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Q4 2009 · Earnings Call Transcript

Feb 11, 2010

Executives

Jill Peters – VP, IR David Overton – Chairman & CEO Doug Benn – EVP & CFO

Analysts

Steven Krons – Goldman Sachs Jeffrey Bernstein – Barclays Capital John Glass – Morgan Stanley Steven Warren [ph] – Banc of America/Merrill Lynch Keith Seigner – Credit Suisse John Ivankoe – JP Morgan Brad Ludington – KeyBanc Capital Matt Antley [ph] – Stifel Nicolaus Larry Miller – RBC

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 The Cheesecake Factory earnings conference call. My name is Katrina and I'll be your operator for today.

At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session.

(Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Jill Peters.

Please proceed, ma'am.

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 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 investor 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 current thoughts on the first quarter fiscal 2010, as well as an update on the full-year 2010. Following that, we'll open the call to question.

Without further delay, I'll turn the call over to David.

David Overton

Thank you, Jill. Our comparable sales in the fourth quarter were a significant improvement both sequentially from the third quarter and against a weak fourth quarter of 2008.

It's important to note that the comparable sales improvement was more than entirely attributable to better guest traffic and although guest traffic was negative, it improved to the best level that we have seen in the past three years. At The Cheesecake Factory, all of our markets performed better both sequentially and over – and year-over-year.

While California and the Northwest still showed some weakness, the Southwest was stabilized and Florida and the Southeast continued to be positive. The Midwest was also positive in the fourth quarter, which is a big market for us with over 26 Cheesecake Factory restaurants in that region.

Our better than expected comparable sales performance in the fourth quarter together with the higher than targeted savings from the cost, from our cost management initiatives and one-time benefit from strategic tax planning drove our earnings per share upside. On an operating basis, our earnings per share in the fourth quarter increased 87% from the prior-year quarter.

Throughout the past year, we have talked a lot about what differentiates our brands with an emphasis on menu innovation and our commitment to guest satisfaction as two key drivers of our performance. Value became much more important to consumers throughout the industry last year.

We recognized that guest needs were changing because of the recession and in response we introduced new menu categories that gave guests even more option, but did so in a way that were profitable for the company. And we also did it while staying true to the quality, integrity and image of our brand.

Our upcoming menu change at The Cheesecake Factory continues along the same path. I don't want to reveal all of the new items since the menu only began rolling out this week, but look for quality new items on the value-oriented specials menus and enhanced small plates and snacks menu and a number of other changes that represents trends in food today and continued to give our guests what they want.

In addition to innovation, we know that we have to deliver on service. It's important for guests to feel good about their experiences in our restaurants because their level of satisfaction is a significant driver of whether they intend to return and recommend that to someone else.

A key way that our measures – that measures our progress is through guest satisfaction score trends. Over the past four months, the hospitality component of our guest satisfaction scores remained at the highest level that we have ever seen.

Our technical service scores which measure us against specific service standards that we’ve set have consistently remained high throughout 2009. Other highlights of the quarter include over $7 million in savings from our cost management initiatives, resulting in $27 million in savings for the year, which is ahead of our target and we continue to look for additional savings opportunities.

Our holiday marketing strategy was successful in its focus on building future guest visits as our gift card sales were up over 25% in December. As to development, we continue to expect to open as many as three new Cheesecake Factory restaurants in 2010, including the location that opened in Tucson, Arizona last week.

We're looking for additional sites, but this is our best estimate at this time. Before we move on to the financial review, I do want to touch on the Grand Lux impairment charge.

We believe that two of the biggest challenges facing Grand Lux during this recession stems from lower brand awareness and the perception of its slightly higher positioning. We feel these factors played a role in the lagging performance of four units which triggered the impairment.

We're working on the changes to possibly – to positively impact the Grand Lux concept, including a very extensive menu change in all locations to broaden the approach ability of the concept and deliver value to guests. Our next grand lucks menu change coming in a few months will also be quite wide ranging.

All of the Grand Lux locations remain open and we continue to look for future sights that we believe would be appropriate for this concept. At this time, I'll turn the call over to Doug.

Doug Benn

Okay. Thank you, David.

Total revenues at The Cheesecake Factory for the fourth quarter were up slightly at $400.6 million. Restaurant revenues reflect the 1% increase in total restaurant operating weeks, primarily from the opening of three new restaurants during the trailing 15-month period, offset by an approximate 1% decrease in average weekly sales.

As we previously reported, overall comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants decreased 29% for the quarter. By concept, comparable sales decreased 0.7% and 3.9% at The Cheesecake Factory and Grand Lux Cafe respectively.

At The Cheesecake Factory concept, we realized an effective menu price increase of about 0.8% in our summer menu change, which gave us about 2% of price in our menu in the fourth quarter as compared to last year. As we have seen out throughout 2009, dessert sales were again positive in the fourth quarter, although beverage sales are still down versus the prior year.

At the Bakery, third-party sales were up about 1% versus the prior year at $26.1 million. Cost of sales decreased 25.3% of revenue for the fourth quarter of 2009, compared to 26.8% in the same quarter last year.

The 150 basis point improvement was driven primarily by lower restaurant costs of sales. About one half of the savings came from our cost of sales initiatives in the fourth quarter.

The other half came from lower commodity costs, coupled with pricing leverage. Total labor was 32% of revenue, for the fourth quarter down 110 basis points from 33.1% in the prior year.

Our direct operating labor was about 60 basis points better than the fourth quarter of last year, due to our operational initiatives which resulted in improving our overall productivity. In addition, we saw some favorability from lower health insurance costs in the fourth quarter of this year as compared to the prior-year period.

Other operating costs and expenses were 24.8% of revenues for the fourth quarter of 2009, down 60 basis points from 25.4% reported in the fourth quarter of last year. Savings from our cost management initiatives as well as lower worker's compensation and general liability insurance and utility costs, the three of those things were partially offset by marketing expenses.

G&A expense for the fourth quarter was 6.5% of revenues, up 100 basis points as compared to the fourth quarter of 2008. The majority of this increase came from higher-performance bonus accruals relative to the prior-year period.

Pre-opening expenses incurred during the fourth quarter were $500,000, a portion of which was in support of new restaurants slated to open in the first quarter of 2010. This compares to $2.7 million in the same quarter last year, related to the opening of two new Cheesecake Factory restaurants in the fourth quarter of 2008.

Over the past few quarters, on our conference calls and in our filings with the SEC, we have talked about the varying performance at Grand Lux Cafe. Some locations have been doing very well driving some of the highest sales volume companywide and as David indicated, some other locations have had weak performance.

In accordance with accounting rules, we perform impairment testing. In the fourth quarter, the testing resulted in writing down the majority of the carrying value of four Grand Lux Cafes.

As such, we recorded a pre-tax non-cash charge of $26.5 million. For the full year 2009, our operating margins on a pro forma basis improved about 80 basis points to 6.4%, a solid first step towards our intermediate term goal of getting back to 2007 operating margin levels of 7.3%.

Our results exceeded our originally anticipated operating margin for 2009 because of better than expected comparable sales performance and higher than targeted savings from cost management initiatives. Interest expense for the quarter included a $2.2 million charge to unwind an interest rate collar in conjunction with a $50 million repayment on our revolving credit facility.

Moving on to taxes, as a result of our strategic tax planning efforts, we had a $1.4 million benefit to our tax provision in the fourth quarter resulting from a change in accounting method. This change allowed us to accelerate the deduction for repair and maintenance expenses that had been previously capitalized.

Our liquidity position continues to be solid. Our cash balance stands at $74 million at year end despite using $50 million during the quarter to reduce the balance on our revolving credit facility.

As a result of the repayment in the fourth quarter, our revolving credit facility balance now stands at $100 million. We have repaid $175 million since the beginning of 2009.

Cash flow from operations for the year was approximately $197 million, net of roughly $37 million of cash used for capital expenditures; we generated about $160 million in free cash flow this year. That wraps up our business and financial review for the fourth quarter of 2009.

Now, I'll spend a few minutes on our outlook for the first quarter of 2010 and our current thoughts on the full year. While there will probably not come a time when we will have perfect clarity for forecasting sales, it continues to be especially challenging to do so against the uncertainty created by the ongoing weak economic backdrop.

National unemployment remains at historically high levels and state unemployment in places such as California is even higher. However, as we have done in the past, we continue to provide our best estimate for earnings per share ranges, based on our comparable sales assumption.

Our comparable sales assumption factors in everything that we know as of today, which includes quarter to date trends, what we think will happen in the weeks ahead, weather impacts and the effects of any shifts associated with holidays. We do not plan to give any more specifics on first quarter to date comparable sales trends on this call.

With that said, for the first quarter of 2010, we estimated diluted earnings per share between $0.23 and $0.25, based on an assumed range of comparable sales between flat and positive 1%. This assumes the benefit of about 1% from an increase in gift card redemptions in the fourth quarter as a result of the higher gift card sales in the fourth quarter of 2009.

Excluding this benefit, the comparable sales assumption for the first quarter is between negative 1% and flat, which assumes the continuation of the comparable sales performance we delivered in the fourth quarter. For the full year, 2010, we now estimate diluted earnings per share between $1.16 and a $1.24 based on an assumed comparable sales range of between 1%, negative 1% and flat.

This is the best barometer we have today of performance for the remainder of 2010, assuming no significant worsening of the overall economy or the stock market. Our guidance represents growth of about 8% to 16% in earnings per share off of a base of $1.07 in 2009.

With about 60% of our commodities contracted for 2010, we continue to expect food cost inflation to be between flat and up 1% this year. This reflects lower contracted prices for our proteins, offsetting slightly higher expected produce costs, partially due to the freeze in Florida, in addition to slightly higher expected dairy and fish costs.

Our full-year EPS estimate also factors in lower depreciation expense due to the impairment charge we took in the fourth quarter and capital allocation strategies either in the form of continued debt pay down or share repurchases in 2010. It does not include any payments to unwind the remaining interest rate collar.

We now expect our tax rate to be between 29% and 30% in 2010. This is higher than our 2009 tax rate due to the one-time benefit of $1.4 million that we’ve recorded in the fourth quarter of 2009 and an assumed higher level of profitability in 2010.

Our projection for capital spending in 2010 is now $50 million to $55 million. This is comprised of $20 million to $23 million for new restaurant development, including as many as three new Cheesecake Factory restaurants planned for 2010 and an estimate for early 2011 openings.

Capital spending is also expected to include $21 million to $22 million for maintenance and capacity additions for our existing restaurants and $9 million to $10 million for corporate and bakery capital spending. 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

Thank you. (Operator instructions) And our first question will come from the line of Steven Krons from Goldman Sachs.

Please proceed.

Steven Krons – Goldman Sachs

Hey, guys. Thanks.

Couple, just two quick ones. First, I guess on the revenue side, the small plates and menu innovation as you talked about, how are you guys going to think about communicating this and kind of leveraging the success you had in kind of target and marketing during 2009?

If you could talk about your plans there and then just I have straight on the gift card sales, I know there were some changes year-over-year. In the fourth quarter, you were negatively affected by the changes and how you offered the gift cards, I think?

And now you are saying the redemptions are more likely going to occur more so in the first quarter, if have that straight, if you could just through that, that will be helpful.

Doug Benn

Sure. Sure.

Let me answer number two first and then maybe David can answer number one. Number two, we – in the fourth quarter, we concentrated more on selling gift cards than making retail sales and there's a number of reasons that we had significant gift card sales increases in the fourth quarter.

But what we're saying is impacting the first quarter is the redemption of that 25% more in gift card sales that we had in December of 2009 that we didn't have in December of 2008. And David.

David Overton

And really, we're just going to be doing more of the same. We did have one of our quarters where we focused our marketing on small plates and snacks.

We'll be doing the same thing this year. We did add pancakes and other things to our brunch menu.

So we kicked that piece of the menu up. And I believe some marketing, but again, through the servers being excited about it and the menu – it's really a piece that's selling is up, with its prime positioning in the menu.

And again, it continues to do well and we just keep bolstering it up to keep it exciting, fresh and new.

Jill Peter

Operator, next.

Operator

And our next question will come from the line of Jeffrey Bernstein from Barclays Capital. Please proceed.

Jeffrey Bernstein – Barclays Capital

Great. Thank you.

Actually, two quick questions. One is related to your cost management initiatives.

I think you said $7 million in the fourth quarter coming in well above the $22 million or $24 million target for '09. Just wondering if you can talk about 2010, you said look for additional savings.

I'm wondering what areas those might be in and what it might annualize to in 2010, whether or not any of the cuts you made in '09 might be required to be invested in 2010 and beyond with your hopes to accelerate unit growth. And then just separately, can you just comment, I think you said the CapEx is now $50 million to $55 million for 2010.

I think it’s down a little bit from before. So I'm just wondering what the change was and perhaps how you are going to spend the money below the CapEx line in terms of returning that free cash or what might you do with that?

Thank you?

Doug Benn

Okay. Sure.

With respect to the CapEx, the – we just really sharpened our pencil, I think with respect to look at what we thought we were going to spend. And if you look at modeling, let me tell you how we look at capital allocation for 2010.

We have not made a final decision on – we'll have about $110 million of estimated free cash flow this year and we have modeled in the way that I would, have you look at it. Is that model as a reduction of debt expense at the end of the first quarter, the end of the second quarter and at the end of the third quarter, approximately one third of the $100 million that we have left in debt, although we may pay down debt, we may do a – initiate a share repurchase, but the bottom line is either of those work out to about the same impact on earnings per share, depending on when you do the share repurchase, how much you pay and the same thing with the repayment of the debt.

The other question was –

Jeffrey Bernstein – Barclays Capital

Cost management initiatives for 2010.

Doug Benn

Cost management initiatives. Yes, there's 8 to $10 million of our identified cost management initiatives that we already identified in 2009, are going to be carrying over into 2010.

And most of them we will realize in the first quarter and most of the rest of that 8 to $10 million we'll recognize in the second quarter. We have not announced or specifically identified additional cost-saving initiatives, but we think that there are some and we have not factored those into our guidance yet, but we think that there are some additional cost-savings initiatives that we can get in the second half of the year.

But, again, we're trying to achieve that balance of making sure that we're cutting costs, where it's not impacting our guests and it's a little tougher to do the second time around. I mean, we went through some pretty substantial, $27 million worth of cost savings in 2009 and we're going to look for some more in 2010, but have not identified those yet.

Operator

And our next question will come from the line of John Glass from Morgan Stanley. Please proceed.

John Glass – Morgan Stanley

Hi. Thanks.

Can you hear me, okay?

Doug Benn

Yeah. John.

John Glass – Morgan Stanley

Thanks. In your margin guidance, what is the margin, I guess, implied in the earnings guidance for 2010?

And if I quickly do it, it would seem that you are not really expecting any further operating expense, why wouldn't that be the case, I guess? And maybe you just clarify, what you do expect the EBIT margin to be next year, or this year?

Doug Benn

Well. We – I talked about the operating income margin which is the EBIT margin, being somewhere in the neighborhood of – well, maybe I didn't, yet.

I would say that – we would expect – depending on the level of comparable store sales, that's the big, that's the big factor, somewhere between, anywhere between 6.6 and 7% operating margin for next year, so if you look at it that way, that's what we're looking for and that does improve, include some improvement in for the year in things like labor. It assumes about flat cost of sales, but significant improvement in labor, but remember, if we're expecting to have minus 1 to zero comp-store sales, there is still some deleveraging to be made up, so really, the margins are improving a little bit more than that from cost management.

Jill Peters

And John, our previous guidance had implied an operating margin somewhere in the range of 6 to 6.5%.

John Glass – Morgan Stanley

Great. Okay.

Thank you.

Operator

And our next question will come from the line of Joe Buckley from Bank of America/Merrill Lynch. Please proceed.

Steven Warren – Banc of America/Merrill Lynch

Hi. It's actually Steven Warren [ph] for Joe.

I guess you ended the year with 2% of pricing. Can you talk about what your 2010 guidance assumes on pricing and how you think about that with soon be possibly higher?

Doug Benn

Sure. Those 2% is – as you said it was in the menu for most of 2009.

In 2010, we're right in the middle of a menu change as David talked about now and our target for this menu change is to achieve a price increase of 0.6% and that 0.6% is replacing a menu price increase that we took last year during the same time of 1.2%. So if you take that 2% down by that 0.6% difference, if you follow me, we're at 1.4% of price in the menu.

So continuing to, we want to make sure that we achieve the balance in this economy, between protecting our margins and wanting to grow our guest count. We felt that that was what we could take.

It comes very close to covering our market basket of inflation that we think we're going to have. Food cost inflation of between zero and 1% and along with some inflation in utilities in that range as well as labor, 0.6% comes close to covering what we think that will be and achieves the balance of protecting margins and guest counts in our estimation.

Operator

And our next question will come from the line of Keith Siegner. Please proceed.

Keith Seigner – Credit Suisse

Thank you. I just have two questions related to Grand Lux.

You have talked in the past about how the Cheesecake Factory brand, the brand engagement is so key and then, in reference to the charge you talked about how lower-brand awareness and perceived higher price points have been a hurdle for this concept. So the first question would be – does it make sense to continue to put the investment in to this concept that maybe doesn't have the scale advantaging and marketing and awareness that the Cheesecake Factory has?

And then the second question relates to the four units that you took the charge for – you basically, it sounded like wrote off the entire carrying value. Are these units close to being cash flow negative?

Might you consider maybe converting them to a Cheesecake Factory or possibly even a RockSugar, we event heard about that lately. Could that be another alternative?

Thanks.

David Overton

We feel that because of the power of some of our Grand Luxes, we have, we, forget the ones in Las Vegas, we can do 16 million, 10 million, 11 million. Some of these restaurants were as high as 9 and 10 and have had some problems in this economy, so we think we know what is wrong with the ones that are taking the charge and that we might have gone too far in the suburbs and there is some other things.

So we have a smaller unit design. We have some menu changes in mind.

We certainly want to do one or so more to see if it can't be a viable second concept. These can't be turned in to Cheesecake Factory, these particular ones are within in a five-mile radius, so we couldn't that and the building would not be suitable in any way for a RockSugar, it would need its own building.

These are two big for RockSugar, so on and so forth. So we haven't given up yet.

Again, we think in the right locations. These things are doing as well as Cheesecake Factory and can continue to build a national reputation, but we are now slowing down because these couple of restaurants that have done a little less.

Do you want to add anything, Doug?

Doug Benn

Yeah. Just to emphasize what David said, two of the restaurants that we took a charge on, we opened in the slowest economies at the beginning of the great recession or whatever they are calling it.

David Overton

In two of the most troubled cities,

Doug Benn

In two of the most troubled cities out there. So they have not even had a chance to be successful yet.

So it really make sense to us to just and we have done the analysis to, just continue to do the things to make these better and to be more careful about the learnings that we have got from what we have done in the past with Grand Lux and selecting future locations.

Operator

And our next question will come from the line of John Ivankoe from JP Morgan. Please proceed.

John Ivankoe – JP Morgan

Hi. Great, thank you.

Just thinking about the CapEx for fiscal '10 and I'm wondering what that says about fiscal '11 development, as you are currently thinking about expanding at this point, presumably The Cheesecake Factory chain and maybe put that in the contexts, as, David, as you kind of think about what the company should be over time? I mean, do you want to return to unit growth?

Do you feel like you have the prototype, especially the smaller box to return the unit growth if that's appropriate or should we expect more of a cash generative company over time in any cycle?

David Overton

Yeah, I think the development right now, what we're seeing from, going on out there, theirs is a little bit of a pickup, okay? Not a lot.

And we're very focused on getting as many premier A-Plus locations as we possibly can. The smaller prototype in Annapolis really expands our market opportunity for the concept and we're going to build and really when we look at expansion of the concept, we're really; let's dial back in to what the real goal is.

The real goal is to grow our earnings per share in the mid-teens over the next five year period time. And in order to grow earnings per share in the mid-teens, we're going to, one way to do that, really not the only way to do that but one way to do that is with revenue growth of 7% to 9%.

And I can go through the math offline with anyone that wants to but to do that, we need to build of somewhere between 5 and 10 units a year and with that said, we'll open as many sites as we can do well. We're looking for A-Plus sites that we can build economically that hit our return targets.

We have the experience to do that and so our number one choice for capital.

David Overton

And our guys are out there even today flying around to a number of cities that are smaller for the smaller unit to try to make some deals and get out there and see how they do. So I think there's a lot of growth out there in the future.

We obviously we want landlords to start building again. They haven't done that just yet but we have our eye on really, a whole number of sites at this very moment.

Thank you, John.

Operator

And our next question will come from the line of Brad Ludington from KeyBanc Capital. Please proceed.

Brad Ludington – KeyBanc Capital

Thank you. Just a couple of brief question.

First, can you quantify in a dollar amount what the impairment charge is, what impact that will have on depreciation in 2010 and beyond? And then just looking at what Valentine's Day does with shifting from Saturday to Sunday, if it was a, a good weekend, good weather, everything else, can you quantify roughly what kind of impact that might have on same-store sales?

Doug Benn

Well. I would think that that will probably make Valentine's Day last more the entire weekend.

I don't think we have factored in a whole big shift from that particular shifting of the day and the other question?

David Overton

Doug Benn

And going forward, if you look at it on an earnings per share basis, it's about the impairment will benefit future years by about $0.02 per share.

Brad Ludington – KeyBanc Capital

Thank you.

Operator

And our next question will come from the line of Larry Miller from RBC. Please proceed.

Larry Miller – RBC

Hey, guys. I just had a question on that smaller prototype, can you share with us again, the economics of that box and how you see that market size.

I know, I think you have talked about like 140. Do you have more confidence at this point?

And any color you can provide on that would be very helpful as you kind to get to that accelerated unit growth rate.

Doug Benn

Yeah. We look at – the way we look at the unit development is we're looking a thousand dollars per square foot basically in sales.

We can do that out of, let's say it's a 10,000 a big 10,000 square foot restaurant that's a $10 million restaurant those will provide us with the return hurdles that we need. In that 8300 square foot box in analysis an $8 million restaurant in that particular space will also provide us and meet our return hurdles, however, the big thing we found out in analysis is that restaurant can do 10 million as the business is there to do 10 million we know that their boss can do 10 million.

So obviously the return hurdle is more than exceed, more than net and exceeded if we can do more than $8 million out of that, out of that location but as far as looking to the future at number of restaurants and this prototype, the way that I would, one way you could put it is, is if we looked at the next 10 years were up to development at growing, operating week growth of somewhere in the neighborhood of 5% and comparable store sales growth of 3% I think those things are achievable that's amounts to 5 to 10 units per year. Now I'm not saying that's what we'll do but certainly I can identify on a map the next 10 years worth of development and I don't think our crystal ball needs to go out any further than that.

Operator

And our next question will come from the line of Steve West from Stifel Nicolaus. Please proceed.

Matt Antley – Stifel Nicolaus

Yes. Hi, guys; Matt Antley [ph] in for Steve.

But I just had a quick question on, you talk about getting operating margins back to 2007 levels. Does that require significant Comp leverage going forward?

Or is the run rate of the cost savings initiatives that you have in place now and things that you think you can identify going forward, can that get you back there with sort of that 1 to 3% Comp, maybe long-term range there?

Doug Benn

I would tell you that this year, I talked about 6.6 to 7%. If we achieve the high end of our Comp sales guidance which is flat, we'll come, we'll approach the 7%.

To get the 7.3%, we're going to have to have positive Comps because there's just not going to be a whole lot more cost cutting to get there. So but I think in any model going forward if you just assume a modest level of Comp-store sales improves which obviously we're not assuming that for 2010 but I would be hopeful that we would assume that for 2011 when we're closer to that period of time, 3% Comp sales growth, because we have done some all of the cost initiatives that we have done, we have a very lean cost structure today and 3% Comps will generate significant margin improvement and we'll, we'll go way past 7.3% if we achieve 3% Comps for any period of time.

Operator

(Operator instructions) And our next question will be a follow-up from the line of Larry Miller from RBC. Please proceed.

Larry Miller – RBC

Hey, Doug. That was exactly my question.

How is that 1% Comp flow-through changed and how should we think about that going forward? If you can give us some parameters on what it might have been maybe a year or two ago assuming cost structure doesn’t change a lot what it might look like if you do, positive traffic going forward?

Doug Benn

I don't know if I fully understand what you are asking.

Larry Miller – RBC

What's the, what's the flow-through on a 1% traffic Comp today versus may be last year or the year before that.

Doug Benn

I don't know that that has changed significantly. It represented though 1% Comp will give us about $0.08 in earnings per share and if you want to kind of boil that down to how that affects the margins I don't have a sensitivity that shows me what 1% Comps does to margins right in front of me.

Larry Miller – RBC

Okay. I'll follow up with you, I just had.

Doug Benn

One thing you might consider, Larry is that approximately a 40% flow-through is something that we have typically used, I mean, so for each additional dollar in sales we would look to have $0.40 of that to the bottom line, so if you factor in enough 1%s and see what that does to the total, you can get there.

Larry Miller – RBC

Yeah. That was my question, I was just wondering if that 40% has gone up a bit as you made that cost structure evenly.

Doug Benn

Well. We typically do better than 40%.

We typically do better than 40%. But I would conservatively tell you that we would expect to see 40% and then hopefully that will be better.

We haven't changed what we expect to see.

Larry Miller – RBC

All right. That's great.

Thanks, Doug.

Doug Benn

Yeah.

Operator

And there are no further questions. Ladies and gentlemen, that concludes today's conference.

Thank you for your participation. You may now all disconnect.

Have a great day.

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