The Cheesecake Factory Incorporated — Fiscal 2021 Second-Quarter Form 10-Q
Business context and reporting period
Unaudited results cover the 13 and 26 weeks ended June 29, 2021, compared with the periods ended June 30, 2020. The company operated 301 restaurants in the United States and Canada under The Cheesecake Factory, North Italia and Fox Restaurant Concepts brands, plus 28 internationally licensed Cheesecake Factory locations and two bakery facilities. Nearly all restaurants operated without indoor-dining restrictions at quarter-end, although COVID-19, staffing and consumer-behavior risks remained material.
Key financial metrics
| Metric | 13 weeks ended June 29, 2021 | 13 weeks ended June 30, 2020 | 26 weeks ended June 29, 2021 | 26 weeks ended June 30, 2020 |
|---|---|---|---|---|
| Revenue | $769.0 million | $295.9 million | $1,396.4 million | $911.0 million |
| Income/(loss) from operations | $41.1 million | $(83.7) million | $50.0 million | $(273.8) million |
| Operating margin | 5.3% | (28.3%) | 3.6% | (30.1%) |
| Net income/(loss) | $33.7 million | $(56.5) million | $37.6 million | $(192.7) million |
| Net income/(loss) available to common stockholders | $17.1 million | $(70.5) million | $15.8 million | $(206.7) million |
| Diluted EPS | $0.37 | $(1.61) | $0.35 | $(4.72) |
- Revenue increased 159.9% in the quarter and 53.3% year to date, primarily reflecting the severe COVID-19 disruption in the prior-year comparison.
- Net cash provided by operating activities was $130.4 million in the first half, compared with cash used of $35.7 million in the prior-year period. Capital expenditures were $30.9 million.
- Cash and cash equivalents were $161.8 million at June 29, 2021, versus $154.1 million at December 29, 2020.
- Long-term debt was $465.0 million, consisting principally of $130.0 million outstanding under the revolving facility and $335.0 million of convertible notes net of issuance costs. Gross convertible-note principal was $345.0 million; total consolidated debt principal was approximately $475.0 million.
- The company reported $240.1 million of net availability under its revolving facility and a liquidity balance of $411.9 million. It was in compliance with applicable credit-facility covenants.
- Restaurant sales remained weighted toward off-premise channels at 31% in the quarter and 36% in the first half, versus 16% in the comparable fiscal 2019 periods.
Material changes versus the prior comparable period
- The Cheesecake Factory comparable sales increased 150.0% year over year in the quarter and 7.8% versus fiscal 2019; first-half comparable sales increased 52.0% year over year but were 1.2% below fiscal 2019.
- North Italia comparable sales increased approximately 182% year over year in the quarter and approximately 10% versus fiscal 2019; first-half comparable sales increased approximately 63% year over year and approximately 3% versus fiscal 2019.
- Quarterly cost of sales declined to 22.0% of revenue from 24.4%, labor declined to 35.7% from 41.5%, other operating costs declined to 25.9% from 41.1%, and G&A declined to 6.3% from 12.1%, primarily due to sales leverage and the prior-year pandemic impact.
- The company recorded no quarterly impairment expense, compared with $2.4 million in the prior-year quarter. First-half impairment expense was $0.6 million versus $194.3 million in the prior-year period.
- Acquisition-related contingent consideration, compensation and amortization expense was $11.4 million in the quarter and $11.9 million year to date, compared with a benefit of $0.9 million and $5.4 million, respectively, in the prior-year periods.
- On June 15, 2021, the company issued $345.0 million of 0.375% convertible senior notes due 2026 and 3.125 million common shares for $175.0 million. Proceeds funded the conversion of all Series A preferred stock: $443.8 million was paid to cash-settle 150,000 shares and 2.4 million common shares were issued upon conversion of the remaining 50,000 shares.
- The company terminated its interest-rate swap for $2.4 million, contributing to higher interest and other expense.
Guidance, outlook, commentary and risks
- Management expected approximately 3% cost-of-sales inflation in the second half of fiscal 2021, approximately $47 million of G&A per quarter, up to 14 new restaurants, approximately $16 million of preopening costs and approximately $95 million of fiscal-year cash capital expenditures. Up to two additional internationally licensed Cheesecake Factory restaurants were expected.
- Third-quarter-to-date comparable sales through July 26, 2021 increased approximately 61% for The Cheesecake Factory and 64% for North Italia versus the prior-year period; both concepts were approximately 10% above the comparable fiscal 2019 period.
- Management targets approximately 2% to 3% annual menu-price increases, unit-level cash-on-cash returns of approximately 20% to 25% for The Cheesecake Factory, approximately 35% for North Italia and 25% to 30% for FRC concepts, and longer-term annual unit growth of approximately 7% across concepts.
- Common dividends and share repurchases remained suspended, subject to future operating performance, liquidity, debt levels and credit-agreement restrictions.
- The revolving facility provides $400 million of commitments, terminates July 30, 2024, and includes covenant relief through the quarter ending December 28, 2021, subject to a $100 million monthly liquidity covenant and other restrictions. The facility is secured during the relief period.
- Key risks include renewed COVID-19 restrictions or variants, consumer-spending volatility, labor shortages and wage inflation, commodity-cost inflation, lease and occupancy costs, execution of new restaurant openings, acquisition-related obligations, debt-service and covenant requirements, potential dilution from convertible notes, and the ability to fund cash settlement or repurchase obligations under the notes.
- Pending matters include a $4.2 million California wage citation and an $8.0 million IRS tax deficiency dispute. Management had not reserved for either matter and stated that reasonably possible losses from pending matters were not expected to have a material adverse effect, although outcomes remain uncertain.
Most important facts for investors to verify
- Whether comparable sales and restaurant-level margins remain above or near pre-pandemic levels after accounting for labor availability, wage inflation and commodity costs.
- Whether the company can achieve its fiscal 2021 opening, capital-expenditure and preopening-cost plans while maintaining adequate liquidity.
- The terms, covenant limitations and potential dilution associated with the $345.0 million convertible notes, including cash-settlement requirements and conversion provisions.
- Whether the revolving facility’s covenant-relief period and liquidity requirements affect the timing of reinstating common dividends or share repurchases.
- The valuation assumptions and potential payment range for acquisition-related contingent consideration, which had an undiscounted modeled range of $0 to $162.7 million.
- Developments in the California wage citation, IRS tax dispute, COVID-19 conditions and the company’s ability to recruit and retain restaurant and bakery personnel.