The Cheesecake Factory Incorporated — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013, consisting of 52 weeks. The filing is an annual report rather than a standalone quarterly filing; fourth-quarter data are included for the quarter ended December 31, 2013.
Business context
The Company operated 181 company-owned upscale casual restaurants as of February 27, 2014: 169 The Cheesecake Factory, 11 Grand Lux Cafe and one RockSugar Pan Asian Kitchen. It also operated two bakery production facilities and licensed The Cheesecake Factory internationally. Fiscal 2013 included nine restaurant openings, three Grand Lux Cafe closures and the opening of the first company-owned restaurant outside the U.S., in Puerto Rico.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,877.9 million | $1,809.0 million | +3.8% |
| Income from operations | $161.0 million | $138.7 million | +16.0% |
| Operating margin | 8.6% | 7.7% | +0.9 percentage points |
| Net income | $114.4 million | $98.4 million | +16.2% |
| Diluted EPS | $2.10 | $1.78 | +18.0% |
| Net margin | 6.1% | 5.4% | +0.7 percentage points |
| Cash flow from operations | $204.8 million | $195.4 million | +4.8% |
| Capital expenditures | $106.3 million | $86.4 million | +23.0% |
| Cash and equivalents | $61.8 million | $83.6 million | -26.1% |
Fourth quarter: Revenue was $475.1 million, operating income was $44.4 million, net income was $33.0 million, basic EPS was $0.64 and diluted EPS was $0.62. Fourth-quarter operating income included a $3.8 million benefit from impairment and lease-termination items, which increased net income by approximately $2.3 million.
Operating drivers: Comparable restaurant sales increased 1.0%, comprising 1.8% average-check growth and a 0.8% traffic decline. Restaurant operating weeks increased 2.3%, and average sales per restaurant operating week increased approximately 2.0%. External bakery sales declined to $55.3 million from $65.2 million.
Cost of sales improved to 24.2% of revenue from 24.9%, while labor expense remained 32.1%. General and administrative expense increased to 6.1% of revenue from 5.7%, primarily due to higher stock-based compensation and professional and legal fees.
Liquidity, debt and capital allocation
- The Company had no borrowings under its unsecured revolving credit facility at year-end and had $179 million of net availability after $21 million of standby letters of credit.
- The facility matures October 16, 2018 and includes a potential $100 million commitment increase, subject to conditions. The Company was in compliance with its covenants; reported Net Adjusted Leverage and EBITDAR ratios were 2.5 and 3.0, respectively.
- Total long-term debt and deemed landlord financing liability was $68.7 million, including $66.2 million of deemed landlord financing liability.
- Operating cash flow funded significant investment, but cash declined by $21.8 million because of capital expenditures, dividends and $183.7 million of share repurchases.
- The Company declared $0.52 per share of dividends in FY2013 and repurchased 4.5 million shares. Aggregate minimum lease payments were approximately $931.0 million, including $72.2 million due in 2014.
Material changes versus the prior comparable period
- Revenue growth accelerated to 3.8% from 2.9% in FY2012, although comparable sales growth slowed to 1.0% from 1.9% and traffic shifted from a 0.7% increase to a 0.8% decrease.
- Profitability improved materially as operating margin increased to 8.6% from 7.7%, partly reflecting lower cost of sales and other operating costs as a percentage of revenue and favorable impairment and lease-termination items.
- External bakery revenue declined approximately 15.2%, primarily because of lower warehouse-club sales.
- Capital expenditures increased $19.8 million, primarily due to new restaurant development. Nine restaurants opened versus eight in FY2012.
- G&A expense increased 10.1%, exceeding revenue growth, and stock-based compensation increased to $14.1 million from $10.8 million.
- The Company entered into a new $200 million revolving credit facility in October 2013 and increased its share-repurchase authorization to 48.5 million shares.
Guidance, outlook and unusual items
- Management targeted FY2014 diluted EPS of $2.29 to $2.41, based on comparable-sales growth of 1% to 2%.
- Expected FY2014 food-cost inflation was 3% to 4%, with an estimated EPS impact of $0.07 to $0.10, driven primarily by shrimp and salmon.
- Management expected operating margins to be flat to slightly positive versus FY2013 and projected a corporate tax rate of approximately 29%.
- The Company planned 10 to 12 company-owned restaurant openings, including one relocation, and expected three to five licensed openings in the Middle East and Mexico.
- Planned FY2014 cash capital expenditures were $110 million to $120 million, excluding approximately $14.2 million of non-capitalizable preopening costs. Management expected to use substantially all free cash flow for dividends and share repurchases.
- FY2013 included a net $0.6 million credit in impairment and lease-termination expense: $3.7 million of relocation-related costs and $4.9 million of landlord-related income, along with $0.6 million of Grand Lux Cafe closing costs. An additional $0.3 million of relocation expense was expected in FY2014.
- On February 27, 2014, the Company entered into a $75 million collared accelerated share repurchase agreement, funded with cash on hand and/or temporary borrowings.
Principal risks and contingencies
- Consumer discretionary spending, guest traffic, competition, weather and changing dining preferences could pressure comparable sales.
- Food, labor, health-care, commodity and occupancy costs may increase faster than menu pricing or productivity improvements.
- Restaurant-site availability, lease renewals, construction delays, location cannibalization and execution of new openings could affect growth and returns.
- Food safety incidents, product recalls, negative publicity, brand damage and social-media events could reduce traffic and increase liabilities.
- International licensing creates risks involving regulatory compliance, supply-chain reliability, foreign markets and licensee execution.
- The Company is self-insured for significant portions of workers’ compensation, general liability, employment practices and health-care risks; accrued self-insurance liabilities were $41.1 million at year-end.
- Pending wage-and-hour and uniform-related class actions and arbitrations seek unspecified monetary damages. The Company had not reserved for potential future payments and stated that pending matters were not expected to materially affect liquidity or financial position, although outcomes remain uncertain.
- Approximately $1.03 billion of contractual obligations were disclosed, including leases, purchase obligations and uncertain tax positions.
Important facts for investors to verify
- Reconcile FY2013 and fourth-quarter results to the audited consolidated financial statements, including the benefit from impairment and lease-termination items.
- Assess whether comparable-sales growth can continue despite the FY2013 traffic decline and planned 1% to 2% annual menu price increases.
- Evaluate the effect of food-cost inflation, wage and benefit increases, and the projected 29% tax rate on FY2014 EPS guidance.
- Review the cash requirements of planned capital expenditures, dividends, share repurchases and approximately $931 million of minimum lease payments.
- Monitor compliance with credit-facility covenants and the impact of the $75 million ASR on cash, borrowings and diluted share count.
- Follow the pending labor litigation, self-insurance estimates, restaurant relocations and potential future impairment charges.
- Confirm execution of the 10-to-12-unit domestic expansion plan and the timing and quality-control implications of international licensed openings.