The Cheesecake Factory Incorporated — Q3 2022 Form 10-Q
Business context and reporting period
The company operates 314 company-owned restaurants in the United States and Canada, including 210 The Cheesecake Factory, 32 North Italia and FRC-related locations, plus 29 internationally licensed Cheesecake Factory restaurants. Its bakery division operates two facilities. The filing covers the 13 and 39 weeks ended September 27, 2022, compared with September 28, 2021. Fiscal 2022 includes 53 weeks and ends January 3, 2023.
Key financial metrics
| Metric | 13 weeks ended Sept. 27, 2022 | 13 weeks ended Sept. 28, 2021 | 39 weeks ended Sept. 27, 2022 | 39 weeks ended Sept. 28, 2021 |
|---|---|---|---|---|
| Revenue | $784.0 million | $754.5 million | $2,410.4 million | $2,150.8 million |
| Revenue growth | 3.9% | — | 12.1% | — |
| Income/(loss) from operations | $(2.2) million | $31.4 million | $54.1 million | $81.3 million |
| Operating margin | (0.3)% | 4.1% | 2.2% | 3.8% |
| Net income/(loss) | $(2.4) million | $32.7 million | $46.4 million | $70.3 million |
| Net margin | (0.3)% | 4.3% | 1.9% | 3.3% |
| Diluted EPS | $(0.05) | $0.64 | $0.92 | $0.96 |
| Cash flow from operations | Not separately provided | Not separately provided | $98.9 million | $119.2 million |
At September 27, 2022, cash and cash equivalents were $133.2 million, compared with $189.6 million at December 28, 2021. Long-term debt was $467.5 million, including $130.0 million outstanding under the revolving facility and $345.0 million of convertible senior notes principal. Net availability under the revolving facility was $238.5 million, after outstanding debt and $31.5 million of standby letters of credit. Total liabilities included $1.36 billion of operating lease liabilities. Stockholders’ equity was $323.5 million.
Material changes versus the prior comparable period
- Third-quarter revenue increased $29.5 million, but operating income declined $33.6 million and net income declined $35.1 million, as inflation and operating costs more than offset sales growth.
- Third-quarter cost of sales increased to 25.2% of revenue from 22.5%, labor expense increased to 37.4% from 37.1%, and other operating costs increased to 27.7% from 26.7%.
- For the first 39 weeks, revenue increased $259.5 million, while operating income declined $27.3 million and net income declined $23.8 million.
- Cheesecake Factory comparable sales increased 1.1% in the quarter and 8.2% year to date; North Italia comparable sales increased approximately 10% and 17%, respectively.
- Off-premise sales represented approximately 23% of restaurant sales in the quarter and 25% year to date, down from 28% and 33% in the prior-year periods but above pre-pandemic levels.
- Cash from operations declined $20.3 million year to date, while capital expenditures increased to $78.1 million from $49.2 million.
- The company resumed dividends and share repurchases in fiscal 2022. Year-to-date common dividends paid were $28.3 million and share repurchases were $41.5 million for 1.35 million shares.
Guidance, outlook, risks and unusual items
- Fourth-quarter fiscal 2022 revenue is expected to be approximately $900 million to $930 million, including the 53rd operating week. Management expects approximately 15% commodity inflation and 5% net labor inflation, with G&A of $55 million to $56 million, preopening costs of approximately $7 million and depreciation and amortization of approximately $25 million.
- Fiscal 2022 capital expenditures are expected to be approximately $130 million, with as many as 13 new restaurants planned.
- Fiscal 2023 revenue is expected to be approximately $3.5 billion to $3.6 billion, with mid-single-digit commodity and net labor inflation. Management plans 21 to 24 new restaurants and expects $150 million to $170 million of capital expenditures.
- Management’s objectives include recovering pre-COVID margins, expanding restaurant-level margins and pursuing approximately 7% aggregate annual unit growth across concepts. The filing does not provide a specific earnings or margin target.
- Key risks include COVID-19 disruptions, staffing challenges, supply-chain interruptions, commodity and wage inflation, geopolitical conditions, consumer spending, construction and permitting delays, lease obligations, debt covenant compliance and the ability to maintain dividends and share repurchases.
- On October 6, 2022, the company entered a new unsecured $400 million revolving facility maturing October 6, 2027, with potential commitments of up to an additional $200 million. The company repaid and reborrowed the existing $130 million balance under the new facility.
- On October 26, 2022, the board declared a $0.27 per-share quarterly dividend and increased the share repurchase authorization to 61.0 million shares.
- The company reached tentative settlements concerning a $4.2 million California wage citation and an IRS tax matter; management recorded immaterial reserves or amounts and stated that pending claims are not expected to have a material adverse effect.
- Acquisition-related contingent consideration and compensation expense was $2.9 million year to date, down from $12.6 million in the prior-year period. The estimated undiscounted range of potential related payments was $0 to $204.0 million.
Important facts for investors to verify
- Whether pricing actions can offset continuing food, wage, utility and other operating-cost inflation without materially reducing traffic.
- The sustainability of comparable-sales trends at The Cheesecake Factory, North Italia and FRC concepts.
- Progress toward restoring pre-pandemic operating margins and the effect of the 53rd week on reported results.
- Compliance with the new facility’s maximum 4.25 net adjusted leverage ratio and minimum 1.90 EBITDAR-to-interest-and-rent ratio.
- Liquidity after planned capital expenditures, dividends, repurchases, acquisition-related payments and restaurant expansion.
- The timing and economics of planned restaurant openings, including possible supply-chain and permitting delays.
- The final outcomes of the California wage matter, IRS matter and other ordinary-course litigation and employment claims.