Cheesecake Factory run stalls as older stores sag.

Reality is starting to stick to the Cheesecake Factory Inc.

The Teflon-coated operator of casual dining stores failed for the first time since its 1992 initial public offering to show an increase in comparable store sales and paid the price with a steep drop in share price.

Shares of the Calabasas Hills-based company fell by 9 percent two weeks ago, after it announced its first-quarter earnings fell a penny short of analysts' expectations.

The company was quick to blame severe winter weather and an ill-timed Easter holiday for what it said was between $2.5 million and $2.9 million in lost revenues. But analysts were not so sure.

"This... decline cannot be explained solely by weather or the Easter/spring break calendar shift," John Ivankoe, an analyst at JP Morgan Chase & Co., wrote in an April 22 report. "Even using the company's estimate that these factors may have hurt sales, the adjusted February and March comps were still down by 2 percent -- meaningfully below the unadjusted comps of many of its casual dining peers."

Ivankoe has downgraded the restaurant operator's stock to underweight, the lowest of the firm's ratings.

While shares have since regained some of the ground lost after the earnings announcement, closing May 7 at $33.54, it is still trading well below its 52-week high of $42.99.

Company officials did not return calls. But in a late April conference call with analysts, Jerry Deitchle, its president and chief financial officer, hewed to the calendar and weather as the causes for failing to meet revenue expectations, a rare occurrence for the company.

"When you only have 60 stores and about a dozen of them are closed for a few days during the quarter, you're going to see an impact," he said.

The stumble comes as the company faces increasing pressure to open up its equity compensation plans to approval by shareholders and to start expensing stock options.

The Culinary Workers Union Local 226, which holds 30,000 shares, gained the support last week of the New York State Common Retirement Fund, which controls 900,000 shares (roughly 1.8 percent of those outstanding), in its push to enact the two measures, according to filings with the Securities and Exchange Commission.

In its proxy statement, the company has recommended against the measures, which will be put to a vote at its annual meeting, to be held Tuesday (13th).

The company had a stumble last year when it said rinse water found its way into a whipped-cream machine causing an outbreak of Listeria contamination in August. That resulted in a nationwide recall of all its products made during a three-day period. One operator destroyed 2,500 cakes after tainted product was sent to 19 Olive Garden restaurants.

Dennis Milton, an analyst at Standard & Poor's recommending a hold on the stock, said Cheesecake Factory stock is finally coming down to realistic proportions.

Milton criticized the chain for growing too slowly and taking too few risks. "They are very cautious," he said. "They are well managed, but they are fiscally cautious."

Net income for the three months ended April 1 was $12.6 million, compared with $10.6 million (21 cents) for the like-year earlier period. Revenues were $172.9 million, up from $150.2 million a year ago.

The growth it has seen in revenues was largely attributed to new store openings, which contributed $30.1 million in revenues. Backing out the revenues contributed by new operations, overall same store sales decreased by 2 percent in the first quarter.

That caused Cheesecake Factory to trail its peers, according to Ivankoe's report, which said it had a 1.9 percent decline in same-store sales through the first eight weeks of the quarter. The industry was led by PF Chang's, which posted a 5.5 percent gain in the period, followed by Outback Steakhouse (up 1.6 percent), Olive Garden (1.3 percent) and Red Lobster (1 percent).

Restaurant industry consultant Randy Watt, president of Costa Mesa-based Fessel International, said Cheesecake has heeded analysts' calls for more growth. And with only 65 restaurants, he said there should be plenty of room to expand.

"They are kicking up their growth a bit," he said, "and they seem to have a very good expansion plans."

Still, some analysts still wonder whether Cheesecake Factory is cannibalizing its own sales as it opens new restaurants in markets where it already has a presence.

The company has opened three high-end versions of its eatery, called Grand Lux Cafe -- including one on Chicago's North Shore Drive just down the block from a Cheesecake factory location. Company officials told investors sales have held steady at that location.

Even so, Ivankoe and Milton said the company might be pricing itself out of the casual dining sector. The average check at the company's restaurants increased by 1.5 percent over the quarter, to $15.78 -- one of the highest amounts for similar eateries.

That has not escaped the attention of Cheesecake executives. Deitchle said in the conference call that if higher prices of its "winter menu," introduced in the first quarter, were found to be hurting sales, adjustments would be made when its "summer menu" is introduced later this quarter.

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Cheesecake Factory

YEAR (Dec. 31)                  2002    2001

Revenue (millions)              $652  $539.1
Operating Expenses (millions)  581.7   483.7
Operating Income (millions)     70.3    55.4
Net Income (millions)           49.1    39.3
Earnings Per Share             $1.00   $0.83

SUMMARY

Business: Casual dining restaurants

Headquarters: Calabasas Hills

CEO: David Overton

Market Cap: $1.6 billion

Divided Yield: N/A

Total Liabilities: $62 million

P/E Ratio: 32.44

Long-Term Debt: $0

* Cheesecake factory does not pay dividends

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