The Cheesecake Factory Incorporated: Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2020; 52 weeks. The filing is an annual report, although the request identifies 2020 Q4. Fourth-quarter results are included where disclosed.
Business Context
The Company operated 294 company-owned restaurants across The Cheesecake Factory, North Italia, Fox Restaurant Concepts and other brands in the United States and Canada, plus 27 internationally licensed The Cheesecake Factory restaurants. It also operated two bakery facilities. Fiscal 2020 results were materially affected by COVID-19 restaurant closures, capacity limits, furloughs and the shift toward off-premise dining.
- Off-premise sales represented approximately 43% of restaurant sales, compared with 16% in fiscal 2019.
- The Cheesecake Factory restaurants accounted for 206 of the 294 company-owned locations.
- The Company completed the North Italia and Fox Restaurant Concepts acquisition in October 2019, making fiscal 2020 the first full year including the acquired businesses.
Financial Performance and Liquidity
| Metric | Fiscal 2020 | Fiscal 2019 | Change or comment |
|---|---|---|---|
| Revenue | $1,983.2 million | $2,482.7 million | Down 20.1% |
| Operating income/(loss) | $(347.4) million | $103.6 million | Operating margin declined to (17.5%) from 4.2% |
| Net income/(loss) | $(253.4) million | $127.3 million | Net margin declined to (12.8%) from 5.1% |
| Loss available to common stockholders | $(277.1) million | $127.3 million | Basic and diluted loss per share was $(6.32) |
| Adjusted net loss | $(74.9) million | $116.4 million | Excludes selected COVID-19, impairment, acquisition and preferred-stock items |
| Cash flow from operations | $2.9 million | $218.8 million | Down $215.9 million |
| Capital expenditures | $50.3 million | $73.8 million | Reduced in response to COVID-19 |
| Cash and cash equivalents | $154.1 million | $58.4 million | Increased by $95.7 million |
| Long-term debt | $280.0 million | $290.0 million | Revolving facility balance at year-end |
The Cheesecake Factory comparable restaurant sales declined 28.2%, driven by a 41.5% decline in customer traffic, partly offset by 13.3% average-check growth. Average-check growth reflected approximately 3.1% menu pricing and a 10.2% favorable mix shift, principally from off-premise orders.
Cost pressures and sales deleverage materially reduced margins. Cost of sales increased to 23.1% of revenue from 22.6%; labor expenses increased to 39.3% from 36.3%; other operating costs increased to 31.1% from 25.5%; and general and administrative expenses increased to 7.9% from 6.5%.
Material Changes Versus Fiscal 2019
- Revenue decreased $499.5 million, primarily because of COVID-19-related comparable-sales declines.
- The Company recorded $219.3 million of impairment and lease-termination expenses, compared with $18.2 million in fiscal 2019. The charges included $79.4 million of goodwill impairment, $101.0 million of trade-name and trademark impairment, and restaurant-level impairment and closure costs.
- Interest and other expense increased to $8.6 million from $2.5 million because of higher borrowings.
- Fiscal 2019 included a $39.2 million gain on investments in unconsolidated affiliates; no comparable gain occurred in fiscal 2020.
- The Company issued $200 million of Series A convertible preferred stock in April 2020, incurring $10.3 million of issuance costs and recording $13.5 million of paid-in-kind dividends.
- The quarterly common-stock dividend and share repurchases were suspended in March 2020. Only $0.36 per share was declared for fiscal 2020.
- The Company opened seven restaurants in fiscal 2020, compared with nine in fiscal 2019, including one Cheesecake Factory location versus five in the prior year.
Debt, Liquidity and Commitments
- The unsecured revolving credit facility provides total commitments of $400 million and terminates July 30, 2024.
- At December 29, 2020, $280.0 million was outstanding, with $23.4 million of standby letters of credit and $96.6 million of net borrowing availability.
- The Company reported liquidity of $249.5 million and compliance with applicable covenants at year-end.
- The May 2020 amendment provided temporary covenant relief and imposed restrictions on capital expenditures, dividends, repurchases, additional debt and acquisitions.
- Total undiscounted contractual obligations were $2.58 billion, including $2.04 billion of operating lease obligations, $280.0 million of debt, and $39.8 million of deferred acquisition consideration.
- The Company expects approximately $36 million of cash tax refunds from fiscal 2020 net operating loss carrybacks, subject to filing and final tax determinations.
Guidance, Outlook and Management Commentary
- Management targeted approximately 2% commodity-cost inflation in fiscal 2021 and expected hourly wage inflation to be somewhat more favorable than in recent years, subject to pandemic developments.
- Depending on the pandemic, management expected to open 12 to 15 new restaurants in fiscal 2021, including two to three Cheesecake Factory, six North Italia and four to six FRC locations, plus as many as three international licensed locations.
- Fiscal 2021 net capital expenditures were projected at $100 million to $105 million, in addition to $17.3 million of deferred consideration payable to FRC sellers.
- Longer-term objectives included restoring pre-COVID restaurant margins, repaying revolver borrowings, reopening dividend and repurchase programs, and pursuing aggregate annual unit growth of approximately 7% across concepts.
- Management stated that available cash, expected operating cash flow, anticipated tax refunds and available revolver capacity were expected to provide adequate liquidity for the next 12 months.
Key Risks, Contingencies and Unusual Items
- COVID-19 restrictions, restaurant closures, capacity limits, changing consumer behavior, staffing constraints and supply disruptions could continue to impair sales, cash flow and liquidity.
- Labor-cost inflation, minimum-wage changes, healthcare costs, commodity-price volatility and lease obligations remain significant margin risks.
- The Company relies on third-party delivery, distribution, technology and payment providers; vendor failures or cybersecurity incidents could disrupt operations and create liabilities. A SolarWinds-related penetration was identified, but the Company reported no malware activation or data exfiltration.
- Series A preferred stock carries a 9.5% annual dividend, senior liquidation rights, conversion rights at $22.23 per share and potential redemption obligations. At year-end, it was convertible into approximately 9.4 million common shares, or 17.1% of outstanding common stock on an as-converted basis.
- The Company disclosed a $4.2 million California wage citation and an $8.0 million IRS tax deficiency dispute; no reserves were recorded because outcomes could not be reasonably estimated or the Company believed its position was supportable.
- Future impairment charges, restaurant closures, lease-termination costs and additional acquisition-related obligations remain possible.
Investor Verification Checklist
- Verify the pace and profitability of sales recovery, including the sustainability and economics of the elevated off-premise mix.
- Reconcile reported loss to adjusted loss and assess whether impairment, COVID-19 and acquisition-related exclusions are genuinely nonrecurring.
- Monitor revolver availability, covenant testing after the relief period, interest costs and the Company’s ability to reduce debt.
- Assess the cash cost, dilution and redemption risk associated with the Series A preferred stock.
- Track restaurant openings, comparable sales, labor availability, wage inflation and progress toward margin recovery.
- Review the expected $36 million tax refund, deferred FICA obligations, deferred acquisition consideration and total lease commitments.
- Evaluate the integration and performance of North Italia and FRC, including the risk of further goodwill or intangible-asset impairments.