The Cheesecake Factory Incorporated: Q1 Fiscal 2014 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended April 1, 2014, compared with the 13 weeks ended April 2, 2013. The company operated 181 company-owned restaurants as of May 9, 2014: 169 Cheesecake Factory, 11 Grand Lux Cafe and one RockSugar Pan Asian Kitchen, plus two bakery facilities. The company also had international licensing operations in the Middle East, Mexico and Chile.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $481.4 million | $463.0 million | 4.0% increase |
| Income from operations | $33.1 million | $36.8 million | 10.1% decrease |
| Operating margin | 6.9% | 7.9% | Down 100 basis points |
| Net income | $22.5 million | $25.3 million | 11.0% decrease |
| Diluted EPS | $0.43 | $0.47 | Decrease |
| Cash flow from operations | $77.1 million | $45.1 million | Increase |
| Capital expenditures | $30.1 million | $14.6 million | Increase |
Comparable restaurant sales increased 0.9%, reflecting 2.2% average check growth, including approximately 2.0% pricing and 0.2% mix, offset by a 1.3% decline in guest traffic. Severe winter weather and the timing of Easter and spring breaks reduced comparable sales by approximately 2.0%. Total restaurant operating weeks increased 2.4%, while average sales per restaurant operating week increased approximately 2.0% to $199,300.
Cost of sales was 24.8% of revenue versus 24.7% in the prior-year period. Labor expense increased to 33.1% of revenue from 32.6%, primarily because of weather-related productivity inefficiencies, holiday timing and higher group medical costs. General and administrative expense increased to 6.5% of revenue from 6.2%, partly due to an accrual for a pending legal claim. Preopening costs increased to $2.2 million from $1.3 million following the opening of one restaurant.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $31.5 million at April 1, 2014, down from $61.8 million at December 31, 2013.
- The company generated $77.1 million of operating cash flow and used $30.4 million in investing activities.
- Financing activities used $77.0 million, including $99.0 million for treasury stock purchases, $7.2 million for dividends and $25.0 million of borrowings under the revolving credit facility.
- The credit facility provides $200 million of revolving commitments, matures October 16, 2018 and had $154 million of net borrowing availability at April 1, 2014, after $25 million of borrowings and $21 million of standby letters of credit.
- The company was in compliance with its financial covenants. Net Adjusted Leverage was 2.6 versus a maximum of 4.0, and the EBITDAR Ratio was 3.0 versus a minimum of 1.9.
- The company paid a quarterly dividend of $0.14 per share and repurchased approximately 2.1 million shares for $99.0 million during the quarter, including 1.4 million shares under a $75 million accelerated stock repurchase program.
Material changes versus the prior comparable period
- Revenue increased, but operating income, net income and diluted EPS declined because labor, G&A and preopening costs rose as percentages of revenue.
- Cash flow from operations improved substantially, but aggressive share repurchases and higher capital spending caused cash to decline by $30.3 million.
- Debt increased from zero at December 31, 2013 to $25.0 million at April 1, 2014, primarily funding the accelerated stock repurchase program.
- Capital expenditures more than doubled year over year, reflecting new restaurant development and other investments.
- The company opened one Cheesecake Factory restaurant in Q1 2014; no restaurants were opened in the prior-year quarter.
Guidance, outlook, risks and unusual items
Management estimated Q2 adjusted diluted EPS of $0.59 to $0.62, based on comparable sales growth of 1.5% to 2.5%. Fiscal 2014 adjusted diluted EPS guidance was $2.24 to $2.33, based on comparable sales growth of 1% to 2%. Management expected food-cost inflation of 3% to 4%, primarily from shrimp and salmon, with an estimated fiscal-year EPS impact of $0.07 to $0.10. The company expected a fiscal 2014 tax rate of approximately 29% and operating margins slightly above fiscal 2013 levels at the midpoint of its assumptions.
The company planned to open as many as 10 restaurants in fiscal 2014, including one relocation, and expected three to four licensed restaurants to open in the Middle East and Mexico. Fiscal 2014 capital expenditures were expected to range from $105 million to $115 million, excluding approximately $14 million of non-capitalizable preopening costs.
Management expects to use substantially all free cash flow and employee stock-option proceeds for dividends and share repurchases. It also expects to repay the $25 million credit-facility balance during fiscal 2014. Commodity prices, especially for seafood and certain dairy products, remain volatile and are not fully covered by long-term supplier contracts. The company does not use financial instruments to hedge commodity prices.
The company recorded $0.2 million of impairment and lease-termination expense in Q1 2014 related to the planned relocation of one restaurant and expected an additional $0.6 million in Q2. It also disclosed pending wage-and-hour and uniform-related class and collective actions, with settlement discussions ongoing in one matter. Management stated that it did not expect the pending matters to have a material adverse effect, although future results could be affected by developments.
Forward-looking results remain subject to weather, consumer demand, traffic, competition, commodity costs, labor costs, legal matters, interest rates, construction timing and compliance with credit-facility distribution restrictions. Management reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-sales growth and guest traffic recover after the weather and holiday-timing disruptions.
- Whether labor, medical, seafood and other commodity costs allow the company to achieve its margin and EPS guidance.
- The pace, cost and returns of the planned restaurant openings and capital expenditures.
- The timing of repayment of the $25 million credit-facility borrowing and the effect of covenant limits on dividends and repurchases.
- The final number of shares delivered under the accelerated stock repurchase program and the resulting share count and EPS impact.
- Developments and potential costs associated with the pending labor and uniform-related litigation and settlement discussions.