The Cheesecake Factory Incorporated (CAKE) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Q4 2014 Cheesecake Factory Earnings Conference Call. My name is Steve, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would like to turn the call over to Jill Peters. Please proceed, ma'am.

Good afternoon, and welcome to our fourth quarter fiscal 2014 earnings call. I am Jill Peters, Vice President of Investor Relations. Joining me on the call today are David Overton, our Chairman and Chief Executive Officer; David Gordon, our President and Doug Benn, our Executive Vice President and Chief Financial Officer. Before we begin, let me quickly remind you that during this call, items will 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 be materially different from those stated or implied in forward-looking statements as a result of the factors detailed in today's press release, which is available on our website at investors.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 statement. David Overton will begin the call today with the discussion of our longer term strategy, which we believe positions us well to increase shareholder value in the future. Next, Doug will take you through our operating results in detail. He will also provide our outlook for fiscal 2015 both, the first quarter as well as the full year. Finally, David Gordon will discuss our near-term strategy, outlining a number of initiatives we have in place to drive comfortable sales and strengthen restaurant level margins in 2015. Following that, we will open the call for questions. One final note, we are providing a PowerPoint slides on our website to summarize the financial takeaways from our longer term strategic discussion today. This slide is available at investors.thecheesecakefactory.com. With that, I will turn the call over to David.

Thank you, Jill. Although we delivered another year of positive quarterly comparable sales in 2014, within our anticipated range, I think it is fair to say that the year did not live up to our expectations. While much of what impacted us last year was beyond our control, our objectives are to drive guest traffic, more effectively manage our [ph] cost and grow our earnings. Today, we are a $2 billion global company. We have been a longstanding leader in casual dining with the highest AUVs in the industry, which were $10.5 million last year. The Cheesecake Factory celebrates its 37th anniversary this month and our concept is still relevant across the broad demographics with a strong branding name. We are a growth company and we will remain one. We will continue to operate with the focus on excellence in menu innovation and food quality as well as service and hospitality. These areas are key differentiators, competitive advantages and areas in which we have deep expertise. They form a strong foundation from which we can successfully grow our company in the years ahead. We see our growth coming primarily from four drivers. The first is continued high-quality domestic growth of the Cheesecake Factory, and our target remains 300 company-owned locations. With 177 restaurants in operation today, we are only about 60% into the growth potential of our core concept. Our site standards are high and we remained focused on A-plus sites in both, new and existing markets. This is an effective strategy as the new restaurants we have opened in the past three years continue to deliver 10% higher sales per square foot relative to our company average. We will fit the size of the restaurant to the demographics of the market and the specifics of the site in order to achieve our targeted returns. We are opening between 10 and 12 new restaurants each year domestically and this is a reasonable expectation going forward. The number of openings each year is governed by the availability of premier sites not by capital or infrastructure constraints. Second is comparable sales growth consistent with our annual range of between 1% and 2%. We want to grow traffic from current levels, which will allow us to reach the upper end of this target. Given a high valued and incremental 1% increase in annual guest traffic at The Cheesecake Factory, equates to about 14 additional guests per restaurant per day, which is achievable. We have a number of initiatives to increase traffic this year and we feel good about our ability to do so. Third, we are looking at options in addition to the Cheesecake Factory restaurants to support meaningful growth into the future. We are open to new concepts whether internal or external and ways to leverage the power of the Cheesecake Factory brand. We are actively working on these efforts in a thoughtful and highly selective way with the goal of having at least a couple of opportunities prime within the next few years. Ultimately, we are looking for these additional growth drivers to contribute enough incremental revenue and associated margin growth for us to remaining mid-teens EPS grower. The final driver of our growth plan is the continued development of the Cheesecake Factory brand internationally. It plays a key role in our margin improvement in the future. We have three international licensing agreements in place today that we believe can provide for four or five new restaurant openings each year. Our current agreement specify for as many as 42 additional restaurants, representing a long runway of growth. Additionally, at least one of our licensees continues to expand in countries beyond their initial agreement and has asked us to evaluate these opportunities. Our licensing agreements require no capital investment in our part, limiting our risk yet providing us with a high flow through royalty stream as well as revenue stream for our bakery. Before I wrap up, I would like to comment briefly on Grand Lux Café the scheduled opening of the newest Grand Lux Café and the King of Prussia Mall is planned for early this summer. It is an excellent location in an expanded art of one of the premier retail centers in the country. We know King of Prussia well as we have a high volume Cheesecake Factory restaurant there. Given the location and potential sales volume, we feel good about this restaurant's ability to deliver our targeted returns. In conclusion, we have multiple avenues for top-line growth and a solid opportunity to recapture pick operating margins. With our continued plans to return a significant amount of capital to shareholders through share repurchases, we believe we can generate dependable and sustainable EPS growth. Taking our dividend into account, our longer term strategy is to deliver total shareholder returns in mid-teens plus range. The strength of the Cheesecake Factory brand, our focus on great guest experience and our operational tenure and talent, all contribute to our confidence in executing our plan for growth. We are energized about our future and we are committed as ever to increasing shareholder value. Now I will turn the call over to Doug for the financial review.

Thank you, David. Total revenues of the Cheesecake Factory for the fourth quarter of 2014 were $499.7 million. Revenues reflect an overall comparable sales increase of 1.4% at the Cheesecake Factory restaurants. Beginning with the fourth quarter, our discussion of comparable sales on our earnings press releases and on our quarterly conference calls will focus solely on the Cheesecake Factory restaurants. Our quarterly and annual filings with the SEC will continue to include a brief discussion of comparable sales for Grand Lux Café. This change allows us to focus our discussion with you on the key driver of our business since The Cheesecake Factory restaurants currently generate about 90% of our total revenues. This is also consistent with our segment reporting and breaking out the Cheesecake Factory as a separate segment. External bakery sales were $17.4 million in the fourth quarter, up slightly from the fourth quarter of 2014 as expected. Cost of sales increased 19 basis points in the fourth quarter of 2014 at 25.3% of revenues versus 24.4% in the prior year quarter. The variance in the fourth quarter was primarily attributable to the impact from higher dairy prices that higher dairy prices had on our restaurant and our bakery as we expected. Although dairy prices were off of their peak in the fourth quarter, they were still quite higher year-over-year. Labor was 32.5% of revenues, up 90 basis points as compared with the fourth quarter of the prior year. We continue to see unusually high group medical claims activity relative to the prior year, which represented the majority of the increase. The remainder of the pressure and labor stem primarily from higher wage rates. G&A was 5.8% of revenues in the fourth quarter, down 40 basis points from the same quarter of the prior year, primarily related to a lower corporate bonus accrual partially offset by higher equity compensation costs. As we have noted in the past, our equity compensation expense has increased due to lower priced options dropping off of our expense calculation. Pre-opening expense was $5.5 million in the fourth quarter of 2014 versus $4.9 million in the same period last year. We opened five new restaurants in the fourth quarter of 2014. In the same period of the prior year, we opened six new restaurants, including three relocations, which had lower pre-opening cost. For the full-year, our tax rate was 26.9%, in line with the expected rate of about 27%. Cash flow from operations for the full-year 2014 was approximately $240 million. Net of roughly $114 million of cash used for capital expenditures, we generated about $126 million in free cash flow for the year. During the fourth quarter, we repurchased approximately 3,000 shares of common stock at a cost of about $156,000. For the year, we repurchased approximately 3.1 million shares of our common stock for $140.5 million. Together with dividends, we returned $170.8 million in cash to shareholders. That wraps up our business and financial review for the fourth quarter of 2014. Now, I will spend a few minutes on our outlook for the first quarter 2015 and an update on the full-year. 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 and the most current input cost information we have that time. 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 impact associated with holidays and known weather influences. For the first quarter of 2015, we estimate diluted earnings per share of between $0.47 and $0.50 based on an assumed range of comparable sales of between 3% and 4% at the Cheesecake Factory restaurants. The key cost assumptions considered in our earnings per share sensitivity for the first quarter 2015, include group medical insurance cost pressure of between two and $3 million. We begin to lap the majority of the cost pressure from 2014 in the second quarter and overall wage inflation $3 million to $4 million, including about $1 million in higher minimum wages mostly driven by the California minimum wage increase in July 2014. I will note that while we are expecting to pay more for group medical and labor costs with the comparable sales assumption of 3% to 4%, we do not expect labor to be higher as a percentage of sales compared to the first quarter of 2014. For the full year 2015, we are currently estimating diluted earnings per share in a range of $2.08 to $2.20 based on assumed comparable sales range of 1.5% and 2.5% at the Cheesecake Factory restaurants. We continue to plan for the opening of as many as 11 domestic restaurants this year. Our total capital expenditures are expected to be between $120 million and $130 million. Internationally, we continue to [indiscernible] under licensing agreements as the comparable sales, The Cheesecake Factory, as well as the casual dining industry overall saw a strong starts to the quarter during the past six weeks. This is reflected in our first quarter comparable sales assumption. However our 2015 earnings per share range is based on the assumption that we return to our historical norm of comparable sales of between 1% and 2% for the remaining three quarters of the year. Mathematically, this results in a 1.5% to 2.5% comparable sales range for the year. In terms of food cost inflation, there was no change to our thinking and that we are modeling between 2% and 3% for the restaurants and between 1% and 2% for the total company, including the recapture of about three quarters of the bakery dairy pressure from 2014. Our food cost inflation reflects measurably higher cost for beef and to a lesser extent chicken, partially offset by year-over-year favorability in dairy and seafood costs. In labor, we continue to believe that group medical insurance costs will be approximately flat year-over-year as a percentage of sales in 2015. In addition, we expect overall wage inflation of $10 million to $12 million, including about $4 million in minimum wage increases. As to our corporate tax rate, we expect it to be in a range of between 27% and 28% for 2015. In keeping with our practice of consistently returning or free cash flow to shareholders, we plan to do the same in 2015. Our earnings per share sensitivity range for the year assumes that we will utilize every cash flow, per share repurchases and dividends. That wraps up our financial review, and I will now turn the call over to David Gordon.

Thank you, Doug. Let me give you some context to help you think about how we achieved the financial targets for this year that Doug just outlined. From a sale standpoint, we have an opportunity with respect to guest traffic at The Cheesecake Factory. It was down about 1% last year and recapturing that traffic will enable us to achieve the high end of our comparable sales range in 2015. When we separate our restaurants by changes in guest traffic in 2014, a significant percentage of our restaurants had positive guest traffic. Those that didn't were geographically concentrated in the Northeast and mid-Atlantic. Looking at industry data, we know that this is an issue across casual dining. We are conducting market research with a focus on the Northeast and the mid-Atlantic to understand this dynamic better, which will inform us of our opportunities in these regions and what steps we need to take to capture those opportunities. Another industry data point to help us differ [ph] our segment of casual dining, guest satisfaction scores were down on average between 1% and 2% last year. At The Cheesecake Factory, we did better than the industry and maintained our high scores, but we are not satisfied with that. Our goal is to get better and drive high-performance. When we measure guest satisfaction, two of the key drivers that we focus on are speed of service and server friendliness and attentiveness. Speed of service is all about throughput and wait times. The Cheesecake Factory is the highest volume concept in the industry nearly 90 million guests dined in our restaurants last year, which can results in long wait times. At these levels every minute matters. We are implementing this process to revitalize our managers' focus on running every shift in a way that increases throughput while maintaining our high standards, excellence in food quality, service and hospitality. We believe that running shifts with a specific and conscious focus on throughput and assessing performance at the end of each shift can lead to further improvements. In addition to what I just shared with you, we have three other comparable sales driving initiatives in place for this year. First, we are redesigning our server training with an enhanced focus on what today's guest expect, the higher level of service that is tailored to their needs. One of the differentiators of The Cheesecake Factory is our excellent in service and hospitality. Our scores with respect to server friendliness and attentiveness improved last year, but we know we can get even better. In addition, we are also implementing the use of iPads to deliver restaurants server staff training. We tested the use of tablets last year and the results show the technology to be more effective method of teaching resulting in faster training times and a better retention of the material. Next, we are continuing to build on the success of our gift card program. In each of the past two years, our gift card sales increased an average of about 25%, which demonstrates the affinity the consumers have for our brand. We will continue to capitalize on the strength of the brand to expand both, digital and physical gift card buying opportunities. Third, as we discussed with you last year, we are evaluating a number of ways the technology could be used in our restaurants, but as to the guest experience. This year, we are moving forward in piloting a technology for mobile payment in our restaurants. We are building a mobile app branded for The Cheesecake Factory, and guest will be able to use a number of different payment systems. We are excited about this initiative and the learning opportunity that afforded us as well as its potential to provide a service to our guests and continue to incrementally improve our speed of service that talked about earlier. In addition to improving guest traffic, we are also extremely focused on improving our margins. There are a number of ways that should help us progress in this area. First, you may remember that we installed the back of the house cost management system with substantial capabilities across production planning and inventory management a few years ago to help us analyze usage and waste. We are now leveraging the system to more efficiently manage the daily production in our restaurants. With our industry-leading high volumes, our ability to reduce waste by even a small percentage can yield significant savings across the brand. We have this new functionality in pilot today. Based on its continued success, we intend to roll it out companywide later this year. Also with respect to cost of sales, we have enhanced our processes for managing commodity costs. With the pressure that we saw from diary and shrimp last year, we are evaluating different approaches to limiting our risk getting the lowest cost and having more predictability at the same time. Our approach for many years was to enter into volume-based contracts. While we will continue to do that, we are now also considering supplementing our contracting with strategies such as direct hedging for certain products and diversifying the length of our contracts to more effectively manage our exposure. Third, moving on to labor, it is a well covered topic across the restaurant industry that labor costs are potential for operators this year. When approach we are taking is to provide our field operations teams with increased visibility on labor wages by position compared to local market rates to help ensure that we pay an appropriate wage rate. This should help us to maximize productivity and remain the employer of choice as well as a great place to work. In addition, we are rolling out a new exception-based tool within our business intelligence system to our field leadership. This tool will provide predictive analytics, enabling our area directors to work with their restaurants to identify labor opportunities before they arise. Proactively managing labor this way could help increase labor productivity by helping operators flex labor appropriately relative to the fluctuations in guest traffic. The fifth and final area I want to spend a minimum addressing this one aspect of our sustainability initiative. While this is not just a four-wall initiative, much of our initial work is focused on our restaurants. One of the first projects involves installing new equipment in our back-of-the-house operations this year to both, lower our energy usage and reduce costs. This is just the beginning with more to come in this area. The initiatives I shared with you built on where we are already best-in-class. We know that we have the knowledge a talented tenured team to continue to execute well and deliver an exceptional guest experience. The actions we are taking this year will help to support our long-term strategic plan as well and continue to grow our company and produce sustainable mid-teens earnings per share growth. With that said, we will 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] Standby for your first question, which comes from the line of Jeffrey Bernstein of Barclays. Please go ahead.

Thank you very much. Just two questions I guess. One on the year the guidance, Doug that you gave for 2015. It seems like at the mid-point you have lowered at least the bottom-line earnings per share by what look to be $0.30 or so. I was wondering if you could help bridge that for us, because it seems like the comp you are assuming modestly higher even if it slows the rest of the year and unit openings are in line and the cost of sales seem to be in line, group medical in line. I am just wondering what are the biggest deltas that led to that reduction. Then I had a follow-up.

Sure. The majority of it, Jeff, is really just the shortfall from the fourth quarter '14, so we are working off of a lower 2014 earnings per share base than we expected to when we gave the initial guidance for 2015 in October, so that is the majority. Higher labor costs relative to what we expected is most of the rest. Our wage rate increases are a reality, not just for us, but it is not yet soon to be across the industry. Our guidance for 2015 assumes $10 million to $12 million in overall wage inflation, about $4 million of that coming from minimum wages. In October, our assumption was for $7 million to $9 million in wage inflation, so another $3 million I guess in wage inflation expectation since we gave our initial guidance, so basically we were assuming that for years we had wage inflation for about the last five years of about 1%. In October, we assume for 2015 that wage inflation will be about 2%. Now based on what we are seeing in the fourth quarter and what we expect to see this year, we would expect to see wage inflation next year of about 3%, so those are the differences.

Got it, it looks like based on the guidance that you came in on the fourth quarter at least, you came in maybe $0.12 below the mid-point, so the differential being $0.18 you are saying the biggest component will be that labor side and then some other smaller thing.

Okay. Then the other question was just on the comp, the guidance for the first quarter up 3% to 4%, like you said it seems like the industry maybe is talking about the more favorably about the first quarter thus far. Whether you could opine upon how much you attribute if anything to gas or weather or perhaps why you would not assume some of that uptick with sustainable. What are you seeing in that need you to be so cautious to assume that reverts back? Thanks.

Okay. Yes. Sure. Let me see if I can address all of those things. A couple of things that we factored in for first quarter comp are really things that have happened already. For instance, the New Year's holiday shift was a benefit to the first quarter of about, say, 25 basis points to 30 basis points, because New Year shifted into 2015 from 2014. I will explain how that can happen later. Then we had some of slight negative whether impact in the first quarter so far. Then our assumption for the rest of the first quarter with respect to whether is that the remainder of the quarter weather-wise will be about the same as the weather was last year, which if you remember wasn't so good. I guess if there was better whether, the rest of the quarter there was some upside there, there are also other factors, but they are probably a wash. For instance, Valentine's Day shifting from Friday to a Saturday, that is not a positive for us, but the Easter holiday is earlier this year, but it stays in the second quarter of '15, so we may get a little bit of benefit from that in the first quarter. Our comp store sales assumption for the quarter of 3% to 4% really it represents the highest quarterly comp store sales for Cheesecake Factory in the last five years, so our quarterly best in the last five years, I looked it up, was positive 2.9% in the third quarter of 2010. Given our high volumes of 4% comp on a $10.5 million averaging volume is over $100,000 increase for restaurant for one quarter, so that is a lot more dollars spend and a lot more gets in the door, so we are seeing more sales vibrancy in the first quarter. Then you asked about the rest of the year and that is a tough one to answer, because the answer regarding the rest of the year is we really don't know, but in the absence of any additional information that gives us confidence that we expect the first quarter bump in sales to be sustainable. We believe it is prudent to estimate a range for the remaining three quarters of the year that is more consistent with our historical performance, so I would think we want to be a more sustained trend than a few weeks to increase our comparable sales assumptions beyond the 1% to 2% range for the rest of the year, so we are just trying to set realistic expectations.

Understood. Thank you.

You are welcome.

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

Thanks very much. First, I just want to make sure I understand sort of the change on wages. Last year, we talked about the medical claims being the variant for most of those quarters. Now, we are talking about wages. Can you just break it down between as you think about it is it the ambient wage inflation, maybe better economy, how much of this is minimum wage may be as you, [ph] less efficiently your labor. Is there any piece of it where labor hours per hundred guests, how you measure it is also getting worse?

You were talking about productivity there on the last thing, John, and I would say that that might slipped slightly, but that is not what we are concerned about at all with respect to wages. It is more of the wage rate. Just to give you as I said, we are expecting $10 million to $12 million of wage rate inflation in 2015, including about $4 million that has come in from minimum wages, so know were David Gordon talked about one of the things that we do not want to try to mitigate and manage wage inflation. The first that we are providing our management team with more rich data around pay rates in their specific marketplace to allow them to have better information to pay more appropriately for each position and to not overreact and pay too much or to not pay enough and potentially risk losing somewhat. That makes wage rates more manageable. In addition, I think we are going to have to consider taking additional price. Looking forward to the second half of the year, while we are always trying to balance capturing guest traffic and offsetting cost pressures, protecting our margins is certainly a priority and we would consider taking more pricing than normal or more than what we have done historically later in the year in light of the cost headwinds, particularly labor wage rates. In light, I will say industry behaviors, we see other restaurant operators that look like they are willing to take a little more price than what they normally have. In general, we believe restaurant companies including us will have to consider more pricing in this cost environment as pace of the economy accelerates.

Can I just sneak in one more? When you look at his five-year view that you are presenting, what does that say about your ultimate operating margin goal of the business. At one-time, pardon me if I am wrong, sort of a 9% goal, you are below that now. Is that no longer obtainable or how do you think about where the margin structure is going to be in the business going forward given what you just talked about?

We are thinking about a little bit differently. We are still confident that we can get to those 9% margins you are talking about. I believe it's even 9.5%, but we will get there primarily through the flow through from international royalties and not because we are going to get more efficient running labor or that the other costs that we managed through our P&L are going to be that much lower. We are hoping for the initiatives that we put in place such as sustainability and other things that we are doing to be able to offset cost pressures from whether it would be wage rate or commodity cost inflation or whatever and that the driver of the margins will be primarily from flow through on international royalties.

Thank you. Your next question comes from the line of Sharon Zackfia from William Blair. Please go ahead.

Hi. Good afternoon. Doug, on the group medical, which was an issue most of the year, I think you are self-insured if I am not mistaken, are there more efficient ways to take care of your medical insurance needs kind of going forward? Are those been explored? Then secondarily on dairy, can you kind of fill us on are you contracted on that. I know diary is kind of round trip, so a little surprised to hear it is not a little bit more of a benefit than you originally expected in 2015, so maybe help reconcile that for us?

Yes. With respect to group medical, we have looked extensively at how to insure ourselves and the self-insured route is certainly over the long-term would almost always prove out to be less costly. What you don't have is certainly, and you do not have certainty from quarter-to-quarter and you pay something for that lack the certainty and you might say, well, it might be worth paying that. Just to give you an idea of what transpired in 2014, with respect to high-cost claims, we define sharing a high cost claims anything above $50,000. In 2004, we saw almost 50% more high-cost claims than in 2013. Additionally, the dollar amount of those kinds each high-cost claim was more than 80% higher. Now, our consultants are telling us that they are seeing some increase in high-cost claims in the market overall, but they do believe that we what we experienced last year is unusually high, but given that group medical is a difficult thing to forecast, because of this impact of high cost claims. We have seen this before. It happened maybe to a lesser extent, but certainly we saw spikes in 2009 and in 2011. What we factored in for this year and I can't tell you if it is right or wrong, but I can tell you what we factored in. We factored in the same group medical expenses as a percentage of sales for 2015 into our guidance, which really means we have increased the dollars, because their sales are going up. We are increasingly the dollars, so we are expecting the same level as the bad level of high-cost claims, if you will, for 2015. I do not know if that is going to be end up being right, but I am just telling you what we did assume. Then with respect to dairy, David talked some about what we are doing to manage commodities in general a little more closely and certainly dairy we formed a group internally that is comprised of finance and purchasing people that evaluate commodity movements and opportunities regularly and we are very actively evaluating opportunities for either longer-term fixed pricing agreements that we can enter into that we have not been able to enter into in the past or we thought that we could not, so maybe being able to contract for more today. I think we are making progress on what we are doing with dairy cost of commodities we are about twice the amount contracted today than we were last year about 42% contracted on our dairy we are only 22% contracted at this point in time last year and we are looking to bring that up to the company average of between 60% and 65%.

Okay. Thank you.

You are welcome.

The next question comes from the line of Joseph Buckley from Bank of America. Please go ahead.

Thank you. I would like to ask two questions. One of David's, when you were outlining the components of your targeted mid-teen percentage growth, the third initiative you mentioned additional growth drivers and things that I am wondering if that includes things like Grand Lux Café of if there was some other additional initiatives that you may have been referring to or thinking about. Maybe, I will start that one and then ask my second question if that is okay.

Okay. Well, as we said, we are evaluating both, internal and external concepts and we have been doing that for while. We like to keep abreast of what is going on out there. What are the possibilities, whatever we do, we will be in fast casual whether it is casual dining, whether it is regular or casual dining or fast casual, certainly we are working very hard on getting Grand Lux to have more profitability, so it will be a better vehicle if we choose to do that, but it is really anything and everything within our strengths of casual dining that we are considering to bolster our sales into the future.

Okay. I guess, your comments obviously that could include acquisitions.

It could. We certainly are open and looking at those things.

Okay. Then a question then this is was maybe more for Doug. Just on the pricing, labor and the margins. You talk about the margins now on a company basis, which these national earnings are going to boost, but on a restaurant level basis, how are you thinking about margins and I know you mentioned maybe taking a little bit of incremental pricing this year, but would you consider regional pricing to kind of match them in new prices with the cost of doing business in the various parts of the U.S.

We have some regional pricing in place today. When we consider expanding that to the more broadly to have more targeted regional pricing, I would just say maybe. I would say anything would be open to looking at from a pricing standpoint today, so I do not know you have anything to add to that, Dave?

No. It is just that, when we do change our pricing and most of it is based on labor and whether there tip credit for tipped employees or higher minimum wage. When we change the menu that way, it is really because of the cost we are incurring.

Okay. Thank you.

Your next question is from the line of Keith Siegner of UBS. Please go ahead.

Thank you. Can you folks hear me okay?

We hear you.

Just a very simple question for Doug, when you talked about some of the tech and I know I have asked this other quarters in the past, but I kind of wanted to ask you it again. Have you thought about server handheld? If every minute counts and can really help with the traffic counts, especially during peak hours, have you thought about server handhelds in certain stores as an option and could that be done quickly as a way to maybe help resolve this a little more quickly? Thanks.

Hi, Keith. This is David Gordon. We have talked about what type of technology makes the most sense for us. Although it may sound like handheld to table or something that could be done simply and easily. At Cheesecake Factory, nothing is going to be that simple and/or that easy. Driving hospitality and service through really what our guests expect from the server and that is service experience, the entire experience that they want is not just about throughput. Throughput is an important part of driving traffic and making sure that our peak times we are operating as fast as we can, but there is also the experience in ensuring that the guest experiences right for the brand and right for Cheesecake Factory, that doesn't mean that we are not looking at every opportunity and look at technology, but the complexity of the menu also makes it very challenging to do something as what sounds as simple as a handheld with the table when guest are requesting to change the food in many different ways which is wonderful for us. It is something that we are able to do when we want to do, but the complexity of a handheld can make that even more challenging. Then I would also just add that it is significant cost structure as well if we are going to have that level of technology to every restaurant and the size of our restaurants with the amount of servers that we have is also something that we would clearly have to understand. Right now, we are…

Maybe if I could just clarify one thing, what I meant there was maybe enhancing new experience and increasing throughput what about just for a payment option? Like a server…

In my opening remarks, I did say that this year we are currently in the process of piloting a mobile payment option, so if all goes well, we will start that pilot in the second quarter this year, and if we are happy with those results and the successful of those results, we would be looking forward to rolling that out companywide if all goes well throughout the year for mobile payment.

Thanks.

The next question comes from the line of David Tarantino from Baird. Please go ahead.

Hi. Good afternoon. First, clarifications, Doug, can you give us the breakdown between traffic and ticket for the fourth quarter?

Sure. For The Cheesecake Factory, this is just The Cheesecake Factory concept, the comp was 1.4%, traffic was minus 1.2%, price was up 2% and mix was positive 0.6%.

Thank you. I guess the question I have then, is that traffic spread or gap versus the industry seems to have flipped to being negative after a lot of quarters of positives. Just wondering what your thoughts are on what drove that difference and where Cheesecake Factory might be maybe on a relative disadvantage or is it some of the internal guest metrics scores that you are looking out or is there anything else that you think might be driving that?

Yes. I think David, historically, we have not seen as bigger move up and down as the industry had seen. We are pretty steady and delivering comp sales in a range somewhere between 1% and 2% and the traffic has been pretty steady as well. Our goal is obviously to get to the higher end of that 1% to 2%, so that can accomplish our growth targets and David talked about some of our initiatives in that area. We have typically seen the gap versus the industry compressed when the economy or the consumer confidence is stronger and widen when times are a little tougher, which is really fine because actually we like to see the industry doing better, because it is good for everyone. As you know the Knapp-Track reported negative comps each quarter from a two straight years until 2014, the end of the year. During that timeframe, the Cheesecake Factory is performing pretty consistently positive each quarter. With respect to gas prices that people talk about those a lot, they certainly do not hurt when they are low, but we have seen before whether gas prices are going up or going down that we don't think they have that much of an impact on us, but they do appear to help other restaurants more than they help us, which probably accounts for at least some part of the narrowing of the gap.

Just as far as the service metrics, I think David you also asked; we have sustained our high end service metrics over the past two years. I think, as I said earlier, we are not satisfied with that. We want to do more we want to see those scores moving in an upward trajectory. With the rest of the industry moving in the negative direction, we have been able to sustain the scores which are all-time high scores for the past couple of years.

Got it. Then maybe just a follow-up to that, it seems like your comments imply that you didn't think weather was helping in the first quarter at least with your first quarter outlook, so I guess what would you attribute the strength to if it is not weather what do you think is driving that?

I don't know what exactly to attribute it to other than I would think. I think that we have seen is that there has been just, it looks like a more vibrant economy. It looks like more guests are coming in the door. There is some weather impact, there is some noise in the quarter of course, there is a shifting of the New Year's holiday, but I think in general at least through the first six weeks of the quarter, we just feel that the consumer is stronger and better. The other thing I will mention too is gift cards I think David mentioned in his remarks, 25%; I mean this is really a great indication how strong our brand is. I think that gift card sales across the industry are not generally up, and ours in 2013 versus 2012 and 2014 versus 2013 were up 25%. As you probably know gift cards sales, the majority of them happen in the months of November and December, so part of what is happening in the first quarter has to do with gift card redemption, so gift card redemption has been very strong and stronger than what we have seen in prior first quarters, but I will add that gift card activation has also been strongly at least in January. It is not a big month for gift cards sales, so it is sort of a nice increase over a small number, but it is still the activations are very good, so our ability to drive gift cards sales is helping us as well.

Great. Thank you.

You are welcome.

Your next question from the line of Will Slabaugh with Stephens. Please go ahead.

Yes. Thanks guys. Just given the cost pressures we have seen recently, what is the comp you think needed to expand margins in 2015? Then if we can look beyond into what may look like a more normalized playing field as far as labor is concerned and as far as maybe not inflating quite as much, what might that comp need to be able to expand margins then?

I think what I tried to do is talk to that earlier when I said that we are not looking at if our goal is mid-teen earnings per share growth and the component of that is comp store sales is 2%, we are not looking at that being a driver of margin enhancement. We are looking at being able to keep margins in tact with that maybe having to use other initiatives such as sustainability or other things focusing on labor productivity or food efficiencies, those things that we always focus on in order to keep that part of the margin flat. It probably takes still somewhere between 1.5% to 2% to get some kind of the leverage on sale, but not a lot until you get over 2%, so I would especially in this cost environment, because I think that this wage inflation is 3% wage inflation, which is included in our 2015 guidance, is not that unusual. I mean if you go back to the go-go years, I remember from my past though, we had 3% or 4% wage inflation, but the economy was very good and what came with that 3% to 4% wage inflation was generally a, in the more vibrant economy, was the comp store sales were better too. Right now in our guidance, we have not factored in and I talked about the last three quarters of the year any kind of improvement in comp store sales over what we normally runs or stay 1% to 2%, because we really do not know, but the signs in the first six weeks of the year are good.

Got it. Just a quick follow-up if I could on labor, so just to be clear, you are anticipating labor to be up as a percentage of sales in Q2 through 4Q. Correct?

I would say that was the answer to that Jill? I do not know. I would said that probably not. It depend on the way you talk about the high-end of the range or low-end of the range. We are talking about the high end of the range. I would not think that the labor as a percentage of sales would necessarily be higher.

Thank you.

Your next question comes from the line of Joshua Long from Piper Jaffray. Please go ahead.

Great. Thank you. I was wondering if we might be able to talk a little more about the unit opening expectations for this year and in terms of cadence. Then maybe also in terms of the opportunity for relocations and what that might do to the pre-opening number or expectations for pre-opening costs for the year?

Yes. Okay. First of all we don’t have any relocation plans, so relocations we have done four of those. They have all worked out very well. We will do them on a select basis. We do not see a lot of relocations that are coming up, certainly, none this year. Then with respect to the 11 openings we are anticipating, they are going to be backend loaded like they normally are, so I would say anywhere between two and three in the first half of the year and the rest in the second half of the year.

Great. Thank you. That is very helpful. Then on the consumer facing technology aspect on mobile payments or mobile ordering, just trying to think about the thought process of kind of building it versus buying it. Any sort of rollout timeline that you might be willing to discuss?

We are not completely building it in-house, so we do have a partners that we are partnering with, so we are not doing all the work on our own. That is a great partnership. We worked actually for about a year looking for the right partner to roll out mobile payment and that is allowing us to do it as quickly as we can.

Great. Thank you so much.

Your next question from the line of Matt DiFrisco from BRG. Please go ahead.

Thank you. I apologize if this was already asked, but did you specify what price you have assumed in both, the first quarter and the full year of 2015 as a base? Then I guess when was the last time you tripped price, can you just tell us sort of the cadence of anything might be rolling off. I am just curious specifically why you have not maybe taken price sooner, considering you are seeing traffic and you even mentioned the economy getting stronger. Why wait to defend margins?

Okay. I think it is an excellent question. What is in the menu is what has always been in the menu or has been at least for the last year or so is about 2%. We are in the process right now today of rolling out a new menu that includes a 1% price increase and 1% price increase of rolling off, but it is a good question on why we would not have put that in. We have already made the decisions with respect to that menu and they are already moving forward and being printed. Here is the way we look we look at the pricing. First of all, factored into our guidance, I didn’t mention this, so we haven't really factored in any pricing in our second menu change in the year which happens in the August type of timeframe in the summer July and August. We have not factored in any more pricing than the 1% that is rolling off, but we have said that we would consider that and I think we are still considering how much more that should be, so I think I lost my track…

I guess what my question is rooted in then, incremental pricing would be incremental to the earnings growth as well going forward, if all else stays constant and as far as the commodity picture and what you are seeing as far as labor?

That is right. Exactly.

Okay. I guess if I could fill in a second one is there anything unique going on in the other operating expense line. That seem even though you did north of 1% comp or in line with your guidance on the comp side, that seemed to have missed on a degree of leverage. You were not getting as much as you might have got in years past. I would assume all of the healthcare costs group, health care costs are all embedded in benefits and labor, not necessarily in that line. Is there something else going on in that other operating expense line that is maybe utilities or something that was due to one-time in nature?

The only thing I can point to is that really last year, we had utility cost credit, we had a benefit of water credit that we got, that we did not have this year, so that is part of it and that is really the only thing that I see unusual gone on there.

Excellent. Thank you, guys.

You are welcome.

Your next question comes from the line of Steve Anderson from Miller Tabak. Please go ahead.

Hi, good afternoon. You have mentioned in your remarks that you see getting to 90% operating margins through the continuation of the international licensing channel. Do you see yourselves at a point where you want to break out those sales, so as to provide us additional clarity on that line item?

We will, and what we want to do is protect the confidential nature I should say of our agreements with our licensee partners, so we will do that when we feel that you won't be able to determine, say, what the royalty rate is for any particular transaction, so we will break that out and probably it won't be this year, but maybe it will be next year. We will think about that for next year. Then the goal was not 9% it was 9.5%.

Okay. Thank you.

You are welcome.

Your last question comes from the line of Paul Westra from Stifel Nicolaus. Please go ahead.

Great. Thank you. Just had a follow-up question on your pricing commentary, Doug, if you could just mention, I mean just clarify what is your pricing assumption for the first half of the year and what is for your guidance in the second half of the year, assuming you have taken no additional pricing?

Our guidance for the second half of the year assumes that we are going to take the pricing we normally assume, which is on an annualized basis 2% a year. In the menu for the first half of year is 2%, and our assumptions for the second half of the year is 2%. Again, we have said that we will, so not included in guidance is our additional thought that we would consider taking greater pricing than that normal amount.

Great. I was little confused there. One last one on dairy then, I know your guidance said you are going to fall back about three quarters of that 2014 headwind. Could you sort of quantify when you expect dairy to be down, your basket to be down on a year-over-year basis?

As soon as it laps around, I mean, our assumption from dairy I do not know if they are down on the first quarter, they are probably that flat in the first quarter, but they will certainly be down in the second quarter.

Okay. Great. Thank you.