CAKE

Business Context and Reporting Period

Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen weeks ended March 30, 2004
Operations: As of April 20, 2004, the Company operated 75 Cheesecake Factory restaurants, three Grand Lux Cafes, one Cheesecake Factory Express, and a bakery production facility. The Company utilizes a 52/53-week fiscal year.

Key Financial Metrics

Note: All figures in millions unless otherwise noted. Data derived from Consolidated Statements of Operations, Balance Sheets, and Cash Flows.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 28% to $220.5 million. Restaurant sales rose 28% to $211.2 million, driven by a $37.5 million increase from new openings and an 8.5 million (approx. 6.1%) increase in comparable restaurant sales. Bakery sales increased 21.3% to $9.3 million.
• Profitability: Net income increased 32% to $16.7 million. Operating margin improved to 11.1% of revenues compared to 10.4% in the prior year.
• Liquidity: Cash and cash equivalents surged from $15.2 million at the end of 2003 to $63.6 million, a net increase of $48.5 million during the quarter, primarily due to operating cash flows and proceeds from stock option exercises.
• Cost Structure: Restaurant cost of sales increased to 24.9% of restaurant sales (from 23.5%) due to new openings and higher commodity costs for poultry, fish, and dairy. However, labor expenses decreased as a percentage of total revenue to 31.3% (from 32.3%) due to revenue leverage.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Expansion Plans: The Company expects to open up to 16 new restaurants in fiscal 2004 (approx. 14 Cheesecake Factory and 2 Grand Lux Cafes). Two opened in Q1; more are planned for Q2, Q3, and Q4.
• Capital Expenditures: Estimated at $130-$140 million for fiscal 2004, net of landlord contributions. This includes $95-$98 million for new restaurants and a $20 million purchase of a building adjacent to the bakery facility.
• Commodity Costs: Management expects higher costs for fresh poultry, fish, and dairy for the remainder of the year but anticipates flat costs for produce. They plan to offset these via menu price increases and efficiency.
• Bakery Sales: Goal is a 5% increase in outside bakery sales for fiscal 2004, though volumes remain less predictable than restaurant sales.

Risks and Contingencies

• Commodity Volatility: Approximately one-third of restaurant cost of sales consists of fresh commodities not contractible beyond 30 days, exposing the Company to weather and market fluctuations.
• Bakery Customer Concentration: Large-account bakery customers may discontinue purchases without notice; the Company cannot enter into long-term contracts with them.
• Single Facility Risk: The Company currently depends on a single bakery production facility.
• Market Risk: Exposure to interest rate changes on a $35 million credit facility (currently unutilized) and market value fluctuations of $94 million in marketable securities.

Investor Verification Checklist

• Comparable Sales Sustainability: Verify if the 6.1% comparable sales increase is sustainable given the "honeymoon" effect of new locations normalizing.
• Commodity Hedging: Confirm the extent of fixed-price contracts for non-contractible fresh commodities (poultry, fish, dairy) to assess margin protection.
• Capital Expenditure Execution: Monitor the $130-$140 million CapEx plan, specifically the $20 million building purchase and the timing of 16 new openings.
• Bakery Mix: Track the reliance on warehouse clubs (58% of bakery sales) and the stability of large-account relationships.
• Liquidity Deployment: Observe how the $157.9 million in cash and marketable securities is deployed between new restaurant construction, the bakery expansion, and potential debt repayment or share buybacks.