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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2012

or

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-20574

THE CHEESECAKE FACTORY INCORPORATED

(Exact name of registrant as specified in its charter)

(818) 871-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of October 24, 2012, 53,672,626 shares of the registrant’s Common Stock, $.01 par value, were outstanding.

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

INDEX

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PART I.         FINANCIAL INFORMATION

Item 1.            Financial Statements

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

See the accompanying notes to the consolidated financial statements.

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

See the accompanying notes to the consolidated financial statements.

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

See the accompanying notes to the consolidated financial statements.

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See the accompanying notes to the consolidated financial statements.

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.  Basis of Presentation and Significant Accounting Policies

The accompanying consolidated financial statements include the accounts of The Cheesecake Factory Incorporated (referred to herein as the “Company,” “we,” “us” and “our”) and its wholly owned subsidiaries prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The financial statements presented herein have not been audited by an independent registered public accounting firm, but include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of the financial condition, results of operations and cash flows for the period.  However, these results are not necessarily indicative of results for any other interim period or for the full fiscal year.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules of the Securities and Exchange Commission (“SEC”).  The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2012 filed with the SEC on February 29, 2012.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions for the reporting periods covered by the financial statements.  These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities.  Actual results could differ from these estimates.

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31st for financial reporting purposes.  Fiscal 2012 consists of 52 weeks and will end on January 1, 2013.  Fiscal 2011, which ended on January 3, 2012, was a 53-week year, with an additional week in the fourth quarter.

Certain reclassifications have been made to prior year amounts to conform to current year presentation.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued guidance that provides entities with an option to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary.  If an entity concludes that it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required.  However, if an entity concludes otherwise, quantitative testing is not required.  This standard is effective for annual and interim periods beginning after September 15, 2012, with early adoption permitted.  We do not expect that the adoption of this standard will have a material impact on our financial statements.

In June 2011, the FASB issued guidance that eliminated the previous option to report other comprehensive income and its components in the statement of changes in equity.  Companies can elect to present items of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements.  There are no changes to the accounting for items within comprehensive income.  This standard impacts presentation only and became effective for us in the first quarter of fiscal 2012.

2.  Inventories

Inventories consisted of (in thousands):

3.  Long-Term Debt

In December 2010, we entered into a five-year credit agreement (“Facility”) that provides us with revolving loan commitments totaling $200 million, including letter of credit subfacility commitments that total $35 million.  The Facility contains a commitment increase feature that could provide for an additional $50 million in available credit upon our request and the satisfaction of certain conditions.  In conjunction with our entry into the Facility, we terminated our prior credit facility dated April 2007, as amended March 2008 and January 2009.  We had no outstanding borrowings under the Facility at October 2, 2012 or January 3, 2012.

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Borrowings under the Facility bear interest at a floating rate based on LIBOR, plus a spread ranging from 1.75% to 2.25%, depending on our ratio of debt plus eight times rent (“Adjusted Debt”) to trailing 12-month earnings before interest, taxes, depreciation, amortization, rent and noncash stock option expense (“EBITDAR”), as defined in the agreement.  In addition, we pay a commitment fee ranging from 0.3% to 0.4%, also depending on our ratio of Adjusted Debt to EBITDAR, calculated on the average unused portion of the Facility.

We are obligated to maintain certain financial covenants, which include a maximum Adjusted Debt to trailing 12-month EBITDAR ratio (“Adjusted Debt Ratio”) of 4.0, as well as a trailing 12-month minimum EBITDAR to interest and rental expense ratio (“EBITDAR Ratio”) of 1.9.  At October 2, 2012, our Adjusted Debt and EBITDAR ratios were 2.7 and 2.9, respectively.  Therefore, we were in compliance with the financial covenants in effect under the Facility at that date.  The Facility limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on these ratios.

Availability under the Facility is reduced by outstanding standby letters of credit, which are used to support our self-insurance programs.  As of October 2, 2012, we had net availability for borrowings of $178 million, based on a zero outstanding debt balance and $22 million in standby letters of credit.

4. Commitments and Contingencies

Within the ordinary course of our business, we are subject to private lawsuits, government audits, administrative proceedings and other claims.  These matters typically involve claims from guests, staff members and others related to operational issues common to the foodservice industry.  A number of these claims may exist at any given time, and some of the claims may be pled as class actions.  From time to time, we are also involved in lawsuits with respect to infringements of, or challenges to, our registered trademarks.  We could be affected by adverse publicity and litigation costs resulting from such allegations, regardless of whether these allegations are valid or whether we are legally determined to be liable. At this time, we believe that the final disposition of any pending lawsuits, audits, proceedings and claims will not have a material adverse effect individually or in the aggregate on our financial position, results of operations or liquidity.  It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, audits, proceedings or claims.

5. Stockholders’ Equity

(1)          It is our policy to capitalize the portion of stock-based compensation costs for our internal development and construction, legal, and facilities departments that relates to capitalizable activities such as the design and construction of new restaurants, remodeling existing locations, lease, intellectual property and liquor license acquisition activities and equipment installation.  Capitalized stock-based compensation is included in property and equipment, net and other assets on the consolidated balance sheets.

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Stock Options

The weighted average fair value at the grant date for options issued during the third quarter of fiscal 2012 and 2011 was $10.27 and $11.88 per option, respectively.  The fair value of options at the grant date was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions for the third quarter of fiscal 2012 and 2011, respectively: (a) an expected option term of 6.1 and 6.0 years, (b) expected stock price volatility of 37.3% and 38.5%, (c) a risk-free interest rate of 1.1% and 1.4%, and (d) a dividend yield on our stock of 1.4% and 0.0%.

Stock option activity during the thirty-nine weeks ended October 2, 2012 was as follows:

The total intrinsic value of options exercised during the thirteen and thirty-nine weeks ended October 2, 2012 was $3.4 million and $11.6 million, respectively.  The total intrinsic value of options exercised during the thirteen and thirty-nine weeks ended September 27, 2011 was $0.9 million and $4.6 million, respectively.  As of October 2, 2012, the total unrecognized stock-based compensation expense related to unvested stock options was $16.8 million, which we expect to recognize over a weighted average period of approximately 2.3 years.

Restricted Shares and Restricted Share Units

Restricted share and restricted share unit activity during the thirty-nine weeks ended October 2, 2012 was as follows:

Fair value of our restricted shares and restricted share units is based on our closing stock price on the date of grant.  The weighted average fair value at the grant date for restricted shares and restricted share units issued during the third quarter of fiscal 2012 and fiscal 2011 was $34.00 and $26.98, respectively.  The fair value of shares that vested during thirty-nine weeks ended October 2, 2012 was $2.4 million.  No shares vested during the thirteen weeks ended October 2, 2012.  The fair value of shares that vested during the thirteen and thirty-nine weeks ended September 27, 2011 was $0.3 million and $1.2 million, respectively.  As of October 2, 2012, total unrecognized stock-based compensation expense related to unvested restricted shares and restricted share units was $21.4 million, which we expect to recognize over a weighted average period of approximately 3.7 years.

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7.  Net Income Per Share

At October 2, 2012 and September 27, 2011, 1.2 million and 0.7 million shares, respectively, of restricted stock issued to employees were unvested, and therefore excluded from the calculation of basic earnings per share for the fiscal quarters ended on those dates. Diluted net income per share includes the dilutive effect of outstanding equity awards, calculated using the treasury stock method.  Assumed proceeds from in-the-money options include windfall tax benefits, net of shortfalls, calculated under the “as-if” method as prescribed by FASB Accounting Standards Codification (“ASC”) 718, “Compensation — Stock Option Compensation.”

Shares of common stock equivalents of 1.9 million and 2.8 million for the thirteen and thirty-nine weeks ended October 2, 2012 and 3.3 million and 2.7 million for the thirteen and thirty-nine weeks ended September 27, 2011, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.

We began paying a cash dividend to our shareholders during the third quarter of fiscal 2012.  Certain of our restricted stock awards are considered participating securities as these awards include non-forfeitable rights to dividends with respect to unvested shares.  As such, they must be included in the computation of earnings per share pursuant to the two-class method.  Under the two-class method, a portion of net income is allocated to participating securities, and therefore is excluded from the calculation of earnings per share allocated to common shares.  For both the thirteen and thirty-nine weeks ended October 2, 2012 the calculation of basic and diluted earnings per share pursuant to the two-class method resulted in an immaterial difference from the amounts displayed in the consolidated statements of comprehensive income.

8.  Segment Information

Our management reviews discrete financial information for The Cheesecake Factory, Grand Lux Cafe and RockSugar Pan Asian Kitchen restaurants and our bakery division for decision-making purposes.  However, based on quantitative thresholds set forth in ASC 280, “Segment Reporting,” The Cheesecake Factory is our only business that meets the criteria of a reportable operating segment.  Although not required, we present segment information for the bakery separately from our restaurant concepts because the bakery is a distinctively different business, and we believe information regarding this segment is useful to readers.  Bakery sales to our Company-owned restaurants are recorded at prices similar to third-party national accounts.  Unallocated corporate expenses, assets and capital expenditures are presented below as reconciling items to the amounts presented in the consolidated financial statements.

Segment information is presented below (in thousands):

9.  Subsequent Events

Hurricane Sandy, which severely affected the Mid-Atlantic and Northeast United States in late October, caused closures and other business interruption issues at a number of our restaurants.  As of the date of this filing, all of the impacted locations are reopened.  We had no significant physical damage to any of our restaurants and are evaluating the impact of the storm on our fourth quarter results including our ability to recoup any losses through insurance coverage.

On November 6, 2012, our Board of Directors approved the adoption of 10b5-1 Plan which will be effective from December 6, 2012 through July 3, 2013.  See “Liquidity and Capital Resources” in Part I, Item 2 of this report for further discussion of our share repurchases.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain information included in this Form 10-Q and other materials filed or to be filed by us with the SEC, as well as information included in oral or written statements made by us or on our behalf, may contain forward-looking statements about our current and expected performance trends, growth plans, business goals and other matters.  These statements may be contained in our filings with the SEC, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers.  Words or phrases such as “believe,” “plan,” “will likely result,” “expect,” “intend,” “will continue,” “is anticipated,” “estimate,” “project,” “may,” “could,” “would,” “should,” and similar expressions are intended to identify forward-looking statements.  These statements, and any other statements that are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Acts”).

In connection with the “safe harbor” provisions of the Acts, we have identified and are disclosing important factors, risks and uncertainties that could cause our actual results to differ materially from those contained in forward-looking statements made by us, or on our behalf (see Part II, Item 1A of this report, “Risk Factors,” and Part I, Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2012).  These cautionary statements are to be used as a reference in connection with any forward-looking statements.  The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC.  Because of these factors, risks and uncertainties, we caution against placing undue reliance on forward-looking statements.  Although we believe that the assumptions underlying forward-looking statements are reasonable, any of the assumptions could be incorrect, and there can be no assurance that forward-looking statements will prove to be accurate.  Forward-looking statements speak only as of the date on which they are made.  Except as may be required by law, we do not undertake any obligation to modify or revise any forward-looking statement to take into account or otherwise reflect subsequent events or circumstances arising after the date that the forward-looking statement was made.

General

This discussion and analysis should be read in conjunction with our interim unaudited consolidated financial statements and related notes included in this Form 10-Q in Part I, Item 1, and with the following items included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2012: the audited consolidated financial statements and related notes in Part IV, Item 15, the “Risk Factors” included in Part I, Item 1A and the cautionary statements included throughout the report.  The inclusion of supplementary analytical and related information herein may require us to make estimates and assumptions to enable us to fairly present, in all material respects, our analysis of trends and expectations with respect to our results of operations and financial position taken as a whole.

As of November 9, 2012, we operated 173 Company-owned upscale, casual, full-service dining restaurants: 158 under The Cheesecake Factory® mark, 14 under the Grand Lux Cafe® mark and one under the RockSugar Pan Asian Kitchen® mark.  We also operated two bakery production facilities.

The Cheesecake Factory is an upscale, casual dining concept that offers more than 200 menu items including appetizers, pizza, seafood, steaks, chicken, burgers, pasta, specialty items, salads, sandwiches, omelettes and desserts, including approximately 40 varieties of cheesecake and other baked desserts.  Grand Lux Cafe and RockSugar Pan Asian Kitchen are also upscale, casual dining concepts offering approximately 200 and 80 menu items, respectively.  In contrast to many chain restaurant operations, substantially all of our menu items (except certain desserts manufactured at our bakery production facilities) are prepared on the restaurant premises using high quality, fresh ingredients based on innovative and proprietary recipes.  We believe our restaurants are recognized by consumers for offering value with generous food portions at moderate prices.  Our restaurants’ distinctive, contemporary design and decor create a high-energy ambiance in a casual setting.  Our restaurants typically range in size from 7,000 to 15,000 interior square feet, provide full liquor service and are generally open seven days a week for lunch and dinner, as well as Sunday brunch.

In 2011, we announced our initial expansion plans outside of the United States. We entered into an exclusive licensing agreement with a Kuwait-based company to build and operate The Cheesecake Factory restaurants in the Middle East. The agreement provides for the development of 22 restaurants in the United Arab Emirates, Kuwait, Bahrain, Qatar and the Kingdom of Saudi Arabia, with the opportunity to expand the agreement to include other markets in the Middle East and North Africa, Central and Eastern Europe, Russia and Turkey. This licensing agreement includes an initial development fee, site and design fees and ongoing royalties on our licensee’s restaurant sales. The transaction also includes an agreement to supply bakery products branded under The Cheesecake Factory trademark to such restaurants.  Our licensee opened its first restaurant in August 2012 in Dubai, a second location in Kuwait in November 2012 and expects to open an additional restaurant in Dubai in December 2012.  We do not expect these openings to have a material impact on our financial results in fiscal 2012.  We continue to review opportunities to expand in markets outside of the United States.

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Overview

In addition to being highly competitive, the restaurant industry is affected by changes in consumer tastes and discretionary spending; changes in general economic conditions; public safety conditions; demographic trends; weather conditions; the cost and availability of food products, labor and energy; and government regulations.  Accordingly, as part of our strategy we must constantly evolve and refine the critical elements of our restaurant concepts to protect our competitiveness and to maintain and enhance the strength of our brands.

Our strategy is driven by our commitment to guest satisfaction and is focused primarily on menu innovation and operational execution to continue to differentiate ourselves from other restaurant concepts, as well as drive competitively strong performance that is sustainable.  Financially, we are focused on prudently managing expenses at our restaurants, bakery facilities and corporate support center.  We are also committed to allocating capital in a manner that will maximize profitability and returns.  Investing in new restaurant development that meets our return on investment criteria is our top capital allocation priority with a focus on opening our restaurant concepts in premier locations within both new and existing markets in the United States and new markets internationally.

In evaluating and assessing the performance of our business, we believe the following are key performance indicators that should be taken into consideration:

·                   Comparable Restaurant Sales and Overall Revenue Growth.  Changes in comparable restaurant sales come from variations in guest traffic, as well as in check average.  Our strategy is to grow guest traffic by continuing to offer innovative, high quality menu items that offer guests a wide range of options in terms of flavor, price and value.  In addition, we focus on service and hospitality with the goal of delivering an exceptional guest experience.

Check average is impacted by menu price increases and/or changes in menu mix.  Our philosophy with regard to menu pricing is to use price increases to help offset key operating costs in a manner that balances protecting both our margins and guest traffic levels.  With regard to our menu mix, it has been influenced in fiscal 2012 by a couple of factors.  These include check management by our guests and shifting of menu preferences as we evolve our menu and our guests try new items.  Over time, and as the economy strengthens, we expect menu mix to stabilize, allowing us to capture more of the menu price increases we implement.

Our overall revenue growth is driven by comparable restaurant sales increases, revenue from new restaurant openings, increases in third-party bakery sales and royalties from additional licensed international locations.

·                  Income from Operations Expressed as a Percentage of Revenues (“Operating Margins”).  Operating margins are subject to fluctuations in commodity costs, labor, restaurant-level occupancy expenses, general and administrative expenses (“G&A”), and preopening expenses.  Our objective is to gradually increase our operating margins by capturing fixed cost leverage from comparable restaurant sales increases, maximizing our purchasing power as our business grows, and operating our restaurants as productively as possible.

By efficiently scaling our restaurant and bakery support infrastructure and improving our internal processes, we work toward growing G&A expenses at a slower rate than revenue growth over the long-term, which also should contribute to operating margin expansion.  However, G&A as a percentage of revenues may vary from quarter to quarter.

·                  Return on Investment.  Return on investment measures our ability to make the best decisions regarding our allocation of capital.  Returns are affected by the cost to build restaurants, the level of revenues that each restaurant can deliver and our ability to maximize the profitability of restaurants through operational execution and disciplined cost management.  Our objective is to deploy capital in a manner that will maximize our return on investment.

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Results of Operations

The following table sets forth, for the periods indicated, information from our consolidated statements of comprehensive income expressed as percentages of revenues.  The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any other interim period or for the full fiscal year.

Thirteen Weeks Ended October 2, 2012 Compared to Thirteen Weeks Ended September 27, 2011

Revenues

Revenues increased 5.4% to $453.8 million for the thirteen weeks ended October 2, 2012 compared to $430.4 million for the thirteen weeks ended September 27, 2011.

Restaurant sales increased 6.0% to $437.9 million compared to $413.3 million in the prior year third quarter.  Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased by 2.5%, or $9.9 million, from the third quarter of fiscal 2011, driven by an increase in guest traffic of 1.5% and average check growth of 1.0%.  Increases in menu pricing were partially offset by changes in menu mix due to check management by our guests, as well as some shifting of menu preferences as our guests tried newer items.  In the prior year third quarter, there was an approximate 0.4% negative impact from Hurricane Irene.  The Cheesecake Factory and Grand Lux Cafe restaurants become eligible to enter our comparable sales base in their 19th month of operation.  At October 2, 2012, there were nine The Cheesecake Factory restaurants and one Grand Lux Cafe not yet in our comparable sales base.

Comparable sales at The Cheesecake Factory restaurants increased 2.9% from the prior year third quarter driven by an increase in guest traffic, as well as average check growth.  We implemented effective menu price increases of approximately 1.0% and 0.8% during the first and third quarters of fiscal 2012, respectively.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, The Cheesecake Factory menu included a 2.0% increase in pricing for the thirteen weeks ended October 2, 2012.  This increase in menu pricing was partially offset by changes in menu mix due to check management by our guests, including a reduction in the number of guests ordering non-alcoholic beverages, as well as some shifting of menu preferences as our guests tried newer items.

Comparable sales at our Grand Lux Cafe restaurants decreased 2.0% from the prior year third quarter driven by lower guest traffic, partially offset by an increase in average check.  With fewer restaurants in operation than The Cheesecake Factory and a number of locations that are proportionately larger in size, Grand Lux Cafe can experience greater variability in its comparable sales from quarter to quarter.  During the second quarter of fiscal 2012, we implemented an effective menu price increase of approximately 1.0%.  Since this was the only price increase we made during the preceding 12 months, the Grand Lux Cafe menu included a 1.0% increase in pricing for the thirteen weeks ended October 2, 2012.

We generally update and reprint our menus twice a year.  As part of these menu updates, we evaluate the need for price increases based on those operating cost and expense increases of which we are aware or that we can reasonably expect.  While menu price increases can contribute to higher comparable restaurant sales in addition to offsetting margin pressure, we carefully consider all potential price increases in light of the extent to which we believe they will impact guest traffic.

Additionally, other factors outside of our control, such as general economic conditions, inclement weather, timing of holidays, and competitive and other factors, including those referenced in Part I, Item lA, “Risk Factors,” of our Annual Report on Form 10-K for the year ended January 3, 2012, can impact comparable sales.

Total restaurant operating weeks increased 4.5% to 2,249 for the thirteen weeks ended October 2, 2012 due to the opening of ten new restaurants during the trailing 15-month period.  Average sales per restaurant operating week increased approximately 1.4% to $194,700 in the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011.

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Bakery sales to other foodservice operators, retailers and distributors (“bakery sales”) decreased 7.0% to $15.9 million for the thirteen weeks ended October 2, 2012 compared to $17.1 million for the comparable period of last year primarily due to a decline in sales to our warehouse club accounts, partially offset by higher international sales related to our licensee’s first restaurant opening in the Middle East.  We strive to develop and maintain long-term, growing relationships with our bakery customers, based largely on our 39-year reputation for producing high quality and creative baked desserts.  However, it is difficult to predict the timing of bakery product shipments and contribution margins on a quarterly basis, as the purchasing plans of our large-account customers, who constitute a majority of our bakery sales, may fluctuate.

Cost of Sales

Cost of sales consists of food, beverage, retail and bakery production supply costs incurred in conjunction with our restaurant and bakery revenues, and excludes depreciation, which is captured separately in depreciation and amortization expenses.  As a percentage of revenues, cost of sales decreased to 24.6% in the third quarter of fiscal 2012 compared to 25.4% in the comparable period of last year.  This improvement was primarily due to lower costs for dairy, produce and fish, as well as a benefit from a higher mix of restaurant sales as compared to bakery sales.

Our restaurant menus are among the most diversified in the foodservice industry and, accordingly, are not overly dependent on a few select commodities.  Changes in costs for one commodity can sometimes be counterbalanced by cost changes in other commodity categories.  The principal commodity categories for our restaurants include produce, poultry, meat, fish and seafood, dairy, bread and general grocery items.

We attempt to negotiate short-term and long-term agreements for our principal commodity, supply and equipment requirements, depending on market conditions and expected demand.  However, we are currently unable to contract for extended periods of time for some of our commodities such as many dairy and certain fish and grocery items (excluding cream cheese used in our bakery operations).  Consequently, these commodities can be subject to unforeseen supply and cost fluctuations.  Cream cheese is the most significant commodity used in our bakery products.  We contracted for a substantial portion of our fiscal 2012 cream cheese requirements and purchase cream cheese on the spot market as necessary to supplement our contracted amounts.

We have taken steps to qualify multiple suppliers and enter into agreements for some of the key commodities used in our restaurant and bakery operations.  However, there can be no assurance that future supplies and costs for these commodities will not fluctuate due to inclement weather, energy cost and availability and other market conditions outside of our control.  For new restaurants, cost of sales are typically higher during the first three to four months of operations until our management team becomes accustomed to optimally predicting, managing and servicing the sales volumes at the new restaurant.

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

Labor Expenses

As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery direct production labor, including associated fringe benefits, decreased to 32.1% in the third quarter of fiscal 2012 compared to 32.3% in the third quarter of fiscal 2011.  Lower group medical insurance and bakery labor costs were partially offset by higher payroll taxes.

Other Operating Costs and Expenses

Other operating costs and expenses consist of restaurant-level occupancy expenses (rent, common area expenses, insurance, licenses, taxes and utilities), other operating expenses (excluding food costs and labor expenses, which are reported separately) and bakery production overhead, selling and distribution expenses.  As a percentage of revenues, other operating costs and expenses increased to 25.1% for the thirteen weeks ended October 2, 2012 from 24.7% for the thirteen weeks ended September 27, 2011. This increase was primarily due to higher workers’ compensation, repair and maintenance, and marketing expenses, partially offset by lower debit card transaction fees.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist of the restaurant management recruiting and training program, as well as the restaurant field supervision, bakery administrative, and corporate support organizations.  As a percentage of revenues, G&A expenses decreased to 4.9% for the thirteen weeks ended October 2, 2012 versus 5.5% for the comparable period of fiscal 2011 due primarily to the recoupment of legal expenses via an insurance settlement and lower stock-based compensation expense, partially offset by a higher fiscal 2012 accrual for corporate performance bonuses.

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Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses were 4.1% for both the thirteen weeks ended October 2, 2012 and the comparable period of last year.

Preopening Costs

Preopening costs were $2.4 million for the thirteen weeks ended October 2, 2012 compared to $4.3 million in the comparable period of the prior year.  We incurred preopening costs to open one The Cheesecake Factory restaurant and one Grand Lux Cafe in the third quarter of fiscal 2012 compared to four The Cheesecake Factory restaurants in the third quarter of fiscal 2011.

Preopening costs include all costs to relocate and compensate restaurant management employees during the preopening period; costs to recruit and train hourly restaurant employees; wages, travel and lodging costs for our opening training team and other support employees; and straight-line minimum base rent during the build-out and in-restaurant training periods.  Also included in preopening costs are expenses for maintaining a roster of trained managers for pending openings; the associated temporary housing and other costs necessary to relocate managers in alignment with future restaurant opening and operating needs; and corporate travel and support activities.  Preopening costs can fluctuate significantly from period to period, based on the number and timing of restaurant openings and the specific preopening costs incurred for each restaurant.

Interest and Other (Expense)/Income, Net

Interest and other expense, net increased to $1.7 million for the third quarter of fiscal 2012 compared to $1.2 million for the comparable period last year.  This increase was primarily due to changes in the value of our investments in variable life insurance contracts used to support our Executive Savings Plan (“ESP”), a non-qualified deferred compensation plan, and to higher asset retirements.  Interest expense included $0.9 million in both the third quarter of fiscal 2012 and the third quarter of fiscal 2011 associated with landlord construction allowances deemed to be financing in accordance with accounting guidance.

Income Tax Provision

Our effective income tax rate was 27.8% for the third quarter of fiscal 2012 compared to 29.2% for the comparable prior year period.  This decrease was attributable to changes in the value of our investments in variable life insurance contracts used to support our ESP.  This was partially offset by a lower proportion of employment credits in relation to pretax income primarily due to the expiration of the Hiring Incentives to Restore Employment (“HIRE”) Act retention credit at the end of fiscal 2011, as well as to increased state taxes in relation to pretax income.

Thirty-Nine Weeks Ended October 2, 2012 Compared to Thirty-Nine Weeks Ended September 27, 2011

Revenues

Revenues increased 5.0% to $1,344.3 million for the thirty-nine weeks ended October 2, 2012 compared to $1,279.9 million for the thirty-nine weeks ended September 27, 2011.

Restaurant sales increased 5.6% to $1,305.8 million compared to $1,236.8 million for the same period of the prior year.  Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased by 2.2%, or $26.4 million, from the first three quarters of fiscal 2011, driven primarily by an increase in guest traffic of 1.3% and average check growth of 0.9%.  Increases in menu pricing were partially offset by changes in menu mix due to check management by our guests, as well as some shifting of menu preferences as our guests tried newer items.

Comparable sales at The Cheesecake Factory restaurants increased 2.5% from the first three quarters of fiscal 2011 driven primarily by improved guest traffic, as well as average check growth.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, The Cheesecake Factory menu included a 2.0% increase in pricing for the thirty-nine weeks ended October 2, 2012.  This increase in menu pricing was partially offset by changes in menu mix due to check management by our guests, as well as some shifting of menu preferences as our guests tried newer items.

Comparable sales at our Grand Lux Cafe restaurants decreased 1.5% from the first three quarters of fiscal 2011 driven by lower guest traffic, partially offset by an increase in average check.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, the Grand Lux Cafe menu included a 1.2% increase in pricing for the thirty-nine weeks ended October 2, 2012.  This increase in menu pricing was partially offset by changes in menu mix due to check management by our guests, as well as some shifting of menu preferences as our guests tried newer items.

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Total restaurant operating weeks increased 4.3% to 6,686 for the thirty-nine weeks ended October 2, 2012.  Average sales per restaurant operating week increased approximately 1.2% to $195,300 compared to the same period of fiscal 2011.  A busy holiday week that usually falls in the first fiscal quarter was captured as the 53rd week of fiscal 2011, thereby shifting a high-volume sales week out of the first quarter of fiscal 2012 and replacing it with an average sales week.  This negatively impacted our average weekly sales increase in the first three quarters of fiscal 2012 by approximately 0.6%.

Bakery sales decreased 10.9% to $38.5 million for the thirty-nine weeks ended October 2, 2012 compared to $43.2 million for the comparable period of last year due primarily to a decline in sales to our warehouse club accounts, partially offset by higher international sales related to our licensee’s first restaurant opening in the Middle East.

Cost of Sales

As a percentage of revenues, cost of sales decreased to 24.6% in the thirty-nine weeks ended October 2, 2012 compared to 25.3% in the comparable period of last year.  This improvement was primarily due to lower costs for dairy, produce and fish, as well as a benefit from the higher mix of restaurant sales as compared to bakery sales.

Labor Expenses

As a percentage of revenues, labor expenses for the thirty-nine weeks ended October 2, 2012 decreased to 32.3% compared to 32.5% in the comparable period of last year.  Lower group medical insurance costs were partially offset by higher payroll taxes and other labor-related costs.

Other Operating Costs and Expenses

As a percentage of revenues, other operating costs and expenses decreased to 24.4% for the thirty-nine weeks ended October 2, 2012 from 24.5% for the thirty-nine weeks ended September 27, 2011.  This decrease was primarily due to lower comparative debit card transaction fees.

General and Administrative Expenses

As a percentage of revenues, G&A expenses increased to 5.8% for the thirty-nine weeks ended October 2, 2012 versus 5.6% for the comparable period of fiscal 2011 due primarily to a higher fiscal 2012 accrual for corporate performance bonuses, partially offset by the recoupment of legal expenses via an insurance settlement.

Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses were 4.1% for both the thirty-nine weeks ended October 2, 2012 and the comparable period of last year.

Preopening Costs

Preopening costs were $7.5 million for the thirty-nine weeks ended October 2, 2012 compared to $7.1 million in the comparable period of the prior year.  We incurred preopening costs to open three The Cheesecake Factory restaurants and one Grand Lux Cafe in the first three quarters of fiscal 2012 compared to five The Cheesecake Factory restaurants in the first three quarters of fiscal 2011.  Although we opened fewer restaurants on a year-to-date basis in fiscal year 2012 compared with the prior year, factors such as the timing of those openings and other expenses that are not tied to specific openings resulted in higher fiscal 2012 costs.

Interest and Other (Expense)/Income, Net

Interest and other expense, net was $3.7 million for both the thirty-nine weeks ended October 2, 2012 and September 27, 2011.  Interest expense included $2.7 million for the first three quarters of 2012 compared to $2.8 million for the first three quarters of fiscal 2011 associated with landlord construction allowances deemed to be financing in accordance with accounting guidance.

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Income Tax Provision

Our effective income tax rate was 28.6% for the first three quarters of fiscal 2012 compared to 28.2% for the comparable prior year period.  This increase was attributable to a lower proportion of employment credits in relation to pretax income primarily due to the expiration of the Hiring Incentives to Restore Employment (“HIRE”) Act retention credit at the end of fiscal 2011, as well as to increased state taxes in relation to pretax income.  This was partially offset by changes in the value of our investments in variable life insurance contracts used to support our ESP.

Non-GAAP Measures

Adjusted net income and adjusted diluted net income per share are supplemental measures of our performance that are not required by or presented in accordance with GAAP.  These non-GAAP measures may not be comparable to similarly-titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

We calculate these non-GAAP measures by eliminating from net income and diluted net income per share the impact of items we do not consider indicative of our ongoing operations.  We believe these adjusted measures provide additional information to facilitate the comparison of our past and present financial results.  We utilize results that both include and exclude the identified items in evaluating business performance.  However, our inclusion of these adjusted measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items.  In the future, we may incur expenses or generate income similar to the adjusted items.

Following is a reconciliation from net income and diluted net income per share to the corresponding adjusted measures (in thousands, except per share data):

(1)         Represents the realization of proceeds from one of our variable life insurance contracts used to support our ESP.  This item is non-taxable and was recorded in interest and other (expense)/income.

Fiscal 2012 Outlook

For the fourth quarter of fiscal 2012, we estimate diluted earnings per share will be between $0.50 and $0.53 based on an assumed comparable restaurant sales increase in a range between 1.0% and 2.0%.  We estimate diluted earnings per share for fiscal 2012 will be between $1.87 and $1.90 based on an estimated comparable restaurant sales increase of approximately 2%.  We currently expect food cost inflation of between flat and 1.0% and a corporate tax rate of between 28.5% and 29.5% for the full year.

During fiscal year 2012, we plan to open eight new restaurants.  On a year-to-date basis as of November 9, 2012, we opened three The Cheesecake Factory locations and one Grand Lux Cafe.  In addition to these Company-owned locations, our licensee opened its first restaurant in Dubai, a second location in Kuwait and expects to open an additional restaurant in Dubai during this fiscal year.

Our lease for The Cheesecake Factory restaurant located in Brentwood, California expired on October 4, 2012, in accordance with its terms, and we elected not to renew it.  Costs related to this expiration were minimal, and we do not expect it to impact our comparable sales and earnings per share assumptions for fiscal 2012 or future years.

We expect fiscal 2012 cash capital expenditures to range between $85 million and $95 million.  We also plan to repurchase between $90 million to $100 million of our common stock, depending on Company performance and market conditions, $75.0 million of which we repurchased during the first three quarters of fiscal 2012.  In addition, we expect to pay total cash dividends in fiscal 2012 of approximately $12.8 million.

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Fiscal 2013 Outlook

We estimate diluted earnings per share for fiscal 2013 will be between $2.10 and $2.18 based on an assumed comparable restaurant sales increase in a range between 1.5% and 2.5%.  We currently expect food cost inflation of between 3% and 5% and a corporate tax rate of between 29% and 30%.

In fiscal 2013, we plan to open as many as eight to ten new restaurants.  This includes the relocation of two or three restaurants as we take the opportunity to optimize the location of our restaurants in certain trade areas.  In addition to these Company-owned locations, we expect as many as four licensed The Cheesecake Factory restaurants to open internationally in fiscal 2013.

We expect cash capital expenditures in fiscal 2013 to range between $115 million and $125 million.  We anticipate the majority of our free cash flow after capital expenditures to be utilized for dividends and share repurchases.

Liquidity and Capital Resources

The following table presents, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities (in millions):