The Cheesecake Factory Incorporated: Q1 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the thirteen weeks ended March 31, 2020, compared with the thirteen weeks ended April 2, 2019. The Company operates 294 restaurants in the United States and Canada under The Cheesecake Factory, North Italia and Fox Restaurant Concepts brands, plus 26 internationally licensed locations and two bakery facilities. The quarter was materially affected by the COVID-19 pandemic, including dining-room closures, reduced capacity and a shift to off-premise operations.
The Company acquired North Italia and the remaining Fox Restaurant Concepts businesses on October 2, 2019; their results are included from the acquisition date.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $615.1 million | $599.5 million | +2.6% |
| Income/(loss) from operations | $(190.1) million | $30.1 million | Down $220.2 million |
| Operating margin | (30.9%) | 5.0% | Down 35.9 percentage points |
| Net income/(loss) | $(136.2) million | $27.0 million | Down $163.1 million |
| Net margin | (22.1%) | 4.5% | Down 26.6 percentage points |
| Diluted EPS | $(3.11) | $0.60 | Declined |
| Cash provided by/(used in) operations | $(33.0) million | $33.5 million | Down $66.5 million |
- Revenue from acquired concepts contributed $84.1 million. The Cheesecake Factory comparable sales declined 12.9%, including growth through February followed by a 46.4% decline in March. North Italia comparable sales declined approximately 12%, including a 48% March decline.
- Cost of sales was 22.9% of revenue versus 22.7% in the prior-year quarter. Labor expenses increased to 38.6% of revenue from 36.2%, and other operating costs increased to 27.3% from 25.6%, primarily due to COVID-19-related costs and sales deleverage.
- The Company recorded $191.9 million of impairment and lease-termination expense, including $79.4 million for goodwill, $101.0 million for trade names and trademarks, $2.3 million for licensing agreements and approximately $8.9 million for long-lived assets.
- Adjusted net income, excluding specified unusual items and their tax effects, was $5.9 million, or $0.13 of adjusted diluted EPS, compared with $28.1 million and $0.62, respectively, in Q1 2019. These are non-GAAP measures.
- Cash and cash equivalents were $81.0 million at March 31, 2020, compared with $58.4 million at December 31, 2019. The increase was primarily funded by additional revolver borrowings.
- Capital expenditures were $15.8 million, compared with $13.4 million in the prior-year quarter. Investing cash outflow was $15.9 million.
Balance sheet, debt and liquidity
- Total assets were $2.676 billion at March 31, 2020, compared with $2.841 billion at December 31, 2019. Stockholders’ equity declined to $419.0 million from $571.7 million, primarily reflecting the quarterly net loss.
- Long-term debt was $380.0 million, up from $290.0 million at year-end 2019. The Company had a $400.0 million unsecured revolving credit facility, with $19.4 million of standby letters of credit and approximately $0.6 million of net borrowing availability at March 31, 2020.
- The Company reported a Net Adjusted Leverage Ratio of 4.3 and an EBITDAR-to-interest-and-rent ratio of 2.3 at March 31, 2020, remaining in compliance with its then-effective covenants.
- On May 1, 2020, the credit facility was amended to provide covenant relief, impose a minimum monthly liquidity requirement of $65.0 million during specified periods, limit capital expenditures to $90.0 million during the covenant relief period and increase restrictions on distributions, debt and acquisitions.
- On April 20, 2020, the Company issued 200,000 shares of Series A Convertible Preferred Stock for $200.0 million. The preferred stock carries a 9.5% annual dividend, payable in cash or in kind at the Company’s option, and ranks senior to common stock.
Material changes, outlook and management commentary
- As of March 31, 2020, 33 restaurants were temporarily closed and 261 operated on an off-premise-only basis. By June 22, 2020, 194 dining rooms had reopened, while 19 restaurants remained temporarily closed and 81 remained off-premise only; capacity restrictions continued.
- The Company furloughed approximately 41,000 hourly staff members, reduced board, executive and corporate compensation, eliminated non-essential spending and capital expenditures, suspended new-unit development, and pursued rent deferrals, abatements or restructurings.
- The quarterly common-stock dividend and share repurchases were suspended to preserve liquidity. The Company paid a $0.36-per-share dividend on March 20, 2020 before the suspension.
- New-unit development was suspended pending greater clarity regarding the restaurant operating environment. Seven locations remained under development, and the Company estimated approximately $5 million of maintenance capital expenditures per quarter for the remainder of fiscal 2020.
- Management expects to return to positive cash flow when industry conditions normalize, repay revolver borrowings and eventually reinstate dividends and share repurchases, but no specific reinstatement date was provided.
- The Company expects approximately $36 million of cash refunds from federal tax-loss carryback claims under the CARES Act, with claims expected to be filed during fiscal 2021.
- Management’s impairment projections assumed average unit volumes and margins would substantially return to pre-COVID-19 levels by mid-fiscal 2021. Actual results may differ materially, and future changes in estimates could result in additional impairments.
- The Company stated that cash, expected operating cash flow, anticipated tax refunds and available borrowings under the amended facility should be sufficient to meet obligations over the next 12 months, subject to the pandemic and related uncertainties.
Risks, contingencies and unusual items
- Key risks include further restaurant closures, renewed restrictions, reduced consumer traffic, lower off-premise sales, staffing shortages, supplier disruptions, rent obligations, limited borrowing availability and potential covenant pressure after the relief period.
- Some landlords alleged lease defaults, and the Company had not reached agreements with all landlords regarding rent concessions. Failure to resolve these matters could result in litigation or eviction proceedings.
- The Company disclosed a $4.2 million California wage citation involving a janitorial-services vendor and an $8.0 million IRS tax deficiency dispute. No reserves were recorded because the outcomes and potential liabilities were not reasonably estimable or, in management’s view, probable.
- Acquisition-related contingent consideration was revalued downward by approximately $5.9 million during the quarter, primarily because of lower projected cash flows and delayed restaurant openings.
- A 1% increase in food costs would have increased quarterly cost of sales by approximately $1.4 million. A 1% increase in interest rates would have increased annual interest expense by approximately $3.8 million based on March 31 debt levels.
Investor verification priorities
- Verify the pace and profitability of dining-room reopenings, capacity restrictions and the sustainability of off-premise sales.
- Assess liquidity after the $200.0 million preferred-stock issuance, revolver borrowings, ongoing rent obligations and cash operating losses.
- Review the amended credit-facility covenants, $65.0 million minimum liquidity requirement, capital-expenditure cap and conditions for returning to the original leverage and coverage tests.
- Evaluate the risk of additional goodwill, trademark, licensing or long-lived-asset impairments if recovery assumptions are not achieved.
- Confirm the timing and collectability of the estimated $36.0 million CARES Act tax refunds.
- Monitor the status of the California wage citation, IRS tax dispute, landlord negotiations and acquisition-related contingent consideration.