The Cheesecake Factory Incorporated: Fiscal 2014 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended December 30, 2014, with quarterly information for the fourth quarter ended December 30, 2014. The company operated 189 company-owned restaurants as of February 27, 2015: 177 The Cheesecake Factory, 11 Grand Lux Cafe and one RockSugar Pan Asian Kitchen. It also operated two bakery facilities and had eight internationally licensed The Cheesecake Factory restaurants.
The company generated revenue primarily from company-owned restaurants, bakery sales and international licensing royalties. The Cheesecake Factory was the only reportable operating segment; Grand Lux Cafe, RockSugar, bakery and licensing operations were combined in Other.
Financial performance and key metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Revenue | $1,976.6 million | $1,877.9 million | 5.2% increase |
| Income from operations | $144.7 million | $161.0 million | 10.1% decrease |
| Operating margin | 7.3% | 8.6% | 130 basis-point decline |
| Net income | $101.3 million | $114.4 million | 11.4% decrease |
| Diluted EPS | $1.96 | $2.10 | 6.7% decrease |
| Cash flow from operations | $239.6 million | $204.8 million | 17.0% increase |
| Capital expenditures | $114.0 million | $106.3 million | 7.2% increase |
Net margin was 5.1%, compared with 6.1% in fiscal 2013. The effective income tax rate was 26.9% in both years. Fourth-quarter revenue was $499.7 million, operating income was $34.8 million, net income was $24.5 million and diluted EPS was $0.48.
- The Cheesecake Factory comparable sales increased 1.5%, reflecting 2.5% average-check growth, including 2.0% pricing and 0.5% favorable mix, partly offset by a 1.0% traffic decline.
- Grand Lux Cafe comparable sales declined 3.1%, primarily because of lower customer traffic.
- The Cheesecake Factory operating weeks increased 4.5% to 8,886, and the company opened ten restaurants during the year.
- External bakery sales declined to $53.2 million from $55.3 million, primarily because of lower warehouse-club sales.
- Cost of sales increased to 24.9% of revenue from 24.2%, primarily due to higher dairy costs and record butter prices.
- Labor expense increased to 32.7% of revenue from 32.1%, driven mainly by higher medical claims and higher wage rates.
- Preopening costs increased to $14.4 million from $12.9 million.
Liquidity, debt and capital allocation
Cash and cash equivalents were $58.0 million at December 30, 2014, compared with $61.8 million at the prior year-end. The company generated $239.6 million of operating cash flow, used $115.9 million in investing activities and used $127.5 million in financing activities.
The company had no outstanding borrowings under its unsecured $200 million revolving credit facility at year-end and had $178.8 million of net borrowing availability after $21.2 million of standby letters of credit. It was in compliance with all financial covenants. Total long-term debt and deemed landlord financing liabilities were $80.2 million, consisting primarily of deemed landlord financing.
- Fiscal 2014 capital expenditures were $114.0 million, including $80.5 million for new restaurants.
- The company repurchased 3.1 million shares for $143.2 million and paid $30.3 million of cash dividends.
- Cash dividends declared increased to $0.61 per share from $0.52 per share.
- Minimum contractual obligations totaled $1.15 billion, including $985.7 million of lease commitments and $164.2 million of purchase obligations.
- Self-insurance liabilities totaled $55.2 million at year-end.
Material changes versus the prior comparable period
- Revenue growth was driven by new restaurant capacity and higher The Cheesecake Factory comparable sales, but margin and earnings declined because of commodity inflation, medical costs, wage pressure, higher preopening costs and increased interest and other expense.
- The company’s restaurant base expanded, with 177 The Cheesecake Factory restaurants at year-end versus 168 in fiscal 2013.
- Income from operations declined despite higher revenue, and operating margin fell 130 basis points.
- Net income and diluted EPS declined, although lower weighted-average shares outstanding partially mitigated the EPS impact.
- Operating cash flow improved substantially, while cash declined modestly because of share repurchases, capital expenditures and dividends.
- Fiscal 2014 included $0.7 million of costs related to relocating one The Cheesecake Factory restaurant. Fiscal 2013 included a $4.9 million landlord-related gain and additional closure and relocation costs, making year-over-year comparisons less representative.
Guidance, outlook, risks and unusual items
Management forecast fiscal 2015 diluted EPS of $2.08 to $2.20, based on comparable sales growth of 1.5% to 2.5%. Expected food-cost inflation was 1% to 2%, wage inflation approximately 3%, group medical costs flat as a percentage of revenue and an effective tax rate of 27% to 28%. Management expected operating margins to be slightly favorable to fiscal 2014 at the high end of the outlook range.
The company planned to open as many as 11 company-owned restaurants, including at least one Grand Lux Cafe, and expected as many as four licensed restaurants in the Middle East and Mexico. Fiscal 2015 cash capital expenditures were expected to range from $120 million to $130 million, with substantially all free cash flow and employee stock-option proceeds expected to be returned through dividends and share repurchases.
- Key operating risks include declining customer traffic, intense restaurant competition, consumer discretionary spending weakness and adverse weather.
- Commodity, labor, health-care and utility cost volatility could pressure margins; fiscal 2014 already reflected higher dairy, medical and wage costs.
- The company leases all restaurant locations, creating significant fixed obligations and exposure to lease renewals, rent increases and potential relocation costs.
- Food safety incidents, product recalls, reputational damage, cybersecurity breaches and failures at third-party vendors could reduce sales or increase liabilities.
- Expansion depends on securing suitable sites, qualified personnel and effective execution of complex restaurant openings.
- Pending employment-related class actions sought unspecified amounts; management had not reserved for certain newer matters and stated that pending proceedings were not expected to have a material adverse effect, individually or in aggregate.
- On February 27, 2015, after year-end, the company entered into a $75 million collared accelerated share repurchase agreement, to be funded with cash and/or temporary credit-facility borrowings.
Most important facts for investors to verify
- Whether comparable-sales growth and customer traffic improve sufficiently to support the fiscal 2015 EPS outlook.
- Whether food, labor, medical and occupancy costs stabilize and allow operating-margin recovery.
- The pace, investment returns and potential sales cannibalization from new restaurant openings.
- The effect of substantial lease obligations, deemed landlord financing and self-insurance liabilities on future liquidity.
- The final share count and average repurchase price under the February 2015 accelerated share repurchase program.
- The status and potential cost of employment litigation, food-safety matters, recalls and other contingencies.
- The company’s ability to continue funding dividends and share repurchases while maintaining planned capital expenditures and covenant compliance.