Business Context and Reporting Period
The Cheesecake Factory Incorporated filed an unaudited Form 10-Q for the 13 weeks and 39 weeks ended October 2, 2012, compared with September 27, 2011. Fiscal 2012 consists of 52 weeks and ends January 1, 2013. As of November 9, 2012, the company operated 173 company-owned restaurants and two bakery production facilities, supplemented by international licensing activity.
Financial Performance and Position
| Metric | Q3 2012 | Q3 2011 | 39 Weeks 2012 | 39 Weeks 2011 |
|---|---|---|---|---|
| Revenue | $453.8 million | $430.4 million | $1,344.3 million | $1,279.9 million |
| Income from operations | $39.3 million | $30.3 million | $110.5 million | $95.3 million |
| Operating margin | 8.7% | 7.0% | 8.2% | 7.4% |
| Net income | $27.2 million | $20.6 million | $76.3 million | $65.8 million |
| Net margin | 6.0% | 4.8% | 5.7% | 5.1% |
| Diluted EPS | $0.49 | $0.36 | $1.38 | $1.11 |
- Third-quarter revenue increased 5.4%; restaurant sales increased 6.0%. Comparable sales at The Cheesecake Factory and Grand Lux Cafe increased 2.5%, driven by 1.5% traffic growth and 1.0% average-check growth.
- For the first 39 weeks, revenue increased 5.0% and restaurant sales increased 5.6%. Comparable sales increased 2.2%, with 1.3% traffic growth and 0.9% average-check growth.
- Q3 cost of sales improved to 24.6% of revenue from 25.4%, primarily from lower dairy, produce and fish costs and a higher restaurant-sales mix. Labor improved to 32.1% from 32.3%, while other operating costs increased to 25.1% from 24.7%.
- Q3 general and administrative expense declined to 4.9% of revenue from 5.5%, aided by an insurance recovery of legal expenses and lower stock-based compensation. Preopening costs declined to $2.4 million from $4.3 million.
- Cash provided by operations for the first 39 weeks was $125.1 million versus $121.9 million. Capital expenditures were $64.6 million versus $50.2 million.
- Cash and cash equivalents were $56.4 million at October 2, 2012, compared with $48.2 million at January 3, 2012. Total assets were $1.049 billion and stockholders’ equity was $575.7 million.
- The company had no borrowings under its $200 million revolving credit facility and reported $178 million of net borrowing availability after $22 million of standby letters of credit. It was in compliance with its covenants, reporting an Adjusted Debt Ratio of 2.7 versus a maximum of 4.0 and an EBITDAR Ratio of 2.9 versus a minimum of 1.9.
- The company repurchased $75.0 million of common stock during the first 39 weeks, including $17.4 million in the third quarter, and paid $6.4 million in dividends. Treasury stock totaled $805.4 million at cost at October 2, 2012.
Material Changes Versus Prior Comparable Period
- Profitability improved materially: Q3 operating income rose approximately 30%, net income rose approximately 32%, and diluted EPS rose from $0.36 to $0.49.
- Restaurant expansion increased operating weeks by 4.5% in the quarter and 4.3% year to date, reflecting ten restaurant openings during the trailing 15-month period.
- Bakery sales declined 7.0% in Q3 and 10.9% year to date, primarily because of lower warehouse-club sales, partly offset by higher international sales.
- Grand Lux Cafe comparable sales declined 2.0% in Q3 and 1.5% year to date, while The Cheesecake Factory comparable sales increased 2.9% and 2.5%, respectively.
- Share repurchases were substantially lower than in the prior year period, while the company initiated a quarterly $0.12-per-share cash dividend in fiscal 2012.
- G&A expense increased as a percentage of revenue year to date, to 5.8% from 5.6%, primarily because of higher corporate performance-bonus accruals.
Guidance, Outlook, Risks and Unusual Items
- For fiscal 2012, management estimated Q4 diluted EPS of $0.50 to $0.53 and full-year diluted EPS of $1.87 to $1.90, based on approximately 2% comparable-sales growth. Expected food-cost inflation was flat to 1.0%, with a corporate tax rate of 28.5% to 29.5%.
- Fiscal 2012 plans included eight new restaurants, $85 million to $95 million of capital expenditures, $90 million to $100 million of share repurchases, and approximately $12.8 million of dividends.
- For fiscal 2013, management estimated diluted EPS of $2.10 to $2.18, comparable-sales growth of 1.5% to 2.5%, food-cost inflation of 3% to 5%, and a tax rate of 29% to 30%. Planned capital expenditures were $115 million to $125 million, with as many as eight to ten new restaurants and up to four international licensed openings.
- Hurricane Sandy caused temporary closures and business interruptions at several restaurants in late October. All affected locations had reopened by the filing date; the company reported no significant physical damage and was evaluating fourth-quarter effects and insurance recovery.
- Year-to-date adjusted net income was $75.9 million, excluding a $0.4 million after-tax benefit from proceeds of a variable life insurance contract. The filing states that this item was non-taxable and recorded in interest and other income.
- Key risks include consumer discretionary spending, economic conditions, weather, food and labor costs, commodity volatility, competition, public safety, regulatory requirements, litigation, and execution of restaurant expansion. Certain dairy, fish and grocery commodities cannot be contracted for extended periods and may experience unforeseen price or supply changes.
- The company is subject to ordinary-course lawsuits, audits and claims, including potential class actions and trademark matters. Management does not currently expect these matters to have a material adverse effect, but acknowledges that circumstances could affect future quarterly or annual results.
Important Facts for Investors to Verify
- Verify the sustainability of comparable-sales and traffic growth, particularly given the divergence between The Cheesecake Factory and Grand Lux Cafe performance.
- Assess whether improved margins can persist amid the projected fiscal 2013 food-cost inflation of 3% to 5% and potential labor, occupancy and commodity pressures.
- Reconcile planned capital expenditures, dividends and share repurchases with operating cash flow and the facility’s covenant restrictions.
- Monitor the financial impact of Hurricane Sandy, including business interruption losses and potential insurance proceeds.
- Evaluate bakery sales trends, warehouse-club account concentration and the expected contribution from international licensing.
- Confirm future dividend and repurchase activity, which remains subject to Board approval, market conditions, company performance and credit-facility limitations.
- Consider that the interim financial statements are unaudited and that results for the quarter or first 39 weeks may not be indicative of the full fiscal year.