Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008 (13 weeks) and Thirty-Nine Weeks Ended September 30, 2008
Operations: Operates 144 Cheesecake Factory restaurants, 13 Grand Lux Cafes, and one RockSugar Pan Asian Kitchen unit, alongside two bakery production facilities.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Sep 30, 2008 | 13 Weeks Ended Oct 2, 2007 | 39 Weeks Ended Sep 30, 2008 | 39 Weeks Ended Oct 2, 2007 |
|---|---|---|---|---|
| Revenues | $405,116 | $375,536 | $1,206,053 | $1,105,286 |
| Net Income | $11,783 | $18,524 | $45,213 | $60,638 |
| Diluted EPS | $0.19 | $0.26 | $0.69 | $0.81 |
| Operating Margin | 5.2% | 7.4% | 6.2% | 8.0% |
| Cash from Operations (39 weeks) | $114,782 (vs. $86,392 prior year) | |||
| Cash & Equivalents (Sep 30, 2008) | $55,011 | |||
| Long-Term Debt | $275,000 (Credit Facility) |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 8% in the quarter and 9% for the 39-week period, driven primarily by new restaurant openings ($44.1M and $131.6M respectively).
- Comparable Sales Decline: Comparable restaurant sales decreased 4.7% in the quarter and 3.7% for the 39-week period. Management attributes this to reduced traffic caused by macroeconomic factors.
- Profitability Compression: Net income decreased 36% in the quarter and 25% for the 39-week period. Operating margins contracted due to higher commodity costs (produce, cheese, poultry), increased labor costs (minimum wage hikes), and de-leveraging of fixed costs.
- Capital Expenditures: Capital expenditures decreased significantly to $56.9M for the 39-week period compared to $143.8M in the prior year, reflecting fewer new openings.
- Debt Levels: Long-term debt increased by $100 million to $275 million to fund share repurchases.
Guidance, Outlook, and Risks
- Share Repurchase Suspension: Effective October 16, 2008, the company temporarily suspended its share repurchase program and terminated its Rule 10b5-1 plan to maintain capital flexibility due to the global financial crisis.
- Expansion Outlook: The company plans to open one additional Cheesecake Factory restaurant in the fourth quarter of 2008. Total fiscal 2008 capital expenditure estimates range from $75 million to $80 million.
- Legal Contingencies:
- IRS Audit: The IRS has disallowed a $5.1 million deduction for executive stock option compensation. The company has reserved $2.3 million for estimated taxes and interest.
- EEOC Charges: The EEOC has filed charges alleging sex discrimination and a hostile work environment. The company denies these allegations and has not reserved for future payments.
- Market Risks: Significant exposure to macroeconomic conditions affecting consumer spending and commodity price volatility (particularly fresh produce and dairy).
Investor Verification Checklist
- Liquidity Position: Verify the impact of the suspended share repurchase program on future cash flow and the remaining $9.4 million availability on the credit facility.
- Comparable Sales Trend: Monitor if the decline in comparable sales (traffic) stabilizes or worsens given the macroeconomic environment.
- Commodity Costs: Assess the ability to pass on rising food costs (cheese, produce) to consumers via menu price increases without further impacting traffic.
- Legal Reserves: Track the resolution of the IRS audit regarding executive compensation deductibility and the status of EEOC litigation.
- Debt Covenants: Confirm continued compliance with debt-to-EBITDA covenants as earnings fluctuate.