Business Context and Reporting Period
The Cheesecake Factory Incorporated filed this unaudited Form 10-Q for the 13 and 39 weeks ended October 3, 2023. Fiscal 2023 is a 52-week year ending January 2, 2024; the comparable fiscal 2022 period ended September 27, 2022 and was a 53-week year. The company owned and operated 325 restaurants in the United States and Canada, including 213 Cheesecake Factory, 33 North Italia, 31 Flower Child and 39 other FRC locations, plus two bakery facilities and 31 internationally licensed Cheesecake Factory locations.
Financial Metrics
| Metric | Q3 2023 | Q3 2022 | First 39 Weeks 2023 | First 39 Weeks 2022 |
|---|---|---|---|---|
| Revenue | $830.2 million | $784.0 million | $2.562 billion | $2.410 billion |
| Operating income/(loss) | $19.0 million | $(2.2) million | $100.4 million | $54.1 million |
| Operating margin | 2.3% | (0.3)% | 3.9% | 2.2% |
| Net income/(loss) | $17.9 million | $(2.4) million | $88.7 million | $46.4 million |
| Diluted EPS | $0.37 | $(0.05) | $1.80 | $0.92 |
| Net margin | 2.2% | (0.3)% | 3.5% | 1.9% |
| Cash from operations | Not separately provided | Not separately provided | $150.5 million | $98.9 million |
Q3 revenue increased 5.9%, while first-nine-month revenue increased 6.3%. Cheesecake Factory comparable sales increased 2.4% in Q3 and 3.2% year to date; North Italia comparable sales increased approximately 8% in both periods. Cheesecake Factory Q3 traffic declined 1.0%, offset by a 3.4% increase in average check. Off-premise sales represented approximately 21% of restaurant sales in Q3, versus 23% in the prior-year quarter and 15% in Q3 2019.
Q3 food and beverage costs declined to 23.5% of revenue from 25.2%, and labor expense declined to 36.3% from 37.4%. Year-to-date food and beverage costs declined to 23.5% from 24.5%, and labor expense declined to 35.9% from 37.1%. Preopening costs increased to $6.7 million in Q3 and $15.8 million year to date, compared with $4.3 million and $9.0 million, respectively.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $64.0 million at October 3, 2023, down $50.8 million from January 3, 2023 and below the $133.2 million balance at September 27, 2022.
- Year-to-date investing cash outflows were $100.6 million, including $99.9 million of property and equipment additions.
- Year-to-date financing cash outflows were $100.6 million, including $40.1 million of dividends, $36.3 million of treasury stock purchases and $24.2 million of acquisition-related deferred consideration and compensation.
- The revolving credit facility has $400 million of commitments, terminates October 6, 2027 and had $130.0 million outstanding, $33.5 million of letters of credit and $236.5 million of net availability at October 3, 2023. The company was in compliance with its financial covenants.
- The company had $345.0 million of convertible senior notes outstanding, with a carrying value of $339.5 million net of issuance costs. The notes mature June 15, 2026 and bear interest at 0.375%.
- Total operating lease liabilities were approximately $1.391 billion, consisting of $144.5 million current and $1.247 billion noncurrent obligations.
- Management believes cash, operating cash flow and available revolver borrowings provide adequate liquidity for the next 12 months and the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Operating income improved from a $2.2 million loss to $19.0 million in Q3 and increased 85.8% year to date, reflecting revenue growth and lower food and labor costs as percentages of revenue.
- Net income improved from a $2.4 million loss to $17.9 million in Q3 and increased 91.0% year to date.
- Interest and other expense increased to $2.0 million in Q3 and $6.1 million year to date, primarily because of higher interest on the revolving facility.
- G&A expense rose to 6.5% of revenue in Q3 and 6.4% year to date, compared with 6.4% and 6.2%, respectively.
- Capital expenditures increased to $99.9 million year to date from $78.1 million, and acquisition-related payments increased to $24.2 million from $7.2 million.
- The first nine months of 2023 included seven restaurant openings, compared with five in the comparable 2022 period, although permitting, landlord-readiness and supply-chain delays affected opening timing.
- Share count declined: diluted weighted-average shares fell to 49.0 million in Q3 and 49.2 million year to date, from 49.7 million and 50.7 million, respectively.
Guidance, Outlook, Commentary and Risks
- For fiscal 2023, management expects revenue of approximately $3.45 billion, net income margin of approximately 3.8%, preopening costs of approximately $26 million and as many as 16 new restaurants. Estimated capital expenditures are $150 million to $160 million.
- For Q4 fiscal 2023, management expects revenue of approximately $870 million to $890 million, commodity inflation in the low-single digits, labor inflation in the mid-single digits, net income margin of approximately 4.25% at the midpoint and preopening costs of approximately $10 million.
- For fiscal 2024, management expects revenue of approximately $3.6 billion to $3.7 billion, commodity and net labor inflation in the low- to mid-single digits, and net income margin of approximately 4.0% to 4.5%. Planned capital expenditures are approximately $175 million to $200 million, including initial development of a third bakery facility.
- Management targets approximately 7% annual unit growth across concepts over the longer term and restaurant-level cash-on-cash returns of approximately 20% to 25% for Cheesecake Factory, 35% for North Italia and 25% to 30% for FRC concepts.
- Principal risks include inflation in commodities and wages, labor availability, supply-chain disruption, consumer spending weakness, higher interest rates, permitting and landlord delays, lease obligations, debt covenant restrictions, adverse weather, geopolitical events, foreign exchange exposure and execution risk in new concepts and international licensing.
- Acquisition-related contingent consideration had a fair value liability of $18.0 million at October 3, 2023. The modeled undiscounted range of possible outcomes was $0 to $276.0 million, with results sensitive to future revenue, margin and volatility assumptions.
- A California wage citation remains subject to documentation and final agency approval of a tentative settlement; the company has reserved an immaterial amount. Two website privacy class actions were voluntarily dismissed without prejudice.
- Subsequent to quarter-end, the board declared a $0.27 per-share dividend and approved a Rule 10b5-1 repurchase plan effective December 4, 2023 through May 24, 2024. The October dividend also triggers an expected adjustment to the convertible notes' conversion rate and price.
Important Facts for Investors to Verify
- Whether comparable-sales growth can continue without further substantial menu pricing, particularly given declining Cheesecake Factory traffic.
- Whether management can achieve the stated fiscal 2023 and fiscal 2024 revenue and margin guidance while absorbing wage, commodity, occupancy and insurance inflation.
- The timing and return profile of planned restaurant openings, including the impact of permitting and landlord delays and the third bakery facility.
- Liquidity headroom after planned capital expenditures, dividends, share repurchases and FRC acquisition-related payments, including compliance with revolver covenants.
- The cash-flow effect and ultimate settlement range for acquisition-related contingent consideration.
- The maturity, conversion economics and potential dilution or cash requirements associated with the $345.0 million convertible notes due in 2026.