The Cheesecake Factory Incorporated — Fiscal 2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended January 3, 2017. Fiscal 2016 included 53 weeks, compared with 52 weeks in fiscal 2015; management estimates the extra week contributed approximately $54.7 million of revenue and $0.07 of diluted EPS. As of March 2, 2017, the Company operated 208 company-owned restaurants, 15 internationally licensed restaurants, and two bakery facilities.
The business is primarily upscale casual dining, supported by bakery operations, international licensing, Grand Lux Cafe, Rock Sugar Southeast Asian Kitchen, and investments in North Italia and Flower Child.
Financial performance and key metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Revenue | $2,275.7 million | $2,100.6 million | 8.3% |
| Income from operations | $201.0 million | $165.2 million | 21.6% |
| Operating margin | 8.8% | 7.9% | +0.9 percentage points |
| Net income | $139.5 million | $116.5 million | 19.7% |
| Diluted EPS | $2.83 | $2.30 | 23.0% |
| Net margin | 6.1% | 5.5% | +0.6 percentage points |
| Cash flow from operations | $302.5 million | $235.4 million | 28.5% |
| Capital expenditures | $115.8 million | $153.9 million | Down $38.1 million |
- The Cheesecake Factory comparable restaurant sales increased 1.2% on a 53-week basis, driven by 2.8% average-check growth, partially offset by a 1.6% decline in customer traffic.
- Grand Lux Cafe comparable sales increased 2.2%. External bakery sales increased to $53.6 million from $52.8 million.
- Cost of sales improved to 23.2% of revenue from 24.0%, primarily reflecting lower seafood, grocery, dairy, and poultry costs.
- Labor expense increased to 33.4% of revenue from 32.6%, primarily due to state and local minimum-wage increases.
- Preopening costs declined to $13.6 million from $16.9 million. The Company opened seven Cheesecake Factory restaurants and one Grand Lux Cafe in 2016.
- Cash and cash equivalents were $53.8 million at year-end, compared with $43.9 million at the prior year-end. Total assets were $1.29 billion and stockholders’ equity was $603.2 million.
- The balance sheet included $100.6 million of deemed landlord financing liability. The Company had no outstanding borrowings under its revolving credit facility at year-end.
Fiscal fourth quarter
For the quarter ended January 3, 2017, revenue was $603.1 million, income from operations was $47.1 million, net income was $32.4 million, and diluted EPS was $0.66. The quarter included $0.1 million of accelerated depreciation related to a planned restaurant relocation.
Material changes versus the prior comparable period
- Revenue and profitability benefited from the additional fiscal week, unit growth, positive comparable sales, menu pricing, and lower commodity costs.
- Operating margin expanded despite higher labor costs and wage inflation.
- Interest and other expense increased to $9.2 million from $5.9 million, primarily due to higher expense on deemed landlord financing liabilities and asset disposals and the absence of an insurance benefit recognized in 2015.
- Fiscal 2015 included a $6.0 million impairment charge related to Rock Sugar Pan Asian Kitchen; fiscal 2016 included only $0.1 million related to the planned relocation of one Cheesecake Factory restaurant.
- The Company invested $42.0 million in North Italia and Flower Child and committed to provide up to an additional $42 million of growth capital, subject to stated conditions.
- Share repurchases increased to $146.5 million from $109.4 million, while declared dividends increased to $0.88 per share from $0.73.
Liquidity, debt, and capital allocation
Operating cash flow of $302.5 million exceeded capital expenditures of $115.8 million, producing approximately $186.7 million of cash flow before investments, dividends, and share repurchases. The Company paid $42.4 million of dividends and repurchased $146.5 million of stock during fiscal 2016.
The amended unsecured revolving credit facility provides $200 million of commitments, with potential expansion of up to $100 million. At year-end, net availability was $178.0 million after $22.0 million of standby letters of credit. The facility matures December 22, 2020. The Company was in compliance with its covenants, including a 2.4 Net Adjusted Leverage Ratio versus a 4.0 maximum and a 3.1 EBITDAR Ratio versus a 1.9 minimum.
Contractual obligations totaled $1.16 billion, including $1.02 billion of lease commitments and $142.1 million of purchase and construction obligations. The Company expects to fund obligations primarily from operating cash flow.
Guidance, outlook, and management commentary
- Fiscal 2017 adjusted diluted EPS guidance is $2.95 to $3.07, based on Cheesecake Factory comparable sales growth of 1.0% to 2.0%.
- Management expects commodity inflation of approximately 1.0% to 2.0%, wage inflation of approximately 5%, and a corporate tax rate of 23% to 24% following adoption of new stock-based compensation accounting guidance.
- The Company planned to open as many as eight company-owned restaurants, including one relocation and a second RockSugar location, and four to five internationally licensed restaurants.
- Fiscal 2017 capital expenditures were expected to range from $125 million to $140 million, excluding approximately $13.6 million of expected non-capitalizable preopening costs.
- Management expected to use substantially all free cash flow, plus employee stock-option proceeds, for dividends and share repurchases.
- Longer term, management continues to target approximately 300 domestic company-owned Cheesecake Factory restaurants, measured Grand Lux Cafe growth, international expansion, and mid-teens growth in total shareholder return.
Risks, contingencies, and unusual items
- Major operating risks include declining customer traffic or comparable sales, intense restaurant competition, consumer discretionary spending, commodity volatility, labor and minimum-wage inflation, and difficulty recruiting and retaining qualified personnel.
- The Company leases all restaurant locations and has substantial future lease obligations; rent expense was $138.9 million in fiscal 2016.
- Food safety incidents, product recalls, adverse publicity, social media events, cyberattacks, technology failures, and third-party vendor disruptions could materially affect sales and costs.
- The Company is self-insured for significant portions of workers’ compensation, general liability, employment practices, and health benefits. Accrued self-insurance liabilities were $64.1 million at year-end.
- Several employment-related class actions and other legal matters were pending. The Company generally had not reserved for potential future payments, except for an immaterial amount related to one settlement. Management stated that pending matters were not expected to have a material adverse effect, but quarterly or annual results could be affected by changes in circumstances.
- The IRS proposed disallowing $12.9 million of Section 199 deductions for tax years 2010–2012. The Company disagreed and had not recorded a reserve for potential future payments.
- A planned restaurant relocation was expected to generate approximately $1.2 million of additional accelerated depreciation and impairment expense in fiscal 2017.
- Future lease accounting rules are expected to have a material effect on the consolidated financial statements when adopted in fiscal 2019.
Most important facts for an investor to verify
- Whether comparable-sales growth and customer traffic improve without excessive reliance on menu-price increases.
- Whether approximately 5% wage inflation and expected commodity inflation are offset by pricing, productivity, and purchasing gains.
- The sustainability of free cash flow after capital expenditures, lease commitments, dividends, repurchases, and up to $42 million of additional growth capital for North Italia and Flower Child.
- Progress toward the fiscal 2017 EPS guidance range, restaurant-opening plan, and capital-expenditure budget.
- The outcome and potential financial exposure from employment litigation, the IRS tax matter, self-insurance claims, and other contingencies.
- The impact of the 53rd week on fiscal 2016 comparisons and the return to a 52-week fiscal year in 2017.