CAKE

Business Context and Reporting Period

Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen weeks ended April 1, 2003
Operations: As of April 23, 2003, the Company operated 61 upscale, full-service 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

Liquidity: Cash and marketable securities on hand totaled $124.3 million as of April 1, 2003. The Company has a $25 million revolving credit facility with no borrowings outstanding.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 15% to $172.9 million. Restaurant sales rose 20% to $165.2 million, driven by a $30.1 million increase from new openings, partially offset by a 2% decline in comparable restaurant sales.
• Bakery Sales Decline: Bakery sales decreased 39% to $7.7 million compared to a record $12.6 million in the prior year. This was due to difficult comparisons following initial inventory fills for major customers in 2002 and the loss of a large foodservice customer.
• Operating Expenses: Labor expenses increased 20.5% to $55.8 million, primarily due to new restaurant openings and reverse leverage from lower-than-expected sales volumes. Restaurant cost of sales as a percentage of sales improved to 23.5% from 24.3% due to lower commodity prices.
• Profitability: Net income increased 19.6% to $12.6 million. Operating margin improved to 10.4% from 10.0%.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Expansion: The Company expects to open up to 14 new restaurants in fiscal 2003. Two opened in Q1, with more planned for Q2 and the second half of the year.
• Bakery Recovery: Bakery sales are expected to increase sequentially to approximately $10 million in Q2 2003, driven by an expanded relationship with SYSCO Corporation.
• Capital Expenditures: Estimated CAPEX for fiscal 2003 is $85-$90 million, net of landlord contributions. This includes funding for new restaurants, maintenance, and a 20% capacity increase at the current bakery facility.
• Cost Environment: Management expects food costs to remain stable for contractible commodities but notes that fresh produce and dairy remain subject to weather and market fluctuations.

Risks and Contingencies

• Legal Proceedings: The State of California filed lawsuits alleging violations of "Proposition 65" regarding mercury in fish. The Company is participating in an industry task force and has implemented interim notices. Potential liability cannot be reasonably estimated.
• Weather Impact: Severe winter weather in Q1 2003 resulted in approximately 22 lost days of sales and an estimated $2.5-$2.9 million negative impact on revenue.
• Commodity Risk: Approximately one-third of restaurant cost of sales consists of fresh commodities not contractible beyond 30 days, exposing the Company to price volatility.

Investor Verification Checklist

• Bakery Sales Recovery: Verify the ramp-up of sales to SYSCO Corporation and the resumption of business with the previously lost large-account customer.
• Comparable Store Sales: Monitor the trend of comparable restaurant sales, which declined 2% in Q1 due to weather and calendar shifts.
• Legal Exposure: Track the status of the California Proposition 65 litigation regarding mercury in fish and potential settlement costs.
• Capital Allocation: Confirm that capital expenditures remain within the $85-$90 million range and that new restaurant openings proceed as scheduled.
• Commodity Costs: Watch for fluctuations in fresh produce, poultry, and dairy prices that could impact margins in the second half of the year.