4 million worth of advertising? And really some of these things you can get nationally, locally, and so that’s one of the big ways.
It’s not so much what we are doing that day in terms of dollars -- it’s the kind of push and general brand awareness, top of mind, and how much PR we can get. Do you have anything to add to that?
W. Douglas Benn
No, I think that it -- the other thing that we are doing that day is we have a huge increase in business during that day, or we did last year and we would expect to have that this year. And those people the come into our restaurants that day are also going to receive a card that allows them to come back and have a slice of cheesecake for every $30 that they spend, so we are going to be doing a similar sort of bounce back during that day that will we hope to fuel sales later in the quarter as well.
Keith Siegner - Credit Suisse
That’s actually very helpful, and then one last question [inaudible] -- how is Rock Sugar doing? Any updated thoughts there?
David Overton
No, you know, it’s doing very well. We are still tweaking mostly the labor.
We are happy with it. We are looking at a couple of possible sites in the country and maybe looking to do one more but really not a lot of new news with Rock Sugar -- it’s just perfecting what we are doing.
Keith Siegner - Credit Suisse
Thank you very much.
Operator
The next question is from Paul Westra with Cowen & Company.
Paul Westra - Cowen & Company
I have a follow-up question on your implied [inaudible] guidance, the second half, just to make sure I have it correct. [inaudible] --
David Overton
You’re breaking up, Paul. Can you speak clearly?
Paul Westra - Cowen & Company
I’ll do my best. I’m just trying to reconcile some of the implied line item guidance you gave for the second half, just to make sure I got it correct.
I just want to make sure -- you did mention you expect in your guidance full year store level margins to be down in that 45 to 90 basis point range, but my question is given your commentary that we expect maybe 100 or 150 basis points of food labor, how much are your food costs down year over year and I think to Joe’s question, you mentioned labor should be flat to down. It seems like you are implying the other operating occupancy line to be up substantially in the 200-plus basis point level.
Is that correct and if so, why?
W. Douglas Benn
Let me see if I can reconcile that for you -- the cost of sales, what we did say was 100 basis points, not 100 to 150, so if we expect cost of sales to be lower by 100, we would expect other operating expenses to be higher by 100 and they kind of offset each other. Then we would expect, as you mentioned, labor to be slightly lower than last year for the year.
The real increase is coming from the G&A line, where we had this founder’s retirement benefit accrual that we took this quarter that will be in that number at the end of the year, as well as the bonus accrual, and then a little bit of an impact from sales deleveraging on the G&A line and on really the depreciation line. So the way I would look at it is that G&A is probably going to be about 60 to 80 basis points worse than last year and depreciation may be 10 to 20 basis points worse than last year, and the whole rest of the P&L just slightly better than last year.
Paul Westra - Cowen & Company
Okay, that’s helpful. And then just one other question on your G&A -- once you’ve got that -- it seems like that $23.5 million kind of quarter run-rate that you’ve posted here, I think what you just mentioned implies that -- is that a good number to look at for 2010 as well or do you expect to get some extra cost savings or maybe even some additions?
W. Douglas Benn
Well, we’ve got to go through the planning process for 2010 and it depends what our initiatives are going to be for the year but for the full year this year, I think including the founders retirement benefit, it’s going to be around $80 million and I would say that from that number, we would not allow G&A to grow at a pace of any faster than what we thought revenue could grow.
Paul Westra - Cowen & Company
Great, that’s helpful. Thanks and congrats on the good quarter.
Operator
Our last question will come from the line of Nicole Miller with Piper Jaffray.
Nicole Miller - Piper Jaffray
Thank you. Good afternoon.
I just wanted to ask as you look at the economic environment and then Doug, you made some mention of looking at the Grand Lux Café portfolio, and all of that in combination, does it change the long-term opportunity for what the whole portfolio looks like over time? I think you had mentioned numbers historically that would imply a doubling of the current unit base.
W. Douglas Benn
I think that you’ve got to kind of take this environment out of it and look forward to a more normalized environment and when I say normalized, I don’t really believe that we ever are going to be back to where we were from an economic standpoint for a long, long time, to back to where we were a few years. But taking that into account, taking into account that we have the Annapolis restaurant and we can build smaller prototypes that allow us to go into more locations, I would think that from a Cheesecake Factory standpoint alone, there’s at least 30 to 50 more big ones and maybe a hundred of the other ones, 150 of the other ones.
And Grand Lux, we really haven’t done a model on that but I would say that we could double the number of units over time. That’s a pretty long period of time that that would take to do.
Nicole Miller - Piper Jaffray
And then it doesn’t sound like you have any commodity locks for 2010 but I just wanted to confirm that.
W. Douglas Benn
We don’t have any right now that I know of.
Nicole Miller - Piper Jaffray
Okay. Thank you so much.
David Overton
Thank you, everyone.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Good day, everyone.