The Cheesecake Factory Incorporated — Q1 2016 Form 10-Q Summary
Business context and reporting period
The filing covers the thirteen weeks ended March 29, 2016, compared with the thirteen weeks ended March 31, 2015. Fiscal 2016 contains 53 weeks and ends January 3, 2017. As of May 5, 2016, the company operated 201 company-owned restaurants, 11 internationally licensed Cheesecake Factory restaurants, and two bakery production facilities.
Financial performance and position
- Revenue: $553.7 million, up 6.9% from $518.0 million. Cheesecake Factory comparable sales increased 1.7%, while Grand Lux Cafe comparable sales increased 3.1%.
- Profitability: Income from operations was $48.6 million versus $41.1 million. Net income was $34.0 million versus $28.4 million. Diluted earnings per share increased to $0.68 from $0.56.
- Margins: Operating margin improved to 8.8% from 7.9%; net margin improved to 6.1% from 5.5%. Cost of sales declined to 23.6% of revenue from 24.4%, while labor expense increased to 33.5% from 33.0%.
- Cash flow: Operating cash flow was $76.3 million versus $65.3 million. Capital expenditures were $22.4 million, producing approximately $53.9 million of operating cash flow less capital expenditures.
- Liquidity: Cash and cash equivalents were $53.9 million at March 29, 2016, compared with $43.9 million at December 29, 2015.
- Debt and credit: The company had no outstanding borrowings under its $200 million unsecured revolving credit facility and $180.0 million of net borrowing availability, after $20.0 million of standby letters of credit. The facility matures December 22, 2020.
- Debt covenants: The company reported a Net Adjusted Leverage Ratio of 2.5 and an EBITDAR Ratio of 3.0, compared with covenant limits of 4.0 maximum and 1.9 minimum, respectively.
- Capital returns: The company paid $9.9 million in dividends and repurchased approximately 1.0 million shares for $50.0 million. The quarterly dividend was increased to $0.20 per share from $0.165 in the prior-year quarter.
Material changes versus the prior comparable period
- Revenue growth reflected new restaurant operating weeks, 1.7% comparable sales growth at Cheesecake Factory restaurants, and higher average checks, partly offset by a 0.5% decline in customer traffic.
- Cheesecake Factory operating weeks increased 5.9% to 2,436, and average sales per restaurant operating week increased 1.2% to $208,000.
- Labor costs increased as a percentage of revenue primarily because of higher hourly wage rates, partially offset by lower group medical costs.
- Other operating costs improved as a percentage of revenue due primarily to lower natural gas and electricity costs and favorable workers’ compensation and general liability insurance expenses.
- Preopening costs increased to $2.3 million from $1.5 million because one restaurant opened in the current quarter versus none in the prior-year quarter.
- The effective tax rate declined to 26.6% from 27.4%, primarily because of the favorable resolution of a state income tax examination.
- Share repurchases declined from $80.4 million in the prior-year quarter to $50.0 million, while the company had no credit-facility borrowings compared with $25.0 million of borrowings in the prior-year period.
Guidance, outlook, risks, contingencies, and unusual items
- Second-quarter outlook: Diluted EPS guidance was $0.69 to $0.72, based on Cheesecake Factory comparable sales ranging from flat to up 1.0%.
- Fiscal 2016 outlook: Diluted EPS guidance was $2.61 to $2.70, based on Cheesecake Factory comparable sales growth of 1.0% to 2.0%. The additional fiscal week was expected to contribute approximately $0.05 to $0.08 per diluted share.
- Management expected food costs to be approximately flat as a percentage of revenue, wage inflation of approximately 5%, and an effective tax rate of approximately 27% to 28%.
- The company planned to open as many as eight company-owned restaurants, including one Grand Lux Cafe, and expected four to five additional international licensed openings.
- Fiscal 2016 cash capital expenditures were expected to range from $100 million to $110 million, excluding approximately $14.3 million of non-capitalizable preopening costs.
- Management expected to use substantially all free cash flow plus employee stock-option proceeds for dividends and share repurchases and believed available cash, operating cash flow, credit capacity, and landlord contributions would fund planned capital needs over the next 12 months.
- Key operating risks include commodity-price volatility, wage inflation, customer traffic declines, competition, macroeconomic and weather conditions, and execution of new restaurant openings. The company did not use financial instruments to hedge commodity prices.
- Pending employment-related class actions included matters involving uniforms, overtime, rest breaks, wage statements, employee classification, and California PAGA claims. The company had reserved an immaterial amount for the Sikora/Reed settlement and had not reserved for the other identified matters. Management stated that pending matters were not expected to have a material adverse effect, although quarterly results could be affected by changes in circumstances.
- The company adopted certain accounting updates in the quarter without material impact. It had not determined the effect or transition method for forthcoming share-based payment and lease-accounting standards.
Important facts for investors to verify
- Whether comparable-sales growth and customer traffic trends support the full-year EPS guidance.
- Whether approximately 5% wage inflation and commodity-price changes pressure labor and food-cost margins.
- The timing, cost, and returns of the planned restaurant openings and the $100 million to $110 million capital-spending program.
- Compliance with credit-facility covenants as dividends and share repurchases continue.
- Developments in the pending wage-and-hour and employment litigation, including the scheduled final approval hearing for the Sikora/Reed settlement.
- The sustainability of cash generation given the company’s stated intention to return substantially all free cash flow to shareholders.