Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen and thirty-nine weeks ended September 28, 2004
Operations: As of October 20, 2004, the Company operated 85 Cheesecake Factory restaurants, four Grand Lux Cafes, one Cheesecake Factory Express, and a bakery production facility. The Company utilizes a 52/53-week fiscal year.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Sep 28, 2004 |
39 Weeks Ended Sep 28, 2004 |
39 Weeks Ended Sep 30, 2003 |
|---|---|---|---|
| Total Revenues | $247,683 | $703,135 | $559,312 |
| Net Income | $12,784 | $47,253 | $42,266 |
| Diluted EPS | $0.24 | $0.89 | $0.82 |
| Operating Cash Flow | N/A | $85,173 | $66,026 |
| Cash & Equivalents | $6,454 | $6,454 | $1,706 |
| Marketable Securities | $115,512 | $115,512 | $121,840 |
| Long-Term Debt | $0 | $0 | $0 |
| Capital Expenditures | N/A | $(105,583) | $(66,699) |
Note: Marketable securities include $28.2 million in current assets and $87.3 million in non-current assets.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 25.2% for the quarter and 25.7% for the year-to-date period compared to the prior year. Restaurant sales grew 25.2% (quarter) and 25.9% (YTD), driven primarily by new restaurant openings ($42.8M and $117.3M respectively) and comparable restaurant sales increases of 2.6% (quarter) and 4.3% (YTD).
- Profitability: Net income for the quarter decreased 10.9% to $12.8 million from $14.4 million in the prior year, despite revenue growth. This was due to higher operating costs and a legal accrual. Year-to-date net income increased 11.8% to $47.3 million.
- Cost Pressures: Restaurant cost of sales as a percentage of sales increased to 25.0% (quarter) and 25.1% (YTD) due to higher commodity costs (poultry, dairy). Bakery cost of sales increased to 50.6% (quarter) and 52.0% (YTD) due to non-contracted dairy commodity costs.
- Legal Accrual: The Company accrued $4.5 million in the third quarter for pending wage and hour lawsuits regarding meal and rest breaks, impacting operating income.
- Weather Impact: Hurricanes and severe weather in Florida and the Southeast resulted in approximately 64 lost days of restaurant sales, estimated to impact total restaurant sales by $1.8 million to $2.0 million for the quarter.
Guidance, Outlook, and Risks
- Expansion Plans: The Company expects to open as many as 16 new restaurants in fiscal 2004 (14 Cheesecake Factory, 2 Grand Lux Cafe). For fiscal 2005, the plan is to open up to 18 full-service restaurants.
- Capital Expenditures: Estimated capital expenditures for fiscal 2004 range between $130 million and $140 million, net of landlord contributions. This includes a $21 million purchase of a new building adjacent to the bakery facility.
- Liquidity: The Company has no long-term debt and no borrowings outstanding under its $35 million credit facility. Management believes cash, investments, and operating cash flows are sufficient to fund operations and expansion through fiscal 2005.
- Stock Repurchases: The Board increased the share repurchase authorization to 4,000,000 shares. As of October 20, 2004, 1,300,645 shares had been repurchased for approximately $26.5 million.
- Risks: Key risks include volatility in food commodity prices (particularly fresh poultry, fish, and dairy), adverse weather conditions, the inability to secure long-term contracts with large bakery customers, and the outcome of pending litigation regarding labor laws.
Investor Verification Checklist
- Legal Contingency: Verify the status of the $4.5 million accrual related to California labor law lawsuits and potential for additional costs.
- Commodity Costs: Monitor the impact of rising poultry and dairy costs on future margins, given the Company's limited ability to contract for fresh commodities beyond 30 days.
- Expansion Execution: Track the timing of the planned 16 new restaurant openings for fiscal 2004, as delays are common due to leasehold complexities.
- Bakery Sales Stability: Assess the predictability of bakery sales, which rely heavily on large-account customers (e.g., warehouse clubs, SYSCO) who may discontinue purchases without notice.
- Capital Allocation: Review the utilization of the $35 million credit facility and the pace of share repurchases relative to capital expenditure needs.