CHEESECAKE FACTORY INC – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

    This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes in Part IV, Item 15 of this report, the "Risk Factors" included in Part I, Item 1A of this report, and the cautionary statements included throughout this report.    As of February 23, 2012, we operated 170 upscale, casual, full-service dining restaurants: 156 under The Cheesecake Factory® mark, 13 under the Grand Lux Cafe® mark and one under the RockSugar Pan Asian Kitchen® mark.  We also operated two bakery production facilities.    The Cheesecake Factory is an upscale, casual dining concept that offers more than 200 menu items including appetizers, pizza, seafood, steaks, chicken, burgers, pasta, specialty items, salads, sandwiches, omelettes and desserts, including approximately 40 varieties of cheesecake and other baked desserts. Grand Lux Cafe and RockSugar Pan Asian Kitchen are also upscale, casual dining concepts offering approximately 200 and 80 menu items, respectively.  In contrast to many chain restaurant operations, substantially all of our menu items (except certain desserts manufactured at our bakery production facilities) are prepared on site at our restaurants using high quality, fresh ingredients based on innovative and proprietary recipes.  We believe our restaurants are recognized by consumers for offering value with generous food portions at moderate prices.  Our restaurants' distinctive, contemporary design and decor create a high-energy ambiance in a casual setting.  Our restaurants typically range in size from 7,000 to 15,000 interior square feet, provide full liquor service and are generally open seven days a week for lunch and dinner, as well as Sunday brunch.    We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31st for financial reporting purposes.  Fiscal years 2010 and 2009 each consisted of 52 weeks, while fiscal 2011 consisted of 53 weeks.  The estimated impact of the 53rd week in fiscal 2011 in comparison to fiscal 2010 was an increase in revenue of approximately $43 million.  While certain expenses increased in direct relationship to additional revenue from the 53rd week, some expenses are incurred on a calendar month basis.    Overview    In addition to being highly competitive, the restaurant industry is affected by changes in consumer tastes and discretionary spending; changes in general economic conditions; public safety conditions; demographic trends; weather conditions; the cost and availability of food products, labor and energy; and government regulations.  Accordingly, as part of our strategy we must constantly evolve and refine the critical elements of our restaurant concepts to protect our competitiveness and to maintain and enhance the strength of our brands.    Our strategy is driven by our commitment to guest satisfaction and is focused primarily on menu innovation and operational execution to continue to differentiate ourselves from other restaurant concepts, as well as drive competitively strong performance that is sustainable.  Financially, we are focused on prudently managing expenses at our restaurants, bakery facilities and corporate support center.  We are also committed to allocating capital in a manner that will maximize profitability and returns.  Investing in new restaurant development that meets our return on investment criteria is our top capital allocation priority with a focus on opening our restaurant concepts in premier locations within both existing and new markets.    

In evaluating and assessing the performance of our business, we believe the following are key performance indicators that should be taken into consideration:

    †          Comparable Restaurant Sales and Overall Revenue Growth.  Changes in comparable restaurant sales come from variations in guest traffic, as well as in check average (as a result of menu price increases and/or changes in menu mix). Our strategy is to grow guest traffic by continuing to offer innovative, high quality menu items that offer guests a wide range of options in terms of flavor, price and value.  In addition, we plan to continue focusing on service and hospitality with the goal of delivering an exceptional guest experience.    Our philosophy with regard to menu pricing is to use price increases to help offset key operating costs in a manner that balances protecting both our margins and guest traffic levels.  Historically, menu mix generally had a neutral effect on our average check, allowing us to retain the full impact of our menu price increases.  However, as a result of the economic downturn, menu mix became slightly negative due to check management by our guests.  We expect to return more toward the previous (neutral) pattern as the economy strengthens.    Comparable restaurant sales growth, in addition to revenue from new restaurant openings and increases in third-party bakery sales, drive our overall revenue growth.  In the future, we expect international locations to also contribute to our revenue growth.                                           29 

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    †          Income from Operations Expressed as a Percentage of Revenues ("Operating Margins").  Operating margins are subject to fluctuations in commodity costs, labor, restaurant-level occupancy expenses, general and administrative expenses ("G&A") and preopening expenses.  Our objective is to gradually increase our operating margins by capturing fixed cost leverage from comparable restaurant sales increases; maximizing our purchasing power as our business grows; and operating our restaurants as productively as possible by retaining the efficiencies we gained through the implementation of cost management initiatives.    By efficiently scaling our restaurant and bakery support infrastructure and improving our internal processes, we strive to grow G&A expenses at a slower rate than revenue growth over the long-term, which should also contribute to operating margin expansion.    †          Return on Investment.  Return on investment measures our ability to make the best decisions regarding our allocation of capital.  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 through operational execution and disciplined cost management.  Our objective is to deploy capital in a manner that will maximize our return on investment.    Results of Operations   

The following table sets forth, for the periods indicated, our consolidated statements of operations expressed as percentages of revenues:

                                                 Fiscal Year                                          2011    2010    2009 Revenues                                 100.0 % 100.0 % 100.0 %  Costs and expenses: Cost of sales                             25.5    24.9    24.6 Labor expenses                            32.3    32.4    33.0 Other operating costs and expenses        24.3    24.6    25.1 General and administrative expenses        5.5     5.8     6.1 Depreciation and amortization expenses     4.1     4.3     4.7 Impairment of assets                       0.1       †     1.7 Preopening costs                           0.6     0.3     0.2  Total costs and expenses                  92.4    92.3    95.4  Income from operations                     7.6     7.7     4.6 Interest expense                          (0.3 )  (1.0 )  (1.5 ) Interest income                            0.0     0.0     0.0 Other (expense)/income, net                0.0     0.0     0.1  Income before income taxes                 7.3     6.7     3.2 Income tax provision                       1.9     1.8     0.5  Net income                                 5.4 %   4.9 %   2.7 %    

Fiscal 2011 Compared to Fiscal 2010

   Revenues   

Revenues increased 5.9% to $1,757.6 million for fiscal 2011, including approximately $43 million contributed by the 53rd week, compared to $1,659.4 million for fiscal 2010.

    Restaurant revenues increased 6.2% to $1,685.0 million for fiscal 2011 compared to $1,586.3 million for the prior fiscal year.  The 53rd week contributed approximately $41 million in restaurant revenues in fiscal 2011.  Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased by 1.8%, or $28.9 million, from fiscal 2010 to fiscal 2011.  The Cheesecake Factory and Grand Lux Cafe restaurants become eligible to enter our comparable sales calculations in their 19th month of operation.  At January 3, 2012, there were eight The Cheesecake Factory restaurants not included in the comparable sales base.    Comparable sales at The Cheesecake Factory restaurants increased 2.0% from fiscal 2010 on a 53 week basis driven by both improved guest traffic and average check.  We implemented effective menu price increases of approximately 0.7% and 1.3% during the first and third quarters of fiscal 2011, respectively.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, The Cheesecake Factory menu included a 1.6% increase in pricing for fiscal year 2011.  This increase in menu pricing                                           30 

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    was partially offset by a menu mix shift due to check management by guests, particularly related to non-alcoholic beverage purchases.  Inclusive of our summer 2011 and winter 2012 menu changes, we are targeting an effective price increase of approximately 2.2% for the first half of fiscal 2012.  We plan to review our operating cost and expense trends in the spring of 2012 and consider the need for additional menu pricing in connection with our 2012 summer menu change.    Comparable sales at our Grand Lux Cafe restaurants decreased 0.3% from fiscal year 2010 on a 53 week basis driven by a decline in guest traffic, partially offset by an increase in average check.  During the second quarter of fiscal 2011, we implemented an effective menu price increase of approximately 1.4%.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, the Grand Lux Cafe menu included a 0.9% increase in pricing for fiscal year 2011.  This increase in menu pricing was offset by menu mix shifts due to ongoing check management by guests, particularly with regard to their purchase of non-alcoholic beverages.    We generally update and reprint the menus in our restaurants twice a year.  As part of these menu updates, we evaluate the need for price increases based on those operating cost and expense increases of which we are aware or that we can reasonably expect.  While menu price increases can facilitate increased comparable restaurant sales in addition to offsetting margin pressure, we carefully consider all potential price increases in light of the extent to which we believe they will be accepted by our restaurant guests.    Additionally, other factors outside of our control, such as general economic conditions, inclement weather, timing of holidays, and competitive and other factors, including those referenced in Part I, Item 1A, "Risk Factors," of this report can impact comparable sales.    Total restaurant operating weeks increased 4.2% to 8,777 in fiscal 2011 from the prior year due to the opening of seven new restaurants during the trailing 15-month period.  Excluding the impact of the 53rd week in fiscal 2011, total operating weeks increased 2.1% to 8,607.  Average sales per restaurant operating week increased approximately 2.1% to $192,000 in fiscal 2011 compared to fiscal 2010 due to an improvement in both guest traffic and average check.    Bakery sales to other foodservice operators, retailers and distributors ("bakery sales") decreased 0.7% to $72.6 million in fiscal 2011 compared to $73.1 million in the prior fiscal year due primarily to decreases in warehouse club and national account sales.    We strive to develop and maintain long-term, growing relationships with our bakery customers, based largely on our 39-year reputation for producing high quality and creative baked desserts.  However, it is difficult to predict the timing of bakery product shipments and contribution margins on a quarterly basis, as the purchasing plans of our large-account customers may fluctuate.    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 increased to 25.5% in fiscal 2011 compared to 24.9% in fiscal 2010.  This increase was due to continuing cost pressures from certain commodities, primarily dairy and some general grocery items.    Our 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 can sometimes be counterbalanced by cost changes in other commodity categories.  The principal commodity categories for our restaurants include produce, poultry, meat, fish and seafood, dairy, bread and general grocery items.    We attempt to negotiate short-term and long-term agreements for our principal commodity, supply and equipment requirements, depending on market conditions and expected demand.  However, we are currently unable to contract for extended periods of time for certain of our commodities such as fish and many dairy items (excluding cream cheese used in our bakery operations).  Consequently, these commodities can be subject to unforeseen supply and cost fluctuations.  Cream cheese is the most significant commodity used in our bakery products.  We contracted for a substantial portion of our fiscal 2011 cream cheese requirements and also purchased cream cheese on the spot market as necessary to supplement our contracted amounts.    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 expected cost increases for key commodities and other goods and services utilized by our operations.    We have taken steps to qualify multiple suppliers and enter into agreements for some of the key commodities used in our restaurant and bakery operations. However, there can be no assurance that future supplies and costs for these commodities will not fluctuate due to weather and other market conditions outside of our control.  For new restaurants, cost of sales will typically be higher during the first three to four months of operations until our management team becomes more accustomed to optimally predicting, managing and servicing the sales volumes at the new restaurant.                                           31  --------------------------------------------------------------------------------

   Table of Contents    Labor Expenses    As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery direct production labor, including associated fringe benefits, decreased to 32.3% in fiscal 2011 compared to 32.4% in fiscal 2010. This improvement was primarily due to leverage from increased comparable sales and favorable group medical insurance costs, partially offset by higher payroll taxes due to a benefit in fiscal 2010 from the federal Hiring Incentives to Restore Employment ("HIRE") Act, which resulted in lower employer FICA costs in that year.   

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, selling and distribution expenses.  As a percentage of revenues, other operating costs and expenses decreased to 24.3% for fiscal 2011 versus 24.6% for fiscal 2010.  This decrease was primarily due to leverage from increased comparable sales and lower marketing expenses, partially offset by higher year-over-year expense related to our self-insured workers' compensation and general liability plans.    

General and Administrative Expenses

    General and administrative ("G&A") expenses consist of the restaurant management recruiting and training program, as well as the restaurant field supervision, bakery administrative and corporate support organizations.  As a percentage of revenues, G&A expenses decreased to 5.5% for fiscal 2011 versus 5.8% for fiscal 2010 due primarily to a lower fiscal 2011 accrual for incentive compensation and leverage from increased sales.    

Depreciation and Amortization Expenses

    As a percentage of revenues, depreciation and amortization expenses decreased to 4.1% for fiscal 2011 compared to 4.3% for fiscal 2010.  The decrease is primarily attributable to lower capital investments due to fewer restaurant openings in the past few years, as well as proportionately higher investment during those years in information systems, which have shorter useful lives than most restaurant capital expenditures.    Impairment of Assets    In fiscal 2011, we recorded expense of $1.5 million, representing reductions to the carrying values of three previously impaired locations, consisting of one Grand Lux Cafe and two The Cheesecake Factory restaurants.  No impairment charges were recorded in fiscal 2010.  If the economic recovery remains slow and/or we are unable to implement initiatives to appropriately scale our infrastructure in a timely manner, we may be required to record additional impairment charges in future periods.  (See Note 1 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our accounting policies regarding Impairment of Long-Lived Assets.)    Preopening Costs    Preopening costs increased to $10.1 million for fiscal 2011 compared to $5.2 million for the prior fiscal year.  We incurred preopening costs to open seven The Cheesecake Factory restaurants in fiscal 2011 compared to opening three The Cheesecake Factory restaurant during fiscal 2010.    Preopening costs include all costs to relocate and compensate restaurant management employees during the preopening period; costs to recruit and train hourly restaurant employees; wages, travel and lodging costs for our opening training team and other support employees; and straight-line minimum base rent during the build-out and in-restaurant training periods.  Also included in preopening costs 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.    

Interest Expense, Interest Income and Other (Expense)/Income, Net

    Interest expense decreased to $4.9 million for fiscal 2011 compared to $16.8 million for fiscal 2010 due primarily to $7.4 million recorded in fiscal 2010 to unwind an interest rate collar.  In addition, we had no outstanding borrowings under our Facility during fiscal 2011 as compared to a $66.2 million average debt balance in the prior year.  (See Notes 7 and 8 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our long-term debt and derivative financial instruments, respectively.) Interest expense also included $3.8 million and $3.6 million in fiscal 2011 and fiscal 2010, respectively, associated with landlord construction allowances deemed to be financing in accordance with accounting guidance.    Interest income increased to $0.8 million for fiscal 2011 compared to $0.2 million for the prior year due primarily to $0.7 million of interest income in fiscal 2011 related to the favorable resolution of litigation we filed against the IRS relating to disallowed employee compensation expense as to tax years 2003 and 2004, as described in Note 9 of Notes to Consolidated Financials Statements in Part IV, Item 15 of this report.                                           32  --------------------------------------------------------------------------------

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    We recorded net other expense of $0.2 million in fiscal 2011 compared to $0.5 million for fiscal 2010.  This variance primarily relates to changes in the value of our investments in variable life insurance contracts used to support our Executive Savings Plan ("ESP"), a non-qualified deferred compensation plan.    Income Tax Provision    Our effective income tax rate was 25.9% for fiscal 2011 compared to 26.4% for fiscal 2010.  This decrease was primarily attributable to the HIRE Act retention credit in fiscal 2011 and the favorable resolution of litigation we filed against the IRS relating to disallowed employee compensation expense as to tax years 2003 and 2004, as described in Note 9 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report.  These decreases were partially offset by non-deductible losses in fiscal 2011 as compared non-taxable gains in fiscal 2010 on our investments in variable life insurance use to support our ESP.   

Fiscal 2010 Compared to Fiscal 2009

   Revenues   

Revenues increased 3.6% to $1,659.4 million for fiscal 2010 compared to $1,602.0 million for fiscal 2009.

    Restaurant revenues increased 3.4% to $1,586.3 million for fiscal 2010 compared to $1,534.3 million for the prior fiscal year.  Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased by 2.0%, or $30.0 million, from fiscal 2009 to fiscal 2010.  At December 28, 2010, there were three The Cheesecake Factory restaurants not included in the comparable sales base.    Comparable sales at The Cheesecake Factory restaurants increased 2.0% from fiscal 2009 driven primarily by improved guest traffic.  We implemented effective menu price increases of approximately 0.6% and 0.7% during the first and third quarter of fiscal 2010, respectively.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, The Cheesecake Factory menu included a 1.4% increase in pricing for fiscal year ended December 28, 2010.  This increase in menu pricing was partially offset by menu mix shifts due to ongoing check management by guests, particularly with regard to their purchase of non-alcoholic beverages.    Comparable sales at our Grand Lux Cafe restaurants increased 1.5% from fiscal year 2009, driven by improved guest traffic.  We did not implement any price increases in fiscal 2010.  However, menu price increases made in fiscal 2009 had a year-over-year impact in fiscal 2010.  On a weighted average basis, the Grand Lux menu included a 0.7% increase in pricing for fiscal year ended December 28, 2010.  This increase in menu pricing was offset by menu mix shifts due to ongoing check management by guests, particularly with regard to their purchase of non-alcoholic beverages.    Total restaurant operating weeks increased 1.4% to 8,426 in fiscal 2010 from the prior year due to the opening of three new restaurants during the trailing 15-month period.  In addition, average sales per restaurant operating week increased approximately 1.8% to $188,000 in fiscal 2010 compared to the prior fiscal year due principally to the improvement in guest traffic.    Bakery sales increased 8.0% to $73.1 million in fiscal 2010 compared to $67.7 million in the prior fiscal year due primarily to increases in warehouse club and national account sales.    Cost of Sales    As a percentage of revenues, cost of sales increased to 24.9% in fiscal 2010 compared to 24.6% in fiscal 2009.  This increase was due to cost pressures from certain commodities, primarily dairy and cheese, partially offset by pricing leverage and savings from our cost of sales initiatives, including the development of new menu items with lower food costs, negotiation of more favorable pricing for certain commodities and improvements in our supply chain.    Labor Expenses    As a percentage of revenues, labor expenses decreased to 32.4% in fiscal 2010 compared to 33.0% in fiscal 2009.  This improvement was primarily due to overall productivity gains as a result of our operational initiatives, which included aligning the staffing in our restaurants with current sales volumes, leverage from positive comparable sales and lower stock-based compensation.    

Other Operating Costs and Expenses

    As a percentage of revenues, other operating costs and expenses decreased to 24.6% for fiscal 2010 versus 25.1% for fiscal 2009.  This decrease was primarily due to savings from our cost management initiatives, leverage of fixed costs due to positive comparable sales and favorable experience related to our self-insured workers' compensation and general liability plans.                                           33  --------------------------------------------------------------------------------

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General and Administrative Expenses

    As a percentage of revenues, G&A expenses decreased to 5.8% for fiscal 2010 versus 6.1% for fiscal 2009.  This variance was primarily due to a $2.9 million charge in fiscal 2009 resulting from a change in the amount and structure of the retirement benefit contained in the employment agreement with our Chief Executive Officer, as well as to lower stock-based compensation expense.    

Depreciation and Amortization Expenses

    As a percentage of revenues, depreciation and amortization expenses decreased to 4.3% for fiscal 2010 compared to 4.7% for fiscal 2009.  The decrease is primarily attributable to leveraging from positive comparable sales, as well as to lower depreciation expense resulting from the impairment charge we recorded in fiscal 2009 discussed below in Impairment of Assets.    Impairment of Assets    We recorded a $26.5 million impairment charge against the carrying value of four Grand Lux Cafe restaurants in fiscal 2009.  No impairment charges were recorded in fiscal 2010.    Preopening Costs    Preopening costs increased to $5.2 million for fiscal 2010 compared to $3.3 million for the prior fiscal year.  We incurred preopening costs to open three The Cheesecake Factory restaurants in fiscal 2010 compared to opening one The Cheesecake Factory restaurant during fiscal 2009.    

Interest Expense, Interest Income and Other (Expense)/Income, Net

    Interest expense decreased to $16.8 million for fiscal 2010 compared to $23.4 million for fiscal 2009 due primarily to lower average outstanding debt balances during fiscal 2010 as compared to the prior year.  Interest expense included $7.4 million in both fiscal 2010 and 2009 to unwind interest rate collars in conjunction with reducing our revolving credit facility balance.  (See Notes 7 and 8 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our long-term debt and derivative financial instruments, respectively.)  Interest expense also included $3.6 million and $3.7 million in fiscal 2010 and fiscal 2009, respectively, associated with landlord construction allowances deemed to be financing in accordance with accounting guidance.    

Interest income decreased to $0.2 million for fiscal 2010 compared to $0.4 million for the prior year due primarily to lower invested balances and lower interest rates on those invested balances during fiscal 2010.

    We recorded net other expense of $0.5 million for fiscal 2010 compared to net other income of $0.7 million for fiscal 2009.  This variance primarily relates to changes in the value of our investments in variable life insurance contracts used to support our ESP, and the realization in fiscal 2009 of $0.7 million in proceeds from one of these contracts, as well as reductions in other miscellaneous income items.    Income Tax Provision    Our effective income tax rate was 26.4% for fiscal 2010 compared to 16.5% for fiscal 2009.  This increase was primarily attributable to deleverage from employment-related tax credits on higher pretax income, as well as lower non-taxable gains on our investments in variable life insurance contracts used to support our ESP, partially offset by the favorable resolution of our litigation we filed against the IRS relating to disallowed employee compensation expense as to tax years 2005 and 2006, as described in Note 9 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report.    Fiscal 2012 Outlook   

This discussion contains forward-looking statements and should be read in conjunction with our consolidated financial statements and related notes in Part IV, Item 15 of this report, the "Risk Factors" included in Part I, Item 1A of this report, and the cautionary statements included throughout this report.

    In fiscal 2012, we plan to open as many as seven to eight new restaurants, including one Grand Lux Cafe.  We estimate diluted earnings per share for fiscal 2012 will be between $1.80 and $1.90 based on the assumption that comparable restaurant sales will increase in a range of between 1.5% and 2.5%.  We expect cash capital expenditures in fiscal 2012 to range between $100 million and $110 million.  We also plan to continue to use the majority of our free cash flow to repurchase shares of our common stock.    

Liquidity and Capital Resources

    Our corporate financial objectives are to maintain a sufficiently strong and conservative balance sheet to support our operating initiatives and unit growth with financial flexibility; to provide the financial resources necessary to protect and enhance the competitiveness of our restaurant and bakery brands; and to provide a prudent level of financial capacity to manage the risks and uncertainties of conducting our business operations in the current economic environment and through future economic and industry cycles.  Our ongoing capital requirements are principally related to our restaurant expansion plan and ongoing maintenance of our restaurants and bakery facilities, as well as investment in our corporate and information technology infrastructures.                                           34  --------------------------------------------------------------------------------

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    Similar to many restaurant and retail chain store operations, we utilize operating lease arrangements for all of our restaurant locations.  We believe that our operating lease arrangements continue to provide appropriate leverage for our capital structure in a financially efficient manner.  However, we are not limited to the use of lease arrangements as our only method of opening new restaurants.  While most of our operating lease obligations are not required to be reflected as indebtedness on our consolidated balance sheet, the minimum base rents and related fixed obligations under our lease agreements must be satisfied by cash flows from our ongoing operations.  Accordingly, our lease arrangements reduce, to some extent, our capacity to utilize funded indebtedness in our capital structure.    Historically, we have obtained capital from our ongoing operations, public stock offerings, debt financing, employee stock option exercises and construction contributions from our landlords.  Our requirement for working capital is not significant, since our restaurant guests pay for their food and beverage purchases in cash or cash equivalents at the time of sale, and we are able to sell many of our food inventory items before payment is due to the suppliers of such items.    The following table presents, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities (dollar amounts in millions):                                                                Fiscal Year                                                      2011       2010       2009  Cash provided by operating activities              $  196.1   $  167.1   $  

198.8

 Capital expenditures                               $  (76.7 ) $  (41.8 ) $  (37.2 ) Proceeds from exercise of employee stock options   $   16.1   $   30.6   $    1.7 Repayment on credit facility                       $      †   $ (100.0 ) $ (175.0 ) Purchase of treasury stock                         $ (172.1 ) $  (52.1 ) $      †     During fiscal 2011, our cash and cash equivalents decreased by $33.4 million to $48.2 million at January 3, 2012.  This decrease was primarily attributable to treasury stock purchases and capital expenditures, partially offset by cash provided by operating activities and proceeds from exercises of employee stock options.  See Note 1 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of cash and cash equivalents.    Capital expenditures were higher in fiscal 2011 compared to fiscal 2010 and 2009 due to the number of restaurants opened in each year (seven, three and one, respectively.)  Capital expenditures for new restaurants, including locations under development as of each fiscal year end were $46.9 million, $15 million and $8 million for fiscal 2011, 2010 and 2009, respectively.  Fiscal 2011 capital expenditures also included $20.0 million for our existing restaurants, and approximately $9.8 million for bakery and corporate infrastructure investments.    For fiscal 2012, we currently estimate our cash outlays for capital expenditures to range between $100 million and $110 million, net of agreed-upon up-front cash landlord construction contributions and excluding $11 million of expected noncapitalizable preopening costs for new restaurants.  The amount reflected as additions to property and equipment in the consolidated statements of cash flows may vary from this estimate based on the accounting treatment of each lease (See Note 1 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report).  Our estimate for capital expenditures for fiscal 2012 contemplates a net outlay of $51 million to $56 million for as many as seven to eight restaurants expected to be opened during fiscal 2012 and estimated construction-in-progress disbursements for anticipated fiscal 2013 openings. These amounts are net of estimated collections of up-front cash landlord construction contributions.  Expected capital expenditures for fiscal 2012 also include $32 million to $33 million for maintenance and capacity additions on our existing restaurants and $17 million to $21 million for bakery and corporate infrastructure investments.    At January 3, 2012, we had no borrowings outstanding under our $200 million revolving credit facility ("Facility").  Availability under the Facility is reduced by outstanding standby letters of credit, which are used to support our self-insurance programs.  As of January 3, 2012, we had net availability for borrowings of $182 million, based upon a zero outstanding debt balance and $18 million in standby letters of credit.  In addition, our Facility limits our cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined leverage ratio. See Note 7 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our long-term debt.    During fiscal 2008 and 2007, we entered into several zero-cost interest rate collars that hedged interest rate variability on a portion of outstanding borrowings on our Facility.  During fiscal 2010 and 2009, in conjunction with repayments on our Facility, we unwound our derivatives at a cost of $7.4 million in each year.  We had no derivative instruments outstanding at January 3, 2012
On October 17, 2011, our Board of Directors increased the authorization to repurchase our common stock by 10.0 million shares to 41.0 million shares. Under this authorization, we have cumulatively repurchased a total of 31.2 million shares at a total cost of $730.4 million through January 3, 2012.  Our share repurchase authorization does not have an expiration date, does not require us to
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purchase a specific number of shares and may be modified, suspended or terminated at any time.  See Note 10 of Notes to Consolidated Financial Statements in Part IV, Item 15 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 our credit facility and expected landlord construction contributions should be sufficient in the aggregate to finance our capital allocation strategy, including capital expenditures and share repurchases and allow us to consider additional possible capital allocation strategies, such as the initiation of a dividend or the acquisition of other growth vehicles.    
As of January 3, 2012, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties.
 Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.
Contractual Obligations and Commercial Commitments
The following schedules summarize our contractual obligations and commercial commitments as of January 3, 2012 (amounts in millions):
                                                              Payment Due by Period                                                Less than 1                                    More than 5                                    Total          Year          1-3 Years      4-5 Years         Years Contractual obligations Leases (1)                       $   947.9    $        67.0    $     137.6    $     137.6    $       605.7 Long-term debt                           -                -              -              -                - Purchase obligations (2)             107.8             97.4            9.4            0.9              0.1 Uncertain tax positions (3)            0.7                -            0.7              -                - Total                            $ 1,056.4    $       164.4    $     147.7  
$     138.5    $       605.8
  Other commercial commitments Standby letters of credit        $    18.0    $           -    $         -    $      18.0    $           -    
-------------------------------------------------------------------------------- (1)      Represents aggregate minimum lease payments for our restaurant operations, automobiles and certain equipment, including amounts characterized as deemed landlord financing payments in accordance with accounting guidance. See Note 1 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report.  Most of our leases also require contingent rent in addition to the minimum base rent based on a percentage of sales ranging from 3% to 10% and require expenses incidental to the use of the property.  (2)       Purchasing obligations represent commitments for the purchase of goods and estimated construction commitments, net of agreed-upon up-front landlord construction contributions.  Amounts exclude agreements that are cancelable without significant penalty.  
(3)      Represents liability for uncertain tax positions.  See Note 13 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of income taxes.
We expect to fund our contractual obligations primarily with operating cash flows generated in the normal course of business.
Critical Accounting Policies
    Critical accounting policies are those we believe are most important to portraying our financial condition and results of operations and also require the greatest amount of subjective or complex judgments by management.  Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions.  We consider the following policies to be the most critical in understanding the judgment that is involved in preparing our consolidated financial statements.    Property and Equipment    We record property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensed as incurred.  Depreciation and amortization are calculated using the straight-line method over the estimated useful life of each asset or lease term, whichever is shorter.  The useful life of property and equipment and the determination as to what constitutes a capitalized cost versus a repair and maintenance expense involves judgment by management, which may produce materially different amounts of depreciation expense than if different assumptions were used.                                           36  --------------------------------------------------------------------------------
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Impairment of Long-Lived Assets
    We assess potential impairment of our long-lived assets whenever events or changes in circumstances indicate that the carrying value of the assets or asset group may not be recoverable.  Factors considered include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends.  We regularly review any restaurants that are cash flow negative for the previous four quarters to determine if impairment testing is warranted.  At any given time, we may be monitoring a small number of locations, and future impairment charges could be required if individual restaurant performance does not improve.    We have determined that our asset group for impairment testing is comprised of the assets and liabilities of each of our individual restaurants, as this is the lowest level of identifiable cash flows.  We have identified leasehold improvements as the primary asset because it is the most significant component of our restaurant assets, is the principal asset from which our restaurants derive their cash flow generating capacity and has the longest remaining useful life.  The recoverability is assessed in most cases by comparing the carrying value of the assets to the undiscounted cash flows expected to be generated by these assets.    Impairment losses are measured as the amount by which the carrying values of the assets exceed their fair values.  This assessment process requires the use of estimates and assumptions regarding future cash flows and estimated useful lives, which are subject to a significant degree of judgment based on our experience and knowledge.  These estimates can be significantly impacted by changes in the economic environment, real estate market conditions and capital spending decisions.    In fiscal 2011, we recorded expense of $1.5 million, representing additional reductions to the carrying values of three previously impaired locations, consisting of one Grand Lux Cafe and two The Cheesecake Factory restaurants. During fiscal 2009, we recorded a $26.5 million impairment charge against four Grand Lux Cafe locations.  No impairment charges were recorded in fiscal 2010. If the economic recovery remains slow and/or we are unable to implement initiatives to appropriately scale our infrastructure in a timely manner, we may be required to record additional impairment charges in future periods.    Leases    We currently lease all of our restaurant locations.  We evaluate each lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes.  All of our restaurant leases are classified as operating leases.  Minimum base rent for our operating leases, which generally have escalating rentals over the term of the lease, is recorded on a straight-line basis over the lease term.  The initial lease term includes the build-out, or rent holiday period, for our leases, where no rent payments are typically due under the terms of the lease.  Contingent rent expense, which is based on a percentage of revenue, is recorded as incurred to the extent it exceeds minimum base rent per the lease agreement.    We expend cash for leasehold improvements and FF&E 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 pursuant to agreed-upon terms in our leases.  If obtained, landlord construction contributions usually take the form of up-front cash, full or partial credits against our future minimum or percentage rents otherwise payable by us, or a combination thereof.  Depending on the specifics of the leased space and the lease agreement, amounts paid for structural components are recorded during the construction period as either prepaid rent or construction-in-progress and the landlord construction contributions are recorded as either an offset to prepaid rent or as a deemed landlord financing liability.    Upon completion of construction, we perform an analysis on the leases for which the structural cost was initially recorded to construction-in-progress to determine if they qualify for sale-leaseback treatment.  For those qualifying leases, the deemed landlord financing liability and the associated construction-in-progress are removed and the difference is reclassified to either prepaid or deferred rent and amortized over the lease term as an increase or decrease to rent expense.  If the lease does not qualify for sale-leaseback treatment, the deemed landlord financing liability is amortized over the lease term based on the rent payments designated in the lease agreement.    
Gift Card Revenue Recognition
    We recognize a liability upon the sale of our gift cards and recognize revenue when these gift cards are redeemed in our restaurants or on our website.  Based on our historical gift card redemption patterns, we can reasonably estimate the amount of gift cards for which redemption is remote, which is referred to as "breakage."  Breakage is recognized in proportion to historical redemption trends and is classified as revenues in our consolidated statement of operations.  Utilizing this method, we estimate both the amount of breakage and the time period of redemption.  If actual redemption patterns vary from our estimates, actual gift card breakage income may differ from the amounts recorded.    Self-Insurance Liability    We retain the financial responsibility for a significant portion of our risks and associated liabilities with respect to workers' compensation, general liability, employment practices, employee health benefits and other insurable risks.  The accrued liabilities associated with these programs are based on our estimate of the ultimate costs to settle known claims as well as claims incurred but                                           37 
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    not yet reported to us ("IBNR") as of the balance sheet date.  Our estimated liabilities are not discounted and are based on information provided by our insurance brokers and insurers, combined with our judgment regarding a number of assumptions and factors, including the frequency and severity of claims, claims development history, case jurisdiction, applicable legislation and our claims settlement practices.  We maintain stop-loss coverage with third-party insurers to limit our individual claim exposure for many of our programs and for aggregate exposure on our employee health benefits program.  The estimated amounts receivable from our third-party insurers under this coverage are recorded in other receivables.  Significant judgment is required to estimate IBNR amounts as parties have yet to assert such claims.  If actual claims trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.    Stock-Based Compensation    We apply the Black-Scholes valuation model in determining the fair value of stock option grants, which requires the use of subjective assumptions, including the volatility of our common stock price and the length of time employees will retain their vested stock options prior to exercise.  Additionally, we estimate the expected forfeiture rate related to stock options, restricted shares and restricted share units in determining the amount of stock-based compensation expense for each period.  Changes in these assumptions can materially affect our results of operations.  (See Note 11 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of stock-based compensation.)    Income Taxes    We provide for income taxes based on our estimate of federal and state tax liabilities.  Our estimates include, but are not limited to, effective state and local income tax rates, allowable tax credits for items such as FICA taxes paid on reported tip income, and estimates related to depreciation expense allowable for tax purposes.  Our estimates are made based on the best available information at the time we prepare our income tax provision.  In making our estimates, we also consider the impact of legislative and judicial developments.  As these developments evolve, we update our estimates, which, in turn, may result in adjustments to our effective tax rate.  We generally file our income tax returns within nine to ten months after our fiscal year-end. 
 All
 tax returns are subject to audit by federal and state governments, usually years after the returns are filed, and could be subject to differing interpretations of the tax laws.    We account for uncertain tax positions under Financial Accounting Standards Board guidance, which prescribes a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized.  The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon settlement.  Assessment of uncertain tax positions requires significant judgments relating to the amounts, timing and likelihood of resolution.  Our actual results could differ materially from these estimates.    
Recent Accounting Pronouncements
See Note 1 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for a summary of new accounting standards.
Impact of Inflation and Changes in the Costs of Key Operating Resources
    Our operating margins depend on, among other things, our ability to anticipate and react to changes in the costs of key operating resources, including food and other raw materials, labor, energy and other supplies and services.  Substantial increases in costs could impact our operating results to the extent that such increases cannot be passed along to our restaurant and bakery customers.  While we have taken steps to qualify multiple suppliers and enter into agreements for some of the commodities used in our restaurant and bakery operations, there can be no assurance that future supplies and costs for such commodities will not fluctuate due to weather and other market conditions outside of our control.  We are currently unable to contract for extended periods of time for certain of our commodities such as fish and many dairy items (excluding cream cheese used in our bakery operations).  Consequently, these commodities can be subject to unforeseen supply and cost fluctuations.    Our staff members are subject to various minimum wage requirements.  We operate in many states, including California, where the minimum wage is higher than the federal minimum and in such states our staff members receive minimum compensation equal to the state's minimum wage.  There have been and may be additional minimum wage increases in excess of federal minimum wage implemented in various jurisdictions in which we operate or seek to operate.  Minimum wage increases may have a material adverse effect on our labor costs.  Certain operating costs, such as taxes, insurance and other outside services continue to increase with the general level of inflation or higher and may also be subject to other cost and supply fluctuations outside of our control.    While we have been able to partially offset inflation and other changes in the costs of key operating resources by gradually increasing prices for our menu items and bakery products, coupled with more efficient purchasing practices, productivity improvements and greater economies of scale, there can be no assurance that we will be able to continue to do so in the future.  From                                           38  --------------------------------------------------------------------------------
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    time to time, competitive conditions could limit our menu pricing flexibility. In addition, macroeconomic conditions could make additional menu price increases imprudent.  There can be no assurance that future cost increases can be offset by increased menu prices or that increased menu prices will be fully absorbed by our restaurant guests without any resulting changes in their visit frequencies or purchasing patterns.  Substantially all of the leases for our restaurants provide for contingent rent obligations based on a percentage of sales.  As a result, rent expense will absorb a proportionate share of any menu price increases in our restaurants.  There can be no assurance that we will generate increases in comparable restaurant and bakery sales in amounts sufficient to offset inflationary or other cost pressures.    
Seasonality and Quarterly Results
    Our business is subject to seasonal fluctuations in that our restaurant sales are typically higher during the second and third quarters of the fiscal year, as well as during the Christmas holiday season.  Historically, our highest levels of revenues for our established restaurants occur in the second and third quarters of the fiscal year.  Approximately 90% of our restaurants are located in or near retail centers and malls that typically experience seasonal fluctuations in sales.  Patio seating represents approximately 20% of the total available productive seating in our restaurants and can be subject to disruption from inclement weather.  Quarterly results have been and will continue to be significantly impacted by the number and timing of new restaurant openings and their associated preopening costs and operating inefficiencies.  Our bakery revenue is seasonal to the extent that the fourth quarter's sales are typically higher due to holiday-related orders and also may vary significantly due to the timing and/or size of orders from our larger bakery customers.  (See Item 1A - Risk Factors - "Our business is somewhat seasonal, which could result in fluctuations in our financial performance from quarter to quarter and year-to-year" and "Adverse weather conditions and natural disasters could unfavorably impact our restaurant sales.")  As a result of these factors, our financial results for any single quarter or for periods of less than a year are not necessarily indicative of the results that may be achieved on an annual basis. 


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