Cheesecake Factory Incorporated — Form 10-Q Summary
Business Context and Reporting Period
The company operates upscale-casual restaurants, bakery facilities, consumer packaged goods activities and international licensing operations. As of May 11, 2018, it operated 214 company-owned restaurants and 21 internationally licensed Cheesecake Factory restaurants. The filing covers the thirteen weeks ended April 3, 2018, compared with the thirteen weeks ended April 4, 2017. Fiscal 2018 is a 52-week year ending January 1, 2019.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $590.7 million | $563.4 million | +4.8% |
| Income from operations | $31.6 million | $43.6 million | -27.6% |
| Operating margin | 5.3% | 7.7% | -240 basis points |
| Net income | $26.0 million | $35.0 million | -25.7% |
| Diluted EPS | $0.56 | $0.71 | -21.1% |
| Operating cash flow | $74.9 million | $48.1 million | +$26.8 million |
| Capital expenditures | $30.7 million | $19.2 million | +$11.5 million |
Revenue growth reflected positive comparable sales and new restaurant openings. Cheesecake Factory comparable sales increased 2.1%, driven by 2.7% average-check growth, partly offset by a 0.6% traffic decline. External bakery sales increased to $12.4 million from $12.2 million.
Profitability declined as labor expense increased to 35.7% of revenue from 34.4%, primarily because of higher wage rates, overtime and training. Other operating costs increased to 25.1% from 24.1%, reflecting higher marketing, repairs and maintenance, bakery overhead and self-insured workers’ compensation costs. Cost of sales was broadly stable at 23.0% versus 22.9%.
The effective tax rate decreased to 13.4% from 17.2%, primarily due to the Tax Cuts and Jobs Act. The company paid $13.2 million in dividends and repurchased $34.9 million of stock during the quarter. The declared quarterly dividend was $0.29 per share.
Liquidity, Debt and Capital Allocation
Cash and cash equivalents increased to $24.8 million at April 3, 2018, from $6.0 million at January 2, 2018. Current assets were $163.9 million and current liabilities were $344.3 million.
The company had $30.0 million outstanding under its $200 million unsecured revolving credit facility and $20.7 million of standby letters of credit, leaving net borrowing availability of $149.3 million. The facility matures December 22, 2020. The company was in compliance with its covenants, including a 2.9 net adjusted leverage ratio versus a maximum of 4.0 and a 2.7 EBITDAR ratio versus a minimum of 1.9.
Management expects fiscal 2018 capital expenditures of $80 million to $90 million and growth capital contributions to North Italia and Flower Child of $20 million to $25 million. Management expects cash, operating cash flow, available borrowings and landlord contributions to fund planned capital allocation, including dividends, repurchases, expansion and growth investments.
Material Changes Versus the Prior Comparable Period
- Revenue increased 4.8%, but operating income declined 27.6% and net income declined 25.7%.
- Operating margin contracted to 5.3% from 7.7%, primarily due to labor and other operating cost inflation.
- Operating cash flow increased substantially to $74.9 million from $48.1 million, aided by working-capital changes, including other receivables and income taxes.
- Borrowings increased from $10.0 million at January 2, 2018 to $30.0 million at April 3, 2018, partly funding stock repurchases.
- Stock repurchases increased to $34.9 million from $9.3 million, while diluted weighted-average shares declined to 46.6 million from 49.2 million.
- The company adopted the new revenue recognition standard, reducing retained earnings by $3.6 million after tax and increasing deferred revenue by $4.8 million. The first-quarter income statement impact was not material.
- No restaurant openings occurred during the quarter. The company decided to close one Cheesecake Factory restaurant in May 2018, with related costs expected in the second quarter.
Guidance, Outlook, Risks and Unusual Items
For the second quarter of fiscal 2018, management forecast diluted EPS of $0.78 to $0.82, based on comparable sales growth of 0.5% to 1.5% at Cheesecake Factory restaurants. For full-year fiscal 2018, management forecast diluted EPS of $2.62 to $2.74 and comparable sales growth of 1% to 2%.
Management expected approximately 2.5% commodity inflation, approximately 6% wage-rate inflation and an effective tax rate of 13% to 14%. The company planned to open up to four to six company-owned restaurants, including one Grand Lux Cafe and the first internally developed fast-casual location, plus up to four international licensed restaurants.
Key risks include commodity-cost volatility, wage inflation, customer traffic declines, competition, macroeconomic and weather effects, execution of new restaurant openings, legal claims and compliance with debt-facility distribution covenants. A hypothetical 1% increase in food costs would have increased quarterly cost of sales by approximately $1.4 million. A hypothetical 1% increase in interest rates would increase annual interest expense by approximately $0.3 million based on April 3, 2018 borrowings.
Several employment, wage-and-hour and payment-card lawsuits remained outstanding. Certain matters had tentative settlements or immaterial reserves; other matters had no reserve because potential losses could not be reasonably estimated. Management stated that reasonably possible losses were not expected to have a material adverse effect on financial position, results or liquidity, although individual periods could be affected.
The company expects a material increase in reported assets and liabilities when it adopts the lease accounting standard in the first quarter of fiscal 2019, with likely insignificant income-statement impact.
Important Facts for Investors to Verify
- Whether comparable-sales growth and customer traffic support the full-year guidance range.
- Whether labor, commodity, marketing and other operating-cost inflation continues to pressure operating margins.
- The sustainability of elevated share repurchases and dividends relative to operating cash flow, capital expenditures and debt balances.
- Progress and returns from planned restaurant openings, the fast-casual concept, North Italia, Flower Child and international licensing.
- The status and ultimate cost of pending employment, payment-card and tax-related proceedings.
- The balance-sheet and covenant effects of the upcoming lease-accounting adoption.
- Whether cash flow remains sufficient to fund the company’s stated capital allocation strategy without materially increasing debt.