The Cheesecake Factory Incorporated 2022 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the 53-week fiscal year ended January 3, 2023. Fiscal 2021 had 52 weeks, so comparisons include an approximately $78.4 million benefit from the additional week. The company operated 318 company-owned restaurants in the United States and Canada, including 210 The Cheesecake Factory, 33 North Italia, 35 other Fox Restaurant Concepts and 40 other locations. It also had 30 internationally licensed The Cheesecake Factory restaurants and two bakery facilities.
Key financial metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Revenue | $3,303.2 million | $2,927.5 million | 12.8% increase |
| Income from operations | $38.9 million | $82.3 million | 52.7% decrease |
| Operating margin | 1.2% | 2.8% | Down 160 basis points |
| Net income | $43.1 million | $72.4 million | 40.4% decrease |
| Net income available to common stockholders | $43.1 million | $49.1 million | 12.2% decrease |
| Diluted EPS | $0.86 | $1.01 | Decrease |
| Adjusted net income | $76.2 million | $112.8 million | 32.4% decrease |
| Adjusted diluted EPS | $1.51 | $2.13 | Decrease |
| Cash flow from operations | $161.9 million | $213.0 million | Decrease of $51.1 million |
| Capital expenditures | $112.5 million | $66.9 million | Increase of $45.5 million |
| Cash and cash equivalents | $114.8 million | $189.6 million | Decrease of $74.9 million |
The Cheesecake Factory comparable sales increased 7.0% year over year and 10.6% versus fiscal 2019. North Italia comparable sales increased approximately 15% year over year and approximately 22% versus fiscal 2019. Off-premise sales declined to approximately 25% of The Cheesecake Factory restaurant sales from 32% in fiscal 2021, but remained above the 16% fiscal 2019 level.
Cost pressure materially reduced profitability. Food and beverage costs increased to 24.6% of revenue from 22.3%, primarily from inflation exceeding price increases. Labor costs were 36.7% of revenue versus 36.6%, reflecting wage inflation offset by lower medical insurance costs. Total costs and expenses rose to 98.8% of revenue from 97.2%.
Material changes versus the prior comparable period
- Revenue growth was driven by higher comparable sales, new restaurant openings and the 53rd fiscal week.
- The company implemented menu price increases above its historical 2% to 3% annual range, including effective increases of approximately 3.25%, 4.25% and 2.8% in the first, third and fourth quarters.
- Impairment and lease termination expense increased to $31.4 million from $18.1 million, primarily involving three The Cheesecake Factory, one other FRC and three other restaurants.
- Acquisition-related contingent consideration, compensation and amortization expense declined to $13.4 million from $19.5 million; the related liability was $28.6 million at year-end.
- The company opened 13 restaurants versus 14 in fiscal 2021 and incurred $16.8 million of preopening costs versus $13.7 million.
- Quarterly common dividends resumed during fiscal 2022 after suspension beginning in fiscal 2020. The company paid $42.3 million in common dividends and repurchased 2.0 million shares for $63.1 million.
- The company entered into a new $400 million unsecured revolving credit facility, terminating October 6, 2027. Year-end borrowings were $130.0 million, with $238.5 million of net availability after standby letters of credit.
Debt, liquidity and commitments
Total consolidated indebtedness was approximately $475 million at January 3, 2023, including $345 million principal amount of 0.375% convertible senior notes due 2026 and $130 million drawn under the revolving facility. The balance sheet reported $468.0 million of long-term debt, net of note issuance costs. The revolving facility requires a maximum net adjusted leverage ratio of 4.25 and a minimum EBITDAR-to-interest-and-rent ratio of 1.90; the company was in compliance at year-end.
Undiscounted contractual obligations totaled $2.89 billion, including $2.02 billion of operating lease liabilities, $468.0 million of long-term debt, $129.9 million of purchase obligations and $252.4 million of real estate obligations. The company stated that cash, expected operating cash flow and available revolver capacity should provide adequate liquidity for the next 12 months and the foreseeable future.
Guidance, outlook, commentary and risks
For fiscal 2023, management projected revenue of approximately $3.5 billion to $3.6 billion, average The Cheesecake Factory sales per location of approximately $13 million, net income margin of approximately 4% at the midpoint, and preopening costs of approximately $24 million. Planned openings were 20 to 22 restaurants: five to six The Cheesecake Factory, five to six North Italia and 10 FRC locations. Capital expenditures were expected to be approximately $165 million to $175 million.
Management expected mid-single-digit total inflation across commodities, labor and other operating costs, with first-quarter commodity inflation of approximately 10% to 12% and labor inflation of approximately 6%. First-quarter revenue was projected at $850 million to $880 million, with net income margin of approximately 3% to 3.5%. The outlook assumes no material operating or consumer disruptions.
- Major risks include persistent commodity, wage and healthcare inflation; supply shortages; transportation disruptions; labor shortages; and delays in permits, leases and restaurant construction.
- Consumer discretionary spending may be pressured by inflation, interest rates, unemployment, economic uncertainty and changing dining preferences.
- Future dividends and share repurchases remain discretionary and are subject to cash flow, capital needs and credit agreement restrictions.
- Restaurant impairment, lease termination costs and closures may recur if locations underperform.
- The company faces food safety, public health, litigation, self-insurance, regulatory, cybersecurity, data privacy and reputational risks.
- The convertible notes and revolving facility create refinancing, covenant compliance, cash conversion and potential equity dilution risks.
- The company had no commodity hedging contracts at fiscal year-end.
Management and KPMG LLP concluded that disclosure controls and internal control over financial reporting were effective as of January 3, 2023. KPMG identified evaluation of long-lived asset impairment as the critical audit matter.
Most important facts for investors to verify
- Whether pricing actions can offset food, labor, occupancy and other inflation without materially reducing traffic or mix.
- Whether fiscal 2023 revenue, margin, opening and capital expenditure targets are achieved amid permitting and supply chain delays.
- Cash generation relative to planned capital expenditures, dividends, repurchases, acquisition-related payments and debt obligations.
- Compliance with the revolving facility covenants and the company’s ability to refinance or settle the 2026 convertible notes.
- The performance and required contingent consideration of the FRC portfolio, including the potential $0 to $276.0 million undiscounted range of outcomes modeled at year-end.
- Trends in restaurant-level impairment, lease obligations, self-insurance liabilities and pending employment-related litigation.