The Cheesecake Factory Incorporated (CAKE) Q3 2007 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to The CheesecakeFactory's third quarter 2007 earnings conference call. (Operator Instructions)I would like to turn the call over to Mr. Michael Dixon. Please proceed, sir.

Hello, everyone. I'm Michael Dixon, CFO of The CheesecakeFactory Incorporated, and welcome to our quarterly investor conference callwhich is also being broadcast live over the Internet. Also with us today is David Overton, our Chairman of theBoard and Chief Executive Officer who is actually joining us from Tukwila, Washington -- just outside of Seattle-- where we will open our 134th Cheesecake Factory restaurant laterthis week. Joe Peters, our Vice President of Investor Relations, is also withus. Before we get into the details, let me briefly cover ourcautionary statement regarding risk factors and forward-looking statements ingeneral. Throughout our call today items may be discussed that are not based onhistorical fact and are considered forward-looking statements within themeaning of the Private Securities Litigation Reform Act of 1995. Actual resultscould differ materially from those stated or implied in forward-lookingstatements as a result of the factors detailed in today's press release and inour filings with the Securities and Exchange Commission. All forward-looking statements made on this call speak onlyas of today's date and the company undertakes no duty to update anyforward-looking statements. We have a lot to cover today. In addition to reportingresults for the third quarter of fiscal 2007, we also announced our growth planfor fiscal 2008 today. Our agenda for this call will be as follows: First, we'll discuss our financial results for the thirdquarter of fiscal 2007 which ended on October 2nd, 2007. We will refer to that quarter as the third quarter inour comments today. We'll also give some color on our expectations for theremainder of the year. After that, we'll discuss our growth plan andperformance targets for fiscal 2008. Finally, we'll open the call to questionsand we'll be happy to answer as many questions as time allows. We'd like tofinish up this call in about 45 minutes. Before I get into the details of the quarter, let me takejust a minute to formally welcome Russ Bendel to The Cheesecake Factory family.As we announced in early September, Russ joins us as President and ChiefOperating Officer of The Cheesecake Factory restaurants. Russ brings with him awealth of restaurant industry experience and we look forward to him taking ouroperations to an even higher level. As we speak, Russ is well into hisorientation program. Again, we're very happy to have Russ on board. So with that, let's get on to the quarter's results. Totalrevenues at The Cheesecake Factory for the third quarter increased 15.4% to$375.5 million. Our revenue growth this quarter was comprised of an approximate16% increase in restaurant revenues and a 4% decrease in bakery revenues. I'lltalk more about the bakery business in a moment. The 16% increase in restaurant revenues represents anapproximate 18% increase in total restaurant operating weeks resulting primarilyfrom the openings of 27 new restaurants during the trailing 15 month period,coupled with an approximate 1.4% decrease in average sales per restaurantoperating week. Overall comparable sales at The Cheesecake Factory and GrandLux Cafe restaurants increased 1.2% for the quarter. By concept, comparablesales increased approximately 1% at The Cheesecake Factory restaurants andincreased 4.8% at the Grand Lux Cafes. While we're pleased to report positive comparable salesagain this quarter, the environment for most casual dining operators continuesto be challenging. That being said, although we generally expect comparablesales to be in line with our menu price increase, we are still a little bitbehind that as traffic has not yet returned to normal levels. We remained abouta percent or so off in traffic with approximately 2.2% of price in our menuduring the third quarter. This trend has been fairly consistent throughout thefirst nine months of the year. In our summer menu change which we finished rolling out inmid-August we took an additional 1.5% effective menu price increase to helpoffset known cost pressures, primarily related to minimum wage, janitorial anddairy costs. As a reminder, we are not lapping any menu price increase fromlast summer. Returning to the third quarter, average weekly sales at TheCheesecake Factory restaurants decreased about 1.1%, which is still slightly behindthe change in comparable restaurant sales. As we've said many times in thepast, there are a couple of factors that generally can impact this comparison.First, the timing of new restaurant openings and the associated honeymoon salesperiod will always have an impact on the gap between comparable sales andaverage weekly sales. When we open in existing markets we generally do notexperience, nor do we expect to experience, the honeymoon sales trends ofroughly 130% of sustainable volumes that we often see in new markets. 16 of the 21 Cheesecake Factory restaurants opened since thethird quarter of last year are in existing markets. The strategy of capturingadditional profitable market share in areas that we know very well and where ourbrand recognition is high has worked well for us and we will continue tomaximize this opportunity in the future. Second, the restaurants we've opened in the last 18 monthsare considerably smaller on average than those opened prior to that timeperiod. The average number of productive seats is about 5% less at thoserestaurants not in the comp base compared to those restaurants in the compbase. This is a function of opening restaurants in great markets as preferredsites become available and appropriately fitting the restaurant size to thosemarkets. Most importantly, the average returns at these locations are in excessof our cost of capital and deliver a fully capitalized return in excess of our25% threshold. Lastly on a more specific note, four of the 20 CheesecakeFactory restaurants that opened last year were built smaller, as they are inslightly smaller markets, and consequently delivered average weekly sales belowour company average. While these locations will still deliver initial annualsales of $7 million or so, and will continue to grow as these markets matureand the retail developments are built out, they do account for a large part ofthe gap between our comp sales and average weekly sales. Excluding theselocations, average weekly sales at The Cheesecake Factory would have increasedapproximately 0.1%. We continue to be very pleased with sales at our Grand LuxCafes. Comparable sales at Grand Lux increased 4.8% in the third quarter. On atwo-year basis, Grand Lux Cafe has delivered comparable sales of 11.5%. Wecontinue to view this as an incredibly strong performance, particularly inlight of the soft operating environment the industry has experienced for nearlytwo years and for a young concept with no advertising or promotions. The salesvolumes continue to increase at Grand Lux. We will continue to leverageoperating costs and improve this concept’s restaurant level margins. Grand LuxCafe is a strong, viable second concept for The Cheesecake Factory. Longer term, we feel very confident that there is plenty ofprofitable growth ahead for both The Cheesecake Factory and Grand Lux Cafe.With only 143 restaurants opened to date, the majority of our expected revenuegrowth for the next few years will continue to come from openings of newrestaurants. Our longer term expectations for annual comparable restaurantsales growth remains in the range of menu price increases, or about 1% to 2%. For 2007, our overall revenue growth target, including bothrestaurant and bakery sales, is 15% to 16%, which translates into approximately15% growth in the fourth quarter. This is a little bit lower than our previousguidance and reflects the slightly softer sales we experienced in the secondhalf of September and through the first couple of weeks of October. Overallcomparable sales through the first three weeks of the fourth quarter aretracking between flat and a positive 1%. We are on target to achieve our goal of opening as many as21 new restaurants, including five Grand Lux Cafes. As we discussed on our lastquarterly conference call, 20% to 25% of these openings will be in new marketswith the remainder representing opportunities to return to those markets wehave been very successful. In addition, a large number of our targeted 2007 openingsare in the Northeast, which has proven to be a very strong geographic area forus, with a number of high volume restaurants already operating in this region,with certainly enough population density to support several more. As we noted in our press release, the new restaurants thatwe have opened to-date in the Northeast have delivered average weekly sales inexcess of $250,000 since opening, consistent with our expectations for highvolumes in this region. In particular, our location in Braintree, Massachusetts, which opened in late June,continued its strong performance with average weekly sales of over $280,000during its 15 weeks in operation. We opened six Cheesecake Factory restaurants and one GrandLux Cafe in the third quarter, in line with our stated guidance. To-date in thefourth quarter, we've already opened two The Cheesecake Factory restaurants in Peabodyand Natick, Massachusetts,and a third opening will follow later this week in Tukwila, Washington, a suburb of Seattle,as I mentioned earlier. We expect to open five more Cheesecake Factoryrestaurants and three Grand Lux Cafes in the fourth quarter, for a total of 11new restaurants this quarter as originally planned. As a reminder, there are risks to achieving our openingschedule as we currently lease all of our restaurant locations, many of whichare in newly constructed or to-be-constructed retail developments such asshopping malls, entertainment centers, cityscape strip centers and so forth. Asa result, we rely heavily on our landlords to deliver our leased spaces to usaccording to their original commitment so that we can build them out in atimely manner. Our locations are upscale and highly customized, which helpsto create the non-chain image that we enjoy with consumers and which we believerepresents a significant competitive advantage for us. But that also createssome unique design and permitting challenges. Once we get the space from thelandlords and obtain our building permits, our construction and pre-openingprocesses are typically consistent, usually taking four to six months tocomplete on average. So as a result of these factors, it's not uncommon to haveplanned openings move a few weeks or even a month due to various factorsoutside of our control. Having said that, we have consistently achieved ourstated opening targets. We have an incredible development team that consistentlymanages through these challenges to deliver restaurants on time and an equallytalented operations team to get these restaurants open and running like aCheesecake Factory from day one. I will remind our investors that it takes 90 to 120 days onaverage for our new restaurants to work through their normal grand opening inefficienciesand for food and labor costs to reach their targeted operating profit margins. Now moving to our bakery operations. Bakery sales, net ofinter-company bakery sales, decreased 4% in the third quarter from the year-agoperiod to $13.1 million versus $13.7 million in the prior year. The decrease isdue primarily to lower sales to the warehouse clubs, which is our largest saleschannel for outside bakery sales. Clearly, the macro pressures impacting diningout occasions are affecting dessert purchases as well. Our plan for third party bakery sales continues to focus ongenerating consistent and predictable sales and contribution margins. Based onour current outlook for warehouse club sales and other outside sales channels,we expect bakery sales to be approximately flat to down 1% in fiscal 2007compared to the prior year. While slightly lower than our earlier expectations,I remind investors that this is a small part of our business. While we remain optimistic with respect to opportunities tosteadily build our bakery sales volumes over time, bakery sales are not aspredictable as our restaurant sales. Our ability to predict the timing ofbakery product shipments and contribution margins is very difficult due to thenature of that business and the purchasing plans of our larger customers, whichmay fluctuate from quarter to quarter. In our view, the bakery's most impactful role to ourbusiness will continue to be its service as a dependable, high quality producerof desserts for sale in our own restaurants which will sell approximately $200million of desserts made in our bakery production facilities during fiscal2007. Approximately 15% of our restaurant sales consist of dessert sales, whichis a much larger percentage than achieved by most other casual diningrestaurant concepts. That covers our top line performance for the third quarterand the update on our restaurant opening plan for the fourth quarter. Now I'llbriefly review the individual components of our operating margins for the thirdquarter. Cost of sales decreased to 24.7% of revenues for the third quartercompared to 25% in the same quarter last year and 24.7% in the June quarter.The 30 basis point improvement over the prior year is attributable to favorableyear-over-year pricing for produce, seafood and general grocery items,partially offset by the continued pressure from higher dairy costs. As a reminder, fluid dairy commodities are one of the onlyareas in which we are unable to contract price, and as most of you know, dairycosts have risen significantly this year. This has a meaningful impact on usdue to the amount of manufacturer cream we use in making our fresh whip creamat the restaurants. The principal commodity categories for our restaurantsinclude fresh produce, poultry, meat, fish and seafood, cheese, other freshdairy products, bread, and general grocery items. We have contracted withsuppliers for those expected commodity requirements for fiscal 2007 that can becontracted, and where possible, we have extended certain of our contractsthrough 2008. As of today, we have contracted for a number of our 2008commodity requirements, including all of our poultry and beef requirementsthrough 2008 at flat or slight increases to current prices. We have not yet contracted our cream cheese requirements for2008, but I will note that the contractible price has come down quite a bitover the past few weeks and we will continue to monitor this and lock in aprice at an appropriate level. Based on the contracts we have in place and our currentexpectations for those items that we cannot contract, we expect cost of salesas a percent of revenues to be approximately 20 to 25 basis points lower forfiscal 2007 compared to fiscal 2006. Total labor expenses were 32.2% of revenues for the third quarter,down from the 32.3% in both the prior year and sequential quarters. This is alittle better than we anticipated and especially impressive in light of theslightly softer sales. Our operators did a great job managing labor during thequarter, which resulted in a 10 basis point improvement year over year. Forfiscal 2007, we still expect labor expenses to be approximately 40 basis pointshigher than the prior year. Other operating costs and expenses were 22.9% of revenuesfor the third quarter, a slight increase from the 23.7% reported in the samequarter last year and the 22.9% in the sequential quarter. The increase fromthe prior year period was a result of higher insurance costs, primarilyworker's compensation and the deleveraging of fixed costs to operate ourrestaurants as a result of the slightly lower sales this quarter. We expectother operating costs as a percent of revenues to be 30 to 40 basis pointshigher for the full fiscal year relative to fiscal 2006, due to the higherjanitorial and insurance costs. Now this translates into a 120 to 140 basispoint increase in Q4 versus the prior year, as we benefited last year from somevery favorable adjustment to our self-insurance reserves. G&A expenses for the third quarter were 5.3% ofrevenues, down from the 5.7% in the prior year and better than the 5.4% in thesequential quarter. The decrease relative the year ago quarter was primarilydue to about $1 million of professional fees incurred in the prior year relatedto the stock option review. In addition, we continue to effectively manage ouroverhead costs in line with our revenues and look aggressively for cost savingopportunities. Our G&A expenses consist of two major components: thecost for our corporate, bakery and field supervision support team, which shouldgrow at a lesser rate than revenues; and the cost for our restaurantmanagement, recruiting and training program, which should grow at a rate closerto our unit growth rate. During the remainder of fiscal 2007 we will continueto add resources to the corporate support, training and field supervisionactivities of our business to properly support our restaurant and bakeryoperations for the planned 21 new restaurant openings. Our expectation for total G&A expenses as a percent ofrevenues for the fourth quarter is a 50 to 60 basis point improvement comparedto the prior year as we lapse some of the option investigation costs incurredin 2006. For fiscal 2007, we expect G&A to be flat to a 10 basis pointimprovement compared with the prior year. Depreciation expense was 4.2% of total revenues for thethird quarter, compared to 4.1% for the third quarter of the prior year and4.2% for the sequential quarter. For fiscal 2007, our expectation fordepreciation expense as a percent of revenues continues to be in the 4.2% to4.3% range based on our expected growth and investment plans. Actualpre-opening costs incurred during the third quarter were approximately $8.7million compared to $5.4 million for the same quarter last year. This was a bithigher than we expected due to higher costs in general, which I'll discuss in amoment, and a couple of locations moving forward in the fourth quarter newrestaurant opening schedule which resulted in higher pre-opening costs in thethird quarter. We opened six Cheesecake Factory restaurants and one GrandLux Cafe in the third quarter of this year compared to three Cheesecake Factoryrestaurants and one Grand Lux Cafe in the year-ago quarter. We usually incurmost of our pre-opening costs in the two months before an opening and the monthof a restaurant’s opening. As a result, the timing of restaurant openings andtheir associated pre-opening costs will always have an impact on our quarterlyearnings comparison. Our expectation for fiscal 2007 total pre-opening costs is$24.5 million to $25 million in support of as many as 21 new restaurantopenings during fiscal 2007, including five Grand Lux Cafes. This is in thesame range as we previously guided to, even though much of the pre-openingcosts will move into fiscal 2008. Our back ended opening schedule, whichrequires us to hire managers a little earlier than desired in order to have theappropriate number of trained managers in place to support our openings,combined with the increased costs for staff relocation have pushed pre-openingexpenses a little higher than originally planned. Again, based on theinformation we have as of today, we plan to open eight Cheesecake Factoryrestaurants and three Grand Lux Cafes in the fourth quarter. To wrap up our operating margin expectations, we expectoperating margins to be 35 to 45 basis points better in the fourth quarter but30 to 40 basis point lower for the full fiscal 2007 versus the prior year, asthe slightly lower sales volumes combined with the ongoing dairy costincreases, minimum wage and other margin pressures we've already discussedoffset much of the benefits of our effective menu price increase. That covers our review of the major line item components ofour operating margins for the third quarter. Again, please refer to the fulldiscussion of risks and uncertainties associated with our forward-lookingstatements, including in our filings with the SEC. Included in interest expense net is $2.3 million of interestexpense and $150 million in outstanding debt we have under the revolving creditfacility during the quarter. We have an interest rate collar agreement on theoutstanding revolver balance that mitigates the risks from interest ratevariations, and keeps our LIBOR rate within a range of 4.6% to 5.4%. We alsopay a bank margin on top of LIBOR which will vary based on our debt to EBITDAratio. Our current interest rate on $150 million balance is approximately 5.9%,which translates into approximately $2.2 million of interest expense for thefourth quarter of fiscal 2007. Our effective tax rate for the third quarter was 29.5%. Wecontinue to plan an effective tax rate of 30% to 31% for the full fiscal year2007. Let me provide a brief recap of our stock-based compensationexpense for those investors who are tracking it as a separate line item. Ourtotal stock-based compensation expense reflected in the income statement forthe third quarter was approximately $4.7 million, of which $1.8 million wascharged to labor expenses and $2.8 million was charged to G&A expenses. For fiscal 2007 we continue to expect stock basedcompensation expense to be approximately $18 million to $19 million, of whichabout $8 million will be charged to labor expenses and approximately $11million will be charged to G&A expenses. As a percent of revenues, thisamount is fairly consistent with fiscal 2006. Lastly, before I move off the income statement, let meprovide some comments on the $200 million accelerated share repurchase, or ASR,that we entered into in the first quarter of this year. We completed the ASR inSeptember and retired an additional 1 million shares for a total of 7.7 millionshares repurchased under this program. We anticipate a weighted averageoutstanding share count for the fourth quarter of between 72 million and 72.5million shares. As we've discussed, we expect the impact from the ASR to beneutral to fiscal 2007 earnings per share with the benefit from the new sharecount offset by the interest expense. The transaction will be accretive tofiscal 2008 and beyond. Our share repurchase authorization from our board of directorsis currently 16 million shares, of which there are approximately 4.7 millionshares remaining, net of the shares retired this year. The authorization doesnot require us to purchase any shares and may be terminated at any time. Our liquidity position and financial flexibility continue toremain very strong. As of October 2nd, our cash and marketable securities onhand were approximately $60 million. Our cash flow from operations through thethird quarter was approximately $86 million and our cash and accrued CapEx forthe third quarter approximately $144 million, which includes construction inprogress for upcoming 2008 openings. Our estimated cash CapEx for fiscal 2007 is in the range of$195 million to $205 million. This includes the cost for the five Grand LuxCafes included in our targeted 21 openings, a large percentage of planned openingsin the Northeast which generally havehigher than average constructions costs, and a portion of the cost of our Asiantest concept. Based on our current expansion plans and current expectations ofthe operating environment, we expect to be able to finance our CapExrequirements for fiscal 2007 through expected operating cash flow, agreed uponlandlord construction contributions and our cash on hand. We have $150 million in funded debt in our capitalstructure, as I mentioned earlier, and currently do not anticipate a need foradditional funded debt or any other external financing during fiscal 2007 otherthan landlord construction contributions to meet our fiscal 2007 growthobjectives. We do have $50 million available under our credit facilityfor backup liquidity purposes and to support standby letters of credit for ourinsurance arrangements. To wrap up our business and financial review for the thirdquarter, both total revenues were somewhat lower than we expected, we did aneffective job at controlling costs, and delivered a 50 basis pointyear-over-year improvement in operating margin before pre-opening costs.Relative to the data points provided by a number of other casual diningoperators during the past month, we believe we're delivering competitivelystrong results. As always, our primary focus remains the long-term healthygrowth of The Cheesecake Factory and the continued enhancements to ourproductivity and profitability. Delivering a great guest experience is ournumber one priority and we continue to be pleased with the progress of ourproductivity initiative such as the Kitchen Management System, which we believewill allow us to more effectively and efficiently deliver a better experienceto our guests. We anticipate having KMS in approximately one-half of ourrestaurants by year end and in all of our restaurants by the end of fiscal2008. In addition, we have completed the roll out of our laborscheduling tool, which enables our managers to spend less time on schedulingand more time on the floor with guests and developing and training staffmembers. On the growth side, we will achieve our stated goal to open21 new restaurants this year. We continue to believe there is room forapproximately 200 Cheesecake Factory locations of our current size and scopeand as many as 150 Grand Lux Cafe locations. We also believe there are anadditional 130 to 140 Cheesecake Factory locations that can deliver annualrevenues between $8 million and $10 million. Our development group has designeda restaurant at an investment cost that is appropriate for this expected volume,so that we can grow our business at steady or increasing rates of return. With only 143 restaurants open as of today, we believe thatour business has a sustainable period of profitable growth ahead of it forseveral years to come. Our strong financial position provides us with capitalresources and flexibility to continue executing our growth plan with greatconfidence. Along those lines, I'd now like to focus on our growth planfor fiscal 2008 which we also announced this afternoon. We are targetingrevenue growth of approximately 14% to 15%, not much different than our revenuegrowth for the past few years. Net income growth of 17% to 19%, and estimateddiluted earnings per share growth of 22% to 24%. Let me tell you how we intend to achieve those goals. Ourplan consists of three key objectives: (1)Expand our restaurant base with high quality locations ata rate that is healthy and manageable for our business. (2)Use our free cash flow to return cash to stockholdersthrough share repurchases; and, (3) Improve our operating margin by 30 to 50 basis points. Our expansion plan for 2008 is to open as many as 17 newrestaurants, including as many as three to four Grand Lux Cafes and one RockSugar Pan Asian Kitchen, our newest concept. The 2008 plan targetsapproximately four fewer restaurants than we will open in 2007. This decisionis not driven by a lack of great locations or inability to successfully open ahigh volume restaurant. As you know, we are the landlord’s tenant of choice andare offered thousands of sites every year. We are also confident that ourdevelopment department is capable of opening at least 25 restaurants per year. However, we have a long-term view of our business and assuch we're going to slightly recalibrate our opening schedule. Investors whohave followed us for awhile know that the types of locations that we choose --that is, selecting only great locations -- historically resulted in a back end loadeddevelopment schedule. We locate many of our restaurants in newer retail centerswhere developers target completion before the holiday season, so having anopening schedule in the second half of the year has been a fact of life for us. We have a full pipeline of quality sites in 2008. Bytargeting 17 openings, we will position ourselves for a more balanced openingschedule in 2009 and beyond. This will allow us to reaccelerate our growth in2009 and to continue to target revenue growth in the mid-teens for the nextseveral years. We have identified 60 to 70 potential Cheesecake Factorylocations with expected average annual revenues over $10 million, and between130 and 140 locations with estimated annual revenues of approximately $8 to $9million. Clearly, we have an ample number of locations to choose from, whichmakes our near and longer-term growth objectives very achievable. Also, with only 13 Grand Lux Cafes in operation by the endof this year we have significant site selection opportunities for this conceptas well. At least one of our 2008 locations will be specifically targeted atthe 130 to 140 potential locations we've talked about with projected revenuesof $8 million to $9 million. We will test our ability to build a slightlysmaller-sized restaurant at an appropriate investment cost and still delivernew restaurant ROIs that are among the best in the industry. The additional objective of our growth plan for fiscal 2008are increased share repurchases, funded by a lower level of CapEx spending, andimproved operating margins in an otherwise difficult margin environment. Let mespend a minute on each of these areas. We anticipate total cash capital expenditures in fiscal 2008to be between $160 million and $170 million, an approximate20% decrease fromfiscal 2007. The savings comes from building fewer new restaurants and alsofrom building more efficient, less capital intensive Grand Lux Cafes. Many ofyou will recall from our analyst meeting earlier this year we established anobjective to reduce Grand Lux investment cost per square foot by $75 to $100.We've identified the changes necessary to achieve this target withoutsacrificing the guest experience and those changes are factored into the GrandLux design plans for next year. We expect that the reduction in cash capital spending willenable us to generate free cash flow of between $60 million and $70 million,which we intend to use in support of an active share repurchase program. Wehave approximately 4.7 million shares available under our current repurchaseauthorization and our board may consider the opportunity to increase sharerepurchases in the future. On the margin front, we expect that the lower pre-openingcosts and increase in G&A leverage will allow us to improve our operatingmargin by approximately 30 to 50 basis points. In light of the expectedindustry-wide pressure from commodity and labor costs, we believe this is acompetitively solid margin improvement. In summary, we're very expected about our ability to achieveour growth plan for 2008 and beyond. Our expansion goals position us to opensuccessful, high quality restaurants more evenly throughout the years to come.It is both an achievable plan and one that will enable us to deliversignificant diluted EPS growth while returning value to stockholders throughmeaningful share repurchases. That wraps up our prepared remarks and at this time we'll behappy to answer your questions. In order to accommodate as many questions aspossible in the time we have left in this call, please be courteous and limityourself to one question and then re-queue with any additional questions. If wearen't able to get to your question on this call, please feel free to give us acall at our offices after the call.

Your first question comes from John Glass – CIBC. John Glass – CIBC: Mike, I get the reduction in The Cheesecake Factory growthgiven the pressures you have, et cetera, but why slow the Grand Lux as well? I thoughtyou were in an expansion mode, maybe you were going to continue to swap outmore Cheesecakes for Grand Luxs, you could still do that within the confines ofa lower absolute growth this year. Could you maybe talk about the thoughtprocess behind slowing down Grand Lux Cafe as well?

I think – and David can chime in on this – really, we are notlooking to slow down Grand Lux, it is really just getting the right spots andhaving them available at the right time. The locations that we have looked atfor 2008 for Grand Lux locations, just getting the right spots, the number thatare available in the areas we want to go to is just a little bit lower. We arenot intentionally trying to slow down Grand Lux Cafe. It is a function of thespace available, at the right time. John Glass – CIBC : Do you think that over time those will always be a littlebit harder to get? What gives you confidence you can grow that at a faster clipif you are having difficulties now just trying to open three to four?

I don't think it's a matter of difficulty. Again, it's just finding the exact right site wherewe want to go following the growth pattern that we have with The CheesecakeFactory. There's lots of sites all over the country, but we are very particularabout how we're growing it and building our reputation with cities, going inand the sites we are looking for are incredible sites in incredible cities. Wehave a lot of them planned. We have sites that are planned for '09 and '10 thatare the absolute best in Boston,the best here and there. But they are all over the board in terms of when we goingto get those very special sites we are looking for, for Grand Lux.

Your next question comes from Jeffrey Bernstein - LehmanBrothers.

Just a question on traffic trends. It looks like pricingwould now be running in the 3% range for both brands, slightly above yourhistorical averages. I was wondering if you could talk about any noticeableimpact to sales, traffic or mix? Yousaid you saw a slowdown back in September, early October. I was wondering ifthat was attributable to macro or ifthere is any issue from a near term pull back on pricing? If not, I am wondering if you may considermaintaining those levels closer to the 3% range in future years, given the factthat the consumer is giving you a lot of credit for your value scores?

Jeff, I think the answer to the first part of your questionis, I believe it is still due to the macro trends. You hit on it. We did seetraffic slow down in the second half of September and continuing in the firstcouple weeks of October which is again reflected in the guidance we gave onrevenues for the full year. Our average check is really still tracking right along thelines of our menu price increases. So Idon’t feel that we are being impacted there. Having said that, I don’t thinkthat we will change our pricing strategy. I think we will continue to pricewhat we need to do to effectively offset some of the margin pressures. It isstill obviously a very competitive environment, and we want to be very carefulwith the guest out there.

I think you had mentioned that Grand Lux was running 2% to3% pricing, and you took the 1% increase in the spring. Is now the point intime that you would take the full menu roll out, I am wondering where pricingis going to end up for Grand Lux.

You are right on the current pricing on Grand Lux. Grand Lux is just undergoing a menu changewith I think slight menu price increase, if I am not mistaken, David?

Right. We are right at about 1 point.

So 1 point now, in addition to?

In addition to what is in there.

So what would it be running in total, going forward?

I think it is still going to be between 2% and 3%.

Your next question comes from the line of Ashley Woodruff –FBR. Ashley Woodruff – FBR: Just a question on your comments on 2008. The 22% to 24% EPSgrowth goal seems especially ambitious, given what you've seen recently in termsof your same-store sales trends and traffic weakening. When you are looking into 2008 what are you expecting to reachthat? What do you need to see in terms of your same-store sales trends? On that 30 to 50 basis point improvement in margins, are youexpecting that other line items like cost of sales, bakery and restaurant, areyou expecting those are flat?

From a big picture perspective, Ashley, I think relativelyflat on all of those line items. As Imentioned, we should get a little bit of G&A leverage. Obviously we willget some fairly good pre-opening expense leverage with just the fewer openings,which will drive that operating margin growth that I talked about. I think the real leverage you get from that net income downto the earnings per share is just the benefit of the share repurchase programthat we have just completed, as well as additional share repurchases that wecontemplate going forward. Ashley Woodruff – FBR: Is that premise of same-store sales similar to what you haveseen recently, or improving in 2008?

I think it is relatively similar to what we have experiencedlately. We are not being overly aggressive in assuming that the traffic isgoing to resume.

Your next question comes from Larry Miller – RBC CapitalMarkets. Larry Miller – RBCCapital Markets: Thanks. If I could follow up on John’s question, does thatmean that going forward it would be something like 10 to 12 Cakes and then youwould think to reaccelerate Grand Lux, given the opportunities, and that is howwe should think about planning the model, not necessarily the 17 stores peryear?

I think that is a reasonable assumption, Larry. I think asDavid indicated, we want to accelerate the growth at Grand Lux, but we alsowant to be right about picking the best spots. So our goal would be to continueto ramp up Grand Lux Café growth. We aretargeting the 17 total openings for 2008 and then we will ramp up again fromthat in 2009, and I would expect the Grand Lux Cafes will play a bigger part inthat growth. Larry Miller – RBCCapital Markets: I get how you can get to 14%, 15% revenue growth bybalancing out fiscal 2008 relative to 2007, which only had a few openings inthe first half of the year. Wouldn’t that necessarily normalize in fiscal ’09and beyond, and therefore you wouldn’t get the big productivity adjustment?Muted opening or capacity growth at that point?

I think you will see certainly in the first half of ’09,once you get that far out, you will see some of the lower growth in ’08 willhave an impact on the first half of ’09. I still think that there are opportunities for us to continue to drivethat revenue growth into the mid to high teens number with comparable EPSgrowth. Certainly we get a benefit on that EPS growth in fiscal 2008just from the slowdown or the lowering of the pre-opening costs. Larry Miller – RBCCapital Markets: Does that mean then that you are expecting traffic growth?Normally you have said that you wouldn’t be able to grow sales ahead ofpricing. I guess I am confused on how we get to 14% in the out years.

Well again, we can target the revenue growth from the newstore openings. We feel we have plenty of opportunities to grow morerestaurants than 17 beyond 2008. Larry Miller – RBCCapital Markets: I see. I misunderstood. Thanks a lot.

Your next question comes from Sharon Zackfia – WilliamBlair. Sharon Zackfia –William Blair: Mike, you commented on the last couple of weeks of Septemberand October slowing. I don’t think anyone asked, but has that been a nationalslowing, or have you seen any geographic concentration there?

I would say that we have seen Californiaslow quite a bit, more so. A little bitof slowing everywhere, but I would say Californiahas slowed more so. I think interestingly enough, the Southwest area has sloweddown as well. So both Californiaand Southwest have led the charge in the slowdown from mid-September forward. Sharon Zackfia –William Blair: Separately, I am assuming, based on your language in thepress release, that the weightings for the restaurants next year will still beback end weighted, and it is really ’09?

That is correct. The idea is to really slow the pipeline in’08 so that we have anywhere from 20 to 24 places to choose from; only open the16 or 17 that we talked about, and then move the rest into early ’09. Sharon Zackfia –William Blair: Just circling back once again on what you have seen inOctober, I think you gave the comps for the first three weeks. Was Octoberpretty similar to your full quarter comps last year, or was it markedlydifferent?

I don’t know the answer to that off the top of my head, sorry

Your next question comes from Matt DiFrisco - Thomas Weisel.

Thanks. This is a follow-up on Larry’s question earlier. Ithink there was a presumption being made by all of us that you will be morebalanced in ’08. Can you give us a little bit of how the quarter might look --how the quarters might look as you break out and open up those total 17 stores? And then, can you update us on what your estimates are forthe CapEx contribution from the Rock brand?

2008, as I think Sharonjust kind of alluded to, will still be back-end loaded. It just won’t be as --there just won’t be as many restaurants to open in the third or fourth quarterbecause we are going to open fewer in total, so it is still -- 2008 is stillgoing to be a back-end loaded schedule, but the idea will be to move some ofthose that we would have tried to open late in ’08 into the first half of ’09to make ’09 more of the balanced opening schedule. As for the capital costs for Rock Sugar, I don’t have afinal number on that so I’m not ready to give that out.

How about the pre-opening? I mean, typically I think we werelooking for almost double the amount of what a Cheesecake is running at now. Isthat about the same but more in 1Q than some of it falling in 4Q?

Yes, that’s true. What we had put in for 2007, I said $1million to $2 million on the Rock Sugar pre-opening. I don’t think it will beat the $2 million number but it will be somewhere, closer to $1.5 million withmost of that falling in the first quarter.

And then, what are we looking at right now as far as goingon in the G&A line as far as leverage being gained in relation to falling alittle short of original plans and compensation. I’m just curious -- how muchare we getting a benefit from lack of bonus contributions in ’07 that will comeback in ’08 when you do start hitting your plan and getting to 22% profitgrowth? Are we going to see a ramp up in relative G&A, potentially?

I think as a percent of revenues, as I indicated, we arestill looking to get some leverage on that G&A line for 2008. We’ve neverreally specifically broken out the bonus costs in that line item. Any assumptions that are based on what I gave for the 2008plan would include our potentially hitting those bonus targets. But I’m stillexpecting to see some year-over-year leverage.

Last question; what do you think will enable you goingforward to have it more balanced, the schedule, in ’09, aside from justdeferring some openings? The presumption was always the best time to open thestore though is also around the fourth quarter and the holiday, or developersweren’t ready to open up. I’m just curious -- why do you feel more comfortablenow deferring the Christmas opening time schedule or Thanksgiving time scheduleto now maybe January or February, when that’s not been a strong period for youin the past to open?

I think we’ve opened very well in the first quarter. We just-- in other words, they just move and they don’t get serious about doing theirwork, so everything backs up. But as far as being -- it’s a fine time for us toopen as long as the landlord gets their work done and we can get open. Doesthat answer your question? We don’t feel the first quarter is any worse to open than thefourth. It’s just that we haven’t been able to because of all of the work thatthe landlord has to do and they don’t get started usually until March.

Right, but I would think that there was a presumption whenyou got into the site by the developer that you would be opening aroundThanksgiving or Christmas and that would be the time.

You know, so often, we try to get it open much earlier butit just gets put off for various reasons -- permitting, landlord getting itdone, not wanting to do work during the Christmas season, so they don’t reallystart until later -- there’s a number of problems that come up, but it’s notthat -- we would open as many stores as we could in the -- we don’t like openingin the beginning of January. It is too hard to get our staff together butcertainly starting the last week in January, February and March is a fine timefor us to open, if we can get it all put together.

Okay. I just wanted to see if there wasn’t something as faras site selection that’s enabling you to go differently away from strip mallsand lifestyle centers and more independent standalones, or --

Those are still not the sites we prefer.

Okay. Thank you.

I think just to follow that up real quick, generallyspeaking, we tended to one of the first locations that opens as part of a newdevelopment, or a refurbished development. We don’t necessarily have to be partof that grand opening. We can open, as David mentioned, a few months later inthe first quarter. By doing that, we’ll be able to balance our schedule alittle better.

Thank you.

Your next question comes from the line of Nicole Miller ofPiper Jaffray. Please proceed.

Good afternoon. I’m sorry if I missed this in the firstpart, I’m traveling, but what is the comp assumption for 2008 and then what isthe pricing within the assumption?

We didn’t give either of those. We just kind of gave thatrevenue target, so you’ve got the 17 restaurant openings with that revenuegrowth of 14% to 16%.

And I think I caught the tail end of one of the earlierquestions about the Grand Lux pricing would be 2% to 3% going forward. Couldyou make the same commentary on the Cheesecake Factory units?

Well, the Cheesecake Factory right now have 3% in the menu.They have about a weighted 2.2% for the third quarter. As of today, they are3%. We haven’t made any decisions on our first quarter 2008 price increase, butwe continue to evaluate the cost pressures and within the next month or so,we’ll make a finalization on that.

Okay, and then just one quick question, first just to makesure that all of your employees and families are safe, given the fire andevacuation issues in Southern California, and if you could, I don’t want to beoverreacting to a situation and it may be too early to tell, but is there anycolor you can give on the impact to your stores at this point?

First, thank you for your concern. At this point, none ofour restaurants have been damaged or are being threatened to be physicallydamaged by the fires. As far as I’ve heard, all of our staff members are safeas well, so okay on both counts.

Okay, so just one store potentially at this time andnothing’s been closed or -- I’ve heard of some power outage issues today incertain areas and what not, but not for your stores?

None of our stores have been impacted.

Thank you so much.

Your next question comes from the line of Joe Buckley ofBear Stearns. Please proceed.

Thank you. Just a question on the difference between thefour restaurants that are averaging about $7 million in sales and the one youare targeting to open next year that you were targeting in the $8 million to$10 million area. Is there a difference between those prototypes or --

I think what we are saying is that we have developed a 7,500 foot store with theappropriate size kitchen, scaled down investment, so if we go into those --when we go into those markets that will have $7 million, $8 million, $9 millionchoices, we will have the appropriate size store. The ones that are doing that currently, some of those are 8,900 square feet, some are9,000. Inother words, we didn’t have a model that small to build into those kinds ofvolumes. So now we do, so if we make that selection going forward, we believethat it’s the right size store for those volumes.

Thank you.

Your next question comes from the line of Bryan Elliott ofRaymond James. Please proceed.

Good afternoon. A couple of questions on the growth plans.Would you expect the spreading out into ’09 of the openings to possibly reducepre-opening costs per concept, as we get smoother and don’t have as much of arush at the end of the year?

Yes, I would. I think that the, as I mentioned the impact nopre-opening expenses this year, there is a bit of a cost because we can’t hireas many managers as we need all at once, so we hire them throughout the yearand we can carry extra managers as a result. By spreading it out, we should beable to smooth out our hiring needs and reduce some of those costs.

Secondly, would you expect any material changes in the levelof landlord financings that you’ve been getting in recent years as a result ofthis change? In other words, would it be marginally less attractive to alandlord to have you open in February instead of mid-November or earlyDecember?

We don’t think it will make any difference to landlords.

Thank you.

Your next question comes from the line of Steven Kron ofGoldman Sachs. Please proceed.

Thanks, a couple of follow-ups, first, Mike, on the 22%, 24%EPS growth goals for 2008, you had some one-timers in the first quarter of ’07.I think they equated to around $0.02 to $0.03. I just want to make sure thatthis is inclusive of those things in the first quarter of this past year, soyou are going to get a little bit of a benefit on a year-over-year basis fromthose items?

That’s correct.

Okay, so we shouldn’t carry that forward into 2009 per se,right because you are going to get a little bit of benefit from that?

That’s correct.

And as far as the CapEx guidance of 160 to 170, can youbreak out -- I assume most of it is growth CapEx but what would the maintenancepiece be?

I don’t have that. I think it’s fair to assume the sameratio as to what it is in 2007, interms of new restaurants versus the remaining pieces.

Okay, and then on the 17 units that you targeted, can youjust provide the mix of how many are new geographies versus existing?

I can’t do that today, Steven. I think the idea here is thatwe are -- we’ve got a lot of them to choose from and we are going to pick theones that are right for us and that fit best within our opening schedule, sothose markets could change from the roster that we’re going to pick from.

Thank you.

Your next question comes from the line of Paul Westra ofCowen & Company. Paul Westra - Cowen& Company: Good afternoon. Most of my questions have been answered, butcould you talk a little bit about bakery sales? I know you had a flattishoutlook for this year, lapping last year’s big year. Should we assume aresumption to that 10% level next year as you look out in your forecast?

That’s a good question. I think somewhere between 5% and 10%is a reasonable outlook for 2008. Again, I think some of the softness we’veexperienced this year in the warehouse clubs, we’ve got several different ironsin the fire, if you will, both within the clubs as well as some other channels,so I think somewhere in the 5% to 10% range next year is a reasonable estimate. Paul Westra - Cowen& Company: But if we look at this year, obviously last year’s fourthquarter was your highest on record, up significantly. It seems you areforecasting for the current fourth quarter a flattish number. I assume thingshaven’t materially slowed than what was feared or expected.

Again, we came into the year expecting to do a little bitbetter than we are, even last quarter I was still expecting to do a positive 1%or 2%, so now I’m flat to negative one. So there’s certainly been somepressure, again really in that warehouse channel, warehouse club channel. But Ithink the outlook for next year is okay. Paul Westra - Cowen& Company: One other question, on tax rate, should we assume 30% forthe fourth quarter and for next year?

I think I said 30 to 31 for the full fiscal year, whichwould be the fourth quarter rate, obviously, and it think somewhere in thatrange for next year is reasonable. Paul Westra - Cowen& Company: Okay. I must have missed that. Thank you.

We’ve got time for two more questions, Operator.

Yes, sir. Your next question comes from the line of JohnIvankoe of J.P. Morgan. Please proceed.

Thanks. The first question that, and I’m sorry if youanswered it maybe in different pieces, has to do with again lowering thedevelopment slightly for ’08. I know one of the reasons is not wanting to openunits back-ended anymore, but in the last couple of years, you’ve actually donea pretty remarkable job with that. I think from a profit and operations pointof view, you’ve been at least in line with what anyone would have thought youcould have done. Is there something that you saw in maybe the second half of’06 or second half of ’07 that made you say that you didn’t want to open somany units in a given time period again?

First, thank you for the compliment. I think that ouroperations team, development team have done a phenomenal job of opening thatmany restaurants. I think the challenge for us is not so much getting thembuilt because our development group can do that, or picking the sites, becausethere’s plenty to choose from. It’s really focusing on what’s the right growth ratelong-term for us, and there’s a lot of ancillary costs, sort of the pre-openingcosts that we’ve alluded to, some other softer costs that I think would warrantus to try to take a stab and balancing the schedule a little bit, which willreally again help us longer term, 2009, 2010, et cetera. That’s really thedriving force behind it.

Okay, I’ll accept that. And then secondly, Mike, I just wantto make sure I understand how you are calculating the free cash; they are kindof rough numbers, but I think they are easy just to do off the back ofenvelope; in ’08, maybe $100 million of net income, round numbers, $20 millionof options add back, 75 of D&A maybe gets you a cash of like 195 and 165 orso of CapEx, the number’s like 30. Is there a pretty big chunk of working capitalbenefit that you are expecting in that number or is there something I’m notthinking about?

No, I don’t think you’re too far off. I think your numbersare about right. We’ll get a little bit of --

The number I came up with is like $30 million of free cash,so -- that’s not huge, but it matters to your equity bayou.

No, we can go through it. I can try and walk through it withyou later. I don’t have all the details right in front of me right now.

Okay. Thank you.

Your final question comes from the line of Dustin Tompkinsof Morgan Keegan. Please proceed.

Thanks. Just quickly, you’ve obviously made some assumptionsabout 2008 with your earnings growth ahead of revenue growth. Should we assumethat you are not expecting much benefit in the way of cost of sales or labor?You know, when you said the 30 to 50 basis points is primarily an account oflower pre-opening and G&A, could you just update your commodity and laborpicture in ’08?

I think you are pretty much right on. As of right now, weare assuming relatively flat commodity, cost of sales and relatively flatlabor, with the real benefits coming as you just indicated on G&A andpre-opening.

Thank you.

Okay.

Thank you, everyone. Bye-bye.

Thank you for your participation in today’s conference. Thisconcludes the presentation. You may now disconnect. Good day.