Business Context and Reporting Period
The Cheesecake Factory Incorporated filed an unaudited Form 10-Q for the thirteen weeks ended April 4, 2023, compared with the thirteen weeks ended March 29, 2022. Fiscal 2023 contains 52 weeks, versus 53 weeks in fiscal 2022. The company operated 318 restaurants in the United States and Canada, including 210 The Cheesecake Factory, 33 North Italia, 31 Flower Child and 35 other FRC locations, plus 30 internationally licensed Cheesecake Factory restaurants.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $866.1 million | $793.7 million | 9.1% increase |
| Income from operations | $33.9 million | $28.3 million | 19.8% increase |
| Operating margin | 3.9% | 3.6% | 30 basis-point expansion |
| Income before taxes | $32.0 million | $26.9 million | 19.3% increase |
| Net income | $28.1 million | $23.2 million | 21.1% increase |
| Net margin | 3.2% | 2.9% | 30 basis-point expansion |
| Diluted earnings per share | $0.56 | $0.45 | 24.4% increase |
| Cash provided by operations | $65.0 million | $33.5 million | 93.9% increase |
| Capital expenditures | $38.0 million | $29.1 million | 30.5% increase |
- Food and beverage costs were 23.8% of revenue versus 23.7%; labor expenses improved to 36.0% from 37.3%; other operating costs increased to 26.7% from 26.2%.
- Cash and cash equivalents were $116.2 million at April 4, 2023, compared with $114.8 million at January 3, 2023.
- Long-term debt was $468.5 million, including $130.0 million outstanding under the revolving facility and $338.5 million, net of issuance costs, on the convertible notes.
- Revolver availability was $238.5 million after $130.0 million of borrowings and $31.5 million of standby letters of credit. The company was in compliance with its debt covenants.
- Total lease liabilities were $1.36 billion, consisting of $140.5 million current and $1.22 billion noncurrent liabilities.
- The company paid $13.2 million in dividends and repurchased $12.4 million of stock during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher comparable restaurant sales and new openings. The Cheesecake Factory comparable sales increased 5.7%, driven by a 4.7% average-check increase and 1.0% higher customer traffic. North Italia comparable sales increased approximately 9%.
- The fiscal-calendar change, including the absence of the high-volume 53rd week captured in fiscal 2022, reduced first-quarter 2023 revenue by approximately $10 million.
- Menu pricing and sales leverage helped reduce labor expense as a percentage of revenue, partially offsetting commodity and wage inflation.
- Impairment and lease-termination expense increased to $2.2 million from $0.2 million, primarily due to lease termination costs for one Grand Lux Cafe location.
- Preopening costs increased to $3.1 million from $1.8 million as the company opened one Flower Child and one other FRC restaurant; no restaurants opened in the comparable prior-year quarter.
- Adjusted net income was $30.6 million, or $0.61 adjusted diluted EPS, compared with $24.0 million and $0.47, respectively, in the prior-year period. These are non-GAAP measures.
- Off-premise sales represented approximately 23% of restaurant sales versus 28% in the prior-year quarter, remaining above the 17% level reported for the first quarter of 2019.
Guidance, Outlook, Risks and Unusual Items
- Fiscal 2023 revenue guidance was approximately $3.55 billion, with an expected net income margin of approximately 4%, preopening costs of approximately $24 million and total inflation in the mid-single-digit range.
- Management expects to open as many as 20 to 22 restaurants in fiscal 2023 and anticipates $165 million to $175 million of capital expenditures.
- Second-quarter 2023 revenue was expected to be approximately $870 million to $890 million, with commodity inflation in the high-single-digit range, labor inflation in the mid-single-digit range and net margin of approximately 4.75% at the midpoint.
- Management expects adequate liquidity for the next 12 months and the foreseeable future from cash, operating cash flow and available revolver borrowings.
- Key risks include commodity and wage inflation, supply-chain disruptions, staffing challenges, interest-rate increases, consumer spending volatility, COVID-19-related effects, permitting and construction delays, debt-covenant restrictions and delays in restaurant openings.
- A California wage citation had reached a tentative settlement, subject to documentation and final agency approval; an immaterial reserve was recorded. Two new class actions allege website wiretapping and privacy violations. Potential liability was not estimable and no reserve was recorded.
- Acquisition-related contingent consideration liabilities had a fair value of $29.3 million, with a modeled undiscounted range of outcomes from zero to $276.0 million. The corresponding $13.0 million payment was made early in the second quarter.
- The company declared a $0.27-per-share dividend payable June 6, 2023. The dividend was expected to increase the conversion rate and decrease the conversion price of the convertible notes.
Important Facts for Investors to Verify
- Whether revenue growth and comparable sales remain sustainable after separating menu-price increases from underlying traffic growth.
- Whether commodity, labor and occupancy inflation remains within management's guidance and whether margins continue to recover.
- The timing and cost of the planned 20 to 22 restaurant openings and the potential effect of permitting, construction and supply-chain delays.
- Compliance with the revolver's 4.25 maximum net adjusted leverage ratio and 1.90 minimum EBITDAR ratio, and the effect of floating interest rates on cash flow.
- The company's ability to fund capital expenditures, dividends, share repurchases and the $345.0 million convertible notes due in 2026 while reducing revolving borrowings.
- Developments in the website privacy litigation, California wage citation settlement and acquisition-related contingent consideration.