Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 1, 2003 (26 weeks)
Operations: As of July 22, 2003, the Company operated 63 upscale casual dining restaurants under The Cheesecake Factory mark, three Grand Lux Cafe locations, one Cheesecake Factory Express, and a bakery production facility. The Company utilizes a 52/53-week fiscal year.
Key Financial Metrics (26 Weeks Ended July 1, 2003)
| Metric | Value (in thousands) | Prior Year (26 weeks) |
|---|---|---|
| Total Revenues | $361,480 | $315,594 |
| Net Income | $27,908 | $23,814 |
| Diluted EPS | $0.54 | $0.47 |
| Operating Cash Flow | $47,309 | $49,572 |
| Cash & Cash Equivalents | $5,302 | $11,033 (Dec 31, 2002) |
| Total Marketable Securities | $121,653 | $103,453 (Dec 31, 2002) |
| Long-Term Debt | $0 | $0 |
| Current Ratio | 1.1:1 | 1.2:1 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 14.5% to $361.5 million. Restaurant sales grew 19.1% to $344.0 million, driven primarily by new openings ($57.3 million increase) despite a 0.8% decline in comparable restaurant sales due to severe winter weather.
- Bakery Sales Decline: Bakery sales decreased 34.7% to $17.5 million. This follows a record-setting prior year period and the loss of a large foodservice customer following a product recall in late 2002.
- Profitability: Net income increased 17.2% to $27.9 million. Operating margins improved slightly to 11.1% from 10.8% in the prior year.
- Cost Pressures: Labor expenses rose to 31.6% of revenue (from 30.7%) due to fixed cost leverage and weather-related sales volatility. Other operating costs increased to 23.0% of revenue (from 22.4%) due to higher insurance and energy costs.
- Liquidity: Cash and cash equivalents decreased by $5.7 million to $5.3 million, while total marketable securities increased by $12.5 million to $121.7 million. The Company holds no long-term debt.
Guidance, Outlook, and Risks
- Expansion Plans: The Company expects to open up to 14 new restaurants in fiscal 2003. Four have opened YTD; up to 10 are planned for the August-December timeframe.
- Capital Expenditures: Estimated at $85-$90 million for fiscal 2003, net of landlord contributions. This includes funding for new restaurants, maintenance, and a 20% capacity increase at the current bakery facility.
- Future Bakery Facility: Evaluation is underway for a second bakery production facility on the East Coast, with work expected to commence in fiscal 2004.
- Cost Outlook: Management expects food costs to remain stable for contractible commodities but notes fresh produce and dairy remain subject to weather fluctuations. Insurance and energy costs are expected to remain elevated.
- Legal Proceedings:
- Proposition 65: California Attorney General filed a lawsuit regarding mercury in fish. The Company has implemented interim notices and does not believe the outcome will have a material adverse effect.
- Labor Lawsuit: A class-action suit regarding meal and rest breaks is pending; the Company intends to defend vigorously.
- Stockholder Proposals: At the May 2003 annual meeting, stockholders voted against proposals to expense stock options and separate the Chairman/CEO roles, but voted in favor of submitting equity compensation plans and the poison pill to stockholder approval.
Investor Verification Checklist
- Bakery Recovery: Verify if the large foodservice customer lost in late 2002 has resumed purchasing, as this significantly impacts bakery revenue stability.
- Comparable Sales: Monitor the trend of comparable restaurant sales, which declined 0.8% YTD due to weather, to assess organic growth health.
- Opening Timeline: Confirm the timing of the planned 10 restaurant openings in the second half of 2003, as delays could impact revenue and preopening cost recognition.
- Commodity Costs: Track fresh produce and dairy prices, as the Company cannot contract these for periods longer than 30 days.
- Legal Exposure: Monitor the status of the California Proposition 65 litigation regarding mercury warnings and potential penalties.