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Cheesecake's 2Q profit slips, traffic stabilizes

CALABASAS HILLS Calif. The Cheesecake Factory Inc. reported a 13-percent slide in second-quarter profits, but officials said results were better than expected and guest traffic appears to be stabilizing.

For the quarter ended June 30, the Calabasas Hills, Calif.-based casual-dining chain reported net earnings of $16.6 million, or 28 cents per diluted share, compared with $19.1 million, or 29 cents per diluted share, in the second quarter last year.

Same-store sales for the company overall were down 3.2 percent, though it was an improvement over the first-quarter drop of 3.4 percent. Officials said guest traffic counts were down only 3.8 percent for the quarter, compared with the previous quarter decline of 4.3 percent.

By brand, the 146-unit namesake brand saw same-store sales fall 3 percent for the quarter, and the 13-unit Grand Lux Café saw same-store sales fall 5.4 percent, officials said.

The chain’s core market of California fared worse than other markets, Overton noted, and though dessert and non-alcoholic beverage sales remained strong, the sale of alcohol was down.

Revenues were nearly flat for the quarter, totaling $407.9 million, compared with $407.1 million in the prior-year quarter.

David Overton, Cheesecake Factory Inc.’s chairman and chief executive, credited the better-than-expected results in part to the successful introduction of the Small Plates & Snacks section of the menu, which will be expanded with the rollout of the chain’s new summer menu, beginning next week.

Introduced in the first quarter, the small-plates offerings of smaller-portion items priced between $3.95 and $6.95, will be expanded by about eight dishes, with some slow sellers being dropped.

Although The Cheesecake Factory is known for its massive portion sizes traditionally, the small plate section of the menu accounted for about 5 percent of sales during the first and second quarters, and Overton said the plates have “excellent food costs.”

The new summer menu will also include a 1 percent increase in prices, bringing the price increase for the year to about 2.2 percent. Overton noted that the company is cautious about raising prices at a time when consumers are reluctant to spend, but he said, “We felt it was not the time to fall back on margins.”

Overton said the company has also made progress on key areas, such as guest satisfaction, menu development, cost controls and debt reduction. “It’s good to know we haven’t inadvertently traded guest satisfaction for cost savings,” he said.

By the end of the year, Overton said the company expects to see $22 million to $24 million in savings resulting from cost containment efforts, about $10 million of which have already been realized.

The company has already launched a “phase II” in cost cutting, which will include such initiatives as cross training to improve store efficiency, as well as seeking higher employee contributions to the health plan.

The Cheesecake Factory has no current plans to open new restaurants during the rest of the year due to “postponements by developers of planned opening dates for sites,” the company said. Development plans for 2010 will likely be revealed when the company reports third-quarter results in October.

The company’s development team, meanwhile, is working on smaller prototype models for both the Cheesecake Factory and Grand Lux brands, Overton said, assuming growth will resume once the economy improves.

Overton said the company would launch on June 30 a new cheesecake called Stefanie’s Ultimate Red Velvet Cake Cheesecake, which is named for the customer who suggested the flavor in a previously announced promotion. For each slice of the cake sold over the next year, the company will give 25 cents to Feeding America, a hunger relief organization. Overton also noted that on National Cheesecake Day, which is June 30, all slices of cheesecake would be half price.

 

The company also recorded a $2.6 million pre-tax, non-cash charge resulting from a change in the employment agreement with Overton, who signed a new contract that runs through 2012 and increases his annualized salary from $792,000 to $850,000.

In addition, the company recorded a $3.3 million pre-tax charge resulting from a payment to unwind an interest rate collar on a portion of the outstanding balance on the company’s revolving credit facility. Those charges, however, were partially offset by a realization of $700,000 in proceeds from a variable life insurance contract, which the company uses to support its non-qualified deferred compensation plan.

For the year, officials are predicting earnings will range between 80 cents per diluted share to 86 cents based on an estimated same-store sales decline of between 3 percent and 4 percent.

Officials expect same-store sales for the third quarter to drop between 4 percent and 5 percent, resulting in an earnings guidance ranging between 20 cents per diluted share and 23 cents per diluted share.

Overton said the company also hired David Barad as the company’s new vice president of eCommerce. Barad is charged with building the online sales of gift cards and cheesecakes.

Contact Lisa Jennings at [email protected]

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