CAKE

Business Context and Reporting Period

Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 27, 2005 (13 weeks)
Operations: The Company operates 98 upscale casual dining restaurants under The Cheesecake Factory mark, 5 Grand Lux Cafes, one Cheesecake Factory Express, and a bakery production facility. The Company also licenses bakery cafes to third parties.

Key Financial Metrics

Note: Prior year figures have been restated to correct historical accounting for operating leases and landlord construction allowances. The filing does not provide a specific "Net Working Capital" figure for the 13-week period, but reports Net Working Capital of $42.0 million as of September 27, 2005.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 18% ($45.1 million) for the quarter and 21% ($146.2 million) for the 39-week period. Restaurant sales drove this growth, increasing 19% and 21% respectively, due to new openings and a ~1% increase in comparable sales.
• Profitability: Net income increased 77% for the quarter and 38% for the 39-week period. Operating margins improved to 11.1% for the quarter (from 7.5%) and 11.2% for the 39-week period (from 9.9%).
• Expense Management: Cost of sales as a percentage of revenue decreased to 25.5% (from 26.3%) due to lower commodity costs, particularly poultry. Labor expenses remained flat at 31.0% of revenue despite higher minimum wages, offset by menu price increases.
• Legal Reserve Impact: The prior year quarter included a $4.5 million reserve for labor law litigation, which significantly reduced prior year operating income. The current quarter does not include this charge.
• Restatement: Fiscal 2004 amounts were restated to correct lease accounting errors regarding contingent rent, rent holidays, and landlord contributions. This adjustment reduced prior year net income by approximately $396,000 for the quarter and $652,000 for the 39-week period.

Guidance, Outlook, and Risks

• Expansion Plans: The Company expects to open up to 18 new restaurants in fiscal 2005 (16 Cheesecake Factory, 2 Grand Lux Cafe). Eleven have opened to date, with seven more planned for the fourth quarter.
• Capital Expenditures: Estimated capital expenditures for fiscal 2005 range from $155 million to $163 million (net of landlord contributions). This includes a new bakery production facility in Rocky Mount, NC, expected to be operational in Q1 2006.
• Commodity Outlook: Management expects generally flat costs for most commodities, lower costs for poultry and dairy, and slightly higher costs for cream cheese and fresh fish. Menu price increases are expected to offset cost pressures.
• Accounting Changes: The Company must adopt SFAS 123R (Share-Based Payment) in Q1 2006, which will require recognizing stock-based compensation expense, expected to materially impact net income. Additionally, FAS 13-1 regarding rental costs during construction periods may impact future reporting.
• Risks: Key risks include adverse weather (hurricanes impacted Q3 sales by $3.0-$3.2 million), commodity price volatility, labor cost increases, and the inability to secure long-term contracts with large bakery customers.

Investor Verification Checklist

• Restatement Impact: Verify the specific impact of the lease accounting restatement on prior year comparables, as it affects the baseline for growth calculations.
• Comparable Sales: Confirm the 1.0% comparable sales increase for the quarter, noting the management estimate that sales would have been 2.1% higher without hurricane-related closures.
• Capital Expenditure Timing: Monitor the timing of the 7 planned fourth-quarter openings, as delays could shift preopening costs and revenue recognition into fiscal 2006.
• Legal Settlement: Track the status of the $4.5 million labor law settlement reserve and any potential revisions to this estimate.
• Stock-Based Compensation: Review the pro forma impact of SFAS 123R adoption in 2006, which is expected to reduce reported net income by amounts similar to current pro forma disclosures (approx. $8.1 million for the 39-week period).