The Cheesecake Factory Incorporated (CAKE) Q4 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 The Cheesecake Factory Earnings Conference Call. My name is Kathy, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Ms. Jill Peters. Please proceed.

Thank you. Good afternoon, and welcome to our Fourth Quarter Fiscal 2010 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 fact and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available in the Investors section of our website at www.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission. All forward-looking statements made on this call speak only as of today's date. The company undertakes no duty to update any forward-looking statements. David will start off the call today with some opening remarks. Doug will then take you through our operating results in detail and provide our thoughts on the first quarter and full year 2011. Following that, we'll open the call to questions. Now I'll turn the call over to David.

Thank you, Jill. We're very pleased to report another quarter of positive comparable sales. Our business was pretty stable throughout the quarter, excluding the weather and holiday shift. And we saw strength in key markets such as Texas, the Midwest, Florida and Southeast. Comparable sales performance in the fourth quarter contributed to full year comparable sales of 2%, the best it's been in six years. We're clearly capturing market share and doing so on the strength of our concepts, food and service. In addition, the bakery had substantially higher sales in the fourth quarter. Customers responded well to new products as we continue to introduce innovative desserts to them. With average unit volumes of nearly $10 million and guest counts of over 75 million at The Cheesecake Factory last year, we maintain our best-in-class position in casual dining. This helped us deliver a healthy 130-basis-point increase in operating margins last year, which led to over 30% earnings per share growth in 2010. In addition, we now have zero debt on our balance sheet, a more favorable credit facility in place and a solid cash balance of over $80 million. We're in an exceptionally strong position for 2011 and beyond. We opened our first new restaurant of the year a few days ago in Houston. It's one of our 8,000-square-foot formats and the first of as many as six to nine new restaurants that we plan to open this year. In addition to domestic growth, we recently announced our initial expansion plans outside of the U.S. We signed the license agreement with a Kuwaiti company to open 22 Cheesecake Factory restaurants in five countries in the Middle East over the next five years. This is the first step in our global development strategy. We're evaluating other markets, being extremely selective about our partners, focusing on excellent operating companies with expertise in multiple countries. International growth provides one more way for us to enhance our future earnings potential and continue building shareholder value. With that, I'll turn the call over to Doug.

Well, thank you, David. Total revenues at The Cheesecake Factory for the fourth quarter increased 4% to $417 million compared to $401 million in the prior year fourth quarter. Restaurant revenues reflect a 1.9% increase in total restaurant operating weeks due to the opening of three new restaurants during the trailing 15-month period plus a 0.8% increase in average weekly sales. Overall, comparable sales at The Cheesecake Factory and Grand Lux Café restaurant increased 2.1% for the quarter after excluding the impact from snowstorms in the Northeast and rain in California. In addition, the holiday shift had a small impact on comparable sales. An increase in guest traffic once again drove the improvement in our comparable sales, but it's important to note that our average ticket improved as well to the best it's been in three quarters. We are implementing a 0.7% menu price increase in our winter 2011 menu change, lapping a 0.6% menu price increase from the winter of 2010. As a result, we'll have 1.4% in pricing by the end of the first quarter of this year. At the bakery, external sales were $31.9 million, up 22% versus the prior year, as David referenced earlier. Cost of sales increased to 26.3% of revenue for the fourth quarter of 2010 compared to 25.3% in the same quarter of last year. This increase was due primarily to the higher bakery sales as well as continued pressure from both restaurant and bakery dairy costs, as expected. Favorability from produce and general grocery costs offset some of the increase. Our cost of sales as a percentage of revenue for the full year was approximately flat, in line with our expectations. Labor was 30.8% of revenue for the fourth quarter, down 120 basis points from 32% in the prior year. This decrease was primarily related to lower equity compensation as well as a benefit from the Federal HIRE Act, which resulted in lower employer FICA costs and to a continued management of restaurant labor costs. Other operating costs and expenses were 25.1% of revenues for the fourth quarter of 2010, up from 24.8% in the fourth quarter last year. Although insurance expense in the fourth quarter of this year was consistent with what we experienced in the first three quarters of the year, we had an unusually low expense in the fourth quarter of last year, impacting the comparison. G&A expenses were 5.9% of revenues in the fourth quarter, down 60 basis points as compared to the fourth quarter of 2009. The decrease came about due to lower bonus accruals in the fourth quarter of this year relative to the prior year period. And depreciation expense for the fourth quarter of 2010 was 4.3% of revenues, down versus 4.8% in the prior year period. The favorability stemmed from positive comparable sales leverage as well as the impairment charge we recorded in the fourth quarter of 2009. Net interest expense was $1.5 million in the fourth quarter of 2010, down significantly from $5.4 million in the fourth quarter of last year. Last year's net interest expense included $2.2 million to unwind an interest rate collar, as well as interest expense on a higher average debt balance. Our tax rate for the quarter was 23.8%, better than we expected, due primarily to a higher manufacturing tax deduction on the significant increase in the production of bakery products in the fourth quarter. In total, operating margins in the fourth quarter of 2010 improved 90 basis points to 7.4%, helping us to achieve the best full year operating margin that we've had in three years at 7.7%. Ultimately, our goal is to return operating margins to peak levels. We made significant progress toward this objective in 2010, and this was done while we increased our guest count and maintained high guest satisfaction scores. This is exactly what we set out to do, take market share and provide a great guest experience to encourage repeat visits. During the fourth quarter, we repurchased just over 35,000 shares at an approximate cost of $934,000. During 2010, we repurchased about 2.1 million shares, returning over $50 million in cash to shareholders. Our liquidity position is as strong as it's ever been, with a cash balance of about $82 million and no bank debt. We repaid the $40 million outstanding on our former credit facility in the fourth quarter and entered into a new $200 million revolving credit facility with more favorable terms and additional financial flexibility. Cash flow from operations for the year was approximately $165 million, net of roughly $42 million of cash used for capital expenditures. We generated about $123 million in free cash flow during the year, which we used to pay off $100 million in debt in addition to returning a substantial portion of our cash to shareholders through share repurchases, as I mentioned earlier. That wraps up our business and financial review for the fourth quarter of 2010. Now I'll spend a few minutes on our 2011 outlook. As we have done in the past, we continue to provide our best estimate for earnings per share ranges based on realistic comparable sales assumptions. These assumptions factor in everything we know as of today, which includes quarter-to-date trends, what we think will happen in the weeks ahead, known weather influences and the effect of any impacts associated with holidays. 2011 is a 53-week year for us, with the extra week falling in the fourth quarter. Our assumptions for the full year reflect this. We are maintaining our estimate for full year 2011 diluted earnings per share at between $1.55 and $1.70 in spite of about $0.05 in higher cost of sales now expected this year than what we anticipated when we provided our initial 2011 outlook in October. We are able to absorb this pressure by actively managing our cost structure, including ongoing improvements in labor productivity and tight G&A controls. Our earnings estimate for the full year is based on an assumed comparable sales range of between 1% and 3%, which reflects both guest traffic and average check growth. Our business remains strong and stable, continuing the trend from last year. For the first quarter of 2011, we estimate diluted earnings per share between $0.29 and $0.33. We expect year-over-year food cost pressures to be significantly heavier in the first and second quarters of 2011 and then to moderate on a comparative basis in the fourth quarter. Our earnings per share estimate for the quarter is based on an assumed range of comparable sales between flat and 2%. This sales range for the quarter is consistent with our full year comparable sales assumption of 1% to 3% after taking into account the record snowstorms in the Northeast and the recent storms in the Midwest impacting the first quarter. We expect our tax rate to be between 28% and 29% for both the first quarter and full year 2011. Our projection for capital spending in 2011 remains at $70 million to $90 million in support of our planned six to nine new restaurant openings in 2011 as well as expected early 2012 openings. We are targeting at least $100 million of our free cash flow towards share repurchases in 2011, which will support earnings per share growth. Some of these shares are expected to be repurchased in the open market, and the remainder will be repurchased under a 10b5-1 plan that was approved by our board yesterday. 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 Instructions] Our first question comes from the line of Jeffrey Bernstein of Barclays Capital.

In terms of the question, I know commodity costs were a little bit more onerous this quarter than they have been. And it sounds like, at least, in the first half of '11, that's going to continue. I'm just wondering whether you can give some color on perhaps what percentage of your goods are locked for the full year '11 and at what year-over-year levels those are at. And if you are not necessarily locked, what type of assumption are you making for that floating portion? And then just the follow-up or a clarification, I guess, relates to on that commodity front, when you think about the pricing versus margins, I knew you said you've got kind of 1% -- close to 1.5% pricing. But can you just talk about your desire to maintain or grow the margin in '11 through price or whether you'd opt for perhaps less pricing in an effort to sustain the traffic?

Sure. First of all, with respect to what we have under contract, we currently have around 60% of our food items under contract, and virtually all of our proteins are under contract. Based on our forecast for the entire year, taking into account non-contracted items and contracted items with estimating and forecasting the non-contracted items, we would expect food cost inflation currently to be about 3% for us for the year, with that falling a lot heavier, as we've said, in the first half of the year, with 4% in the first half of the year and around 2% in the second half of the year. So you would see more food cost inflation in addition to being in the first quarter. You will see some more food cost inflation in the second quarter. By the fourth quarter, though, we expect some of these costs to abate that are not under contract. And also, we're expecting to lap a lot of very high dairy costs from 2010. So with respect to the commodities that we're seeing, we're expecting to come down in the second half of the year, I think, the primary ones that are not contracted for are dairy, fresh fish and some of our cheese. With respect to pricing, let me say this. As we stated, we have 1.4% of pricing in our menu right now. If cost of sales pressures were to worsen from here, we have the ability and we have the willingness to be more aggressive with menu pricing when our August menu price change comes around. We believe we have pricing power. The question would be when would be the best time to use that power in a more significant way. And we've done, I think, a very good job in the past of balancing cost pressures with what guest traffic was there, but we are looking to improve our margins in 2011 despite the cost of sales pressure. So we've been willing to take steps in the past to protect our margins, including taking pricing. And we'd be willing to consider that for the August menu change. As the year goes along, I would say we'll be in a better position to consider bigger menu price increases. But I think that in this area, we would rather be a follower than a leader and to take menu pricing once we're seeing others do more of it, once it's noticed more by the consumer in the supermarket and the other places where they buy food.

Our next question comes from the line of John Glass of Morgan Stanley.

Doug, I guess, on the labor line, could you first talk about or quantify some of those onetime things you identified to kind of get down to what the underlying labor rate was or percentage and if it's really changing? And you talked about some of the savings, I think, in labor on an ongoing basis. What are those, I guess? And is it meaning that labor sort of falls? Or are these just anti-inflationary measures such that you can keep labor at a kind of current percentage sales rates in 2011?

Sure. With respect to the 120 basis points of decrease in labor, about 90 of that, I would say 90 to 100, was due to what I'll call some one-time things: the HIRE Act, which is the FICA tax holiday that allowed us to not pay FICA tax for workers that we hired that had previously been unemployed; and lower equity compensation. We had an increase or a change on our forfeiture rate. But about 30 basis points or so was due to us managing our labor rates, being a -- we're doing a good job, I believe, of managing labor. In fact, labor productivity, which we measure by sales and guest per labor hour, was pretty steady with last year, and we continued to hold the line on the average hourly rates. So we made some pretty good progress, and we've got some sales leverage even from a very small increase in comparable store sales in the quarter on the labor line. Looking forward to 2011 and what kind of additional savings we can have on the labor line, I think the magnitude of that is going to depend obviously on what comp store sales are. At the higher end of our range, we should be able to sustain some improvement in the labor line. At the lower end, it's going to be a little more challenging. While total labor for 2011 might look, on a comparative basis, like it's not a significant improvement over 2010, we are expecting to offset a lot of expected pressures on the labor line, such as from health insurance, such as from minimum wage increases in the State of New York, new labor regulations in places like New York. And in addition, we're going to be lapping around the HIRE Act and the lower equity compensation that I talked about earlier. So we've enjoyed the benefit of those in the fourth quarter this year. So on a comparative basis, next year, there would be less of a comparative benefit.

Our next question comes from the line of Brad Ludington of KeyBanc Capital Markets.

Doug, I think you all said on the last conference call that you would -- I mean, it's not going to be as significant as what we've seen with you, but you would probably have some new cost savings initiatives lined up for 2011. Can you comment on whether you've identified any and maybe what those are?

Sure. We're in the process of developing between $3 million and $5 million in additional cost management initiatives, that we'll hope to be able to realize in the second half of the year for sure but perhaps before that. A number of these initiatives have been identified. And you could look at these, this $3 million to $5 million, as representing really potential upside to our annual earnings per share guidance, or you could choose to look at them as a hedge. Our guidance assumes that our food costs are going to moderate on certain items, as I mentioned, in the second half of the year based on projections for non-contracted items. But the commodity market is very dynamic. So we are going to identify an additional $3 million to $5 million in additional cost savings. That will happen, but whether you call it upside or earnings guidance or a hedge against what cost of sales may do in the second half of the year is up to you.

And just briefly, can you -- it's not in the guidance. Can you say what line items those savings would impact if they do come through?

They would be mainly on the other operating expense and the labor line items.

Our next question comes from the line of Destin Tompkins of Morgan Keegan. Destin Tompkins - Morgan Keegan & Company, Inc.: First of all, I just wanted to follow up on the commodity question. I heard another restaurant company expressing concern over produce in the near term. I just wondered, is that something you're seeing near term or in the first half of the year? Is that part of that, I guess, higher pressure or more food inflation you're seeing in the first half?

Probably, some of that is. We are able to contract some of our produce, so we do have some of our produce under contract, more than half. So that's maybe mitigating that some, but produce is not -- the good news about produce and a produce crop and what hazards that happened to that is they can be grown rather quickly. So it's more of a short-term issue. Destin Tompkins - Morgan Keegan & Company, Inc.: And then just in terms of the top line, can you just kind of update us on maybe some marketing initiatives or new menu plans you may have in place for 2011?

Sure. With respect to the menu, we, I think, are one of the best innovators of menus in the casual dining business, if not the best. And we continue to innovate across our menu, including our bar menu, as we always do. And the menu changes coming out in February and March includes some changes, this winter, in addition to a 0.7% increase.

We're committed not to give any of our new menu ideas out until the menu comes out. So we wouldn't go into specifics. There was an article in the USA Today about skinny drinks, which have certain of our best-selling cocktails available at 150 calories or less. We got a lot of press on that. But other than that, you'll just have to wait until the menu comes out.

So no further comments about the menu items. But with respect to marketing, the sales drivers in the first quarter really is the redemption of the Slice of Joy cards that were distributed in the fourth quarter. And if you'll remember, for every $25 gift card purchase, whether it be in-store or online through the new eGift card eGift program, for every $25 gift card purchase, there was a Slice of Joy card given that was redeemable in the first quarter for a cheesecake, a slice of cheesecake in our restaurants. So that will be a sales driver in the first quarter. We're also involved in the first quarter with a social media guest engagement driver associated with Facebook program that's tied with Valentine's Day that's going on right now. But in marketing, as you know, our primary focus is in gaining publicity and increasing guest engagement with many ways but with social media as one of the big ways. And we have significantly increased our number of Facebook fans and opt-in emails over the last year. So we've been successful with that, and our objective is to continue to utilize those mediums. Destin Tompkins - Morgan Keegan & Company, Inc.: And then just lastly, you mentioned weather impact in the fourth quarter. With that what you've seen so far in the first quarter, I don't know if I missed it, but did you comment on any weather impact in the first quarter today?

I did. We would say in the first quarter, if you kind of look at it as the net weather impact, because there are a couple of days that are few and far between where there's actually a positive comparison, because last year had bad weather, but the net weather impact for the first quarter is right around 1%.

Our next question comes from the line of Keith Siegner of Credit Suisse. Keith Siegner - Crédit Suisse AG: Quick question on the bakery. Maybe I ask this question a lot, but it actually has a big impact on a number of different line items that we talked about today, from COGS all the way down to tax rate. So given the strength in sales at bakery, given that butter prices have moved so dramatically, I was wondering if you could talk a little bit about what your expectations are for bakery, what your thoughts are about pricing for bakery against high butter prices or where you're contracted on butter. I just ask because since the cost items are all bucketed together, I'm trying to get an understanding of how we should think about influences on those various cost line items including taxes given a particular outlook for bakery.

Yes. Well, let's talk first about the sales side for the bakery. Obviously, the fourth quarter was very good. And the fourth quarter is typically the bakery's highest sales quarter. And it was again, and they exceeded our high sales quarter by 22%. And as David mentioned, we saw a really good response to the product development that we've done in the bakery. And looking forward to 2011, we expect to see some of this momentum continue from a sales standpoint in the bakery. However, with that said, the bakery sales, we don't really think are going to represent more than 5% of our overall sales, which is what they have been for many years. So not a huge impact on the total, but you're exactly right. The bakery does impact a number of line items. It is interesting how really $0.01 or $0.02 -- if you count the taxes, there was a couple of pennies worth of bakery influence in this quarter if you count the production deduction that we get in the bakery. When looking at cost, bakery is in -- looking at those similar to the way the restaurants are, if we need to take pricing, we're going to take pricing. We can perhaps be, in a way, more aggressive with pricing in the bakery, in a way, not more aggressive with pricing in the bakery. So I mean, it's very -- bakery sales are very dependent on a few customers, so we have to be very cognizant of that. But generally, in the long run, we're certainly going to price our bakery products so that they have -- we don't deteriorate our cost of sales at the bakery. With that said, with higher bakery sales, they do generate higher cost of sales for the company overall. Keith Siegner - Crédit Suisse AG: Does the manufacturing tax deduction that benefited you in the fourth quarter, does that linger into 2011?

It will if bakery sales, if bakery production -- it's not really bakery sales, but they're linked. If bakery production is higher than what it was in the previous year, it would be helpful, yes. Keith Siegner - Crédit Suisse AG: One last question for me, and this is a little bit more strategic. We know what the unit growth targets are for 2011. We know it's all Cheesecake Factory. We haven't heard about RockSugar in a while. And for Grand Lux, I mean, you talked about how you might get back to some growth there in the future. But at this point, is this effectively a one-concept chain? Would you like to have more concepts? Would you think about acquiring a new concept that you could put some capital behind given how much free cash flow you have? Or do you really think about this as a one-concept company primarily?

As we've said, we're hoping to get a new smaller-sized Grand Lux open. We're hoping to do that this year. We'll see if that makes it this year, but we have a lot of changes there and a lot of plans. And we want to make sure we're revitalizing Grand Lux for the right size markets and the volume that it's doing. So we're hopeful. Obviously, if we did not have that then that's something that we might want to consider. Remember, we think we can double the size of our company just on Cheesecake Factory alone. And RockSugar, we will do another RockSugar. But with all of our work on Grand Lux and the economy and so on and so forth, we're just taking our time honing and perfecting RockSugar. We will grow it, but we're not in a rush. So I think you should think of us as we are today. But certainly, down the line, M&A is something that could happen, but we're putting our energies into Grand Lux.

Our next question comes from the line of Mitch Speiser of Buckingham Research.

First, can you give us an update on the, I believe, it's two smaller-sized formats that are open, how those sales trends are going versus your expectations?

Sure. We have three. Actually, a fourth just opened recently, in fact, three days ago or whenever Monday was, in Houston. We just opened in Memorial City, and that was an 8,000-square-foot format. So out of the three that have opened so far, obviously, way too early to talk about the Houston restaurant, we've been very pleased with the results and the returns on investment that we're getting. Because we invest significantly less capital in those restaurants, but they're still carrying the same kind of sales volume and sales volume potential as the bigger ones, which bodes very well for our return on investment. So that's one of the reasons we're very optimistic about being able to double our footprint with The Cheesecake Factory is because these smaller-footprint restaurants will be able to go in more locations than the bigger.

And on the first quarter guidance, which I believe is flat to down earnings on a year-over-year basis or actually, kind of more in the flattish range, I'd say, is that primarily due to the upfront food cost issues that you talked about? Are there any other things to consider as to why the earnings growth guidance is roughly flattish?

Yes, it is primarily due to exactly what I talked to you. I would steer everybody to really think about the whole year, because we've done a complete analysis of the whole year. We're comfortable with our guidance for the year. We didn't change that guidance, but the timing in the first quarter is impacted by -- I don't know if whether you want to call it seasonality of the food cost issue or not, but we expect food cost inflation to be much heavier in the first half. But it's also impacted some, $0.01 or $0.02, by the weather in the first quarter, and the lower expected sales resulting from that weather is certainly impacting earnings some in the first quarter as well.

And on food costs or costs in general, I believe in the third quarter, you mentioned for 2011 cost pressures of 1.5% to 2%. I think that included the labor and utilities. Given that framework, where do you see the cost guidance in 2011 and including labor and utilities as well as food?

I think we would have to -- from 1.5% to 2% that we said at that time, we'd have to say 2% to 2.5% at this point in time. And again, that includes cost of sales at around 3% and labor at 1.5% or a little bit less and then utilities are in there as well. But our assumption regarding cost of sales inflation has gone up by more than a full percentage point since October when we talked about our commodity basket, which is what you're referring to being 1.5% to 2%.

And my last question is, in general, on this more movement to wellness. Could you give us a sense of, in terms of organic products that you offer and naturally raised products that you offer, do you intend to move into this category more aggressively? Is there enough supply for you to get into this area of wellness?

I think that more supply's coming along. We certainly have enough now that all of our salad greens are organic, and more and more are coming available all the time. I'm not sure that people are really just demanding organic. I think they want a high quality. I think that they do want all the naturally raised meats. We now offer brown rice as well as white rice as a choice, which people appreciate, salad instead of fries. At Cheesecake Factory, we have sweet potato fries instead of regular fries. All of these things are appreciated by sort of the whole foods group that's out there and I think growing. We're not going to jump in and just change all of our menu items, but as usual, we will add items to the menu that I think people can come in, know they can have choices, know they can get a great meal at a great price at the calorie count that they want. But just remember, at this point, even we probably are in 12 different places, where all of the calories are already on the menu, and there's been virtually no change in what people are buying. They're not buying less desserts. They're not switching what they're buying. And so when people go out to eat, they really want what they want. It's a different experience than at home. Having said that, we will have great choices for everyone and most likely, more this year.

Our next question comes from the line of Rachael Rothman of Susquehanna.

This is Jake Bartlett in for Rachael. I had a question just on the benefit you got from the HIRE Act. Is that something that you think that restaurants across the space are going to be benefiting from? Is there anything particular about what you've done or your model that made you benefit more? And I know you mentioned it was about 90 to 100 basis points along with the low equity comp. If we can try to break up the HIRE Act impact, that would be great.

Well, the HIRE impact was about half of that. So let's just say 40 to 50 basis points. And then the HIRE Act required a lot of work. I would assume that it would apply to everyone. I don't know why it wouldn't, but it does take work to go back and determine every employee that was hired during the year and whether or not they qualified for this or not. So we did a good bit of research and scrambling to be able to get that HIRE Act credit, but I don't see why other companies would not be getting it as well.

So maybe in concept, they had a little more turnover, maybe more usual things could get more of a benefit from that?

It could. You had to hire workers that were unemployed. Interestingly enough, the intent was to try to incentivize people to hire workers who were unemployed. It actually didn't do that at all. We just hired who we're going to hire anyway, and if they happened to have been unemployed before, we got the HIRE Act credit.

And I had a question on your development. You're maintaining the six to nine stores. Wondering if you can give us any more color on the kind of the weighting on a quarterly basis for your openings?

Well, we had the one and then we've said the others, we're going to open between the third and fourth, and we don't have that locked down yet. Could be some in the third and some in the fourth quarter. I don't think any in the second.

I noticed that the store you opened in Houston was, I think, about a 15- to 20-minute drive from your other Cheesecake Factory there, a very old one, as well as a Grand Lux. And just wondering how you feel about sales cannibalization? Is that something that you've kind of factor in? Are you expecting much -- I guess, you probably factor that in as you're doing your hurdle analysis and such.

We do. The store in the Galleria is one of our highest grossing and best restaurant, and we believe that although we may have a little cannibalization for 60 to 90 days, it will be back. It was the same when we opened others. And we're right across the street with Grand Lux, and within the 60 days, the business came right back actually and more. And this last year was a great year there. So although it is a little close, even for us, we felt that they were two distinct markets, and the business in the Galleria with all its tourism and so on will be back. But we do watch for cannibalization. In this case, we thought it was very prudent that we could open it.

Just on what you're seeing in terms of availability of sites, of negotiations with landlords, are you more optimistic now or less so than you have been in the recent past? Any changes to the development environment?

Actually, I would love to tell you that it was better, but I don't think it is. I think it's still tough out there. There's still not a lot of new construction. I think something that helped us and that will continue is if a Marshalls goes out or a large big box that happened to be attached to a high-end shopping center, and they re-do that, and they put in three or four concepts, so we've gotten a number of those, and there's still a number out there we're looking at. So that's been helpful, but there's not a lot of construction. And I think everybody's still being very prudent and it's a tough -- it's tough when you are looking at the level we're looking. It's not as plentiful as we'd like it. However, we look all the time, and it's not just models, but there's in-line, street, specialty centers that we are looking harder at now.

Our next question comes from the line of Joe Buckley of Bank of America.

Talking about the sales levels, and you've mentioned these smaller stores. From an operations standpoint, are there any changes, good or bad, from an operating course perspective with the smaller prototypes?

We're working on that now. We have several tests going in the under $8 million range that we think will allow us to save some money. And moving around a little bit. And so far, our tests have gone well. I think there'll be a little bit more and then I think we'll be able to make some changes and lock down some savings. So that is a test that we're pretty happy with. I don't have all the details yet, but I know that our ops team is excited about it. That would be about 25, 30 stores that we might be able to make some changes in.

And can you say like what part of the operations the changes would occur? Is it labor primarily or...

Yes, it's labor and things that back up management in that size store. You can really operate it differently. So yes, you would see it more on the labor.

You mentioned a couple of regions that was particularly strong in sales. I don't know if you mentioned California or not. Could you maybe give us an update on how California was in the fourth quarter?

Well, California in the fourth quarter was -- first of all, we saw strength in key geographies like Texas and the Midwest and Florida and the Southeast. But the impact -- the harder to measure California in the fourth quarter, because we had a period of time where it rained nonstop for like nine days in a row. So that impacted our sales in the fourth quarter. If you just total up the year, and I know you were asking about the fourth quarter, we were positive in every one of our geographies except California. I call it flattish, because it was like right at like a tenth down. So that was our worst market at just barely down for the year, and the fourth quarter was certainly impacted by weather.

Our next question comes from the line of Matt DiFrisco of Oppenheimer. Matthew DiFrisco - Oppenheimer & Co. Inc.: I was just wondering when you -- I picked up on your discussion about the higher quality food, and I'm curious if longer term or even in the near term, as you roll that out, have you factored that into your cost of goods sold? You've historically had, obviously, one of the industry-leading lowest relative food cost, and I would assume higher quality food, you might not want to take in step pricing to offset that as well. So how would you look at that as your earnings model?

We've had the fries, the organic greens, I think, for one or two quarters now. So we've already been running with that, and I think that you have to be careful. I think people want higher quality food, and I think our food is incredibly high in casual dining. But we're certainly not going to go out there and buy certain brands of chicken that are very nice or heirloom. I don't think our guests want to pay the money for that. But we have heirloom tomatoes in Grand Lux, and really, we're paying the same as we are for regular tomatoes. So the farmers that we deal with and the producers know what we're looking for. They know what we're willing to pay, and many of them are working on getting ready for our volume. And so then therefore, we can offer either more organic or heirloom varieties, and really, it's on and on. We've improved a lot of things at no extra cost. As more restaurants want them, they'll be able to produce cheaper and people will be the beneficiary of that. Matthew DiFrisco - Oppenheimer & Co. Inc.: And then also, I guess, this is the time of the year when you do your -- when last year, I think you did your menu rollout. Are we also getting a new menu rollout?

Yes, we always do it. Whether we put one item on or none or 15, we always do it. That's when we raise prices if we're going to take off a few items. So yes, one is actually coming out any day now and then there'll be another one in August. Matthew DiFrisco - Oppenheimer & Co. Inc.: Is it as meaningful -- I think you called it out this time last year as far as being maybe a little bit of an impact to labor. Is there anything drastically changing that you might think adds a little something to the back of the house as far as preparation?

No, Matt. I think that this time, it was lighter than that, because we felt that we made so many changes in the last time. We're integrating that. There'll be some more changes on the middle one, so I think that it'll either be helpful in labor or certainly even but not more. Matthew DiFrisco - Oppenheimer & Co. Inc.: With respect to the January weather, Doug, you said 1%. Do you mean 1% to date or 1% for the quarter? And then could you -- are we correct in assuming that would be the Dallas region, I guess, is where you're feeling most effect from the weather?

At the Midwest, in Dallas, the Northeast. We're seeing it all over the place as everyone else is, I would assume. But 1% is quarter-to-date, so we're sort of assuming that whatever bad weather happened last year for the rest of this quarter that the exact same bad weather happens this year. Matthew DiFrisco - Oppenheimer & Co. Inc.: And then did you give the mix -- the price and the mix that you were carrying through the fourth quarter?

We didn't talk about that specifically, but traffic was 0.4% of the 0.9%, and the price was 0.5%. So as we expected, our average check improved sequentially from what we reported in the second and third quarters, primarily because both our incident rate, and the price point for non-alcoholic beverages continued to show some year-over-year improvements. So we got to keep some of our menu pricing when that hadn't happened for a quarter or two. Matthew DiFrisco - Oppenheimer & Co. Inc.: And then last fact checking or book -- going back over the numbers you probably might have given already. Did you also talk anything about as far as with respect to your timing of openings for the quarter, per quarters when they're going to open?

Yes. We talked about being back-end loaded.

Yes, third and fourth quarters, nothing in the second. We just opened one in the first.

Our next question comes from the line of Nicole Miller of Piper Jaffray.

I think I asked a few quarters ago, and I just wanted to go back to any license opportunities. So can you give us an update, for example, The Cheesecake's obviously in the grocery aisle. Is there more of a door opportunity there? And then what other products might you entertain in the future in the grocery aisle?

For the most part, our products have been too expensive in the grocery aisle with all the markups. That's why we have done so well in the warehouse clubs. And there, the markup is very low, and our product sells for a great price. And we're selling $30 million, $40 million or more through that channel. So we may have products that will be in mainstream grocery stores, but there is none that is imminent that you -- certainly, I don't think we'll have any in for this year, although we've introduced new products in the warehouse clubs and general restaurant wholesale and done very well with them.

Our next question comes from the line of David Tarantino of Robert W. Baird. David Tarantino - Robert W. Baird & Co. Incorporated: Just like bigger picture question on your comps outlook for this year. And perhaps, if you could talk about your view on the consumer and what you're embedding in your traffic assumptions? Because as you cycle, maybe a little bit tougher comparisons through this year than you've been cycling over the last four quarters, what gives you the confidence that you're going to be able to hit the range that you've laid out?

Well, I think that most of the news that I'm reading about the consumer and most of what I'm seeing shows some more optimism for 2011 than what we saw in 2010.

Did you hear this morning that nose jobs are up, and that bodes well for spending in the future? I heard that this morning.

So nose jobs are up. But generally, I think that there's more optimism for this year. But with that said, unemployment's still high. Housing's still out there, and all we're assuming, really, in our comp sales guidance is that we can keep the same type of comp store sales. The midpoint of that range is exactly what we ran for 2010, so we're looking at 1% to 3%. And we are trending at about 2%, so that's still a solid range for us. David Tarantino - Robert W. Baird & Co. Incorporated: And maybe a follow-up on that, Doug. On the mix side of the equation, that's been an offset to your pricing for the last four quarters. It looks like it got better in the fourth quarter. Do you expect that to start to flatten out and maybe you get, capture more of the price increase that you have embedded in the menu?

I would, yes. We expected it to happen in the fourth quarter, and it did. And I would expect it to get a little bit better going forward, yes. David Tarantino - Robert W. Baird & Co. Incorporated: And when would you expect that to flatten out, or maybe not get better?

Well, it's started to flatten out already, right? It already happened. In the fourth quarter, it's going to continue as I would expect as we see the incident rates for non-alcoholic beverages. When we talk about non-alcoholic beverages improving, they're not -- we're not selling more alcoholic beverages. The rate of decline over the year, last year, has become less and less steep and continues to get less and less steep. And it hasn't become zero yet, but it's getting less steep. So to the extent that that continues and as we lap around, we should be able to get additional average check.

Operator, I think we have time for two more questions.

Our next question comes from the line of Bryan Elliott of Raymond James. Bryan Elliott - Raymond James & Associates: I apologize for this but missed the beginning of the call as well. The guidance is not in the press release, Doug, so just really briefly re-go over the guidance that you gave on the call that's not in the press release.

Yes. Reiterating the full year guidance, which is the most important point, at $1.55 to $1.70 based on same-store sales assumptions of 1% to 3%. And Bryan, doing that despite the fact that since we initially gave that guidance, we have encountered at least $0.05 more of cost of sales pressure and then we've talked at length about how we thought we were making that up. And then in the first quarter, we said that our earnings per share were going to be between $0.29 and $0.33 and that the cost pressures that we were seeing from a cost of sales standpoint were very front-end loaded in the year and that we expected to see that mitigate and really reverse itself in the fourth quarter, particularly after we lap around very high dairy cost that we experienced in the fourth quarter of this year. And we based that first quarter earnings on a comp store sales assumption of between flat and 2%, which is consistent, we think, with the 1% to 3% that were given for the entire year, if you factor in that we've had a net weather impact, so far, during this quarter of about negative 1%. Bryan Elliott - Raymond James & Associates: So some margin pressure from the weather, volatility, but the bulk of it in Q1 -- some weather volatility, margin pressure through the income statement, but much of it, most of it, food cost related?

Yes. Bryan Elliott - Raymond James & Associates: And pricing is going to stay around 2%?

Pricing is 1.4%. Bryan Elliott - Raymond James & Associates: For Q1?

Yes, you're going to have to listen to the replay, because we gave some really good details.

Our last question comes from the line of John Ivankoe of JPMorgan.

This is Amod Gautam on for John. I had just a couple of quick questions. One, you talked a little bit about acquisitions as well as repurchases. Just wanted to find out where the potential for interest in giving a dividend falls within your priorities for using cash. And then secondly, on the tax rate guidance for 28% to 29%, does that embed the kind of the manufacturing tax benefit that you get from higher bakery sales?

It does. It embeds in everything that we think we know about what our bakery sales are, which are based on the budget for our bakery sales. So we put in there what we can. And tax rates are always difficult, to be honest with you, because you never end up really being right. It seems like something always goes on. And with respect to the acquisition front and capital allocation and dividends -- dividends are certainly, have been discussed for a while in this company. I think that we will ultimately be a dividend payer, obviously, when you go down that path. We've got the capital to really be able to do what I would describe as do-it-all, to build all of the restaurants that we want to build, to repurchase enough shares to offset our equity dilution and to pay a dividend. The only thing was when you pay a dividend, it's got permanency to it, and you have to be sure that you're ready to have or to commit to it and to increase it over time. So we will do that, and it's being, has been and continues to be discussed within our walls.

Yes. We don't know when we'll do it, but it's certainly something that we do think about. Well, thank you, everyone.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.