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 29, 1998
Operations: As of November 10, 1998, the Company operated 26 upscale, high-volume casual dining restaurants and a bakery production facility. The Company also operates limited-menu bakery cafe outlets.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Sept 29, 1998 |
39 Weeks Ended Sept 29, 1998 |
39 Weeks Ended Sept 28, 1997 |
|---|---|---|---|
| Total Revenues | $68,576 | $192,351 | $149,777 |
| Net Income | $4,209 | $11,069 | $7,029 |
| Diluted EPS | $0.21 | $0.54 | $0.42 |
| Operating Cash Flow | N/A | $21,706 | $16,050 |
| Cash & Equivalents (End) | $26,342 | $26,342 | $9,121 |
| Long-Term Debt | $0 | $0 | $9,000 |
| Current Ratio | 2.1:1 | 2.1:1 | 1.1:1 |
Margins (39 Weeks 1998 vs 1997):
- Operating Income Margin: 7.3% (vs 6.9%)
- Net Income Margin: 5.7% (vs 4.7%)
- Cost of Food, Beverages & Supplies: 26.9% of total revenue (vs 26.0%)
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 28% for the quarter and 29% for the year-to-date period. Restaurant sales grew 30% (quarter) and 31% (YTD), driven primarily by new restaurant openings ($13.3M and $38.4M respectively) and a 1.5% menu price increase.
- Profitability: Net income increased 45% for the quarter and 57% YTD. Operating income margins improved due to revenue leverage over fixed costs.
- Cost Pressures: Cost of food, beverages, and supplies as a percentage of restaurant sales increased to 28.9% (from 28.3% prior year) due to higher commodity costs (produce, chicken, dairy). Bakery costs as a percentage of bakery sales rose to 47.4% (from 40.7%) due to dairy commodity costs and product mix shifts.
- Liquidity & Debt: The Company repaid all funded debt ($9.0M) in December 1997 using proceeds from a November 1997 public offering. As of September 29, 1998, there was no long-term debt outstanding. Cash and marketable securities increased significantly to $53.1M.
- Capital Expenditures: Capital expenditures for the 39-week period were $21.3M, primarily for new restaurant openings.
Guidance, Outlook, and Risks
- Expansion Plans: The Company aims to increase total restaurant productive square footage and operating weeks by 25% to 30% during fiscal 1998 and 1999. Estimated capital expenditures for fiscal 1998 range between $25M and $30M.
- Accounting Change (SOP 98-5): The Company must adopt a new accounting standard (SOP 98-5) effective for fiscal years beginning after December 15, 1998. This requires expensing start-up and preopening costs as incurred rather than deferring them. This will result in a one-time charge against earnings and accelerate the recognition of preopening expenses, potentially impacting future results significantly.
- Year 2000 Issue: The Company believes its mission-critical systems are compliant but notes risks associated with suppliers and customers. Contingency plans are being developed.
- Commodity Risks: Continued volatility in dairy, produce, and chicken prices remains a risk to margins.
- Forward-Looking Statements: Management warns that actual results may differ due to economic conditions, competition, weather, and the success of new concepts like the bakery cafe.
Investor Verification Checklist
- Verify the impact of the upcoming SOP 98-5 accounting change on future earnings, specifically the one-time charge and accelerated preopening expense recognition.
- Monitor commodity price trends (dairy, produce, chicken) and their effect on food cost percentages.
- Confirm the timeline and capital requirements for the planned 25-30% expansion in square footage for fiscal 1998-1999.
- Review the performance of new bakery cafe concepts and large-account bakery sales to assess diversification success.
- Assess the Company's ability to maintain liquidity if capital markets tighten, given the reliance on cash flow and potential future fundraising for growth.