The Cheesecake Factory Incorporated — Q1 2011 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the thirteen weeks ended March 29, 2011, compared with the thirteen weeks ended March 30, 2010. The company operated 164 upscale casual restaurants as of May 6, 2011, consisting of 150 Cheesecake Factory, 13 Grand Lux Cafe and one RockSugar Pan Asian Kitchen location, plus two bakery production facilities and two licensed bakery cafes.
The company entered an agreement to develop up to 22 Cheesecake Factory restaurants in the Middle East over five years. Management did not expect a meaningful near-term financial impact.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $418.8 million | $405.4 million | +3.3% |
| Income from operations | $29.9 million | $28.7 million | +4.1% |
| Operating margin | 7.1% | 7.1% | Flat |
| Income before taxes | $28.4 million | $26.2 million | +8.7% |
| Net income | $20.5 million | $18.7 million | +9.6% |
| Diluted EPS | $0.34 | $0.31 | +9.7% |
| Cash provided by operations | $52.5 million | $46.5 million | +13.1% |
| Capital expenditures | $10.5 million | $6.9 million | +$3.6 million |
Net margin improved to 4.9% from 4.6%. The effective income tax rate declined to 28.1% from 28.7%, primarily due to a higher manufacturing deduction and the projected HIRE Act retention credit. Interest expense declined to $1.4 million from $3.0 million because the company had no borrowings under its revolving facility, compared with $100 million of debt in the prior-year period.
At March 29, 2011, cash and cash equivalents were $76.2 million, compared with $81.6 million at December 28, 2010. Total assets were $1.005 billion and stockholders’ equity was $568.2 million. The company had no borrowings under its $200 million revolving credit facility and had $184 million of net borrowing availability after $16 million of standby letters of credit. The company was in compliance with its financial covenants, including an Adjusted Debt Ratio of 2.7 versus a 4.0 maximum and an EBITDAR Ratio of 2.6 versus a 1.9 minimum.
Material changes versus the prior comparable period
- Restaurant revenue increased 3.4% to $406.9 million. Comparable sales at Cheesecake Factory and Grand Lux Cafe restaurants increased 1.6%; Cheesecake Factory comparable sales rose 2.1%, while Grand Lux Cafe comparable sales declined 3.8%.
- Total restaurant operating weeks increased 1.7% to 2,126, reflecting four restaurant openings during the trailing 15-month period. Average sales per restaurant operating week increased 1.3% to $190,800.
- Bakery sales to external foodservice operators, retailers and distributors increased 1.7% to $11.9 million, although quarterly shipment timing remained variable.
- Cost of sales increased to 25.0% of revenue from 24.3%, primarily because of higher dairy, fish, seafood and grocery commodity costs.
- Labor expense improved to 32.8% of revenue from 33.3%, reflecting productivity gains, lower medical insurance costs and lower stock-based compensation.
- Other operating costs increased to 24.7% of revenue from 24.5%, primarily because of higher self-insured workers’ compensation and general liability costs.
- Depreciation and amortization declined to 4.2% of revenue from 4.5%, and preopening costs declined to $1.8 million from $2.1 million because one restaurant opened in Q1 2011 versus two in Q1 2010.
- Operating cash flow increased by $6.1 million, while treasury stock purchases increased to $50.6 million from $12.5 million. The company repurchased 1.7 million shares during the quarter.
Guidance, outlook, risks and unusual items
Management forecast fiscal 2011 diluted EPS of $1.58 to $1.70, assuming comparable restaurant sales growth of 1.5% to 3.0%. The forecast includes approximately $0.11 of EPS pressure from higher cost of sales than previously projected. Second-quarter diluted EPS guidance was $0.39 to $0.41, with approximately $0.05 of year-over-year cost-of-sales pressure. Management expected commodity pressure to be heavier in the first half of the year and to moderate by the fourth quarter.
The company planned to open six to nine restaurants during fiscal 2011, including one already opened in Q1, incur $70 million to $90 million of capital expenditures and repurchase at least $100 million of common stock, subject to performance, market conditions and credit-facility restrictions. The company also stated that it may consider initiating a dividend. The fiscal year contains 53 weeks, including an extra week in the fourth quarter.
Principal operating risks include consumer discretionary spending, competition, weather, labor and energy costs, commodity price volatility, government regulation and the ability to pass cost increases through menu pricing. Fish and most dairy products generally could not be contracted for long periods; cream cheese requirements were substantially contracted for fiscal 2011. Bakery customers generally had no long-term purchase commitments and could discontinue orders without advance notice.
Legal contingencies included an unresolved IRS dispute related to the deductibility of certain executive stock-option compensation, for which the company reserved $1.4 million for estimated taxes, interest and penalties through March 29, 2011. The company also disclosed EEOC matters and California wage-and-hour and employment lawsuits, generally without reserves based on their current status. Management believed these matters would not have a material adverse effect, while noting that future quarterly results could be affected by changes in circumstances.
The company stated that its disclosure controls were effective and that no material changes occurred in internal control over financial reporting. The interim financial statements were unaudited and management cautioned that quarterly results were not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether comparable sales remain within the 1.5% to 3.0% fiscal 2011 guidance range, particularly given the Grand Lux Cafe decline.
- Whether commodity inflation, especially dairy, seafood and other food costs, moderates as expected and whether menu pricing affects traffic or mix.
- Progress toward the six-to-nine restaurant opening plan and the $70 million to $90 million capital expenditure forecast.
- Execution of the plan to repurchase at least $100 million of stock while maintaining credit-facility covenant compliance and liquidity.
- Changes in the IRS tax dispute, EEOC matters and California wage-and-hour litigation, including any required additional reserves.
- The effect of the 53-week fiscal year and the Middle East licensing agreement on reported revenue, earnings and comparability.