The Cheesecake Factory Incorporated — 2020 Q3 Form 10-Q Summary
Business context and reporting period
The filing covers the thirteen and thirty-nine weeks ended September 29, 2020, compared with the periods ended October 1, 2019. Fiscal 2020 was materially affected by COVID-19-related dining-room closures, capacity restrictions and shifts toward off-premise sales. The Company owned and operated 295 restaurants across The Cheesecake Factory, North Italia and other Fox Restaurant Concepts brands, plus two bakery facilities, as of the filing date.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | First 39 weeks 2020 | First 39 weeks 2019 |
|---|---|---|---|---|
| Revenue | $517.7 million | $586.5 million | $1,428.7 million | $1,788.7 million |
| Operating income/(loss) | $(34.9) million | $27.0 million | $(308.6) million | $97.2 million |
| Net income/(loss) | $(28.3) million | $16.1 million | $(221.0) million | $78.6 million |
| Net income/(loss) available to common stockholders | $(33.2) million | $16.1 million | $(239.8) million | $78.6 million |
| Diluted EPS | $(0.76) | $0.36 | $(5.47) | $1.76 |
| Operating margin | (6.7%) | 4.6% | (21.6%) | 5.4% |
| Net margin | (5.5%) | 2.7% | (15.5%) | 4.4% |
- Q3 Cheesecake Factory comparable sales declined 23.3%, driven by a 40.4% traffic decline, partly offset by 17.1% average-check growth. Off-premise sales represented approximately 45% of restaurant sales.
- For the first 39 weeks, Cheesecake Factory comparable sales declined 31.1%, traffic declined 43.5%, and off-premise sales represented approximately 43% of restaurant sales.
- Q3 cost ratios increased to 38.7% of revenue for labor, 30.7% for other operating costs and 7.3% for G&A, versus 36.4%, 25.5% and 6.2%, respectively, in the prior-year quarter.
- Q3 included $10.4 million of impairment and lease-termination expense. The first 39 weeks included $204.7 million of such expense, primarily related to goodwill, trade names, trademarks, licensing agreements and restaurant assets.
- Adjusted net loss was $17.7 million, or $(0.33) per adjusted share, in Q3; adjusted net loss was $57.8 million, or $(1.17) per adjusted share, for the first 39 weeks. These non-GAAP measures exclude selected COVID-19, impairment, acquisition and preferred-stock-related items.
Cash flow, debt and liquidity
- Operating cash flow was $(32.7) million for the first 39 weeks, compared with $116.2 million of cash provided in the prior-year period. Q3 operating cash flow was $2.9 million positive.
- Capital expenditures were $38.3 million for the first 39 weeks, compared with $46.7 million in the prior year.
- Cash and cash equivalents were $243.8 million at September 29, 2020, versus $58.4 million at December 31, 2019. The increase was primarily funded by preferred-stock issuance and credit-facility borrowings.
- Long-term debt was $376.0 million at quarter-end under the $400 million unsecured revolving facility. Net borrowing availability was only $0.6 million after outstanding debt and $23.4 million of standby letters of credit. Liquidity, defined under the amended facility, was $242.7 million, and the Company was in compliance with applicable covenants.
- The May 2020 facility amendment provided covenant relief through the period specified in the agreement and imposed minimum liquidity requirements, capital-expenditure limits and restrictions on dividends, repurchases, acquisitions and additional debt.
- In October 2020, the Company repaid $96.0 million of facility borrowings, reducing debt to $280.0 million.
- The Company issued $200.0 million of Series A convertible preferred stock in April 2020, net of $10.3 million of issuance costs. The preferred stock carries a 9.5% annual dividend, payable in cash or in kind, and was convertible at $22.23 per common share; approximately 9.4 million common shares would have been issuable upon conversion at September 29, 2020.
Material changes versus the prior comparable period
- Revenue declined 11.7% in Q3 and 20.1% for the first 39 weeks, while the Company shifted from operating profit to operating loss.
- COVID-19 caused temporary closures, capacity restrictions, lower traffic, higher fixed-cost deleverage and additional sanitation, personal protective equipment and employee-benefit costs.
- The Company recorded $204.7 million of impairment and lease-termination expense during the first 39 weeks, compared with none in the prior-year period. Intangible assets declined to $253.6 million from $437.2 million at December 31, 2019.
- The North Italia and Fox Restaurant Concepts acquisitions, completed October 2, 2019, contributed $63.9 million of Q3 revenue and $185.1 million of revenue for the first 39 weeks, but also added operating complexity and acquisition-related obligations.
- The common-stock dividend and share repurchase program were suspended to preserve liquidity. The Company had cumulatively repurchased 53.0 million shares for $1.696 billion through quarter-end.
- Lease concessions were obtained from various landlords; $7.6 million of rent payments was deferred, the majority due in fiscal 2021.
Guidance, outlook, commentary and risks
- For Q4 fiscal 2020, assuming comparable sales remain approximately 7% below the prior year and current dining-room capacity restrictions continue, management expected positive operating profit, earnings per share and operating cash flow. Planned Q4 capital expenditures were $10 million to $15 million.
- Management estimated fiscal 2021 commodity inflation of approximately 2%, potential opening of 12 to 14 restaurants, and approximately $105 million of capital expenditures, subject to pandemic conditions.
- Management stated that margins and average unit volumes were expected to substantially recover toward pre-COVID levels by mid-fiscal 2021 in the impairment assumptions, but emphasized that actual outcomes could differ significantly.
- Management expected approximately $40 million of cash tax refunds from CARES Act net operating loss carrybacks. The Company also deferred $20.5 million of payroll taxes and recognized $8.5 million of employee-retention credits.
- Key risks include renewed restaurant closures, capacity restrictions, weaker consumer spending, labor and supply disruptions, landlord disputes or eviction proceedings, covenant compliance after relief expires, limited credit availability, further impairments, commodity inflation and dilution or required payments related to the preferred stock.
- 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 or were being contested.
Most important facts for investors to verify
- Whether restaurant capacity restrictions, traffic trends and off-premise sales support the Q4 assumption of approximately negative 7% comparable sales.
- Actual Q4 operating cash flow, profitability and capital expenditures versus management’s outlook.
- Post-October debt repayment, available revolver capacity and compliance with liquidity and future leverage covenants.
- Timing and amount of expected CARES Act tax refunds and deferred payroll-tax payments.
- Potential dilution, dividend accruals and redemption or change-of-control obligations associated with the Series A preferred stock.
- Whether additional restaurant closures, lease terminations or impairment charges occur as pandemic conditions evolve.
- The status and potential financial impact of the California wage citation and IRS tax litigation.
- The filing states that disclosure controls were effective, but the Company had not fully evaluated acquisition-related changes to internal control over financial reporting.