Business Context and Reporting Period
The Cheesecake Factory Incorporated filed an unaudited Form 10-Q for the 13 and 26 weeks ended June 28, 2022, compared with the periods ended June 29, 2021. Fiscal 2022 contains 53 weeks and ends January 3, 2023. The company operated 309 company-owned restaurants in the United States and Canada, including 208 Cheesecake Factory, 30 North Italia and other Fox Restaurant Concepts locations, plus 29 internationally licensed Cheesecake Factory restaurants and two bakery facilities.
Financial Performance and Position
| Metric | Q2 2022 | Q2 2021 | First Half 2022 | First Half 2021 |
|---|---|---|---|---|
| Revenue | $832.6 million | $769.0 million | $1.626 billion | $1.396 billion |
| Income from operations | $27.9 million | $41.1 million | $56.3 million | $50.0 million |
| Operating margin | 3.4% | 5.3% | 3.5% | 3.6% |
| Net income | $25.7 million | $33.7 million | $48.8 million | $37.6 million |
| Net income available to common stockholders | $25.7 million | $17.1 million | $48.8 million | $15.8 million |
| Diluted EPS | $0.50 | $0.37 | $0.96 | $0.35 |
| Cash flow from operations | Not separately provided | Not separately provided | $87.5 million | $130.4 million |
Q2 revenue increased 8.3%, while first-half revenue increased 16.5%. Cheesecake Factory comparable sales increased 4.7% in Q2 and 12.0% in the first half; North Italia comparable sales increased approximately 12% and 21%, respectively. Q2 sales benefited from higher traffic and new restaurant openings.
Profitability was pressured by inflation. Q2 cost of sales increased to 24.5% of revenue from 22.0%, and labor costs increased to 36.6% from 35.7%. First-half cost of sales increased to 24.1% from 21.8%, while labor costs increased to 36.9% from 36.1%. G&A and depreciation improved as percentages of revenue, but did not offset food, wage and utility inflation.
Cash and cash equivalents were $194.9 million at June 28, 2022, compared with $189.6 million at December 28, 2021. First-half investing cash outflows were $46.0 million, including $46.4 million of property and equipment additions. Financing cash outflows were $36.2 million, including $14.3 million of common dividends and $14.8 million of treasury stock purchases.
Debt included $345.0 million principal amount of 0.375% convertible senior notes due 2026, recorded at $337.0 million net of issuance costs, and $130.0 million outstanding under the revolving facility. Net availability under the revolver was $237.7 million after standby letters of credit. The company reported a net adjusted leverage ratio of 4.1 and an EBITDAR ratio of 2.2 at quarter-end, versus maximum and minimum covenant thresholds of 4.75 and 1.9, respectively.
Material Changes Versus the Prior Comparable Period
- Revenue increased, driven by comparable sales, improved customer traffic and additional units.
- Operating income declined in Q2 despite higher revenue, primarily because commodity, labor, utility and insurance costs grew faster than pricing.
- Net income available to common stockholders and EPS benefited from the absence of Series A preferred stock dividends and allocations that reduced 2021 common earnings.
- Acquisition-related contingent consideration, compensation and amortization expense declined to $0.9 million in Q2 from $11.4 million and to $1.8 million for the first half from $11.9 million.
- Operating cash flow declined by $42.9 million in the first half, primarily because liabilities accrued at the end of 2021 were paid during 2022.
- The company resumed common dividends and share repurchases after pandemic-related suspensions. It paid a $0.27-per-share dividend and repurchased approximately 0.5 million shares for $14.8 million during the first half.
- Off-premise sales declined to approximately 25% of restaurant sales in Q2 and 26% for the first half, compared with 31% and 36% in the prior-year periods, but remained above the 16% pre-pandemic mix.
Guidance, Outlook, Risks and Unusual Items
- Management projected Q3 fiscal 2022 revenue of approximately $785 million to $805 million and full-year revenue of approximately $3.32 billion to $3.37 billion.
- Management expects fiscal 2022 commodity inflation of approximately 14% to 15%, third-quarter commodity inflation of 15% to 16%, and net labor inflation of approximately 5%.
- The company had 4.75% menu pricing in place at the time of filing and was implementing an additional 4.25% increase in Q3.
- Fiscal 2022 guidance included approximately $18 million of preopening costs, $91 million of depreciation and amortization, a 9% to 10% tax rate and approximately $140 million of capital expenditures.
- The company planned to open as many as 15 restaurants in fiscal 2022, including four Cheesecake Factory, four North Italia and as many as seven FRC locations.
- Key risks include COVID-19 resurgence, staffing constraints, supply-chain disruption, commodity and wage inflation, geopolitical conditions, consumer spending, lease obligations, debt covenant compliance and the ability to offset costs through pricing.
- Contingencies include a $4.2 million California wage citation and an IRS tax matter that was settled in May 2022; management reserved immaterial amounts and stated that pending matters were not expected to have a material adverse effect.
- Acquisition-related contingent consideration had a $17.8 million fair value at quarter-end, with modeled undiscounted outcomes ranging from zero to $204.0 million.
- The company stated that all restaurants were operating without capacity restrictions at quarter-end, but COVID-19-related effects and costs could recur.
Important Facts for Investors to Verify
- Whether menu pricing offsets the projected 14% to 15% commodity inflation and approximately 5% labor inflation without materially reducing traffic.
- Progress toward restoring pre-pandemic restaurant-level margins, given Q2 operating margin compression.
- Actual third-quarter and full-year revenue versus the stated ranges and the effect of the 53rd operating week.
- Operating cash-flow conversion and liquidity after planned capital expenditures, dividends, share repurchases and FRC-related payments.
- Compliance with the revolving credit facility covenants and the company’s ability to reduce debt before the facility maturity in July 2024.
- The timing, cost and returns of planned restaurant openings, including the company’s stated unit-level return targets.
- Changes to the convertible notes’ conversion rate and conversion price following the July 2022 dividend.
- Developments in the California wage citation, tax matter and acquisition-related contingent consideration.