Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

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
	2004			2003			2002
Revenues:				(restated)(1)			(restated)(1)
Restaurant sales		94.5	%		94.5	%		92.5	%
Bakery sales to other foodservice operators, retailers and distributors		5.5			5.5			7.5
Total revenues		100.0			100.0			100.0
Costs and expenses:
Restaurant cost of sales		23.8			22.7			21.9
Bakery cost of sales		2.7			2.5			3.5
Labor expenses		30.8			30.9			30.7
Other operating costs and expenses		23.1			23.4			23.1
General and administrative expenses		4.2			4.6			4.9
Depreciation and amortization expenses		3.7			3.7			3.5
Preopening costs		1.5			1.6			1.7
Total costs and expenses		89.8			89.4			89.3
Income from operations		10.2			10.6			10.7
Interest income, net		0.2			0.4			0.6
Other income, net		0.1			0.4			0.3
Income before income taxes		10.5			11.4			11.6
Income tax provision		3.7			4.0			4.1
Net income		6.8	%		7.4	%		7.5	%

Fiscal 2004 Compared to Fiscal 2003

Revenues

Total revenues increased 25% to $969.2 million for fiscal 2004 compared to $773.8 million for fiscal 2003.

Restaurant sales increased 25% to $916.4 million for fiscal 2004 compared to $731.3 million for the prior fiscal year. The increase of $185.1 million consisted of the following components: $66.9 million from the openings of sixteen new restaurants during the fiscal year; $93.1 million from restaurants opened prior to fiscal 2004 that were not considered comparable sales during fiscal 2004; and $25.1 million from comparable restaurant sales. Total restaurant operating weeks increased approximately 22% to 4,314 in fiscal 2004 compared to 3,531 during fiscal 2003. A single restaurant open during the full period of fiscal 2004 would have generated 52 operating weeks. Average sales per restaurant operating week for restaurants open during the full fiscal year increased 2.8% to $213,900 in fiscal 2004 compared to $208,100 for fiscal 2003.

Comparable restaurant sales increased approximately 3.9% during fiscal 2004. 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 $976 for fiscal 2004, we generally do not expect to achieve increases in comparable sales other than our effective menu price increases. For fiscal 2004, the comparable restaurant sales increase slightly exceeded our effective price increase for the full fiscal year of approximately 2.5% due to the lower than expected sales in fiscal 2003 due to inclement weather. Refer to Management’s Discussion and Analysis of Fiscal 2003 Compared to Fiscal 2002.

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 2005 winter menu change, we implemented an approximate 1% effective menu price increase for the purpose of offsetting those operating cost and expense increases that were known or expected as of January 2005. We plan to review our operating cost and expense trends in the spring of 2005 and consider the need for additional menu pricing in connection with our 2005 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 increased 24% to $52.9 million in fiscal 2004 compared to $42.6 million in the prior fiscal year. This increase was primarily due to increased sales to our warehouse club customers, which accounted for approximately 64% of total bakery sales for fiscal 2004 compared to 62% for fiscal 2003, as well as increased sales of The Dream Factory and private label products.

Restaurant Cost of Sales

Restaurant cost of sales increased 31% to $230.9 million in fiscal 2004 compared to $175.7 million in fiscal 2003. This increase was primarily attributable to the 25% increase in restaurant sales during fiscal 2004. As a percentage of restaurant sales, these costs increased to 25.2% during fiscal 2004 compared to 24.0% for the prior fiscal year. This increase was primarily attributable to increased costs for fresh poultry and certain dairy-related commodities during fiscal 2004.

The menu at our restaurants is one of the most diversified in the foodservice industry and, accordingly, is not overly dependent on a single commodity. Changes in costs for one commodity are often, but not always, counterbalanced by cost changes in other commodity categories. The principal commodity categories for our restaurants include fresh produce, poultry, meat, fish and seafood, cheese, other fresh dairy products, bread and general grocery items.

We are currently able to contract for the majority of the food commodities used in our restaurant operations for periods up to one year. Many of the fresh commodities, such as fish, dairy, and certain produce and poultry products are not currently contractible 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. We currently expect food costs as a percentage of restaurant revenues for fiscal 2005 to be less than fiscal 2004. Based on contracts we have in place and current and expected market conditions, we expect generally flat costs for the majority of our commodities, including produce, meat, seafood and general grocery items. We also expect slightly lower costs for our poultry and dairy commodities and higher costs for our fresh fish commodities.

As has been our past practice, we will carefully consider opportunities to introduce new menu items and implement menu price increases to help offset expected cost increases for key commodities and other goods and services utilized by our operations. While we have been successful in the past in reacting to inflation and other changes in the costs of key operating resources by gradually increasing prices for our menu items, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future.

While we have taken steps to qualify multiple suppliers and enter into agreements for some of the key commodities used in our restaurant operations, there can be no assurance that future supplies and costs for commodities used in our restaurant operations will not fluctuate due to weather and other market conditions outside of our control. For new restaurants, cost of sales will typically be higher than normal during the first 90-120 days of operations until our management team at each new restaurant becomes more accustomed to optimally predicting, managing and servicing the high sales volumes typically experienced by our restaurants.

Bakery Cost of Sales

Bakery cost of sales includes ingredient, packaging and production supply costs and excludes depreciation, which is captured separately in depreciation and amortization expenses. Bakery cost of sales was $26.2 million for fiscal 2004 compared to $19.7 million for the prior fiscal year. The increase of $6.5 million was principally attributable to the 24% increase in bakery sales for fiscal 2004. As a percentage of bakery sales, bakery cost of sales increased to 49.6% for fiscal 2004 compared to 46.3% for fiscal 2003. This percentage increase was primarily due to increased costs for certain non-contracted dairy commodities, such as butter and manufacturers’ cream. While we have taken steps to qualify multiple suppliers and enter into agreements for some of the key commodities used in our bakery operations, there can be no assurance that future supplies and costs for commodities used in our bakery or restaurant operations will not fluctuate due to weather and other market conditions beyond our control. Cream cheese is the most significant commodity used in our bakery products, with an expected requirement for as much as 11 million to 12 million pounds during fiscal 2005. We have executed contracts for all of our cream cheese requirements for the first four months of fiscal 2005 at a fixed cost per pound that is slightly higher than the actual cost per pound in fiscal 2004. We plan to contract the remainder of our cream cheese requirements for fiscal 2005 as appropriate based on market conditions and prices. We will also purchase cream cheese on the spot market as necessary to supplement our agreements.

Labor Expenses

Labor expenses, which include restaurant-level labor costs and bakery direct production labor (including associated fringe benefits), increased 24.6% to $298.4 million for fiscal 2004 compared to $239.4 million for fiscal 2003. This increase was principally due to the 25% increase in total revenues during fiscal 2004. As a percentage of total revenues, labor expenses decreased slightly to 30.8% for fiscal 2004 compared to 30.9% for fiscal 2003 reflecting the leveraging of the fixed component of our labor costs with the 25% increase in total revenues. For new restaurants, labor expenses will typically be higher than normal during the first 90-120 days of operations until our management team at each new restaurant becomes more accustomed to optimally predicting, managing and servicing the high sales volumes typically experienced by our restaurants.

Other Operating Costs and Expenses

Other operating costs and expenses consist of restaurant-level occupancy expenses (rent, insurance, licenses and taxes, and utilities), other operating expenses (excluding food costs and labor expenses reported separately) and bakery production overhead, selling and distribution expenses. Other operating costs and expenses increased 23.5% to $223.5 million for fiscal 2004 compared to $181.0 million for fiscal 2003. This increase was principally attributable to the 25% increase in total revenues during fiscal 2004. During fiscal 2004, we also accrued a $4.5 million reserve for pending legal actions. As previously disclosed, the Company and a subsidiary were named in three lawsuits and in individual wage and hour claims filed directly with the California Division of Labor Standards Enforcement alleging violations of California labor laws with respect to providing meal and rest breaks to our hourly employees. While these actions are still pending, we have accrued $4.5 million based on an estimate of the ultimate costs, expenses and fees which may be incurred in connection with these matters. See Item 3, “Legal Proceedings” in this Annual Report on Form 10-K. This increase was partially offset by a $2.0 million settlement of an insurance claim, net of related expenses, associated with the fiscal 2002 voluntary withdrawal of bakery products that were produced in the Company’s bakery production facility. As a percentage of total revenues, other operating costs and expenses decreased to 23.1% for fiscal 2004 (including the net costs and expenses associated with the legal reserve and the insurance settlement of approximately $2.5 million or 0.3% or total revenues) versus 23.4% for fiscal 2003, primarily due to the leveraging of the fixed component of these costs with the 25% increase in total revenues. For fiscal 2005, we currently expect other operating costs and expenses as a percent of revenues to be approximately the same as fiscal 2004 after excluding the net costs and expenses associated with the legal reserve and insurance settlement.