Business Context and Reporting Period
The Cheesecake Factory Incorporated operates upscale casual dining restaurants and bakery production facilities. As of August 5, 2011, it operated 165 restaurants, two bakery facilities, and two licensed bakery cafes. This unaudited Form 10-Q covers the 13 and 26 weeks ended June 28, 2011, compared with the comparable periods ended June 29, 2010. Fiscal 2011 is a 53-week year.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | Change |
|---|
| Revenue | $430.7 million | $418.9 million | 2.8% increase |
| Income from operations | $35.2 million | $37.3 million | 5.7% decrease |
| Operating margin | 8.2% | 8.9% | Down 70 basis points |
| Net income | $24.7 million | $19.2 million | 28.7% increase |
| Diluted EPS | $0.42 | $0.32 | Increase of $0.10 |
| Net margin | 5.7% | 4.6% | Up 110 basis points |
| Metric | First Half 2011 | First Half 2010 | Change |
|---|
| Revenue | $849.5 million | $824.3 million | 3.1% increase |
| Income from operations | $65.0 million | $66.0 million | 1.5% decrease |
| Operating margin | 7.7% | 8.0% | Down 30 basis points |
| Net income | $45.2 million | $37.9 million | 19.3% increase |
| Diluted EPS | $0.76 | $0.62 | Increase of $0.14 |
| Net margin | 5.3% | 4.6% | Up 70 basis points |
- Q2 comparable sales at The Cheesecake Factory and Grand Lux Cafe increased 2.1%; Cheesecake Factory comparable sales rose 2.3%, while Grand Lux Cafe sales were flat.
- First-half comparable sales increased 1.8%; Cheesecake Factory sales rose 2.2%, while Grand Lux Cafe sales declined 1.9%.
- Q2 cost of sales increased to 25.5% of revenue from 24.5%, reflecting higher dairy, fish, shrimp, and grocery costs. Labor improved slightly to 32.4% from 32.5%.
- Cash provided by operating activities was $93.8 million versus $76.1 million in the first half of 2010. Capital expenditures were $30.2 million versus $17.9 million.
- Cash and cash equivalents declined to $58.9 million at June 28, 2011 from $81.6 million at December 28, 2010, primarily because of $95.0 million of share repurchases and $30.2 million of capital expenditures.
- The company had no borrowings under its $200 million revolving credit facility and reported $181 million of net availability after $19 million of standby letters of credit. Adjusted Debt and EBITDAR ratios were both 2.8, compared with covenant limits of 4.0 and a minimum EBITDAR ratio of 1.9.
- Total assets were $995.7 million and stockholders' equity was $556.7 million at June 28, 2011.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher comparable restaurant sales, two additional restaurants in the trailing 15-month period, and modest bakery growth.
- Operating income declined despite revenue growth because commodity inflation increased cost of sales and preopening costs were higher.
- Net income benefited substantially from lower interest expense. Q2 2010 included a $7.4 million pretax charge to unwind an interest rate collar and average debt of $92.5 million; Q2 2011 had no revolving-credit borrowings.
- First-half share repurchases totaled 3.2 million shares for $95.0 million. The weighted-average basic share count declined to 57.5 million from 59.3 million, supporting EPS growth.
- Restaurant capital expenditures increased to $26.9 million in the first half from $16.4 million, consistent with planned expansion.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management projected Q3 comparable sales growth of 1.5% to 3.0% and diluted EPS of $0.36 to $0.39.
- Full-year fiscal 2011 diluted EPS guidance was $1.62 to $1.70, based on comparable sales growth of 1.5% to 2.5%.
- Management planned to open seven restaurants during fiscal 2011, including six in the second half, and expected cash capital expenditures of $75 million to $85 million.
- Planned fiscal 2011 share repurchases were increased to $125 million to $150 million, subject to performance, market conditions, available cash, and credit-facility restrictions.
- Management expected a 27% to 28% tax rate, approximately $3 million to $5 million of cost savings, a 1.25% menu price increase, and continued food-cost pressure. Cost of sales was expected to be 70 to 90 basis points higher year over year in Q3.
- Principal operating risks include commodity-price volatility, labor and occupancy costs, consumer discretionary spending, competition, weather, regulatory requirements, and the uncertain timing of bakery shipments. The company cannot contract for long periods for certain fish and dairy products.
- The company monitors a small number of cash-flow-negative restaurants for potential impairment; no impairment charge was reported in the filing.
- Contingencies include an unresolved IRS Section 162(m) matter with a $1.4 million reserve, EEOC discrimination matters, and California wage-and-hour litigation. Management had not reserved for certain EEOC and wage-and-hour matters and believed existing proceedings would not materially affect financial position, results, or liquidity.
- The company stated that no material changes had occurred to the risk factors disclosed in its 2010 Form 10-K. Disclosure controls were considered effective, and no material changes to internal control over financial reporting were identified.
Important Facts for Investors to Verify
- Whether comparable-sales momentum and traffic trends support the 1.5% to 2.5% full-year guidance.
- Whether commodity inflation, particularly dairy and seafood, causes the projected margin pressure or exceeds planned cost savings and menu pricing.
- Execution of the planned restaurant openings and the associated preopening and capital expenditures.
- Cash usage from the planned $125 million to $150 million repurchase program relative to operating cash flow and the $181 million available credit capacity.
- Progress and potential financial exposure from the IRS, EEOC, and California wage-and-hour matters.
- Whether the 53rd fiscal week produces the expected benefit incorporated in full-year guidance.
