Business Context and Reporting Period
The Cheesecake Factory Incorporated filed its Form 10-K for the 52-week fiscal year ended December 29, 2015. The company operated 201 company-owned restaurants at February 25, 2016: 188 Cheesecake Factory, 12 Grand Lux Cafe and one RockSugar Pan Asian Kitchen, plus 11 internationally licensed Cheesecake Factory restaurants and two bakery facilities.
The business consists primarily of upscale-casual restaurants, vertically integrated bakery operations, external bakery sales and international licensing. Fiscal 2016 will contain 53 weeks.
Financial Performance and Key Metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $2,100.6 million | $1,976.6 million | +6.3% |
| Income from operations | $165.2 million | $144.7 million | +14.2% |
| Operating margin | 7.9% | 7.3% | +60 bps |
| Net income | $116.5 million | $101.3 million | +15.1% |
| Net margin | 5.5% | 5.1% | +40 bps |
| Diluted EPS | $2.30 | $1.96 | +17.3% |
| Cash flow from operations | $235.4 million | $239.6 million | -1.8% |
| Capital expenditures | $153.9 million | $114.0 million | +35.1% |
- The Cheesecake Factory comparable restaurant sales increased 2.6%, driven by a 3.0% increase in average check, partly offset by a 0.4% decline in customer traffic. Grand Lux Cafe comparable sales declined 2.3%.
- Cost of sales declined to 24.0% of revenue from 24.9%, primarily because lower dairy and seafood costs more than offset higher meat costs.
- Labor expense was 32.6% of revenue versus 32.7%; lower medical costs were largely offset by higher hourly wage rates.
- Other operating costs declined to 23.8% of revenue from 24.2%, aided by lower natural gas prices. General and administrative expense increased to 6.5% from 6.0%.
- External bakery sales were $52.8 million, compared with $53.2 million in 2014. Gift-card breakage revenue was $6.6 million.
- Cash and cash equivalents were $43.9 million at year-end, compared with $58.0 million in 2014. Total assets were $1.23 billion and stockholders’ equity was $588.5 million.
- Total long-term debt and deemed landlord financing liability, including the current portion, was $91.3 million. The company had no outstanding borrowings under its revolving facility at year-end, $180.0 million of net borrowing availability and $20.0 million of standby letters of credit.
- The company paid $36.0 million in dividends and repurchased $109.4 million of stock during fiscal 2015. Dividends declared increased to $0.73 per share from $0.61.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected 11 new restaurant openings in 2015 versus 10 in 2014, higher comparable sales at The Cheesecake Factory and higher operating weeks.
- Operating income and net income improved despite increased preopening costs of $16.9 million versus $14.4 million and higher general and administrative costs.
- The company recorded a $6.0 million impairment charge against the RockSugar Pan Asian Kitchen restaurant in 2015; the restaurant remained open.
- Capital expenditures increased substantially, including $104.5 million for new restaurants and $20.9 million for bakery and corporate infrastructure, including a new training center.
- The company entered into a new $200 million revolving credit facility maturing December 22, 2020. Fiscal-year borrowings of $60.0 million were fully repaid within the year.
- Share repurchases decreased to 2.1 million shares costing $104.8 million, compared with 3.1 million shares costing $143.2 million in 2014.
Guidance, Outlook, Risks and Unusual Items
- Management estimated fiscal 2016 diluted EPS of $2.56 to $2.68, including an estimated $0.05 to $0.08 benefit from the additional 53rd week.
- Fiscal 2016 guidance assumes Cheesecake Factory comparable sales growth of 1.5% to 2.5%, food costs flat as a percentage of revenue, approximately 5% wage inflation and an effective tax rate of approximately 28%.
- The company planned up to eight domestic openings, including one Grand Lux Cafe, up to four to five international licensed openings and $100 million to $110 million of cash capital expenditures.
- Management expects to use substantially all free cash flow, plus employee stock-option exercise proceeds, for dividends and share repurchases, subject to operating needs and credit-facility limits.
- Key operating risks include declining customer traffic, intense restaurant competition, wage and labor-cost inflation, commodity-price volatility, food safety incidents, adverse weather, regulatory and employment-law changes, cyber incidents, lease obligations and the ability to secure high-quality restaurant sites.
- The company is exposed to substantial fixed lease commitments: aggregate minimum lease payments were $1.014 billion, including $81.9 million due in fiscal 2016. Purchase obligations were approximately $151.0 million.
- Self-insurance liabilities were $60.0 million at year-end. Several wage-and-hour and employment-related class actions were pending; the company stated that no pending matters were expected to have a material adverse effect, although outcomes could affect future periods.
- Management and PricewaterhouseCoopers LLP concluded that disclosure controls and internal control over financial reporting were effective as of December 29, 2015.
Investor Verification Priorities
- Verify the reconciliation of reported EPS to adjusted EPS, particularly the $6.0 million RockSugar impairment and its after-tax impact.
- Assess whether comparable-sales growth can continue despite declining traffic and reliance on menu pricing and average-check increases.
- Monitor wage inflation, minimum-wage legislation, healthcare costs and commodity prices, especially dairy, produce and meat.
- Evaluate liquidity after planned capital expenditures, dividends and repurchases against only $43.9 million of cash and significant lease commitments.
- Review compliance with the revolving-credit covenants and the facility’s restrictions on dividends and share repurchases.
- Track the performance and impairment risk of Grand Lux Cafe and RockSugar Pan Asian Kitchen, as well as the timing and execution of domestic and international openings.
- Review pending employment litigation, self-insurance estimates, food-safety exposure and cybersecurity protections for potential unreserved liabilities.