Financial Analysis of the Cheesecake Factory

Table of Contents

Introduction......................................................................3

Section 1...........................................................................3

Section 2- Ratio Analysis...................................................8

Table 1- Ratio Analysis for 3 restaurants.........................................8

Section 3- Vertical Analysis...................................................9

Table 2- Vertical/Common Size Analysis..........................................9

Section 4- Major Elements of Cash Flow..................................10

Table 3- Cash Flow Comparison for 3 restaurants.............................10

Figure 1- Comparison of Net Income .............................................11

Figure 2- Comparison of Net Cash Flow from Operating Activities........11

Figure 3- Comparison of Net Cash Flow from Investing Activities.........12

Figure 4- Comparison of Net Cash Flow from Financing Activities.........12

Figure 5- Comparison of Net Change in Cash...................................13

Figure 3- Comparison of Free Cash Flow........................................13

Section 5- Horizontal Analysis...............................................14

Table 4- Horizontal Analysis for 3 restaurants.................................14

Appendix of Financial Statements......................................15

The Cheesecake Factory(CF), which first went public in September 1992, is a strong player in the full-service restaurant industry. It is one of the fastest growing restaurant chains with over 85 restaurants nationwide. Cheesecake Factory currently has 51.824 million common shares of stock outstanding with a market value that fluctuates around $40-$45 per share. Since turning public, the restaurant has thrived because it has successfully been able to increase sales and net income annually, produce healthy profit margins, and provide a sound return on equity for its shareholders. The Cheesecake Factory is unique in that it has maintained a Debt to Capital Ratio of 0% since turning public. The restaurant chain does not have any outstanding debt! In comparison to other full service restaurants in the industry, Cheesecake Factory has historically reported higher operating revenues, net income and return on assets. The numbers for this restaurant are optimistic. As long as Cheesecake Factory continues to carefully manage growth and plan for the future, it will remain a strong player in the restaurant industry.

In order to do a complete analysis of Cheesecake Factory's overall performance in the market, it is important to look at ratios, cash flows, and trends. The numbers may seem promising but their true validity will become evident once they are compared to the numbers for other full-service restaurants in the industry. I have chosen to compare Cheesecake Factory(CF) to PF Changs China Bistro(PF Changs), and California Pizza Kitchen(CPK). California Pizza Kitchen operates 140 restaurants nationwide and currently has 19.073 million common shares of stock outstanding with a market price that fluctuates around $20-$25 per share. PF Chang's China Bistro operates 97 Bistros nationwide and currently has 25.613 million shares of common stock outstanding with a market price that fluctuates around $48-$55 per share.

Table 1 of this report contains a chart with 15 important ratios pertaining to liquidity, profit and solvency. Each ratio has been calculated for Cheesecake Factory, PF Changs and California Pizza Kitchen based on the annual reports for Fiscal Year 2003. I have chosen to use 2003 as the most recent year since we are only Ñ* of the way through 2004 and some of the numbers in the quarterly reports may wind up being restated prior to the release the Fiscal Year 2004 annual report. Some interesting things to note prior to continuing with the ratio analysis are:

1. None of the restaurants examined paid out cash dividends in 2003 and historically have paid out very little in cash dividends

2. Cheesecake Factory and PF Changs do not report any debt so the debt to asset ratio = 0, and as a result the Times Interest Earned ratio is also = 0.

Cheesecake Factory has healthier liquidity ratios than P.F. Changs and California Pizza Kitchen. The factory has a ratio 1.4:1 for current assets to liabilities, indicating that for every $1 of liabilities the factory has $1.40 in assets. California Pizza Kitchen ranks second with a current ratio of 1.26:1, and P.F. Changs is the lowest with nearly a 1:1 ratio of current assets to current liabilities. Cheesecake Factory appears to be more efficient in converting its receivables into cash and selling its inventory. Receivables for the factory were converted into cash almost 29 times during the year, indicating that it typically took less than 13 days to receive cash from the receivables. In addition CF goes through inventory pretty quickly, most inventory is kept on hand less than 12 days and was turned over a total of 32 times during 2003. The number for inventory turn over seems particularly impressive considering that CF has the largest menu selection of the three restaurants. The restaurant purchasers must carefully examine the eating trends of the customers so that they purchase the right amount of ingredients/entrйe components and aren't stuck with excess inventory. Inventory turnover is really important in the restaurant industry because most of the inventory accounted for is food, a majority of which is perishable. The quicker the inventory can be turned over, the less money wasted. CPK and PF Changs are slower at converting their receivables into cash, and slower at turning inventory into sales. For 2003, CPK converted their receivables into cash less than 3 times, the outstanding time for receivables was about 133 days. P.F. Changs converted their receivables to cash less than 2 times in 2003 with an outstanding time of 291 days. Inventory was on hand, for CPK and PF Changs respectively for 112 and 174 days.

While all three restaurants have decent profit ratios, Cheesecake Factory takes the cake. For every dollar of sales generated by CF, 7.4%