Feb 12, 2009
Executives
Jill Peters - VP, IR David Overton - Chairman and CEO Doug Benn - EVP and CFO
Analysts
John Glass - Morgan Stanley Steven Kron - Goldman Sachs Jeffrey Bernstein - Barclays Capital Keith Siegner - Credit Suisse Matt DiFrisco - Oppenheimer Joe Buckley - Banc of America/Merrill Lynch Chris O'Cull - SunTrust Bryan Elliott - Raymond James Tom Forte - Telsey Advisory Group Mitch Speiser - Buckingham Research
Operator
Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 earnings call for The Cheesecake Factory. My name is Melanie, and I will be your coordinator today.
(Operator Instructions). As a reminder, today's call is being recorded for replay purposes.
I would now like to turn the call over to Ms. Jill Peters.
Please proceed.
Jill Peters
Thank you. Good afternoon, and welcome to our fourth quarter earnings call.
I'm Jill Peters, Vice President of Investor Relations. With us today are David Overton, Chairman and Chief Executive Officer; Doug Benn, Executive Vice President and Chief Financial Officer, and Matt Clark, Senior Vice President of Strategic Planning.
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 Investor 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. On the call today, David will begin by providing some opening remarks.
Doug will then take you through our operating results in detail and outline our expectations for 2009. Following that, we'll open the call to questions.
Without further delay, I'll turn the call over to David.
David Overton
Thank you, Jill. First, I would like to formally welcome Doug to The Cheesecake Factory.
Many of you know Doug from his long standing tenure at RARE Hospitality. Doug brings a wealth of experience to his role, and we're excited to have him on as an integral part of our team.
As everyone is well aware, the economic backdrop continues to be challenging, unemployment rose steadily throughout 2008, and in January rose again to a level we haven't seen since the early '90s and consumer confidence remained low. Our results for the fourth quarter were pretty much in line with what we expected.
Comparable sales were negatively impacted a little more than we anticipated by the New Year's holiday shift in to 2009. It continues to be difficult in a negative comparable sales environment to combat the de-leveraging impact of our cost structure.
However, our team was focused on this, and did a good job, particularly on managing our G&A spending. In an environment like the one we're in, it is important for us to continue to focus on controlling the things we can control ensuring that guests have a wonderful experience every time they visit the restaurant is entirely within our control.
While the importance of service and hospitality can never be underestimated, they are even more critical today as key drivers of guest loyalty. I am particularly pleased with the measurable progress we have made in improving our guest satisfaction scores during the past year.
Guest satisfaction and service metrics overall are important because they indicate the propensity of a guest to return. Our score has improved by 7 percentage points from December '07 to December '08.
We believe improvement in these scores should have a positive impact on future sales trends. I am also happy with our menu innovation and new product offerings, another area of focus that is completely within our control.
While menu innovation has always been one of our strengths, we have recently targeted our efforts on promoting a higher guest value perception to respond to guests changing needs. Continued focus on our menu will keep us relevant and give guests new reasons to come into our restaurant and return again.
Another factor within our control is managing our cost structure. We have already made appropriate changes to our staffing levels to reflect current and expected sales levels.
During 2009, we plan to continue to aggressively manage our restaurant and G&A expenses. Preserving cash and reducing debt is also a priority of ours in 2009.
Given the environment, we will temper our development a little further this year, as we firmly believe that even more conservative stance on capital spending is prudent. As a result, we have modified our previously communicated development plans for 2009.
We will open a Cheesecake Factory restaurant next week in Walnut Creek, California. We may also open as many as two additional Cheesecake Factory restaurants during the remainder of the year, but their openings are not assured, and may slip into 2010.
I would like to make a couple of comments about our most recent opening in Annapolis, Maryland. This unit is in first of our smaller format Cheesecake Factory restaurant.
At 8,300 square feet, this restaurant was built at an investment cost appropriate for its expected volume in order to deliver returns consistent with the returns from our larger restaurants. In the 10 weeks since Annapolis opened, we have learned that this smaller format restaurant has the potential to deliver $200,000 in average weekly sales, higher than we originally projected.
So while we are pleased with the strong performance in Annapolis to-date, what we are most excited about is our belief that we can open restaurants more economically with this format even in 10,000 square foot locations. We believe companies with strong brand, sound competitive positioning, solid free cash flow, a healthy balance sheet and room for future growth will be well positioned to not only exit this economic downturn on firm ground, but prosper in the years ahead as total restaurant supply decreases.
The Cheesecake Factory has all of these characteristics. Our restaurant brands are some of the strongest and most unique in casual dining.
During 2009, we will continue to do things that enhance our brands, and the guest experience in our restaurants, while at the same time, managing our margins and controlling costs. Additionally, we will conservatively manage our balance sheet through cash conservation and planned reduction in existing debt levels.
Now, I would like to turn the call over to Doug to review our results and discuss our outlook for the year.
Doug Benn
Thank you, David. Total revenues at The Cheesecake Factory for the fourth quarter decreased 1.5% to $400.4 million reflecting an approximate 2% decrease in restaurant revenues, and a 14% increase in bakery revenues.
This decrease in restaurant revenues represents a 7% increase in total restaurant operating weeks, primarily from the opening of 18 new restaurants during the trailing 15-month period, coupled with an approximate 9% decrease in average weekly sales. Overall, comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants decreased 7.1% for the quarter.
By concept, comparable sales decreased 7% and 8.1% at The Cheesecake Factory and Grand Lux Cafes respectively. During the quarter, the average check at The Cheesecake Factory was close to flat relative to the fourth quarter of last year, as the 2.5% price increase in our menu in the fourth quarter was almost entirely offset by an unfavorable menu mix shift.
Our data shows that guests have adjusted their ordering habit, and are reducing their beverage and dessert orders somewhat. At The Cheesecake Factory, while our comparable sales were soft to general, the weakness was concentrated in the West, particularly California and Arizona, and was generally more pronounced in suburban areas.
This is a continuation of the geographic trends we've seen throughout the year. At Grand Lux Cafe, a large portion of their comparable sales decline continues to come from our one unit in California and two of our units in Florida, although comparable sales are soft in general.
Moving on to our bakery operations, third-party bakery sales increased 14% in the fourth quarter. Third-party bakery sales increased 14% in the fourth quarter to $25.9 million versus $22.8 million in the prior-year quarter.
This increase is due primarily to higher sales to the warehouse clubs for the holiday season. Bakery sales in the fourth quarter of 2007 increased 9% year-over-year.
So a portion of the increase resulted from an easier comparison. Cost of sales increased to 26.8% of revenue for the fourth quarter of 2008 compared to 26.2% in the same quarter last year.
The 60 basis point increase was primarily the result of higher cost for bakery commodities, particularly eggs and dairy. Cost of sales for our restaurants were flat year-over-year.
Total labor was 33.1% of revenue for the fourth quarter, up 80 basis points from 32.3% in the prior year. While we continue to realize the planned labor savings made possible by the rollout of our kitchen management system, this savings was offset by sales de-leveraging as well as higher costs stemming from minimum wage increases and higher year-over-year health insurance costs.
Other operating costs and expenses were 25.4% revenue for the fourth quarter of 2008, up 230 basis points from the 23.1% reported in the same quarter last year. The primary driver of the increase was the de-leveraging effect of lower sales levels.
In addition, about a quarter of the increase resulted from non-recurring favorable adjustments to our self-insurance reserves in the fourth quarter of last year. G&A expense for the fourth quarter was 5.5% of revenues, down 50 basis points as compared to the fourth quarter of 2007.
We continue to tightly manage our overhead costs and appropriately scale our infrastructure for the current environment as well as for our slower expected rate of growth. Depreciation expense was 4.7% of total revenue for the fourth quarter compared to 4.3% for the fourth quarter of 2007.
Pre-opening costs incurred during the fourth quarter were $2.7 million compared to $11 million in the same quarter last year. As expected, this decrease resulted from our reduced opening schedule this year relative to last.
We opened two new Cheesecake Factory restaurants in the fourth quarter of this year compared to eight Cheesecake Factory restaurants and three Grand Lux Cafes in the fourth quarter of 2007. After performing our periodic asset impairment testing, we concluded that we should write down a portion of the carrying value of three Cheesecake Factory restaurants.
In the fourth quarter, we recorded a non-cash charge of approximately $3 million related to these restaurants. The restaurants will remain open and are all currently cash flow positive.
Interest expense includes $2.9 million of expense on the $275 million in debt that we had outstanding under our revolving credit facility during the quarter. As a reminder, we have an interest rate caller agreement in place on $250 million of the outstanding revolver that served to keep our rate on our borrowings within a weighted average range of between 6.5% and 7%.
We incurred approximately $700,000 of expense during the quarter from declines in the market value of our investments in variable life insurance contracts used to informally fund our non-qualified deferred compensation plan. We have always experienced gains and losses related to these investments.
However, dramatic market declines in the fourth quarter of 2008 made the amount more pronounced. We are taking steps to significantly reduce the variability of future losses or gains related to these investments.
Our effective tax rate for the fourth quarter, excluding the effect of the impairment, was 23.2%, driven by benefits in FICA tip tax credits and a true-up related to our investments in tax-exempt securities. Our effective tax rate for the year, also excluding the effect of impairment, was 28.9%, slightly below the 30% rate in 2007.
The decrease from the prior year was primarily attributable to higher tax credit and other employment incentives as well as a reduction in our reserve for uncertain tax position. During the fourth quarter of 2008, we repurchased approximately 750,000 shares prior to terminating our 10b5-1 plan and suspending our stock repurchase authorization.
During 2008, we repurchased 9.6 million shares in total at a cost of approximately $172 million. At yearend, 2008, we are in a solid liquidity position with approximately $81 million in cash and marketable securities on our balance sheet.
Our $300 million five-year revolving credit facility is in place until April 2012. We have no principal payments due on the facility prior to that time, and we are in compliance with the financial covenants and the agreement as of yearend.
Last month, we announced an amendment to the terms of our credit facility. In essence, this amendment allows us to benefit from relaxed restrictions on the fixed-charge coverage ratio and exchange for a higher interest rate spread.
Our leverage ratio was also tightened as part of the amendment, but our objective, as David mentioned, is to reduce our debt level this year. So directionally, this was in line with our plan.
Our cash flow from operations for 2008 was approximately $169 million, net of capital expenditures of $85 million. We generated approximately $84 million in free cash flow during the year.
That wraps up our business and financial review for the fourth quarter. Now I'll spend a few minutes looking at our outlook for 2009.
We have decided to modify our guidance practices. It is difficult to forecast in this uncertain environment.
So rather than providing line item guidance, we will provide estimated ranges for diluted earnings per share based on comparable sales assumptions. We'll also share some thoughts with you on directionally where we see our costs heading this year.
While these earnings per share ranges are our best estimate on where we expect to be, based on factors known at this time, they are obviously very correlated to the assumed level of the same-store sales. I would urge you to look at our guidance as more like a sensitivity analysis than an absolute prediction.
With that said, for fiscal 2009, we anticipate diluted earnings per share between $0.57 and $0.67 based on the assumption that comparable sales will be in a range of between minus 4% and minus 6%. For the first quarter of 2009, we expect diluted earnings per share between $0.09 and $0.11, based on an assumed range of comparable sales between minus 6% and minus 7%, which reflects a continuation of the trends that we saw during the fourth quarter of 2008.
The comparable sales assumption for the fourth quarter factors in two holiday shifts, a benefit from the timing of the New Year's holiday in our first quarter, and a negative impact from Easter, and more importantly, the accompanying spring break shifting in to our second quarter. It also reflects pricing of approximately 2.2% in the menu for the first quarter.
It probably goes without saying, but I will note that if our comparable sales move outside of our stated ranges, we would expect our earnings per share to be correspondingly higher or lower than the range it set forth. Our guidance for comparable sales for the full fiscal year 2009 implies improvement during the year as compared to our first quarter assumption.
While we certainly do not have a crystal ball related to 2009, our assumed comparable sales ranges take into account the fact that we will be lapping significantly more negative comps as we move through the second, third, and fourth quarters of the year. Although not factored in our guidance, we could also begin to see some traffic improvement, sometime late this year from the ongoing capacity reductions currently underway in casual dining.
Incorporated in our guidance is food cost inflation in the 2.5% to 3% range, down slightly from the 3% to 4% we projected in late October. Commodity costs have continued to decline from their peak levels, and with 60% of our commodities contracted on an annual basis, with additional contracts in place that run three or six months, we have a better read today on the level of expected increase.
Combined with menu price increases, we would expect to keep cost of sales as a percentage of revenue for 2009 relatively flat with 2008 levels. We would expect other operating costs to be higher driven by the de-leveraging effect from lower expected sales and the lapping of favorable adjustments to our insurance costs in 2008.
Excluding an expected 30 basis point benefit from lower pre-opening cost, we expect our operating margins in 2009 to be lower by approximately 150 to 170 basis points as compared to 2008, depending on where we fall within our assumed range of comparable sales. We expect capital spending to be between $45 million and $50 million in 2009, of which about $18 million to $20 million will be spent in support of the development plan that David outlined.
In addition, we expect $70 million to $80 million in free cash flow this year. We plan to utilize our free cash flow combined with a portion of our 2008 year end cash balance to reduce the outstanding balance on our credit facility.
We hope to be able to pay off $75 million to $100 million by year end. 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 questions. Operator?
Operator
(Operator Instructions). And our first question comes from the line of John Glass with Morgan Stanley.
Go ahead.
John Glass - Morgan Stanley
Thanks. Thanks very much.
My question has to do with the growth infrastructure in the company, and related to that Doug, what's your view is on the company going forward as you look at with fresh eyes. So in 2008, I presume you have cut some of the growth infrastructure, real estate, some of the extra managers you had in training, but over what period in other words when are we going start to lap some of those reductions is it you assume there maybe year-over-year benefit in the first half of the year, I presume.
And then like as you look at the company from a fresh or other opportunities you immediately see to change the way things that have been done that would also maybe cut costs or preserve margins in some way?
Doug Benn
Yes. This is my fourth week on the job, and I've had lots of opportunities to look at things, and this company has done a pretty good job so far, I think in both controlling their costs, and in focusing on things that they can be controlled.
With respect to infrastructure, we, for instance, recently we just streamlined our cost structure a little bit more to remove another $4 million to $5 million in costs on an annualized basis, which we reflected in our guidance. For example, part one of these types of costs is because of the reduced opening schedule that we have planned.
We have reduced the number of managers in our pipeline, or our bench, if you will, to run new restaurants. So, I think that I have not had the full opportunity to go through all of the cost structure changes that could be made, but the company has been very proactive with that already.
John Glass - Morgan Stanley
Thank you.
Doug Benn
You're welcome.
Operator
Our next question comes from the line of Steven Kron with Goldman Sachs. Go ahead.
Steven Kron - Goldman Sachs
Great. Thanks.
Good afternoon. A question on the three stores where you took a non-cash write down.
Can you just give us a little bit more color as to maybe commonalities within those stores? Where they may be located?
You mentioned in the release that you are going to keep them open and work on productivity measures. Can you maybe drill down specifically what you are planning on doing?
Are there other stores that might be on the short list which might see similar things over the next six to 12 months as you kind of map out your expectations of sales trend? And, lastly to that topic, David, is free cash flow positive the metric that you are going to measure on whether or not a store should stay open or not, or is there additional investment that need to be made in these stores, that if it doesn't meet a return hurdle, we could see some of these stores close.
Doug Benn
Let me start off by answering and then David can chime in. As you probably know, we're required to go through an impairment testing periodically, and we do it every quarter.
We look carefully at what projected future cash flows are, and there is some subjectiveness to it, obviously, and we look at that and that's how we made the determination that these three restaurants are need to be written down. Two of the three restaurants are very close to the end of their lease term.
So, it was just a matter of the cash flow at the restaurant not being quite enough in the year or two remaining under lease where it could recover the remaining book value on the investment. So, two of the three were like that, the third was it was not -- there is not anything geographically that we can say about any of these write downs that we did.
So, this is as far as other potential write downs, we will continue to look at possible impairment of our assets. It's not something that is an optional exercise, it's something that we are required to do by the accounting rules, and we will continue to do that each and every quarter, and if at some future quarter there are other write downs that we need to take, then we will do that.
As far as the last part of your question for David, repeat that part again.
Steven Kron - Goldman Sachs
It was basically a question as to what metrics are you using to determine whether a store should stay open or may be closed.
Doug Benn
Well, I'll let David answer. But my comment to that would be that if it's generating cash and we think that we can make improvements to the restaurants, some of it depends on how long there is remaining on the lease term.
Generally, though, it would make sense if you were covering all of your rent and generating free cash flow, there would be absolutely no reason to close the restaurant.
David Overton
I think if it wasn't for the accounting rules, we would have not closed any of these stores. Again, they are all making a profit.
We are keeping them open. It was just technical that we had to do that.
But as Doug said, we'll look at these. But at this point, all of the stores are cash flow positive.
Okay, Steve?
Steven Kron - Goldman Sachs
Yes. Thank you very much.
David Overton
Okay.
Doug Benn
You're welcome.
Operator
Our next question comes from the line of Jeffrey Bernstein with Barclays Capital. Go ahead.
Jeffrey Bernstein
Great, thank you. Actually more looking from the sales side, I had two questions.
One, I think in the press release, maybe David's quote, you talk about your ability to remain relevant. Just wondering if you can give us an update in terms of the current initiatives to meet guest needs.
In the past you talked about gift cards. Just wondering whether you've pursued other things such as lower-priced options or sizes or combos to multiple people.
And I'm just wondering about some sort of alternatives to meet those guest needs and whether you might market it that way. And then separately, just wondering if you could comment on the comp trend.
I know we have it for the quarter. Just wondering If can give any type of sequential color as we move through the fourth quarter or any color as we looked in to January of this year.
Thank you.
Barclays Capital
Great, thank you. Actually more looking from the sales side, I had two questions.
One, I think in the press release, maybe David's quote, you talk about your ability to remain relevant. Just wondering if you can give us an update in terms of the current initiatives to meet guest needs.
In the past you talked about gift cards. Just wondering whether you've pursued other things such as lower-priced options or sizes or combos to multiple people.
And I'm just wondering about some sort of alternatives to meet those guest needs and whether you might market it that way. And then separately, just wondering if you could comment on the comp trend.
I know we have it for the quarter. Just wondering If can give any type of sequential color as we move through the fourth quarter or any color as we looked in to January of this year.
Thank you.
David Overton
Sure. We have been testing a number of different tests of different kinds of foods, price points for the last six months.
We have what we call a special menu that's now in most of our restaurants, not 100%, with great size portions at $11.95, to $12.95. Most of those items are very high up on the list.
They are either one or two in their categories. They have been extremely well received.
In fact, people are ordering them so intensely and with the excellent food costs we have on them, they are actually making a positive impact on our food costs, while offering a better price point. And I'm not sure you would think that they were smaller portions.
Also, we're rolling out our winter menu as we speak. I think 36 restaurants have already got the new menu within the last couple of days, and we'll rollout for the next month.
We have a small plate and snack menu what we think are just excellent items. They are very, very well priced.
And again, they are to fill in for snack time. You can order two or three of them as you would one.
You could trade down to them and you could order them as extra sides with your main dish. In our tests, we have not lowered our check average, and they really serve a purpose to allow all kinds of people to come in and find the right price point, the right food.
So, those things are already on their way in terms of keeping us relevant, keeping the menu exciting, giving the right price point. And in fact, they are actually helping to lower our food price rather than just go ahead and discount, which is really kind of last on our list.
So we'll see what else is coming up. We have lots of ideas.
Menu innovation is one of our strong suits. And then, Doug, why don't you take the last question?
Doug Benn
Yes, I'll just add to that that again, as I think David alluded to, we have priced these to make sure that we have comparable margins off of these products that we get off of other products on our menu. And we're just trying to give the guests more reasons to visit our restaurants.
But, Jeff, with respect to our first quarter comp guidance, we have incorporated everything into that comp guidance that we know at this point in time, including our comps to date, including Easter/Spring Break shift that I talk about, including Valentine's Day being on Saturday. Our comparable quarter to date sales are better than minus 6% to minus 7% right now.
But obviously, they would have to be since we're expecting a negative calendar shift at the quarter end. So we've factored in everything that we know.
And when we looked at a crystal ball, it came out minus 6% to minus 7%.
Jeffrey Bernstein
Great, thank you.
Barclays Capital
Great, thank you.
David Overton
You're welcome.
Operator
Our next question comes from the line of Keith Siegner with Credit Suisse. Go ahead.
Keith Siegner - Credit Suisse
Thanks. I have a question actually about the bakery.
The growth year-over-year was somewhat against your comps, but I think it also has to do with some of the shift towards eating at home. And I think you are one of the unique restaurants that has this ability to profit or gain from this shift maybe towards more eating at home and not through just licensing, but through actual production.
I was wondering if you could talk a little bit about maybe how you are thinking about that opportunity either with the existing channels maybe going from additional products or have you even thought about possibly additional channels. I mean, you have excess capacity.
It seems like a unique opportunity. If you can address that, that'd be great.
David Overton
Sure. When you say additional channels, what exactly do you mean?
Keith Siegner - Credit Suisse
Maybe outside of just the big boxes, have you thought about maybe selling some of your products through other retail locations or venues?
David Overton
Well, we haven't decided to sell any of our actual dinner items or restaurant items yet. It's something that we could look at.
We have been asked to do so. I think a few weeks ago, we finished rolling out our catering menu to all of our restaurants.
I think we're pretty much 100% with catering. The curbside was done.
So in terms of making sure all of that, that is up. We have an enhanced website to make it easier for people to order food to go.
The bakery continues to have more cakes and sell to, I think, the military and different types. That's really what we're doing at this point.
I don't think that there is anything else that's really big right now. To us, the 70-something million people that came in the restaurant last year is where we're concentrating to make sure we're bringing them in and having them come back for more with the right food, the right price, the right flavor and the right service.
I still think that's our greatest game at this point.
Doug Benn
And, Keith, with that said too, I think that one of the things that we are going to be focused on this year, as David mentioned an enhanced website, we're going to be looking maybe more at e-commerce options, because the good thing about the bakery and the good thing about Cheesecake it is travels very well. And we can get it to people that want to order it that maybe don't come into our restaurants.
So that's a potential development channel that we'll have.
Keith Siegner - Credit Suisse
Okay. Thank you.
Operator
Our next question comes from the line of Matt DiFrisco with Oppenheimer. Go ahead.
Matt DiFrisco - Oppenheimer
Thanks very much. Doug, welcome back to the restaurant universe; you were missed.
Just got a quick question I guess going through the numbers here. Looking at your pricing of 2.5% to 3% -- your commodity price inflation of 2.5% to 3%, and in the context of at least having around 2% through the first quarter and presumably some sort of price through all of '09, I would guess you would get commodity you would have lower relative COGS in that type of environment.
Are you looking for a mix shift down or are new products going to be assumed to be lower margin?
Doug Benn
No. We have got 60% of our commodities under contract now.
I am factoring in what we are paying for those commodities. If our commodity costs are up 2.5% to 3%, and then we are only raising our menu pricing by 2.2%, there's nothing really there that allows us to run lower cost of sales.
Matt DiFrisco - Oppenheimer
Okay. I just thought that you would be able to elaborate that a little bit better, and then also just…
Doug Benn
Great. I was going to say, cost of sales, as you know, Matt, is pretty much the only truly variable cost we have on our income statement, and so lever, even in an environment, this quarter was a great example, even though our sales in this quarter were down 7%, our cost of sales at our restaurants were flat, and that's because it really wasn't so much volume dependent.
Matt DiFrisco - Oppenheimer
Right. And then what are you seeing also as far as if we look at the slower growth line items where you could save, I would think that given the weight that the models had in the past from development that there would be greater relief on the margins.
It doesn't seem like that's reflected in the guidance though. You mentioned a little bit about the G&A, but is there anything else also.
I would assume that just the natural maturation of the store base should see improvement in the margins as well, or are you being conservative as far as that is concerned?
Doug Benn
I would tell you that our ability to maintain or grow margins is a humongous part of that is sales related. So, it is extremely de-leveraging when you have decreasing same-store sales.
Now with that said, if we continue to have greater same-store sales decreases than we expect, we have things that we can look at in the cost structure to pull further costs out. But I think, like I said earlier, that we have done a good job of examining that and the cost that I mentioned, the $4 million to $5 million weren't necessarily all G&A related.
Some to those were at the restaurant level.
Matt DiFrisco - Oppenheimer
Okay. And then last question, just with respect to the new credit facility, what is your limit?
Can you remind us on your share repurchase activity in 2009, if you are limited?
Doug Benn
Well, right now it's suspended, and I frankly wouldn't even worry about that particular question now because the likelihood of us doing any kind of share repurchase this year is very close to zero.
David Overton
We are going to be paying down debt.
Doug Benn
We are going to be paying down debt and then even one of the things we didn't mention about new credit facility is there are further restrictions on us using our cash for things like share repurchases.
Matt DiFrisco - Oppenheimer
Exactly, I just wanted to make clear is that, then limited and off the table in 2009 completely.
Doug Benn
No. It's not off the table completely, but I can tell you psychologically and planning wise, the way we're looking at the business is that the likelihood of share repurchases is zero.
Matt DiFrisco - Oppenheimer
Okay. Thank you.
Operator
Our next question comes from the line of Joe Buckley with Bank of America. Go ahead.
Joe Buckley - Bank of America/Merrill Lynch
Thank you. Just wondering if you could talk about the retail environment and [what's you range] and if you're concerned about retail closures around any significant portion of your restaurants that might affect business going forward?
David Overton
At this is point although there has been some closures, it's not anything we're worried about. We are as much of a designation and bring people to a mall which is why we are sort of considered a mini anchor by landlords.
So, so much our business is coming directly to us and not just feeding off the mall. Now clearly, if no one is going to the mall and there is nothing open, but I can tell you even in Florida very hard hit area, I was there doing store visits, and those malls were packed and there were still plenty of people.
Now we are in really the best malls in America, and we're not in any average malls. I am not sure we're in any malls that are outside the top ten unless they are right in the middle of the busiest shopping areas in the city.
So, I think for us, you can't just look at average mall or average mall numbers and compare us to that, because we're in front we have our own door, we're our own draw, and we are in the best malls in the country.
Joe Buckley - Bank of America/Merrill Lynch
Okay. And then questions on the pricing.
The 2.2% for the first quarter, how much of that is a price increase being taken on the winter menu being rolled out, or is that all the winter menu?
Doug Benn
We're lapping a 1.5% increase that we took last year, and we're lapping that with a 1.2%, so the…
Joe Buckley - Bank of America/Merrill Lynch
In this menu change?
Doug Benn
In this menu change? Yes, it is.
Joe Buckley - Bank of America/Merrill Lynch
Okay. And then on the food costs, 60% that's under contract, does that include the cream cheese needs for the year?
David Overton
Yes. It includes cream cheese.
Joe Buckley - Bank of America/Merrill Lynch
Are you talking about (inaudible) that down year-over-year, presumably?
David Overton
Yes, it is, Joe. It's down.
Joe Buckley - Bank of America/Merrill Lynch
Can you quantify at all?
David Overton
Say it again? Oh, yeah.
The cream cheese as you might suspect the single biggest commodity we use in the bakery, and it's down about 9%.
Joe Buckley - Bank of America/Merrill Lynch
Okay. Okay, thank you.
Operator
Our next question comes from the line of Chris O'Cull with SunTrust. Go ahead.
Chris O'Cull - SunTrust
Yeah, thanks. Couple of questions; follow-up on the question about the malls.
In terms of just the lease agreements that you guys have I know a lot of them are on variable rates. But, have you been able to go back and renegotiate with landlords better terms given that we have seen some retailers close?
David Overton
You know, I think that there would have to be a lot of retailers close. In our lease, our percentage rent would automatically go down if department store is closed.
There are lots of things in there. But frankly, we really have some of the best lease arrangements out there in the industry.
Very rarely do we hit minimum rent, we're almost always on percentage rent, so it's very hard to go back and do that, even though if we individually if we have troubled restaurants then of course we would go back. But at this point, we haven't done that, but we will watch it carefully, and then if any, too many are closing, it would automatically come down quite a bit with the terms we’ve already negotiated when we start these leases.
Doug Benn
Just to add on to what David said, anything we do with respect to negotiating with landlords will be site specific. We'll look at what each particular site and rather than a big basket of sites.
Chris O'Cull - SunTrust
Okay. And then, David, I believe the new CMO has been on Board for a few months now.
Would you share with us some of his findings and maybe what new approaches we may see in marketing the brand during 2009?
David Overton
Well, you know, he has brought on board just recently a PR company, actually a couple of them to work on. We had a great fourth quarter promotion that worked very well.
This one is happening now. It's called Share the Love.
I think you can find it on our website. We were just on Entertainment Tonight last night where either on or going to be on within a week Dr.
Phil create a cheesecake and get your name on the menu, what's your profile, your Cheesecake profile. If you go on the website, you'll see it.
We've already given out 2 million of these sorts of gifts, if you will, for the Valentine season. So he is building all of these promotions, one per quarter, working with the PR companies, working more heavily with the mall marketing.
So he is working on many fronts. And again, with everything moving as much as this, it's very hard for us to tell you exactly what we're getting from it, but that we're holding.
We're not seeing our sales deteriorate, I think, that is a good thing. It's hard to know why that's all happening.
But I think if you look at the Share the Love promotion, you'll see how creative it is. And we've gotten hundreds of thousands of hits already with the name of your cheesecake.
And that's something that will actually be going on for a few months. So we're very happy with Mark.
We think he is doing a great job. And he is moving on many fronts in a very creative professional manner.
Chris O'Cull - SunTrust
And then one last question, Valentine you mentioned falls on obviously Saturday. It was Thursday last year.
Is there an opportunity to push the check average for the event, given that it is falling on, on Saturday, which obviously is a high volume day for you guys?
David Overton
I think we've never raised the price or given a limited menu. It doesn't really seem like us.
So although the restaurant general managers split tables apart, try to get every two-top they can working for us, because it's almost all twos on Valentine's Day. So everybody is going to try to max it out, but I don't think we can really get the check average up in any effective way.
Maybe next year. We haven't planned on this year.
We usually are known for come in. We have three to four hour waits on that day and don't jack up the prices.
Chris O'Cull - SunTrust
Okay, great. Thanks.
David Overton
Thank you.
Operator
Our next question comes from the line of Brian Elliott with Raymond James. Go ahead.
Bryan Elliott - Raymond James
Thank you. Good afternoon.
David, I wanted to ask about your opening comments regarding the capacity declines that you referenced. If you could give us a little more flavor on what you are seeing, what you are thinking, how you are measuring it, how much capacity do you think we might lose here in casual dining in '09?
Doug Benn
You want me to take that up? It's almost impossible to measure that, Bryan.
It was in both of our comments, I guess, that we talked about that. We all are reading about a number of restaurant closures.
We all know the environment is soft, but a way to measure that I don't really know other than to say to you that at some point in time, you would think that we and others would benefit from a supply decrease. I don't know when that's going to be.
I said in my comments near the end of this year, but I don't really base that on anything other than a guess.
David Overton
That's right. It is a guess, but there are a lot of small dinner houses that really are competition to us, even more than other national chains.
And so they are the most vulnerable in this economy. And I think as many of them will close and they aren't going to be able to discount for that long, it should be a benefit.
I wish we could quantify it, but we just think in general there is a little positive to this news and that might be a little of it.
Bryan Elliott - Raymond James
All right. Well, I certainly don't know how to measure it either.
I was hoping you might be able to help me, but it's clearly happening. Thanks.
David Overton
Thanks.
Operator
Our next question comes from the line of Tom Forte with Telsey Advisory Group. Please go ahead.
Tom Forte - Telsey Advisory Group
Great. Thank you.
I wanted to know if you could talk about some of the headlines out of California regarding the unemployment at 9.3%, the furloughs for republic employees and the delay in tax refund checks. Given your large exposure to California, I wanted to know if you had any thoughts on trends there and what might happen as the year progresses.
David Overton
Yes. We certainly don't know.
I think we heard today that they are very close to passing their budget. And so I don't think that they are going to be giving out IOUs.
Last time the banks cashed them and it really didn't have an impact. Really where it's the hardest is in the Inland Empire, Inland, and we don't have that many restaurants there.
Our restaurants in Northern California are stronger than our Inland ones. We still have some of our highest-grossing restaurants, San Diego, Sherman Oaks in California, even though, if you mix in the ones that are deep in the Inland Empire, those were the ones hit the hardest by gas, unemployment, and where they have even 11% unemployment.
So, Southern California, with its housing problems is weaker; Northern is not, but we still have many $13 million, $14 million, $15 million restaurants even though all of them are down a little bit.
Doug Benn
I think that covers...
David Overton
Matt, do you have anything? Okay.
So, obviously there are stronger markets, and we would have to -- they have to be one of the strongest sites. We're opening up Walnut Creek next week, but San Francisco is in our top five restaurants even Pleasanton which is a suburb very close to Walnut Creek is over a $12 million restaurant.
So, we feel great about the Walnut Creek opening even though it's in Northern California.
Tom Forte - Telsey Advisory Group
Great. Thank you very much.
David Overton
Great.
Operator
(Operator instructions). And our next question comes from the line of Mitch Speiser with Buckingham Research.
Mitch Speiser - Buckingham Research
Thanks very much. First, David, are you seeing any markets that are experiencing sequential comps improvements?
David Overton
Sequential?
Mitch Speiser - Buckingham Research
Like a less worse on the negative comps or…
David Overton
Well, yes, and we're seeing markets that actually have positive comps. I mean we're seeing both of those.
Mitch Speiser - Buckingham Research
Okay. Just wanted to get a sense of the whole country is sinking deeper, but it sounds like there are some pockets.
David Overton
The whole country is not the same. There are definitely areas that have been hit less.
Texas is stronger. Obviously, we all know about Arizona and Nevada.
So, different areas that are holding very nicely, and again, in the last weeks and since the end of the fourth quarter, we're not following, and so we feel I can't tell you that it's stabilizing for good, but I think all of the things we're doing, and the things that are happening in the economy, and maybe people are going to be quiet as nervous as they are and they will come out, and go to their casual dinning restaurants. They may not have dessert.
They may order a little less, but we are seeing that people do want to go out and not just stay home and hunker down. Now, again, we're in some of the best areas in the country.
We're not out in the deep, deep suburbs, and maybe it's just us, but, you know, we are seeing people come back out to eat, and you go in some of our restaurants, and you know I went into our Aventura Cheesecake Factory at 5:30 on Thursday and we had an hour wait. So, of course, I guess it's season there, but it was still pretty packed.
Doug Benn
The other thing from a geographic standpoint that we see is the suburban locations are not as strong as the urban locations. So, it's areas of the country, but even within areas of the country generally urban locations where there is heavy population density, and perhaps higher income levels are performing are holding up better.
Mitch Speiser
Great. I would like to have a follow-up please.
On the cost side, have you seen any rebates in gas surcharges, or has that reversed? And separately, your overall utility cost outlook, what it was maybe in the fourth quarter, and how it's looking in the first quarter and the full year?
Thanks.
Buckingham Research
Great. I would like to have a follow-up please.
On the cost side, have you seen any rebates in gas surcharges, or has that reversed? And separately, your overall utility cost outlook, what it was maybe in the fourth quarter, and how it's looking in the first quarter and the full year?
Thanks.
David Overton
Actually, the good news is, I think, our largest supplier just took off all surcharges. I think it was just this week, and I'm not sure there is any left.
If there is it's very, very few. So most of that has -- we have gotten relief there.
And then…
Doug Benn
And then I would add on energy costs. I think that we would anticipate them being a little bit lower this year and that -- at least some part of that is factored in to our guidance.
Mitch Speiser
Great. Thanks.
Buckingham Research
Great. Thanks.
David Overton
We have time for two more questions, operator.
Operator
And there are no further questions on the line.
David Overton
There is no further? Okay.
Well, thank you very much, and we'll talk. Doug?
Doug Benn
Well, thank you very much. We'll talk to you next quarter.
David Overton
Feel free to call if you have any other questions. Thank you.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation.
You may disconnect. Have a wonderful day.