The Cheesecake Factory Incorporated: Q1 Fiscal 2021 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the thirteen weeks ended March 30, 2021, compared with the thirteen weeks ended March 31, 2020. The company operated 298 company-owned restaurants in the United States and Canada under The Cheesecake Factory, North Italia and Fox Restaurant Concepts brands, plus 28 international licensed Cheesecake Factory restaurants and two bakery facilities.
Operations continued to be affected by COVID-19 restrictions, although nearly all restaurants had reopened for limited indoor dining by April 27, 2021. Cheesecake Factory restaurants with reopened dining rooms operated at approximately 60% average indoor capacity at that date.
Financial Performance and Key Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $627.4 million | $615.1 million | Up 2.0% |
| Income/(loss) from operations | $8.8 million | $(190.1) million | Improved $198.9 million |
| Operating margin | 1.4% | (30.9)% | Improved 32.3 points |
| Net income/(loss) | $3.9 million | $(136.2) million | Improved $140.0 million |
| Net income/(loss) margin | 0.6% | (22.1)% | Improved 22.7 points |
| Net loss available to common stockholders | $(1.2) million | $(136.2) million | Improved $135.0 million |
| Basic and diluted loss per share | $(0.03) | $(3.11) | Improved $3.08 |
| Adjusted net income | $10.8 million | $5.9 million | Up $4.9 million |
| Adjusted net income per share | $0.20 | $0.13 | Up $0.07 |
Revenue growth reflected higher comparable restaurant sales, new openings and increased third-party bakery sales, partially offset by permanent and temporary closures. Cheesecake Factory comparable sales increased 2.8% year over year but remained 10.4% below Q1 FY2019. North Italia comparable sales increased approximately 5% year over year and remained approximately 5% below Q1 FY2019.
- Cheesecake Factory average check increased 19.6%, driven by approximately 3.0% menu pricing and a 16.6% favorable mix change.
- Cheesecake Factory customer traffic declined 16.8%, primarily because of the pandemic and the measurement effect of off-premise orders.
- Off-premise sales represented approximately 43% of restaurant sales versus 22% in the prior-year quarter.
- External bakery sales increased to $16.7 million from $13.8 million.
- Cost of sales declined to 21.7% of revenue from 22.9%; labor declined to 36.6% from 38.6%.
- Other operating costs increased to 28.9% of revenue from 27.3%, reflecting incentive compensation, sanitation and personal protective equipment costs, and marketing.
- COVID-19-related costs were $4.9 million in Q1 FY2021.
Cash Flow, Liquidity, Debt and Capital Structure
- Operating cash flow was $21.6 million, compared with $(33.0) million in the prior-year quarter.
- Capital expenditures were $7.2 million, compared with $15.8 million.
- Cash increased $27.3 million during the quarter to $181.3 million at March 30, 2021, from $154.1 million at December 29, 2020.
- Long-term debt was $280.0 million. The company had $96.6 million of net borrowing availability based on $280.0 million of debt and $23.4 million of standby letters of credit.
- The amended $400 million revolving facility terminates July 30, 2024. The company was in compliance with applicable covenants at March 30, 2021.
- A $100 million monthly liquidity covenant remains in effect until the company demonstrates compliance with specified financial covenants for the quarter ending December 28, 2021.
- Common dividends and share repurchases remained suspended to preserve liquidity. The company repurchased approximately 75,300 shares during the quarter solely for tax-withholding obligations.
- The company had $213.5 million recorded for Series A convertible preferred stock and declared a $5.1 million preferred dividend for the quarter.
The amended credit agreement suspends testing of the net adjusted leverage and EBITDAR ratios through the quarter ending December 28, 2021, while imposing additional collateral, payment and capital-allocation restrictions. The company stated that available cash, expected operating cash flow and borrowing capacity should provide adequate liquidity for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Operations returned to modest profitability after the severe pandemic-related disruption in Q1 FY2020.
- Q1 FY2020 included $191.9 million of impairment and lease termination expense, compared with $0.6 million in Q1 FY2021.
- Q1 FY2020 included a $4.5 million acquisition-related benefit; Q1 FY2021 included $0.6 million of acquisition-related expense.
- Operating cash flow improved by $54.6 million.
- Cash increased to $181.3 million from $81.0 million at March 31, 2020, aided by the prior-year preferred stock issuance, debt actions and improved operating performance.
- The company adopted ASU 2020-06 using the modified retrospective method, recording a $4.8 million cumulative adjustment to retained earnings related to convertible instrument accounting.
Guidance, Outlook, Commentary and Risks
- Second-quarter-to-date comparable sales through April 27, 2021 increased approximately 220% for The Cheesecake Factory and 336% for North Italia versus the severely disrupted 2020 comparison; increases versus Q1 FY2019 were approximately 7% and 8%, respectively.
- Management estimated approximately 2% commodity cost inflation for fiscal 2021 and expected minimum-wage impacts to be more favorable than in recent years, while noting uncertainty around hourly wage inflation.
- Management estimated general and administrative expense of approximately $47 million per quarter for the remainder of fiscal 2021.
- The company planned as many as 14 new company-owned restaurants in fiscal 2021 and as many as three international licensed Cheesecake Factory restaurants.
- Fiscal 2021 cash capital expenditures were estimated at approximately $100 million.
- Management’s longer-term objectives include restoring pre-pandemic margins, approximately 7% annual unit growth across concepts, debt repayment, and eventual reinstatement of common dividends and share repurchases.
- Key risks include changing COVID-19 restrictions and consumer behavior, labor and commodity inflation, restaurant reopening execution, debt covenant compliance, liquidity requirements, landlord and supplier stability, litigation, uncertain tax positions and the performance of North Italia and FRC brands.
- Outstanding contingencies include a $4.2 million California wage citation and an $8.0 million IRS tax deficiency matter; the company has not reserved for either matter because the outcomes and potential liabilities were not reasonably estimable.
Important Facts for Investors to Verify
- Whether comparable sales and traffic improvements persist as indoor dining capacity normalizes and off-premise sales moderate.
- The company’s ability to meet the $100 million liquidity covenant and regain compliance with leverage and EBITDAR covenants after the relief period.
- Actual cash capital expenditures, restaurant openings and associated returns on invested capital.
- Progress toward restoring pre-pandemic restaurant-level margins amid wage, commodity, occupancy and COVID-19-related costs.
- The potential dilution and cash obligations associated with the Series A preferred stock, which was convertible into approximately 9.6 million common shares, or approximately 17.1% of outstanding common stock, on an as-converted basis at quarter-end.
- The resolution and possible financial impact of the California wage citation, IRS tax dispute and other ordinary-course claims.
- Whether the company can resume common dividends and share repurchases without compromising liquidity or violating credit agreement restrictions.