Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen and twenty-six weeks ended June 29, 2004
Operations: As of July 23, 2004, the Company operated 77 upscale casual dining restaurants under The Cheesecake Factory mark, three Grand Lux Cafes, one Cheesecake Factory Express, and a bakery production facility. The Company also licenses bakery cafes to third parties.
Key Financial Metrics
(Amounts in thousands, except per share data)
| Metric | 13 Weeks Ended June 29, 2004 |
26 Weeks Ended June 29, 2004 |
|---|---|---|
| Total Revenues | $234,920 | $455,454 |
| Net Income | $17,812 | $34,467 |
| Diluted EPS | $0.34 | $0.65 |
| Cash from Operations | N/A | $64,731 |
| Cash & Cash Equivalents | $8,012 | $8,012 |
| Total Marketable Securities | $128,218 | $128,218 |
| Long-Term Debt | $0 | $0 |
| Current Ratio | 1.2:1 | 1.2:1 |
Liquidity: Total cash and marketable securities on hand were $136.2 million as of June 29, 2004. The Company has a $35 million revolving credit facility with no borrowings outstanding.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 25% for the quarter and 26% for the year-to-date compared to the prior year periods. Restaurant sales grew 25% (quarter) and 26.3% (YTD), driven by new openings and a 4.5% (quarter) to 5.2% (YTD) increase in comparable restaurant sales.
- Profitability: Net income increased 16.7% for the quarter and 23.5% YTD. Operating income margins remained stable at 11.3% for the quarter and 11.2% YTD.
- Cost Pressures: Restaurant cost of sales as a percentage of sales increased to 25.8% (quarter) and 25.3% (YTD) from 23.9% and 23.7% in the prior year, respectively, due to higher commodity costs (poultry, dairy) and new restaurant ramp-up. Bakery cost of sales margin also compressed to 52.1% (quarter) and 50.7% (YTD).
- Capital Expenditures: Additions to property and equipment totaled $70.8 million for the 26-week period, a significant increase from $38.8 million in the prior year, reflecting aggressive expansion.
Guidance, Outlook, and Risks
Expansion Outlook: Management expects to open up to 16 new restaurants in fiscal 2004 (14 Cheesecake Factory, 2 Grand Lux Cafe). Capital expenditure requirements for the full year are estimated at $130-$140 million, net of landlord contributions.
Cost Outlook: The Company anticipates restaurant cost of sales as a percentage of sales to remain higher than the prior year for the remainder of fiscal 2004 due to commodity inflation. Bakery sales are expected to grow 8-10% for the remainder of the year.
Risks and Contingencies:
- Commodity Volatility: Approximately one-third of restaurant costs (fresh poultry, fish, dairy) are not contracted long-term and are subject to market fluctuations.
- Legal Proceedings: The Company is defending class-action lawsuits in California regarding meal and rest breaks. Plaintiffs have demanded approximately $9 million in damages (excluding interest/penalties).
- Bakery Customer Concentration: Large-account bakery customers may discontinue purchases without notice, creating revenue volatility.
- Single Facility Risk: Operations currently depend on a single bakery production facility.
Investor Verification Checklist
- Verify the sustainability of the 4.5% comparable restaurant sales growth given the impact of favorable weather and menu price increases.
- Monitor the trajectory of restaurant cost of sales percentages as commodity prices for poultry and dairy fluctuate.
- Assess the impact of the $70.8 million capital expenditure run rate on future cash flows and debt levels.
- Review the status of the California labor class-action lawsuits and potential settlement costs.
- Confirm the timing of the 12 planned restaurant openings for the remainder of fiscal 2004 to validate preopening cost estimates.