The Cheesecake Factory Incorporated: Fiscal 2012 Form 10-K
Reporting period: Fiscal year ended January 1, 2013. Fiscal 2012 comprised 52 weeks; fiscal 2011 comprised 53 weeks, including an estimated $43 million of additional revenue. The fourth quarter ended January 1, 2013 and comprised 13 weeks.
Business context
The Company operated 177 company-owned upscale casual restaurants at February 28, 2013: 162 Cheesecake Factory, 14 Grand Lux Cafe and one RockSugar Pan Asian Kitchen. It also operated two bakery production facilities. Restaurant sales represented 96% of fiscal 2012 revenue. Three Middle East licensed Cheesecake Factory locations opened during fiscal 2012.
Key financial metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $1,809.0 million | $1,757.6 million | +2.9%; +5.5% excluding the extra week in 2011 |
| Restaurant revenue | $1,743.8 million | $1,685.0 million | +3.5% |
| Bakery sales to external customers | $65.2 million | $72.6 million | -10.2% |
| Income from operations | $138.7 million | $133.5 million | +3.9% |
| Operating margin | 7.7% | 7.6% | +10 basis points |
| Net income | $98.4 million | $95.7 million | +2.8% |
| Diluted EPS | $1.78 | $1.64 | +8.5% |
| Cash flow from operations | $195.4 million | $196.1 million | -$0.7 million |
| Capital expenditures | $86.4 million | $76.7 million | +$9.7 million |
| Cash and cash equivalents | $83.6 million | $48.2 million | +$35.4 million |
Comparable sales increased 1.9%, driven by 0.7% guest-traffic growth and 1.2% average-check growth. Comparable Cheesecake Factory sales increased 2.2%, while Grand Lux Cafe comparable sales declined 2.0%. Average sales per full-year restaurant were approximately $10.1 million, and average sales per productive square foot were approximately $887.
Cost of sales improved to 24.9% of revenue from 25.5%, primarily due to lower dairy, produce and fish costs and a higher restaurant-sales mix. Labor expense improved to 32.1% from 32.3%, while general and administrative expense increased to 5.7% from 5.5%. Net margin was 5.4% in both periods. The effective tax rate increased to 26.5% from 25.9%.
Liquidity, debt and capital allocation
- The Company had no borrowings under its $200 million revolving credit facility at year-end and had $178 million of net availability after $22 million of standby letters of credit.
- The Company was in compliance with its financial covenants. The adjusted debt ratio was 2.7 versus a maximum of 4.0; the EBITDAR ratio was 2.9 versus a minimum of 1.9.
- Total long-term debt and deemed landlord financing liability was $57.2 million, consisting primarily of deemed landlord financing.
- Fiscal 2012 financing activities included $101.4 million of treasury-stock purchases and $12.8 million of dividends paid. The Company repurchased approximately 3.2 million shares during the year and began paying a quarterly dividend of $0.12 per share.
- Minimum contractual lease payments totaled $916.1 million, including $69.8 million due in fiscal 2013. Most leases also include contingent rent and other occupancy obligations.
Material changes and unusual items
- Impairment and lease-termination expense increased to $9.5 million from $1.5 million. Fiscal 2012 included a $5.5 million impairment of one Cheesecake Factory location and $4.0 million of reimbursements related to three Grand Lux Cafe locations scheduled to close at the end of March 2013.
- The Company expects approximately $1.0 million of additional rent and closing costs in the first quarter of fiscal 2013 related to those Grand Lux Cafe closures.
- Preopening costs increased to $12.3 million from $10.1 million as the Company opened seven Cheesecake Factory restaurants and one Grand Lux Cafe.
- Bakery sales to external customers declined primarily because of lower warehouse-club sales, partially offsetting restaurant growth.
- Adjusted net income was $103.7 million, or adjusted diluted EPS of $1.88, excluding the after-tax effects of impairment and lease-termination items and a $0.4 million benefit from variable life insurance proceeds.
Guidance, outlook and risks
- Fiscal 2013 diluted EPS guidance was $2.10 to $2.18, representing 12% to 15% growth over fiscal 2012, based on comparable-sales growth of 1.5% to 2.5%.
- Management expected operating-margin expansion of approximately 30 to 40 basis points, food-cost inflation of approximately 3%, and a corporate tax rate of 29% to 30%.
- The Company planned eight to ten new company-owned restaurants, including two or three relocations, and as many as three additional licensed international restaurants.
- Fiscal 2013 cash capital expenditures were expected to be $100 million to $120 million, with free cash flow projected at $85 million to $110 million. Management planned to return the majority of free cash flow to shareholders through dividends and share repurchases.
- Key risks include discretionary consumer spending, competition, food and labor inflation, minimum-wage and health-care costs, availability and renewal of restaurant leases, execution of new openings, retention of qualified personnel, food safety, self-insurance claims, litigation, information-security failures and international licensee execution.
- Management stated that pending lawsuits, audits and claims were not expected to have a material adverse effect individually or in the aggregate, although circumstances could affect a particular quarter or fiscal year.
Investor verification items
- Reconcile fiscal 2012 growth with the 53-week fiscal 2011 comparison and assess comparable-sales performance excluding the extra week.
- Verify the sustainability of margin gains given expected 3% food inflation, labor-cost pressures and a higher projected tax rate.
- Review the financial impact and final timing of the three Grand Lux Cafe closures and any further impairment charges.
- Evaluate whether the planned $100 million to $120 million of capital spending is consistent with projected free cash flow and shareholder distributions.
- Monitor covenant headroom, the $916.1 million lease commitment, self-insurance liabilities and the $22 million standby-letter-of-credit requirement.
- Assess the assumptions underlying the $2.10 to $2.18 fiscal 2013 EPS outlook, particularly comparable sales, restaurant openings, international royalties and cost inflation.