Cheesecake Factory Inc (CAKE) 2002 Q4 法說會逐字稿

Good afternoon.

My name is Stephanie and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Cheesecake Factory quarterly investor conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.

If you would like to withdraw your question, press the pound key.

At this time I would like to introduce Gerald Deitchle, president and CFO, and David Overton, chairman and CEO.

Please go ahead.

Thank you, operator and good afternoon, everybody.

I'm Gerry Deitchle of the Cheesecake Factory and welcome to your quarterly investor conference call which is also being broadcast live over the Internet.

As the operator mentioned, David Overton, our chairman and CEO is with us on the call today, also Mike Dixon (ph), our VP finance, and Jane Vallaire (ph), our newly promoted director of investor relations.

So before we get started today I would like to ask Jane to read our cautionary note regarding risk factors and forward-looking statements.

Jane, go ahead.

Thanks, Gerry.

The company's comments during this conference call held today, February 4th,2003, includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Investors and listeners are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements.

Forward-looking statements involve known and unknown risks and uncertainties and other factors which may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by a forward-looking statements.

All forward-looking statements made today on this conference call speak only as of today's date.

Investors and listeners are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in our periodic filings with the Securities and Exchange Commission.

This conference call is the property of the Cheesecake Factory, Incorporated, any retransmission, rebroadcast or redistribution of this call without the expressed written consent of the Cheesecake Factory, Incorporated, is prohibited.

Thanks, Jane.

Our agenda for the call today will be as follows: first we'll go over the press release we issued today that covers our financial results of the fourth quarter of fiscal 2002 and we'll also provide a business and financial update and then after that we'll be happy to take a few questions.

We would like to finish up the call in about 45 to 50 minutes, so let's go ahead and get started.

Our management team was very pleased with our record financial performance for the fiscal quarter and year-ended December 31st.

Once again, the Cheesecake Factory achieved record levels of sales and earnings for both periods thanks to our strong concepts and brands and thanks especially to the hard work and dedication of our almost 15,000 staff members across the country.

We achieved our stated goal to open as many as 12 new restaurants during fiscal 2002 which was a new growth record for our company.

And we successfully opened seven of those 12 restaurants during a 14 week period of time which we believe is a strong testament to the strength and depth of our design construction and operations teams.

If you ask anybody in the restaurant business they'll tell you it's not easy to do what we do at the Cheesecake Factory, but year after year our team always rises to the challenge.

Not only do we enjoy the benefits of the unique brand identity and competitive positioning and almost 25 years of sustained popularity, our achievements also continue to be the direct result of the very hard work of some of the best restaurant operators in the business led by our operating presidents Mike Barry (ph) and Peter Demelio (ph), and assisted by our regional vice presidents, Jack Belk (ph) and and Wane Jones (ph), along with a super support team.

The Cheesecake Factory also continues to raise the culinary bar of excellence in casual dining.

We learned yesterday that our vice-president of culinary development and our executive chef, Bob Oculra (ph), has just been named the Menumasters Chef Innovator of the Year by the nation's restaurant news publications, so congratulations, Bob, for your tremendous success in keeping our concepts at the leading edge of culinary excellence in casual dining.

Now we're going to go over the highlights for fiscal 2002 that ended on Tuesday, December 31st.

As we previously disclosed in our press release on January the 9th, our total revenues for the quarter were 174.4 million, up17% compared to the same quarter last year.

Our operating income increased 21% to 18.8 million.

Our operating margin increased 30 basis points to10.8%.

Our net income increased 20% to13.2 million and our diluted net income per-share increased 18% to 26 cents.

We successfully opened five new restaurants during the fourth quarter, which was a first for us, compared to three restaurant openings during the same quarter last year.

Accordingly, we did incur 3.4 million of preopening costs during the quarter which was about 1.2 million more than the same quarter last year.

That 1.2 million of additional preopening costs impacted our operating margin comparison for the quarter by about 50 basis points and our diluted earnings per-share comparison by a little over one cent.

Additionally, the five new restaurants in the fourth quarter impacted our operating margins somewhat as it takes about 90days on average for our new restaurants to achieve their targeted operating margin run rates and Mike Dixon will cover that later in our call today.

I had some analysis on our total restaurant for the fourth quarter.

Our total restaurant sales increased about 20% to 161 and-a-half million dollars during the fourth quarter.

Now, that 20% increase consists of a 21.7% increase in restaurant operating weeks partially offset by a 1.2%decrease in average restaurant sales per week.

Our comparable restaurant sales were about three tenths of a percent for the fourth quarter which does represent our 42nd consecutive quarter for positive comparisons on that measure since our IPO back in September of 19 movement we did note in our press release on January the 9th that restaurant sales comparisons for the fourth quarter were impacted by more severe winter weather, this year compared to the same quarter last year which impacted our ability to utilize our outdoor patio seating as much as we were able to last year.

For example, we have got about one fourth of our restaurants located in California and of those restaurants, 24% of our total available seats are located on outdoor patios and that is a lot of outdoor seating capacity.

In California was one of the markets where weather comparisons were unfavorable quarter-over-quarter.

We also have large patio seating available in several other markets, Kansas City, Baltimore and Atlanta are some good examples where the colder weather comparison caused us to close our patios much earlier this year than last year.

Actually, about 17% of our total company-wide seats are located on patios and we believe that is one of the highest percentages in casual dining.

We estimate our ability to use our outdoor seating our comparable sales for the quarter by about one full percentage point.

We were pleased to note that in today's press release that for the first five weeks of the current fiscal year, fiscal year 2003, our comparable sales and our average sales per week were up about 2% and 1% respectively compared to the same period last year.

Both five-week periods include Super Bowl week so it is an apples to apples comparison.

Now, while this five-week sales trend is not necessarily indicative of the results to be achieved for the full quarter, they're encouraging, particularly given the difficult operating environment and our trends for the fourth quarter.

With respect to comparable sales comparisons at the Cheesecake Factory, notwithstanding weather or other factors outside of our control, we only expect to achieve increases in comp. sales that are roughly approximately equal to our annualized affective menu price increases that we take in our established restaurants which have averaged about one-to-one and a half percent for the past couple of years of our industry leading sales productivity, we are as some say kind of a victim of our own success when it comes to the comp. sales metric.

Our average annual sales per square foot is about$1000 and is already more than twice the average for the casual dining segment so it is very difficult to surpass that level of high productivity.

With the concept is busy and is productive as it always is, particularly during peak meal periods we just don't have that much excess capacity to grow significant amounts of sales in our established restaurants.

So the vast majority of our planned growth in total restaurant sales for the next few years will clearly come from new restaurant openings, not comp. sales increases in the increase model.

This did we are in the process of rolling out an approximate 1% affective price increase to all of our restaurants in connection with our current menu change.

I think most of our investors know we do change and update our menus twice a year usually in January and February and July and August.

Our current rollout started in January and should be completed by the middle of February.

That is our current menu change in price increase.

It takes about 45 days or so to execute a company-wide menu change given the acquired restaurant training process for our new menu items at our company.

Now, shifting over to the average restaurant sales per week metric, we experienced and continue to experience huge grand opening sales weeks for many of our new restaurants that we've opened during the past several months that aren't in the comp. base yet.

This is a relatively new phenomenon for the Cheesecake Factory and we believe it's directly attributable to the national brand identity that we're creating, again , some would say we are a victim of our success on this metric as well.

Here is the most resent example.

Last December we opened in chart, North Carolina in the middle of the ice storm and still achieved record sales for an opening week of $318,000.

Now, that annualized to over 16 million of sales which is a wonderful number but in reality, it's not sustainable on a normalized run rate basis.

We'll be very, very happy if sales in Charlotte eventually annualize in the 11 to $12 million range right at the thousand dollars per square foot average that we enjoy.

This is the primary factor behind the recent divergence in the comparisons for the comp. sales metric and the average weekly sales metric.

While our two new Grand Lux Cafe (ph) locations are annualizing at lower sales levels than the (inaudible).

If you exclude them from the average sales per week comparison for the fourth quarter ,it would only have benefited that comparison by a couple of tenths of a percent which is certainly less of a benefit than we have seen over the past couple of quarters and which we believe is very favorable as their sales volumes continue to build.

Here is some updates on sales trends for some of our individual restaurants during the fourth quarter.

We enjoyed above average sales increases during the quarter for several of our restaurants and I'm just going to go down the list here.

Columbus, Ohio, Providence, Rhode Island, San Francisco, an incredible restaurant that exceeded 16 million in sales, I think.

We added almost 2 million of incremental sales in that restaurant last year in spite of the other comparison in the fourth quarter.

California, Las Vegas market has been strong.

Most of our restaurants in south Florida have been strong and our locations in the Chicago market.

As you would expect, sales comparisons were softest in those markets where we had substantial outdoor patio seating that was not available on a quarter-over-quarter basis including several of our California restaurants and restaurants with large patios that we had to close early in Kansas City and Baltimore and Atlanta.

Moving to our Grand Lux cafe concept, sales continued to gradually build at both new locations, the one here in Las Vegas that we opened a year ago in November and the third GRL cafe we opened in downtown Chicago last July.

We're very, very encouraged with results with goodwill that is still in the in can you basing stage for the concept.

For those of you that have not been to good will, it's an upscale casual dining concept that we often described as being kind of kicked up a notch with an average check running of about 1640, 1650 per person and that is just a little bit higher than average check which runs about $15 and 78 cents.

Sales at both newspaper Grand Lux cafe locations is currently analyzing between eight and 9 million, gradually building.

Most restaurant owners would say it is an incredible accomplishment for any new restaurant concept to open up with annualized sales volume that strong without any advertising support.

We do plan to continue to find tune Grand Lux cafe during the upcoming year and we do have plans for a fourth location in 2004 and we're evaluating several different opportunities for locations for that particular restaurant.

Sales for our first Grand Lux cafe which is located in the venetian property in Las Vegas exceeded$19 million last year and we believe we have a strong opportunity to reach the $20 million mark this year so there certainly is a lot of consumer interest in Grand Lux and we continue to be very excited about the concepts potential to to become a second growth vehicle for us in the upscale casual dining segment.

Also forks all of the foodies on our call today, the 2003 Zaget (ph) guide from Las Vegas was just released and Grand Lux cafe was rated a score of 24 for food.

Zaget score of 20 to 25 represents very good to excellent food quality and just to give you a point of reference, Spogo is rated 25 and Grand Lux is rated 24.

So food quality is clearly the foundation of all great restaurant concepts in Grand Lux is really knocking the cover off the balance in that reinvestigate.

Moving to our restaurant expansion plan, we achieved our stated expansion goal as I mentioned earlier to open as many as 12 new restaurants in 2002 and as we previously noted, seven of those 12 are open during a 14 week period.

We currently plan to open as many as 14full-service Cheesecake Factory restaurants during2003, which all potential locations have been identified.

We opened our first restaurant this year on January 27th in Edison, New Jersey at the mall and once again we enjoyed another strong opening, sales were well in excess of $300,000 for a -- our first full week of operations.

We plan to open one more restaurant during the first quarter in little ton, Colorado in Park Meadows on the week of February ten.

We have two more restaurants planned for second quarter openings, five are planned to third quarter openings appeared five more are planned for fourth quarter openings which will bring the full year total to 14.

Consistent with our comments during the past several conference calls, our 2003openings will be back ended as in the past years.

We are currently expecting the full year increase in total restaurant operating week's for 2003 to be approximately 22% so that will be up slightly compared to the approximate 20% increase in restaurant operating weeks that we achieved during2002 just ended.

And again, while we're on the subject a new restaurant development we would like to remind our investors that our restaurant development model is very different than the traditional cookie cutter chain restaurant development model, pad sites or strip center locations or -- are more easily acquire.

The design and construction processes are very simplified by having more standardized layouts and the restaurant concepts themselves have more control over the overall development process.

Our development process is more similar to that of an upscale retail chain.

We currently lease all of our restaurant locations, many of which are in newly constructed or to be constructed retail developments such as malls, entertainment centers, city skate centers and as a result we rely heavily on our landlords to deliver spaces to us in a timely manner according to their time frames that they originally committed to so we can build them out.

Our locations are upscale, highly customized which helps to create the non-chain image we have with consumers and we think that gives us a significant competitive advantage but it also creates design construction, some permitting challenges.

But once we get the spaces from our landlords and get our permits, our construction and preopening processes are typically very predictable and consistent, usually taking five to six months on average.

So, as a result of factors outside of our control, sometimes our opening schedule cannot be as even or as predictable by quarter and it's not uncommon at all for those investors that have followed us over the past several years to have planned openings move a few weeks or even a month.

On the other hand, we always pick great locations.

When we got our restaurants open, they have never been disappointing.

We're batting 1000 for successful restaurants so far and there are not many chain restaurant operators that have the track record that we have in terms of opening successful restaurants.

Moving to our bakery operations, our bakery sales to wholesalers, retailers and foodservice distributors which we call third-party or outside bakery sales were 12.9 million for the fourth quarter compared to our record setting14.4 million for the same quarter last year.

We noted in our revenue release of January the ninth that sales to our warehouse club customers were a little less than we were expecting for the fourth quarter due principally to the soft holiday sales environment in general.

Sales to wear house club customers comprised about 65% of our total bakery sales for the fourth quarter and then ended up about 56% of our full year bakery sales so that clearly is an important distribution channel for outside bakery products.

You may have seen our bakery's press release today that the significant increase in our bakery's relationship with Cisco corporation, which is North America's largest foodservice distributor.

While it's too early to speculate as to incremental annual sales that are expanded relationship with Cisco might generate, there is no question that Cisco sells several millions of dollars of baked desserts to their customers each year through their distribution locations and we will have a strong opportunity to capture a significant portion of those sales under the dream factory and Cisco supreme labels starting in the prink spring of this year.

Our bakery operation's goal for 2003 is to increase outside bakery sales by about five to 10%.

The majority of this targeted sales increase, if achieved, should occur during the second half of the year.

It will most likely be driven by our dream factory product line through Cisco and other distribution channels.

Accordingly, we do expect that bakery sales for the first half of 2003 will be comparatively less than the same period last year, due in part, to the comparison against high initial sales volumes last year that resulted from the initial filling of the inventory pipeline for large warehouse club customers and large new retail customer.

If you recall, during the first half of last year our bakery sales were up 65%scared to the first half of 2001.

Largely as a result of these initial pipeline fills.

And again, while we remain optimistic with respect to increased bakery sales, we prefer to try to be conservative and always caution our investors that bakery sales are less predictable than restaurant sales.

Our time to predict the shipments and contribution margins is difficult due to the nature of that business and the purchasing plans of our larger customers which may fluctuate from quarter-to-quarter.

In our view, the bakery's most impactful role to the cheesecake business is a high quality producer of deserts for sale in our own restaurants which collectively should sale well over 100 million deserts made in our central bakery production facilities this coming here.

Our capacity utilization in the bakery production facility is really a function of three factors, the mix of products that we're producing, the volume of each product that we're making and how efficiently we're producing each product.

We didadd a little more capacity to our existing bakery production facility last year so we're in excellent shape for our 2003 production operations.

We currently expect the capacity utilization of our bakery production facility given mix and efficiencies and the extra capacity that we added last year to approach about 80% for fiscal 2003.

Assuming that we do achieve our goal to increase outside bakery sales by five to 10%.

So we're in excellent shape in from a capacity perspective to achieve our goals.

We continue to evaluate various alternatives to add additional production capacity in the future and we'll keep you advised as we move close to completing our evaluation during the next couple of months.

So that covers our top line performance for the fourth quarter and now I would like to introduce Mike Dixon, our vp of finance.

He's going to introduce our operating margins for the fourth quarter with you.

Thanks, Gerry.

First, starting at the financial page, cost of restaurant, food, beverages and supplies decreased to 23.4% of restaurant sales for the fourth quarter just ended compared to 25.1% for the same quarter last year and 23.4% for the sequential quarter.

We continue to experience comparatively lower cost for most of the food commodities in our restaurant, favorable, supply conditions in general for most of our commodities and our increase in economy to scale scanned purchasing power.

Because our menu is so diverse we have many different food commodities in our operation but one-third of our total vant cost of sales consist of the fresh commodities such as produce, poultry and dairy that is not contracted for periods longer than a few weeks or a month, but we have had some recent success of attracting our high volumes such as strawberries and we work in this area.

In the absence of weather or other marketing conditions outside of our control, we currently expect our restaurant cost of sales for 2003 to remain about the safely as we experienced in 2002.

Assuming current supply and demand conditions continue for the commodity that said we use, particularly the fresh produce, poultry and dairy.

We have taken steps wherever possible to extend our existing contracts for item such as cheeses, oil, beef, beverages, sugar, coffee, seafood, paper, bread and most grocery items if not for all of 2003 at roughly the same cost we experienced during 2002.

Bakery cost percentage of outside bakery sales for the fourth quarter were 45%.

Which was slightly lower than the 47.1% for the same quarter last year and slightly higher than the 43.4% reported for the sequential quarter.

This cost percentage is comparatively lower for the fourth quarter, most of this decrease is offset by increase cost for bakery selling and distribution expenses that are rolled up in the other operating expense line item in our operating items.

Please note that this cost percentage is a relatively small component of our margin structure.

Since the net purchase cost for most of our key bakery commodities remain stable during 2002 and is expected to remain fiscal 2003, this cost percentage will fluctuate preliminary as a result of the products shipped for any given quarter.

We produce over hundred different products and some are higher contribution margins depending on the distribution channel.

Some distribution channels such as the warehouse club channel have higher selling and distribution costs in other channels.

With respect to our outlook for bakery commodities cost our currently annual contract for cream cheese expire this month and entered into new agreements that call for lower cost per pound than we paid in the past.

We expect to use nine to10 million pounds of cream cheese in 2003 which is the largest commodity in our bakery all raisings.

Moving back up to consolidated statement of operations, total labor cost for combined restaurant and bakery all raisings were 30.5% of total revenues for the fourth quarter which was slightly higher than the 29.9% number reported for the same quarter last year but slightly lower than the 31% reported in the sequential quarter.

Labor in our restaurant operations continues to benefit from slightly lower staff turn overrates, slightly overtime hours and slightly lower pressure on our average hourly wage rates except California where the wage went up 50 cents at the beginning of 2002and where we have 25% of our restaurants.

There is no minimum wage increase currently schedule for California this year.

Our increase labor expense is a percent of revenues for the fourth quarter was principal due to the exact impact of opening five restaurants in the quarter which was the first for our business.

Previously noted, it takes about 90 days for our restaurants to achieve their targeted operating margins with labor costs being the most challenging to bring in line.

In addition, initial sales for most of our recent opening have been so strong as Gerry already we're making sure we were properly staffing the openings to deliver the best possible service to our guests.

The impact of higher labor cost associated with new restaurants accounted for most of the 60 basis point increase compared to the same quarter last year.

Over labor as a results impacted by higher fringe benefit, group medical insurance and lower bakery sales.

We expected our operating labor cost to fiscal 2003wouldacouldashoulda tract for resent trends there.

Will be some pressure in labor cost in the upcoming third and fourth quarters due to the large number of planned openings.

Other operating expenses were 23.4% of total revenues for the fourth quarter which was up compared to 22.4%reported for the same quarter last year but down from the 24.1% sequential quarter.

This increase over the prior year is attributable to the higher insurance cost, work comp., property, liability coverage and a little bit of slightly negative leverage on some of the fiction cost of the bakery sale.

Insurance cost impact represented about 35basis points likely continue going forward.

As you know and as we have talked about previously, the insurance markets have hire for all businesses for all coverage category.

G&A expenses for the fourth quarter were 4.7% for total revenues for the quarter, the same as the sequential quarter.

This compares favorably versus 5.2% for the same quarter last year n terms of absolute dollars, R&D will fluctuate depending on the restaurant managers that are in our training program and the number of trained managers that we are bank for future restaurant openings.

Our G&A expense consists two of major components, the cost for corporate bakery and field supervision support team which should grow at a lesser rate than revenues and restaurant recruiting and management program which grows at a rate closer to unit growth.

Also, in order to keep up with the growth we have leased some additional space for expanded management training and culinary R&D as well as for the corporate team that will add some dollars to the G&A budget for 2003 that we did not have during 2002.

Our current expectations for total G&A expenses as a percent have is in the range of 5% depending on the (inaudible) achieved.

Operation expense was 3.5% of total revenues for the fourth quarter compared to 3.3% for the same quarter last year and 3.6% in the sequential quarter.

Current expectation for total operating expense is revenues going forward in 2003 remains in the 3.5range based on expected growth and investments plans.

Actual opening costs in the fourth quarter were 3.4 million compared to 2.2 million for the same quarter last year.

During the quarter just ended, we opened 53 last year.

Preopening costs in both quarters for other openings in progress.

We usually incur most of our preopening cost in the two months before and the months of a restaurant's opening.

As most of our investors know we are acquired by accepted by the accounting profession back in 1998 to expense restaurant preopening costs in the year they're incurred.

The as a result of our and their associated preopening costs will have an impact on our quarterly earnings comparison.

The preopening cost for our upscale highly customized and operational complex restaurants is higher than most in terms of absolute dollars but it is inline with other upscale concepts relative to the scopes of operation.

Analysts and investors should factor it into their model action for 14new restaurant openings during fiscal 2003 with planned openings by quarter to be two to five and five and also allow for the normal 90 day period for new restaurant op rating margins to reach their targeted run rate melds.

That covers it for the fourth quarter.

Thanks for lower food cost and G&A expense leverage that just set the pushes and pulls our operating margin still expanded slightly during the fourth quarter.

Please refer to the full discussion of risks and uncertainties associated with forward-looking statements including in the company's filings with the SEC.

Affected tax rate for fiscal year 2002 was 35.7perses.

Same rate 35.7% as our estimated tax rate for fiscal 2003 and we'll adjust it as move through the year.

Our position and flexibility remain strong.

As of December31st, our cash and marketable security on hand were approximately $114 million.

Now, we believe that maintaining a liquidity position in this range makes good business sense in this operating environment both we and our investors can have continued confidence in our ability to execute our growth plan with maximum financial flexibility knowing we have the capital in place to do so there.

May be a small financial cost associated with the capital resources that we currently carry but in our view this small cost is offset by the benefits that reduce risk and flexibility in terms of our ability to execute our growth plan.

Our cash flow from operations for fiscal 2002 was$93 million and our cash accrued cap section for2002 was $86 million which includes construction of progress for 2003 openings.

Currently estimate our cash cap-ex for fiscal 2003 to be in the range of $90 million.

Based on current expansion plans and operating environment, we expect to be able to finance our cap-ex requirements for fiscal 2003through expected operating cash flow agreed upon planned loader construction contributions and our cash on hand.

We have no funded debt and currently do not anticipate a need for funded debtor any other external financing for fiscal 2003does other than landlord contributions.

We keep the $25 million credit facility in place and support by standard of letter of credit for our insurance arrangements.

We have a share repurchase authorization from Board of Directors to buy back up to 1,687,500 shares in the open market during fiscal 2002 the company bought back approximately 197,000 shares at a total cost of about $7.1 million.

We have approximately 640,000 shares remaining in our current repurchase authorization.

Now, Gerry, back to you for wrap-up.

Thanks a lot, Mike.

Just to wrap up our business and financial review, then we'll take some questions.

We strongly review the financial performance for the fourth quarter in fiscal year-ended December 31st was very strong.

Continues our positive momentum despite the difficult operating environment.

Our restaurants continue to enjoy one of the most consistently strong sales trends in the industry and with room we believe for at least 200 restaurants domestically, we believe that we have a sustainable period of profitable growth ahead of us for several years to come.

That wraps up our business and financial review for the fourth quarter and at this time we'll be happy to answer a few questions and if we don't have time to get to your question on this call, at least feel free to call me at our corporate office and we'll try to help you as much as we can.

So, operator, we're ready for some questions.

At this time, I would like to remind everyone, in order to ask a question, please press star than the number one on your telephone keypad.

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from Dennis Forst.

Gerry, good afternoon.

Hi, Dennis.

I know you always talk about usable square footage and your sales per square foot.

Do you have the number of -- for the end of the year '02,what the square footage was and then how much square footage you're going to actually add this year with 14 restaurants?

Yes.

At the end of 2002 we had an estimated1,718,799 productive square feet, and if we're opening 14 -- as many as 14 restaurants, we would expect to add based on the dimensions that we're talking about approximately 164,000 square feet which would bring us up to about 882,000 by the end of 2003, assuming that we open the 14restaurants.

So that would represent an increase of approximately 23 percent.

Right.

I have one other question that had to do with the cash balance.

With that much cash, would it make sense, if the opportunity would avail itself to find properties that you could own in fee and then not have to pay a lease cost and return not earn a 1% return on the cash these days?

I think the answer to your question, I'll answer it from a financial point of view and then David will answer it from a business point of view, but I think the answer is, where it makes sense and where we have the opportunity to do one or the other, we always analyze the financial impact of each alternative to maximize the runt on investment that we're making.

As it turns out for fiscal 2003, I I believe there are at least three locations we have accepted for great business sites but they do not have any contributions available.

We had two locations in fiscal 2002 that were like that so having this much cash on hand gives us maximum flexibility, as Mike mentioned in his comments, to be able to pick the very best sites, to finance them through our own cash, if necessary, of course we always prefer to use landlord financing but you're absolutely right.

If we put our own money in then we do get a trade off in terms of minimum versus percentage, and we do run the numbers to see what is most advantageous for us.

David, do you want to comment on that?

No, I think that is right, Gerry.

Most of the property we go for we could not afford to buy because we still are -- we like those great urban sites in the city.

But we analyze each site and where the opportunity is there we try to make the best decision.

Okay, thanks.

Thanks, Dennis.

Your next question comes from Michael Novak (ph).

Hello, Mike.

Hi, how are you?

Hanging in there.

A question for you on the G&A line.

It grew an in absolute dollars, 13 and a half percent this year, a little over 8% the year before.

Is there any reason to believe that rate should accelerate substantially from those types of growth rates to the 20% level or should we still see something around ten plus or minus three percentage points?

Well, I think assuming a steady state run rate type of operation, I think you would expect to see that percentage rate gradually stabilize, the percentage rate in growth stabilize as time went on.

Mike mentioned in the financial section of the comments that we made today that for physical2003, we will have the impact of the additional lease space next door to us for the new culinary R&D and our management training center and additional office space that we will not have comparatively in the 2002 baseline.

So again, I think for planning purposes, the best that we --the best advice that we can give at this time is that we still try to target our total G&A expenses as a percentage of revenues to probably track around 5% during 2003 and maybe a little less, you know, ultimate revenue leverage that we achieve.

That is really the best guidance we can give.

Other than the new leased space, is there any other major additions to G&A?

Well, we have some staff additions, but those are really in connection with our growth.

As we mentioned in our comments, there is a portion of our G&A that is relatively fixed and then you have substantial portion that will be variable at the rate of our restaurant growth.

That is where we put our management recruiting and training program which is a substantial expense for us to keep up our growth rate.

You have a field supervision organization which will grow at a rate somewhere probably between corporate staff's rate of growth and the restaurant growth rate.

So you've got two or three pieces there.

It will fluctuate from quarter-to-quarter, depending in part on the number of restaurant management trainees that we have in the pipeline and depending on whether restaurant openings get delayed or not.

If we're able to get our new restaurant management teams through our training programs and get them right to the restaurant openings 90 days before, then we're in pretty good shape.

But if there is any delay in that schedule, then we carry those in G&A and we're kind of banking those managers so we have them ready when we're ready to start our preopening activities at the restaurant.

It is really that activity that will cause a little variables in our G&A from quarter-to-quarter.

That is understandable.

Just to understand the impact that new lease space is costing you on an annualized basis?

I think it's probably around $1 million.

$1 million.

Thank you very much.

Okay.

Your next question comes from Alfred Lockwood (ph).

Hi, guys.

Hi, Al, how are you?

Pretty good.

What kind of changes in the restaurant sales mix are you noticing in the current environment, if any?

We have not noticed any change in the average ticket.

Our percentage on food, dessert and alcohol is relatively steady.

It has been vested over the eight years that I have been with the company so we have not really seen anything materially shifting any way.

David, anything you're hearing anecdotally?

No.

It's really the same.

We're really on the menu now and have a dozen new items and we're just moving along as usual.

Gerry, can I get an update on preopening costs for the restaurant?

The direct preopening cost for an established company restaurant for a company restaurant in an established market averages about $750,000.

They might be a little bit more, they might be a little less, depending on the number of factors including how many restaurants we have in the market, how difficult it is to recruit and train the staff, our travel cost incurred for our training teams to come in and be at the location for 30 to 45 days.

But on average, the direct costs run about 750,000 per restaurant.

Next year one of our 14 restaurants will be in Honolulu.

Obviously those preopening costs are going to run a little bit higher than average, but that is the only one next year that might depart from the average.

Again, the other 13, some will be more, some will be a little less, but we expect them to average around750.

Lastly, planning for an expansion (inaudible)(inaudible) can you provide any more I guess of an outline on how you attempt to do that?

No.

We just haven't finished our evaluation yet.

We have a meeting with our bakery team herein a few weeks and they have done a lot of work over the past six months and looking at different alternatives and as soon as we're done then we can make our management decisions and we'll advise you, but I think it's highly unlikely that you'll see any additional capacity available during 2003.

As I mentioned in our comments when we opened up the call and we really don't need any additional capacity at all this year to achieve our growth rates.

I think we're in excellent shape there.

We still need to complete our evaluation and I think we're getting close to being able to do that.

Okay.

Thanks a lot, guys.

Okay, Al.

Your next question comes from Hil Davis.

Hi, good afternoon.

Hi, Hil, how are you?

I'm well, thank you.

I was just curious, we made some calls around some of the units and we kind of got this -- some decent comp. numbers kind inform line with what you all said for the first five weeks and it was kind of a general consensus that the weekends were really driving the growth there.

Is that something that you all see there as well and is it that customers are just kind of learning to use you all in the off peak times on the weekends and how could you maybe drive growth a little more in the weekdays?

I can tell you after 911 we noticed that our weekend business and again that was, what, over a year ago, a year and several months ago, we noticed that after 911, you know, our weekday business, Monday through Thursday did I understand of got a little softer but our weekend seemed to be a little stronger.

I don't think that has changed much as of late.

I think our weekends have always been strong.

As far as trying to drive consumers to using us during a certain period of time, unless they kind of find away to do that themselves, we don't have any promises in place really to try to guide the consumer as to how to use us or what to buy from us.

I think that is very deep, deeply imbedded int he philosophy of that we open our doors, we offer a menu, guests come in and find their favorites, they learn how to use us.

And then the hours to come.

David, did you want to amplify?

No, the whole goal is to stretch out the lunch and dinner periods and get them to come late and come early to avoid the waits and depending on the restaurant and what kind of area it's in, that is just what did happens.

But again, to do that thousand dollars a conveyor foot and to be --dollars a square foot and to be in the 250, 260,270,000 a week, we have very busy weekdays.

However, weekends are always busier than weekdays and it has been that ever since we started the restaurant 25 years ago.

And one final question if you don't mind.

I was just wondering when this you look at the patio close you're for this year, is that kind of a normal run rate for you?

You won't see a big benefit in Q4 for next year.

I know you can't predict weather.

This is a historical average run rate where patios were open and such things as that?

I think it is fare to say that the winter before last or at least the fall, the holiday season before the one we just got through was one of the mildest winters or falls on report.

I think if we all -- I think what we just went through is more normal so I think that is a fair statement although none of us can predict the weather.

Thank you very much.

Okay, Hil.

Your next question comes from John Izencoe (ph).

Hi, thanks.

Talking about the Cisco agreement, can you just give us how much you are currently selling through Cisco and how many accounts of there are existing for 400,000 plus accounts that they're making the Cheesecake Factory products available to?

You know, our relationship with Cisco is really just starting.

We have had some products over the years with Cisco, but in terms of -- some Dreamfactory and a few of their distribution centers, but really this is a major, major expansion opportunity with Cisco.

And is it fair to assume you might be trading some gross margin for increased revenue opportunity as we think about this business going forward?

You know, actually I think that there may be a slight trade in the way that we present our bakery cost of sales.

You may see a higher cost in sales or you may see a slightly -- I'm sorry, you may see a lower cost of sales.

You may see a trade in higher distribution and selling expenses which are necessary to broker products through the Cisco network and you'll see that in the other operating expense line but I think after you net the two, John, the net bottom line contribution of the Dreamfactory line, I think really plays to the power ally of our production capabilities and our margins.

So on a bottom line contribution margin basis, I think it's going to be at least as attractive if not a little bit more attractive than some of our other product lines.

Again, these are relatively simple cakes for us to produce and they really played to the strengths of our production capabilities.

Great, thank you.

Okay, John.

Your next question comes from Maurice Stayan (ph).

Hello, Maurice.

I guess we lost him, operator can we take another call, please.

Your next question comes from Greg Schroeder.

A couple of questions but first could I get the number for cap-ex?

I missed that.

We got that is approximately 86 million that includes both cash cap-ex and the accrued cap-ex that we're required to property at year-end.

For some of the newer restaurants that have opened stronger than sustainable volumes then kind of fall into more realistic volumes?

How long does that experience take?

Is it a couple of months?

Is it six months?

You know, I don't think there is a rule of thumb that we can come up with now.

We have seen a range anywhere from six months to 12 months as of late.

This is a new phenomenon for Cheesecake Factory.

It is not like we have six or 700restaurants that we can track behaviors an come up with an average.

Cheesecake Factory restaurants.

We have only got 60 cheesecake factories and they all behave a little bit different of differently so it is extremely hard to come up with a rule of thumb as to what that honeymoon period may or may not be for average on restaurants.

And then as you accelerate the expansion rate in '02 and next year in '03, could you talk a little bit about the ability to higher and train managers and staff, you know, at a faster rate in the future?

Well, we think that is one of our strengths.

We put a lot into our infrastructure in these last year's because of the complexity of our operation.

We need excellent managers, excellent training, excellent development and we have that.

So we --we have our teams set up.

We have our own recruiting department.

We have an excellent training department, and we have trainers throughout the country.

So really, that is moving along nicely.

Our pay is tremendous for our general managers and executive kitchen managers.

You know, they get the BMW, they get stock options, they have a car, they have a great salary bonus so we're in great shape and that is really not a problem.

Again, it's getting them out there.

It's operating with quality and consistency, but we are ready for, you know, our growth rate and we've known what it has been for years.

All the pieces are in place.

It's just a matter of adding whatever it is that particular year if you need an extra trainer or you need an extra area supervisor or so on.

One of the things if I could just speak antecdotally for a moment when we had about ten restaurants and when I came to Cheesecake Factory, I was literally blown away by the infrastructure that the company had put in place for management recruiting and training.

Absolutely first class, professional, as good as it ever gets.

The company has been able to build and improve on that over the years.

Last year we successfully recruited, I think, over, what, 230 or so managers through our system.

This year our goal was to recruit almost 300 managers.

The infrastructure is clearly in place.

We get over, what, 3000applications per month for management positions and the challenge that we have is to sort through all of the applications an run all the trainees through our very detailed assessment processes and interview processes.

We assess every candidate from a mental aptitude and a psychological aptitude like most large restaurant chains do.

And most of our infrastructure is in place.

Not easy to do but we feel highly confident that is one of our strengths as David mentioned.

Thank you for that.

We're going to take a couple of more questions then we'll have -- be happy to answer your calls off-line.

Okay.

Your next question comes from Bryan Elliott.

Good afternoon.

Just following up on that question a little bit.

You opened, you know, five stores this quarter.

I think you said kind of every other week you had an opening here recently.

Sort of looking longer term, what are your plans and thoughts on sort of what the annual growth rate could be, you know, a few years out?

Opening as many, you know, as 20 to 25 stores a year something that you're planning for by mid decadeand comfortable with both from a real estate as well as from a recruitment standpoint?

Yes, we are.

We're -- we have planned that out.

We understand what we need.

Hopefully by --by '05 we'll be able to open more grand lux as well and all of that is within our plan and we will have the capabilities to do that and we believe the real estate is out there as we've talked about.

We think there's as many as 200Cheesecake Factories as they are today with the ranges we have and there is probably more, depending on what size we eventually decide to open.

Do you have anything to add, Gerry?

I would just add really as part of our G&A infrastructure today, we already have little compartments of grand lux cafe in place.

We have a small field supervision infrastructure, we have a culinary and a training infrastructure.

When it comes time to put the pedal to the metal on grand lux, we have the basic infrastructure in place.

All we have to do is make sure we have the design and construction resources available.

Site availability is not an issue at all.

In fact, David, we have many, many inquiries of into with respect to grand lux cafe.

Landlords have offered us the same tenant allowances as they did Cheesecake Factory to bring grand lux in.

I think the future is bright to keep up our growth rate.

It's not going to be easy but the infrastructure is in place and the financial resources are clearly in place and they're all leverageable, I think.

Thank you.

Okay, thank you, Bryan.

We'll take one more question on the line here and then we'll wrap up our call.

Okay.

Your last question comes from Maurice Stan.

Hello, Maurice?

Hello.

I'm sorry, operator, we can't hear him.

Can we take another call, please?

Yes, sir, your next call comes from Matt Gifrisko (ph).

Matt, hello?

Can you hear me?

Yes, we can hear you, can you hear us.

Yes, I can hear you.

You -- can you give us some more color around the properties you were saying are available and seem plentiful.

How far out do you go in your pipeline?

You mentioned a little bit like the preopening cost being two months free the opening of the store after the opening.

However in advance do you have the to have the property locked up for it to be - to break ground and start building your store on there and also I guess how far right now in your-- have you bought in advance into '04 into first quarter of '05, how do you look at that?

We look at it also following, just to kind of start from the end and back up.

It takes us about90 days when we begin our operational preopening activities to when we can get open, although most of those activities will occur within the 30 days from the opening.

So it takes that period of time for preopening activities to occur and then as I mentioned in our comments, once we get the space from the landlord, it takes us on average five to six months to billed out the space, get our preopening activities done and be ready for an opening.

So as long as we have the spaces from our landlords then it takes us five or six months to get them knocked out, to get them opened and ready to go.

So we mentioned that of the 14locations that we would like to open in 2003,every one of those sites has been identified.

One is open, one will open in February.

We laid out our proposed opening schedule.

I think we're highly confident unless there is some construction delay or weather delay or something that is outside of our control that we'll be able to get our 14 units open this year.

There is enough time in the pipeline to be able to execute that.

Looking in 2004, we've already identified and signed several letters of intent for potential 2004 locations.

David, did you want to elaborate on that?

We like to be 12 to 18 months out in the whole process so we have well over half of our sites identified for '04.

We already have maybe seven sites that we have identified for '05 depending on either somebody's lease is up or somebody's building a new project.

So it moves like that.

It just doesn't go in order, you know.

You seethe sites, you see when they ever happening.

Again, 12 to 18 months out.

Landlords will come, layout all of their sites, tell what you say is coming up or what they will build on for us and want to know if we're interested and we'll earmark that for whenever they're ready.

That is really the process.

So our comfort level is to - really to be done within 12 months and then within that12 to 18 months, is we start putting our plan together.

Okay.

Have you walked away from any deals recently that perhaps because of the economic situation, the market or the demographic not as appealing as initially thought?

Well, I'm not exactly sure what you mean.

Walked away from any properties that you might have ear marked in a development?

No.

I think once we do it we know there is a high level of interest from the landlord.

They usually come to us.

Again, we know so many landlords now so we have great relationships certainly with all the major mall owners.

So, no, but, you know, there are times where there is anew landlord and at some point we may disagree on a clause and that clause is big enough where we might says no deal and just move on.

Then there is always some other site to take their place and every once in a while that site will come back a year or two later when there is new management, new ownership or whatever.

Even though you may not do it at one point, it doesn't mean you won'tget it down the line.

It's just the way it works.

And if you don't mind I just have one other question on the real estate side.

Okay.

In your modeling or in your assumptions for the outlook, what type of sensitivity should we expect you are supposed to on the real estate taxes going up or landlords passing that on if the retail environment doesn't pick up and they cannot get certain taxes paid by your retail leases?

All of our leases have limitations and caps as to the amount of annual increases that landlords can pass through to us related to property taxes, insurance and other common area maintenance items and they're typically again every lease is a little bit different but we negotiate very, very hard for annual protection in terms of percentage maximums usually tide to the CPI but it can vary depending on the deal how much of those passthroughs we're going to be able to pass on an annual basis.

I think we're protected as we possibly can on any dramatic pass throughs occurring in any given year.

Thank you.

Thank you and that will conclude our call today and if anybody else has any questions, please callus at our offices.

Thank you.

This concludes today's Cheesecake Factory conference call.

You may now disconnect.