CAKE

Business Context and Reporting Period

Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003 (13 weeks and 39 weeks)
Operations: As of October 22, 2003, the Company operated 68 upscale, full-service restaurants under The Cheesecake Factory mark, three Grand Lux Cafes, one Cheesecake Factory Express, and a bakery production facility. The Company utilizes a 52/53-week fiscal year.

Key Financial Metrics

(Amounts in thousands, except per share data)

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 22.1% for the 13-week period and 17.1% for the 39-week period compared to the prior year. Restaurant sales drove this growth, increasing 22.8% (13 weeks) and 20.3% (39 weeks), primarily due to new restaurant openings.
• Bakery Sales Decline: Bakery sales to other operators increased 12.1% in the 13-week period but decreased 22.6% for the 39-week period. The 39-week decline was attributed to a loss of a large foodservice customer following a 2002 product withdrawal and the absence of record-setting inventory fills seen in the prior year.
• Profitability: Net income increased 19.0% for the 13-week period and 17.7% for the 39-week period. Operating margins remained relatively stable, with income from operations at 10.5% of revenue (13 weeks) and 10.8% (39 weeks).
• Cost Pressures: Restaurant cost of sales as a percentage of sales increased slightly to 24.2% (13 weeks) due to higher commodity costs for poultry, fish, and meat, partially offset by volume discounts. Labor expenses as a percentage of revenue decreased to 30.5% (13 weeks) due to revenue leverage.
• Liquidity: Cash and cash equivalents decreased from $11.0 million to $1.7 million during the 39-week period, primarily due to significant capital expenditures ($66.7 million) and net purchases of marketable securities ($14.8 million).

Guidance, Outlook, and Risks

• Expansion Plans: The Company expects to open up to 14 new Cheesecake Factory restaurants in fiscal 2003 (7 opened or planned through Q3/Q4). The goal for fiscal 2004 is to open up to 16 new full-service restaurants.
• Capital Expenditures: Estimated capital expenditures for fiscal 2003 range from $85 million to $90 million, net of landlord contributions. This includes funding for new restaurants, maintenance, and a 20% capacity increase at the bakery facility.
• Commodity Risks: Approximately one-third of restaurant cost of sales consists of fresh commodities (produce, poultry, fish, meat, dairy) that cannot be contracted for more than 30 days, exposing the Company to price volatility. Management expects poultry costs to decrease in Q4 but fish and meat costs to remain elevated.
• Market Risks: The Company holds $118 million in marketable securities. A hypothetical 10% decline in market value would result in an $11.8 million unrealized loss. The Company has no outstanding borrowings under its $25 million credit facility.
• Operational Risks: Risks include adverse weather conditions impacting traffic, delays in restaurant openings due to permitting or construction, and the ability to raise menu prices to offset cost increases.

Investor Verification Checklist

• New Restaurant Openings: Verify the actual number and timing of the 7 planned openings for Q4 2003 and the 16 planned for fiscal 2004, as delays are common.
• Commodity Cost Trends: Monitor Q4 2003 food costs, specifically for fresh poultry, fish, and meat, to confirm if management's expectation of decreasing poultry costs materializes.
• Bakery Customer Recovery: Track the status of the large foodservice customer lost in 2002 to determine if purchase activity has resumed.
• Capital Expenditure Execution: Review actual capital spending against the $85-$90 million estimate to ensure liquidity remains sufficient for growth.
• Comparable Sales: Analyze future comparable restaurant sales growth, noting that the 1.8% increase in Q3 2003 was largely driven by menu price increases rather than volume growth.