Business Context and Reporting Period
The Cheesecake Factory Incorporated filed an unaudited Form 10-Q for the 13 weeks ended April 2, 2024, compared with the 13 weeks ended April 4, 2023. The company operated 335 company-owned restaurants, including 216 Cheesecake Factory, 38 North Italia, 31 Flower Child and 42 other FRC locations, plus 34 internationally licensed Cheesecake Factory restaurants. Its bakery division operated two facilities.
Financial Performance and Liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $891.2 million | $866.1 million | +2.9% |
| Income from operations | $39.3 million | $33.9 million | +15.8% |
| Operating margin | 4.4% | 3.9% | +50 basis points |
| Net income | $33.2 million | $28.1 million | +18.3% |
| Net margin | 3.7% | 3.2% | +50 basis points |
| Diluted EPS | $0.68 | $0.56 | +21.4% |
| Cash flow from operations | $66.7 million | $65.0 million | +$1.7 million |
| Capital expenditures | $37.1 million | $38.0 million | -$0.9 million |
- Food and beverage costs declined to 22.8% of revenue from 23.8%, while labor costs remained 36.0%. Other operating costs declined to 26.3% from 26.7%, but general and administrative expense increased to 6.8% from 6.2%.
- Cash and cash equivalents were $60.2 million at April 2, 2024, versus $56.3 million at January 2, 2024 and $116.2 million at April 4, 2023.
- Cash used in financing activities was $25.3 million, including $12.8 million of dividends and $12.5 million of share repurchases.
- Total debt was $470.6 million, including $130.0 million outstanding under the revolving facility and $340.6 million net carrying value of convertible senior notes. The $345.0 million notes mature June 15, 2026.
- The $400 million revolving facility had $236.5 million of net borrowing availability, after outstanding borrowings and $33.5 million of standby letters of credit. The company was in compliance with its debt covenants.
- Total liabilities were $2.51 billion, including $1.39 billion of operating lease liabilities. Stockholders’ equity was $332.4 million.
Material Changes Versus the Prior Comparable Period
- Total revenue increased primarily from new restaurant openings, partially offset by lower comparable restaurant sales at The Cheesecake Factory.
- The Cheesecake Factory revenue increased 1.8%, but comparable sales declined 0.6%, driven by a 1.5% traffic decline partially offset by a 0.9% average-check increase.
- North Italia revenue increased 12.0%, with comparable sales up approximately 3%; traffic declined 1% and average check increased approximately 4%.
- Five restaurants opened during the quarter: two North Italia, one Flower Child and two Other FRC locations, compared with two openings in the prior-year quarter.
- Preopening costs increased to $5.9 million from $3.1 million, reflecting the higher number of openings.
- Adjusted net income increased to $35.6 million from $30.6 million, and adjusted diluted EPS increased to $0.73 from $0.61. Adjustments primarily comprised impairment and lease termination costs and acquisition-related expenses.
- The company repurchased approximately 0.4 million shares during the quarter and had cumulatively repurchased 56.9 million shares for $1.82 billion, excluding excise tax.
Guidance, Outlook, Risks and Unusual Items
- Fiscal 2024 revenue guidance is approximately $3.6 billion, with an expected net income margin of approximately 4.25%.
- Management expects approximately $28 million of fiscal 2024 preopening costs and $180 million to $200 million of capital expenditures.
- The company plans to open as many as 22 restaurants in fiscal 2024, including three to four Cheesecake Factory, six to seven North Italia, six to seven Flower Child and six to seven Other FRC locations.
- Second-quarter fiscal 2024 revenue guidance is $890 million to $910 million, with an expected net income margin of approximately 5.25% at the midpoint. Management expects low-single-digit commodity inflation and mid-single-digit labor inflation.
- Management targets approximately 7% annual unit growth across concepts and a long-term average total shareholder return objective of 13% to 14%, consisting of EPS growth plus dividend yield.
- Key risks include inflation in commodities, wages and other operating costs; staffing and supply-chain challenges; permitting and landlord delays affecting restaurant openings; consumer spending pressure; interest-rate exposure; debt covenant restrictions; foreign exchange and international operations; litigation; and adverse weather or geopolitical events.
- Unusual or nonrecurring items included $2.1 million of impairment and lease termination expense, $1.1 million of acquisition-related expense and $5.9 million of preopening costs.
- The company stated that pending legal matters are not expected to have a material adverse effect individually or in the aggregate, although quarterly results could be affected by changes in circumstances.
- Management believes cash, operating cash flow and available revolving capacity will provide adequate liquidity for the next 12 months and the foreseeable future.
Most Important Facts to Verify
- Whether The Cheesecake Factory’s negative comparable-sales and traffic trends improve while pricing remains elevated.
- Whether fiscal 2024 revenue, margin, capital expenditure and restaurant-opening guidance is achieved amid inflation and permitting delays.
- Progress toward the planned 22 openings and the resulting impact on preopening costs and cash flow.
- Revolving-facility availability, covenant compliance and the company’s ability to manage the 2026 convertible notes.
- The sustainability of margins after food-cost benefits, higher G&A expense and continued wage inflation.
- The pace and valuation of dividends and share repurchases relative to debt repayment and restaurant development needs.