CHEESECAKE FACTORY INC - Quarter Report: 2019 October (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2019


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-20574

THE CHEESECAKE FACTORY INCORPORATED

(Exact name of registrant as specified in its charter)


Delaware		51-0340466
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)


26901 Malibu Hills Road
Calabasas Hills, California		91301
(Address of principal executive offices)		(Zip Code)

(818) 871-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:


Title of Each Class	Trading Symbol	Name of Each Exchange on which Registered
Common Stock, par value $.01 per share	CAKE	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

As of November 1, 2019, 44,633,789 shares of the registrant’s Common Stock, $.01 par value per share, were outstanding.

Table of Contents

THE CHEESECAKE FACTORY INCORPORATED

INDEX

			Page Number

PART I	FINANCIAL INFORMATION
	Item 1.	Unaudited Financial Statements:	1
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Income	2
		Condensed Consolidated Statements of Comprehensive Income	3
		Condensed Consolidated Statement of Stockholders’ Equity	4
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
	Item 4.	Controls and Procedures	27

PART II	OTHER INFORMATION		27
	Item 1.	Legal Proceedings	27
	Item 1A.	Risk Factors	28
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
	Item 6.	Exhibits	30

Signatures			31

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)


	October 1,		January 1,
	2019		2019
ASSETS
Current assets:
Cash and cash equivalents	$	306,252	$	26,578
Accounts receivable		16,356		20,928
Income taxes receivable		8,415		—
Other receivables		31,445		68,193
Inventories		47,778		38,886
Prepaid expenses		38,895		40,645
Total current assets		449,141		195,230
Property and equipment, net		759,243		913,275
Other assets:
Intangible assets, net		20,271		26,209
Prepaid rent		—		34,961
Operating lease assets		984,838		—
Investments in unconsolidated affiliates		69,328		79,767
Other		98,949		64,691
Total other assets		1,173,386		205,628
Total assets	$	2,381,770	$	1,314,133
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	36,095	$	49,071
Income taxes payable		—		712
Gift card liabilities		135,566		172,336
Operating lease liabilities		90,027		—
Other accrued expenses		172,098		194,381
Total current liabilities		433,786		416,500

Deferred income taxes		38,449		52,123
Deferred rent liabilities		—		79,697
Deemed landlord financing liabilities		—		113,095
Long-term debt		335,000		10,000
Operating lease liabilities		959,632		—
Other noncurrent liabilities		81,087		71,659
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued		—		—
Common stock, $.01 par value, 250,000,000 shares authorized; 97,548,633 and 96,621,990 issued at October 1, 2019 and January 1, 2019, respectively		975		967
Additional paid-in capital		850,485		828,676
Retained earnings		1,375,690		1,384,494
Treasury stock, 52,906,744 and 51,791,941 shares at cost at October 1, 2019 and January 1, 2019, respectively		(1,692,701)		(1,642,140)
Accumulated other comprehensive loss		(633)		(938)
Total stockholders’ equity		533,816		571,059
Total liabilities and stockholders’ equity	$	2,381,770	$	1,314,133

See the accompanying notes to the condensed consolidated financial statements.

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)


	Thirteen		Thirteen		Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018

Revenues	$	586,536	$	575,160	$	1,788,662	$	1,747,176

Costs and expenses:
Cost of sales		132,941		132,168		403,566		398,059
Labor expenses		213,600		203,449		648,831		624,432
Other operating costs and expenses		149,397		140,975		451,724		426,466
General and administrative expenses		39,746		37,469		116,116		118,166
Depreciation and amortization expenses		21,342		24,090		64,363		71,819
Impairment of assets and lease terminations		—		263		—		2,846
Preopening costs		2,546		3,251		6,851		5,799
Total costs and expenses		559,572		541,665		1,691,451		1,647,587
Income from operations		26,964		33,495		97,211		99,589
Loss on investment in unconsolidated affiliates		(10,345)		(1,558)		(13,439)		(2,686)
Interest and other income/(expense), net		6		(1,732)		(17)		(5,018)
Income before income taxes		16,625		30,205		83,755		91,885
Income tax provision		535		1,730		5,171		9,028
Net income	$	16,090	$	28,475	$	78,584	$	82,857

Net income per share:
Basic	$	0.37	$	0.63	$	1.78	$	1.82
Diluted	$	0.36	$	0.61	$	1.76	$	1.79

Weighted average shares outstanding:
Basic		43,682		45,321		44,034		45,418
Diluted		44,186		46,368		44,643		46,400

See the accompanying notes to the condensed consolidated financial statements.

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Thirteen		Thirteen		Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018

Net income	$	16,090	$	28,475	$	78,584	$	82,857
Other comprehensive gain/(loss):
Foreign currency translation adjustment		(109)		272		305		(223)
Other comprehensive gain/(loss)		(109)		272		305		(223)
Total comprehensive income	$	15,981	$	28,747	$	78,889	$	82,634

See the accompanying notes to the condensed consolidated financial statements

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

For the thirty-nine weeks ended October 1, 2019:


										Accumulated
	Shares of			Additional						Other
	Common	Common		Paid-in		Retained		Treasury		Comprehensive
	Stock	Stock		Capital		Earnings		Stock		Loss		Total
Balance, January 1, 2019	96,622	$	967	$	828,676	$	1,384,494	$	(1,642,140)	$	(938)	$	571,059
Cumulative effect of adopting the pronouncement related to lease accounting, net of tax	—		—		—		(41,466)		—		—		(41,466)
Balance, January 1, 2019, as adjusted	96,622		967		828,676		1,343,028		(1,642,140)		(938)		529,593
Net income	—		—		—		26,984		—		—		26,984
Foreign currency translation adjustment	—		—		—		—		—		239		239
Cash dividends declared Common stock, $0.33 per share	—		—		—		(14,952)		—		—		(14,952)
Stock-based compensation	350		3		5,907		—		—		—		5,910
Common stock issued under stock-based compensation plans	412		4		5,537		—		—		—		5,541
Treasury stock purchases	—		—		—		—		(11,071)		—		(11,071)
Balance, April 2, 2019	97,384	$	974	$	840,120	$	1,355,060	$	(1,653,211)	$	(699)	$	542,244
Net income	—		—		—		35,510		—		—		35,510
Foreign currency translation adjustment	—		—		—		—		—		175		175
Cash dividends declared Common stock, $0.33 per share	—		—		—		(14,899)		—		—		(14,899)
Stock-based compensation	47		1		4,691		—		—		—		4,692
Common stock issued under stock-based compensation plans	49		—		650		—		—		—		650
Treasury stock purchases	—		—		—		—		(28,093)		—		(28,093)
Balance, July 2, 2019	97,480	$	975	$	845,461	$	1,375,671	$	(1,681,304)	$	(524)	$	540,279
Net income	—		—		—		16,090		—		—		16,090
Foreign currency translation adjustment	—		—		—		—		—		(109)		(109)
Cash dividends declared Common stock, $0.36 per share	—		—		—		(16,071)		—		—		(16,071)
Stock-based compensation	13		—		4,699		—		—		—		4,699
Common stock issued under stock-based compensation plans	56		0		325		—		—		—		325
Treasury stock purchases	—		—		—		—		(11,397)		—		(11,397)
Balance, October 1, 2019	97,549	$	975	$	850,485	$	1,375,690	$	(1,692,701)	$	(633)	$	533,816

See the accompanying notes to the condensed consolidated financial statements.

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

For the thirty-nine weeks ended October 2, 2018:


										Accumulated
	Shares of			Additional						Other
	Common	Common		Paid-in		Retained		Treasury		Comprehensive
	Stock	Stock		Capital		Earnings		Stock		Loss		Total
Balance, January 2, 2018	95,412	$	954	$	799,862	$	1,345,666	$	(1,532,864)	$	(88)	$	613,530
Cumulative effect of adopting the pronouncement related to revenue recognition, net of tax	—		—		—		(3,560)		—		—		(3,560)
Balance, January 2, 2018, as adjusted	95,412		954		799,862		1,342,106		(1,532,864)		(88)		609,970
Net income	—		—		—		26,029		—		—		26,029
Foreign currency translation adjustment	—		—		—		—		—		(246)		(246)
Cash dividends declared Common stock, $0.29 per share	—		—		—		(13,280)		—		—		(13,280)
Stock-based compensation	334		4		6,079		—		—		—		6,083
Common stock issued under stock-based compensation plans	211		2		538		—		—		—		540
Treasury stock purchases	—		—		—		—		(34,903)		—		(34,903)
Balance, April 3, 2018	95,957	$	960	$	806,479	$	1,354,855	$	(1,567,767)	$	(334)	$	594,193
Net income	—		—		—		28,353		—		—		28,353
Foreign currency translation adjustment	—		—		—		—		—		(249)		(249)
Cash dividends declared Common stock, $0.29 per share	—		—		—		(13,296)		—		—		(13,296)
Stock-based compensation	45		—		5,130		—		—		—		5,130
Common stock issued under stock-based compensation plans	227		2		5,775		—		—		—		5,777
Treasury stock purchases	—		—		—		—		(7,126)		—		(7,126)
Balance, July 3, 2018	96,229	$	962	$	817,384	$	1,369,912	$	(1,574,893)	$	(583)	$	612,782
Net income	—		—		—		28,475		—		—		28,475
Foreign currency translation adjustment	—		—		—		—		—		272		272
Cash dividends declared Common stock, $0.33 per share	—		—		—		(15,082)		—		—		(15,082)
Stock-based compensation	51		—		4,803		—		—		—		4,803
Common stock issued under stock-based compensation plans	108		1		1,019		—		—		—		1,020
Treasury stock purchases	—		—		—		—		(18,864)		—		(18,864)
Balance, October 2, 2018	96,388	$	963	$	823,206	$	1,383,305	$	(1,593,757)	$	(311)	$	613,406

See the accompanying notes to the condensed consolidated financial statements.

Table of Contents

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018

Cash flows from operating activities:
Net income	$	78,584	$	82,857
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization expenses		64,363		71,819
Deferred income taxes		(2,640)		916
Impairment of assets and lease terminations		—		2,532
Stock-based compensation		15,135		15,807
Loss from investments in unconsolidated affiliates		13,439		2,686
Changes in assets and liabilities:
Accounts and other receivable		40,634		35,747
Income taxes receivable/payable		(9,127)		11,832
Inventories		(8,890)		2,789
Prepaid expenses		(2,746)		10,163
Operating lease assets/liabilities		(5,234)		—
Other assets		(8,985)		279
Accounts payable		(15,654)		(8,392)
Gift card liabilities		(36,774)		(38,606)
Other accrued expenses		(5,898)		(8,323)
Cash provided by operating activities		116,207		182,106
Cash flows from investing activities:
Additions to property and equipment		(46,702)		(78,716)
Additions to intangible assets		(353)		(2,677)
Investments in unconsolidated affiliates		(3,000)		(25,000)
Loans made to unconsolidated affiliates		(22,500)		—
Proceeds from variable life insurance contract		—		540
Cash used in investing activities		(72,555)		(105,853)
Cash flows from financing activities:
Deemed landlord financing proceeds		—		19,156
Deemed landlord financing payments		—		(3,799)
Borrowings on credit facility		335,000		45,000
Repayments on credit facility		(10,000)		(35,000)
Proceeds from exercise of stock options		6,516		7,337
Cash dividends paid		(44,990)		(41,449)
Treasury stock purchases		(50,561)		(60,893)
Cash provided/(used) in financing activities		235,965		(69,648)
Foreign currency translation adjustment		57		26
Net change in cash and cash equivalents		279,674		6,631
Cash and cash equivalents at beginning of period		26,578		6,008
Cash and cash equivalents at end of period	$	306,252	$	12,639

Supplemental disclosures:
Interest paid	$	854	$	6,156
Income taxes paid	$	16,966	$	8,144
Construction payable	$	6,400	$	8,609
Non-cash operating:
Settlement of sale-leaseback accounting	$	—	$	286
Non-cash investing:
Settlement of landlord sale-leaseback accounting	$	—	$	(1,174)
Non-cash financing:
Settlement of landlord financing obligation for sale-leaseback leases	$	—	$	888
Deemed landlord financing proceeds	$	—	$	7,278

See the accompanying notes to the condensed consolidated financial statements.

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THE CHEESECAKE FACTORY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of The Cheesecake Factory Incorporated and its wholly owned subsidiaries (referred to herein collectively as the “Company,” “we,” “us” and “our”) and are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and transactions for the periods presented have been eliminated in consolidation. The unaudited financial statements presented herein include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of the financial condition, results of operations and cash flows for the period. However, these results are not necessarily indicative of results that may be achieved for any other interim period or for the full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules of the Securities and Exchange Commission (“SEC”). The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2019 filed with the SEC on March 4, 2019 (“fiscal 2018 10-K”).

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal 2019 consists of 52 weeks and will end on December 31, 2019. Fiscal 2018, which ended on January 1, 2019, was also a 52-week year.

Beginning with our fiscal 2018 10-K, we separately disclosed our investments in unconsolidated affiliates on the consolidated balance sheet and our related share of losses on the consolidated statement of income and statement of cash flow. Corresponding balances for the thirteen and thirty-nine weeks ended October 1, 2018 were reclassified to conform to the current presentation.

Beginning with our fiscal 2018 10-K, we corrected an error in our consolidated statements of income by reclassifying complimentary meals out of revenue and other operating expenses. We also reclassified the associated cost of complimentary meals from other operating expenses to cost of sales and labor. The reclassifications had no impact on previously reported income from operations or net income. Corresponding balances for the first three fiscal quarters of 2018 were reclassified to conform to the current presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ from these estimates.

Recent Accounting Pronouncements

We adopted FASB Accounting Standards Codification (“ASC”) Topic 842, “Leases,” as of January 2, 2019, using the alternative transition method and recorded a cumulative effect adjustment to beginning retained earnings without restating prior periods. We elected the package of practical expedients which allowed us to carry forward our historical lease classification, our assessment of whether a contract is or contains a lease and our initial direct costs for any leases that existed prior to adoption of the new standard. In addition, we elected the hindsight practical expedient, which lengthened the lease term for certain of our leases to include renewal options, and the short-term lease exclusion. Adoption of the new standard resulted in the recognition of operating lease assets and liabilities of $975.1 million and $1,045.4 million, respectively, and a reduction to retained earnings of $41.5 million, net of tax. All prior lease-related balances of $39.2 million of prepaid rent, $140.2 million in property and equipment, net, $6.2 million of intangible assets, net, $82.1 million of deferred rent liabilities and $118.7 million of deemed landlord financing have been reclassified into operating lease assets or eliminated upon ASC 842 adoption.

Table of Contents

Leases

We currently lease all our restaurant locations, generally with initial terms of 20 years plus two five-year renewal options. Our leases typically require contingent rent above the minimum base rent payments based on a percentage of revenues, have escalating minimum rent requirements over the term of the lease and require payment for various expenses incidental to the use of the property. A majority of our leases provide for a reduced level of overall rent obligation should specified co-tenancy requirements not be satisfied. We expend cash for leasehold improvements and furniture, fixtures, and equipment to build out and equip our leased premises. We may also expend cash for structural additions that we make to leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed to us by our landlords as construction contributions. If obtained, landlord construction contributions usually take the form of up-front cash, full or partial credits against our future minimum or percentage rents, or a combination thereof. We do not meet any of the accounting criteria for being the owner of the asset under construction. Many of our leases provide early termination rights permitting us to terminate the lease prior to expiration in the event our revenues are below a stated level for a period of time, generally conditioned upon repayment of the unamortized landlord contributions.

In addition to leases for our restaurant locations, we also lease automobiles and certain equipment that is used in the restaurants, bakeries and corporate office. The automobile leases are the only non-real estate leases included in our operating lease assets and liabilities. All other leases are immaterial or qualify for the short-term lease exclusion.

The assessment of whether a contract is or contains a lease is performed at contract inception. A lease is defined as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is defined as having both the right to obtain substantially all the economic benefits from the use of the asset and to direct how and for what purpose the asset is used.

At lease commencement, we evaluate each lease to determine its appropriate classification as an operating or finance lease. All our restaurant and automobile leases are classified as operating leases. For restaurant leases existing at transition, we will continue to apply our historical practice of excluding executory costs, and only minimum base rent will be factored into the initial operating lease liability and corresponding lease asset. For restaurant leases beginning after adoption of ASC 842, we have elected the single lease component practical expedient. Operating lease assets and liabilities are recorded on the balance sheet at lease commencement based on the present value of minimum base rent and other fixed payments over the reasonably certain lease term. The difference between the amounts we expend for structural costs and the construction contributions received from our landlords is recorded as an adjustment to the operating lease asset. Lease terms include the build-out period for our leases where no rent payments are typically due under the terms of the lease, as well as options to renew when we deem we have significant economic incentive to exercise the extension. When determining if we have a significant economic incentive, we consider relevant factors, such as contractual, asset, entity and market-based considerations. Option periods are included in the lease term for the majority of our leases. Termination rights have not been factored into the lease terms since based on our probability assessment we are reasonably certain we will not terminate our leases.

We cannot determine the interest rate implicit in our leases because we do not have access to the lessor's estimated residual value or the amount of the lessor's deferred initial direct costs. Therefore, we use our incremental borrowing rate as the discount rate for our leases. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not generally borrow on a collateralized basis, we derive an appropriate incremental borrowing rate using the interest rate we pay on our non-collateralized borrowings, adjusted for the amount of the lease payments, the lease term and the effect of designating specific collateral with a value equal to the unpaid lease payments for that lease. We apply the incremental borrowing rate on a portfolio basis given the impact of applying it on a lease by lease basis would be immaterial.

We monitor for events or changes in circumstances that require reassessment of our leases. When a reassessment results in the re-measurement of a lease liability, a corresponding adjustment is made to the carrying amount of the operating lease asset. We also assess the potential impairment of our operating lease assets under long-lived asset impairment guidance in ASC 360.

Rent expense included in our operating lease assets is recognized on a straight-line basis. Contingent rent expense is recorded as incurred to the extent it exceeds minimum base rent per the lease agreement. Other variable rent expense is recognized as incurred. The reasonably certain lease term and the incremental borrowing rate for each restaurant location require judgment by management and can impact the classification and accounting for a lease as operating or finance, as well as the value of the operating lease asset and liability. These judgments may produce materially different amounts of rent expense than would be reported if different assumptions were used.

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2. Inventories

Inventories consisted of (in thousands):


	October 1, 2019		January 1, 2019
Restaurant food and supplies	$	20,102	$	18,362
Bakery finished goods and work in progress		21,679		13,845
Bakery raw materials and supplies		5,997		6,679
Total	$	47,778	$	38,886

3. Gift Cards

The following tables present information related to gift cards (in thousands):

Gift card liabilities:


	Thirteen		Thirteen		Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018

Beginning balance	$	142,361	$	133,617	$	172,336	$	163,951
Activations		21,577		20,559		70,949		70,754
Redemptions and breakage		(28,372)		(28,834)		(107,719)		(109,363)
Ending balance	$	135,566	$	125,342	$	135,566	$	125,342

Gift card contract assets: ⁽¹⁾


	Thirteen		Thirteen		Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018

Beginning balance	$	20,092	$	20,619	$	23,388	$	23,814
Deferrals		2,929		2,500		8,993		8,902
Amortization		(4,689)		(4,756)		(14,049)		(14,353)
Ending balance	$	18,332	$	18,363	$	18,332	$	18,363

(1)	Included in prepaid expenses on the condensed consolidated balance sheets.

4. Other Assets

Other assets consisted of (in thousands):


	October 1,2019		January 1,2019
Executive Savings Plan trust assets	$	66,869	$	57,605
Loans receivable from unconsolidated affiliates		22,500		—
Deposits		5,485		5,489
Deferred income taxes		4,095		1,597
Total	$	98,949	$	64,691

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5. Leases

Components of lease expense were as follows (in thousands):


	Thirteen Weeks Ended		Thirty-Nine Weeks Ended
	October 1, 2019		October 1, 2019
Operating	$	26,270	$	77,875
Variable		15,768		48,529
Short-term		81		234
Total	$	42,119	$	126,638

Rent expense on all operating leases (under ASC 840) was as follows (in thousands):


	Thirteen Weeks Ended		Thirty-Nine Weeks Ended
	October 2, 2018		October 2, 2018
Straight-lined minimum base rent	$	21,078	$	62,051
Contingent rent		4,980		15,187
Common area maintenance and taxes		10,110		29,948
Total	$	36,168	$	107,186

Supplemental cash flow information related to leases (in thousands, except percentages):


	Thirty-Nine Weeks Ended
	October 1, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	73,163
Right-of-use assets obtained in exchange for new operating lease liabilities		35,271
Weighted-average remaining lease term — operating leases (in years)		17.1
Weighted-average discount rate — operating leases		5.3	%

As of October 1, 2019, the maturities of our operating lease liabilities are as follows (in thousands):


2019	$	18,474
2020		100,442
2021		98,794
2022		97,528
2023		96,003
Thereafter		1,230,956
Total future lease payments	$	1,642,197
Less: Interest		592,538
Present value of lease liabilities	$	1,049,659

As of January 1, 2019, the aggregate minimum annual lease payments under operating leases (under ASC 840), including amounts characterized as deemed landlord financing payments, were as follows (in thousands):


2019	$	93,792
2020		91,808
2021		88,829
2022		86,925
2023		81,929
Thereafter		495,091
Total	$	938,374

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During the first three quarters of fiscal 2019, five leases were executed; three have initial terms of 20 years plus two five-year renewal options, one has an initial term of 10 years and four five-year renewal options and one has a term of 20 years. All but one include allowances for tenant improvements. Four of these leases commenced in the third quarter of fiscal 2019, two with reasonably certain lease terms of 20 years and two with reasonably certain lease terms of 30 years. The remaining lease is expected to commence in the fourth quarter of fiscal 2019 with undiscounted fixed payments over the initial term of $14.1 million. We will assess the reasonably certain lease term at lease commencement.

6. Long-Term Debt

On July 30, 2019, we entered into a Third Amended and Restated Loan Agreement (the “New Facility”), which amends and restates in its entirety our prior Second Amended and Restated Loan Agreement dated as of December 22, 2015. The New Facility, which terminates on July 30, 2024, provides us with revolving loan commitments that total $400 million (of which $40 million may be used for issuances of letters of credit). The New Facility contains a commitment increase feature that could provide for an additional $200 million in available credit upon our request and subject to the participating lenders electing to increase their commitments or new lenders being added to the New Facility. During the third quarter of fiscal 2019, we utilized the New Facility to support the North Italia and Fox Restaurant Concepts LLC ("FRC") acquisitions (see Note 12 for further discussion of the acquisitions). At October 1, 2019, we had net availability for borrowings of $45.6 million, based on a $335.0 million outstanding debt balance and $19.4 million in standby letters of credit.

We are subject to certain financial covenants under the New Facility requiring us to maintain (i) a maximum "Net Adjusted Leverage Ratio" of 4.75 and (ii) a minimum ratio of EBITDAR to interest and rent expense of 1.9 ("EBITDAR Ratio"), as well as customary events of default that, if triggered, could result in acceleration of the maturity of the New Facility. The New Facility also limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined ratio, and also sets forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters.

Borrowings under the New Facility bear interest, at our option, at a rate equal to either: (i) the adjusted LIBO Rate (as customarily defined) (the “Adjusted LIBO Rate”) plus a margin that is based on our net adjusted leverage ratio, or (ii) the sum of (a) the highest of (1) the rate of interest last quoted by The Wall Street Journal as the prime rate in effect in the United States, (2) the greater of the rate calculated by the Federal Reserve Bank of New York as the effective federal funds rate or the rate that is published by the Federal Reserve Bank of New York as an overnight bank funding rate, in either case plus 0.5%, and (3) the one-month Adjusted LIBO Rate plus 1.0%, plus (b) a margin that is based on our net adjusted leverage ratio. Letters of credit issued under the New Facility bear fees that are equivalent to the interest rate margin that is applicable to revolving loans that bear interest at the adjusted LIBO Rate plus other customary fees charged by the issuing bank. Under the New Facility, we paid certain customary loan origination fees and will pay an unused fee on the unused portion of the New Facility that is also based on our Net Adjusted Leverage Ratio. Our Net Adjusted Leverage and EBITDAR Ratios were 3.3 and 2.5, respectively, at October 1, 2019, and we were in compliance with all covenants in effect at that date.

Our obligations under the New Facility are unsecured. Certain of our material subsidiaries have guaranteed our obligations under the New Facility. The New Facility will be used for our general corporate purposes, including for the issuance of standby letters of credit to support our self-insurance programs, and to fund dividends, stock repurchases and permitted acquisitions.

7. Commitments and Contingencies

On December 10, 2015, a former restaurant management employee filed a class action lawsuit in the Los Angeles County Superior Court, alleging that the Company improperly classified its managerial employees, failed to pay overtime, and failed to provide accurate wage statements, in addition to other claims. The lawsuit seeks unspecified penalties under the California Labor Code Private Attorney General Act in addition to other monetary payments (Tagalogon v. The Cheesecake Factory Restaurants, Inc.; Case No. BC603620). On July 29, 2016, we filed a response to the complaint. On March 7, 2019, the parties participated in voluntary mediation, which concluded without the parties reaching a resolution. On June 4, 2019, the parties notified the Court that they reached a tentative agreement to settle this case. The settlement agreement is subject to documentation and court approval. Based on the current status of this matter, we have reserved an immaterial amount in anticipation of settlement.

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On June 7, 2018, the California Department of Industrial Relations issued a $4.2 million wage citation jointly against the Company and our vendor that provides janitorial services to eight of our Southern California restaurants, alleging that the janitorial vendor or its subcontractor failed to comply with various provisions of the California Labor Code (Wage Citation Case No. 35-CM-188798-16). The wage citation seeks to recover penalties and other monetary payments on behalf of the employees that worked for this vendor or its subcontractor. On June 28, 2018, we filed an appeal of the wage citation. The initial hearing on our appeal took place on November 5, 2019. We intend to vigorously defend this action. However, it is not possible at this time to reasonably estimate the outcome of or any potential liability from this matter and, accordingly, we have not reserved for any potential future payments.

On June 22, 2018, the Internal Revenue Service issued a Notice of Deficiency in which they disallowed $8.0 million of our §199 Domestic Production Activities Deduction for tax years 2010, 2011 and 2012. On September 11, 2018 we petitioned the United States Tax Court for a redetermination of the deficiency. The tax court has assigned docket number 18150-18 to our case. We intend to vigorously defend our position in litigation and based on our analysis of the law, regulations and relevant facts, we have not reserved for any potential future payments.

Within the ordinary course of our business, we are subject to private lawsuits, government audits, administrative proceedings and other claims. These matters typically involve claims from customers, staff members and others related to operational and employment issues common to the foodservice industry. A number of these claims may exist at any given time, and some of the claims may be pled as class actions. From time to time, we are also involved in lawsuits with respect to infringements of, or challenges to, our registered trademarks and other intellectual property, both domestically and abroad. We could be affected by adverse publicity and litigation costs resulting from such allegations, regardless of whether they are valid or whether we are legally determined to be liable.

At this time, we believe that the amount of reasonably possible losses resulting from final disposition of any pending lawsuits, audits, proceedings and claims will not have a material adverse effect individually or in the aggregate on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, audits, proceedings or claims. Legal costs related to such claims are expensed as incurred.

8. Stockholders’ Equity

On July 25, 2019, our Board of Directors (“Board”) approved a quarterly cash dividend of $0.36 per share that was paid on August 27, 2019 to the stockholders of record at the close of business on August 14, 2019. Future decisions to pay or to increase or decrease dividends are at the discretion of the Board and will be dependent on our operating performance, financial condition, capital expenditure requirements, limitations on cash distributions pursuant to the terms and conditions of the New Facility and applicable law, and such other factors that our Board considers relevant. (See Note 6 for further discussion of the New Facility.)

Our share repurchase authorization does not have an expiration date, does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time. Shares may be repurchased in the open market or through privately negotiated transactions at times and prices considered appropriate by us. We make the determination to repurchase shares based on several factors, including current and forecasted operating cash flows, capital needs associated with new restaurant development and maintenance of existing locations, dividend payments, debt levels and cost of borrowing, obligations associated with the Acquisitions, our share price and current market conditions. (See Note 12 for further discussion of the acquisitions.) The timing and number of shares repurchased are also subject to legal constraints and financial covenants under the New Facility that limit share repurchases based on a defined ratio. (See Note 6 for further discussion of our long-term debt.) Our objectives regarding share repurchases are to offset the dilution to our shares outstanding that results from equity compensation grants and to supplement our earnings per share growth.

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9. Stock-Based Compensation

On April 5, 2017, our Board approved an amendment to our 2010 Stock Incentive Plan to increase the number of shares of common stock available for grant under the plan to 12.7 million shares from 9.2 million shares. This amendment was approved by our stockholders at our annual meeting held on June 8, 2017. On April 4, 2019, our Board adopted The Cheesecake Factory Incorporated Stock Incentive Plan. This plan was approved by our stockholders at our annual meeting held on May 30, 2019. The maximum number of shares of common stock available for grant under this plan is 4.8 million shares plus 1.8 million shares, which, as of May 30, 2019, were available for issuance under our 2010 Stock Incentive Plan plus 1.9 million shares which may become available for issuance under The Cheesecake Factory Incorporated Stock Incentive Plan due to forfeiture or lapse of awards under our 2010 Stock Incentive Plan following May 30, 2019.

The following table presents information related to stock-based compensation, net of forfeitures (in thousands):


	Thirteen		Thirteen		Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018

Labor expenses	$	1,742	$	(129)	$	5,184	$	4,046
Other operating costs and expenses		68		110		204		220
General and administrative expenses		2,837		4,751		9,747		11,541
Total stock-based compensation		4,647		4,732		15,135		15,807
Income tax benefit		1,141		1,180		3,719		3,944
Total stock-based compensation, net of taxes	$	3,506	$	3,552	$	11,416	$	11,863

Capitalized stock-based compensation⁽¹⁾	$	52	$	71	$	166	$	209

(1)

It is our policy to capitalize the portion of stock-based compensation costs for our internal development department that relates to capitalizable activities such as the design and construction of new restaurants, remodeling existing locations and equipment installation. Capitalized stock-based compensation is included in property and equipment, net and other assets on the condensed consolidated balance sheets.

Stock Options

We did not issue any stock options during the third quarters of fiscal 2019 or fiscal 2018. Stock option activity during the thirty-nine weeks ended October 1, 2019 was as follows:


				Weighted
				Average
		Weighted		Remaining
		Average		Contractual	Aggregate
	Shares	Exercise Price		Term	Intrinsic Value ⁽¹⁾
	(In thousands)	(Per share)		(In years)	(In thousands)
Outstanding at January 1, 2019	1,799	$	45.03	4.1	$	5,606
Granted	300		46.03
Exercised	(219)		29.81
Forfeited or cancelled	(17)		48.38
Outstanding at October 1, 2019	1,863	$	46.95	4.4	$	1,993

Exercisable at October 1, 2019	1,028	$	45.37	2.9	$	1,993

(1)

Aggregate intrinsic value is calculated as the difference between our closing stock price at fiscal period end and the exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have been received by the option holders, had they all exercised their options on the fiscal period end date.

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The total intrinsic value of options exercised during the thirteen and thirty-nine weeks ended October 1, 2019 was $0.1 million and $3.7 million, respectively. The total intrinsic value of options exercised during the thirteen and thirty-nine weeks ended October 2, 2018 was $0.8 million and $5.5 million, respectively. As of October 1, 2019, total unrecognized stock-based compensation expense related to unvested stock options was $7.7 million, which we expect to recognize over a weighted average period of approximately 3.3 years.

Restricted Shares and Restricted Share Units

Restricted share and restricted share unit activity during the thirty-nine weeks ended October 1, 2019 was as follows:


		Weighted
		Average
	Shares	Fair Value
	(In thousands)	(Per share)
Outstanding at January 1, 2019	1,702	$	48.08
Granted	453		45.80
Vested	(317)		45.16
Forfeited	(82)		48.05
Outstanding at October 1, 2019	1,756	$	48.01

Fair value of our restricted shares and restricted share units is based on our closing stock price on the date of grant. The weighted average fair value for restricted shares and restricted share units issued during the third quarter of fiscal 2019 and fiscal 2018 was $44.24 and $50.15, respectively. The fair value of shares that vested during the thirteen weeks and thirty-nine weeks ended October 1, 2019 was $1.9 million and $14.3 million, respectively. The fair value of shares that vested during the thirteen weeks and thirty-nine weeks ended October 2, 2018 was $3.0 million and $14.8 million, respectively. As of October 1, 2019, total unrecognized stock-based compensation expense related to unvested restricted shares and restricted share units was $39.9 million, which we expect to recognize over a weighted average period of approximately 3.6 years.

10. Net Income Per Share

Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, reduced by unvested restricted stock awards. As of October 1, 2019 and October 2, 2018, 1.8 million shares and 1.7 million shares, respectively, of restricted stock issued to staff members were unvested and, therefore, excluded from the calculation of basic earnings per share for the fiscal periods ended on those dates. Diluted net income per share includes the dilutive effect of outstanding equity awards, calculated using the treasury stock method. Shares of common stock equivalents of 2.1 million and 1.3 million as of October 1, 2019 and October 2, 2018, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.


	Thirteen		Thirteen		Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018
	(In thousands, except per share data)
Net income	$	16,090	$	28,475	$	78,584	$	82,857

Basic weighted average shares outstanding		43,682		45,321		44,034		45,418
Dilutive effect of equity awards		504		1,047		609		982

Diluted weighted average shares outstanding		44,186		46,368		44,643		46,400

Basic net income per share	$	0.37	$	0.63	$	1.78	$	1.82

Diluted net income per share	$	0.36	$	0.61	$	1.76	$	1.79

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11. Segment Information

For decision-making purposes, our management reviews discrete financial information for The Cheesecake Factory, Grand Lux Cafe, RockSugar Southeast Asian Kitchen and Social Monk Asian Kitchen restaurants, our bakery division, consumer packaged goods and international licensing operations. Based on quantitative thresholds set forth in ASC 280, “Segment Reporting,” The Cheesecake Factory is our only business that meets the criteria of a reportable operating segment. The other segments noted above are combined in “Other.” Unallocated corporate expenses, assets and capital expenditures are presented below as reconciling items to the amounts presented in the condensed consolidated financial statements.

Segment information is presented below (in thousands):


	Thirteen		Thirteen		Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018
Revenues:
The Cheesecake Factory restaurants	$	536,101	$	524,846	$	1,636,253	$	1,596,561
Other		50,435		50,314		152,409		150,615
Total	$	586,536	$	575,160	$	1,788,662	$	1,747,176

Income/(loss) from operations:
The Cheesecake Factory restaurants ⁽¹⁾	$	59,664	$	63,013	$	189,897	$	193,955
Other		4,388		3,495		15,416		14,353
Corporate		(37,088)		(33,013)		(108,102)		(108,719)
Total	$	26,964	$	33,495	$	97,211	$	99,589

Depreciation and amortization:
The Cheesecake Factory restaurants	$	17,728	$	20,116	$	53,340	$	60,452
Other		2,410		2,798		7,270		7,666
Corporate		1,204		1,176		3,753		3,701
Total	$	21,342	$	24,090	$	64,363	$	71,819

Capital expenditures:
The Cheesecake Factory restaurants	$	16,149	$	20,375	$	42,880	$	50,537
Other ⁽²⁾		642		5,718		2,185		25,668
Corporate		540		753		1,637		2,511
Total	$	17,331	$	26,846	$	46,702	$	78,716


	October 1, 2019		January 1, 2019
Total assets:
The Cheesecake Factory restaurants	$	1,888,948	$	928,345
Other		226,098		164,972
Corporate		266,724		220,816
Total	$	2,381,770	$	1,314,133

(1)	The thirteen and thirty-nine weeks ended October 2, 2018 include $0.3 million and $2.8 million of lease termination costs related to the closure of one The Cheesecake Factory restaurant.

(2)	The thirteen and thirty-nine weeks ended October 2, 2018 include costs related to an infrastructure modernization of our California bakery facility.

12. Subsequent Events

Dividend

On October 23, 2019, our Board declared a quarterly cash dividend of $0.36 per share to be paid on November 26, 2019 to the stockholders of record at the close of business on November 12, 2019.

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North Italia and Fox Restaurant Concepts LLC (“FRC”) Acquisitions

On October 2, 2019 (the “Closing Date” or “Closing”), we completed the acquisition of North Italia (the “North Italia Acquisition”) and the remaining business of Fox Restaurant Concepts LLC (the “FRC Acquisition”), including Flower Child and all other FRC brands (the “FRC Acquisition” and together with the North Italia Acquisition, the “Acquisitions”). North Italia is a restaurant company that operated 21 locations across ten states and Washington D.C. as of the Closing Date. FRC is a multi-concept restaurant company that operated 10 concepts with 47 locations across eight states and Washington D.C. as of the Closing Date.

We have concluded that the Acquisitions represent a single business combination of related businesses under common control within the scope of ASC Topic 805, “Business Combinations”. The acquisition date was determined to be the Closing Date, which was the date we obtained control by legally transferring the consideration for the remaining ownership interests, acquiring the assets and assuming the liabilities of North Italia and the remaining FRC business.

The Acquisitions, which we expect will accelerate and diversify our revenue growth, were completed for consideration consisting of the following components: $286 million in cash at Closing, which was primarily funded by drawing on the New Facility; assumption of $10 million in debt previously owed by FRC to us; $45 million of deferred consideration due ratably over the next four years (including a $13 million indemnity escrow amount specifically related to the FRC Acquisition); and a $12 million indemnity escrow amount specifically related to the North Italia Acquisition due ratably over the next two years. Additionally, included in consideration are the acquisition-date fair values of contingent consideration and our previously held equity interests in North Italia and Flower Child.

The provision for contingent consideration is payable on the fifth anniversary of the Closing Date and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia and Flower Child with considerations made in the event we undergo a change in control or divest any FRC brand (other than North Italia and Flower Child) during the five years after Closing. We are also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years after Closing.

During the third quarter of fiscal 2019, we incurred $3.2 million of costs to effect the Acquisitions, which have been expensed in accordance with ASC 805 and are included in general and administrative expenses in the accompanying condensed consolidated statement of operations.

We have excluded the disclosure of purchase accounting and supplemental pro forma financial information required under ASC 805 for a public business entity. Disclosure of such information has been deemed impracticable by management due primarily to the short timeframe we have had to obtain the necessary information from the acquired company (not a public business entity), apply various valuation methodologies and prepare the information for this filing. The purchase accounting and related disclosures will be included in the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2019 and finalized within the one-year measurement period permitted under ASC 805.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Certain information included in this Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission (“SEC”), as well as information included in oral or written statements made by us or on our behalf, may contain forward-looking statements about our current and presently expected performance trends, growth plans, business goals and other matters.

These statements may be contained in our filings with the SEC, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (together with the Securities Act, the “Acts”). This includes, without limitation, financial guidance and projections and statements with respect to the acquisitions of North Italia and Fox Restaurant Concepts LLC (“FRC”) and expectations regarding accelerated and diversified revenue growth as a result of the acquisition of North Italia and FRC, as well as expectations of our future financial condition, results of operations, cash flows, plans, targets, goals, objectives, performance, growth potential, competitive position and business; and our ability to: leverage our competitive strengths, including investing in or acquiring new restaurant concepts and expanding The Cheesecake Factory® brand to other retail opportunities; deliver comparable sales growth; provide a differentiated experience to customers; outperform the casual dining industry and increase our market share; leverage sales increases and manage flow through; manage cost pressures, including increasing wage rates, insurance costs and legal expenses, and stabilize margins; grow earnings; remain relevant to consumers; attract and retain qualified management and other staff; manage risks associated with the magnitude and complexity of regulations in the jurisdictions where our restaurants are located; increase shareholder value; find suitable sites and manage increasing construction costs; profitably expand our concepts domestically and in Canada, and work with our licensees to expand our concept internationally; support the growth of North Italia and other FRC restaurants; operate Social Monk Asian Kitchen; and utilize our capital effectively and continue to increase cash dividends and repurchase our shares. These forward-looking statements may be affected by factors outside of our control including: the ability to achieve projected financial results; economic and political conditions that impact consumer confidence and spending; impact of recently enacted tax reform; acceptance and success of The Cheesecake Factory in international markets; acceptance and success of North Italia and the FRC concepts, Social Monk Asian Kitchen and other concepts; the risks of doing business abroad through Company-owned restaurants and/or licensees; foreign exchange rates, tariffs and cross border taxation; changes in unemployment rates; changes in laws impacting our business, including increases in minimum wages and benefit costs; the economic health of our landlords and other tenants in retail centers in which our restaurants are located; the economic health of suppliers, licensees, vendors and other third parties providing goods or services to us; adverse weather conditions in regions in which our restaurants are located; factors that are under the control of government agencies, landlords and other third parties; the risk, costs and uncertainties associated with opening new restaurants; and other risks and uncertainties detailed from time to time in our filings with the SEC. Such forward-looking statements include all other statements that are not historical facts, as well as statements that are preceded by, followed by or that include words or phrases such as “believe,” “plan,” “will likely result,” “expect,” “intend,” “will continue,” “is anticipated,” “estimate,” “project,” “may,” “could,” “would,” “should” and similar expressions. These statements are based on our current expectations and involve risks and uncertainties which may cause results to differ materially from those set forth in such statements.

In connection with the “safe harbor” provisions of the Acts, we have identified and are disclosing important factors, risks and uncertainties that could cause our actual results to differ materially from those projected in forward-looking statements made by us, or on our behalf. (See Part II, Item 1A of this report, “Risk Factors,” and Part I, Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2019.) These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC. Because of these factors, risks and uncertainties, we caution against placing undue reliance on forward-looking statements. Although we believe that the assumptions underlying forward-looking statements are currently reasonable, any of the assumptions could be incorrect or incomplete, and there can be no assurance that forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by law.

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General

This discussion and analysis, which contains forward-looking statements, should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes in Part I, Item 1 of this report and with the following items included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2019: the audited consolidated financial statements and related notes in Part IV, Item 15; the “Risk Factors” included in Part I, Item 1A; the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7; and the cautionary statements included throughout this report. The inclusion of supplementary analytical and related information herein may require us to make 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.

The Cheesecake Factory Incorporated is a leader in experiential dining. We are culinary forward and relentlessly focused on hospitality. We currently own and operate 290 restaurants throughout the United States and Canada under brands including The Cheesecake Factory^®, North Italia^® and a collection within the FRC subsidiary. Internationally, 23 The Cheesecake Factory^® restaurants operate under licensing agreements; one location in the Middle East closed in preparation for a relocation early in fiscal 2020. Our bakery division operates two facilities that produce quality cheesecakes and other baked products for our restaurants, international licensees and third-party bakery customers.

Overview

Our strategy is driven by our commitment to customer satisfaction and is focused primarily on menu innovation, service and operational execution to continue to differentiate ourselves from other restaurant concepts, as well as to drive competitively strong performance that is sustainable. Financially, we are focused on prudently managing expenses at our restaurants, bakery facilities and corporate support center, and leveraging our size to make the best use of our purchasing power.

Investing in new Company-owned restaurant development is our top capital allocation priority, with a focus on opening our concepts in premier locations within both new and existing markets. For The Cheesecake Factory concept, we target an average cash-on-cash return on investment of approximately 20% to 25% at the unit level. We target an average cash-on-cash return on investment of over 30% for the North Italia concept and 25% to 30% for the FRC concepts. Returns are affected by the cost to build restaurants, the level of revenues that each restaurant can deliver and our ability to maximize the profitability of restaurants. Investing in new restaurant development that meets our return on investment criteria is expected to support achieving mid-teens Company-level return on invested capital.

Our overall revenue growth is primarily driven by revenues from new restaurant openings and increases in comparable restaurant sales. Changes in comparable restaurant sales come from variations in customer traffic, as well as in average check.

For The Cheesecake Factory concept, our strategy is to increase comparable restaurant sales by growing average check and stabilizing customer traffic through (1) continuing to offer innovative, high quality menu items that offer customers a wide range of options in terms of flavor, price and value (2) focusing on service and hospitality with the goal of delivering an exceptional customer experience and (3) continuing to provide our customers with convenient options for off-premise dining. We are continuing our efforts on a number of initiatives, including a greater focus on increasing customer throughput in our restaurants, leveraging the success of our gift card program, working with a third party to provide delivery services for our restaurants, increasing customer awareness of our online ordering capabilities, augmenting our marketing programs, enhancing our training programs and leveraging our customer satisfaction measurement platform.

Average check is driven by menu price increases and/or changes in menu mix. We generally update The Cheesecake Factory restaurant menus twice a year, and our philosophy is to use price increases to help offset key operating cost increases in a manner that balances protecting both our margins and customer traffic levels. We plan to continue targeting menu price increases of approximately 2% to 3% annually, utilizing a market-based strategy to help mitigate cost pressure in higher-wage geographies, and expect near-term increases to be at the higher end of this range.

On October 2, 2019, we completed the acquisitions of North Italia and FRC, including Flower Child, which we expect will accelerate and diversify our revenue growth. (See Note 12 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of the Acquisitions.)

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Margins are subject to fluctuations in commodity costs, labor, restaurant-level occupancy expenses, general and administrative (“G&A”) expenses and preopening expenses. Our objective is to stabilize our margins, and longer-term to drive margin expansion, by maintaining flat restaurant-level margins at The Cheesecake Factory concept, leveraging our bakery operations, international and consumer packaged goods royalty revenue streams and G&A expense over time, and optimizing our restaurant portfolio.

We plan to maintain a balanced capital allocation strategy, comprised of: investing in new restaurants that are expected to meet our targeted returns, repaying borrowings under our credit facility and continuing our dividend and share repurchase program, the latter of which offsets dilution from our equity compensation program and supports our earnings per share growth. Our ability to declare dividends and repurchase shares is subject to financial covenants under the New Facility.

Our domestic revenue growth (comprised of our annual unit growth and comparable sales growth), combined with international expansion, planned debt repayment, our share repurchase program and our dividend supports our long-term financial objective of 13% to 14% total return to shareholders, on average. We define our total return as earnings per share growth plus our dividend yield.

Results of Operations

The following table presents, for the periods indicated, information from our condensed consolidated statements of income expressed as percentages of revenues. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any other interim period or for the full fiscal year.


	Thirteen		Thirteen		Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended		Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018

Revenues	100.0	%	100.0	%	100.0	%	100.0	%

Costs and expenses:
Cost of sales	22.7		23.0		22.6		22.8
Labor expenses	36.4		35.4		36.3		35.7
Other operating costs and expenses	25.5		24.5		25.2		24.4
General and administrative expenses	6.8		6.5		6.5		6.8
Depreciation and amortization expenses	3.6		4.2		3.6		4.1
Impairment of assets and lease expiration	—		0.0		—		0.2
Preopening costs	0.4		0.6		0.4		0.3
Total costs and expenses	95.4		94.2		94.6		94.3
Income from operations	4.6		5.8		5.4		5.7
Loss on investments in unconsolidated affiliates	(1.8)		(0.2)		(0.7)		(0.1)
Interest and other expense, net	(0.0)		(0.3)		(0.0)		(0.3)
Income before income taxes	2.8		5.3		4.7		5.3
Income tax provision	0.1		0.3		0.3		0.6
Net income	2.7	%	5.0	%	4.4	%	4.7	%

Thirteen Weeks Ended October 1, 2019 Compared to Thirteen Weeks Ended October 2, 2018

Revenues

Revenues increased 2.0% to $586.5 million for the thirteen weeks ended October 1, 2019 compared to $575.2 million for the thirteen weeks ended October 2, 2018, primarily due to new restaurant openings and positive comparable restaurant sales.

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Comparable sales at The Cheesecake Factory restaurants increased by 0.4%, or $1.9 million, from the third quarter of fiscal 2018. This compares to the casual dining industry which experienced a comparable sales decline of 0.8%, as measured by Knapp Track. Our comparable sales growth was driven by average check growth of 4.1% (based on increases of 3.2% in menu pricing and 0.9% in mix), partially offset by a decline in customer traffic of 3.7%. We implemented effective menu price increases of approximately 1.6% and 1.6% in the first and third quarter of fiscal 2019, respectively. The Cheesecake Factory average sales per restaurant operating week increased 0.3% to $203,996 in the third quarter of fiscal 2019 from $203,429 in the third quarter of fiscal 2018. Total operating weeks at The Cheesecake Factory restaurants increased 1.9% to 2,628 for the thirteen weeks ended October 1, 2019 compared to 2,580 for the comparable prior year period.

The Cheesecake Factory restaurants become eligible to enter our comparable sales base in their 19th month of operation. At October 1, 2019, there were six The Cheesecake Factory restaurants not yet in our comparable sales base. International licensed locations and restaurants that are no longer in operation, including those which we have relocated, are excluded from our comparable sales calculations.

External bakery sales were $13.8 million for the third quarter of fiscal 2019 compared to $13.6 million in the comparable prior year period.

Cost of Sales

Cost of sales consists of food, beverage, retail and bakery production supply costs incurred in conjunction with our restaurant and bakery revenues, and excludes depreciation, which is captured separately in depreciation and amortization expenses. As a percentage of revenues, cost of sales was 22.7% for the third quarter of fiscal 2019 compared to 23.0% for the comparable period of fiscal 2018. Higher produce costs were more than offset by favorability across several commodity categories.

The Cheesecake Factory restaurant menus are among the most diversified in the foodservice industry and, accordingly, are not overly dependent on a few select commodities. Changes in costs for one commodity sometimes can be offset by cost changes in other commodity categories. The principal commodity categories for our restaurants include general grocery items, dairy, produce, seafood, poultry, meat and bread. (See the discussion of our contracting activities in Item 3 — “Quantitative and Qualitative Disclosures About Market Risk.”)

As has been our past practice, we will carefully consider opportunities to introduce new menu items and implement selected menu price increases to help offset any expected cost increases for key commodities and other goods and services. For new restaurants, cost of sales will typically be higher for a period of time after opening until our management team becomes more accustomed to predicting, managing and servicing the sales volumes at these restaurants.

Labor Expenses

As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery direct production labor, including associated fringe benefits, were 36.4% and 35.4% in the third quarters of fiscal 2019 and 2018, respectively. This variance was primarily due to higher hourly wage rates, stock-based compensation expense and payroll taxes.

Other Operating Costs and Expenses

Other operating costs and expenses consist of restaurant-level occupancy expenses (rent, common area expenses, insurance, licenses, taxes and utilities), other operating expenses (excluding food costs and labor expenses, which are reported separately) and bakery production overhead and distribution expenses. As a percentage of revenues, other operating costs and expenses were 25.5% and 24.5% for the thirteen weeks ended October 1, 2019 and October 2, 2018, respectively. This variance was primarily driven by increased rent expense related to our adoption of the new lease accounting standard, as well as higher marketing expense. These increases were partially offset by lower workers’ compensation and general liability insurance costs.

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G&A Expenses

G&A expenses consist of the restaurant management recruiting and training program, restaurant field supervision, corporate support and bakery administrative organizations, as well as gift card commissions to third-party distributors. As a percentage of revenues, G&A expenses were 6.8% and 6.5% for the third quarters of fiscal 2019 and 2018, respectively. This variance was primarily due to $3.2 million of acquisition-related costs incurred in the third quarter of fiscal 2019, partially offset by lower stock-based compensation.

Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses were 3.6% and 4.2% for the thirteen weeks ended October 1, 2019 and the comparable period of last year, respectively. This decrease was primarily due to our adoption of the new lease accounting standard.

Impairment of Assets and Lease Terminations

There was no impairment of assets in the third quarter of fiscal 2019. In the third quarter of fiscal 2018, we recorded $0.3 million of lease termination costs related to the closure of one The Cheesecake Factory restaurant.

Preopening Costs

Preopening costs were $2.5 million for the thirteen weeks ended October 1, 2019 compared to $3.3 million in the comparable period of fiscal 2018. We opened one restaurant in the third quarter of fiscal 2019 compared to two restaurants in the comparable prior year period. Preopening costs include all costs to relocate and compensate restaurant management staff members during the preopening period, costs to recruit and train hourly restaurant staff members, and wages, travel and lodging costs for our opening training team and other support staff members. Also included are expenses for maintaining a roster of trained managers for pending openings, the associated temporary housing and other costs necessary to relocate managers in alignment with future restaurant opening and operating needs, and corporate travel and support activities. Preopening costs can fluctuate significantly from period to period based on the number and timing of restaurant openings and the specific preopening costs incurred for each restaurant.

Loss on Investment in Unconsolidated Affiliates

Loss on investment in unconsolidated affiliates, which represents our share of losses incurred by North Italia and Flower Child, was $10.3 million and $1.6 million in the thirteen weeks ended October 1, 2019 and October 2, 2018, respectively. This increase was primarily driven by impairment of assets, acquisition-related expenses, and preopening costs associated with new unit development.

Interest and Other Income/(Expense), Net

Interest and other income/(expense), net was $6,051 of income for the third quarter of fiscal 2019 compared to $1.7 million of expense for the comparable prior year period. This variance was primarily due to our adoption of the new lease accounting standard under which we no longer have deemed landlord financing liabilities and associated interest expense.

Income Tax Provision

Our effective income tax rate was 3.2% for the third quarter of fiscal 2019 compared to 5.7% for the comparable prior year period. This decrease was primarily due to a higher proportion of FICA tip credit in relation to pre-tax income, higher non-taxable gains on our investments in variable life insurance contracts used to support our non-qualified executive deferred compensation plan and the impact of technical guidance published in the fourth quarter of fiscal 2018 regarding the deductibility of employee meals.

Thirty-Nine Weeks Ended October 1, 2019 Compared to Thirty-Nine Weeks Ended October 2, 2018

Revenues

Revenues increased 2.4% to $1,788.7 million for the thirty-nine weeks ended October 1, 2019 compared to $1,747.2 million for the thirty-nine weeks ended October 2, 2018, primarily due to new restaurant openings and positive comparable restaurant sales.

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Comparable sales at The Cheesecake Factory restaurants increased by 0.9%, or $14.2 million, from the first three quarters of fiscal 2018, outperforming the casual dining industry which experienced a comparable sales increase of 0.1%, as measured by Knapp Track. Our comparable sales growth was driven by average check growth of 3.9% (based on an increase of 3.1% in menu pricing and 0.8% in mix), partially offset by a decline in customer traffic of 3.0%. The Cheesecake Factory average sales per restaurant operating week increased 1.0% to $208,042 in the first three quarters of fiscal 2019 versus $206,034 in the first three quarters of fiscal 2018. Total operating weeks at The Cheesecake Factory restaurants increased 1.5% to 7,865 for the thirty-nine weeks ended October 1, 2019 compared to 7,749 for the comparable prior year period.

External bakery sales were $39.1 million for the first three quarters of fiscal year 2019 compared to $38.7 million in the comparable prior year period.

Cost of Sales

As a percentage of revenues, cost of sales was 22.6% for the first three quarters of fiscal 2019 compared to 22.8% for the comparable period of fiscal 2018. Higher produce costs were more than offset by favorability across several commodity categories.

Labor Expenses

As a percentage of revenues, labor expenses were 36.3% and 35.7% in the first three quarters of fiscal 2019 and 2018, respectively. This variance was primarily due to higher hourly wage rates.

Other Operating Costs and Expenses

As a percentage of revenues, other operating costs and expenses were 25.2% and 24.4% for the thirty-nine weeks ended October 1, 2019 and October 2, 2018, respectively. This variance was primarily driven by increased rent expense related to our adoption of the new lease accounting standard and higher marketing costs. These increases were partially offset by lower general liability and workers compensation.

General and Administrative Expenses

As a percentage of revenues, G&A expenses were 6.5% and 6.8% for the first three quarters of fiscal 2019 and 2018, respectively. This variance was primarily due to lower legal costs and several other categories, partially offset by $3.2 million of acquisition-related costs incurred in the third quarter of fiscal 2019.

Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses were 3.6% and 4.1% for the thirty-nine weeks ended October 1, 2019 and the comparable period of last year, respectively. This decrease was primarily due to our adoption of the new lease accounting standard.

Impairment of Assets and Lease Terminations

There was no impairment of assets in the first three quarters of fiscal 2019. In the first three quarters of fiscal 2018, we recorded $2.8 million of lease termination costs related to the closure of one The Cheesecake Factory restaurant.

Preopening Costs

Preopening costs were $6.9 million for the thirty-nine weeks ended October 1, 2019 compared to $5.8 million in the comparable period of fiscal 2018. We opened three restaurants in the first three quarters of fiscal 2019 compared to two restaurants in the comparable prior year period.

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Loss on Investment in Unconsolidated Affiliates

Loss on investment in unconsolidated affiliates, which represents our share of losses incurred by North Italia and Flower Child, was $13.4 million and $2.7 million in the thirty-nine weeks ended October 1, 2019 and October 2, 2018, respectively. This increase was primarily driven by impairment of assets, acquisition-related expenses, and preopening costs associated with new unit development.

Interest and Other Income/(Expense), Net

Interest and other income/(expense), net was $16,986 of expense for the first three quarters of fiscal 2019 compared to $5.0 million of expense for the comparable period last year. This variance was primarily due to our adoption of the new lease accounting standard under which we no longer have deemed landlord financing liabilities and associated interest expense.

Income Tax Provision

Our effective income tax rate was 6.2% for the first three quarters of fiscal 2019 compared to 9.8% for the comparable prior year period. This decrease was primarily due to a higher proportion of FICA tip credit in relation to pre-tax income, higher non-taxable gains on our investments in variable life insurance contracts used to support our non-qualified executive deferred compensation plan and the impact of technical guidance published in the fourth quarter of fiscal 2018 regarding the deductibility of employee meals.

Non-GAAP Measures

Adjusted net income and adjusted diluted net income per share are supplemental measures of our performance that are not required by or presented in accordance with GAAP. These non-GAAP measures may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. We calculate these non-GAAP measures by eliminating from net income and diluted net income per share the impact of items we do not consider indicative of our ongoing operations. We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Our inclusion of these adjusted measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items. In the future, we may incur expenses or generate income similar to the adjusted items.

Following is a reconciliation from net income and diluted net income per share to the corresponding adjusted measures (in thousands, except per share data):


	Thirteen		Thirteen			Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended			Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018		October 1, 2019		October 2, 2018

Net income	$	16,090	$	28,475	$	78,584	$	82,857
After-tax impact from:
Impairment of assets and lease terminations ⁽¹⁾		—		195		—		2,106
Loss on investments in unconsolidated affiliates ⁽²⁾		7,655		1,153		9,945		1,988
Acquisition costs ⁽³⁾		2,361		—		2,361		—
Adjusted net income	$	26,106	$	29,823	$	90,890	$	86,951

Diluted net income per share	$	0.36	$	0.61	$	1.76	$	1.79
After-tax impact from:
Impairment of assets and lease terminations ⁽¹⁾		—		0.00		—		0.04
Loss on investments in unconsolidated affiliates ⁽²⁾		0.18		0.03		0.23		0.04
Acquisition costs ⁽³⁾		0.05		—		0.05		—
Adjusted diluted net income per share ⁽⁴⁾	$	0.59	$	0.64	$	2.04	$	1.87

(1)	Represents lease termination costs related to the closure of one The Cheesecake Factory restaurant. The associated pre-tax amounts were $0.3 million and $2.8 million in the thirteen and thirty-nine weeks ended October 2, 2018, respectively. This

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amount is recorded in impairment of assets and lease terminations on the condensed consolidated statements of income. The tax effect assumes a 26% tax rate based on the federal statutory rate and an estimated blended state tax rate.

(2)

Represents our share of losses incurred by North Italia and Flower Child. The pre-tax amounts associated with these items were $10.3 million and $13.4 million in the thirteen and thirty-nine weeks ended October 1, 2019, respectively, and $1.6 million and $2.7 million in the thirteen and thirty-nine weeks ended October 2, 2018, respectively. These amounts are recorded in loss on investment in unconsolidated affiliates on the condensed consolidated statements of income. The tax effect assumes a 26% tax rate based on the federal statutory rate and an estimated blended state tax rate.

(3)

Represents our costs incurred to effect the Acquisitions. The pre-tax amount associated with this item was $3.2 million in both the thirteen and thirty-nine weeks ended October 1, 2019. These costs are recorded in general and administrative expenses on the condensed consolidated statements of income. The tax effect assumes a 26% tax rate based on the federal statutory rate and an estimated blended state tax rate.

(4)	Adjusted diluted net income per share may not add due to rounding.

Fiscal 2019 Outlook

The following fiscal 2019 outlook excludes any gain or loss on investment in unconsolidated affiliates and any impact from the Acquisitions, including integration costs. (See Note 12 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of the Acquisitions.)

For the fourth quarter of fiscal 2019, we estimate adjusted diluted net income per share will be between $0.61 and $0.66 based on an assumed comparable sales range of 0.5% to 1.5% at The Cheesecake Factory restaurants. We estimate adjusted diluted net income per share for fiscal 2019 will be between $2.65 and $2.70 based on an assumed comparable sales range of approximately 1% at The Cheesecake Factory restaurants. Reconciliations of our anticipated adjusted diluted net income per share ranges to their corresponding GAAP measures have not been provided as we cannot determine the probable significance or timing of certain reconciling items which are outside of our control and therefore cannot be reasonably predicted. For fiscal 2019, we estimate commodity cost inflation of about 2%, primarily driven by produce, meat and seafood costs, wage rate inflation of approximately 6% and an effective tax rate of approximately 9%.

In fiscal 2019, we plan to open as many as five new The Cheesecake Factory restaurants, two of which opened during the first three quarters of fiscal 2019. In addition, the first location of Social Monk Asian Kitchen, our new fast casual concept, opened during the first quarter of fiscal 2019. We expect as many as six The Cheesecake Factory restaurants to open internationally under licensing agreements, three of which opened during the first three quarters of fiscal 2019. In addition, the licensed location in Beirut ceased operations on May 1, 2019 and one location in Kuwait closed in preparation for a relocation in early fiscal 2020. We expect as many as two Flower Child locations to open in the fourth quarter of fiscal 2019, one of which opened in October. We also expect as many as one North Italia restaurants during the fourth quarter of fiscal 2019.

We currently estimate fiscal 2019 cash capital expenditures to range between $80 million and $90 million. This estimate contemplates a net outlay of $45 million to $49 million for restaurants expected to be opened during fiscal 2019, $30 million to $35 million for replacements, enhancements and capacity additions to our existing restaurants and approximately $5 million to $6 million for bakery and corporate infrastructure investments. In addition, we now expect $10 million to support the planned North Italia and FRC openings during the fourth quarter of fiscal 2019.

We plan to maintain a balanced capital allocation strategy, investing in new restaurants that are expected to meet our targeted returns, repaying borrowings under our credit facility and continuing our dividend and share repurchase program.

Fiscal 2020 Outlook

We expect fiscal 2020 net capital expenditures to range between $130 million and $140 million to support our objective for accelerated unit growth of 7%. We will also make an $11.3 million acquisition installment payment on the post-close consideration.

For fiscal 2020, we are currently estimating commodity cost inflation of approximately 2%, wage rate inflation of approximately 5.5% and an effective tax rate of approximately 8% to 9%.

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In fiscal 2020, we plan new unit growth to accelerate with as many as 20 new restaurants. This includes six The Cheesecake Factory restaurants, six North Italia restaurants and eight restaurants within the FRC subsidiary, which includes as many as five Flower Child locations. We also expect as many as four locations to open internationally under licensing agreements.

Liquidity and Capital Resources

The following table presents, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities (in millions):


	Thirty-Nine		Thirty-Nine
	Weeks Ended		Weeks Ended
	October 1, 2019		October 2, 2018
Cash provided by operating activities	$	116.2	$	182.1
Additions to property and equipment	$	(46.7)	$	(78.7)
Growth capital provided to unconsolidated affiliates	$	(25.5)	$	(25.0)
Net borrowings on credit facility	$	325.0	$	10.0
Proceeds from exercise of stock options	$	6.5	$	7.3
Cash dividends paid	$	(45.0)	$	(41.4)
Treasury stock purchases	$	(50.6)	$	(60.9)

During the thirty-nine weeks ended October 1, 2019, our cash and cash equivalents increased by $279.7 million to $306.3 million. This increase was primarily attributable to borrowings on the New Facility to support Acquisitions (see Note 12 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of the Acquisitions), cash provided by operating activities and proceeds from exercise of stock options, partially offset by treasury stock purchases, additions to property and equipment, dividend payments and growth capital provided to North Italia and Flower Child. Cash flows from operations decreased by $65.9 million from October 2, 2018, primarily due to timing of income tax payments, prepaid expenses and the depletion of inventory during the first three quarters of fiscal 2018 due to the temporary closure of our California bakery while we upgraded the facility.

As of October 1, 2019, we maintained a $400 million unsecured revolving credit facility (the “New Facility”), $40 million of which could be used for issuances of letters of credit. The New Facility, which terminates on July 30, 2024, contains a commitment increase feature that could provide for an additional $200 million in available credit upon our request and the satisfaction of certain conditions. Certain of our material subsidiaries have guaranteed our obligations under the New Facility. During the third quarter of fiscal 2019, we utilized the New Facility to support the Acquisitions (see Note 12 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of the Acquisitions.) At October 1, 2019, we had net availability for borrowings of $45.6 million, based on a $335.0 million outstanding debt balance and $19.4 million in standby letters of credit. The New Facility limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined ratio. As of October 1, 2019, we were in compliance with the covenants set forth in the New Facility. (See Note 6 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.)

As of October 1, 2019, we held cumulative minority equity investments of $88 million in two of FRC’s brands, North Italia and Flower Child, including $3 million invested in the first quarter of fiscal 2019. In addition, we provided these concepts with $22.5 million under secured promissory notes during the first three quarters of fiscal 2019. Pursuant to agreements entered with FRC in 2016, we had the right, and an obligation if certain financial, legal and operational conditions were met, to acquire the remaining interest in North Italia in fiscal 2019 and in Flower Child in fiscal 2021. On October 2, 2019, we acquired North Italia and FRC, including Flower Child and all other FRC brands.

The Acquisitions were completed for consideration consisting of the following components: $286 million in cash at Closing, which was primarily funded by drawing on our New Facility; assumption of $10 million in debt previously owned by FRC to us; $45 million of deferred consideration due ratably over the next four years (including a $13 million indemnity escrow amount specifically related to the FRC Acquisition); and a $12 million indemnity escrow amount specifically related to the North Italia Acquisition due ratably over the next two years. Additionally, included in consideration are the acquisition-date fair values of contingent consideration and our previously held equity interests in North Italia and Flower Child.

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we undergo a change in control or divest any FRC brand (other than North Italia and Flower Child). We are also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years after Closing.

In fiscal 2012, our Board approved the initiation of a cash dividend to our stockholders, which is subject to quarterly Board approval. Cash dividends have been declared every quarter since initiation. Future decisions to pay or to increase or decrease dividends are at the discretion of the Board and will be dependent on our operating performance, financial condition, capital expenditure requirements, limitations on cash distributions pursuant to the terms and conditions of the New Facility and applicable law, and other such factors that the Board considers relevant.

Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 52.9 million shares at a total cost of $1,692.7 million through October 1, 2019, including 0.3 million shares at a cost of $11.4 million repurchased during the third quarter of fiscal 2019. Our share repurchase authorization does not have an expiration date, does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time. We make the determination to repurchase shares based on several factors, including current and forecasted operating cash flows, capital needs associated with new restaurant development and maintenance of existing locations, dividend payments, debt levels and cost of borrowing, obligations associated with the Acquisitions, our share price and current market conditions. The timing and number of shares repurchased are also subject to legal constraints and financial covenants under the New Facility that limit share repurchases based on a defined ratio. (See Note 6 of Notes to Condensed Consolidated Financial Statements in Part 1, Item 1 of this report for further discussion of our long-term debt.) Our objectives regarding share repurchases are to offset the dilution to our shares outstanding that results from equity compensation grants and to supplement our earnings per share growth. (See Note 8 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our repurchase authorization and methods.)

Based on our current expansion objectives, we believe that during the upcoming 12 months our cash and cash equivalents, combined with expected cash flows provided by operations, available borrowings under the New Facility and expected landlord construction contributions should be sufficient in the aggregate to finance our capital allocation strategy, including capital expenditures, continuation of our dividend and share repurchase program, potential debt repayments and obligations associated with the Acquisitions. (See Note 12 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of the Acquisitions.)

As of October 1, 2019, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties other than our then existing arrangement with FRC. Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.

Recent Accounting Pronouncements

See Note 1 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a summary of new accounting standards.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The following discussion of market risks contains forward-looking statements and should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this report and with the following items included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2019: the audited consolidated financial statements and related notes in Part IV, Item 15; the “Risk Factors” included in Part I, Item 1A; the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7; and the cautionary statements included throughout the report. Actual results may differ materially from the following discussion based on general conditions in the commodity and financial markets.

We purchase food and other commodities for use in our operations based on market prices established with our suppliers. Many of the commodities purchased by us can be subject to volatility due to market supply and demand factors outside of our control. We mitigate the risk of supply shortages and obtain competitive prices by utilizing multiple qualified suppliers for substantially all our ingredients and supplies. We negotiate short-term and long-term agreements for some of our principal commodity, supply and equipment requirements, such as certain dairy products and poultry, depending on market conditions and expected demand. We continue to evaluate the possibility of entering into similar arrangements for other commodities and also periodically evaluate hedging vehicles, such as direct financial instruments, to assist us in managing risk and variability associated with such commodities. Although

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these vehicles may be available to us, as of October 1, 2019, we had chosen not to enter into any hedging contracts due to pricing volatility, excessive risk premiums, hedge inefficiencies or other factors. Commodities for which we have not entered into contracts can be subject to unforeseen supply and cost fluctuations, which at times may be significant. Additionally, the cost of commodities subject to governmental regulation, such as dairy and corn, can be especially susceptible to price fluctuation. Commodities we purchase on the international market may be subject to even greater fluctuations in cost and availability, which could result from a variety of factors, including the value of the U.S. dollar relative to other currencies, international trade disputes, tariffs and varying global demand. We may or may not have the ability to increase menu prices or vary menu items in response to food commodity price increases. For the third quarters of both fiscal 2019 and 2018, a hypothetical increase of 1% in food costs would have negatively impacted cost of sales by $1.3 million.

We are exposed to market risk from interest rate changes on our funded debt. This exposure relates to the component of the interest rate on the New Facility that is indexed to market rates. Based on outstanding borrowings at October 1, 2019 and January 1, 2019, a hypothetical 1% rise in interest rates would have increased interest expense by $3.4 million and $100,000, respectively, on an annual basis. (See Note 6 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.)

We are also subject to market risk related to our investments in variable life insurance contracts used to support our non-qualified executive deferred compensation plan, to the extent these investments are not equivalent to the related liability. In addition, because changes in these investments are not taxable, gains and losses result in tax benefit and tax expense, respectively, and directly affect net income through the income tax provision. Based on balances at October 1, 2019 and January 1, 2019, a hypothetical 10% decline in the market value of our deferred compensation asset and related liability would not have impacted income before income taxes. However, under such scenario, net income would have declined by $1.7 million and $1.5 million at October 1, 2019 and January 1, 2019, respectively.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We have established and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of October 1, 2019.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended October 1, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 7 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

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Item 1A. Risk Factors.

A description of the risk factors associated with our business is contained in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended January 1, 2019 (“Annual Report”). These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC.

Except as set forth below, there have been no material changes in our risk factors since the filing of our Annual Report.

We have incurred and will further incur substantial costs in connection with the Acquisitions.

We have incurred and expect to continue to incur significant costs in connection with the Acquisitions, including accounting, legal and other fees and expenses. Further, the FRC Acquisition requires us to pay contingent consideration and provide financing to FRC in an amount sufficient to support certain targets during the five years after closing, in each case, subject to the satisfaction of certain conditions. In addition, we will incur substantial costs in connection with integrating FRC’s businesses with ours, and there can be no assurance that we will not incur a material amount of unanticipated costs.

We may not be able to successfully integrate FRC’s businesses with ours.

Combining independent companies with separate businesses, customers, employees, cultures and systems is a complex, costly and time-consuming process. We may experience material unanticipated difficulties or expenses in connection with the integration, and this process may disrupt the business of either or both companies. Some of the difficulties we face include:

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consolidating and retaining management and other key employees;

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integrating information, communications and other systems;

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integrating purchasing, logistics, marketing and administration methods;

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integrating corporate and administrative infrastructures;

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minimizing the diversion of management’s attention from ongoing business concerns; and

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failing to successfully manage and coordinate the growth of the combined company.

Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues and diversion of management’s time and focus, which could materially and adversely impact our business, financial condition and operating results.

Any failure to realize the anticipated benefits of the Acquisitions could have a material adverse effect on us.

We acquired FRC’s businesses with the expectation that the Acquisitions will result in various benefits including, among others, business and growth opportunities and synergies in supply chain, real estate and other areas over time. However, even if we are able to successfully integrate FRC’s businesses with ours, there can be no assurances that we will realize some or all of the anticipated benefits of the Acquisitions, within the anticipated timeframes, if at all. We may experience increased competition that limits our ability to expand our business, we may not be able to capitalize on expected business opportunities, and general industry and business conditions may deteriorate. If any of these or other expected or unexpected factors limit our ability to achieve the anticipated benefits of the Acquisitions, or if such business opportunities, growth prospects and synergies are not realized for any other reason, our business, financial condition and operating results could be materially adversely affected.

We have substantial additional indebtedness following the Acquisitions, which could adversely affect our business.

We financed the Acquisitions with a new revolving credit facility of $400 million and cash on hand. (See Note 6 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of the New Facility.) At close of the Acquisitions we had an outstanding balance of approximately $335 million. This increased indebtedness and our resulting higher

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debt-to-equity ratio, as compared to that which has existed on a historical basis, could limit our ability to obtain additional financing in the future and have other material consequences, including:

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increasing our vulnerability to, and limiting our flexibility in planning for, changing business and market conditions, making us more vulnerable to adverse economic and industry conditions;

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limiting our ability to use proceeds from any offering or divestiture transaction for purposes other than the repayment of debt; and

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creating competitive disadvantages compared to other companies with less indebtedness.

Under the New Facility, we are subject to certain financial covenants, limitations on cash distributions and negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters. If we fail to comply with any of these requirements, the New Facility could be terminated and the related outstanding indebtedness could become due and payable at the administrative agent’s discretion (or upon request of the lenders comprising more than 50% of total commitments). A default may also significantly affect our ability to obtain additional or alternative financing. Our ability to refinance our obligations will depend on our operating and financial performance, which in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents our purchases of our common stock during the thirteen weeks ended October 1, 2019 (in thousands, except per share data):


	Total Number			Total Number of Shares	Maximum Number of
	of	Average		Purchased as Part of	Shares that May Yet Be
	Shares	Price Paid		Publicly Announced	Purchased Under the
Period	Purchased ⁽¹⁾	per Share		Plans or Programs	Plans or Programs
July 3 — August 6, 2019	249	$	43.54	249	3,104
August 7 — September 3, 2019	9		38.02	—	3,095
September 4 — October 1, 2019	5		38.76	—	3,090
Total	263			249

(1)	The total number of shares purchased includes 14,890 shares withheld upon vesting of restricted share awards to satisfy tax withholding obligations.

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Item 6. Exhibits

Exhibit No.	Item	Form	File Number	Incorporated by Reference from Exhibit Number	Filed with SEC
2.1	Purchase Agreement, dated as of November 14, 2016, as amended by Amendment & Option Exercise Agreement, dated as of July 30, 2019, by and among The Cheesecake Factory Incorporated and the other Parties thereto*	—	—	—	Filed herewith
2.2	First Amendment to Option Exercise Agreement and Second Amendment to Purchase Agreement and Operating Agreement, dated as of October 2, 2019, by and among The Cheesecake Factory Incorporated and the other Parties thereto*	—	—	—	Filed herewith
2.3	Membership Interest Purchase Agreement, dated as of July 30, 2019, by and among The Cheesecake Factory Restaurants, Inc., Fox Restaurant Concepts LLC, the Sellers party thereto, SWF Posse LLC, as Seller’s representative, and, solely for limited purposes set forth therein, The Cheesecake Factory Incorporated*†	—	—	—	Filed herewith
2.4	First Amendment to Membership Interest Purchase Agreement, dated as of October 2, 2019, by and among The Cheesecake Factory Restaurants, Inc., Fox Restaurant Concepts LLC, and SWF Posse LLC, as Seller’s representative*	—	—	—	Filed herewith
3.1	Restated Certificate of Incorporation of The Cheesecake Factory Incorporated	10-Q	000-20574	3.2	8/6/18
3.2	Bylaws of The Cheesecake Factory Incorporated (Amended and Restated on May 20, 2009)	8-K	000-20574	3.8	5/27/09
10.1	Third Amended and Restated Loan Agreement with JPMorgan Chase Bank, National Association dated as of July 30, 2019	—	—	—	Filed herewith
31.1	Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer	—	—	—	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer	—	—	—	Filed herewith
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer	—	—	—	Filed herewith
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer	—	—	—	Filed herewith
101.1	The following materials from The Cheesecake Factory Incorporated’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2019, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of income, (iii) condensed consolidated statements of comprehensive income, (iv) condensed consolidated statement of stockholders’ equity, (v) condensed consolidated statements of cash flows, and (vi) the notes to the condensed consolidated financial statements	—	—	—	Filed herewith
104.1	The cover page of The Cheesecake Factory Incorporated’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2019, formatted in iXBRL (included with Exhibit 101.1)	—	—	—	Filed herewith

*The schedules (or similar attachments) to this exhibit have been omitted from this filing pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish copies of any such schedules 9oe similar attachments) to the SEC upon request.

† Certain confidential information contained in this agreement has been omitted because it (i) is not material and (ii) would be competitively harmful if publicly disclosed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: November 8, 2019	THE CHEESECAKE FACTORY INCORPORATED

	By:	/s/ DAVID OVERTON
		David Overton
		Chairman of the Board and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ MATTHEW E. CLARK
		Matthew E. Clark
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)