Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 3, 2007 (13 weeks and 26 weeks)
Business Overview: The Company operates upscale, high-volume casual dining restaurants under the "The Cheesecake Factory" and "Grand Lux Cafe" brands, alongside a bakery segment producing desserts for internal and external customers. As of July 26, 2007, the Company operated 126 Cheesecake Factory restaurants, 9 Grand Lux Cafes, and two bakery production facilities.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended July 3, 2007 |
13 Weeks Ended July 4, 2006 |
26 Weeks Ended July 3, 2007 |
26 Weeks Ended July 4, 2006 |
|---|---|---|---|---|
| Revenues | $373,167 | $322,573 | $729,750 | $629,292 |
| Net Income | $23,708 | $23,445 | $42,114 | $42,719 |
| Diluted EPS | $0.33 | $0.30 | $0.56 | $0.53 |
| Operating Margin | 9.5% | 10.2% | 8.3% | 9.3% |
| Cash from Operations (26 wks) | $85,252 (vs $64,142 prior year) | |||
| Capital Expenditures (26 wks) | $104,813 (vs $60,379 prior year) | |||
| Long-Term Debt | $150,000 (New facility utilized) | |||
| Cash & Equivalents | $1,694 (as of July 3, 2007) | |||
| Marketable Securities | $89,208 (Total current and non-current) |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 16% year-over-year for both the 13-week and 26-week periods. Restaurant sales grew 17%, driven primarily by the opening of 20 new restaurants since the prior year's comparable quarter. Comparable restaurant sales increased 0.8% (Cheesecake Factory) and 5.7% (Grand Lux Cafe) for the quarter.
- Expense Increases:
- Labor Expenses: Increased 18% (quarter) and 19% (YTD) due to new openings, higher minimum wages in several states, and increased health insurance costs. Labor as a percentage of revenue rose to 32.3% (quarter) and 32.8% (YTD).
- Cost of Sales: Increased 15% (quarter) and 16% (YTD), tracking with revenue growth. As a percentage of revenue, costs remained stable or slightly improved (24.7% vs 24.9% for the quarter) due to favorable poultry and seafood pricing, partially offset by dairy costs.
- Depreciation: Increased 20% (quarter) and 22% (YTD) due to new restaurant assets.
- Interest Expense: Shifted from net interest income of $0.98 million (prior year quarter) to net interest expense of $1.66 million due to borrowings on a new $200 million credit facility and reduced investment income from treasury stock purchases.
- Liquidity: Cash and marketable securities decreased by $43.4 million to $90.9 million, primarily due to $180.4 million in treasury stock purchases and $104.8 million in capital expenditures, partially offset by operating cash flow and debt proceeds.
Guidance, Outlook, and Risks
- Expansion Plans: The Company expects to open as many as 21 new restaurants in fiscal 2007, including up to five Grand Lux Cafes. An upscale Asian cuisine test concept is planned for late 2007.
- Capital Expenditures: Estimated cash outlays for fiscal 2007 range between $200 million and $210 million, net of landlord contributions.
- Share Repurchases: The Board increased the repurchase authorization to 16.0 million shares. The Company entered an Accelerated Share Repurchase (ASR) agreement for $200 million, with a minimum of 6.7 million shares expected.
- Menu Pricing: Implemented a 1.5% effective menu price increase in the winter 2007 update and is implementing a similar increase in the summer 2007 update to offset cost pressures.
- Tax Outlook: The effective tax rate is estimated to be 30.0% to 31.0% for the remainder of fiscal 2007. The Company anticipates a significant change in unrecognized tax benefits (approx. $14.9 million benefit) upon IRS approval of a change in accounting method for construction allowances.
- Risks and Contingencies:
- Legal Proceedings: Facing class action lawsuits regarding wage and hour violations (Smith v. Cheesecake Factory; Guardado v. Cheesecake Factory) and shareholder derivative actions regarding historical stock option granting practices. No amounts have been reserved.
- Commodity Prices: Exposure to volatility in food costs (dairy, produce, poultry), though the Company utilizes fixed-price contracts where possible.
- Interest Rate Risk: Hedged $100 million of its revolving credit facility with a zero-cost interest rate collar (cap at 5.35%, floor at 4.69%).
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the debt-to-EBITDA and EBITDAR-to-interest ratios required by the new $200 million credit facility.
- Comparable Sales: Monitor the sustainability of comparable sales growth, which is currently driven by menu price increases rather than volume, given high capacity utilization.
- Legal Exposure: Track the status of the shareholder derivative litigation regarding stock option backdating and the wage/hour class actions, as outcomes could result in significant costs or reputational damage.
- Capital Allocation: Assess the impact of the $200 million ASR and ongoing capital expenditures ($200M+ for FY2007) on future liquidity and working capital.
- Tax Position: Confirm the timing and realization of the anticipated $14.9 million tax benefit from the change in accounting method for construction allowances.