Business Context and Reporting Period
The Cheesecake Factory Incorporated filed an unaudited Form 10-Q for the thirteen weeks ended April 2, 2013, compared with the thirteen weeks ended April 3, 2012. As of May 10, 2013, the company operated 174 restaurants and two bakery production facilities. The report covers fiscal 2013, a 52-week year ending December 31, 2013.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $463.0 million | $435.8 million | 6.2% increase |
| Income from operations | $36.8 million | $30.2 million | 21.7% increase |
| Operating margin | 7.9% | 6.9% | 100 basis-point increase |
| Net income | $25.3 million | $20.7 million | 22.0% increase |
| Diluted EPS | $0.47 | $0.37 | 27.0% increase |
| Cash provided by operations | $45.1 million | $41.4 million | 8.9% increase |
| Capital expenditures | $14.6 million | $16.3 million | Decrease |
| Cash and cash equivalents | $87.1 million | $41.3 million at prior-year quarter-end | Current balance |
Cost of sales remained 24.7% of revenue. Labor expense improved to 32.6% from 32.8%, other operating costs improved to 24.0% from 24.3%, and general and administrative expense improved to 6.2% from 6.6%. The effective tax rate was 28.7% in both periods.
The company had no borrowings under its $200 million revolving credit facility. Net borrowing availability was $179 million after $21 million of standby letters of credit. The company reported an adjusted debt ratio of 2.7 versus a maximum covenant ratio of 4.0 and an EBITDAR ratio of 2.9 versus a minimum of 1.9.
Material Changes Versus the Prior Comparable Period
- Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased 1.4%, reflecting 1.8% menu pricing, partly offset by a 0.4% decline in guest traffic. Northeast storms reduced comparable sales by approximately 0.6%.
- Comparable sales at The Cheesecake Factory increased 1.6%, while Grand Lux Cafe comparable sales declined 0.9%.
- Revenue benefited from approximately $2 million of sales shifting from the second quarter into the first quarter because of the timing of spring break and Easter.
- Total restaurant operating weeks increased 3.6% to 2,291, following eight new restaurant openings during the trailing 15-month period. No company-owned restaurants opened in the first quarter of 2013.
- External bakery sales increased to $14.2 million from $10.8 million, primarily because of the timing of shipments to the Middle Eastern licensee and distributor accounts.
- Preopening costs declined to $1.3 million from $2.1 million.
- The company recorded $0.6 million of future rent and closing costs related to the discontinuation of three Grand Lux Cafe locations. Management stated that no further charges were expected for these locations.
- The company paid a $0.12-per-share dividend and repurchased approximately 1.2 million shares for $42.0 million during the quarter. Cumulative repurchases totaled 35.7 million shares costing $873.8 million.
Guidance, Outlook, Risks and Unusual Items
Management projected fiscal 2013 diluted EPS of $2.12 to $2.18, based on comparable restaurant sales growth of 1.5% to 2.5%. The outlook excludes the $0.6 million of first-quarter Grand Lux Cafe closing costs and represents expected EPS growth of 13% to 16% over fiscal 2012.
- Expected fiscal 2013 operating-margin expansion: approximately 50 basis points.
- Expected food-cost inflation: approximately 2.5%; expected corporate tax rate: approximately 29%.
- Planned company-owned restaurant openings: eight to ten, including two or three relocations.
- Expected international licensed openings: up to three.
- Expected cash capital expenditures: $100 million to $120 million.
- Expected free cash flow: $85 million to $110 million, with the majority planned for dividends and share repurchases.
- Second-quarter 2013 diluted EPS guidance: $0.55 to $0.57, based on comparable sales growth of 1.0% to 2.0%.
Key risks include discretionary consumer spending, economic conditions, weather, competition, labor and commodity costs, food and energy availability, government regulation, and volatility in fish and dairy prices that cannot be contracted for extended periods. The company does not hedge commodity prices with financial instruments.
Beginning April 11, 2013, the company faced a California class-action lawsuit alleging violations related to employee uniform purchases. Similar litigation and arbitrations were pending in other states. The company had not reserved for potential payments and stated that pending matters were not expected to have a material adverse effect, although future developments could affect results.
Management concluded that disclosure controls were effective as of April 2, 2013, and reported no material changes in internal control over financial reporting. The first-quarter financial statements were unaudited and interim results are not necessarily indicative of full-year results.
Investor Verification Checklist
- Verify whether comparable-sales growth, guest traffic, and menu pricing trends support the fiscal 2013 EPS outlook.
- Monitor commodity, labor, occupancy, and other operating costs for potential pressure on the targeted 50-basis-point margin expansion.
- Confirm the timing and funding of the planned $100 million to $120 million capital program and eight to ten restaurant openings.
- Assess the sustainability of dividends and share repurchases given credit-facility distribution limits and planned expansion spending.
- Review developments in the uniform-related litigation and any resulting reserves or settlements.
- Evaluate the timing and volatility of external bakery sales and international licensing royalties.