The Cheesecake Factory Incorporated: Fiscal 2023 Form 10-K Summary
Business context and reporting period
The filing covers the 52-week fiscal year ended January 2, 2024, rather than a standalone fourth quarter. The Company operates 334 company-owned restaurants in the United States and Canada: 216 The Cheesecake Factory, 37 North Italia, 32 Flower Child and 41 other Fox Restaurant Concepts locations. It also has 33 internationally licensed The Cheesecake Factory restaurants and two bakery facilities.
Fiscal 2022 contained 53 weeks, including approximately $78.4 million of revenue from the additional week; fiscal 2023 contained 52 weeks. KPMG LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Key financial metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Revenue | $3,439.5 million | $3,303.2 million | +4.1% |
| Income from operations | $108.6 million | $38.9 million | +178.8% |
| Operating margin | 3.2% | 1.2% | +2.0 percentage points |
| Net income | $101.4 million | $43.1 million | +135.1% |
| Diluted EPS | $2.07 | $0.86 | +140.7% |
| Adjusted net income | $131.8 million | $76.2 million | +72.9% |
| Adjusted diluted EPS | $2.69 | $1.51 | +78.1% |
| Cash flow from operations | $218.4 million | $161.9 million | +$56.5 million |
| Capital expenditures | $151.6 million | $112.5 million | +34.8% |
| Cash and cash equivalents | $56.3 million | $114.8 million | -$58.5 million |
Net income margin was 2.9%, compared with 1.3% in fiscal 2022. The effective tax rate was negative 1.3%, reflecting a $1.3 million tax benefit, compared with a negative 31.1% rate and $10.2 million benefit in the prior year.
- Food and beverage costs declined to 23.4% of revenue from 24.6%, primarily because menu pricing exceeded inflation.
- Labor expenses declined to 35.7% of revenue from 36.7%, reflecting pricing leverage and improved staffing levels despite wage inflation.
- Other operating costs increased slightly to 26.8% of revenue from 26.7%, primarily due to higher marketing and Cheesecake Rewards launch costs.
- Impairment and lease termination expense was $29.5 million, compared with $31.4 million, and preopening costs increased to $25.4 million from $16.8 million.
Operating performance and material changes
- The Cheesecake Factory comparable sales increased 3.0%, driven by a 4.0% increase in average check, including 9.4% menu pricing partly offset by mix, while customer traffic declined 1.0%. Off-premise sales represented approximately 22% of restaurant sales, down from 25% in fiscal 2022 but above 16% in fiscal 2019.
- North Italia comparable sales increased approximately 8%, with average check up approximately 5% and traffic up 3%. North Italia revenue increased to $258.9 million from $228.6 million.
- Flower Child revenue increased 11.0% to $127.5 million, while Other FRC revenue increased 11.1% to $263.9 million.
- The Company opened 16 restaurants in fiscal 2023, compared with 13 in fiscal 2022: six The Cheesecake Factory, three North Italia, six Other FRC and one Flower Child.
- Advertising expense increased to $34.7 million from $24.0 million, primarily due to the national Cheesecake Rewards launch.
- The Company recorded $29.5 million of impairment and lease termination expense involving three The Cheesecake Factory locations, one North Italia location, one Other FRC location and two other restaurant lease terminations.
- Fiscal 2023 included $11.7 million of acquisition-related contingent consideration, compensation and amortization expense, compared with $13.4 million.
Debt, liquidity and capital allocation
- Total consolidated debt was approximately $470.0 million at January 2, 2024, including $345.0 million principal amount of 0.375% convertible senior notes due June 2026 and $130.0 million outstanding under the revolving facility, net of issuance costs where applicable.
- The $400 million unsecured Revolver Facility matures October 6, 2027. Net borrowing availability was $236.5 million after outstanding borrowings and $33.5 million of standby letters of credit. The Company was in compliance with all covenants at year-end.
- Key revolving facility covenants include a maximum net adjusted leverage ratio of 4.25 and minimum EBITDAR-to-interest-and-rent ratio of 1.90.
- Operating lease liabilities totaled approximately $1.39 billion on a present-value basis, with undiscounted operating lease payments of approximately $2.08 billion.
- The Company paid $53.2 million of common dividends and repurchased $46.1 million of common stock during fiscal 2023. Approximately 4.5 million shares remained authorized for repurchase at year-end.
- Management stated that cash, expected operating cash flow and available revolver capacity should provide adequate liquidity for the next 12 months and the foreseeable future.
Guidance, outlook, risks and unusual items
- Fiscal 2024 revenue is expected to be approximately $3.6 billion, assuming no material operating or consumer disruptions.
- Management expects fiscal 2024 total inflation across commodities, labor and other operating expenses in the low- to mid-single-digit range, G&A expense at approximately the fiscal 2023 percentage of sales, preopening costs of approximately $28 million and net income margin of approximately 4.25%.
- The Company plans to open as many as 22 restaurants in fiscal 2024 and expects approximately $180 million to $200 million of capital expenditures, with approximately 75% of openings planned for the second half of the year.
- First-quarter fiscal 2024 revenue guidance is $875 million to $895 million, with an expected net income margin of approximately 3.5% at the midpoint. Management cited quarter-to-date inclement weather as a factor.
- Management implemented a February 2024 2.5% price increase, resulting in approximately 4.5% pricing for The Cheesecake Factory menu, and will evaluate additional summer pricing based on inflation.
- Principal risks include discretionary consumer spending pressure, wage and benefit inflation, commodity volatility, supply-chain disruption, labor availability and organizing, food safety, adverse weather, lease renewals, delays in permits and landlord delivery, cyber and privacy incidents, litigation, international licensee performance and covenant or refinancing risk.
- The Company has no commodity hedging contracts in place as of fiscal year-end. A hypothetical 1% increase in food costs would have increased fiscal 2023 food and beverage expense by approximately $8.0 million; a hypothetical 1% increase in interest rates would have increased annual interest expense by approximately $1.3 million.
- Contingent consideration related to the FRC acquisition was $25.5 million at year-end, with a modeled undiscounted outcome range of $2.6 million to $235.4 million.
- Pending litigation and claims are described as ordinary-course matters that management does not currently expect to have a material adverse effect on financial position, results of operations or liquidity, although outcomes could affect a particular period.
Most important facts for investors to verify
- Whether pricing can offset persistent labor, commodity, insurance and occupancy inflation without further weakening customer traffic or mix.
- The sustainability of the fiscal 2023 margin recovery after adjusting for the unusually low effective tax rate and excluding impairment and acquisition-related items.
- Comparable-sales trends, traffic, average check and off-premise mix across The Cheesecake Factory and the faster-growing North Italia and FRC concepts.
- Execution of the plan for up to 22 new restaurants and $180 million to $200 million of fiscal 2024 capital spending, including permitting and landlord-readiness delays.
- Liquidity after dividends, share repurchases, capital expenditures, FRC-related payments and the June 2026 convertible-note maturity.
- Compliance with the Revolver Facility covenants and the availability of the $236.5 million reported borrowing capacity.
- Potential impairment charges, lease obligations, self-insurance liabilities, contingent FRC consideration and employment or privacy litigation.
- The impact of the February 2024 dividend and any resulting adjustment to the convertible notes’ conversion rate and price.