Cheesecake Factory Inc (CAKE) 2003 Q3 法說會逐字稿

Good afternoon.

My name is Jean.

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 speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star 1 on your telephone keypad.

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

Thank you, Mr. Deitchle, you may begin your conference.

Thank you, operator and hello, everybody, I'm Gerry Deitchle, president and Chief Financial Officer of the Cheesecake Factory incorporated and welcome to our quarterly investor conference call, which is also being broadcast live over the Internet.

Also with me on the call today is David Overton, our Chairman and Chief Executive Officer, Mike Dixon, our Vice President of Finance, Jane Vallaire, who's usually on the call with us today, our Director of Investor Relations, is out of the office this afternoon to be had her husband who is having some surgery.

So, I'm going to stand in for Jane today and read our cautionary note regarding risk factors and forward-looking statements as follows.

The company's comments during this conference call held today, October 21, 2003, will 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.

We do not undertake any duty to update any forward-looking statements.

Investors and listeners are referred to the full discussion of risk and uncertainties associated with forward-looking statements, contained in our periodic filings with the SEC.

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.

Now we got that out of the way and our agenda for the call today will be as follows.

First, we're going to cover the press release we issued today to cover the financial results for the third quarter of fiscal 2003, that ended on September 30, 2003.

In the call today, we're going to refer to the quarter just ended as the third quarter.

After that, we'll be happy to answer your questions as time allows.

We'd like to finish up the call today in about 45 minutes, so, let's get started.

Both, David and I were very pleased with the Cheesecake Factory financial results for the third quarter, compared to the same quarter last year.

Our consolidated net income for the third quarter increased 19% to a record $14.4 million or 28 cents per fully diluted share.

After we've experienced the three quarters of unfavorable weather comparisons that clearly impacted our ability to fully utilize our patio seating, which amounts to 17% of our total seating compacity company-wide, we experienced more normalized weather during this past summer, in most of our resturants, and as a result, our comparable restaurant sales increased approximately 1.8% during the third quarter, which is in line with our ongoing expectations for that measure.

And our positive sales comparisons continue during the fourth quarter to date as our comparable restaurant sales comparisons are trending up approximately 2% to date for the fourth quarter.

The macro operating environment has certainly been very challenging during the past couple of years for most consumer business', but the in spite of the environment the Cheesecake Factory has been able to maintain its industry-leading sales productivity over the last 25 years now, almost 26 years, without the need to resort to media advertising or discounting to stimulate or maintain consumer interest in our restaurant concepts and we really believe that's a truly impressive accomplishment for any consumer business.

We continue to rely on our 25-year reputation with consumers for excellence in food, service, ambience and value to sustain our industry-leading sales productivity metrics over the long-term and we still believe and we're convinced this is the best long-term competitive strategy for our upscale casual dining concepts.

The Cheesecake Factory's restaurant business model has always been a pure operating model.

We've always been focused on great restauranteuring and great operational execution, and we're very, very fortunate have what we believe, are some of the best restaurant operators in the industry, led by our veteran regional Vice Presidents Jack Belk and Wayne Jones for the Cheesecake Factory operations and also by Peter D'Amelio, our president of our Grand Lux Cafe operations.

Now going to take a minute to give you additional color on our top line results for the third quarter and I will cover our restaurant growth plan for the rest of this year and for fiscal 2004 and then my colleague, Mike Dixon, where briefly review our operating trends for the third quarter.

Our total revenues for the third quarter were $197.8 million, up about 22% compared to the same quarter last year.

Our total restaurant sales increased almost 23% during the third quarter to about $187.7 million.

Now, that 23% increased consisted of an approximate 21% increase in total restaurant operating weeks, which resulted from the openings of about 12 new restaurants during the trailing 12-month period and that was coupled with an approximate 1.5% increase in average sales per restaurant operating week for the quarter.

Now, the last quater that we were able to report a positive average weekly sales comparison was the second quarter of fiscal 2002.

We're very pleased to see that particular measure move back into positive territory this quarter.

We believe that our increase in comparable restaurant sales for the third quarter as has been the case for most of our recent past quarters, was principally attributable to menu pricing, with respect to comparable sales comparisons at the Cheesecake Factory, we always remind our investors that everything else being equal and in the absence of weather or national events or other factors outside of our control, we only expect to achieve increases in sales for our established restaurants that are roughly equal to our annualized effective menu price increases and those increases have averaged approximately 1.5% or so for the past couple of years.

We do believe that our fiscal 2002 average annual sales per square foot of $1,000 was more than twice the average for the casual dining segment and we believe it's difficult to surpass that level of productivity.

With the Cheesecake Factory concept is busy and productive as it is, particularly during peak meal periods, when most of our guests want to dine with us, we really don't have much excess capacity in our view to grow significant amounts of real sales at most of our established restaurants.

So, accordingly, we always remind our investors that the vast majority of our planned growth in total restaurant sales for the next few years should come from the openings of new restaurants.

And with respect to those new restaurants that we've been opening lately, most of them continue to open with initial annualized sales volumes extremely strong, anywhere from 20% to 40% above where we target the run rates sustainable level of sales to be.

So, we're going through our honeymoon periods for a lot of our restaurants.

Several of our recent restaurant openings continue to experience above average sales volumes, including our newer locations in St. Louis, San Jose, Edison, New Jersey, Charlotte, North Carolina, Nyak, New York and we've just opened three outstanding restaurants that have done extremely well in the top line so far, Raleigh, North Carolina, Tyson's Corner, Virginia and our outstanding restaurant in White Plains, New York.

Generally, over a period of some months after their initial openings, the honeymoon sales volumes for many of our new restaurants gradually reduce as we expect to their sustainable run rate levels of which we continue to target in the range of about $1,000 per square foot in total for each year class of new restaurant openings.

It is entirely possible, though, given some of our recent results, some of our recent openings could settle in with sustained productivity levels in excess of $1,000 per foot.

As we noted in our press release today, sales continued to build very nicely at all three of our Grand Lux Cafes during the third quarter, compared to the same quarter last year, sales for our very first Grand Lux Cafe in Las Vegas, which is located at the Venitian property, increased a solid 21%.

Our second Grand Lux Cafe location in the Beverly center in Los Angeles achieved an impressive 9% sales increase during the quarter.

And our third location in downtown Chicago, that opened a year ago this past July, achieved a strong 48% increase during the third quarter in sales, again that was going up against our soft grand opening a year ago this past July.

But nevertheless, we're very, very encouraged with our solid sales build in Chicago and all of our Grand Lux Cafe restaurants.

We're delighted to see Grand Lux Cafe's reputation for excellence in upscale casual dining continuing to grow in all three markets where we currently have the cafes.

The team is working hard to continue to fine-tune our menu and our operating systems to prepare Grand Lux Cafe for future expansion and we currently plan to open as many as two more Grand Lux Cafes during fiscal 2004.

Our objective with Grand Lux Cafe is a very simple one.

We -- all we want to do is to have a second upscale casual dining growth vehicle ready when needed with an excellent return on investment profile.

Now, we continue to be very excited about the longer term growth potential at Grand Lux Cafe, because it really plays to the strength of our core competency as as a company and it also plays to the strength of current lifestyle and demographic trends that favor the casual dining segment.

Moving to our restaurant expansion plan, we noted in our press release today that we believe that we are on target to open as many as 14 new Cheesecake Factory restaurants during this fiscal year.

Ads we originally planned, nine new restaurants have opened so far this fiscal year, counting our newest Cheesecake Factory restaurant in the woodlands, on the north side of Houston, which opened last night.

Due to the nature of the lead spaces that we select for our restaurants and their highly-customized layouts, it is not possible for us to precisely predict by quarter the exact timing of our restaurant openings and they are associated preopening costs.

Now, having said that, we remain very optimistic that as many as five additional Cheesecake Factory restaurants should open before the end of this year, provided that we don't experience any unforeseen construction or permitting delays.

If we're able to get these open, we will achieve our 2003 full year capacity growth objective of increasing our resturant productive square footage by about 23% and increasing our total restaurant operating weeks by about 21%.

Now, last year as most of our investors know, we successfully opened 7 high volume restaurants during a 13-week period.

So, we clearly have the infrastructure in place to correctly and successfully execute the remainder of the planned openings for this year.

The following five locations are being readied for potential openings during the rest of this year.

Cleveland, Ohio.

That opens Friday night, Gerry.

Thank you, David.

Arlington, Virginia.

Palo alto, California.

Peoria, Arizona that is Arizona, not Illinois.

Sorry for the folks in Peoria, Illinois.

Someday we will get there, I hope.

And Honolulu, Hawaii and next to the royal Hawaiian hotel on Waikiki beach I think we're all very, very excited about the high quality and strong sales potential of all of these locations coming up, particularly the Honolulu location.

As most of our investors know, preopening costs are very significant for our upscale highly-customized and operationally complex concepts.

Most of our preopening costs are typically incurred during the two months before and the month of the actual opening of a restaurant and we expense these in costs as we incur them.

So, even though we cannot precisely predict the exact timing of our upcoming restaurant openings, we do suggest that analysts and investors anticipate preopening costs for the equivalent of as many as seven openings for the upcoming fourth quarter, which includes a little extra preopening cost for the Honolulu location and possibly including some initial preopening costs for potential openings in Q1 of 2004.

Mike Dixon will provide you some additional information on preopening costs here in just a few minutes.

Additionally, we previously commented that it takes on average about 90 days or so for our new restaurants to work through food cost and labor inefficiencies that are very commonly associated with new restaurant openings.

So, once again as we've suggested over the past several conference calls, we've suggested that our investors should anticipate temporarily margin impact from the upcoming clustered openings during the fourth quarter again, all due to the timing of the openings.

Now, the good news is, if we're able to successfully complete all of these remaining openings during the rest of this year, these new restaurants will have a strong opportunity to contribute to our potential sales and earnings growth during fiscal 2004.

We always want to take a minute and remind our investors that our restaurant development model is very different than the traditional cookie cutter chain development restaurant models, where pad sites are more easily acquired.

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

The Cheesecake Factory's restaurant development model is more similar to that of an upscale retail chain, what I kind of refer to as a retail lease model.

We lease all of the building shells for most of our restaurant locations.

Many of the locations are in newly-constructed or to be constructed retail development such as shopping malls, entertainment centers, cityscape strip centers and so forth.

So, as a result, we rely heavily on our landlords to deliver our lease shells to us in a timely manner, according to their original commitments to us so we can get the shells and build them out in a timely manner.

Our locations are very upscale, very high and customized.

That helps to create the non--chain image that we enjoy with consumers and which we believe is a significant competitive advantage for our concepts.

It also creates unique design and permiting challenges, particularly if we are going into a new jurisdiction.

So, as a result of these factors, it is not uncommon at all for to us have planned openings move a few weeks or even as much as a month due to various factors outside of our control.

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

We have an excellent in-house design and construction department, led by Brian McKellar and ablely supported by Rick McCormic and Rick Vaughn.

And we've added capacity to the department this year in order to support our future growth plans.

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

We're batting 1,000 for successful restaurants so far and there aren't many chain restaurant operaters that have the successful development track record that we do.

Moving to our bakery operations, bakery sales to other foodservice operators, retailers and distributors increased 12% to $10.2 million during the third quarter.

We continue to achieve steady growth in the penetration of our dream factory product line with foodservice distributors and retailers in the marketplace during the third quarter.

And our bakery team continues to work hard on some potential opportunities to get new distribution channels for our products with both new and existing customers.

Earlier this year, we did announce an expanded relationship with Sysco Corporation for some of our premium dessert products.

Sysco, not to be confused with the computer networking company, is the largest foodservice marking and distribution organization in North America with over 420,000 restaurant and other foodservice customers.

Our expanded Sysco relationship is continuing to make steady progress as we had expected.

So far, approximately 2/3 of the 63 Sysco operating companies across the country have agreed to carry our products, which is right where we expected to be at this point of our relationship.

And we also continue to build our business with the largest warehouse club operators who continue to represent the largest distribution channel for our outside bakery sales.

While we remain very optimistic with respect to our opportunities, to steadly build our bakery sales volumes over time, we always want to take a minute and remind our investors that bakery sales are not as predictable as restaurant sales.

Our ability to predict the timing of bakery product shipments and contribution margins is very difficult, due to the nature of that business and the purchasing plans of our larger customers which may fluctuate from quarter-to-quarter.

Our fourth quarter is seasonally the strongest quarter for our bakery sales and we're expecting another very busy fourth quarter this year.

The general retail sales environment for the upcoming holiday season is expected, I think by most observers, to be a little better compared to last year and that should benefit our sales to our large warehouse clubs and retail customers.

For the fourth quarter of last year, our bakery sales were about $12.9 million, and we do believe that we have a good opportunity to achieve another positive bakery sales comparison during the upcoming fourth quarter compared to the same quarter last year.

In our view of the bakery's most impactful role of the business will continue to be as service as a high -- as a high, quality dependable producer of desserts for sale in our own restaurants.

Our restaurants are going to collectively sell in excess of over $100 million of desserts, that are going to be made in our central bakery production facility this year.

Approximately 15% of our restaurant sales consist of dessert sales, which is a much larger percentage than achieved by most other casual dining restaurant operators.

We've previously commented that we continue to evaluate various alternatives to add additional production capacity on our bakery operations in order to support our long-term growth plan and we do have room to add about 20% more capacity to our existing bakery production facility here in California for a relatively small Cap Ex investment and we also continue to believe that it's in our best long-term interest to add a small second production facility somewhere on the east coast and we will keep you advised of our plans in that respect as they evolve.

So, I think that covers our top line performance for the third quarter and our new restaurant opening plan for the rest of this year and for next year, so, now I'm going to turn the call over to Mike Dixon, our VP of finance and Mike is going to briefly review the individual components of our operating margins for the third quarter.

Mike?

Thanks, Gerry.

First, starting with the supplemental data at the bottom of the financial page of the press release, the cost of resturant food, beverages and supplies is 24.2% of resturant sales for the third quater just ended.

Compared to 23.4% for the same quater last year and 23.9% for the sequential June quarter.

The menu at our resturants is one of the most diversified in the foodservice industry and a cordoning is not overly depend on a single commodity.

Changes in cost for one commodity are often, but not always.

Counter balanced by cost changes and other commodity catagories.

The principal commodity categories for our restaurants include fresh produce, poultry, meat, fish and seafood, cheese, other fresh dairy products, bread and general grocery items.

Compared to the same period last year.

We experienced increased costs for fresh poultry, fish and certain meat commadities not at an anual contract during the third quarter, reflecting general increases in the costs for these commodities experienced by many food service operators.

These higher costs are partially offset by lower costs for other commodities such as shrimp, and many general grocery items, coupled with increased volume purchase discounts and purchasing power as a result of our continued growth.

Now, we are currently able to contract for approximately 2/3 of the food commodities used in the restaurant operations for periods up to one year generally.

Approximately, 1/3 of our resturant cost of sales consist of fresh produce, poultry, fish some meat and dairy commodities not that are not currently contractable 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.

During the fourth quarter of fiscal 2003, we currently expect the cost for our fresh poultry items to gradually decrease to the approximate level experienced in the same quater last year and we currently expect the cost for fresh fish an certain meats to continue at the higher levels experienced during the third quarter, fiscal 2003.

We generally update and reprint the menus in our restaurants twice a year.

For the Cheesecake Factory restaurants, the updates generally occur during January and February and July and August time frames.

Has been our past progress, we will carefully consider opportunities to introduce new menu items and implement selected menu price increases to help offset expected cost increases for key commodities and other goods and services utilized by our operations.

We're currently in the process of completing negotiations with many suppliers for those expected commodity requirements for fiscal 2004 that can be contracted for and that represent approximately 2/3 of the food commodities used in our restaurant operations.

As we continue to grow, our purchasing power and negotiating leverage with our vendors also continues to grow.

For example, we've already successfully negotiated contracts for next year for many commodities, such as shrimp, bread and domestic cheeses used in our restaurants at the same or lower costs than this year.

As to be expected many other contractible commadities will likely remain flat or cost a little more.

At this point, we believe that we have a good opportunity to offset expected commodity cost increases for most of our contractible items next year through a combination of increased purchasing power and menu pricing.

Also as Gerry, mentioned we have seven openings planned for the fourth quarter of 2003.

As a cost of sales, the new restaurant will be higher in the first 90 to 120 days of operation, due to normal inefficiencies associated with new restaurants, we expect the cost of sales of the percent of resturant sales, could also be slightly higher from these planned openings during the October to December timeframe.

Switching to bakery, the bakery costs of the percentage of outside bakery costs for the third quarter were 45.8%, which was higher than the 43.4% reported for the same quarter last year, but in line with the 45.5% reported for the sequential June quarter.

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

This cost percentage is higher relative to the third quarter last year due to a shift in the sales mix with the products with slightly higher cost of sales.

Also, please remember that this cost percentage is a relatively small component of our margin structure.

Since the net purchase costs for most of our key bakery commadities remain generally stable throughout fiscal 2003 to date and is expected remain generally stable for the remainder of fiscal 2003, this cost percentage will fluctuate principally as a result to the mix of products shipped for any given quarter.

We produce about 200 different products and some have higher margins than others, depending on the product and the distribution channel and also, some distribution channels, such as the warehouse club channel, have higher selling and distribution costs than other channels.

Now, cream cheese is the largest single commodity used in the bakery operations.

In the first quater as we mentioned before.

We entered into new agreements for the remainder of fiscal 2003, that called for a slightly lower cost per pound for cream cheese dhan the previous 12 months months.

We currently expect to use about 9 to 10 million pounds of cream cheese during 2003.

Shifting up to the consolidated statement of operations in our press release, total labor costs for our combined restaurant and bakery operations were 30.5% of total revenues for the third quarter, which was lower than the 31% number reported for the same quarter last year and lower than the 30.9%.

Reported in the sequential June quarter.

The decrease in labor expenses of the percent of revanue for the thrid quater versus the same quater last year was primarily attributable to the leveraging of the fixed components in our labor cost with the 22% increase in total revenues.

We also benefited from minimal increases in average hourly wages and slightly lower staff turnover and training costs in our resturant operations.

Now having said that, we still face higher costs for our group medical insurance benefit plan, which is up approximately 11 to 12% this year, resulting in approximately 10 to 20 basis point impact on labor costs.

For the upcoming fourth quarter, labor expense as a percent of revenues will continue to be impacted by the higher medical insurance cost, we will also be impacted by the planned openings as of as 7 new restaurants during the fourth quarter and the 3 restaurants that were opened in the third quarter, still in the margin mediation cycle.

Again, it takes about 90 to 120 days for the new restaurants to achieve targeted profit margins with labor expense being the most challenging to manage and optimize until we're able to better to predict our run rate sales volume at the new restaurants.

Other operating costs and expenses for our combined restaurant and bakery operations were 23.4% of total revenues for the third quarter, which was down compared to the 24.1% reported for the same quarter last year, but increased slightly from the 23% in the sequential quarter.

Excluding expenses associated with the August 2002 bakery product withdrawl that represented approximate 1.3% of total revenues from the prior year amounts, other operating costs and expenses were actually up approximately 60 basis points in the current period over the comparable period of fiscal 2002.

This increase was due primarily to increased costs for natural gas and electric services to our restaurants and an increased selling and distribution costs related to higher bakery sales to our warehouse club customers.

Going forward, we expect the increased costs for our natural gas and electric services to continue through the fourth quarter of fiscal 2003.

G&A expenses for the third quarter were 4.6% of total revenues, down slightly from the 4.7% in the comparable quater last year and the 4.8% in the sequential quarter.

Our G&A expense consists of two major componets, the cost for corporate, bakery and field supervision support team, which should grow at a less rate than revenues, and the cost for our resturant management recruitment and training program, which should grow at a rate closer to our unit growth rate.

As we mention at our last couple of calls, we leave some additional office space for expanded management training and culinary R&D activities in late fiscal 2002 to keep up with our growth rates.

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

Acordingly, we expect absolute G&A expense to progressively increase from quarter-to-quarter during the remainder of fiscal 2003 and into fiscal 2004.

Now, we initially expected total G&A expenses as a percentage of revenues for the full year of fiscal 2003 to be in the 5% range, but it could be slightly lower than that, depending on the degree of sales leverage actually achieved for the full year.

Depreciation expense was 3.5% of total revenues for the third quarter, compared to 3.6% for the same quarter last year and 3.6% in the sequential quarter.

Our current expectation for total depreciation expense as a percentage of revenues for the full year of fiscal 2003, is in the 3.6% range, based on our expected growth and investment plans.

Again, that percentage will be found in part on the degree of revanue leverage actually achieved.

Actual preopening costs incurred during the third quarter were approximately 4.1 million, compared to $2.2 million for the same quarter last year.

During the quater just ended, we opened three Cheesecake Factory restaurants compared to two Cheesecake Factory restaurants and one Grand Lux Cafe in the same quater last year.

We also incurred preopening costs in both quarters for other openings in progress.

As Gerry mentioned, we usually incur most costs during the two months before and the month of a restaurant's opening.

As most of our investors know, we're required through GAAP, who were adopted by the accounting profession back in 1998, to expense restaurant preopening costs in the period they are incurred.

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

The preopening costs for our upscale highly customized and operationaly complex restaurants is higher than most resturant concepts in terms of absolute dollars, but is in line with other upscale concepts relative to the scope of operations.

We currently expect preopening costs for the fourth quarter to be in the $5 million range, which includes costs associated with the 7 planned openings as well as the early fiscal 2004 openings.

Again, as Gerry mentioned, one of the potential 4th Quarter openings will be a large Cheesecake factory restaurant in Honolulu, Hawaii and will likely have costs in excess of $1 million.

Also, investors should consider in the modeling the normal 90 to 120-day period for new restaurant operating margins to reach thier targeted run rate levels.

That covers our review of the main line item componets of our operating margins for the third quarter.

In summary, our favorable sales comparisons and resulting leverage, coupled with a focus on managing the labor, operating and G&A expenses that we can control, helped to offset the increase in some commodity costs during the third quarter.

As Gerry mentioned, we are confident we will achieve our fiscal 2003 new restaurant opening plan of as many as 14 new restaurants and our absolute bakery sales for the fourth quarter have a good opportunity to increase sequentially.

These two factors combined give us a good opportunity to resume the leveraging of the fixed cost in our marging structure going forward.

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

Our effective tax rate for the third quater was 35.7%, the same as for fiscal 2002, we currently plan on using the same rate 35.7 as our estimated effective tax rate for the remainder of fiscal 2003, subject to adjustment if necessary as we finish out the year.

Our liquidity position and financial flexibility continue to remain very strong, as of September 30, our cash and marketable securities on hand were approximately $120 million, now, this balances up approximately $6 million from the December year-end balance, but it has decreased as expected from the sequential quarter end balance of $127 million and will likely decrease a little further in the fourth quarter, due to the number of expected restaurant openings and the related Cap Ex spending in the third and fourth quarters.

Our cash flow from operations year to date was approximately $66 million and our cash and accrued Cap Ex year to date was approximately $67 million, which includes construction progress for upcoming openings.

We currently estimate our total Cap Ex 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 enviroment, we expect to be able to finance our Cap Ex 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 a 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.

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 of reduced risk and flexability in terms of our ability to execute our growth plan.

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

We do keep a $25 million credit facility in place for backup liquidity purposes and to support stand by 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.

The company didn't buy back any shares in the third quarter much we have approximate 610,000 shares remaining in our current repurchase authorization.

That wraps it up.

Gerry, back to you.

Thanks, Mike.

That was a great summary.

So, to wrap up our business and financial review, the Cheesecake Factory achieved solid increases in revenue, net income and diluted net income per share for the third quarter.

We've opened nine new Cheesecake Factory restaurants so far this year, just as we originally planned and we believe that we're on track to open as many five additional restaurants during the rest of this year, also as we originally planned.

Our sales comparisons for our established restaurants are off to a great start to date for the fourth quarter.

Our bakery sales volumes are continuing to gradually build again.

Our Cheesecake Factory restaurants continue to lead the industry in terms of their absolute sales productivity and with room for at least 200 Cheesecake Factory restaurants domestically.

And we're confident that we have a sustainable period of profitable growth ahead of us for several years to come.

So, that wraps up our financial and business review for the third quarter.

At this time, we will be happy to take a few questions.

Now, we'd like to accommodate as many folks as possible, and questions as possible in the time we've got left on this call, so, we'd like to request that each participant be very courteous to all other participants and limit themselves to just one question if possible, and if we don't have time to get to your question on the call, please feel free to call us at our offices after the call, both Mike and I will be standing by maning the phones as usual.

So now operator, Jean- we're ready to take a few questions.

In order to ask a question, press star 1 on your telephone keypad.

We will pause for just a moment to compile the q&a roster.

Your first question comes from Matthew DeFrisco with Harris Nesbitt.

Hi.

I just had a couple -- one question -- I will try to sum up the question into one here.

I'm trying to figure out or gauge expectations for operating cash flow margins or restaurant margins coming out into 4 Q, taking into account food costs seem to be on the rise here, a little bit and I think you've eluded to that being a trend that's going to continue into the fourth quarter.

And also, the seven store openings in total in the quarter.

Does -- how does that mitigate the currrent good trend of 2% comp growth and the leverage that you would get from that?

I.e.

should we expect the new store openings to offset that leverage of 2%?

And you're expecting operating cash flow margins to be down below where they were the year ago?

Or are you going to see modest increases or expansion of margins like you put up in 3 Q.

Matt, that's quite a question. and I think The best way to answer is it to really, give you the components of the line items that Mike just reiterated in his comments.

Our sales trends continue to be positive to date for the --. [ INAUDIBLE ] -- up 2%.

We did comment in Mike's remarks that from a food cost perspective, we expected the cost for fish and meat commodities that are not currently contractable to continue at the about the same rate they did during the third quarter.

Poultry, which is much a larger component of our food cost structure, peaked a little bit in the third quarter.

We have seen that back off a little bit here so far during the fourth quarter and I think Mike said in his comments that our expectation is for our poultry cost to gradually reduce back to where they were in the same quarter last year throughout the quarter.

As far as the other components of our margins, we cannot really predict the absolute impact of seven openings on labor costs and food costs for the quarter.

We do know that we have typical inefficiencies associated with our new restaurant openings.

If you're comparing quarter-to-quarter over quarter, last year in the fourth quarter we opened five restaurants.

This year we will open seven restaurants.

So, there is a base for some comparability I think on the food and labor costs related to just the clustering of new openings when you look to the fourth quarter last year.

As far as being able to give you a precise forecast of where we think Q 4 will come out from an operating cash flow perspecctive at our resturants, you know, I don't think we've ever been able to do that.

We just comment on the trends byline item and we think overall, you know, with our top line trend holding in nicely, you know, I think that we'll have the opportunity to have a pretty nice quarter.

Okay, I guess a number that you can speak maybe perhaps, more precisely on, the preopening expense guidance seemed a little low there, $5 million for fourth quarter with seven stores.

I guess you've always guided to about 800,000, 7 store openings would be about 5.6 plus you're expecting a higher preopening associated with the Hawaii store.

Did you mean to say a beginning of -- how broad is that range of $5 million?

Matt, we have seven openings, but recall the first of those seven occurred on October 3.

So, substantially a lot of the preopening costs for that -- for that opening were incurred in the third quarter.

And then you have parts of the October openings, their preopening costs, if you recall in our comments, preopening costs are typically incurred two months before and the month of opening.

So, after you adjust for preopening costs for Q4 openings to the extent portions of those were incurred in Q3 and then factor in Hawaii and the rest of the absolute openings in November and December for Q4, I think we're pretty comfortable with the $5 million number.

Okay?

Okay, thanks a lot.

Okay.

Next question, please?

Your next question comes from Michael Novak with Frontier Capital.

Hi, good quarter.

Hey, Mike, thank you.

Question on the average weekly sales.

It's nice you noted it was the first positive quarter since the second quarter of what was it, '01?

'02.

'02.

Would you expect that average weekly sales, now that you've lapped this grand opening effect, that they should stay positive from here on out?

You know, Mike, I think that we have a strong opportunity to maintain positive average weekly sales comparisons.

I think we have a good opportunity, obviously, that's driven to a large extent by the performance of our baseline restaurants and the only information that we have to date is that, you know, for the first 20 days of fiscal October, sales in our baseline restaurants are up about 2%.

Historically, if you go back and take a look at that statistic and I'm sure as I recall you do that, you do have that in your models going back for many quarters, you will see the numbers move around, depending in large part on the mix of established versus new restaurants that are coming in and how many new restaurants are represented portion of total restaurants and where those new restaurants are coming off a honeymoon period.

The best answer to give you is we have a good opportunity to continue the trend, assuming that our to date sales of comparisons in our baseline restaurants continue as they have for the rest of the quarter, but that's an assumption that, you know, we can't state for certain, but we're very optimistic.

The other thing,, too is that we're up against, for Cheesecake Factory, anyway, we're up against a relatively easier comparisons for us for the next couple of quarters, assuming that weather doesn't get in the way.

If you recall, we did have some tough weather we experienced in Q4 last year and Q1 and Q2 of this year.

With respect to utilization of our patio seating, in particular.

And some tough winter weather in Q1of this year.

If weather conditions, you know, stay favorable or don't get in the way, then I think we -- we'd be able to feel much better about it, but it's just tough to predict the weather.

Right.

So, that's really the best answer I think that we can give you.

Okay, well I appreciate it.

And any luck on getting the openings more linear next year?

David, you want to comment on that?

I don't think we can tell you that yet.

You know, it's -- we just pick the best sites and we get them open as soon as we can and I wish I could tell you I could just lay them out, but we just look for the best sites in America and get them built as fast as we can and they fall where they fall.

David, any visibility on the first quarter yet, number of openings?

I believe, David -- I believe that our internal plan, again, we're in the process of finalizing this, Mike, so, please give us a little more time to precisely lock it in as best as we can, but I think we're talking three for the first quarter right now and that's compared to two for the first quarter in the current year.

Great, well good quarter, thank you.

Thank you, Mike.

Your next question comes from Mark Kalinowski with Smith Barney.

Hi, just wanted to ask about the bakery sales.

If I'm not mistaken, I think the Q3 revenue was somewhat towards the lower end of the company-stated target.

Just wanted to see if there was anything that might have pressured the top line there a little bit more than maybe the company expected?

And also just curious, from my conversations with Darden restaurants it appears they're not back to using you as a customer, however, they remain open to that possibility.

I'm curious what you might be doing at the present time to try to win them back over?

I think as it relates to Darden restaurants, we have heard the same thing, we highly respect Darden, they're an excellent restaurant operation.

To the extent they feel that it would be time for to us consider doing business again, I'm sure we'd welcome their call.

We did not have them in our business plan for this year and frankly our book of business is filling up quite quickly for next year.

We have the highest respect for Darden.

We hope to do business again with them in the very near future.

As far as bakery sales, yes, we did have bakery sales during the third quarter of about $10.2 million, we did state that we thought it would fall within the range of 10 to $12 million.

It is very, very difficult for us to precisely predict as I mentioned in our comments on the conference call, the exact timing of the orders and the shipments.

It's not unusual for us to get a $2 million order or shipment will occur within a single week, so, when you look in your quarterly cut-offs, the shipments occur when the orders come in and are shipped.

That's why we're feeling pretty darn good about our ability to have a positive sales comparison for the fourth quarter in our bakery sales.

There is really nothing that's -- that I would say that we are concerned about with respect to the sales trends with our current bakery customers.

The warehouse club business has been very, very solid and I think the upcoming holiday season bodes well for the warehouse club operators.

We also have a couple of large retail accounts as I think a lot of our investors know that had pretty tough holiday business comparisons last year that hopefully will have a chance to better those comparisons for the upcoming holiday season.

So, I think we're very, very optimistic that we've got a chance to have a positive sales comparison for the fourth quarter.

Thank you.

Okay.

Your next question comes from Hardy Boeing with Arnold and Blaketrotter.

Hello, how you doing.

Hi, hardy, how are you?

Okay!

I was curious as to what the run rate on the Chicago, Grand Lux would be now?

And whether we made changes in the menu and whether average ticket is going up or still 75 cents more than the cheesecake?

And if anything's been done to the kitchen?

And so forth.

This is David, Hardy.

Yeah, David.

I think our run rate right now is somewhere in between the 11 and 12 million is what we think, although it's been really doing even better than we thought.

Uh-huh.

The last weeks have been up beautifully.

So, it's hard for to us tell, but we -- we're, you know, we're pretty confident between the 11 and 12 mark.

We are now designing our kitchen for our Dallas opening and working all of -- all of the, you know, that -- those plans as we speak to be as efficient and get the costs down and I think we're making some very nice headway in that.

And, you know, we're coming out with a new menu for Grand Lux in about a week and -- and so there's always little tweaks on some new items and some other items that are -- that are going on in Grand Lux and, you know, again, I think it's moving beautifully.

It's moving the way Cheesecake Factory used to before it got to be so popular and people are discovering it, finding it, coming back and back.

So, again, we're very happy, we're not advertising.

And yet, you know, as Gerry said in the call, it's copping up incredible well.

And how do you feel about the cost engineering of the kitchen and the restaurant at this point?

Very, very good.

I think we've, you know, again, we've just had a few rounds and we've already taken a couple hundred thousand dollars out of it and a number of square feet.

So, I think, you know, by the time we actually, you know, put that plan down, we will have made a lot of progress and each time we build one, we will make more progress until we get it exactly where we want it.

The other thing worth noting here is that with Grand Lux Cafe on Michigan avenue, which is located about 6 blocks south on Michigan avenue of our highest volume Cheesecake Factory unit, we're able to anualize as David mentioned, 11 to 12 million in Grand Lux Cafe six blocks south of our Cheesecake Factory restaurant that actually had same store sales up 1.5% for the third quarter just ended.

So, that's just a beautiful example of the opportunity that we believe we have at hand to develop additional upscale casual dining resturants in markets where we already have a Cheesecake Factory restaurant and where we believe that there's enough business for upscale casual dining to have two great restaurant concepts in some of these great markets in America.

That might be a pretty good combination?

So far so good.

Okay.

Thank you, hardy.

Yep.

We will take a few more questions, operator.

Your next question comes from Dennis Forst with McDonald Investments.

Hey, good afternoon.

I wanted to ask about the return on investment for Grand Lux.

Gerry, at the beginning you were talking about having the second vehicle when needed and that has an excellent ROI.

Can you give us an idea of the cost for the two new Grand Luxes going in next year?

Dennis, we've been asked this question many times before and I think our answer remains, at this point, those two particular units were really prototype units, they were really built to really generate consumer interest in the concept, they were the two units that were built, you know, outside of our experience in Las Vegas.

Now, we can say that our restaurant in Las Vegas at the Venetian, is clearly achieving a very attractive return on -- very, very close to Cheesecake Factory --.

I'm sorry, I am asking about the new ones for next year.

I know.

Basically, we don't really have the final investment costs for, you know, a rollout unit really put together.

That's the end of the year, Dennis, so, we're working on, you know, all the kinds of productivity and efficiency engineering that we have learned and so was I say maybe in three, four months, we will know what they'll cost, and of course we won't know their sales and again, these Grand Luxes are building into their sales, beautifully.

But, you know, again, it's not exactly Cheesecake.

So, I think down the line we will have more information.

Right now we're having everybody engineer out all the excess that we can see right now and, you know, it's kind of, you know, put one foot in front of the next as we get, you know, bring the line down four feet and cut out some square footage and so on and so forth from let's say the kitchen, then you have to open it, run it, make sure it's okay and then go ahead and make is more progress into the next.

It's -- again, we're looking at menu mix and the stores are building so quickly into the sales volume, we don't even know whether the sales volume will be higher or lower or meet-Cheesecake Factory.

We still have work to do.

It's just really too early to talk about all those numbers.

Well, at this time --

They're incubating.

Yes, having said that, we're very, very encouraged with what we see.

From a financial point of view, Dennis, I think we still have work to do on the investment cost, on sales productivity and on our operating margins, but we're making great progress and I don't think we're that far away from having something to convert into a rollout status after we get the next two opened.

Okay, thanks.

One more question, operator.

Okay, and your final question is from Sharon Zackfia with William Blair.

Hi, great quarter.

Thank you, Sharon.

I'm wondering now that I guess Charlotte and Austin have been open for nearly a year and those are some of your smaller markets, kind of how they're doing on a sales per square foot or on a return basis?

I think if you were to take the two together, I think we'd probably be right at our average.

That is our goal, is to get an average sales per square foot of about $1,000 for each class of opening.

Clearly, Charlotte will be the stronger of the two as they stand right now.

Although, you know, Charlotte is still settling in from the record-setting opening volume, you know, a year ago, when it opened up in the middle of an ice storm doing 318 it's first week and it's settling into where we thought it would on a run rate basis and will probably settle in probably north of $1,000 a square foot in sales on an annualized basis.

Austin will probably behave more like an older Cheesecake Factory used to.

We're in a bit of a new market we didn't get a lot of the grand opening hoopla that we did in Charlotte and Raleigh and some of the other cities that we've recently opened at.

So, I think Austin, it's and very profitable restaurant and productive restaurant, it's a little below our average right now, but I think has the opportunity to build over time as we build our reputation and overall awareness in Austin.

You did say Austin, Texas, right?

I did say Austin, Yes.

I didn't know if it was Boston or Austin.

Austin, sorry, I'm mumbling.

I'm a little hard-of-hearing!

All right, take care.

So, I -- I think together we'll be fine.

Okay, operator.

Thank you and thank everyone for being on the call today.

And this does conclude today's conference call.

You may now disconnect.