Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 1, 2008 (13 weeks) and 26 weeks
Operations: Operates 143 Cheesecake Factory restaurants, 13 Grand Lux Cafes, and 1 RockSugar Pan Asian Kitchen. Also operates two bakery production facilities supplying restaurants and third-party distributors.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended July 1, 2008 |
26 Weeks Ended July 1, 2008 |
|---|---|---|
| Revenues | $407,134 | $800,937 |
| Net Income | $19,101 | $33,430 |
| Diluted EPS | $0.29 | $0.50 |
| Operating Cash Flow | N/A | $72,641 |
| Cash & Equivalents | $93,784 | $93,784 |
| Long-Term Debt | $275,000 | $275,000 |
| Operating Margin | 7.4% | 6.7% |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 9% ($407.1M) for the quarter and 10% ($800.9M) for the year-to-date compared to the prior year periods. Growth was driven by 23 new restaurant openings since the prior year quarter.
- Comparable Sales Decline: Despite revenue growth, comparable restaurant sales decreased 4.1% for the quarter and 3.1% for the year-to-date. Management attributes this to reduced traffic due to macroeconomic factors, despite effective menu price increases of approximately 1.5%.
- Profitability Pressure: Net income decreased 19% for the quarter ($19.1M vs. $23.7M) and 21% for the year-to-date ($33.4M vs. $42.1M). Operating margins compressed due to higher commodity costs (cheese, poultry, grocery) and labor expenses.
- Debt Increase: Long-term debt increased by $100 million to $275 million following an amendment to the revolving credit facility in Q1 2008, primarily to fund share repurchases.
- Capital Expenditures: Capital expenditures decreased significantly to $39.8 million for the 26-week period compared to $104.8 million in the prior year period.
Guidance, Outlook, and Risks
- Expansion Plans: Management expects to open six new Cheesecake Factory restaurants and the initial RockSugar Pan Asian Kitchen unit in fiscal 2008. Two additional openings are planned for the fourth quarter.
- Capital Allocation: The company continues to prioritize share repurchases. The Board increased the repurchase authorization to 31.0 million shares. As of July 1, 2008, 18.1 million shares had been repurchased for $430.9 million.
- Liquidity: Cash and marketable securities totaled $94.8 million. Net availability under the credit facility was $9.4 million as of July 1, 2008. Management believes current resources are sufficient for planned operations and capital expenditures.
- Legal and Tax Contingencies:
- IRS Audit: The IRS issued a Notice of Proposed Adjustment disallowing $5.1 million in executive compensation deductions related to misdated stock options. The company established a $2.2 million liability for estimated taxes and interest.
- EEOC Litigation: The EEOC filed complaints alleging sex discrimination (Cleveland) and sexual harassment/hostile work environment (Phoenix). The company denies allegations and has not reserved for future payments.
- Shareholder Derivative Actions: Settlements regarding historical stock option misdating were approved and became effective in June 2008; the company received $940,000 in repayments from directors/officers.
Investor Verification Checklist
- Comparable Sales Trend: Verify if the 4.1% decline in comparable sales stabilizes in subsequent quarters given the macroeconomic headwinds.
- Commodity Costs: Monitor the impact of rising cheese, poultry, and grocery costs on future operating margins and the effectiveness of menu price increases.
- Debt Covenants: Confirm continued compliance with debt-to-EBITDA and EBITDAR-to-interest covenants, especially given the increased debt load.
- Legal Resolutions: Track the outcome of the IRS audit regarding executive compensation deductibility and the EEOC discrimination lawsuits.
- Share Repurchase Pace: Assess the sustainability of the aggressive share repurchase program ($97M spent in the first half of 2008) against cash flow generation.