The Cheesecake Factory Incorporated (CAKE) Q1 2013 Earnings Report, Transcript and Summary

Jill S. Peters - Vice President of Investor Relations David M. Overton - Chairman, Chief Executive Officer and Chairman of Enterprise Risk Management Advisory Committee W. Douglas Benn - Chief Financial Officer and Executive Vice President

Jeffrey Andrew Bernstein - Barclays Capital, Research Division John S. Glass - Morgan Stanley, Research Division Michael Kelter - Goldman Sachs Group Inc., Research Division Joseph T. Buckley - BofA Merrill Lynch, Research Division Will Slabaugh - Stephens Inc., Research Division Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division Nicole Miller Regan - Piper Jaffray Companies, Research Division Michael Tamas - Oppenheimer & Co. Inc., Research Division Keith Siegner - Crédit Suisse AG, Research Division Bryan C. Elliott - Raymond James & Associates, Inc., Research Division John W. Ivankoe - JP Morgan Chase & Co, Research Division Mitchell J. Speiser - The Buckingham Research Group Incorporated Larry Miller - RBC Capital Markets, LLC, Research Division Sharon Zackfia - William Blair & Company L.L.C., Research Division

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 The Cheesecake Factory Earnings Conference Call. My name is Tehisha, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Jill Peters. Please proceed.

Thank you. Good afternoon, and welcome to our First Quarter Fiscal 2013 Earnings Call. I'm Jill Peters, Vice President of Investor Relations. On the call today are David Overton, our Chairman and Chief Executive Officer; and Doug Benn, our Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call, items may be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available in the Investors section of our website at thecheesecakefactory.com and in our filings with the Securities and Exchange Commission. All forward-looking statements made on this call speak only as of today's date and the company undertakes no duty to update any forward-looking statements. 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 outlook for both the second quarter of 2013, as well as the full year. Following that, we'll open the call to questions. With that, I'll turn the call over to David.

Thank you, Jill. The first quarter marks our 13th consecutive quarter of positive comparable sales. We again outperformed the casual dining industry in spite of the impact from the storms in the northeast, and we achieved the high end of our expectation. On a 2-year basis, comparable sales are a healthy 3.8%. Our sales growth has been very consistent during the past few years, which is quite remarkable given the volatility that the industry experienced during this time. Internationally, sales at the 3 Cheesecake Factory restaurants in the Middle East remained strong, a good indicator of the global demand for our restaurant brand and our opportunities for expansion outside the U.S. Operationally, our execution is excellent. We managed our costs during the first quarter, contributing to significant year-over-year growth in operating margin. Our business is steady and strong as we move another step closer in 2013 to recapturing peak operating margin. In fact, all the key performance indicators that we track, from guest satisfaction, to manager retention, to food efficiencies are at or above levels we've achieved over the past year, setting us up for another strong year. We were honored to be named the most preferred casual dining restaurant for the second year in a row by Nation's Restaurant News Consumer Picks report, a comprehensive study that rates restaurant chains based on customer preferences. This award is voted on by our guests, and it's one more source of feedback that we truly are taking care of every guest, everyday. Our 2013 development pipeline remains intact, and we continue to anticipate opening as many as 8 to 10 company-owned restaurants this year. Our first opening is slated for June, with the remaining openings scheduled for the second half of this year, consistent with past years. As to international growth, we still expect as many as 3 locations to open based on the current information we have. In summary, we are successfully executing against our initiatives from comparable restaurant sales, to operating margins, to domestic and international development and capital allocation to achieve our goal of mid-teens earnings per share growth. And together with the dividend, we are driving shareholder value higher. At this time, I'll turn the call over to Doug.

Thank you, David. I'll review our financial results for the first quarter and then provide an update on our outlook for 2013. Before I get into the details, you'll notice we made a change to the financial table that accompanies the press release. We are now reporting The Cheesecake Factory restaurants as a separate segment, which is more aligned with the requirements of segment reporting. Now on to the results for the first quarter. Total revenues at The Cheesecake Factory for the first quarter of 2013 were $463 million. Revenues reflect an overall comparable sales increase of 1.4%, but those results do include a pretty significant impact from storms in the Northeast, which reduced comparable sales by about 60 basis points. We benefited from a timing shift in the first quarter of 2013, with spring breaks and Easter taking place earlier this year. We factored this in, but in reality, sales were stronger than we expected. Roughly $2 million in sales, or about 50 basis points, moved into the first quarter from the second in a year-over-year basis. As we discussed on our last earnings call in February, there was a fire at our highest volume restaurant in Hawaii during the first quarter of this year, and we closed the restaurant for repairs for a period of about 4 weeks. Subsequent to the guidance we provided in February, we made the decision to exclude this 4-week period from our comparable sales computation. We did this for 2 reasons: we believe this reporting provides a more accurate read on the health of our business; and as importantly, also allows for better comparability of sales and earnings both this year and next year, when we lap the closure. As a result, comparable sales exclude an estimated $1.8 million in lost sales from this incident. Comparable sales by concept grew 1.6% at The Cheesecake Factory and declined 0.9% at Grand Lux Café. Total restaurant operating weeks in the first quarter of 2013 increased 3.6% due to the opening of 8 new restaurants during the trailing 15-month period. Average weekly sales increased by approximately 1.7%. At the bakery, external sales were $14.2 million, up about $3.5 million due primarily to timing of shipments. Cost of sales was flat versus the first quarter of the prior year at 24.7% of revenue. Restaurant cost of sales was favorable, with the key drivers being lower seafood and fish cost, as well as better food efficiencies. This favorability was offset primarily by a mix shift, with bakery sales representing a higher percentage of total sales. Labor was 32.6% of revenue in the quarter, down 20 basis points from the prior year, reflecting good overall labor cost management. Other operating costs and expenses were 24% of revenue for the first quarter, down 30 basis points from the first quarter of the prior year. About 1/2 of the reduction was favorability stemming from the timing of marketing costs. G&A was 6.2% of revenues for the first quarter, down 40 basis points from the prior year. We are appropriately managing our infrastructure and additionally, we benefited from lapping the cost from revaluing our CEO's retirement benefit, and also from a lower corporate bonus accrual on the first quarter of this year versus the same period of last year. Depreciation expense for the first quarter of 2013 was 4.2% of revenues, flat with the prior year period. We recorded about $644,000 in lease terminations during the first quarter, representing the final costs related to discontinuing operations of 3 Grand Lux Café restaurants, as expected and as we previously disclosed. Preopening expense was $1.3 million in the first quarter of 2013 versus about $2.1 million in the same period last year. We had no restaurant openings in the first quarter of this year and one in the year-ago period. Our tax rate this quarter was 28.7%, within our expected range and consistent with our full-year expectations. Cash flow from operations for the first quarter of 2013 was approximately $45 million. Net of roughly $15 million of cash used for capital expenditures, we generated about $30 million in free cash flow in the first quarter of 2013. During the first quarter, we used our cash to repurchase about 1.2 million shares of our common stock at a total cost of approximately $42 million. That wraps up our business and financial review for the first quarter of 2013. Now I'll spend a few minutes on our outlook for the second quarter of 2013 and an update on the full year. As we've 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, the effect of any impacts associated with holidays and known weather influences. For the second quarter of 2013, we estimate diluted earnings per share of between $0.55 and $0.57, based on an assumed range of comparable sales between 1% and 2%. The shift forward of comparable sales due to earlier spring breaks in the first quarter impacts us in the second quarter, as we captured about 50 basis points of sales 1 quarter early. We're raising the midpoint of our full-year 2013 diluted earnings per share expectations, with our new range being $2.12 to $2.18 or 13% to 16% growth off a base of $1.88 in 2012. The comparable sale sensitivity associated with this earnings per share range is 1.5% to 2.5%. Over the past 4 years, we've improved our operating margins by 260 basis points, including 50 basis points of improvement in 2012. We now expect to close the gap versus our historical peak margin levels by roughly another 50 basis points in 2013. Operating margin growth in 2013 will be driven by a number of factors, most prominently international growth, with the initial 3 Middle East locations delivering higher than planned volumes and as many as 3 more locations expected to open this year. In addition, we expect cost of sales to be incrementally a little better from what we expected in February, driving some of the expected margin improvement. We are now planning for about 2.5% commodity inflation in 2013, compared to about 3% previously, with most of the incremental benefit captured in the first quarter of 2013. We expect that total capital expenditures will remain between $100 million and $120 million, primarily driven by planned 2013 openings of between 8 and 10 new restaurants, as David mentioned, as well as expected openings in early 2014. As to our corporate tax rate, we expect it to be approximately 29% for 2013, and we continue to anticipate the majority of our free cash flow after capital expenditures to be used for dividends and share repurchases. With that said, we'll take your questions. [Operator Instructions]

[Operator Instructions] Your first question comes from the line of Jeffrey Bernstein from Barclays.

Just -- actually, I just wanted to clarify something you mentioned in terms of the comp for the quarter and then I had a question. The -- it sounds like the guidance you had given for the quarter I guess was flat to plus 1. I just want to make sure, that incorporated what was already the bad weather you knew about and was probably reduced by 50 basis points or so because of the Hawaii closure? So in reality, the guidance was probably more like 50 bps to 150 bps, is that -- so essentially you came in at 1.4, that would have been the high end of what you would've guided to x Hawaii, is that fair?

That's exactly right. So 1.4, if you take out Hawaii, that's about 40 or 45 basis points. So you take that out of the 1.4, and you really get that we were right at the high end of our range on an apples-to-apples basis between 0% and 1%. We're about 0.9%.

Got it. And then you did, from an earnings perspective, you guided 40 to 43. You did 47. So I'm just wondering with the comp at essentially the high end of the range, was there anything unique that drove such a meaningful -- I mean, looking at the P&L, everything looks pretty clean, but I didn't know how the upside came about when the comp was really just at the high end of the existing range.

So we had these sales that shifted our -- we factored into our guidance that there would be a shift from spring break from the second quarter into the first quarter because we knew that spring break was happening earlier this year. However, we had a greater shift than we factored in, really a greater shift and also just greater sales in the first quarter than we expected to have. And that shift was about 50 basis points and associated with that shift was about $0.03 in earnings per share. So $0.47, you could say, that $0.03 of that was attributable to a shifting from the second quarter to the first quarter. We still outperformed the high end of the earnings per share range, and that was primarily attributable to a little bit better cost of sales in the first quarter than what we anticipated.

Got it. So just to clarify, looks like for the full year, you raised just the lower end by $0.02, but in reality you kind of pulled forward $0.03 into the first quarter, which probably reduces your second quarter by that same $0.03. So that's the reason why you didn't raise guidance more?

That's exactly right.

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

Doug, as just a flip side of that, as a clarification, your second quarter guidance looks like it's around 10% growth on a 1 to 2 comp and again you did a much better earnings growth on a lower comp. And so that's just because the value of those weeks is so high? Or is there something else in the cost structure that changes from the first to the second quarter that might lead to the lower earnings growth rate in the second quarter?

No, I don't think there's anything else. We talked about the spring break, Easter shift that benefited the first quarter, which was, again, about 50 basis points. So absent that shift, our comp store sales sensitivity for the second quarter would've been in the 1.5 to 2.5 range instead of 1 to 2, and earnings per share guidance in the second quarter would have been around $0.03 higher, on the high to the low end of the range.

And how meaningful now is the international business? Maybe you could -- I know you're deliberately not disclosing it and changing maybe the way revenue is so it's even harder to figure out. But how meaningful as a contributor was it, say, to the first quarter? Were there any milestone payments that were reached such that you maybe got a one-time fee associated with it? Or any of those expected in the near future?

Well, in the first quarter, we signed up our transaction with our second international partner. So there was a fee associated with it, but it was not the big driver of the quarter. I would say that from an international perspective, that our brand is just doing extremely well in the 3 restaurants that we have opened in the Middle East. And for some time, we've referred to this $0.01 a share in annual earnings per share as a rule of thumb from each international or Middle Eastern restaurant that's open for a full-year. But based on the current volumes that we're doing there, the earnings per share contribution, at least from the initial 3 restaurants in the Middle East, is better than that. So it's meaningful and becoming more meaningful as time goes on.

Okay. Better -- can you quantify better than $0.01?

I don't want to say exactly what the restaurants are doing, but they're doing volumes that far exceed what we're doing in the United States.

Your next question comes from the line of Michael Kelter from Goldman Sachs.

Yes, just a -- first off, a quick follow-up. The international locations, are the second and third doing as strong as the first? Or was the first one particularly high because it was the perfect location? And the other ones are good, but maybe not as good?

We've got 3 of the primest locations you can have. And we -- our brand is such that we're -- we command the better location. In fact, the first location we did across from the aquarium at the Dubai Mall, they actually moved some of the tenants that were there to allow us to go there. The second location is very premiere in the Avenues Mall in...

It's just as strong in Kuwait, if not stronger, with the best position in an expansion of the mall. So we think all 3 are equal, but each one is a little different than the other.

And then also, just another clarification. So you beat by about $0.05 versus your prior guidance. You raised the midpoint of your full year only -- the midpoint of your full year by about $0.01. So effectively, you took down the rest of the year by $0.04. Even if we equate for -- take into account the $0.03 from the timing shift, it actually still means you've taken down your guidance a little bit for the rest of the year. And I just want to make sure I understand if there's some reason why you did that.

No, I -- let me see if I can help you out here a little bit. The -- we beat the high-end -- we gave -- our guidance was 40 to 43 and we beat the high-end of that range by $0.04. We're saying $0.03 of that was the shifting, out of the second quarter and into the first quarter. The other $0.01 had to do with better cost of sales in the first quarter than we anticipated having when we gave our guidance. We lowered our expectations about commodity cost inflation a little bit from about 3% to about 2.5%. But the -- that most of that lowering was captured in the first quarter. For instance, our cost of sales in the first quarter reflected commodity cost inflation that was closer to say, 1%. So we're really not lowering our guidance for the back half of the year at all. In fact, we're raising the midpoint.

Your next question comes from the line of Joe Buckley from Bank of America Merrill Lynch.

Doug, you mentioned the $1.8 million in foregone sales because of the Hawaiian fire. Was there any profit impacts from that in the quarter? Or did insurance cover it?

Yes. So the reason that we initially gave our guidance and we included Hawaii as part of what we were -- we were going to include that in our comp store sales. And the reason we decided not to include it and to report comp store sales absent Hawaii was for the exact reason you're talking about. First of all, yes, we did have insurance proceeds. So the 1.4% comps more closely reflect what we should make off of 1.4% comps. And then looking forward to next year, since Hawaii is out of the comp base, we won't be in a position next year where we're reporting like 4/10 or 5/10 higher comps and have earnings that are lower because those comps aren't real comps at that point in time. So that's why we did it. I don't know if that's clear. I was a little muddy on that answer, but I think that the real thing to say is that the Hawaii -- we just think it aligns better not including Hawaii as part of the comp base.

Yes, I think I understand the same-store sales thought process. I guess I'm curious though, were there insurance benefits then that flowed through the quarter or...

Yes, yes, yes. So we had business interruption insurance related to that Hawaii closure. So the P&L impact from having Hawaii closed was -- there was really no -- not much P&L impact to us. So, yes, there was insurance proceeds in the quarter that were accrued.

Okay. Your G&A came in better than we thought. Did the insurance proceeds flow through G&A by any chance? Or was there some place else...

No, they don't flow-through G&A. The G&A is better than maybe what you expected it to be for really 2 reasons: One being the fact that last year, we had an accrual related to the revaluation of our CEO's retirement benefit that we didn't have this time. So that's why it's lower than last year. Also, our bonus accrual in the first quarter of this year was lower than what it was in the first quarter last year. So those are the 2 primary reasons that you're seeing G&A in the first quarter, lower than what it was last year. If you dial forward for the full year, again, from an operating margin perspective, we're expecting to have 50 basis points, approximately, margin improvement for the year. But from a G&A perspective, once the dust for the year settles, we would expect G&A actually to be a little bit higher this year because of our investment in international and in being able to fund our international growth. So we would expect G&A to be slightly higher for the year. So that means that really the other line items on the P&L are improving by more to come down to a bottom line operating margin improvement of 50 basis points.

Okay. And then just a question on the real business. What are you seeing sales-wise? Traffic check and are you starting to build sales in those shoulder periods again to get the volumes as good as they looked?

Yes, we grew our sales and every day part had sales growth again this quarter and the 2 shoulder periods that we call midafternoon and late night, those grew more than lunch and dinner. So that continues to happen and that's been true for a while.

Yes, because we were really full during lunch and dinner for years. The only way you grow it is by getting better, or having people come in earlier and late, waiting in line longer and that's the natural -- that just happens naturally. So it's always mid-afternoon and late night that will add to your sales numbers.

So our comp for the quarter, Joe, was up 1.4%. The breakdown of that is -- so we have 1.8% of price in our menu for the quarter and traffic was negative 0.4% and mix was flat. So that's sort of how it all adds up. And the way that I look at that traffic is that the loss that we had from the storms of 60 basis points was almost 100% traffic related. So absent those, we were roughly flat to slightly positive with respect to traffic. But again, for the second quarter in a row though, we've been able to get all of our price increase because menu mix was flat.

Your next question comes from the line of Will Slabaugh from Stephens.

I want to ask you another question about international. First, if you could just talk a little bit about South America and what those plans may look like in the coming years, to the extent that you could, just from a build-out standpoint? And then as a follow-up to that, I know I'm looking down the road here, but where we might see your partners build beyond either the Middle East or South America?

Okay. So we recently announced that we signed an agreement with a partner in Mexico and Latin America and our current agreement with that partner is to build 12 restaurants over an 8-year period of time in the countries of Mexico and Chile. So Chile is a South American country, obviously. But there's the potential, as part of that agreement, to expand that agreement into other countries in South America, such as Argentina or Brazil, Colombia and Peru. So those are -- that -- there's -- right now, the first part of the agreement is Mexico and Chile for a minimum of 12 restaurants, is what they've agreed to build. With respect to negotiations under way, we are, as we have said before, in communication and discussions with other potential partners in other parts of the world. We would like to have fewer partners rather than more. So really, one of the ways that we're looking at international development, our first partner, Alshaya, we only have an agreement with them right now to operate in 5 countries, but they do business in many more countries than that. So there's up to, I think, 19 countries. So there's the potential to expand that agreement with Alshaya. In addition to that, we're also talking with other potential partners in other parts of the world such as Asia, and looking to see if there is a potential transaction for us to build Cheesecake Factories and partner with another partner.

Great. And just a quick follow-up there, is there a time point where you think you might be more willing to share contribution there? Or is it just something for the foreseeable future you kind of want to keep to your vest?

When you say contribution, if you mean the royalty rate, we're never going to share that because it's just a -- there's not a reason for us to do that. It puts us in a position where -- a potential competitive disadvantage when negotiating and talking to others. So well that's not -- just not something we're going to talk about is the specific terms of our agreement. We will eventually, once we get more international restaurants open, disclose in addition to the line that says -- on our P&L now that says revenue, we'll have 2 types of revenue: restaurant revenue and royalty revenue. But that's sometime down the road or a year or more away.

Your next question comes from the line of Matthew DiFrisco from Lazard.

Doug, I'm sorry to beat a dead horse here. I'm just trying to understand the beat and the guidance and everything here. As of what I've heard so far, the 1.4% comp you reported, only excludes the Hawaii store. It has in there the benefit of the earlier spring break, correct?

It has in there -- it's just -- it's a regular comp. There's nothing unusual about it at all, other than the fact that we had an earlier spring break, some of which we'd factored into that, the guidance we gave. And some of which we missed because it was greater than what we expected. So if you want to do just a quick reconciliation of what comps we reported to the guidance we gave, you would take out from 1.4% about 0.4% for Hawaii. You would say, well, you didn't factor in -- you said you missed the spring break shift by 50 basis points. You'd pull out maybe 50 basis points associated with that. And then the storms, we said last time that we thought that would have a 40 basis point impact, but there were more storms. And it seems like every morning I woke up, there was some storm somewhere that was causing us to -- so that was 20 basis points going the other way. So roughly 7/10 or 8/10 up, if you want to just put -- if you want to have full visibility on what our guidance was and an update on what it would've been had we had full knowledge.

Yes. But -- okay, so it does have that. And you're basically guiding to the midpoint of your 2Q guidance for same-store sales to be what you just did, 1.4% -- and your guiding to 1.5%. So I guess I'm curious on why that EPS guidance doesn't imply greater margin leverage than what you've already got than what you just put up. I mean, you just had 50 basis points of restaurant margin leverage where you were dealing with inconsistent sales from weather that impacted your traffic and -- adversely, impacted your traffic. So presumably you're going to have a more consistent 1.5% predictable comp, which usually means better labor margins because it's not going to be as unpredictable as gyrations in weather. I don't understand why you're not seeing somewhat of a $0.59 or a $0.60 outlook if you were to basically be 50 basis points up in the environment where you just did 50 basis points improvement. Or am I missing something from 2Q of last year, where there's a benefit or something that we're not -- that we don't have recurring this year? Otherwise, I would think your margin expansion would be the same.

Well, first of all, it would never get to $0.59 or $0.60, right, because of the $0.03 that we said is a shift.

What is the $0.03 shift? How does that show up? I mean, you had a 1.5% comp?

Well, the 1.5% comp, right? So for the quarter, so if -- that was aided by 50 basis points of shifting from the second quarter, and there's profitability associated with the shifting, right? So there's $0.03 of profitability that aided the first quarter that will be a detriment to the second quarter.

You did a 1.5% comp, so that extra 50 bps is worth $0.03?

Well, approximately. Yes.

But your guiding to a -- so then in theory, you're guiding to a 1.5% comp in 2Q. And you're not going to have the weather gyrations of 60 basis points...

I'm guiding really to -- I'm really guiding to, on an apples-to-apples basis, of 1.5% to 2.5% in Q2 if it hadn't been -- if we didn't have that shift. So you mentioned it, Matt, I think, that what your year-over-year growth or not in margins has a lot to do with what was the growth or not in margins for the previous year. And so -- I don't know of anything really unusual in the second quarter, but I do know that we have looked at the second quarter, looked at the whole year. We're going to grow our margins by 50 basis points for the entire year. I don't know what I -- I don't really know if I fully understand the question.

Matt, one other thing to keep in mind is, Doug talked about our food cost inflation coming down for the full year and the fact that we captured most of that incremental benefit in the first quarter. If you look at what we would expect to see on the cost of sales line in the second quarter, we wouldn't expect it to see -- to be flat as it was in Q1. I think the other thing to keep in mind was we did have some benefit on G&A in Q1. But as Doug mentioned, we are making some investment in G&A to help support our international business and that will start to show up in Q2.

Your next question comes from the line of Jeff Farmer from Wells Fargo.

A little bit more straightforward cut question on this one. So you did touch on this, but as you continue to deliver these sort of year-after-year 2% same-store sales, what are some of the common themes between some of the best and worst-performing units? I guess meaning things like trade area, market penetration? Any color would be helpful, especially as you guys look out to 2013 and 2014 development.

The best and worst-performing units, so if you want to just look at the restaurants that we've opened recently, those have been producing better sales metrics, sales per square foot, sales per seat than the average overall. We don't have...

I'm not really looking for...

Are you asking about geographically? Or what are you asking?

No, if you look at all your restaurants out there and the average restaurant is putting up a 2% comp, obviously, there are some that are materially underperforming that number or underperforming it. And I'm just curious -- or outperforming or underperforming. I'm just curious if you were to look at that group of restaurants on either side, sort of a standard deviation outside of that mean performance, what are some of the common themes? Are they poor site selection? Is it sort of a trade area? Is there, is there...

We don't have that great a variance. I really -- we've never responded to a question like that. In fact, our -- we -- for the quarter, for instance, our -- we really didn't have a lot of variance. I mean, we have -- obviously, averages include strong areas and weaker areas, and we have -- we were generally positive across our geographies.

Okay, I'll just come at it one little different way. So as you look at 2013 and '14 development, will those restaurants be primarily located in markets that you have sort of deeper penetration? Or are they newer markets? How should I think about that?

It could be both. It's going to be both all over the board. We're only going to open restaurants in markets where we feel the probability of reaching our return on investment hurdles is very high.

Your next question comes from the line of David Tarantino from Robert W. Baird. David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division: Doug, I promise I won't ask a question about the earnings growth outlook. Doug -- or actually David, I was wondering if you could maybe comment on the development outlook as you see it as you look out to 2014 and '15, and if you're seeing any glimmers of hope in terms of the new construction environment that might allow you to build more units than what you're planning for in 2013?

The answer is yes. We are -- I don't have the number, but we've already -- have potential deals with a number in 2014, probably more than we've ever had a year in advance. Because many that would have been opened this year have moved into next year and they're all the sites we really feel great about. 2015, not so many, but next year, feels very, very good. And we are seeing -- we're starting to see more centers being built and more remodels. And so it definitely feels better. There's no question about it. Each one of the major mall builders are starting to build. We feel great about '14 and we'll see -- and then of course, we feel good about '14 and '15 international new stores as well.

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

Could I please confirm that the contribution from the international joint venture locations that's in the Other revenue line, the $50.5 million for the quarter?

That's right.

Okay. And then I noticed that if you calculate the margin between those 2 segments, The Cheesecake Factory restaurants is relatively the same year-over-year at 14%. But you get 110 basis points improvement in Other. Is that mainly due to the flow-through from that international revenue?

Well, I would think a lot of that is -- let me tell you what's in Other. Other includes the Grand Lux Café, RockSugar, international and the bakery. So it's a little bit tough to put your finger on exactly. So I'm sure the bakery had better profitability from higher sales as well. So some of it is international and some of it is the bakery, and then what impact did Grand Lux and RockSugar have on it.

And then what would have been the impact, just generically, from Grand Lux and RockSugar? Would they have been similar year-over-year like The Cheesecake Factory?

I would probably say maybe so, probably so.

Okay. And then just a big picture question, if you -- the comp outlook that you have guided for, what are the biggest drivers of that outside of price obviously, and I see some of your -- and I use the term peer quite loosely here, but I see some your peers doing things with catering and to-go and delivery. And are those any of the methods that you would like to deploy?

I think our methods are -- have been the same for quite a while and they've been very effective and that's to really -- menu innovation is a huge competitive advantage for us, and continuing to improve our service standards and then our facilities. So we're really operationally oriented as you know, and we're not -- there's not really any tricks to what we're doing. We're not discounting. We're doing the nuts and bolts of the restaurant business and trying to do that better every year.

Nicole, we found that a lot of that business was disruptive. We're very, very busy at lunch and dinner and that's when to-go and catering comes in. And we made a commitment to do the best job we can within the restaurant. We thought that was the way to move our comps forward, and have dependable service for our guest. So right now, we're not big on it and I think that's because we're very busy. We have very tight kitchens and we don't want to disrupt our service when we're packed. So that's where we're at with that.

With that said, we do, do a significant amount of to-go business today.

We've done 8% to 10% to-go from the beginning, but I meant in catering, or in home delivery. But we've always done great to-go business both in cakes and food. But that's different. That's not an order for 30 or 40, where you can disrupt your whole kitchen.

Your next question comes from the line of Brian Bittner from Oppenheimer. Michael Tamas - Oppenheimer & Co. Inc., Research Division: This is Mike Tamas on for Brian. I just wanted to ask about restaurant margins. You're doing a nice job on the labor and other lines. I'm just wondering if there's any additional levers that you had to pull through the rest of the year to kind of get some incremental leverage there?

Well, we're pulling a lot of little levers. A couple of years ago, we pulled some big levers and had some huge, significant, over $30 million worth of savings, but there are still smaller levers that we can pull. One of the things, from a cost of sales standpoint that we have as one of our initiatives this year, is to improve our food efficiencies. And said another way, that means to reduce waste if you want to just boil it down to the simple. And so that's a key initiative of ours, and that's where we're going to get expected cost of sales improvement for the year despite the fact that we're not raising our prices as fast as commodity costs are going up. So if we take approximately 2% pricing, which is what we would expect and approximately what's in the menu now and we have 2.5% of commodity cost inflation, in order to have cost of sales as a percentage of sales to be lower, we have to do some other things. And so that's one of the initiatives. But there's a number of things like that and that's why we're able to, on top of 260 basis points of margin improvement over the last 4 years, including 50 basis points last year, expecting to do another 50 basis point increase this year.

Your next question comes from the line of Keith Siegner from Credit Suisse. Keith Siegner - Crédit Suisse AG, Research Division: All my questions have been asked.

Your next question comes from the line of Bryan Elliott from Raymond James. Bryan C. Elliott - Raymond James & Associates, Inc., Research Division: Quick clarification first. So did I hear -- I think it was Nicole's question, did I hear accurately that we can see the margins at The Cheesecake Factory and I'm not in the office, I believe they were a little static. I don't have the numbers right in front of me. And second, you said the Grand Lux and RockSugar are more or less static. Is that -- did I hear that right?

If -- have you seen the press release, Brian? Bryan C. Elliott - Raymond James & Associates, Inc., Research Division: No, I'm sorry. I have not.

Okay, so when you look at the press release, what you'll see is the segment information there. And the segment information -- there's only 2 segments that are reported. One is restaurants and that's The Cheesecake Factory; and the other is Other, and that's Grand Lux, RockSugar, the bakery and international. So you can -- income from operations for the restaurants is reported and revenues for the restaurants were reported, and the same thing for Others. So you can assume that the income from operations on restaurants is The Cheesecake Factory income from operations. Bryan C. Elliott - Raymond James & Associates, Inc., Research Division: And the margin there was roughly static, correct, at Cheesecake?

I would think it's better. I didn't do -- I don't have the percentage right in front of me. Bryan C. Elliott - Raymond James & Associates, Inc., Research Division: Oh it is better. Okay. Alright. And the 50 bps margin assumption or guidance for the full year -- let me ask the question the other way. You have, in the past, said you need a couple of points of comps to create restaurant-level margin. Has anything changed in that view, I guess, food cost -- food inflation assumption has come down a bit. So that might bring that number down a bit, the breakeven point at the restaurant-level margin?

International is a bigger part of our margin expansion story than maybe what we thought it would be a year ago. Bryan C. Elliott - Raymond James & Associates, Inc., Research Division: Okay, all right. And the -- up to 3 international restaurants, do you have the sense of -- what's your best guesstimate as to which quarters they might open?

I think one is going to open in August, and then the other 2 at the end of the year, November, December. Bryan C. Elliott - Raymond James & Associates, Inc., Research Division: Okay. And -- okay. That's -- last question. You had talked on previous calls about some Cheesecake Factory, some of the earlier stores hitting the end of their lease lives and possibly being candidates for relocation, and that we should factor in some modest amount of existing store closure as we make our intermediate-term forecasts. We didn't close any Cheesecakes here this quarter, but is that still -- I'm just -- I wouldn't see any reason why it would have to change, but I just wanted to clarify that.

That could happen. But right now, there is no stores that we've -- want to close. Obviously, we'll have to negotiate with the landlords, and some we know what they way and some we don't. But at this moment, we have no planned closures. But it could happen.

So we've got our guidance, Brian, at 8 to 10 -- 8 to 10 new restaurants, but 2 to 3 of those being relocations. If you want to call them closures, you can. Bryan C. Elliott - Raymond James & Associates, Inc., Research Division: Okay. That was my understanding. Okay.

Your next question comes from the line of John Ivankoe from JPMorgan. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Just 2 quick follow-ups from me. Doug, I think I heard you say what bakery sales were in your prepared remarks. Were they up something like $3.5 million year-over-year?

Yes. And that was -- the other comment I made, it was a very short comment, but that a lot of that is timing related as well. So part of the shifting into the first quarter, bakery had higher sales in the first quarter and some of that is related to timing. Timing and shipment. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Okay, and it's a little bit annoying of a question, but I'll ask it anyway. Is it pulled -- was it pulled out of the fourth quarter or pulled out of the second quarter?

Looking forward. John W. Ivankoe - JP Morgan Chase & Co, Research Division: Okay, all right that -- no, and that's very helpful. And that actually may help to explain some of the things around earnings that we've been talking about. And then secondly, if I can, just looking at the overall class of openings in 2013, I mean would you expect those more or less to perform in line with the average unit volume or might they be at some kind of discount? Again, just for modeling purposes.

Sales per square foot I would assume that they'd be at or higher than the average. That's the way we would model them. John W. Ivankoe - JP Morgan Chase & Co, Research Division: And do you know the average square footage relative to...

I would say -- and David would probably answer that better, I would think that there's more smaller ones than bigger ones being built this year. So -- and that's probably going to be the case going forward, say 2/3, 1/3 roughly.

Yes, but really, we do so well in the lower square footage as well as the larger one that there won't be that many, depending on if we have to take it. But our average site will probably be around 8,500 and that's really what we're opening and where most of the sites are coming up. Sometimes we have no choice because that's how big these square footages, and so we will take it. But you're going to see -- I don't even look at smaller or bigger anymore. We have a 7,200 and 8,500 and a 10,000 square foot building that we normally use and it will be any one of those, but they'll average around 8,500.

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

On the food cost outlook, Doug, I think I believe you said 2.5% for the year. Can you just -- if you gave us -- you might have given this number, but what was the first quarter inflation and what do you expect the second quarter food inflation to be?

Roughly 1% in the first quarter and we didn't say for the second quarter. We gave the year as approximately 2.5%.

Okay. But the first quarter you're saying is probably as good as it gets on the year-over-year inflation?

First quarter was better than what we expected, and that's what brought the overall guidance down from about 3% to about 2.5%.

Okay. Got it. And a separate question on malls, can you just give us a sense of how many of your stores at this point are in or adjacent to malls?

Probably all the new ones. We find it perfect for us. We like shoppers. That's where we get the midafternoon business and we tend to be a little more feminine than masculine. And so we prefer opening either near or next to shopping than a lunch location that you're done at 1:30 and you don't get any business until dinner.

Got it. And just the overall system, I think numbers have been thrown out there, maybe 2/3 or in or near malls. Is that a good range to work with?

It's probably higher.

Higher, okay. Got it. Great. And just one last stab on second quarter guidance. It looks the midpoint of comps -- of your comps guidance is 1.5% for second quarter. And you're expecting about 7% to 10% earnings growth. In the first quarter, you did about 1.5% comps and you did 27% earnings growth. So is it more of a function of the food costs being a little worse in the second quarter? And maybe that bakery component is a factor for the -- for less of the flow-through and as Jill said, maybe some extra G&A in there, second quarter versus first quarter?

Well, we would expect in the second quarter to have margin improvement again, but nowhere close to the 50 basis points that we got from restaurant margins or 100 basis points overall. Some of that has to do with the fact that, as we said, we would expect G&A for the year to be higher because of our investment in international development. As Jill said earlier, I think that, that's going to begin to impact the second quarter. So G&A, as a percentage of sales, is going to be higher in the second quarter than what it was in the first quarter. And the others have to do with, for instance, some of the leverage came from preopening expense in the first quarter, a little bit of that 100 basis points. That I wouldn't expect to have any of that in the second quarter we would expect to be spending money related to preopening expenses in the second quarter, more in line with what we spent in the previous years. So those are 2 things that I can point at. Can you think of anything else, Jill? And some -- any kind of increase or change in margin year-over-year is highly dependent on, obviously, what it was last year. So -- and there's seasonality and other things involved. If you go back and look, we've never had quarters where -- we've had very consistent results, but we've never had quarters where we report the same percentage increase in margins quarter-over-quarter. That's just not the way that our business works.

Your next question comes from the line of Larry Miller from RBC.

David, you said earlier in the call that all your key performance indicators were stable to improving. What is it you're measuring? And I'd be curious if you could talk about the ones that are lagging and that you're focused on improving.

Sure. I'll let Doug give that one.

Okay. So the key performance indicators, things that we look at or the -- a big one is guest satisfaction scores. So guest satisfaction scores over the past couple of years have risen significantly, and we've been able to keep them at that high level. And we think that, that's one of the reasons why our sales performance and our gap between our sales performance and those in the industry has remained wide and by some measurements that we view is the widest it's ever been, right now today. So that's one of them we look at. We look at, obviously, traffic. We look at, from a profitability standpoint, all kinds of key performance indicators, whether that be sales per square foot. We look at productivity of labor. We look at retention rates. Retention rates have been very stable for us. We have virtually no turnover at the General Manager level, above the General Manager level, virtually no turnover. And then our General Manager and Executive Kitchen Manager turnover is low, as well as well as our staff turnover. So those are -- I would say mainly guest satisfaction scores and retention are the 2 really key metrics for our performance over the longer term.

Okay, great. So those are financial measures. Do you also look at any consumer feedback measures like value and experience and things like that? And are you seeing anything concerning on that front?

We measure that by the number of guests that come in our restaurants and the fact that we are gaining market share related to others.

And where it is also part of the overall guest satisfaction score, that's factored in.

Ladies and gentlemen, our last question comes from the line of Sharon Zackfia from William Blair. Sharon Zackfia - William Blair & Company L.L.C., Research Division: Instead of asking about the next quarter, I kind of wanted to ask a bigger picture question. I think, coming out of the recession, maybe some of us thought there was a big opportunity to recapture some of the traffic that was lost during the recession. And clearly, you've held up way better than almost all of your counterparts. But if you look at kind of the average restaurant today versus maybe 2006 or 2007, where is it weaker? And do you think there is the opportunity to recapture that traffic that may have trailed off during the windows around the peak hours or what have you?

I definitely think there is and in effect, except for the last quarter or 2, we have been recapturing traffic. So if you go back over the last couple of years, most quarters have positive traffic. In fact, one of the -- this quarter, we just finished, Sharon, we're at negative 0.4% traffic. We had some weather, but we were also up against 1.9% traffic improvement in the first quarter last year. So we are getting traffic back. We are growing guest counts. That's a part of our comp store sales growth. Roughly our comp store sales growth, as you mentioned, I think, was -- is roughly been 2% per quarter. But some portion of that generally has been traffic related. So I think that we are moving more toward those peak marginals. The opportunity is that we can expand at our shoulder periods and be able to get those guests back. So what's been done before can be done again. And we're doing the things that are making that happen. One of the things that -- if you look at where our average unit volumes are today, which includes guest traffic, we're not -- we're -- if you look at where we -- when we were last at these average unit volumes and last at these guest traffic levels, our margin is higher today at those lower -- those lower guest traffic levels and lower overall average unit volumes, than when we last did that. So what we have is the opportunity to return to peak margin levels without even returning the whole way to what guest traffic levels we had before. But the opportunity's there and we're, in general, doing that.

And also, because really, the credit has dried up, people are using cash. They're not living on credit that they think they're going to get out of their house. It may always be a little bit different, unless that changes. So to get your profit level up and to run your business well, I think is more important than worrying about the peak traffic levels, because the economy has changed, especially for those people that are just hanging in there and would aspire to go to Cheesecake Factory. But today they might not be able to, or any other restaurant. Sharon Zackfia - William Blair & Company L.L.C., Research Division: Can I follow-up on that? Because I think if you look at the last decade, almost all of the share gains in restaurants have been in quick service. And so as you think about full service being, maybe more challenged from the way people live their lives. I mean, how do you think of CAKE kind of evolving and adapting to that in over the next decade?

I think there's plenty of occasions that people want to dine well. When they do make a choice, they want their money's worth. They don't want to make a mistake. They want to know what they're going to get. They want consistency and there's plenty of opportunity and plenty of occasions for people to go to a full-service. They're going to pick the best because it just is a little more expensive for them and people give up their favorites last, not first. And so I think Cheesecake Factory -- there's plenty of opportunity. And the way we're working on our bottom line, versus worrying so much about every guest, is the way to success in the future.

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