The Cheesecake Factory Incorporated: Fiscal 2010 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended December 28, 2010, with unaudited fourth-quarter data for the quarter ended December 28, 2010. The company operated 164 company-owned upscale casual restaurants as of February 23, 2011: 150 Cheesecake Factory, 13 Grand Lux Cafe and one RockSugar Pan Asian Kitchen. It also operated two bakery production facilities and licensed two bakery cafes.
Restaurant sales represented approximately 96% of fiscal 2010 revenue and bakery sales approximately 4%. Fiscal 2011 would contain 53 weeks.
Financial performance and key metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Revenue | $1,659.4 million | $1,602.0 million | +3.6% |
| Restaurant sales | $1,586.3 million | $1,534.3 million | +3.4% |
| Bakery sales to external customers | $73.1 million | $67.7 million | +8.0% |
| Income from operations | $128.2 million | $73.7 million | +73.9% |
| Operating margin | 7.7% | 4.6% | +310 bps |
| Net income | $81.7 million | $42.8 million | +90.8% |
| Net margin | 4.9% | 2.7% | +220 bps |
| Diluted EPS | $1.35 | $0.71 | +90.1% |
| Cash flow from operations | $165.2 million | $197.1 million | -16.2% |
| Capital expenditures | $41.8 million | $37.2 million | +12.3% |
Cost of sales increased to 24.9% of revenue from 24.6%, primarily because of dairy and cheese cost pressures. Labor expense improved to 32.4% from 33.0%, while other operating costs declined to 24.6% from 25.1%. General and administrative expense declined to 5.8% of revenue from 6.1%.
Interest expense declined to $16.8 million from $23.4 million, although both years included approximately $7.4 million of costs to unwind interest-rate collars. The effective tax rate increased to 26.4% from 16.5%. No impairment charge was recorded in 2010, compared with a $26.5 million impairment charge for four Grand Lux Cafe restaurants in 2009.
Fourth-quarter 2010 revenue was $416.7 million, operating income was $30.8 million, net income was $21.9 million and diluted EPS was $0.36. Fourth-quarter 2009 included the $26.5 million impairment charge and reported a net loss of approximately $13,000.
Liquidity, debt and capital allocation
- Cash and cash equivalents increased to $81.6 million at year-end from $73.7 million.
- The company had no borrowings under its $200 million revolving credit facility and had $184 million of net availability after $16 million of standby letters of credit.
- Total long-term debt and deemed landlord financing liability declined to $53.6 million from $153.3 million, principally because the company repaid $100 million under the credit facility.
- The company remained in compliance with its credit covenants; the adjusted debt ratio was 2.7 versus a maximum of 4.0, and the EBITDAR ratio was 2.6 versus a minimum of 1.9.
- Fiscal 2010 share repurchases totaled $52.1 million for 2.1 million shares. Cumulative repurchases through year-end totaled 25.2 million shares at a cost of $558.3 million.
- Fiscal 2011 planned capital expenditures were $70 million to $90 million, and management targeted repurchasing at least $100 million of common stock, subject to performance, market conditions and covenant restrictions.
- Minimum lease obligations totaled $895.9 million, including $60.6 million due within one year. Most restaurant leases also require contingent rent and other occupancy-related payments.
Material changes versus the prior comparable period
- Comparable sales at Cheesecake Factory and Grand Lux Cafe restaurants increased 2.0% in fiscal 2010, reversing the 2.6% decline in fiscal 2009. The improvement was driven primarily by guest traffic.
- Restaurant operating weeks increased 1.4% to 8,426, and average sales per restaurant operating week rose approximately 1.8% to $188,000.
- The company opened three restaurants in fiscal 2010 compared with one in fiscal 2009. Preopening costs increased to $5.2 million from $3.3 million.
- Bakery sales improved because of higher warehouse-club and national-account sales, although sales remain concentrated among three large warehouse-club customers.
- Operating profitability benefited from positive comparable sales, cost-management initiatives, labor productivity, lower stock-based compensation and favorable self-insurance experience.
- Stockholders’ equity increased to $592.3 million from $516.1 million, despite the fiscal 2010 share repurchases, primarily reflecting retained net income and stock option exercises.
Guidance, outlook, risks and unusual items
Management expected to open six to nine restaurants in fiscal 2011, including one that opened in early February 2011. Fiscal 2011 diluted EPS guidance was $1.55 to $1.70, based on comparable restaurant sales growth of 1.0% to 3.0%. Management expected the additional fiscal week to be included in these estimates.
In January 2011, the company entered an exclusive Middle East licensing agreement for development of 22 Cheesecake Factory restaurants over five years in the United Arab Emirates, Kuwait, Bahrain, Qatar and Saudi Arabia. The agreement provides development, site and design fees, royalties and bakery supply opportunities, but management did not expect a meaningful near-term financial impact.
- Consumer discretionary spending, unemployment, consumer confidence and competition from fast casual, quick-service and grocery alternatives could pressure traffic and comparable sales.
- Food, dairy, cheese, labor, energy, insurance and health-benefit costs may increase faster than menu pricing can offset.
- Restaurant development depends on suitable sites, landlord financing, construction timing, permits, qualified personnel and tenant health at retail centers. All restaurant locations are leased.
- Weather can reduce traffic and underutilize patio seating, which represents approximately 20% of productive seating capacity.
- Food-safety incidents, negative publicity, regulatory changes, minimum-wage increases, employment litigation and self-insurance claims could adversely affect results.
- The company is exposed to litigation and administrative matters, including wage-and-hour claims, EEOC matters and tax disputes. The filing states that management did not believe existing matters would have a material adverse effect, but some matters were not reserved and outcomes remain uncertain.
- Fiscal 2010 included a $7.4 million pretax cost to unwind interest-rate collars. The company had no derivatives outstanding at year-end.
- Adjusted net income was $86.1 million, or $1.42 adjusted diluted EPS, after adding back the after-tax impact of the interest-rate collar unwind. These are non-GAAP measures.
Investor verification checklist
- Verify whether comparable-sales growth and guest traffic continued to support the fiscal 2011 EPS guidance.
- Assess whether commodity, labor, insurance and healthcare cost inflation was offset by pricing and productivity.
- Monitor the pace, investment returns and potential cannibalization of the planned six to nine restaurant openings.
- Review cash deployment between new-unit development, maintenance capital expenditures, debt capacity and the targeted share repurchases.
- Evaluate the substantial operating lease commitments and the financial condition of landlords and retail-center co-tenants.
- Track the implementation, execution risks and economics of the Middle East licensing agreement.
- Review developments in tax proceedings, wage-and-hour litigation, EEOC matters and self-insurance reserves.
- Reconcile adjusted earnings with GAAP earnings, particularly the impact of unusual financing and impairment-related items.