Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Operations: The Company operates 160 upscale, full-service casual dining restaurants (146 The Cheesecake Factory, 13 Grand Lux Cafe, 1 RockSugar Pan Asian Kitchen) and two bakery production facilities. The Company is a large accelerated filer.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenues | $392,794 | $393,803 |
| Net Income | $10,019 | $14,329 |
| Diluted EPS | $0.17 | $0.21 |
| Operating Income | $17,981 | $23,721 |
| Operating Margin | 4.6% | 6.0% |
| Cash from Operations | $40,566 | $38,199 |
| Cash and Equivalents (End of Period) | $88,650 | $128,786 |
| Long-Term Debt | $250,000 | $275,000 |
| Net Working Capital | $7,456 | $4,386 |
Material Changes vs. Prior Period
- Revenue: Decreased slightly by 0.3% to $392.8 million. Restaurant sales increased $1.0 million due to new openings, offset by a 3.4% decline in comparable restaurant sales driven by reduced guest traffic from macroeconomic factors.
- Profitability: Net income declined 30% to $10.0 million. Operating margin compressed to 4.6% from 6.0% due to de-leveraging of fixed costs against lower sales and increased operating expenses.
- Costs: Cost of sales decreased to 25.0% of revenue (from 25.6%) due to favorable commodity pricing and menu engineering. Labor expenses increased to 33.9% of revenue (from 33.7%) primarily due to higher health insurance costs.
- Debt: The Company repaid $25 million on its credit facility, reducing outstanding borrowings to $250 million. Interest expense increased to $5.0 million due to higher interest rates following a January 2009 amendment to the credit facility.
- Capital Expenditures: Decreased significantly to $10.6 million (from $19.8 million) as the Company slowed new restaurant development.
Guidance, Outlook, and Risks
Management Outlook
- Fiscal 2009 EPS: Anticipated diluted earnings per share of $0.67 to $0.75.
- Comparable Sales: Expected to range between negative 3% and negative 4.5%.
- Capital Expenditures: Estimated between $40 million and $45 million for the full year.
- Free Cash Flow: Projected at $85 million to $95 million, with plans to repay a minimum of $100 million of debt.
- Expansion: Plans to open no more than two new locations in fiscal 2009.
Risks and Contingencies
- Legal Proceedings:
- IRS Audit: IRS disallowed a $5.1 million deduction for executive stock option compensation; Company has reserved $2.3 million for estimated taxes and interest.
- Employment Litigation: Multiple lawsuits filed regarding wage and hour violations (California), sex discrimination (EEOC charges in Cleveland and Phoenix), and sexual harassment. No reserves established for these matters as the Company intends to vigorously defend them.
- Landlord Bankruptcy: General Growth Properties (GGP), which owns/controls 22% of Company locations, filed for Chapter 11 protection. Management does not expect a material adverse effect.
- Commodity Prices: Exposure to volatility in food costs (produce, meat, dairy), though the Company utilizes fixed-price contracts where possible.
Investor Verification Checklist
- Verify the impact of the 3.4% decline in comparable restaurant sales on future revenue projections.
- Monitor the resolution of the IRS audit regarding the $5.1 million executive compensation deduction.
- Track the status of multiple employment-related lawsuits (wage/hour, discrimination, harassment) for potential future liabilities.
- Confirm the Company's ability to execute its plan to repay $100 million of debt using projected free cash flow.
- Assess the impact of GGP's bankruptcy on lease terms and operations for the 22% of restaurants located in GGP properties.