Cheesecake Factory Inc (CAKE) 2003 Q1 法說會逐字稿

Good afternoon, my name is Jean, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the first quarter investor conference call.

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

After the speakers' 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 key pad.

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

Thank you.

Mr. Deitchle, you may begin your conference.

Thank you, operator.

And good afternoon, everybody.

I'm Gerry Deitchle, Chief Financial Officer of the Cheesecake Factory.

And welcome to our quarterly investor conference call which is also being broadcast live over the Internet.

Also with us on the call today is David Overton, our Chairman and Chief Executive Officer;

Mike Dixon, our VP of Finance; and Jane Vallaire, our Director of Investor Relations.

And before we get startled today I'd like to ask Jane to read our cautionary note regarding risk factors and forward-looking statements.

Jane, go ahead, please.

Thanks Gerry.

The company's comments during this conference call held today, April 21, 2003, include 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, 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 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 & Exchange Commission.

This conference call is the property of The Cheesecake Factory Incorporated.

Any retransmission, rebroadcast, or redistribution of this call without the express written consent of The Cheesecake Factory Incorporated is prohibited.

Gerry?

Thanks, Jane.

Our agenda for the call today will be as follows.

First we'll go over the press release that we issued today that covers The Cheesecake Factory's financial results for the first quarter of fiscal 2003 that ended on April the 1st, 2003.

And then after that we'll be happy to answer your questions as time allows.

We'd like to finish up the call in about 45 minutes.

So let's go ahead and get started.

I guess if we had to say three words that best described our performance for the first quarter, I think those three words would be severe winter weather without a doubt.

To summarize our financial results for the first quarter, our company achieved solid increases in net income and diluted income per share in spite of the severe winter weather that affected the majority of our restaurants at some point during February and March.

We believe that our restaurant operators did a commendable job of reacting to the sales volatility caused by the weather.

And we believe the sales we lost as a result of the weather conservatively impacted our diluted net income per share for the quarter by at least one penny per share without a doubt, and possibly more.

In response to the weather pressures on our restaurant sales during the quarter, our company made a very extra effort to effectively control the discretionary costs and expenses in our bakery operation and in our G&A support infrastructure.

And we believe that these efforts were very, very successful.

So in spite of the lousy weather The Cheesecake Factory achieved net income for the quarter of 12/6 million - up 20 percent -- and diluted net income per share of 25 cents - up 19 percent.

Very solid increases for both measurements.

I'm going to now give you color on our top line results for the quarter.

And then Mike Dixon will review our operating margin trends.

Our total revenues for the quarter were 172.9 million -- up 15 percent compared to the same quarter last year.

Our total restaurant sales increased about 20 percent during the quarter to 165.2 million.

Now, that 20 percent increase consisted of an approximate 23 percent increase in restaurant operating weeks which resulted from the openings of, I believe, about 13 restaurants during the trailing 12-month period.

And that was partially offset by an approximate 3 percent decrease in average restaurant sales per week which, in turn, was principally attributable to the severe winter weather.

For fiscal January, our sales comparisons were very nicely positive.

Then the severe weather started impacting our restaurant operations in February and March.

And like most restaurant and retail businesses, we were impacted by the President's Day blizzard on the East Coast.

We had ice storms in Texas.

We had heavy rains in California.

We had an unexpected blizzard in Colorado.

And when we sit back and count up all of the days that our restaurants were actually closed due to weather at some point during the quarter, we had about a dozen of our restaurants -- remember we only have 62 or so, and that dozen represents about 20 percent of the total restaurants that we have in our company -- that were each closed on average about two full days.

So that's about 22, 23 or 24 actual days of restaurant sales we lost due to weather during the quarter.

Also in mid-March, about six of our restaurants that are located in military and government markets, San Diego, San Antonio and our restaurants in the D.C. area experienced soft sales comparisons due to the national events of that time.

But the good news is sales for those restaurants are essentially back to our normal expectations.

The shift in Easter from the first quarter last year to the second quarter this year also impacted sales in our 10 Florida restaurants and a few of our Southern California locations to the extent that those areas are spring break destinations.

It's not so much the Easter holiday that impacts our sales.

It's really the accompanying spring breaks for the couple of weeks before and perhaps the week after that are tied to Easter that can have an impact on some of our restaurants, particularly the 10 that we have in Florida.

So altogether we estimate that total restaurant sales were impacted by 2.5 to 2.9 million during the quarter due to the unfavorable weather conditions and the shift in the spring break calendars affecting some of our restaurants associated with the Easter shift.

So as a direct result, our comparable restaurant sales increased by about 2 percent during the quarter.

Please note that our comparable restaurant sales would have been up slightly for the quarter in line with our recent historical trends had we not experienced the weather and the spring break shift.

And as we previously mentioned, we believe that the sales that we lost as a result of the weather conservatively impacted our diluted net income per share for the quarter by at least one penny and possibly more.

We also noted in our press release that it's very important to remember that unlike most national restaurant chain operations, The Cheesecake Factory does not rely on media advertising or discounting to drive short-term sales increases for upscale casual dining concepts.

Instead we've built our business over 25 years and we've built our reputation based on operational excellence -- excellence in food, service, ambience, what have you, that sustains our industry-leading sales productivity metrics over the long haul.

The Cheesecake Factory has always been an operating company first and foremost.

We've always focused on great restaurateuring and operational execution.

And I think we feel strongly this is the best long-term competitive strategy for our upscale concepts.

We are very fortunate to have some of the best restaurant operators in the industry led by our operating presidents Mike Berry for Cheesecake Factory, Peter D'Amelio for Grand Lux Café, and assisted by our regional vice presidents Jack ...

Are we sure someone's working on it?

Jane excuse me?

Ably assisted by our regional vice presidents and the rest of our outstanding restaurants operations team.

With respect to comparable sales comparisons at The Cheesecake Factory we always like to remind our investors that in the absence of weather or other national events or other factors outside of our control, we only expect to achieve increases in same-store sales that are roughly equal to our annualized effective menu price increases at our established restaurants.

And I think our investors know that our average annualized menu price increases have averaged about 1 percent to 1.5 percent for the past couple of years.

We did implement a approximate 1 percent effective menu price increase that was completed in mid February in all of our Cheesecake Factory restaurants right in the middle of this lousy weather.

And that was done in connection with our winter menu change.

And we will evaluate our menu pricing again as we always do with our upcoming summer menu change.

In light of our industry-leading sales productivity we are -- as many say -- a victim of our own success when it comes to the same-store sales metric compared to other restaurant chains.

Our average annual sales per square foot of $1,000 is already more than twice the average for the casual dining segment.

So it's very, very difficult for anyone -- even us -- to surpass that level of high productivity.

With The Cheesecake Factory concept as busy and productive as it is - particularly during peak meal periods -- we don't have much excess capacity to grow significant amounts of real sales in our established restaurants.

So the vast majority of our planned growth in total restaurant sales for the next couple of years will come from new restaurant openings, not same-store sales increases.

And we believe that our long term investors clearly understand that.

Moving to Grand Lux Cafe, our sales continued to build very nicely at all three of our Grand Lux Cafe restaurants during the quarter.

During the first quarter, sales averaged over $400,000 a week at our first Grand Lux Cafe located in the Venetian in Las Vegas, nicely comping up once again.

It just -- that restaurant just continues to amaze all of us how strong it is.

Also more importantly, average sales per week for our second Grand Lux Cafe that we opened up in Los Angeles a little over a year ago were actually up 10 percent during the quarter.

And sales for our third Grand Lux Café that we opened up in downtown Chicago just six or seven blocks away from our highest volume Cheesecake Factory at the John Hancock Center, sales at Grand Lux Café in Chicago are now annualizing over $10 million in sales.

And we haven't seen any cannibalization of our Cheesecake Factory restaurant at the John Hancock Center.

Se we're extremely pleased with that.

We continue to fine-tune our menu and our operating systems to get Grand Lux ready for future expansion, And I believe it is in our plans to open our next Grand Lux Cafe probably next year in 2004.

And of course we're all are very, very excited about the potential of Grand Lux Cafe to be a second growth vehicle for our company.

Moving to our restaurant expansion plan.

As we noted in the press release today, we are reiterating our goal to open as many as 14 new Cheesecake Factory restaurants during fiscal 2003.

Two very successful Cheesecake Factory restaurants were opened during the first quarter just ended -- one in Edison, New Jersey, which has been incredibly strong with its sales and also a great restaurant in Littleton, Colorado, at Park Meadows which represents our third restaurant in the Denver metro area.

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

During the second quarter two more restaurants are planned to open.

We have one planned for Nyak, New York, at the Palisades Center in mid-May and then we have another one in Overland Park, Kansas, hopefully opening in late June.

We do have five restaurants currently planned for openings during the latter half of the third quarter.

And we have five more restaurants currently planned for openings during the first half of the fourth quarter.

We are currently expecting the full-year increase in total restaurant operating weeks this year to be in the range of about 22 percent which, if we achieve that, would be up slightly compared to the approximate 20 percent increase in operating weeks that we achieved last year.

We always want to take a minute and remind our investors that due to the nature of the leased spaces that we select for our upscale restaurants and their highly customized layouts it's not easy to predict by quarter the exact timing of our restaurant openings and their associated pre-opening costs.

Our restaurant development model at the Cheesecake Factory and for Grand Lux Cafe is very different than the traditional cookie cutter chain restaurant development model where pad sites are more easily acquired, the design and construction processes are simplified by having more standardized layouts, and the restaurant companies have more absolute control over the overall development process.

Cheesecake Factory's restaurant development model, I think, 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, cityscape strip centers, and so-forth.

And as a result, we rely very, very heavily on our landlords to deliver our lease spaces to us in a timely manner according to their original commitments so that we can build out those spaces in a timely manner and get the restaurants open.

Our locations are upscale.

They're highly customized.

That helps to create the non-chain image that we enjoy with consumers and gives us a tremendous competitive advantage with consumers.

But that also creates on the other side some unique design and permitting challenges.

But once we get the spaces from landlords and get our building permits, our construction and pre-opening process are usually very consistent, usually taking five to six months to complete on average.

So the key is, is to get the spaces into our control so that we can get in and do our work.

And again as we mentioned earlier, we're highly confident that we'll be able to achieve our full-year goal of opening as many as 14 restaurants this year.

We always pick great locations.

Once we get our restaurants open, they've never been disappointing.

We're batting 1,000 for successful restaurants so far.

And there aren't that many restaurant operators that have the successful track record in development that we do.

We are very, very proud of that.

And we intend to keep that going.

Shifting over to bakery sales.

Our bakery sales to other food service operators, retailers and distributors were 7.7 million for the quarter, compared to a record-setting 12.6 million reported for the same quarter last year.

Now, we previously commented that bakery sales for the first half fiscal 2003 were expected to be less than the same period last year due to a very difficult comparison.

During the first half last year, our bakery sales were unusually high -- up 65 percent, compared to the first half of fiscal 2001 -- principally as a result of the initial inventory pipeline fills for new relationships with the largest warehouse club operator and a national retailer.

For the upcoming second quarter, we're up against a significant 77 percent increase in bakery sales due to these factors.

Starting with the second quarter, we currently expect our absolute bakery sales dollars to sequentially increase to the 10 million range for the second quarter primarily driven by our expanded relationship with Sysco Corporation that we announced a couple of months ago in February.

The initial sales of the Dream Factory product line and products that we make for the Sysco Supreme product line are in line with our expectations.

We're very excited about the ramp-up of our business there.

And we do expect our sales to Sysco to gradually ramp up during the remainder of the year.

Given the operating environment and the difficult sales comparisons, our bakery operations goal for 2003 still remains the same, to achieve a slight increase in total bakery sales for the full year.

The majority of this sales increase, if achieved, will need to occur during the second half of the year, and will most likely be driven by the Dream Factory product line and the other products that we're making with Sysco.

And to the extent we can get Dream Factory in some additional channels we are working on, that will also be a potential benefit for us.

While we remain optimistic with respect to increased bakery sales, we always want to remind our investors that bakery sales are by definition less predictable than restaurant sales.

Our ability to predict the absolute times of bakery products shipments and contribution margins that result from those shipments is very difficult, due to the nature of that business, the purchasing plans of our larger customers which may fluctuate from quarter to quarter.

In our view, our bakery's most impactful role to our business will continue to be its service as a dependable high-quality producer of desserts for sale in our own restaurants, which collectively should sell well over 100 million of desserts made in our central bakery production facility this coming year.

The capacity utilization rate of our bakery production facility, I think most of our investors know, is a function of really three factors -- what we're making; how much we're making of each product; and how efficiently we produce each product.

And as you know, we've been evaluating various alternatives to add additional capacity to our bakery operations in order to support our long-term growth plan.

We do have room in our current production facility here in California to add some more mixers, ovens, slicers, coolers, and related equipment that could effectively increase the capacity of our current facility here in California by 20 percent to 30 percent at a relatively low CapEx investment that we've already got contemplated in our CapEx plan for the year.

So we will likely proceed with that capacity addition activity in our current plant this year, which will give us plenty of capacity for expected production for 2003 and 2004.

And we will likely commence some capacity addition activities on a very small scale on the East Coast starting sometime next year.

And we'll keep you advised of our progress in that respect.

So I think that covers our top-line performance for the first quarter.

And our new restaurant opening plan for the rest of the year.

So now I'm going to turn the call over to Mike Dixon, our VP finance.

And Mike is going to review the individual components of our operating margins for the first quarter.

Mike?

Thanks, Gerry.

First, starting with the supplemental data at the bottom of the financial page of the press release, the cost of restaurant food, beverages and supplies were 23.5 percent of restaurant sales for the first quarter just ended -- compared to 24.3 percent for the same quarter last year, and 23.4 percent for the sequential December quarter.

Since the second quarter of last year, we've experienced comparatively lower costs for most of the food commodities used in our restaurants due to principally to two factors -- favorable supply/demand conditions in general for most of our commodities, and our increasing economies of scale and purchasing power.

Because our menu is so diverse, we use many different food commodities in our operations.

We are currently able to contract for approximately two-thirds of the food commodities used in our operations for periods up to one year.

The remaining one-third of our restaurant cost of sales consists of fresh produce, poultry and dairy commodities that are not currently contractible for periods longer than 30 days in most cases.

As a result, these fresh commodities can be subject to unforeseen supply and cost fluctuations due principally to weather and other general agricultural conditions.

Currently the cost environment for most of our fresh commodities remains favorable.

In the absence of weather or other market conditions outside of our control, we currently expect our restaurant cost of sales for the remainder of 2003 to remain about the same as we experienced in 2002 -- assuming current supply and demand conditions can continue for the commodities that we use, particularly the fresh produce, poultry and dairy commodities.

As we have mentioned in the past we have taken steps wherever possible to extend our existing contracts for items such as cheeses, oils, beef, beverages, sugar, coffee, seafood, paper, bread and most grocery items through most of -- if not all of -- 2003 at roughly the same costs we experienced during 2002.

Bakery costs as a percentage of outside bakery sales for the first quarter were 47.3 percent, which was slightly lower than the 48.3 percent reported for the same quarter last year, and slightly higher than the 45.8 percent reported for the sequential quarter.

This line item principally consists of the raw ingredients and packaging costs for our bakery sales to other foodservice operators, retailers and distributors.

While this cost percentage is slightly lower relative to the first quarter last year, most of this decrease was offset by increased costs for bakery selling and distribution expenses that are rolled up in the other operating expense line items in our operating margins.

Also, 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 remained generally stable during 2002 and really into the first quarter of 2003, and we currently expect it to remain generally stable for the remainder of 2003, this cost percentage will fluctuate principally as a result of the mix of product shift for any given quarter.

We produce about 200 different products.

And some have higher contribution margins than others depending on the product and distribution channel.

Also, some distribution channels, such as the warehouse club channel, have higher selling and distribution costs than other channels.

Cream cheese is the largest single commodity used in our bakery operations.

And we have entered into agreements for the remainder of fiscal 2003 that call for a slightly lower cost per pound for cream cheese than we paid during the past 12 months.

We currently expect to use about nine to 10 million pounds of cream cheese during 2003.

Moving up to the consolidated statement of operations in our press release.

Total labor cost for our combined restaurant and bakery operations were 32.3 percent of total revenues for the first quarter, which was higher than the 30.8 percent number reported for the same quarter last year, and higher than the 30.5 percent reported in the sequential quarter.

Our increased labor expense as a percent of revenues for the first quarter was attributable to several facts.

First, as Gerry, discussed our restaurant comparisons for the first quarter were adversely impacted by severe winter weather and the shift of Easter and spring break holidays from the first quarter last year to the second quarter this year.

As a result, we experienced some reversed leverage on the fixed portion of labor costs in our restaurant operations.

Additionally, the unpredictable fluctuations in restaurant sales due to the severe winter weather made it very difficult for our restaurant operators to adjust their variable hourly labor accordingly.

Lower bakery sales compared to the same quarter last year also resulted in some reversed leverage on our fixed labor costs in our bakery operations.

And finally like almost every business in America, we also continue to face higher costs for our group medical insurance benefit plan which we believe will increase approximately 11 percent to 12 percent.

The good news is that our restaurant costs have returned to normal now that the severe winter weather is behind us.

Labor costs as a percentage of revenue could be impacted during the remainder of the year by the increased medical insurance costs which will have approximately a 10 to 20 basis point impact, and by the significant number of planned openings during the third and fourth quarters.

Other operating expenses were 23 percent of total revenues for the first quarter, which was up compared to the 22.6 percent reported for the same quarter last year. but down from the 23.4 percent in the sequential quarter.

This percentage increase compared to the same quarter last year was primarily attributable to the reverse leverage from less than expected restaurant and bakery sales on the fixed portion of our other operating costs for -- and -- in both our restaurant and bakery operations; increased costs for our workers' comp, property, and general liability insurance programs; and increased costs for natural gas to our restaurants.

On the other hand, our restaurant and bakery operators did an excellent job of partially offsetting these impacts with aggressive management of other controllable costs and expenses, which we are very pleased to see.

Going forward, we do expect the increased cost of our insurance arrangements, which amounts to approximately 40 basis points of total revenues, to continue throughout fiscal 2003.

Most businesses in America are currently facing increasing insurance cost.

And the Cheesecake Factory is no exception.

G&A expenses for the first quarter were 5 percent of total revenues for the quarter -- the same as the comparable quarter last year, and up slightly from 4.7 percent in the sequential quarter.

In response to the weather and other impacts on revenue that we previously discussed, we did make an extra effort to decrease discretionary G&A spending during the first quarter.

In terms of absolute dollars, our G&A expenses will fluctuate from quarter to quarter depending in part on the number of restaurant managers that are in our training program during that given quarter, and the number of trained managers that we are banking for future restaurant openings.

As most of our openings this year are in the third and fourth quarters, we are just beginning to build our bank of trained managers.

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

As we mentioned in the last call, we have leased some additional office space for expanded management training and culinary R&D activities to keep up with our growth rate.

We have also added new senior positions to our restaurant field supervision organization and other investments to support our future growth.

Accordingly, we expect absolute G&A expense to progressively increase from quarter to quarter during the remainder of fiscal 2003.

We still expect total G&A expenses as a percent of revenues for the full year of fiscal 2003 to be in the 5 percent range.

That percentage will depend in part on the degree of revenue leverage actually achieved.

Depreciation expense was 3.8 percent of total revenues for the first quarter, compared to 3.4 percent for the same quarter last year and 3.6 percent in the sequential quarter.

As you would expect, this percentage increase was impacted by the restaurant sales that we lost as a result of the weather and lower bakery sales compared to the same quarter last year.

Our current expectation total depreciation expense as a percentage of revenues for the remainder of 2003 is in the 3.6 percent range based on our expected growth and investment plans.

Again that percentage will depend in part on the degree of leverage achieved.

Actual pre-opening costs incurred during the first quarter were approximately 1.5 million, compared to 2.7 million for the same quarter last year.

During the quarter just ended, we opened two restaurants compared to three openings in the same quarter last year.

We also incurred pre-opening costs is both quarters for other opening sin progress.

Now we usually incur most of our pre-opening costs during the two months before and the month of a restaurant's opening.

As most of our investors know, we are required by generally accepted accounting principals that were adopted back in 1998 to expense restaurant pre-opening costs in the period they are incurred.

As a result, the timing of restaurant openings and their associated pre-openings will always have an impact on our quarterly earnings comparisons.

The pre-opening costs for our upscale highly customized and operationally complex restaurants is higher than most restaurant concepts in terms of absolute dollars, but is in-line with other upscale concepts relative to the scope of operations.

Now as a reminder, analysts and investors should factor pre-opening costs into their models for as many 12 new openings during the remainder of fiscal 2003.

As Gerry mentioned, our current opening schedule calls for two new restaurants in the second quarter, five new restaurants in the latter half of the third quarter, and five new restaurants in the first half of the fourth quarter.

As a result, pre-opening costs will be higher in the second half of fiscal 2003 compared to the prior year.

And remember, one of these potential openings will be a large Cheesecake Factory restaurant in Honolulu, Hawaii, that will require a higher than average pre-opening cost.

Analysts and investors should also consider in the modeling the normal the 90-day period for new restaurant operating margins to reach their targeted run-rate levels.

That covers our review of the major line item components of our operating margins for the first quarter.

In summary the severe winter weather that affected our restaurant sales, coupled with lower bakery sales, caused some reverse leverage on the fixed costs in our margin structure compared to the same quarter last year.

On the other hand, we continue to benefit from lower food costs and good control of those operating G&A expenses that we can control.

As Gerry, mentioned our new restaurant opening plan for 2003 is solidly on track.

And our absolute bakery sales have the opportunity to increase sequentially during the rest of 2003.

We have a very good opportunity to resume the leveraging of the fixed costs in our margin structure going forward.

Again, please refer to the full discussion of risks and uncertainties associated with our forward-looking statements included the company's filings with the SEC.

Our effective tax rate for the first quarter was 35.7 percent -- the same as it was for fiscal 2002.

And we currently plan on using that same rate -- 35.7 percent -- as our estimated effective tax rate for the remainder of fiscal 2003, subject to adjustment if necessary as we move through the year.

Our liquidity position and financial flexibility continue to remain very strong.

As of April 1, our cash and marketable securities on hand were approximately $124 million.

While this balance was up nearly 10 million from the December year-end balance, we do expect this balance to decline during the remainder of the year as most of our planned openings for the year and the related CapEx spending are still to come.

Our cash flow from operations for the quarter was approximately 21 million.

And our cash and accrued CapEx for the quarter was approximately 12 million, which includes construction in progress for upcoming 2003 openings.

We currently estimate our total CapEx spending for the full year of fiscal 2003 to be in the range of $90 million.

Based on our current expansion plans and current expectations for the operating environment, we expect to be able to finance our CapEx requirements for fiscal 2003 through expected operating cash flow, agreed-upon landlord construction contributions, and our cash and investments on-hand.

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

Now 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 benefits of reduced risk and flexibility in terms of our ability to execute our growth plan.

We still have no funded debt, and currently do not anticipate a need for funded debt or any other external financing during fiscal 2003, other than landlord construction contributions.

We do keep a $22 million credit facility in place for backup liquidity purposes, and to support standby letters of credit for our insurance arrangements.

We also have a share repurchase authorization from our board of directors to buy back up to 1,687,500 shares in the open market.

During the first quarter, the company bought back 30,000 shares at a total cost of approximately $800,000.

We have approximately 610,000 shares remaining in our current re-purchase authorization.

Gerry, back to you.

Thanks, Mike.

That was an excellent review of our operating margins for the quarter.

And just to wrap up our business and financial review for the first quarter, once again our company achieved solid increases in income and diluted net income per share despite the winter weather that affected the majority of our restaurants during February and March.

We do believe that our restaurant sales trends have in total returned to normal expectations.

Our new restaurant opening plan for2003 is solidly on track.

Our absolute bakery sales dollars have a good opportunity to increase sequentially by quarter through the rest of this year.

Our restaurants continue to lead the industry in terms of absolute sales productivity and with room for at least 200 restaurant locations domestically., we believe we have got a sustainable period of profitable growth ahead of us for several years to come.

So that concludes our business and financial review for the first quarter and at this time we'll be happy to answer a few questions.

If we for some reason don't have time to get to your question on this call, please feel free to call us at our offices.

We'll be here to try to take your call.

So operator, we're now ready for a few questions.

At this time I would like to remind everyone in order to ask a question simply press star, then the number one on your telephone key pad.

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

Your first question comes from Greg Schroeder of Fulcrum Global Partners.

Hi, Greg.

Hi.

Can you go through the components of other income in the quarter?

They seem to be a little higher than at least I was looking for.

I'm not sure what you were looking for specifically Greg, but I think over the past three or four quarters, we have been running other income of somewhere around 600,000.

As we rebalance our marketable securities portfolio, trying to lengthen the weighted average maturity of our portfolio to capture some additional yield, our portfolio managers are trying to take advantage of opportunities within our investment guidelines to lengthen our maturity, and as a result we've had some games that we've realized from the sales of some of those marketable securities.

Also, in the past couple of quarters, depending on our working capital and cash flow needs, we have to liquidate marketable securities in order to fund our capex requirements.

So that's really where that comes from.

And then we have just some other miscellaneous other income that just comes in the ordinary course of business.

But that's really what it is.

Okay.

And then second question, if -- did I hear you right, that the overall impact of the Easter shift was actually positive?

I'm sorry, actually negative for March, or was that just the spring break markets?

Well, I think that when you look at the impact of the Easter shift and spring break associated schedules on our Florida restaurants in particular, where we have ten of our 62 or so restaurants, for that couple of week period, and Easter was what, three weeks later this year than it was last year, it was all in the first quarter last year, and of course it's in the second - in the second quarter this year.

That's where you're going to see most of the impact.

I think the rest of the company is not that significantly impacted by that shift.

But as we've opened more restaurants in the state of Florida, you can definitely see the impact of that shift for a couple of weeks on our Florida restaurants.

But most of the impact that we talked about that 2.5 to 2.9 million was related to the weather conditions.

Thank you.

Okay, Greg.

Your next question comes from Sharon Zackfia from William Blair.

Hi, how are you?

Hi Sharon how are you.

Good thanks.

Gerry, I think if I'm doing the math right, you said you were up two percent or so in comps the first five weeks of the quarter.

So, I think even if I strip out the weather impact that you broke out, it looks like comps were down maybe one percent for the latter two-thirds of the quarter.

I guess can you give us some color on what might be happening there?

Do you feel the economy or war impact or ...

No.

You know again, it's very, very difficult to isolate any other impacts on our business related to anything other than the weather, which I think is specifically identifiable, or to the extent that we can come up with our best estimate of the impact of the spring break shift in our Florida restaurants as we've previously disclosed.

You know, we have not done that math.

We don't normally comment on individual restaurant sales - comparable restaurant sales on a monthly basis like a lot of the big chains do.

We do know that for the first for the last couple of weeks our same-store sales have been very, very positive but again some of that is going to be attributable to the Easter shift in some of our Florida locations.

So I'm not sure we want to get or create any expectation that we are going to have significantly positive same store sales as a result of just the past couple of weeks.

But we do strongly believe that our restaurant sales are back to where they normally have been tracking in the absence of weather or national events or other factors that are outside of our control.

David, anything you want to add?

No, I think that's right.

We're happy to see that things are back to where we think they were, and we just had a lot of factors facing us in February and March.

Okay.

And then I guess just to touch on average weekly volume, down a little bit more than comps again this quarter, I know in previous quarters you said you were up against pretty tough comparisons on the newer store or newer restaurant side of the business.

Is that the case again this quarter and when are we going to go up against some less blockbuster openings?

I'm not sure it's going to be in any of our interests to have less than a blockbuster restaurant opening and I'm kidding you Sharon.

But the math works out that there seems to be somewhere between about a half a percent or percentage point divergence between our same store sales number and our average weekly store number due to the phenomenon of these blockbuster openings, that as the math rotates through the calculations, you can see that divergence occur.

And it actually occurred for two or three quarters back in 1998, if you go back and look that far.

You know, it's very, very difficult to predict that relationship going forward.

Whether it's going to change and even out, or remain the same.

David, do you have any thoughts about that?

No.

I guess what I'm just trying to get to, are the new stores opening where you want them to open?

Is there everything on plan there?

Oh, absolutely.

Again, as we previously mentioned, over the last couple of years we've been seeing what is normally referred to as a honeymoon effect, where restaurants tend to open up, particularly if we're going back up into a market where we already have a Cheesecake Factory restaurant, so there is some brand identity and customer awareness there of who are, and all that pent-up demand that's there you'll see some our restaurants opening up in anywhere from 20 to 40 percent higher than what their sustainable run rate levels are going to be at about a thousand bucks a foot.

So we see them annualized rates of 120, 1400, 15 bucks afoot.

Those will be wonderful if they can be sustained but they're just not going to.

I think when we open up in a new market that's what you get.

When we open up in a market of two or three then you're going to have a normal great Cheesecake Factory opening.

If we look at these single markets or new markets, like when we open in Charlotte or St. Louis, that's what we tend to get.

And when we don't, like, Park Meadows where we already have two other store in the market, we open normally.

Thanks so much.

Thank you Sharon.

Next question comes from Dennis Forst with McDonald Investments.

Good afternoon.

I was curious about cost of sales, there was a really nice improvement.

I'm wondering whether any of that is attributable to the low bakery revenues in the quarter.

I was trying to look sequentially as well as year over year.

But it seems like bakery costs, and the cost of sales line, would typically be higher than cost of sales in a restaurant.

And I'm wondering if that's part of the reason for the, what was it about basis points improvement year over yea

Dennis, I may not be following you and I apologize.

But when we look sequentially, you know, our restaurant cost of sales is actually sequentially ...

Sequentially, it was up.

Ten base points.

Yes.

And you would expect that because of the first quarter and higher produce cost in general that you normally see in the winter, you get less produce yields because of the quality of the produce that comes in is not of summer quality, and produce is our largest quality.

So I guess that would be the explanation for that.

Although year over year we were actually down a little bit in our told food coast, right Mike?

Right.

Was that 75 basis points Mike, year over year?

Twenty three five versus 24.3.

Right.

Also the bakery revenues were down $5 million year over year also.

Right.

I guess what I'm asking is, bakery costs of sales typically a hire percentage of revenues than restaurant cost of sales?

Well, bakery cost of sales as we break it out on that line item usually runs anywhere from 45 to49 percent bakery sales.

So yes, on an absolute basis that percentage will be higher than the restaurant piece.

But it's -- I would think that the restaurant piece probably has a greater weight.

If you're just looking at combined cost of sales for both the restaurant and bakery together, I think what you're saying is accurate.

But we do break them out separately and do the separate calculations in our earnings release.

Yes, but isn't that true, that - is there not some bakery food costs in restaurant cost of sales?

Yes, there is.

But that's a restaurant - our dessert sales at restaurant level were about 15 percent of our total restaurant sales.

And really, the principal commodity that we use in the desserts that we sell at our restaurants which are produced in our bakery is really cream cheese which is a slightly favorable cost this year than it did the same period last year.

Good enough, thanks.

Okay.

On the balance sheet do you have a net property and equipment number?

I think all we released at this point would be total assets of roughly, what was it Mike, $481million.

Yeah.

We'll be filing our Q pretty quickly.

You'll be able to pick that up.

Thanks a lot.

Okay.

Next question comes from Paul Westra from SG Cowen.

Hey gang.

Hey Paul.

Just a follow up question on same store sales.

You mentioned the weather impact with majority of the 2.7 or odd million.

Was that only for closed units?

No, that was for all restaurants we believe had a weather impact during the quarter.

OK, if I could struggle (ph) forward just another follow-up clarity here, I know - was March sales disappointing I guess was the question you mentioned, I guess it was still disappointing although up from February, can you give us some quantification of any improvement ...

Well, actually prior to, for the first couple of weeks of March, I think our sales after we got past the weather in February, our sales picked up as you would expect once again.

And in the middle of the month, with the national events occurring and the spring break shift, you know, we saw on a pure comparative basis, a weaker comparison during the second half of the month.

But now that seems to have dissipated here as we move into April.

The combination of a good first half and second half, it was still below your goal for March?

Well, I think again, if you take weather out of the comparison, and you know, the Easter shift, I think we were pretty much in line with where we thought the business would be.

But those are two big factors.

And then the one unknown factor which is are very, very difficult to quantify, which would be the impact if any of the national events.

We do know that we had about a half-dozen restaurants or so that for a week or so after the national events started in mid March, we definitely saw some impact there.

Yes, mostly San Antonio, San Diego where there was large military, where, you know, as soon as the war started, and people started shipping out, we noticed some changes there.

But I think the interesting thing to keep in mind about Cheesecake Factory is that unlike many of the larger restaurant chains, we've only got 60 some-odd restaurants.

So if you've got a half dozen or 10 restaurants impacted by either a calendar shift or by a national event or by weather moving through the Northeast or whatever, collectively it can have a one or two percentage point impact on your total business at this time.

One follow up question, the bakery, you mentioned shipments - are your large bakery customers attracting less than originally anticipated?

That's correct.

Is that the warehouse or restaurant channels?

I think it's probably all of the above.

It's the warehouse club channel, it's the other retail channel, and again, economic and retail selling conditions were not particularly exciting during the first quarter.

The one bright spot that we're delighted with is our business with Sysco (ph) which is ramping up very nicely.

But absolutely, for the first quarter, business from the other channels was a little bit less than what we were hoping for.

Really, Paul, a couple of orders more from the warehouse clubs would have brought us right where we wanted to be.

Absolutely.

I think that's a very important point.

It is not uncommon at all for us to get an order for a million dollars or even $2 million in a week that will come unannounced.

So it's very, very, very difficult to predict our orders.

Some of our club operators are still on consignment inventory arrangements, and our consignment draws do not get reported to us right away.

It's just an extremely difficult thing to predict.

But I think going forward our bakery team is optimistic, that particularly on the Sysco (ph) business it has a strong opportunity to get better.

And that optimism is you're forecasting a $10 million decline year over year and $10 million plus gain in the second half?

Well, on an absolute basis, although we've had a policy of really not predicting sales revenues at our company, we felt that in this case, based on orders that we had in hand and stated intentions of our bakery customers that our bakery team felt very, very comfortable that a $10 million sales goal for outside bakery sales in the second quarter which is a sequential improvement from the first quarter, was very reasonably achievable.

Thank you.

Okay.

Next question comes from Mike Smith with Fahnestock.

Hi, Mike.

Good afternoon.

Couple of easy questions.

One, I missed the capex for the year.

What did you say the capex budget was?

Capex plan for the year is $90 million.

We spent about $12 million in the first quarter, but our target for the whole year is still at $90 million.

Okay.

Second question, I'm sure you were expecting to get a question about this but I think a number of us got an e-mail this morning from a union I guess that's trying to organize your stores in Las Vegas.

Gerry, when was your prepared answer to the questions you got concerning -- you were going to get concerning this e-mail?

Mike, I don't think we have enough time on the call today really to get into a detailed discussion of the proposals or any of the related analysis offered by culinary union No. 226 in Las Vegas, one of our relatively new stockholders.

As you mentioned the culinary union in Las Vegas has for almost four years now had an ongoing drive to organize our restaurant at Grand Lux Cafe which is located inside the Venetian property which is a non-unionized operation.

Our board of directors strongly disagrees with the proposal offered by the culinary union No. 226 in Las Vegas and I think that our proxy statement this year contains an excellent discussion of each proposal for consideration at our stockholders at our upcoming annual meeting in May.

So that's our response.

Anything else, Mike?

Yeah, one other question.

The bakery margin, what you have the sales going back up to $10 million in the second quarter.

Do you expect your bakery margin to take half a step back to what seems to be the normal run rate or full step back?

Well, I think that, and this might help answer Dennis's earlier questions, the one-line item that we report in our P&L, bakery items, and Mike I apologize if I'm not understanding your questions, bit that bakery cost of sales is really a variable cost.

It's the cost of ingredients and packaging for the items that we sell.

The rest of our bakery margins, the fixed cost and semi-fixed cost related to labor and other operating expenses are embedded in the labor and operating expense lines of our P&L that we see.

So clearly in the second quarter, if we have an increase in sales that we would expect to see cost of sales hopefully remain kind of where it's been historically.

We don't see anything with respect to mix shifts or ingredient cost that would cause variable cost of sales to change that much based on what we know today and we would expect to see some return, partial return of leverage of fixed cost in our bakery operations with respect to labor and other operating expenses.

So I think those are reasonable expectations.

Mike, anything else?

No, that's right on.

Unless my computer is giving me bad information, and I've been know to write a bad formula before, but it seems like your bakery cost, what you report as a percent of your bakery sales were 36 percent this quarter as opposed to 48 percent in the quarter last year.

Is that reflecting a price increase at the bakery or anything of that nature or is that totally mixed shift?

I think it would be just mixed shift and ingredient cost.

There haven't really been any material price increases on the bakery side at all.

Thanks.

OK, I think I have time for one more question.

Your final question comes from Cliff Josefi (ph) from HD Brown.

Thanks for taking my question.

Absolutely.

What's that?

Absolutely.

Couple of simple once, housekeeping, really.

Can I get the - I came on late, so if you already gave this I'm sorry.

Can I get the inventory balance, prepaid balance, the cash flow from operations and also the tax benefit related to stock options exercised?

You know, when we file our 10-Q here very, very shortly, we will have that detail.

Normally we don't have that detail ready for our earnings release conference call today.

We do have cash flow from operation Mike, of roughly $21 million and our cash capex for the quarter including whatever we would accrue in terms of commitments is roughly about $12 million.

And then we have the other components of the balance sheet that are in the footnote to our earnings release that you'll see there.

I'm sorry, the selected consolidated balance sheet information on our earnings release.

Okay.

So no heads-up now?

No.

Okay thank you very much.

All right.

Thank you all for getting on the call, and we'll talk to you later.

Thank you.

This concludes today's first quarter investor conference call.

You may now disconnect.