The Cheesecake Factory Incorporated — Form 10-Q Summary
Business context and reporting period
Filed November 8, 2013, for the 13 weeks and 39 weeks ended October 1, 2013. The company operated 178 restaurants as of November 8, 2013: 166 Cheesecake Factory, 11 Grand Lux Cafe and one RockSugar Pan Asian Kitchen, plus two bakery facilities. Fiscal 2013 comprises 52 weeks and ends December 31, 2013. The interim financial statements are unaudited.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 39 Weeks 2013 | 39 Weeks 2012 |
|---|---|---|---|---|
| Revenue | $469.7 million | $453.8 million | $1,402.8 million | $1,344.3 million |
| Income from operations | $38.6 million | $39.3 million | $116.6 million | $110.5 million |
| Operating margin | 8.2% | 8.7% | 8.3% | 8.2% |
| Net income | $27.5 million | $27.2 million | $81.4 million | $76.3 million |
| Diluted EPS | $0.50 | $0.49 | $1.49 | $1.38 |
- Q3 revenue increased 3.5%; year-to-date revenue increased 4.4%.
- Comparable sales for Cheesecake Factory and Grand Lux Cafe restaurants increased 0.8% in Q3 and 1.0% year to date. Q3 average check rose 1.7%, while guest traffic declined 0.9%.
- Q3 cost of sales improved to 24.0% of revenue from 24.6%, while labor remained 32.1%. Other operating costs declined to 24.3% from 25.1%, but G&A increased to 6.1% from 4.9%.
- Cash provided by operations was $150.3 million versus $125.1 million in the prior-year period. Capital expenditures were $67.1 million versus $64.6 million.
- Financing cash use was $82.9 million, including $135.5 million of treasury stock purchases and $20.0 million of dividends, partially offset by $63.0 million of stock-option exercise proceeds.
- Cash and cash equivalents were $82.6 million at October 1, 2013, compared with $83.6 million at January 1, 2013.
- The company had no cash borrowings outstanding at October 1, 2013 and had $21 million of letters of credit outstanding. The October 16, 2013 amended and restated facility provides $200 million of unsecured revolving commitments, including $50 million for letters of credit, and matures October 16, 2018.
- Deemed landlord financing liability was $64.3 million at October 1, 2013, compared with $55.1 million at January 1, 2013. The company reported compliance with applicable financial covenants.
Material changes versus the prior comparable period
- Net income increased 1.2% in Q3 and 6.6% year to date; diluted EPS increased 2.0% in Q3 and 8.0% year to date, aided by share repurchases and lower weighted average shares.
- Operating income declined slightly in Q3 despite higher revenue, primarily because of higher G&A, preopening costs and impairment charges. Year-to-date operating income increased 5.5%.
- External bakery sales declined to $12.2 million in Q3 from $15.9 million, primarily due to lower warehouse-club sales; year-to-date bakery sales were broadly stable at $38.2 million versus $38.5 million.
- The company opened two Cheesecake Factory restaurants in Q3 and three during the first 39 weeks, compared with two and four locations, respectively, in the corresponding prior-year periods.
- Q3 included $1.1 million of impairment and accelerated depreciation related to planned restaurant relocations. Year-to-date impairment and lease-termination charges were $3.2 million, compared with none in the prior-year period.
- The quarterly dividend increased 17% to $0.14 per share from $0.12. The company repurchased approximately 2.1 million shares for $90.2 million in Q3 and had cumulatively repurchased 37.8 million shares for $967.3 million.
Guidance, outlook, risks and unusual items
- Fiscal 2013 adjusted diluted EPS guidance was $2.10 to $2.13, based on comparable-sales growth of 1.0% to 1.5%. Q4 adjusted diluted EPS guidance was $0.57 to $0.60, based on comparable-sales growth of 1.5% to 2.5%.
- Management expected approximately 50 basis points of fiscal 2013 operating-margin expansion, approximately 1% food-cost inflation and an approximately 28% tax rate. It planned up to nine new restaurants and approximately $105 million of capital expenditures.
- Fiscal 2013 free cash flow was expected to be approximately $115 million, with up to $230 million returned to shareholders through dividends and repurchases.
- Fiscal 2014 adjusted diluted EPS guidance was $2.29 to $2.41, based on comparable-sales growth of 1% to 2%. Food-cost inflation was expected at 4% to 5%, with shrimp and salmon costs creating estimated EPS pressure of $0.04 to $0.07.
- Fiscal 2014 plans included 10 to 12 company-owned restaurant openings, three to five licensed international openings, and $110 million to $130 million of capital expenditures. Management expected to use substantially all free cash flow for dividends and repurchases.
- Key risks include discretionary consumer spending, competition, labor and commodity inflation, particularly seafood and dairy, weather, regulatory changes, international expansion, and the ability to sustain traffic while implementing price increases.
- Pending wage-and-hour and uniform-related class actions and arbitrations seek unspecified penalties and other payments. The company had not recorded a reserve for potential future payments and stated that current matters were not expected to have a material adverse effect, while acknowledging that outcomes could affect particular periods.
- Management expected an additional $0.9 million of relocation-related expense in Q4 and $4.9 million of income from a landlord related to an early lease termination and waived renewal rights.
Important facts for investors to verify
- Whether comparable-sales growth and guest traffic support the company’s fiscal 2013 and fiscal 2014 EPS guidance.
- The sustainability of margin improvement given projected 4% to 5% fiscal 2014 food inflation and required menu pricing.
- The timing and economics of restaurant relocations, new openings, bakery demand and international licensed openings.
- The impact of share repurchases, dividends and credit-facility distribution limits on liquidity and leverage.
- Developments and potential financial exposure from the pending labor and uniform-related litigation.
- Whether the new $200 million revolving facility remains available and whether the company continues to satisfy its leverage and EBITDAR covenants.