The Cheesecake Factory Incorporated 2021 Q3 10-Q Summary
Business context and reporting period
The filing covers the 13 and 39 weeks ended September 28, 2021, compared with the periods ended September 29, 2020. Fiscal 2021 is a 52-week year ending December 28, 2021. The company operated 308 company-owned restaurants in the United States and Canada, including The Cheesecake Factory, North Italia and FRC brands, plus 29 internationally licensed Cheesecake Factory restaurants and two bakery facilities.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 39 Weeks 2021 | 39 Weeks 2020 |
|---|---|---|---|---|
| Revenue | $754.5 million | $517.7 million | $2,150.8 million | $1,428.7 million |
| Income/(loss) from operations | $31.4 million | $(34.9) million | $81.3 million | $(308.6) million |
| Net income/(loss) | $32.7 million | $(28.3) million | $70.3 million | $(221.0) million |
| Net income/(loss) available to common stockholders | $32.7 million | $(33.2) million | $45.8 million | $(239.8) million |
| Diluted EPS | $0.64 | $(0.76) | $0.96 | $(5.47) |
| Operating margin | 4.1% | (6.7)% | 3.8% | (21.6)% |
| Net margin | 4.3% | (5.5)% | 3.3% | (15.5)% |
- Q3 revenue increased 45.7%; year-to-date revenue increased 50.5%, primarily reflecting the severe COVID-19 disruption in the prior-year periods.
- The Cheesecake Factory comparable sales increased 41.1% in Q3 and 48.0% year to date versus 2020, and were 8.3% and 1.9% above the corresponding 2019 periods, respectively. North Italia comparable sales increased approximately 38% in Q3 and 53% year to date versus 2020.
- Q3 cost of sales was 22.5% of revenue, labor was 37.1%, other operating costs were 26.7%, and G&A was 6.1%. Each was lower as a percentage of revenue than in the prior-year quarter, primarily due to sales leverage.
- Cash provided by operating activities was $119.2 million year to date, versus cash used of $32.7 million in the prior-year period. Capital expenditures were $49.2 million.
- Cash and cash equivalents were $131.0 million at September 28, 2021, down from $154.1 million at December 29, 2020. Liquidity was reported at $373.1 million at September 30, 2021.
- Long-term debt was $465.5 million, including $130.0 million outstanding under the revolving facility and $335.5 million net carrying value of convertible notes. The company also reported approximately $475.0 million of consolidated debt principal.
Material changes versus the prior comparable period
- Results recovered from the pandemic-affected 2020 periods, with a return to operating and net profitability and substantially improved margins.
- The company issued $345.0 million of 0.375% convertible senior notes due 2026 and 3.125 million common shares for $175.0 million on June 15, 2021.
- Proceeds were used in part to repay $150.0 million of revolving debt and fund the conversion of Series A preferred stock. The company paid $443.8 million for the cash-settled conversion of 150,000 preferred shares and converted the remaining 50,000 shares into approximately 2.4 million common shares.
- The Series A preferred stock balance was zero at September 28, 2021, compared with $218.2 million at December 29, 2020.
- The company terminated its interest-rate swap in June 2021 at a cost of approximately $2.4 million. Year-to-date acquisition-related contingent consideration and compensation expense increased to $12.6 million from a $4.0 million benefit in the prior-year period, primarily due to an amendment extending the measurement period through fiscal 2026.
- Prior-year year-to-date impairment and lease termination expense of $204.7 million was largely absent in 2021; 2021 year-to-date expense was $0.6 million.
Guidance, outlook, commentary and risks
- Fourth-quarter comparable sales through November 2, 2021 increased approximately 20% versus 2020 and 10.5% versus 2019 for The Cheesecake Factory; North Italia increased approximately 20% and 14.5%, respectively.
- Management estimated fourth-quarter cost-of-sales inflation of approximately 6%, G&A of approximately $47 million, preopening costs of approximately $5 million and a tax rate of approximately 5%. Labor was expected to be slightly favorable to Q3 as a percentage of sales, with other operating expenses favorable by up to 0.75% of revenue.
- For fiscal 2022, management planned up to 20 new restaurants and approximately $150 million of cash capital expenditures. Expected openings included five Cheesecake Factory, seven North Italia and eight FRC restaurants.
- Management cited labor shortages, wage inflation, supply-chain disruption, commodity inflation, changing consumer behavior and the continuing COVID-19 pandemic as significant uncertainties. Pricing of approximately 3% was in place for The Cheesecake Factory, with additional pricing possible if cost pressures persisted.
- The revolving facility provides $400 million of commitments and had $240.1 million of net borrowing availability at September 28, 2021. Covenant relief and a $100 million monthly liquidity covenant applied through the stated relief period; the company reported compliance with applicable covenants.
- Common dividends and share repurchases remained suspended, other than share withholding transactions, and future capital returns remain subject to performance, liquidity and debt covenants.
- Material contingencies include a $4.2 million California wage citation and an $8.0 million IRS tax deficiency dispute. The company had not reserved for either matter because the outcomes were not reasonably estimable.
Important facts for investors to verify
- Whether sales recovery and comparable-sales momentum continue after the favorable COVID-19 comparison periods.
- The durability of restaurant-level margins amid labor shortages, wage increases, food inflation and supply-chain constraints.
- Compliance with the revolving facility’s liquidity and leverage-related requirements after the covenant relief period.
- Cash requirements and potential dilution associated with the 2026 convertible notes, including conversion or fundamental-change provisions.
- The timing, cost and returns of the planned fiscal 2022 restaurant openings and approximately $150 million capital program.
- The status and potential exposure from the California wage citation, IRS tax dispute and acquisition-related contingent consideration, whose modeled undiscounted outcomes ranged from zero to $162.7 million.