The Cheesecake Factory Incorporated: Fiscal 2015 Q3 Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks and 39 weeks ended September 29, 2015, compared with the corresponding periods ended September 30, 2014. Fiscal 2015 is a 52-week year ending December 29, 2015. As of November 5, 2015, the Company operated 197 company-owned restaurants, nine internationally licensed restaurants, and two bakery production facilities. The reportable operating segment is The Cheesecake Factory restaurant business; Grand Lux Cafe, RockSugar Pan Asian Kitchen, bakery, and international licensing operations are included in Other.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 39 Weeks 2015 | 39 Weeks 2014 |
|---|---|---|---|---|
| Revenue | $526.7 million | $499.1 million | $1,573.8 million | $1,477.0 million |
| Income from operations | $35.6 million | $34.2 million | $126.5 million | $109.9 million |
| Operating margin | 6.8% | 6.8% | 8.0% | 7.4% |
| Net income | $26.2 million | $24.2 million | $89.3 million | $76.8 million |
| Net margin | 5.0% | 4.9% | 5.7% | 5.2% |
| Diluted EPS | $0.52 | $0.48 | $1.76 | $1.48 |
| Cash flow from operations | Not separately provided | Not separately provided | $161.1 million | $161.0 million |
| Capital expenditures | Not separately provided | Not separately provided | $108.6 million | $87.9 million |
Q3 revenue increased 5.5%, while net income increased approximately 8%. For the first 39 weeks, revenue increased 6.6%, net income increased approximately 16%, and diluted EPS increased approximately 19%. Q3 comparable sales increased 2.2% at The Cheesecake Factory, driven by a 2.7% increase in average check, partly offset by a 0.5% decline in guest traffic. Year-to-date comparable sales increased 3.0%, with flat traffic.
Cost of sales improved to 23.9% of revenue in Q3 from 24.9% in the prior-year quarter, primarily because lower dairy and seafood costs more than offset higher meat costs. Labor expense remained 32.7% of revenue. General and administrative expense increased to 6.3% from 5.9%, primarily due to higher corporate performance bonus accruals. The effective tax rate was 25.0% in Q3 and 27.0% year to date.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $29.6 million at September 29, 2015, compared with $58.0 million at December 30, 2014.
- The Company had no outstanding funded debt and $177.7 million of net availability under its $200 million unsecured revolving credit facility, after $22.3 million of standby letters of credit.
- The Company was in compliance with its credit facility covenants; the reported Net Adjusted Leverage Ratio was 2.6 versus a maximum of 4.0, and the EBITDAR Ratio was 3.0 versus a minimum of 1.9.
- Operating cash flow of $161.1 million was substantially unchanged year over year, while capital expenditures increased to $108.6 million.
- The Company used $92.0 million for treasury stock purchases and paid $26.2 million in cash dividends during the first 39 weeks.
- Cumulative repurchases totaled 43.7 million shares for $1.246 billion through September 29, 2015. The Company declared a further $0.20-per-share dividend payable November 23, 2015.
Material changes and unusual items
- The Company recorded a $6.0 million pre-tax impairment charge related to the RockSugar Pan Asian Kitchen restaurant. The after-tax impact was $3.6 million, or $0.07 per diluted share.
- Adjusted diluted EPS was $0.59 for Q3 and $1.83 year to date, compared with reported diluted EPS of $0.52 and $1.76, respectively.
- The Company opened two The Cheesecake Factory restaurants in Q3. Year to date, it opened four The Cheesecake Factory restaurants and one Grand Lux Cafe.
- The Company borrowed and repaid $25.0 million under its revolving facility during the first three quarters, primarily to fund part of a $75 million accelerated share repurchase program.
- External bakery sales declined to $11.7 million in Q3 from $12.6 million, but increased to $36.6 million year to date from $35.8 million.
Outlook, commentary, and risks
For the fourth quarter of fiscal 2015, management estimated diluted EPS of $0.50 to $0.53, based on comparable sales growth of 1.0% to 2.0% at The Cheesecake Factory. For full-year fiscal 2015, adjusted diluted EPS was estimated at $2.34 to $2.37, with comparable sales growth of approximately 2.7%, food cost inflation of 0% to 1%, approximately 4% wage inflation, and an approximately 27% tax rate. Management expected up to 11 new restaurants, $130 million to $140 million of cash capital expenditures, and up to $105 million of share repurchases.
For fiscal 2016, management estimated diluted EPS of $2.56 to $2.68, including an estimated $0.05 to $0.08 benefit from the 53rd week. Assumptions included comparable sales growth of 1.5% to 2.5%, approximately 1% food cost inflation, wage inflation of 4% to 5%, and a 28% to 29% tax rate. Planned development included up to eight company-owned restaurants and up to five internationally licensed restaurants.
Principal risks include commodity price volatility, wage and benefit inflation, labor and employment litigation, workers’ compensation costs, traffic declines, competition, weather and macroeconomic conditions, restaurant execution, and the performance of new or underperforming locations. The Company disclosed multiple employment-related lawsuits; it had not reserved for certain matters and had reserved only an immaterial amount for an anticipated settlement in the Sikora and Reed matters. Management stated that pending matters were not expected to have a material adverse effect, individually or in aggregate, although future results could be affected.
Management concluded that disclosure controls were effective as of September 29, 2015 and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-sales growth and guest traffic trends support the fiscal 2015 and fiscal 2016 EPS outlooks.
- Whether labor inflation, commodity costs, workers’ compensation, and G&A growth pressure restaurant-level and consolidated margins.
- The operating performance and future capital requirements of RockSugar Pan Asian Kitchen following the $6.0 million impairment.
- Whether planned capital expenditures, dividends, and repurchases can be funded while maintaining adequate cash and credit-facility covenant headroom.
- The potential financial and operational effects of pending employment-related litigation and other contingencies.
- The pace, cost, and returns of planned restaurant openings and international licensed expansion.