The Cheesecake Factory Incorporated — Q1 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the 13 weeks ended March 31, 2015, compared with the 13 weeks ended April 1, 2014. The company operated 189 company-owned restaurants and two bakery production facilities as of May 8, 2015, with nine internationally licensed restaurants. Fiscal 2015 consists of 52 weeks and ends December 29, 2015.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $518.0 million | $481.4 million | +7.6% |
| Income from operations | $41.1 million | $33.1 million | +24.1% |
| Operating margin | 7.9% | 6.9% | +100 bps |
| Income before taxes | $39.2 million | $31.7 million | +23.6% |
| Net income | $28.4 million | $22.5 million | +26.2% |
| Diluted EPS | $0.56 | $0.43 | +30.2% |
| Cash provided by operations | $65.3 million | $77.1 million | Down $11.8 million |
The Cheesecake Factory restaurant segment generated $472.8 million of revenue, up from $436.6 million. Comparable sales increased 4.2%, driven by 3.3% average-check growth and 0.9% guest-traffic growth. Total operating weeks increased 5.0%. Grand Lux Cafe comparable sales decreased 1.9%.
Cost of sales improved to 24.4% of revenue from 24.8%; labor improved slightly to 33.0% from 33.1%; other operating costs improved to 23.8% from 24.0%; and G&A improved to 6.4% from 6.5%. The effective tax rate declined to 27.4% from 28.9%.
At March 31, 2015, cash and cash equivalents were $39.5 million, compared with $58.0 million at December 30, 2014. Total assets were $1.129 billion and stockholders’ equity was $506.5 million. The company had $25.0 million of borrowings under its unsecured $200 million revolving credit facility, $21.2 million of standby letters of credit, and $153.8 million of net borrowing availability. The company was in compliance with its debt covenants.
Capital expenditures were $24.2 million, producing reported quarterly free cash flow of approximately $41.2 million before financing and other items. Financing uses included $80.4 million of treasury-stock purchases and $8.4 million of dividends. The company paid a quarterly dividend of $0.165 per share.
Material changes versus the prior comparable period
- Revenue increased $36.5 million, primarily from comparable-sales growth and a 5.0% increase in Cheesecake Factory operating weeks.
- Net income increased $5.9 million and diluted EPS increased $0.13, aided by higher revenue, modest operating-cost leverage, lower preopening costs, and a lower tax rate.
- Operating cash flow declined to $65.3 million from $77.1 million, primarily reflecting changes in accrued expenses and other working-capital items.
- The company borrowed $25.0 million under its credit facility to fund part of a new $75.0 million accelerated share repurchase program. It repurchased approximately 1.7 million shares for $80.4 million during the quarter.
- Preopening costs declined to $1.5 million from $2.2 million; no company-owned restaurant opened in Q1 2015, compared with one in Q1 2014.
- Interest and other expense increased to $1.9 million from $1.4 million, primarily because of higher interest on borrowings and asset-disposal expense.
Guidance, outlook, risks, contingencies, and unusual items
Management estimated Q2 2015 diluted EPS of $0.59 to $0.62, based on comparable-sales growth of 1.5% to 2.5%. Fiscal 2015 diluted EPS guidance was $2.18 to $2.27, also based on comparable-sales growth of 1.5% to 2.5%. Management expected food-cost inflation of 0% to 1%, approximately 3% wage inflation, a 27% to 28% corporate tax rate, and operating-margin improvement versus fiscal 2014.
The company planned to open as many as 11 company-owned restaurants in fiscal 2015, including at least one Grand Lux Cafe, and as many as three licensed restaurants in the Middle East and Mexico. Fiscal 2015 cash capital expenditures were estimated at $120 million to $130 million, excluding $16.2 million of expected non-capitalizable preopening costs.
Management expected to use substantially all free cash flow and employee stock-option proceeds for dividends and share repurchases and expected to repay the $25.0 million facility balance during fiscal 2015. Management believed cash, operating cash flow, available borrowings, and landlord contributions would be sufficient over the next 12 months to fund planned capital allocation.
- Commodity prices, particularly food costs, remain volatile; the company does not currently use financial instruments to hedge commodity prices.
- A hypothetical 1% increase in interest rates would increase annual interest expense by approximately $250,000 on the March 31 debt balance.
- The company disclosed several California employment-related class actions. No reserves were recorded because the company assessed potential payments as not currently estimable or probable; the company intends to defend the matters.
- The company stated that pending litigation, audits, and claims were not expected to have a material adverse effect, although individual periods could be affected by changing circumstances.
- No restaurant impairment or lease-termination expense was recorded in Q1 2015; Q1 2014 included $0.2 million of such expense.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-sales growth remains within the 1.5% to 2.5% fiscal 2015 assumption and whether traffic growth continues.
- Progress toward the $2.18 to $2.27 fiscal 2015 diluted EPS guidance range and targeted operating-margin improvement.
- Food, labor, medical, occupancy, and other operating-cost trends, including the effects of commodity volatility and approximately 3% wage inflation.
- Timing and funding of planned restaurant openings and the $120 million to $130 million capital-expenditure program.
- Completion and final share count of the $75.0 million accelerated share repurchase program, including additional shares due by July 30, 2015.
- Repayment of the $25.0 million credit-facility borrowing and continued compliance with leverage, coverage, and distribution covenants.
- Developments in the disclosed employment-related litigation and any resulting reserve or cash requirements.