Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 29, 2009 (Third Quarter of Fiscal 2009)
Operations: Operates 160 upscale, full-service casual dining restaurants (146 The Cheesecake Factory, 13 Grand Lux Cafe, 1 RockSugar Pan Asian Kitchen) and two bakery production facilities.
Key Financial Metrics
| Metric | 13 Weeks Ended Sep 29, 2009 | 39 Weeks Ended Sep 29, 2009 |
|---|---|---|
| Revenues | $400.6 million | $1,201.4 million |
| Net Income | $16.3 million | $42.8 million |
| Diluted EPS | $0.27 | $0.71 |
| Operating Margin | 6.8% | 6.2% |
| Cash from Operations | N/A (Quarterly) | $146.5 million |
| Cash & Equivalents | $82.3 million | $82.3 million |
| Long-Term Debt | $150.0 million | $150.0 million |
| Capital Expenditures | $7.4 million | $24.4 million |
Material Changes vs. Prior Period
- Revenue: Decreased 1% in the quarter and 0.4% year-to-date compared to the prior year. Comparable restaurant sales declined 2.8% in the quarter and 3.1% year-to-date, primarily due to reduced guest traffic driven by macroeconomic factors.
- Profitability: Net income increased 38% in the quarter ($16.3M vs $11.8M) and decreased 5% year-to-date ($42.8M vs $45.2M). Operating margins improved to 6.8% in the quarter from 5.2% in the prior year.
- Cost Management: Cost of sales as a percentage of revenue decreased to 23.9% (quarter) and 24.4% (YTD) from 25.7% in both prior periods, driven by commodity price normalization and cost initiatives.
- Debt Reduction: The company repaid $125 million of its credit facility during the first three quarters of 2009, reducing outstanding debt from $275 million to $150 million.
- Interest Expense: Increased significantly due to a $2.0 million charge in the quarter (and $5.3 million YTD) to unwind interest rate collars and higher interest rates following a credit facility amendment.
Guidance, Outlook, and Risks
- Fiscal 2009 Outlook: Management anticipates diluted EPS between $0.89 and $0.91, assuming comparable restaurant sales of approximately -3% for the full year. Capital expenditures are expected to range from $35 million to $40 million.
- Cash Flow: Expected free cash flow for fiscal 2009 is projected at $125 million to $130 million.
- Expansion: No new restaurant openings are planned for the remainder of fiscal 2009; one opening occurred in Q1.
- Risks & Contingencies:
- Landlord Bankruptcy: 11% of restaurants are in locations owned by landlords who have filed for Chapter 11 protection (e.g., General Growth Properties). No leases have been rejected to date.
- Legal Proceedings: Ongoing IRS audit regarding executive stock option deductibility (reserve of $2.4 million); multiple class-action lawsuits regarding wage and hour laws and EEOC charges regarding discrimination and harassment.
- Asset Impairment: Monitoring three Grand Lux Cafe locations with a combined carrying value of $28.7 million for potential impairment triggers.
Investor Verification Checklist
- Verify the impact of the $5.3 million non-cash charge related to unwinding interest rate collars on net income and cash flow.
- Monitor the status of the IRS audit regarding executive compensation deductibility and potential additional tax liabilities.
- Assess the financial stability of landlords representing 11% of the restaurant portfolio currently in bankruptcy proceedings.
- Review the trajectory of comparable restaurant sales to confirm if the -3% full-year guidance holds amidst macroeconomic pressures.
- Confirm the company's ability to maintain debt covenants (Debt/EBITDA ratio) given the current leverage and interest rate environment.