The Cheesecake Factory Incorporated: Q1 Fiscal 2022 Form 10-Q
Business context and reporting period
The filing covers the 13 weeks ended March 29, 2022, compared with the 13 weeks ended March 30, 2021. Fiscal 2022 contains 53 weeks and ends January 3, 2023. The Company operated 307 company-owned restaurants in the United States and Canada, including 208 The Cheesecake Factory locations, 29 North Italia locations and other Fox Restaurant Concepts brands, plus 29 internationally licensed Cheesecake Factory restaurants and two bakery facilities.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change or comment |
|---|---|---|---|
| Revenue | $793.7 million | $627.4 million | Up 26.5% |
| Income from operations | $28.3 million | $8.8 million | Operating margin improved to 3.6% from 1.4% |
| Income before taxes | $26.9 million | $6.2 million | Up substantially year over year |
| Net income | $23.2 million | $3.9 million | Net income margin was 2.9% versus 0.6% |
| Net income/(loss) available to common stockholders | $23.2 million | $(1.2) million | Prior period included $5.1 million of preferred dividends |
| Diluted EPS | $0.45 | $(0.03) | Improved from a loss |
| Cash flow from operations | $33.5 million | $21.6 million | Up $11.9 million |
| Capital expenditures | $29.1 million | $7.2 million | Higher development and maintenance spending |
| Cash and cash equivalents | $183.6 million | $181.3 million at prior-year quarter end | Down $6.1 million from December 28, 2021 |
Cost of sales increased to 23.7% of revenue from 21.7%, primarily because commodity inflation exceeded pricing. Labor expenses increased to 37.3% from 36.6% due principally to wage rates, overtime and training labor. Other operating costs declined to 26.2% from 28.9%, while general and administrative expenses declined to 6.2% from 7.1%. The effective tax rate was 13.8%, compared with 37.1% in the prior-year period.
At March 29, 2022, the Company reported $466.5 million of long-term debt, including $130.0 million outstanding under its revolving facility and $336.5 million net carrying value of convertible senior notes. The revolving facility had $240.1 million of net borrowing availability after outstanding debt and $29.9 million of standby letters of credit. The Company was in compliance with all applicable debt covenants; its net adjusted leverage ratio was 3.9 and EBITDAR ratio was 2.3, against maximum and minimum requirements of 4.75 and 1.9, respectively.
Material changes versus the prior comparable period
- Revenue growth reflected recovery from COVID-19 effects in the prior-year quarter, increased comparable sales and additional restaurant capacity. The Cheesecake Factory comparable sales increased 20.7%, with traffic up 25.3% and average check down 4.6% due primarily to a lower off-premise mix.
- North Italia comparable sales increased approximately 32%, with traffic up approximately 32% and average check down approximately 1%.
- Off-premise sales represented approximately 28% of restaurant sales, compared with 43% in the prior-year quarter and 17% in the first quarter of fiscal 2019.
- Operating performance improved despite food and labor inflation. Preopening costs declined to $1.8 million from $3.9 million, and no new restaurants opened during the quarter versus three openings in the prior-year period.
- Capital expenditures increased to $29.1 million, including $16.5 million for new restaurant development and $12.2 million for existing restaurants.
- The Company paid $7.2 million of acquisition-related contingent consideration and compensation associated with the Fox Restaurant Concepts acquisition.
- The Company repurchased 97,682 shares for $3.9 million solely to satisfy tax-withholding obligations on vested restricted share awards. The broader repurchase program was reinstated in April 2022.
Guidance, outlook, commentary and risks
Management projected second-quarter fiscal 2022 revenue of approximately $830 million to $850 million and full-year revenue of approximately $3.3 billion to $3.4 billion. The Company expected fiscal 2022 commodity inflation in the low-to-mid double digits, net labor inflation of approximately 6%, G&A expense of approximately $210 million, preopening costs of approximately $18 million, depreciation and amortization of approximately $90 million, and an assumed tax rate of approximately 11% to 12%.
Management planned to open as many as 15 to 16 restaurants in fiscal 2022 and expected approximately $150 million of capital expenditures. The Company had 4.75% menu pricing in place at the time of filing and expected another price increase above historical norms in the third quarter. Management stated that short-term cost fluctuations could continue to pressure margins.
Key risks include COVID-19 variants and operating restrictions, staffing challenges, wage and commodity inflation, supply-chain disruptions, geopolitical conditions, consumer spending, lease obligations, debt covenant compliance, restaurant development costs, litigation and tax matters. The Company said its cash, operating cash flow and available revolver capacity should provide adequate liquidity for the next 12 months and foreseeable future.
A California wage citation seeks $4.2 million in penalties and other payments; the Company has not reserved for the matter because the outcome and potential liability cannot currently be reasonably estimated. A separate IRS tax dispute involving an $8.0 million alleged deficiency was settled in April 2022, with an immaterial reserve recorded.
On April 21, 2022, the Board declared a $0.27 per-share quarterly dividend payable May 24, 2022 and reinstated the share repurchase program. The dividend is expected to adjust the conversion rate and conversion price of the convertible notes.
Most important facts for an investor to verify
- Reconcile the consolidated revenue of $793.7 million with the MD&A discussion that cites $778.4 million for the fiscal quarter; the filing text does not clearly explain the difference.
- Assess whether pricing can offset projected commodity and labor inflation without materially reducing customer traffic or margins.
- Monitor liquidity, the $130.0 million revolver balance, $240.1 million of net availability, and compliance with leverage and EBITDAR covenants.
- Evaluate the planned approximately $150 million of fiscal 2022 capital expenditures against operating cash flow and the targeted 15-to-16 restaurant openings.
- Review the conversion, redemption and potential dilution terms of the $345.0 million of 0.375% convertible senior notes due 2026.
- Track the California wage matter, ordinary-course litigation and the effects of supply-chain, staffing, COVID-19 and geopolitical risks.