Wall Street is not cutting Cheesecake Factory slack. (Corporate Focus).

THE Cheesecake Factory seems to do everything right.

Its restaurants operate at or near capacity, its growth is controlled and cautious, its operation is profitable.

But despite its success and an enviable fourth quarter financial performance, shares in the Calabasas-based company are trading near to Cheescake Factory's 52-week low.

The problem, in part, stems from troubles in the restaurant sector overall, which has driven stock prices for the group down by about 8 percent since the beginning of the year. Despite its strong performance, Wall Street is painting Cheesecake Factory with the same brush it has used for the rest of the industry.

"Almost every restaurant out there has lowered guidance for the first quarter," said Eric Wold, vice president and research analyst at RTX Securities in San Francisco. One of the few that haven't is Cheesecake Factory. It's a cloud that's hanging over them."

Bad weather and consumers' cautious spending habits have taken a bite out of restaurant sales in general And many figure that if the nation goes to war with Iraq, would-be diners will stay home glued to their television sets instead of eating out.

"In this environment with consumer confidence at low levels and the possibility that we can have a protracted Iraqi conflict, that could have an affect on restaurant stocks," said Rob Curran, an analyst with Pacific Growth Equities Inc.

Cheesecake Factory has had some impact from the weather conditions because the company closes its patios, reducing the number of diners it can serve. But its sales and earnings, so far at least, have not been significantly impacted, either by the weather or by a dismal holiday spending season.

For the fourth quarter ended Dec. 31, 2002, the restaurant reported net income of $13.2 million or $0.26 per diluted share on revenues of $174.4 million. That compares with earnings of $10.9 million or $0.22 per share on revenues of $148.8 million for the comparable period last year.

"The numbers they released for the fourth quarter were very good," said Wold at RTX. "I stated in the report the only reason not to buy was the risk that first quarter earnings due to weather. In the restaurant sector it's the main thing people focus on."

Fears about the impact of weather and war on restaurant sales overall, coupled with concerns over Cheesecake Factory's price to earnings ratio at its 52-week trading high of $43.55, have taken a toll on the company's stock price.

Shares in Cheesecake Factory have fallen steadily since January to the high-$20 range. On Friday, February 28, Cheesecake shares were trading at $29.59

"Yes, our stock price today is less than our stock price a year ago, which intuitively doesn't make much sense in light of our growth this past year," said Jerry Deitchle, president and CFO at Cheesecake Factory.

Deitchle concedes there is little to do to turn around that situation except to stick with the company's formula.

Cheesecake Factory stores are so-well managed that their sales per square foot -- at about $1,000 -- far outpace the industry average of $450 per square foot.

That has been both good news and bad news for the chain.

Because Cheesecake Factory restaurants run at or near capacity there is very little room for growth from existing units.

"The primary sales driver for our company during the next few years will be new Cheesecake Factory restaurant openings," said Deitchle, "not same-store sales increases."

Cheesecake Factory opened 12 new restaurants in 2002 and plans to open another 14 units in 2003. The company currently has 61 restaurants nationwide.

But the lack of wiggle room for increases in same store sales also means that when an event impacts restaurant traffic, the effect is even more conspicuous at Cheesecake Factory.

The chain typically only sees increases of about 1 percent or 1.5 percent from existing units. Bad weather, for instance, which forced Cheesecake Factory to shut down patios in some of its locations, reduced its same store sales increase to 0.3 percent.

"They run such a tight (comparative sales) number -- we don't expect to see more than 1 (percent) or 2 (percent increase) -- it caused concern since January and February tend to be tighter months for restaurants," said Curran.

Still, with its strong fundamentals, analysts agree the company's long term prospects are good.

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The Cheesecake Factory

YEAR (Dec. 31)                   2002  2001 (1)

Revenue (millions)             $652.0     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              $0.96     $0.79

(1) Fiscal year end in 2001 was Jan. 1, 2002.

RELATED ARTICLE: SUMMARY

Business: Restaurant operator

Headquarters: Calabasas Hills

CEO: David Overton

Market Cap: $1,491.8 million

Dividend Yield: N/A *

Total Liabilities: $84.3 million

P/E: 29.8

Lang-Term Debt: 0

* Cheesecake Factory does not pay dividends.