Cheesecake Factory Inc (CAKE) 2003 Q4 法說會逐字稿

Good afternoon.

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

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

All lines are placed on mute to prevent 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 1 on the keypad.

To withdraw 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 of The Cheesecake Factory Incorporated, and welcome to our quarterly investor conference call, which is also being broadcast live over the internet.

Also with us is David Overton, our Chairman of the Board and Chief Executive Officer, who just got off the plane from visiting our outstanding new restaurant in Honolulu, and he's calling in for today's call.

David, you're there, right?

Yes, thank you, Gerry.

Great, also with us today is Mike Dixon, our former VP Finance and our newly appointed Chief Financial Officer, and Jane Vallaire is with us, our Director of Investor Relations.

Jane, would you cover our cautionary statement regarding risk factors and forward-looking statements in general, please?

Yes, thanks Gerry.

The company's comments during this conference call held today, February 4, 2004, 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 undo 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, results 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 risks and uncertainties associated with forward-looking statements contained in our periodic filings with the Security and Exchange Commission.

This conference call is the property of The Cheesecake Factory, Inc.

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

Thanks, Jane.

With that out of the way, 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 fourth quarter 2003 and that ended on December 30, 2003.

We're going to refer to that quarter as the fourth quarter in our comments today, and then after that we'll be happy to answer a few questions as time allowed.

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

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

Our revenues during the fourth quarter increased 23% to $214.5 million.

Our net income increased 18% to $15.6 million, and our diluted net income per share was 30 cents.

As we noted in our press release today, our comparable restaurant sales were up a very solid 2.5% for the fourth quarter, thanks in large part to the sustained popularity of our restaurant concepts.

We had great operational execution once again in our restaurants.

We also had favorable weather comparisons in California and Florida, where we had 21 of our 54 comparable restaurants and where we were able to more effectively utilize our outdoor patio seating.

Our restaurant operations team, led by Peter D'Amelio, Mark Pratte Jack Belk and Wayne Jones, did an outstanding job of managing our controllable costs and expenses during the fourth quarter, particularly at our seven new restaurants that we opened up in the fourth quarter.

This was the first quarter in our history that we opened as many as seven of our large high volume restaurants and we were very, very pleased with our strong initial sales volume and our overall operational execution at these new restaurants.

The Cheesecake Factory has reported positive comparable sales comparisons in 45 out of that 46 quarters we've been a public company, and in our view, this is one of our strongest and most consistent performance metrics.

The Cheesecake Factory has been able to maintain its strong sales productivity for many, many years without the need to resort to media advertising or discounting to stimulate or maintain consumer interest in the concept, and there aren't that many restaurant businesses of a similar size or scope of operations that are able to make that statement.

We continue to rely on our 26-year reputation with consumers for excellence in food, service, ambiance and value, and that really sustains our industry leading sales productivity metrics over the long term, and we continue to strongly believe that's the best long-term competitive strategy for our business.

The Cheesecake Factory's restaurant business model has always been a pure operating model focused on restauranteuring, great operational execution, and always focused on offering great quality and variety to our guests along with great value.

And when you consider the demographic and lifestyle trends that continue to generate increased consumer demand for casual dining occasions, we think The Cheesecake Factory's competitive positioning as a high quality concept with superior value should enable us to capture an increasing share of those casual dining occasions as we continue our expansion across the country.

So now I'm going to take a minute and give some additional color on our top line results for the fourth quarter and go over our new restaurant growth plan for fiscal 2004, and then after that Mike Dixon will briefly review our operating margin trends for the fourth quarter.

Our total restaurant sales increased about 23% during the fourth quarter to almost $200 million.

That 23% increase consisted of an approximate 21% increase of total restaurant operating weeks resulting from the openings of 14 new restaurants during the trailing 12 month period, and that was coupled with an approximate 2.2% increase in average sales per restaurant operating week, which was very close to our 2.5% increase in same-store sales.

We do believe that the 2.5% increase on our comp sales for the fourth quarter was principally due to menu price increases that we've taken, coupled with a slight pickup in guest traffic in our 21 comparable restaurants in California and Florida, again due to favorable weather comparisons and better utilization of our patio seats in those markets.

With The Cheesecake Factory concept is busy and productive as it is, particularly during peak meal periods when most guests want to dine with us, we really don't have much excess capacity 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 and total sales in the next couple of years should come from the openings of new restaurants, not same-store sales increases.

With respect to the same-store 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 sales increases in our established restaurants that are roughly equal to our annualized effective menu price increases, and we continue to believe that the right long-term expectation for annual increases in our comparable restaurant sale is in the 1-2% range.

We did mention in our press release today that comparable restaurant sales are up about 5% for the first five weeks of fiscal 2004, rolling over an approximate 1.4% increase that we achieved during the same period last year.

Now, among other things, our sales comparisons are currently benefitting from higher guest redemptions of The Cheesecake Factory guest cards that were purchased and activated during the holiday season.

The dollar value of Cheesecake Factory gift card activations was up about 19% in comparable restaurants during the holiday season, so that was a very good number and we continue to expect increased gift card redemptions to favorably impact our sales trends for the remainder of the current quarter.

With respect to menu pricing, next week we'll complete the roll-out of our winter menu change that includes an approximate 1.8-2% menu price increase.

We believe that this modest price increase should be sufficient to offset the vast majority of operating cost increases for 2004 that we know of as of today.

As in years past, we'll review operating margins this spring and will consider the need for additional menu pricing in connection with our summer menu change.

For those new restaurants that are not yet in our comp base, most are continuing their expected normal transition from their grand opening or honeymoon sales volumes to their sustained run rate sales level.

Having said that, several of our new restaurants could very well settle in with sales run rates higher than our current average, and some of those restaurants that immediately come to mind in this respect would be both our new locations in San Jose, California, certainly our location in Edison, New Jersey that set on all-time sales first year sales record of approximately $14.5 million for The Cheesecake Factory, and some of our new restaurants in Orlando, Raleigh, North Carolina, White Plains, New York would clearly fall under that category, Cleveland, Ohio, Tyson's Corner, Virginia and clearly our Honolulu restaurant just to name a few.

As we noted in our press release today, sales continued to build very nicely at all three Grand Lux Cafes during the fourth quarter.

Compared to the same quarter last year, sales for our first Grand Lux Cafe in Las Vegas, which is located at the Venetian property, increased a solid 19%.

Our second location in the Beverly Center in Los Angeles achieved an impressive 8% sales increase in the fourth quarter, and the third Grand Lux Cafe location in downtown Chicago that opened a little over a year ago this past July, about a year and a half ago, achieved a strong 30% sales increase during the fourth quarter.

Again, we are very delighted to see Grand Lux Cafe's reputation for excellence continuing to grow in all three markets that we currently have those restaurants.

We are continuing 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 2004.

And our objective with Grand Lux Cafe continues to have -- take an up scale dining growth vehicle ready when we need it with an excellent return on investment profile.

We continue to be very excited about the long-term growth potential of Grand Lux Cafe, as it really plays to the strength of our core competencies as the company ,and it also plays to the strengths of the current lifestyle and demographic trends that favor increased casual dining occasions.

Moving to our restaurant growth plan, we successfully opened seven new Cheesecake Factory restaurants during the fourth quarter, including our large restaurant in Honolulu where weekly sales have averaged in excess of $350,000 since the restaurant opened.

During the full year of 2003 we successfully achieved our goal to open as many as 14 new Cheesecake Factory restaurants and we set a new growth record for the company on that measure.

We opened ten of those restaurants during a 17 week period of time and, again, that's to us a very strong testament to the strength and depth of our design, construction and operating teams.

During the upcoming year of 2004, our goal is to open as many as 16 new restaurants, which would include as many as 14 or so Cheesecake Factory restaurants and, as I previously mentioned, as many as two new Grand Lux Cafes.

Signed leases or letters of intent are in hand for all targeted locations for 2004.

As most of our investors know, it is very difficult for us to predict the timing of our new restaurant openings by quarter due to the nature of our leased restaurant locations and our highly customized layouts.

But based on the information that we have as of today, we do expect to open two restaurants during the first quarter of 2004, including the one that's already opened in Birmingham, Alabama.

We expect to open two more restaurants during the second quarter, as many as seven more restaurants during the third quarter, and as many as five more restaurants during the fourth quarter.

A majority of our planned openings for 2004 will likely occur during the second half of the year as has been the case in recent years for our company.

We do currently expect a greater number of openings to occur in the third quarter than the fourth quarter, which should favorably impact the operating profit contribution of those new restaurants to the full year results for fiscal 2004.

Most of our investors know that it takes 90-120 days on average for our new restaurants to work through their normal grand openings inefficiencies for their food and labor costs and to reach their targeted operating profit margins.

Our capacity growth goal for 2004 is to achieve a 22-23% increase in total restaurant operating weeks, up from a 21% increase achieved last year.

We'll provide updates as to the expected number and timing of restaurant openings during the upcoming year on our quarterly investor conference call.

We always want to take a minute and remind our investors that the restaurant development model that The Cheesecake Factory has is very different than the traditional cookie cutter chain restaurant development model where pad sites or lease spaces are more easily acquired, where the design and construction processes are much more simplified by having more standardized restaurant layouts, and the restaurant companies themselves have more absolute control over the timing and execution of the development process.

The Cheesecake Factory restaurant concept and its development model is more similar to that of an upscale retail chain in many respects, what I kind of refer to as a retail lease restaurant development model.

We lease the building shells or spaces for most of our restaurant locations, many of which are in newly constructed or to-be constructed retail developments, shopping malls, entertainment centers, city scape strip centers and so forth, and as a result we continue to rely very heavily on our landlords to deliver our lease shells to us in a timely manner, according to their original commitments, so we can build out the spaces in a timely manner.

Our locations are very upscale, they're very highly customized, which helps to create that non-chain image that we enjoy with consumers, and which we believe represents a significant competitive advantage for our concepts, but by the same token, our customization creates unique design and permitting challenges.

So, as a result of those factors, it's not uncommon at all to have planned openings for The Cheesecake Factory move a couple of weeks or even a month or so due to various factors outside of our control.

Having said that, though, once we get the spaces from the landlords and get our building permits, our construction and pre-opening processes are typically very consistent, usually taking five to six months to complete on average.

We have very highly professional in house design construction department, that's led by Brian MacKellar and supported by Rick McCormack on the design side and Rick Vaughn on the construction side, and we did add professional staff to that department last year in order to support our future growth plans.

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

We're continue to bat a thousand for successful restaurants so far, and there aren't many chain restaurant operators that have the successful development track record that The Cheesecake Factory has.

Now we're going to move to our bakery operations.

Our bakery sales to other food service operators, retailers and distributors, what we call outside bakery sales, they were up 16% to a record $14.9 million during the fourth quarter.

As most of our investors know, the fourth quarter is seasonally the strongest quarter of the year for our outside bakery sales due to holiday business.

During the fourth quarter our bakery team saw an opportunity to rebalance our inventory positions to better match up with expected demand going into 2004, and they also saw an opportunity to be more aggressive in stimulating trial and awareness of our new Dream Factory product line and other products.

As a result, our outside bakery sales enjoyed a stronger than expected 16% increase in sales during the fourth quarter, but we also experienced some higher related distribution selling and promotional costs related to those sales as a percentage of revenues compared to the same quarter last year.

Last year we announced an expanded relationship with Sysco Corporation for our new Dream Factory dessert line and of the private label Sysco Supreme upscale dessert line.

As many of you know, Sysco is the largest food service marketing and distribution organization in North America with over 420,000 restaurant and food service customers.

Our expanded Sysco relationship is continuing to make steady progress right in line with our expectations.

A little over two-thirds of the Sysco operating companies across the country are now stocking our Dream Factory and/or Sysco Supreme products, and our internal sales and outside broker networks are marketing directly very aggressively to many of Sysco's customers so that more of our products can be pulled through Sysco to the ultimate end users in 2004.

We also continue to build our business with the large warehouse club operators, who continue to be the largest distribution channel for outside bakery sales.

With respect to our outside bakery business, the year of 2003 was a year of investing in the longer term future of that business in many ways.

We created several new products for Sysco and for other new customers and we assembled the necessary production, distribution and sales infrastructure to set ourselves up for successful execution over the long haul, with Sysco and other new customers.

We also needed time during 2003 to gain some experience with our new products in the marketplace.

So the good news is going into 2004, our outside bakery sales have once again resumed positive momentum.

Our bakery team continues to focus on generating more consistent and predictable sales and contribution margins from our outside bakery sales, and we think that our Dream Factory product line continues to offer the best opportunity to do just that.

Our bakery team remains very confident in their ability to meet or possibly exceed our targeted 5% increase in outside bakery sales during 2004 with a good contribution margin.

While we always remain optimistic with respect to opportunities to build our bakery sales, we always remind our investors that bakery sales are not as predictable as our restaurant sales.

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

In our view, the bakery's most impactful role to our business continues to be its service as a dependable high quality producer of desserts for sale in our own restaurants, which collectively sold over $100 million of desserts made in our central bakery production facility last year.

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

We previously commented that we've been evaluating various alternatives to add additional production capacity to our bakery operations in order to support our longer term growth plan.

We are adding about 20% more capacity to our existing bakery production facility here in California during the next couple months for a relatively small Cap Ex investment.

We also continue to believe that it's in our best interest long-term to eventually phase in a small second production facility on the East Coast.

Our current expectation is to have a small East Coast facility up and running sometime during 2005, and we'll keep you advised of our plans in that respect as they continue to evolve.

A small second production facility would offer us clear advantages, not only in terms of serving as a backup production facility for our own restaurants and our current customer base, but also in terms of reducing the freight and distribution costs of our products to our East Coast restaurants and our outside customers on the East Coast.

So that covers our topline performance for the fourth quarter and our new restaurant opening plan for 2004, which is pretty exciting.

Now I'm going to turn the call over to Mike Dixon and he's going to briefly review the components of our operating margins for the fourth quarter.

Thanks, Gerry.

Let's start with supplemental data at the bottom of the financial page of the press release.

The cost of restaurant food, beverages and supplies increased to 24.3% of restaurant sales for the fourth quarter just ended, compared to 23.4% for the same quarter last year and 24.2% for the sequential September quarter.

On our last conference call we commented that our expected food costs for the fourth quarter would likely be in the same range our [inaudible] course for the sequential September quarter, and it turns out our expectation was accurate.

The menu in our restaurants is one of the most diversified in the food service industry and really is not overly dependent on a single commodity.

Changes in cost in one commodity are often, but not always, counterbalanced by cost changes in other commodity categories.

The principle 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 commodities not in an annual contract during the fourth quarter, reflecting general year over year increases in the cost for these commodities, really experienced by many operators.

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

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

Approximately one-third of our restaurant cost of sales consists of fresh produce, poultry, fish, meat and dairy commodities 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.

Now we've completed the majority of our negotiations with suppliers for those expected commodity requirements for fiscal 2004 that can be contracted for and, again that represented two-thirds of the food commodities used in our restaurant operations.

Looking forward to fiscal 2004, based on the results of these negotiations, we are currently expecting generally flat costs for our grocery and domestic cheese commodities, lower costs for shrimp and shellfish commodities, and higher costs for our beef commodities.

Based on current and expected market conditions for our noncontractable commodities, we are also expecting higher costs for fresh poultry and fish commodities, and generally flat costs for our produce commodities, which is our largest commodity category.

As Gerry mentioned, we are implementing a 1.8=2% effective menu price increase in our current new menu roll-out.

Looking forward to 2004 and based on the available information as of today, we believe this menu price increase should be sufficient to essentially offset the known known cost increases for key commodities and other goods and services utilized by our operations.

Now, also as Gerry mentioned, we will review our cost trends this spring and consider the need for any additional menu price increase in connection with our summer menu change.

On the bakery side. bakery cost, the percentage of outside bakery sales for the fourth quarter were 46.6%, which was slightly higher than the 45.8% reported for the same quarter last year and again, the 45.8% reported for the sequential quarter.

Since the net purchase cost for most of our key bakery commodities remained generally stable throughout 2002 and 2003, this cost percentage fluctuates principally as a result of the mix of product shift in any given quarter.

We produce about 200 different products and some have higher contribution margins than others, depending on the product and the distribution channel.

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

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

Looking forward, our current annual contracts for cream cheese expire at the end of this month and we have entered into new agreements for the next twelve months that call for a slightly higher cost per pound than we paid during the last twelve months.

We currently expect to us about 9 to 10 million pounds of cream cheese during 2004, which is the largest single commodity used in our bakery operation.

We have considered this higher cream cheese cost in setting the selling prices for many of our bakery products for fiscal 2004.

Now moving up to the consolidated statement of operations in our press release, total labor expenses for our combined restaurant and bakery operations were 30.2% of total revenues for the fourth quarter, which was slightly lower than the 30.5% reported for the same quarter last year, and the 30.5% reported in the sequential quarter.

The decrease in labor expenses as a percent of revenues for the fourth quarter versus the same quarter last year was primarily attributable to the leveraging of of the fixed components of our labor costs, with a 23% increase in total revenues.

As we stated last quarter, we also benefited from minimal increases in our average hourly wages and slightly lower staff turnover and training costs in our restaurant operations.

Looking forward, we currently expect our labor expenses as a percent of revenues during 2004 should remain fairly consistent with the prior year.

We believe increased costs from our group health insurance benefit plan, as well as increased costs from the few areas that did experience minimum wage increases in 2004, should be effectively offset by continued leverage as a fixed component of labor in both the restaurant and bakery.

Other operating expenses were 23.8% of total revenues for the fourth quarter, which was up compared to the 23.4% reported for the same quarter last year and the 23.5% of the sequential quarter.

This increase over the prior year is primarily attributable to increased cost of natural gas and electric services to the restaurant.

Also, as Gerry mentioned, during the fourth quarter our bakery team saw an opportunity to rebalance our inventory positions to better match up with expected demand going into 2004, and also to be more aggressive in stimulating trial and awareness of our Dream Factory product line and other products.

As a result, our related bakery distribution, selling and promotional costs also ended up slightly higher as a percentage of our total revenues compared to the same quarter last year.

Looking forward to fiscal 2004, we currently expect utility cost pressure in the 10 to 20 basis point range to continue in the other operating expense category, but we also expect to regain some leverage of the fixed costs and expenses in this category from increased restaurant and bakery sales volumes.

G&A expenses for the fourth quarter were 4.2% of total revenues for the quarter, which was down from the 4.7% in the same quarter last year and the 4.6% in the sequential 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 a given quarter, and the number of trained managers we are banking for future opening.

During the fourth quarter, we opened a record 7 new restaurants, as Gerry mentioned, and we staffed the restaurants with over 80 qualified managers that had been recruited and trained during the past several months.

As a result, the manager training component of our G&A expense was a little less during the fourth quarter compared to the sequential quarter.

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 cost for our restaurant management recruiting and training program, which should grow at a rate closer to our unit growth rate.

During fiscal 2004, we plan to add resources to the corporate support, training and field supervision activities of our business, commensurate with the planned openings of as many as 16 new restaurants during the year.

Looking forward, our current expectation for total G&A expenses as a percent of revenues for fiscal 2004, is in the same approximate range achieved during fiscal 2003, but could be slightly more or less depending on the degree of sales leverage actually achieved.

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

Looking forward, our expectation for total depreciation expense as a percent of revenues for 2004 remains in the 3.5% range, based on our expected growth and investment plan.

Actual pre-opening costs incurred during the fourth quarter were approximately $4.5 million, compared to $3.4 million for the same quarter last year.

During the quarter just ended, as Gerry mentioned, we opened 7 restaurants, compared to 5 openings in the same quarter last year.

We also incurred pre-opening costs in both quarters for other openings in progress.

As most of you know 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 also know, we are required by General Accepted Accounting Principles that were adopted by the profession in 1998, to expense restaurant pre-opening costs in the period they incurred.

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

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

Analysts and investors should factor enough pre-opening costs into their models for as many as 16 new restaurant openings during 2004.

Based on the information that we have as of today, we plan to open two restaurants during the first quarter of 2004, including the one that has already opened in Birmingham, Alabama, two restaurants during the second quarter, as many as 7 restaurants during the third quarter and as many as 5 restaurants during the fourth quarter.

In addition, as Gerry mentioned, as many as 2 of those planned 16 openings could be Grand Lux Cafe locations, for which we currently expect pre-opening costs to run approximately 25% higher than our normal pre-opening costs for a Cheesecake Factory restaurant.

So that covers our review of the major line item components of our operating margin for the fourth quarter.

Compared to the same quarter last year, we experienced higher food costs, as we expected.

On the other hand, we also achieved favorable leverage of our labor and G&A expenses.

The estimated 1.8-2% menu price increase that we are currently implementing should help to offset most of our known operating pressures going into 2004.

Additionally, we have a good opportunity to resume the leveraging of the fixed expenses in our margin structure with higher revenues.

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

Based on our final estimates of FICA/TIP credits and other income tax components, our effective tax rate for fiscal 2003 was 35.1%.

We plan to initially use the same rate, 35.1%, as our estimated tax rate for fiscal 2004, and we will adjust it if necessary as we move through the year.

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

As of December 30th, our cash and marketable securities on hand were approximately $137 million.

The $17 million increase in this balance from the sequential quarter represents in part the proceeds from our gift card program during the holiday season.

Our cash flow from operations for fiscal 2003 was approximately $112 million, and our cash and accrued Cap Ex for fiscal 2003 was approximately $106 million, which includes construction in progress for some 2004 openings.

We currently estimate our cash Cap Ex for fiscal 2004 to be in the range of $110-115 million.

Based on our current expansion plans and current expectations for the operating environment, we expect to be able to finance our Cap Ex requirements for fiscal 2004 through expected operating cash flow, agreed upon landlord construction contributions and our cash on hand.

We continue to believe maintaining the liquidity position in our current ranges makes good business sense in this operating environment so both we and our investors can have continued confidence in our ability to execute our growth plan with maximum financial flexibility, knowing we have the capital 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 the benefits of reduced risk and flexibility 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 2004, other than landlord construction contributions.

We have a $35 million credit facility in place for backup liquidity purposes and to support standby letters of credit for our insurance arrangement.

We also have a share repurchase authorization from our Board of Directors to buy back up to 1,687,500 shares on the open market.

The company did not buy back any shares in the fourth quarter.

For all of fiscal 2003, the company bought back approximately 30,000 shares at a total cost of about $800,000.

We have 640,000 shares remaining in our current repurchase authorization, though the authorization does not require us to purchase any shares and may be terminated at any time.

Gerry, I'll turn it back to you for a wrap-up.

Mike, thanks a lot.

Just to wrap up our business and financial review, our company achieved solid increases in total revenues, net income and diluted net income per share for the fourth quarter just ended.

For both fourth quarter and all of fiscal 2003, we achieved our stated goals to open as many as 7 and 14 new restaurants respectively.

We set growth records on both measures for our company, and we were able to achieve that record capacity growth with consistent high quality locations, consistent high quality operational management, and consistent high quality field supervision and corporate support.

And that's really the key to growing a restaurant chain.

Maintaining consistency in the quality of the concept, operational execution, and financial results, and we've been able to demonstrate that for many, many years.

We have very achievable restaurant capacity growth goals for 2004 ,and once again we remain confident that we can execute that growth plan with high quality and high consistency.

While we believe there's room for about 200 Cheesecake Factory restaurant locations domestically and we've only got 74 Cheesecake Factory open as of today, as you can tell by our comps today we are encouraged about the potential of Grand Lux Cafe to become a complementary second growth vehicle for our business.

We believe that The Cheesecake Factory has a sustainable period of profitable growth ahead of us for many years to come, and our strong financial position also provides us with the capital resources and flexibility to continue executing our growth plan with great quality, great consistency, great confidence.

That wraps up our business and financial review for the fourth quarter.

At this time, operator, we're going to be happy to try to answer a few questions.

Now, we want to accommodate as many questions as possible in the time we've got left on the call, so we respectfully request that each participant be courteous to all other participants and limit themselves to just one question, and if we don't have time to get to your question on this call, please feel free to call us at our offices after the call, we'll be here.

Okay, operator, we're ready to take a few questions.

At this time I would like to remind everyone, if you would like to ask a question, simply press star and then the number 1 on the telephone keypad.

Your first question comes from Coralie Witter of Goldman Sachs.

Hi.

I want to ask about the new openings that you have for the coming year.

Could you provide us with a little bit more detail about what kinds of openings they are, maybe what percentage are in brand new malls that have yet to be filled versus existing malls and I think you might be moving more towards free-standing locations but maybe not until later, if you have any of those in '04?

Certainly, I'll take a crack at answering your question and then David can come in and supplement with some additional detail on the specific locations.

As we look at the 16 targeted locations for next year, of course we've opened Birmingham, Alabama, that's a free-standing restaurant at the Summit Center in Birmingham, the upscale part of Birmingham, we've had an excellent opening, excellent sales, excellent operations and that's a new market for us.

Hopefully our next opening this quarter will be in Cincinnati, a new market for us, at Kenwood Town Center.

And I believe, David, that's a free-standing restaurant, is that correct?

Well, it's a punch-out in front of the mall.

Okay, then we have Sacramento, California, a new market for us and I believe that's free-standing.

Yes.

And we have Oakbrook, Illinois and Alpharetta, Georgia, Oakbrook would be a fill-in location for us in the Chicago market and Alpharetta would be our third location in the Atlanta market.

They're both free-standing on mall pads.

And then the other locations that we've either signed leases or letters of intent for would be Rancho Mirage, California and Corte Madera, California.

And David, those locations, I believe --

They're really in a center where they're basically free-standing but really right next to many other free-standing in the mall so it's really an outdoor center that we're part of, so it's kind of in the middle.

And then we have a lease executed for Wayne, New Jersey in Willowbrook Mall and also in Virginia Beach, Virginia, the Town Center property.

And we also have a potential strong location in Des Moines which will be a new market for us.

Pittsburgh, which will be a new market for us, and the Grand Lux Cafe locations I believe we're close to the one in Dallas and then there could potentially be another one in Houston.

So that's kind of a good lineup of many of the site types and locations that we're looking for.

I think you have a good blend of some fill-in locations and some new markets for our concepts, Coralie.

Okay.

And in terms of the -- it doesn't sound like there's a ton of locations that linked to brand new development where you have to wait for an entire development to be built, is that correct?

That's correct, Coralie, but really what's happening are mall owners, in order to get us, are really moving tenants and then adding square footage to their mall at the front doors since that's many times what we require.

So although it's not new, there is a lot of legal work you're dependent on, some of the other tenants moving on time and then landlords, construction is quite a bit.

Again, it's a hybrid of what you'd expect but in the end it's a phenomenal location for us, but there is quite a bit of work with those kinds of things.

We wouldn't take an inside spot, we want to be front and center and that usually takes quite a bit of work on the landlord's part.

Is it safe to assume that the free-standing locations, you have a lot more control over [inaudible] than the ones that are on the outside of the mall?

Much more.

Okay.

I didn't get everything, I couldn't write fast enough, but it sounded like maybe a third of it or so.

We'll get you all of that, we can get you all of that information.

Okay, great.

Thanks, very much.

Thank you.

Next question.

Your next question comes from Mark Kalinowski of Smith Barney.

Hi, just wanted to ask about the long-term future of Grand Lux Cafe.

What types of things would you need to see before you would significantly ramp up the unit growth of that concept and is there any preliminary thought, if you assume the concept works, as to how large it can get?

Thanks.

Mark, we, again, it's a guess.

But when we look at it right now, we are thinking it can get about maybe 125 or so, that possibly could go to 150.

As far as the work we're doing right now, it's all just return on investment.

For instance, again, now we know the menu mix from the two that we have, we are able to shrink the kitchen down where before we were building a kitchen not knowing what we were cooking, or what were the kinds of things that would be popular and which things would drop off the menu.

So, for instance, we brought the kitchen down by, I think it was over $300,000 in our design for Dallas and then there are other things, changes in the bar, just shrinking the square footage, making everything more productive to bring that return on investment down to the level we want.

Again, our first stage was to have a product that captured the imagination and got us sales.

We believe we have that and ever be massaged and will get better.

Now it's just bringing it down, bringing it down until we're very tight and once we get there, and we think we need about another I would say three, four at the most iterations, and then as long as the sales are there in these other markets that we're going to, for instance Dallas and Houston, and we have great sites in both, then we'll be able to pull the trigger.

At least that's the thought right now.

And the only thing that I would add to what David said is from a sales productivity perspective, if you the Grand Lux Cafe in the Venetian property in Las Vegas aside, which, I think, we have said before, its sales productivity is well over $1200 a foot, it did over $22 million last year and it's still comping up tremendously, and if we just take a look at the next two Grand Lux Cafes that we opened outside of the casino environment here in Chicago and L.A., on an annualized basis from a sales per square foot perspective, both of those two restaurants are already annualizing at $800 of annualized sales per square foot.

Now, Cheesecake Factory has an industry leading metric on that measure of close to $1,000 a foot and according to other analyst estimates, I think the number two casual dining chain in terms of sales productivity per square foot would be P.F.

Chang's at around $800, an excellently run business and an excellent concept.

So, we are delighted that Grand Lux Cafe outside of the casino environment is already annualizing at $800 a foot and is still comping up.

That gives us great confidence that what we need to do on the denominator of that return on investment calculation, all the things that David mentioned, are certainly well within our reach to achieve a solid return on investment there.

Okay.

Next question?

Your next question comes from Bret Levy of Heirloom Capital.

Hi, good afternoon.

I'm going to try to sneak in two questions because they are really both short and easy.

I just want to know, first quarter last year was down 2% comp.

You said that the first five weeks last year were up 1.4.

So if I'm doing my math, does that mean that for the rest of the quarter you're pretty much facing a down 3% comp?

I think that's the way the math would play out.

We had severe winter weather in February and in March across the country in different markets, not only in the Northeast but as I recall, California was much colder and rainier than what we've experienced.

Denver also had some severe snowstorms, which we had some interruption in our business in that particular market.

Plus you had the impact of the start-up of the Iraqi conflict in the middle of March which affected five or six of our restaurants in the Washington, D.C. area and San Diego, some of the military markets.

So yes, your math would be correct in that.

And the other one is, I figure I might as well ask one you won't answer.

You talked about redemption of gift cards.

What type of reservoir of purchased gift cards do you still have holding? $10 million, $20 million reservoir of unredeemed gift cards?

You know, I don't have that data right on my desk here, Brett, and even if we did, I'm not sure we would disclose that.

But the only thing we can say is we were just absolutely stunned by the 19% increase in gift card activations in comparable restaurants over the holiday season.

Again, we've only really had the gift cards, this is the second year we had gift cards, so we don't have a lot of track record in terms of their redemption patterns which is what you're trying to get to as -- how long do you get the benefit of those redemptions?

We don't have a great track record on that.

Mike, you have anything to add to that?

No, I think that's it.

So it's very, very difficult to predict how long that impact will be, but the good news is it's very favorable.

Good luck with everything.

Thank you.

Okay, thank you.

Next question.

Your next question from Dennis Forst of McDonald Investments.

Good morning, guys.

Hey Dennis.

Hi.

I just wanted to ask a similar question about gift cards.

Can you give us an idea just of the magnitude of that business, not necessarily when they redeem or the like, but just does that account for 1 or 2 percentage points of the increase in the month or most of the increase?

I'm just trying to get an idea of the magnitude of the gift card business.

The answer is, I'm not sure we want to get into the specific details of the gift card program for a variety of reasons.

But I can tell you that the vast majority of the 5% increase in same-store sales that we've seen for the first five weeks, I would say probably maybe a percent to a little bit more of that might be due to increased gift card redemptions.

I think the rest is probably due to stronger performance that we've seen, a little bit better weather comparison, clearly in a lot of our touristy markets, Florida, Arizona, California, we've also seen a net pickup in business quarter to date.

Now whether that's due to just overall macro conditions being a little bit better or what, I'm not sure we can possibly say.

Okay.

Thank you.

Next question?

Your next question comes from John Glass of CIBC.

Thanks.

When you talk about the menu pricing taking care of your food costs, I just want to clarify, is the correct interpretation of that therefore that food costs should remain flat for the year and maybe if you could give us any sort of quarterly color on that?

The answer to your question is, yes.

Our expectation is that food costs for -- the price increase should be able to cover the food cost increase.

So as you look at it as a percent of restaurant sales, we think it will be relatively stable with where it ended up near the end of 2002.

Again, it's very difficult for us to give you a quarterly progression other than the fact that for the items that we have contracted for, which is roughly two-thirds of our commodity basket that we utilize in our operations, I think those costs will be stable, obviously because we contracted for them and they don't have a seasonable component to us.

The other third of our food costs, again, fluctuates from quarter to quarter.

Typically in the winter, produce costs are going to be a little bit higher due to yields being a little bit less, and then in the summer, usually poultry will spike up a little bit as it always does during the summer months, at least for our business on the fresh side, anyway.

It may be different for other chains but for us it spikes up, and those are the two big categories in our food costs that really move around a little bit.

But to Mike's point, based on our estimate of the total absolute dollar cost in the commodity basket we use in our operations, and based on the price increases that we've already got in place, and again, if we need more pricing in the summer menu change I'm sure that we'll carefully consider, that but we'll be able to cover the absolute dollar cost and then some of our food cost commodities that we are expecting for 2004 as well as other operating costs that we are anticipating in the margins.

And again, as Mike mentioned as a percentage of sales, I think we'll be able to come very close, there might be 10-20 basis points or maybe give or take a little bit in terms of restaurant cost of sales as a percentage of restaurant sales.

As Mike said, I think it's going to come in very, very close.

If I can sneak another in, which is, what does rebalancing of the inventory on the bakery side mean, did you perhaps discount to stimulate trial, or how is it that work?

What we did is that we obviously sell everything at its normal price point but then we aggressively worked our promotional and discount or allowances, our incentive plans to our brokers, our product demos in the various warehouse clubs and other areas where we're trying to stimulate trial, so that's really how that works.

Thank you.

Your next question comes from Michael Novak of Frontier Capital.

Just a quick detail question.

On the occupancy -- or the other expense line, I believe that includes occupancy, but it's been going up anywhere between 40 and 60 basis points over the last three years.

Is there anything else going on in that line item other than natural gas costs?

I think as we've talked about in prior quarters, there's a few other things that are in there.

The utility costs, natural gas and electric, has really impacted that line for quite some time, I think the --

Insurance has always been a pressure.

The other big one is the worker's comp and general general liability insurance, which are also included in there.

Is occupancy in there as well?

Occupancy is in there as well.

Occupancy as a percentage of sales, what's happening with that expense?

Really at the restaurant side, there really isn't anything happening to that.

As you know, every -- substantially every one of our restaurants is in percentage rent, so our occupancy in contrast to a lot of other restaurant chains that don't have the lease structure, the retail lease development strategy that we have, they're able to get a little bit of leverage with increased sales on absolute occupancy costs.

Cheesecake Factory, our occupancy costs are variable because we're in percent rents in every location.

The only other element there that's going to increase would be our common area maintenance charges and related lease costs that we have to absorb as being a tenant in these big retail projects.

Occupancy costs are going to be fairly stable because they're going to fluctuate as a percentage of sales because of the way the rents are structured.

The one item, again, for the current quarter that just ended, that we commented on was the extra investment spending for our bakery sales, related to the distribution, selling and promotional costs, which also get into this line item and which represent really the increased quarter over quarter that you're seeing in that line item.

Okay.

So without asking you to predict natural gas prices, the other factors that are impacting that line item, pressures they are putting on the P&L, should those start to abate?

As we mentioned in the call, we certainly hope to start getting some better leverage on those other items with the increased restaurant and bakery sales.

And on the insurance side, hopefully a lot of the big unfavorable comparisons are going to roll out of the comparisons next year.

Again, we're likely to have a little bit of continued pressure like every other business in America on a few of those line items, but I don't believe it's going to be as significant as it's been over the past 18 months.

And one quick follow-up if I may on a little different subject.

You mentioned that your restaurants often operate near capacity and they're comping up very well right now.

Is there anything you're doing in terms of staffing or is it coming in in the shoulder periods, how are you accommodating that increased traffic?

David, did you want to comment on that from an operational point of view at all?

I think as far as we're concerned, we strive to operate at peak performance all the time.

We have a lot of initiatives going on, but I think that's only a small part of it.

Do you want to comment, again, the gift card sales and where else is that coming in, Gerry?

In order to add to what you said, David, it's not coming in any particular meal period.

Like dinner is not doing any better or lunch is not doing any better.

I think we're just seeing more through-put.

I think operations have picked up a little bit.

We have three major operational initiatives that we are working on this year.

One of which is related to our kitchen performance and our ticket times and could very well be we are able to just be operating better and accommodating the increased business that's being offered to us a little bit better.

Thank you very much.

I think we'll take one more question and then we'll conclude the call.

Your next question comes from Mitch Speiser of Lehman brothers.

Thank you.

Hello.

Hey, Mitch.

How are you doing?

Fine thanks.

And the question is, your '04 outlook, are you forecasting 1-2% comps?

Obviously as you know your '03 comparisons are a little bit softer than normal and your quarter to date numbers are better than expected.

And I'm just asking that because you're saying that your relative labor expense should be flat, but I'm wonder going that compares against a 1-2% comp and if we think you're going to do better than that, if we should expect some more leverage than what you're forecasting yourself on the labor line in particular, and perhaps in the operating expense line as well.

Well, the answer, I think, Mitch, is that we don't set out same-store sales goals other than everything else being equal, we expect same-store sales would benefit from the menu price increases that we take.

If we're saying here in the winter menu change that we are just finishing up, our pricing will be 1.8-2%, and if we typically have something smaller in the summer, at least we've had that practice based on need, I think one could assume that the effective new price in the menu coming into 2004 will be at least 2%, might be a few tenths higher than that.

How that plays into the comparisons throughout the year and how that impacts the relative estimates of labor and operating cost leverage, I would have to leave that up to you folks as the modelers.

We tend to be conservative in our outlook, and if things turn out to be a little bit better, if the overall environment from a retail and restaurant sales perspective turns out to be a little bit better, then clearly we're going to benefit on our operating margins from that like everybody would be.

The only thing we ever comment, with respect to same-store sales, is what our pricing is and it looks like our pricing will be a little bit higher, again, due to need and due to the ability we have to take some price than what we've had over the past three years.

Great.

And just a quick follow-up to that.

With labor -- in the first half of last year, particularly the first quarter last year, there were a lot of inefficiencies, I believe, due to unforeseen weather conditions.

So it seemed like, that the relative labor line was just higher than expected, and given weather is more normalized this year, would it be safe to assume decent leverage on the labor line just from that perspective?

I would say that assuming the weather holds the way it has been, that would be a fair assumption.

Thank you.

Okay.

Thank you, everyone.

We will conclude our call at this moment and please call us at our offices if you have further questions.

Thank you, operator.

Bye-bye.

This concludes today's Cheesecake Factory quarterly investor conference call.

You may now disconnect.