The Cheesecake Factory Incorporated: Q2 2013 Form 10-Q Summary
Business context and reporting period
The filing covers the 13-week quarter and 26-week year-to-date period ended July 2, 2013, with comparative periods ended July 3, 2012. Fiscal 2013 is a 52-week year ending December 31, 2013. As of August 9, 2013, the company operated 175 restaurants: 163 Cheesecake Factory, 11 Grand Lux Cafe and one RockSugar Pan Asian Kitchen, plus two bakery facilities. The company also had international licensing arrangements in the Middle East and Latin America.
The financial statements are unaudited and prepared under U.S. GAAP. The company reported that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Change |
|---|---|---|---|
| Revenue | $470.1 million | $454.7 million | +3.4% |
| Income from operations | $41.2 million | $41.0 million | +0.5% |
| Operating margin | 8.8% | 9.0% | -20 basis points |
| Net income | $28.6 million | $28.4 million | +0.6% |
| Diluted EPS | $0.52 | $0.52 | Flat |
| Cash dividends declared per share | $0.12 | None | New dividend |
| Metric | 26 weeks ended July 2, 2013 | 26 weeks ended July 3, 2012 | Change |
|---|---|---|---|
| Revenue | $933.1 million | $890.5 million | +4.8% |
| Income from operations | $78.0 million | $71.2 million | +9.5% |
| Operating margin | 8.4% | 8.0% | +40 basis points |
| Net income | $53.9 million | $49.1 million | +9.7% |
| Diluted EPS | $0.99 | $0.89 | +11.2% |
- Q2 comparable sales for Cheesecake Factory and Grand Lux Cafe restaurants increased 0.8%, driven by a 1.7% increase in average check and 0.1% favorable menu mix, partly offset by a 1.0% decline in guest traffic.
- Year-to-date comparable sales increased 1.1%; average check rose 1.8%, while guest traffic declined 0.7%. Northeast storms reduced first-half comparable sales by approximately 0.3%.
- Q2 cost of sales improved to 24.0% of revenue from 24.4%, primarily because of lower grocery costs. Labor costs increased slightly to 32.2% from 32.1%, and other operating costs rose to 24.2% from 23.9%.
- Year-to-date operating cash flow was $88.6 million, compared with $74.3 million in the prior-year period. Capital expenditures were $37.5 million versus $34.4 million.
- Cash and cash equivalents increased to $130.6 million at July 2, 2013, from $83.6 million at January 1, 2013.
- The company had no borrowings under its $200 million revolving credit facility and reported $179 million of net borrowing availability after $21 million of standby letters of credit. It was in compliance with all stated financial covenants.
- Adjusted debt and EBITDAR ratios were 2.7 and 2.9, respectively, compared with covenant limits of 4.0 and a minimum of 1.9.
- Stockholders’ equity increased to $634.3 million from $579.7 million at year-end, while treasury stock purchases totaled $45.3 million during the first half.
Material changes versus the prior comparable period
- Revenue growth was supported by higher comparable checks, additional restaurant operating weeks and international bakery and licensing activity, but traffic declined.
- Q2 operating margin contracted modestly despite lower food costs because of higher labor-related costs, natural gas rates, marketing costs and restaurant management bonuses.
- First-half profitability and EPS benefited from revenue growth, lower relative G&A expense, lower food costs and reduced preopening costs.
- External bakery sales were $11.7 million in Q2, essentially flat year over year, but increased to $26.0 million year to date from $22.6 million due primarily to shipment timing and international licensee demand.
- The company incurred $1.5 million of Q2 impairment expense related to the planned relocation of two restaurants. It expects an additional $0.4 million of related expense in the second half of fiscal 2013.
- Three Grand Lux Cafe locations were closed in March 2013. First-quarter 2013 included $0.6 million of future rent and closing costs; management does not expect further charges for those locations.
- The company began paying quarterly dividends in fiscal 2012. The board subsequently increased the quarterly dividend to $0.14 per share for Q3 2013, a 17% increase.
- The board increased the share repurchase authorization by 7.5 million shares to 48.5 million shares. Cumulative repurchases through July 2, 2013 totaled 35.7 million shares costing $877.1 million.
Guidance, outlook, risks and unusual items
- Fiscal 2013 adjusted diluted EPS guidance was $2.10 to $2.15, based on comparable sales growth of 1.0% to 1.5%. The guidance excludes impairment and lease-termination charges.
- Management expected fiscal 2013 operating margin expansion of approximately 50 basis points, food-cost inflation of approximately 2% and a corporate tax rate of approximately 29%.
- The company planned to open as many as eight to ten new restaurants, including two to three relocations, and expected one additional internationally licensed restaurant.
- Planned fiscal 2013 cash capital expenditures were $100 million to $110 million, with expected free cash flow of $100 million to $115 million. Management planned to return as much as $200 million to shareholders through dividends and share repurchases.
- Q3 2013 diluted EPS guidance was $0.51 to $0.53, based on comparable sales ranging from flat to 1.0%.
- Key operating risks include consumer discretionary spending, competition, traffic trends, weather, commodity costs, labor expenses, energy costs, regulation and the ability to execute new restaurant openings and international expansion.
- The company faces class actions and collective arbitrations concerning alleged employee uniform-purchase requirements in California and several other states. No reserve was recorded because potential payments could not be estimated and the company intends to defend the matters vigorously.
- Commodity exposure is concentrated in volatile categories such as certain fish and dairy products. The company does not use financial instruments to hedge commodity prices.
- Changes in the value of variable life insurance contracts supporting the Executive Savings Plan affected other expense. A hypothetical 10% decline in the related asset and liability values would not affect pretax income but would reduce net income by approximately $1.3 million based on July 2, 2013 balances.
- On August 8, 2013, the company agreed to waive lease renewal options at one location in exchange for a $4.875 million payment from the landlord.
Important facts for investors to verify
- Whether comparable-sales growth can improve despite continued guest-traffic declines.
- Whether the projected 50-basis-point fiscal 2013 margin expansion is achieved amid labor, energy and commodity-cost pressure.
- Progress toward the $2.10 to $2.15 adjusted EPS outlook and the $0.51 to $0.53 Q3 EPS guidance.
- Actual restaurant opening, relocation and capital-expenditure spending compared with the stated plans.
- The sustainability of shareholder returns given dividend increases, share repurchases and credit-facility distribution restrictions.
- Potential financial exposure from employee uniform-related litigation and other ordinary-course claims.
- The timing and recurring nature of international licensing royalties and bakery sales.
- The impact of the $4.875 million landlord payment and any additional restaurant relocation impairment expense.