Business Context and Reporting Period
The Cheesecake Factory Incorporated filed an unaudited Form 10-Q for the 13 weeks ended April 3, 2012, compared with the 13 weeks ended March 29, 2011. Fiscal 2012 is a 52-week year, while fiscal 2011 included an additional week in the fourth quarter. As of May 3, 2012, the company operated 171 restaurants and two bakery facilities.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $435.8 million | $418.8 million | 4.1% increase |
| Income from operations | $30.2 million | $29.9 million | 1.2% increase |
| Operating margin | 6.9% | 7.1% | Down 20 basis points |
| Net income | $20.7 million | $20.5 million | 1.3% increase |
| Diluted EPS | $0.37 | $0.34 | 8.8% increase |
| Cash provided by operations | $41.4 million | $52.8 million | Decrease of $11.4 million |
| Capital expenditures | $16.3 million | $10.5 million | Increase of $5.8 million |
| Cash and equivalents at period end | $41.3 million | $76.2 million | Decrease of $34.9 million |
Restaurant sales increased 4.4% to $425.0 million. Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased 2.4%, driven significantly by 1.9% guest-traffic growth. Bakery sales to external customers declined 9.2% to $10.8 million, primarily because of lower warehouse club sales.
Cost of sales improved to 24.7% of revenue from 25.0%, while labor expense remained 32.8%. Other operating costs declined to 24.3% from 24.7%. General and administrative expense increased to 6.6% of revenue from 5.8%, primarily due to the CEO retirement benefit associated with an employment-agreement extension, higher performance-bonus accruals, increased stock compensation, and the effect of the prior-year high-volume holiday week.
The company had no borrowings under its $200 million revolving credit facility. Net borrowing availability was $182 million after $18 million of standby letters of credit. The company was in compliance with its financial covenants, reporting an Adjusted Debt Ratio of 2.7 against a 4.0 maximum and an EBITDAR Ratio of 2.8 against a 1.9 minimum.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher comparable restaurant sales, eight new restaurants opened during the trailing 15-month period, and a 4.0% increase in restaurant operating weeks.
- Average sales per restaurant operating week increased approximately 0.7%, although the shift of a high-volume holiday week into fiscal 2011 reduced Q1 2012 average weekly sales by approximately 1.9%.
- Operating income grew more slowly than revenue, and operating margin narrowed by 20 basis points.
- Net income per diluted share increased partly because diluted weighted-average shares declined to 55.7 million from 60.5 million, reflecting substantial share repurchases.
- The company repurchased approximately 1.4 million shares for $40.9 million during the quarter, bringing cumulative repurchases to 32.6 million shares costing $771.3 million.
- Operating cash flow declined primarily because of working-capital changes, including a larger reduction in accrued expenses and lower favorable changes in receivables and taxes.
- Cash used in investing activities increased due to higher property and equipment spending and intangible-asset additions.
Guidance, Outlook, Risks, and Unusual Items
Management expects fiscal 2012 diluted EPS of $1.83 to $1.91, comparable restaurant sales growth of 1.5% to 2.5%, food-cost inflation of 2.0% to 2.5%, and a corporate tax rate of 28.5% to 29.5%. Planned cash capital expenditures are $100 million to $110 million, and the company intends to repurchase up to $100 million of common stock, subject to performance and market conditions. Second-quarter diluted EPS guidance is $0.47 to $0.49, based on comparable-sales growth of 1.5% to 2.5%.
The company plans to open seven to eight domestic restaurants, including one Grand Lux Cafe, and expects its Middle East licensee to open as many as three restaurants. Management does not expect the Middle East openings to have a material fiscal 2012 impact.
- Principal operating risks include consumer discretionary spending, economic conditions, weather, competition, food and labor costs, energy costs, public safety, and regulatory changes.
- Commodity costs remain volatile, particularly for dairy, fish, and grocery products. The company does not use financial instruments to hedge commodity prices.
- Bakery sales and contribution margins may fluctuate based on the purchasing patterns of large-account customers.
- The company is exposed to market-value changes in variable life insurance contracts supporting its executive deferred-compensation plan; a hypothetical 10% decline would have reduced net income by approximately $1.0 million based on April 3, 2012 balances.
- Routine lawsuits, administrative proceedings, claims, and trademark matters are not expected to have a material adverse effect, although individual periods could be affected by changes in circumstances.
- The filing identifies no material changes to previously disclosed risk factors. Management stated that disclosure controls were effective as of April 3, 2012, with no material changes in internal control over financial reporting.
Investor Verification Items
- Verify whether comparable-sales growth and guest traffic can offset menu-mix pressure and planned price increases.
- Monitor G&A growth, executive compensation costs, stock-based compensation, and their effect on operating-margin expansion.
- Assess the sustainability of cash flow given planned capital expenditures and up to $100 million of share repurchases.
- Track food-cost inflation and the company’s ability to pass commodity increases through to menu pricing without weakening traffic.
- Review bakery customer concentration and the timing of warehouse-club and other large-account purchases.
- Confirm compliance with credit-facility covenants and the restrictions those covenants place on future share repurchases or dividends.
- Consider the effect of the prior-year 53rd-week calendar comparison when evaluating quarterly sales and margins.