Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-K (Annual Report)
Period Ended: December 28, 2004
Operations: As of April 1, 2005, the Company operated 92 full-service restaurants under The Cheesecake Factory mark and 5 under the Grand Lux Cafe mark across 26 states and D.C. Additionally, it operates a bakery production facility in Calabasas Hills, California, supplying its restaurants and external wholesale customers.
Key Financial Metrics (Fiscal 2004)
| Metric | 2004 (Restated) | 2003 (Restated) |
|---|---|---|
| Total Revenues | $969.2 million | $773.8 million |
| Net Income | $66.5 million | $57.2 million |
| Diluted EPS | $0.84 | $0.74 |
| Operating Cash Flow | $150.1 million | $117.6 million |
| Capital Expenditures | $161.9 million | $113.3 million |
| Total Assets | $758.7 million | $609.8 million |
| Long-Term Debt | $17.3 million | $6.9 million |
| Stockholders' Equity | $542.9 million | $456.7 million |
Note: Long-term debt represents a "deemed landlord financing liability" resulting from lease accounting restatements. The Company maintains a $35 million revolving credit facility with no borrowings outstanding as of April 1, 2005.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 25% to $969.2 million, driven by a 25% increase in restaurant sales ($916.4 million) and a 24% increase in bakery sales ($52.9 million).
- Comparable Sales: Comparable restaurant sales increased approximately 3.9%, slightly exceeding the effective menu price increase of 2.5%.
- Expansion: The Company opened 16 new restaurants in 2004 (14 Cheesecake Factory, 2 Grand Lux Cafe), compared to 14 in 2003.
- Cost Pressures: Restaurant cost of sales increased to 25.2% of sales (from 24.0%) due to higher costs for fresh poultry and dairy. Labor expenses remained stable at 30.8% of total revenues.
- Legal Reserve: The Company accrued a $4.5 million reserve in Q3 2004 for pending class-action lawsuits regarding meal and rest breaks for California employees.
Guidance, Outlook, and Risks
- Expansion Plan: The Company plans to open up to 18 new restaurants in fiscal 2005 (approx. 15 Cheesecake Factory, 2-3 Grand Lux Cafe). Most openings are expected in the second half of the year.
- Capital Expenditures: Estimated cash outlays for 2005 range between $158 million and $166 million, including $13-$15 million for a new East Coast bakery facility.
- Restatement of Financials: The Company restated prior period financials (2002-2004) to correct lease accounting errors regarding contingent rent, rent holidays, and landlord contributions. These adjustments were non-cash and did not impact revenues or net cash flows but reduced net income for prior years.
- Accounting Changes: The Company anticipates a material impact on earnings per share upon the adoption of SFAS No. 123(R) regarding share-based payment in Q3 2005.
- Risks: Key risks include commodity price volatility (fish, dairy), labor shortages, weather impacts on patio seating (18% of capacity), and the inability to pass cost increases to consumers.
Investor Verification Checklist
- Lease Accounting Restatement: Verify the impact of the lease accounting correction on the "deemed landlord financing liability" ($17.0 million) and its amortization schedule.
- Legal Contingencies: Monitor the status of the $4.5 million reserve for California labor lawsuits and potential additional claims.
- Stock-Based Compensation: Assess the projected reduction in net income once SFAS 123(R) is adopted in 2005 (pro forma 2004 net income was $57.5 million vs. reported $66.5 million).
- Capital Allocation: Confirm the funding sources for the $158-$166 million capital expenditure plan, specifically the construction of the second bakery facility.
- Comparable Sales Sustainability: Evaluate whether the 3.9% comparable sales growth is sustainable given the Company's high sales per square foot metrics and reliance on price increases.