General

This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and related notes thereto found elsewhere in this Annual Report on Form 10-K.

As of March 4, 2004, we operated 75 upscale, high volume, casual dining restaurants under The Cheesecake Factory® mark. We also operated three upscale casual dining restaurants under the Grand Lux Cafe® mark in Los Angeles, California, Chicago, Illinois and Las Vegas, Nevada; one self-service, limited menu “express” foodservice operation under The Cheesecake Factory Express® mark inside the DisneyQuest® family entertainment center in Orlando, Florida; and a bakery production facility. We also licensed three limited menu bakery cafes under The Cheesecake Factory Bakery Cafe® mark to another foodservice operator.

Our revenues consist of sales from our restaurant operations and sales from our bakery operations to other foodservice operators, retailers and distributors (“bakery sales”). Revenue from restaurant sales is recognized when payment is tendered at the point of sale. Revenue from our gift cards (also known as stored value cards) is recognized upon redemption in our restaurants. Until the redemption of gift cards occurs, all outstanding balances on such cards are included as a liability in our consolidated balance sheets. Revenue from bakery sales to other foodservice operators, retailers and distributors is recognized when the products are shipped. Sales and cost of sales are reported separately for restaurant and bakery activities. All other operating cost and expense categories are reported on a combined basis for both restaurant and bakery activities. The inclusion of supplementary analytical and related information herein may require us to make appropriate 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.

New restaurants become eligible to enter our comparable sales comparison in their nineteenth month of operation. We utilize a 52/53 week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal 2003, 2002 and 2001 each consisted of 52 weeks. Fiscal 2004 will consist of 52 weeks and will end on December 28, 2004. Our next 53-week fiscal year will occur in fiscal 2005.

Results of Operations

The following table sets forth, for the periods indicated, the Consolidated Statements of Operations of the Company expressed as percentages of total revenues.

	Fiscal Year
	2003		2002		2001
Revenues:
Restaurant sales	94.5	%	92.5	%	92.7	%
Bakery sales to other foodservice operators,
retailers and distributors	5.5		7.5		7.3
Total revenues	100.0		100.0		100.0
Costs and expenses:
Restaurant cost of sales	22.7		21.9		23.5
Bakery cost of sales	2.6		3.5		3.6
Labor expenses	30.9		30.7		30.5
Other operating costs and expenses	23.4		23.1		22.4
General and administrative expenses	4.6		4.9		5.2
Depreciation and amortization expenses	3.6		3.5		3.2
Preopening costs	1.5		1.6		1.3
Total costs and expenses	89.3		89.2		89.7
Income from operations	10.7		10.8		10.3
Interest income, net	0.4		0.6		0.8
Other income, net	0.4		0.3		0.3
Income before income taxes	11.5		11.7		11.4
Income tax provision	4.0		4.2		4.1
Net income	7.5	%	7.5	%	7.3	%

Fiscal 2003 Compared to Fiscal 2002

Revenues

Total revenues increased 19% to $773.8 million for fiscal 2003 compared to $652.0 million for fiscal 2002.

Restaurant sales increased 21% to $731.3 million for fiscal 2003 compared to $603.3 million for the prior fiscal year. The increase of $128.0 million for fiscal 2003 consisted of the following components: $57.0 million from the openings of fourteen new restaurants during the fiscal year; $68.4 million from restaurants opened prior to fiscal 2003 that were not considered comparable sales during fiscal 2003; and $2.6 million from comparable restaurant sales. Total estimated productive square feet and restaurant operating weeks increased approximately 24% and 21% to 896,221 square feet and 3,531 operating weeks, respectively, during fiscal 2003. A single restaurant open during the full period of fiscal 2003 would have generated 52 operating weeks. Productive square feet consists of interior plus seasonally-adjusted patio square feet. We believe that measuring the changes in total restaurant operating weeks and total productive square feet from period to period is the most effective way to analyze the growth of the total productive capacity of our restaurant operations.

Average sales per restaurant operating week for restaurants open during the full fiscal year decreased slightly to $208,100 in fiscal 2003 compared to $210,400 for fiscal 2002. This slight decrease was principally due to severe weather throughout much of the country during the first six months of the year that resulted in approximately 22 lost days of restaurant sales due to restaurant closings and reduced availability of our outdoor patio seats. In addition, several of our newer restaurants experienced expected sales decreases to their sustainable run-rate levels after their “honeymoon” opening period. Refer to Part I: Business – “New Restaurant Sales and Investment Characteristics” in this Annual Report on Form 10-K. The average sales per week statistic for any period can also be impacted by the absolute size and productive capacity of new restaurants opened and the number of restaurants opened for new concepts such as Grand Lux Cafe that, by definition, could initially be less productive than our established Cheesecake Factory concept.

Comparable restaurant sales increased approximately 0.7% during fiscal 2003 and our effective price increase for the full fiscal year was approximately 1.2%. Comparable restaurant sales were impacted by the severe weather during the first six months of the year. Since most of our established restaurants currently operate close to full capacity during the peak demand periods of lunch and dinner, and given our relatively high average sales productivity per productive square foot of approximately $971 for fiscal 2003, we generally do not expect to achieve increases in comparable sales other than our effective menu price increases. We presently update and reprint the menus in our restaurants twice a year. For Cheesecake Factory restaurants, these updates generally occur during January-February (the “winter menu change”) and July-August (the “summer menu change”). For our 2004 winter menu change, we are implementing an approximate 1.8-2.0% effective menu price increase for the purpose of offsetting those operating cost and expense increases that are known or expected as of March 4, 2004. We plan to review our operating cost and expense trends in the spring of 2004 and consider the need for additional menu pricing in connection with our 2004 summer menu change. All potential menu price increases must be carefully considered in light of their ultimate acceptability by our restaurant guests. Additionally, other factors outside of our control, such as inclement weather, holidays, general economic and competitive conditions and other factors referenced in this Annual Report on Form 10-K can impact comparable sales comparisons. Accordingly, there can be no assurance that increases in comparable sales will be achieved.

Bakery sales to other foodservice operators, retailers and distributors decreased 13% to $42.6 million in fiscal 2003 compared to $48.7 million in the prior fiscal year. During the first half of fiscal 2002, bakery sales were unusually high principally as a result of the initial inventory pipeline fills for new relationships with the largest warehouse club operator and a national retailer. In addition, a former large-account foodservice industry customer discontinued purchasing our product in the third quarter of fiscal 2002 following a voluntary product withdrawal and recall. While our bakery operations have requalified to do business with this customer, purchase activity has not yet resumed. Sales to warehouse club operators represented approximately 62% of total bakery sales for fiscal 2003 compared to 56% for fiscal 2002.