CHEESECAKE FACTORY INC annual report, FY2021

The Cheesecake Factory Incorporated: FY2021 Form 10-K Summary

Business context and reporting period

The filing covers the 52-week fiscal year ended December 28, 2021, rather than a standalone fourth quarter. The company operates experiential dining, bakery, licensing and consumer packaged goods businesses. At year-end it operated 306 company-owned restaurants in the U.S. and Canada, including 208 The Cheesecake Factory, 29 North Italia and 69 other FRC and other concept locations, plus 29 internationally licensed The Cheesecake Factory restaurants.

Fiscal 2021 reflected recovery from the severe COVID-19 disruption in fiscal 2020. Nearly all restaurants were operating without indoor capacity restrictions by year-end, although staffing shortages, supply-chain disruption, wage inflation and changing public-health requirements continued to affect operations.

Financial performance and key metrics

Metric	FY2021	FY2020	Change
Revenue	$2.928 billion	$1.983 billion	+47.6%
Income from operations	$82.3 million	$(347.4) million	Returned to profit
Income before taxes	$71.6 million	$(356.0) million	Returned to profit
Net income	$72.4 million	$(253.4) million	Returned to profit
Net income available to common stockholders	$49.1 million	$(277.1) million	Returned to profit
Diluted EPS	$1.01	$(6.32)	Improved materially
Adjusted net income	$112.8 million	$(74.9) million	Improved materially
Adjusted diluted EPS	$2.13	$(1.49)	Improved materially
Cash flow from operations	$213.0 million	$2.9 million	+$210.1 million
Capital expenditures	$66.9 million	$50.3 million	+$16.6 million
Cash and cash equivalents	$189.6 million	$154.1 million	+$35.5 million

Reported net margin was approximately 2.5%, compared with a negative 12.8% in fiscal 2020. Income from operations represented 2.8% of revenue, compared with negative 17.5% in fiscal 2020. Cost of sales declined to 22.3% of revenue from 23.1%; labor declined to 36.6% from 39.3%; other operating costs declined to 27.0% from 31.1%; and general and administrative expense declined to 6.4% from 7.9%.

The Cheesecake Factory comparable sales increased 44.0% versus fiscal 2020 and 3.3% versus fiscal 2019. Traffic increased 41.4% and average check increased 2.6% versus fiscal 2020.
North Italia comparable sales increased approximately 48% versus fiscal 2020 and approximately 7% versus fiscal 2019.
Off-premise sales represented approximately 32% of restaurant sales, down from 43% in fiscal 2020 but above the 16% pre-pandemic level in fiscal 2019.
External bakery sales were $66.2 million, compared with $66.6 million in fiscal 2020.
Impairment and lease termination expense fell to $18.1 million from $219.3 million, while acquisition-related contingent consideration, compensation and amortization expense increased to $19.5 million from a $3.9 million benefit.

Balance sheet, debt and liquidity

Total assets were $2.798 billion and stockholders’ equity was $330.2 million at December 28, 2021.
Consolidated long-term debt was $466.0 million, including $130.0 million outstanding under the revolving facility and $336.0 million net carrying value of convertible notes.
The company issued $345.0 million of 0.375% convertible senior notes due 2026 and $175.0 million of common stock in June 2021. Net proceeds were used primarily to settle or convert the Series A preferred stock and reduce revolving borrowings.
The $400 million revolving credit facility had $240.1 million of net borrowing availability, after $130.0 million of borrowings and $29.9 million of standby letters of credit. Reported liquidity was $443.7 million, and the company was in compliance with its covenants at year-end.
Operating lease liabilities totaled approximately $1.350 billion on a present-value basis, with undiscounted future operating lease payments of $2.005 billion.
The common-stock dividend and share repurchase programs remained suspended, although the board was evaluating possible reinstatement in fiscal 2022.

Material changes versus the prior comparable period

Business activity normalized substantially from fiscal 2020, producing a $945 million revenue increase and a return to positive operating income and net income.
Operating leverage improved across food, labor, occupancy, general and administrative and depreciation expense categories, although wage rates, overtime and training costs increased.
The company reopened development activity, opening 14 restaurants in fiscal 2021 versus seven in fiscal 2020.
The Series A convertible preferred stock was eliminated through a $443.8 million cash-settled conversion of 150,000 shares and conversion of the remaining 50,000 shares into approximately 2.4 million common shares.
Cash from operations recovered to $213.0 million, but financing cash flow was negative $108.8 million due primarily to preferred-stock settlement and $150.0 million of revolving debt repayment.
The company adopted ASU 2020-06 and recorded a $4.8 million cumulative adjustment to retained earnings.

Guidance, outlook and management commentary

Fiscal 2022 revenue was projected at approximately $3.3 billion to $3.4 billion, assuming no material COVID-19 disruption and extrapolating recent trends.
The company expected The Cheesecake Factory average sales per location to exceed $12 million, including the impact of the 53rd operating week.
Management projected low-double-digit commodity inflation, approximately 5% net labor inflation, other operating costs of 25.0% to 25.5% of revenue, G&A expense of approximately $210 million, preopening costs of approximately $19 million and depreciation and amortization of approximately $90 million.
Management planned 17 to 19 new restaurants in fiscal 2022: five The Cheesecake Factory, five to seven North Italia and seven FRC locations. Planned capital expenditures were approximately $150 million.
The company had 4.75% menu pricing in The Cheesecake Factory concept as of the February 2022 increase and indicated that additional pricing would depend on inflation and customer price sensitivity.
Management expects first-quarter fiscal 2022 restaurant-level margins to be the lowest of the year because of the timing of pricing actions and the cadence of commodity inflation.
Longer-term targets include approximately 7% annual unit growth across concepts, mid-teens company-level return on invested capital and a 13% to 14% average total shareholder return objective, defined as EPS growth plus dividend yield.

Risks, contingencies and unusual items

COVID-19 remains a material risk through potential restrictions, reduced consumer traffic, staffing disruptions, health-related closures and additional safety costs.
Supply shortages, transportation delays, commodity volatility and labor inflation may pressure margins. The company had no commodity hedging contracts at year-end.
The company is exposed to financial covenant, refinancing and liquidity risk. The revolving facility terminates July 30, 2024, and the convertible notes mature June 15, 2026.
Convertible notes may create dilution and require cash settlement of at least the principal amount upon conversion. Fundamental changes may require cash repurchase of the notes.
The company has substantial lease commitments, with total contractual obligations of $2.789 billion, including $2.005 billion of operating lease payments.
Acquisition-related contingent consideration and compensation liabilities were $23.9 million at year-end, with an undiscounted potential outcome ranging from zero to $204.0 million based on management estimates and performance targets.
Fiscal 2021 included $18.1 million of impairment and lease termination expense, $19.5 million of acquisition-related contingent consideration and compensation expense, $4.9 million of COVID-19-related costs, a $2.4 million interest-rate-swap termination cost and a $7.1 million uncertain-tax-position adjustment included in adjusted earnings.
Pending matters include a $4.2 million California wage citation and an IRS dispute involving an $8.0 million tax deficiency claim; management states that reasonably possible losses from pending matters are not expected to be material, but outcomes may change.
The company depends on its brands, third-party delivery and technology providers, two bakery facilities, leased restaurant locations and its ability to recruit and retain restaurant personnel.

Important facts for investors to verify

Reconcile reported and adjusted earnings, particularly impairment, acquisition-related charges, COVID-19 costs, preferred-stock effects, swap termination costs and uncertain tax positions.
Assess whether comparable-sales growth and traffic can be sustained after the favorable comparison with pandemic-affected fiscal 2020.
Monitor commodity inflation, wage inflation, staffing levels, supply-chain execution and the effectiveness of menu pricing in protecting restaurant-level margins.
Verify fiscal 2022 revenue, margin, unit-opening and capital-expenditure guidance against actual results, including the 53rd fiscal week.
Review debt maturities, conversion and repurchase provisions, covenant requirements and available liquidity under the revolving facility.
Evaluate the cash burden and flexibility created by substantial operating leases, planned capital spending and potential acquisition-related contingent payments.
Track reinstatement of common dividends and share repurchases, which remained subject to board approval, operating performance, covenants and liquidity.