Oct 26, 2010
Executives
W. Benn - Chief Financial Officer and Executive Vice President Matthew Clark - Vice President, Strategic Planning David Overton - Chairman, Chief Executive Officer and Member of Enterprise Risk Management Advisory Committee
Analysts
Brad Ludington - KeyBanc Capital Markets Inc. Keith Siegner - Crédit Suisse AG Destin Tompkins - Morgan Keegan & Company, Inc.
Matthew Van Vliet Matthew DiFrisco - Oppenheimer & Co. Inc.
John Glass - Morgan Stanley Mitchell Speiser - Buckingham Research Bryan Elliott - Raymond James & Associates Jeffrey Bernstein - Barclays Capital
Operator
Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 The Cheesecake Factory Earnings Conference Call. My name is Katie, and I’ll be your coordinator for today.
[Operator Instructions] I would like to now hand the call over to your host for today, Mr. Matt Clark.
Over to you, sir.
Matthew Clark
Good afternoon, and welcome to our Third Quarter Fiscal 2010 Earnings Call. I'm Matt Clark, Senior Vice President of Finance and Strategy.
With us today are David Overton, Chairman and Chief Executive Officer; and Doug Benn, Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call, items may be discussed that are not based on historical fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual results 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.
David will start off the call today with some opening remarks. Doug will then take you through our operating results in detail and provide our thoughts on the fourth quarter and full year fiscal 2010 as well as our initial thoughts on 2011.
Following that, we'll open the call to questions. Without further delay, I'll turn the call over to David.
David Overton
Thank you, Matt. We're very pleased to report another quarter of positive comparable sales at both The Cheesecake Factory and Grand Lux Café, our third in a row.
Our total comparable sales had been consistently strong and now stand at 2.4% year-to-date after recording a 2.8% increase during the third quarter. With this performance, we clearly are capturing market share this year.
While there remains some uncertainty about the overall economy, we continue to focus on what we can control and have been very successful in moving our business forward, delivering significant and sustained sales increases, margin expansion and earnings per share growth. Our better-than-expected comparable sales in the third quarter were once again driven by strong guest traffic gains, which increased 2.8% over the last year, and year-to-date, our guest traffic is up 2.3%.
With growing traffic and sales leverage against more efficient operations, we have delivered an increase in income from operations that is over 31% year-to-date and margins that have expanded by 160 basis points compared to the first three quarters of 2009. As we have done for over three decades, we consistently strive to surpass the expectations of our guests.
This has helped us maintain our industry leading nearly $10 million in average unit volumes even in this environment. Our ongoing high guest satisfaction scores and traffic increases are two indicators that we're doing much more than just meeting the needs of our guests and reflect the vitality of our concepts.
We successfully opened an 8,500 square-foot Cheesecake Factory restaurant in Bridgewater, New Jersey in August, which was our final new restaurant opening for the year. All of our new restaurants are performing well, exceeding both sales and returns expectations.
The recent openings are a great examples of the high-capital return investment opportunities we have, and their high average unit volumes speak to the pent-up demand that exists for The Cheesecake Factory across the country. With our growing pipeline of prime locations and consistent with our overall business plan, we currently expect to open as many as six to nine new locations in 2011.
We remain committed to pursuing all prime sites and expanding each of our brands. We are confident that as we accelerate unit growth, we have the necessary depth and talent within the best-in-class operating teams to continue to effectively execute our highly differentiated brands.
Our expansion opportunities are not constrained in any way as we have a healthy balance sheet and we generate more than enough cash flow to fund all of our future plans. With that, I'll turn the call over to Doug, who will take you through our operating results and thoughts about the fourth quarter 2010 and 2011.
W. Benn
Well, thank you, David. Total revenues at The Cheesecake Factory for the third quarter were $418.4 million, compared to $400.6 million in the prior-year third quarter, an increase of 4.4%.
Restaurant revenues reflect a 1.5% increase in total restaurant operating weeks due to the opening of three new restaurants during the trailing 15-month period plus a 2.7% increase in average weekly sales. Overall, comparable sales at The Cheesecake Factory and Grand Lux Café restaurants increased 2.8% for the quarter.
By concept, comparable sales increased 2.9% and 1.4% at The Cheesecake Factory and Grand Lux Café, respectively. As David mentioned, the key driver of our comparable sales increase was a significant gain in guest traffic, which was 2.8%.
It is important to note that we were able to achieve this increase in traffic without the use of discounting and hence, our sales increases were at full margin. In addition, we had 1.3% in pricing in our menu, which was offset by mixed trends that were similar to those we saw in the first part of the year.
Looking ahead, we will also have approximately 1.3% of menu pricing in the fourth quarter of this year as we implemented a nearly equivalent level of pricing to prior year within our summer menu change. It is further noteworthy that our comparable sales trends were fairly steady throughout the third quarter, both month-to-month and geographically.
We believe this further speaks to the broad-based momentum we have in our business. At the bakery, external sales were $15.3 million, up 9% versus the prior year.
Cost of sales increased to 24.4% of revenue for the third quarter of 2010, compared to 23.9% in the same quarter last year. The 50 basis point increase was due primarily to pressure from dairy and cheese costs, as expected, partially mitigated by pricing leverage on other commodity costs and savings from our cost of sales initiatives.
Total labor was 32.8% of revenue for the third quarter, down 10 basis points from 32.9% in the prior year. This decrease was primarily related to leverage from the positive comparable sales.
Other operating costs and expenses were 24.9% of revenues for the third quarter of 2010, down 60 basis points from 25.5% in the third quarter last year. Savings from our cost management initiative and comparable sales leverage, plus favorable experience related to our self-insured workers' compensation and general liability insurance plan contributed in this area.
Overall, our cost-savings initiatives, benefiting cost of sales, labor and other operating expenses, were within the range of our expectations, resulting in year-over-year savings of just under $1 million during the quarter. G&A expenses were 5.7% of revenues in the third quarter, down about 30 basis points as compared to the third quarter of 2009.
And depreciation expense for the third quarter of 2010 was 4.3% of revenues, down 40 basis points versus the prior-year period. Both of these year-over-year improvements were driven by leverage from our solid comparable sales growth.
Net interest expense continues to come down as we pare back our funded debt and was $1.7 million or 0.4% of sales in the third quarter of fiscal 2010. This was made up of approximately $700,000 in deemed landlord financing, with the interest expense from the balance on our credit facility making up the remaining amount.
Our tax rate for the quarter was 25% as income tax expense was positively impacted by approximately $700,000 due to a favorable settlement with the IRS. Absent the settlement, our tax rate would have been approximately 28%.
In total, operating margins in the third quarter of 2010 improved 70 basis points to 7.5%, keeping us on track to measurably surpass our intermediate term goal of returning to 2007 operating margin levels. We now not only expect to exceed that goal by the end of this year by more than 40 basis points, but we will do so one year earlier than we originally anticipated.
In addition, we expanded our margins while simultaneously growing our guest counts and maintaining our high guest satisfaction ratings. We believe this combination is one of the primary drivers, enabling us to create meaningful and sustained increases in guest traffic, comparable restaurant sales, free cash flow and improved shareholder value.
During the third quarter, we repurchased approximately 900,000 shares of our common stock at a cost of $21.2 million. Year-to-date, we have repurchased just over 2 million shares at a cost of $51.2 million.
We still have 5.8 million shares remaining in our current share repurchase authorization. Our liquidity position continues to be solid with a cash balance of $59.8 million at quarter end compared to a debt balance of only $40 million and as we further reduced the amount outstanding on our credit facility by $30 million in the third quarter.
Cash flow from operations for the first nine months of the year was approximately $110 million. Net of roughly $29 million of cash used for capital expenditures, we generated about $81 million in free cash flow in the first three quarters of the year.
That wraps up our business and financial review for the third quarter of 2010. Now I'll spend a few minutes on our outlook for the fourth quarter and full year 2010, as well as our current thoughts on fiscal 2011.
As we've done in the past, we continue to provide our best estimates for earnings per share ranges based on realistic comparable sales assumptions. Our comparable sales assumptions factor in everything we know as of today, which includes quarter-to-date trends, what we think will happen in the weeks ahead, known weather influences and the effect of any impact associated with holidays.
As has been our practice, we do not plan to give any more specifics on fourth quarter to date comparable sales trends on this call. With that said, for the fourth quarter of 2010, we estimate diluted earnings per share between $0.33 and $0.36 based on an assumed range of comparable sales of between positive 1.5% and 3%.
This range of comparable sales is consistent with our performance so far this year, while also taking into consideration the negative impact from certain fourth quarter holiday shifts of approximately 50 basis points, as well as taking into account our tougher comparison to sales levels from the fourth quarter of last year. Earnings per share estimates for the fourth quarter also include considerations for current commodity price trends for which we are not fully contracted, for example, in the dairy category.
Note that we expect food cost inflation to be up between 1% and 1.5% this year. For the full year 2010, we now estimate diluted earnings per share between $1.39 and $1.42 based on an assumed comparable sales range of between 2% and 2½%.
This is an increase over our prior guidance in both sales and earnings and reflective of our strong third quarter results. We expect our tax rate to be approximately 28% in both the fourth quarter and for the full year 2010, and our projection for capital spending in 2010 is now $40 million to $45 million.
We are also now projecting an increase in capital deployment toward debt reduction and share repurchase. Our current estimate is for a total of $125 million to $150 million to be utilized toward these activities for the full year.
To sum up for 2010, we expect to see solidly positive comparable sales in each quarter and for the full year. Our earnings per share range implies operating margins of approximately 7.7% to 7.8% in 2010.
The midpoint of our earnings per share sensitivity for the year reflects a strong 32% growth in earnings per share as compared to 2009, and our improved performance is enabling us to generate greater free cash flow and create additional shareholder value through increased capital allocation activities. Here are a few key aspects with respect to 2011.
As David mentioned, we plan to open as many as six to nine new restaurants. Our total capital expenditures are expected to be between $70 million and $90 million.
We also plan to continue paying down our debt and repurchasing shares. The combined amount expected to be used in these capital allocation activities is projected at over $100 million for the year.
For the full year 2011, we are currently estimating diluted earnings per share between $1.55 and $1.70, based on an assumed comparable sales range of between positive 1% and 3%. This represents our best estimate at the time and incorporates everything we know as of today and includes the fact that 2011 is a 53-week year for us, with the extra week falling in the fourth quarter.
With that said, we'll 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 question.
Operator
[Operator Instructions] Your first question comes from the line of Jeffrey Bernstein from Barclays Capital.
Jeffrey Bernstein - Barclays Capital
One just related to -- it seems that there's a debate between margin and pricing with a lot of restaurants as we look to 2011, wondering if you can give some thoughts on the commodity outlook specifically for 2011, such as what's already contracted or what percentage. And then your thoughts in terms of the importance of maintaining the existing margin and perhaps taking price versus willing to forego some price increase in order to not disrupt kind of the fragile traffic improvement.
And then, just separately on the six to nine units for 2011, if you can give some color on perhaps what size of units we're talking about. I know you have the bigger and the smaller box, and then any limitations, whether it be real estate or people, that would prevent you from accelerating that or what might have prevented further acceleration in '11 or what would prevent you from doing even more in '12 and beyond.
W. Benn
Sure. Let's talk first about the commodity cost expectations for next year.
When we look at our commodity costs, we call it, our commodity cost basket, which is cost of sales, utilities and labor. And across all three of those basket components, for each of those components, we would expect to have commodity cost inflation of between 1½% and 2%.
And with respect to the cost of sales piece, we feel very good about that estimate because most of our proteins for next year are already wrapped up and contracted for. So we know what we're going to be paying for that for those proteins, which are a significant part of our cost of sales, so that gives us confidence in that number.
With respect to the labor of commodity cost basket, we feel comfortable with that because we've been doing a great job in managing our average hourly rate. We would expect it to go up some, though, next year as wage rates rise to keep top talent in place.
So I think I addressed what you asked there, and maybe I'll let David talk about the six to nine new units.
David Overton
Right. Jeff, there's nothing limiting us in real estate.
These are the number of sites that we have ready and that we're comfortable reporting now. In terms of '12, there's nothing that's saying we can't do more than '10.
It's really just finding the prime sites, making sure they're great. A lot of the mall owners have not really started to build yet, and they haven't really started to remodel yet.
So you're dealing with a lot of sites that take a little longer, whether they're on the streets or they're with some other landlords, so on and so forth. So they don't come quite as quickly as they used to, but I believe they're out there.
We certainly have sites that we're looking at and in lease negotiations with for 2012 and '13 and even beyond. So we feel pretty good about that but a number that we can give you to model is that six to nine right now, that's not saying there couldn't be more.
W. Benn
And, Jeff, I believe you also asked about pricing. And while not providing really any specifics at this point in time with respect to menu pricing details for 2011, as you know, we take two menu price increases a year at The Cheesecake Factory brand in February-March time frame and again, in the August-September time frame.
And we don't want to fall behind on our pricing. And our history has been that we're willing to take enough pricing to at least offset and cover commodity cost increases.
So that's what I would guide you to think at this point in time.
Jeffrey Bernstein - Barclays Capital
And do you know the breakdown of the six to nine between the different sizes?
David Overton
I can’t say, I mean, there's 8,500. There's a few 10,000.
I think there's going to be one that's 7,200, which we're happy to try that prototype out and the rest of our mixture between 8,500 and 10,000. But really, it's going to be hard to model that because the 8,500 can do $10 million and the 10,000 can do more.
So I would just look at those as pretty much all the same except for the one 7,200.
Operator
[Operator Instructions] Your next question comes from the line of John Glass from Morgan Stanley.
John Glass - Morgan Stanley
I'm curious about sort of your overall, that you overall EBIT margin expectations for next year. And it sounds like the rate of increase will slow maybe even flattish.
How much of that is a result of reinvestment in infrastructure that you're going to make next year as you start to open units? In other words, do you expect to continue to -- or start to build or rebuild the branch managers for future openings that you may have depleted over the last couple of years?
So obviously, maybe some pre-opening, and I'm not sure if you speak to the margins x preopening or with the preopening. There's some preopening expenses, maybe if you could address that and also talk about if you've also just found more offsetting cost savings as you did this year to help margins along.
W. Benn
Sure. Our expectation for next year on margins is that they improve.
So we have improvement. I believe in the guidance that we've given, there’s, take the midpoint of the range, somewhere between 30 or 40 basis points of margin improvement that's in there.
And that's after preopening costs, which we would expect would be a little bit higher next year, obviously, with six to nine new units opening. So it's even greater than that, it seems.
So those margin improvements are going to come primarily from where they came from in the third quarter and will come from in the fourth quarter, which is from assumed increases in comparable store sales. So if you take the midpoint of our range of comparable sales for next year of 1% to 3% and just assume 2%, we'll get enough leverage from that 2% to generate somewhere around in the midpoint of that range, maybe 30 or 40 basis points of margin improvement.
Now with that said, we're still going to be entering next year and not factored into our numbers is any kind of additional cost savings initiatives that we might be able to find and implement. We have implemented big cost savings initiatives, as you know.
And over 2009 and 2010, there's not as much left there, but there is something. And we will find some other things where we can save some money, while at the same time, still accomplishing our primary objective, which is to drive guest traffic.
Operator
Your next question comes from the line of Brad Ludington from KeyBanc.
Brad Ludington - KeyBanc Capital Markets Inc.
I wanted to ask on just kind of trends of the consumers coming in. Are they still remaining kind of stable on the bar sales?
I think you said last quarter that that was stable, not up or down. And then also the non-alcoholic sales in IP or soft drink or something at lunch, and kind of also just to throw the other one in I’m going to let you go, does that translate also to -- how is business coming on business spend and any kind of private parties that may book?
W. Benn
On alcoholic beverage sales, they continue to be stable so that's holding true. Our sales dollars were positive this quarter and our incident rates were slightly positive.
So alcoholic beverage sales are hanging right in there. As you mentioned, guests had been managing their check some with respect to non-alcoholic beverages, and incident rates with respect to non-alcoholic beverages are lower.
However, in the third quarter, we did see some very positive news, which was some sequential stabilization in non-alcoholic beverage incident rates. So if that trend of stabilization continues, we would expect to begin to capture more of our menu price increases at that stabilization of those lapse around and therefore, no longer having negative year-over-year comparisons.
And with respect to business spend...
David Overton
Yes. We don't take reservation and we don't do any large private parties.
So it would be hard for us to comment on that. Again, our guest traffic is up, our sales are up and we don't compartmentalize it that way.
Operator
Your next question comes from the line of Destin Tompkins from Morgan Keegan.
Destin Tompkins - Morgan Keegan & Company, Inc.
Doug, as I look at the third quarter and the labor expense, specifically, it seemed like you didn't get quite as much leverage in the third quarter as what you’d gotten in the prior quarters despite a pretty good comp. Was there anything unusual that was limiting maybe as much sales leverage as what you’d experienced recently?
W. Benn
Yes, we probably got a little more sales leverage from our cost saves initiatives and from our positive comparable sales and the leverage there and what's showing up on that line. The one thing that we did have this quarter is the bakery incurred some expenses, primarily related to labor with unplanned over time, which was they use to ramp up production to accommodate some big orders that they received that were anticipated and were sort of last minute in nature.
And the good news, though, is that external bakery sales, as we talked about, were up 9% in the third quarter. And that we would anticipate fourth quarter bakery sales year-over-year to be up as well.
So I think that's what pulled it down just a little bit more.
Destin Tompkins - Morgan Keegan & Company, Inc.
So it doesn't sound like we should see that going forward. And then, as another follow-up, I just wanted to see if you could quantify what the extra week in 2011 might be worth?
W. Benn
About 2%. So if you take the earnings per share range that we gave and about 2% of that I think would amount to about $0.03 a share.
Destin Tompkins - Morgan Keegan & Company, Inc.
And then the sustainability or the -- in terms of those costs going forward around the bakery, that over time should lessen?
W. Benn
It should lessen, yes.
Operator
Your next question comes from the line of Jonathan Cop [ph] from Baird (sic) [Robert W. Baird & Co.]
.
Unidentified Analyst
This is John Cop [ph] calling in for David. Just a quick question thinking about the marketing plan for the next quarter for Q4.
I know last year, you called out kind of a shift towards focusing more on gift card-related promotions during the holiday season, and I'm wondering if you can just give more color around if you're planning something similar this year or if you're expecting the focus to be meaningfully different than what you did in the past.
W. Benn
Well, it's going to be a little bit different but a little bit the same. Let me explain that.
Last year, our promotion was a complementary slice of cheesecake really with every $25 gift card purchase, and that was a very successful promotion for us. We sold a lot of Gift Cards that were redeemed in the first quarter, if you remember the impact on the first quarter sales.
So we're going to be doing something similar to that. However, this year, we're going to be making that offering available online.
We're planning to expand our digital footprint by launching a virtual e-Gift Card program and guests will be able to buy their gift card online and receive their complimentary slice of cheesecake online and either print out that Gift Card immediately or send it to someone. So it’d be much more virtual than it has been in the past.
And we think that, that should help stimulate and drive some more sales of those items.
Operator
Your next question comes from the line of Mitch Speiser from Buckingham Research.
Mitchell Speiser - Buckingham Research
On the gross margin for 2011, can you give us a sense of what you're modeling in there? I would assume there's probably at least 1½% pricing you're taking and just to get a sense of you said 30 to 40 basis points of EBIT margin expansion, if that reflects gross margins up or down.
And if I could maybe just slip another one in there, just on what metrics you look at to gauge the health of your customer, is it anything to do with retail mall traffic? Or is it just general macro numbers that we all get?
W. Benn
Yes, I would look at the margins for next year. The gross margins will be in the midpoint of the range being relatively flat.
And then with the margin expansion coming primarily from more fixed type of items like depreciation, G&A to some extent, with a little bit of going the other way with respect to preopening costs. And then, the way that we gauge our customers, I don’t remember what he said, can you repeat that part of it again?
Mitchell Speiser - Buckingham Research
I was just trying to get a sense of how you gauge the health of your customer base. Any particular metrics that you look at as you look at the fourth quarter, what you don't know about the fourth quarter and how your consumer is holding up in this environment.
W. Benn
Well, I think our consumers are holding up really well because we've had the 2.8% guest count increases. We have 2.8% more people coming into our restaurants in the third quarter and had some momentum coming out of the third quarter.
And despite that, we're willing to say that for the fourth quarter, we would expect comp-store sales gains of between 1½% and 3% in an environment even where we have this negative holiday shift and a hard comparison going on. So we're confident.
David Overton
Yes. If you look at department stores, the stock market, sales of luxury goods, those are all of the things that bode well for us.
Operator
Your next question comes from the line of Matt DiFrisco from Oppenheimer.
Matthew DiFrisco - Oppenheimer & Co. Inc.
Doug, I'm sorry, I jumped on late. If you could just go back and if you've mentioned this is already on the price, what you had in the quarter and what might be embedded in that guidance in the fourth quarter to be sustained.
And then, David, I had a question with respect to the six to nine opening. Also, I'm also sorry if you already specified this, but should we assume that they're all Cheesecakes?
Or are we ready to see RockSugar maybe find a second or third store start to look at those locations?
W. Benn
Yes, let me talk about pricing first. In the third quarter, we had, well, 1.4% of price in the menu, and I mean in the third quarter, yes.
Entering the fourth quarter, we have about 1.3% of menu pricing in because we took a menu price increase in the summer of about 0.7%, which was replacing a price increase that we were lapping of 0.8%. So we took roughly the same amount of price.
So basically, the amount of pricing we have in our menu in the fourth quarter is going to be about the same as it was in the third.
Matthew DiFrisco - Oppenheimer & Co. Inc.
And then the stores?
David Overton
Yes, they're all Cheesecake Factories. We have one 7,200 square foot test model for Cheesecake and we have one new Grand Lux iteration that we're doing, so that's what will have for next year.
Matthew DiFrisco - Oppenheimer & Co. Inc.
What percent of those stores are going to be sort of new markets versus existing markets?
David Overton
There's not a lot of new markets for us. We're pretty much everywhere.
So they're all a mix of markets that we're in. There are some new cities but in states that we have seven or eight other stores.
Matthew DiFrisco - Oppenheimer & Co. Inc.
And then, I guess what is your first primary use of your cash? I mean, would you think this is an opportunity maybe to take advantage of building out the pipeline for greater growth in years ahead?
Or maybe making acquisitions of some lesser brands that have some nice real estate, but you can just sort of put your better format in there?
W. Benn
Our number one use of cash is always going to be organic growth of our three brands. So while we're saying six to nine for next year, we're pursuing all A locations that meet our criteria.
And so that would be the number one use of our cash. Acquisitions are something that are down the list somewhere.
We would certainly do -- for next year, if you look at our capital allocation, we'll have over $100 million of free cash flow after those six to nine new restaurants, and we will use that to pay back debt and to repurchase shares. And I would expect that by the end of the first quarter, our debt would be paid down to zero.
Matthew DiFrisco - Oppenheimer & Co. Inc.
So a dividend would not be not in consideration?
W. Benn
Well, right now, I think I would say we'll keeping our powder and our options open with respect to dividends for now. We're not ruling out anything in the future with respect to the possibilities, certainly, of paying a dividend.
But in the next few quarters, we think we have other excellent capital allocation alternatives to pursue, which should provide good value.
Operator
Your next question comes from the line of Steve West. [Stifel, Nicolaus]
Matthew Van Vliet
Matt Van Vliet on for Steve. One follow-up to the sales mix figures that you gave earlier.
I was wondering you could comment on dessert incidents and maybe trends you're seeing there. As well as if there's been any change in the incidents or amount of average check on the Small Plates & Snacks when those are included in an order.
W. Benn
We're not going to break out the Small Plates & Snacks anymore with respect to the amount that are ordered there or the check average related to them. But with respect to desert sales, we still have a positive incident rate.
So we’re selling more desserts this year than we did last year.
Matthew Van Vliet
On the six to nine units, could you give any color on when in the year you're expecting those to open? And maybe what the risks to coming in near the six or the potential of actually going over the nine just sort of how that breaks out?
W. Benn
I wouldn't comment on that second question, but I'll tell you that on the first question, we'll open one of those during the first quarter and probably the rest of them evenly split somewhere between the third and the fourth quarter. So sort of back-end loaded.
Operator
Your next question comes from the line of Keith Siegner from Crédit Suisse.
Keith Siegner - Crédit Suisse AG
I just wanted to follow up, a little bit higher level question. You mentioned before how historically you'd priced sufficient to offset the cost inflation.
And if you'd look at the COGS line item historically and going back to when you would break up bakery and restaurant costs, you're still floating near historical lows. And actually, when you take out the bakery cost, which is the higher COGS, and you compare it to the peer group, you have one of the lowest COGS out there, so low compared to history and low compared to the peers.
Is there a point at which like the COGS really just structurally can't go any lower? Do you think about that?
Or is there a point where the value proposition of the food becomes impaired? As you think about pricing going forward in that context, how does that come into play?
W. Benn
Well, I think that we have shown that what our number one priority is increasing guest traffic. And in order to do that, you have to be very careful about what price increases you take.
So we have been steady with our price increases, but not really taking great price increases. We have taken enough to offset inflation and maybe over time, cost of sales have fallen some because of just the mix of items being ordered.
But we would look first at being able to make sure that we could sustain same-store sales growth over the long term and be very careful about the balance between pricing and margins. Do you have any other comments about that, David?
David Overton
No, I think that's exactly right.
Operator
At this time, we have time for only two more questions. The next question comes from the line of Bryan Elliott from Raymond James.
Bryan Elliott - Raymond James & Associates
I just wondered how much testing have you done for that virtual Cheesecake promotion, taste testing the virtual versus the real.
David Overton
The paper cheesecakes, they're excellent.
Bryan Elliott - Raymond James & Associates
Just a couple of clarifications on the '11 guidance. Does it assume any share repo?
Or is the guidance before any share repo?
W. Benn
It assumes share repo. It assumes the allocation of around $100 million worth of capital to either debt repayment or share repo.
So it's depending on what's paid off in the fourth quarter, the remainder of debt will be paid down in the first quarter.
Bryan Elliott - Raymond James & Associates
And are you locked at all? You said you're locked on proteins.
What's the dairy status for '11?
W. Benn
That's not something you can really lock on very well. So we're not locked on that now and we're not for '11.
Bryan Elliott - Raymond James & Associates
And your assumption embedded in the guidance is low-single digit dairy?
W. Benn
Well, we're not to comment on every item within the cost of sales guidance. But I would say that we would expect our commodity basket with respect to cost of sales to be up 1½% to 2%, and some of those protein things are down.
Some of them are flat. Other things that we know about are going to be up or down.
And then dairy, we have an increase in for, but I don't want to go through each of them.
Bryan Elliott - Raymond James & Associates
And finally, you talked about the dividend question a couple of questions ago, but just a follow-up to that as well, should we see the pending confiscatory tax regime on dividends be successfully dealt with, would that be a circumstance that you would factor into your thinking about dividends?
W. Benn
Maybe very peripherally. I think the way we would look at it is what dividend can we pay that would be meaningful and that we could sustain for a long period of time and increase over time.
And taxes are taxes. And that's not a big consideration.
Operator
And your final question comes from the line of Brad Ludington from KeyBanc Capital.
Brad Ludington - KeyBanc Capital Markets Inc.
David, I just wanted to clarify on the development, I think you said there would be one Grand Lux next year. And also if that's the case, did you say it would be kind of a new test model for Grand Lux?
David Overton
Yes, as we've been saying, we're bringing the size down to the 8,300 or so that we found so helpful at Cheesecake Factory. We've worked on the interior of the store a bit.
We’ve brought the decor down so it was a little more casual, and people didn't feel it was such a special occasion. And in fact, there's a menu rollout that's happening in a couple of weeks that has a lot of new things on it.
So we're really looking forward to opening next year's Grand Lux. And hopefully, it'll be right in line with having Grand Lux be a continued growth vehicle for us.
Brad Ludington - KeyBanc Capital Markets Inc.
And then on the timing of that, would that be the one in the first quarter or one of the ones in the back half?
David Overton
No, it's one that’ll be in the third or fourth.
W. Benn
Okay. Well, thank you very much, everyone.
Operator
Ladies and gentlemen, thank you for your participation in today's conference call. You may now disconnect.
Have a wonderful day.