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Investors Savor Strength of Cheesecake Factory Stock

With the thrashing high-tech firms have taken in the stock market in recent days, companies like the Cheesecake Factory Inc., which got little respect on Wall Street, are starting to look better to investors. Despite the steady expansion of its restaurants and continued earnings growth, the company had seen its stock stagnate, dipping down into the mid-$20 range last year. But company officials are likely walking with a bit more swagger of late. As the Nasdaq’s high-tech darlings took a nasty pounding, the Cheesecake Factory’s stock appeared to be staging a comeback. It shot up to $45 in recent weeks, before settling back down in the $37 range late last week. “I think all restaurant stocks had taken a hit,” said Howard Gordon, the company’s senior vice president of development and marketing. “Now all of a sudden, all the high-tech and biotech companies are getting smashed, and people are putting their money into companies they feel have good value.” Whether or not investors will stay put is anyone’s guess considering the volatility of the stock market these days, but Cheesecake Factory officials would argue their company, unlike a lot of its “New Economy” brethren, has the earnings to back up the stock’s valuation. Cheesecake Factory reported net income for the fourth quarter ended Dec. 28, 1999 of $7 million (33 cents a diluted share) compared to $3 million (15 cents) during the like quarter in 1998. For the fiscal year ended Dec. 28, 1999, the company reported net income of $21.7 million, vs. $7.7 million during fiscal 1998. Revenues were $347.4 million vs. $265.2 million. Analysts attribute the increase in earnings to the company’s steady expansion of its restaurants, improved same-store sales and a winning menu that includes everything from seafood, pizza, burgers and pasta to fresh-baked goods, including 40 varieties of the company’s namesake product, cheesecake. “The Cheesecake Factory does a tremendous job in their restaurants,” said Michael D. Smith, an analyst with Fahnestock & Co. “In some cases, you face a two-hour wait to get in some restaurants. How does that work? Obviously they’ve figured out a formula people like, and at a price people are willing to pay.” Despite its solid performance, Cheesecake Factory has had its ups and downs. In early 1999, the stock, which was trading around $30 a share, gave up more than 30 percent of its value after officials warned that fourth-quarter earnings would be well below expectations. The stock made a comeback of sorts, but it languished at around $30 a share for several months despite back-to-back earnings surprises in the last two quarters. The Cheesecake Factory operates 34 upscale but casual restaurants, offering more than 200 menu items and an average check of about $15. The company also operates a bakery production facility that produces a wide variety of cheesecakes and other baked goods for sale in the retail market. The average restaurant size is about 10,000 square feet, with the average store taking in $10.3 million annually, said Jane Vallaire, manager of investor relations. Some analysts have estimated that the market for casual dining could support as many as 150 Cheesecake Factory stores throughout the U.S., but the company has held firm to a growth strategy that calls for a 25 percent annual increase in restaurant square footage. Cheesecake Factory opened eight new restaurants in 1999, which account for most of the company’s $38.6 million in capital expenditures for the year, and it anticipates spending about as much in 2000 to launch nine more locations. “This isn’t a cookie-cutter situation. Each restaurant is designed for its particular location, and we want to make sure we maintain the quality not only the food, but the service and the people,” said Vallaire. Smith said the downside to Cheesecake Factory is that it doesn’t have a lot of upside potential in the short term. The stock, thanks to its recent boost, is already trading at Smith’s 12-month price target of $40 a share. “Right now it’s a pretty rich restaurant stock,” he noted. At the same, Cheesecake Factory (Nasdaq: CAKE) could make sense for investors looking for a steady performer over the long haul, he added. “They’re not going to run out of places for new restaurants for at least five or six years,” said Smith. “I’d say the stock is definitely in the momentum category.”

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