Business Context and Reporting Period
The Cheesecake Factory Incorporated filed an unaudited Form 10-Q for the 13 weeks and 26 weeks ended July 3, 2012, compared with the periods ended June 28, 2011. Fiscal 2012 consists of 52 weeks and ends January 1, 2013. As of August 10, 2012, the company operated 173 restaurants and two bakery production facilities.
Financial Highlights
| Metric | Q2 2012 | Q2 2011 | 26 Weeks 2012 | 26 Weeks 2011 |
|---|---|---|---|---|
| Revenue | $454.7 million | $430.7 million | $890.5 million | $849.5 million |
| Income from operations | $41.0 million | $35.2 million | $71.2 million | $65.0 million |
| Operating margin | 9.0% | 8.2% | 8.0% | 7.7% |
| Net income | $28.4 million | $24.7 million | $49.1 million | $45.2 million |
| Net margin | 6.2% | 5.7% | 5.5% | 5.3% |
| Diluted EPS | $0.52 | $0.42 | $0.89 | $0.76 |
| Cash flow from operations | Not separately provided | Not separately provided | $74.3 million | $94.1 million |
- Q2 revenue increased 5.6%; restaurant sales increased 6.3% to $442.9 million.
- Comparable sales for The Cheesecake Factory and Grand Lux Cafe increased 1.7% in Q2 and 2.0% for the first half. The Cheesecake Factory comparable sales increased 2.1% in Q2 and 2.3% year to date, while Grand Lux Cafe comparable sales declined 2.9% and 1.3%, respectively.
- Bakery sales to external customers declined 16.9% in Q2 and 13.4% year to date, primarily because of lower warehouse-club sales.
- Q2 cost of sales declined to 24.4% of revenue from 25.5%, primarily due to lower dairy, produce and fish costs. Labor costs declined to 32.1% from 32.4%.
- Preopening costs increased to $3.0 million in Q2 and $5.1 million year to date, reflecting one restaurant opening in Q2 and two openings during the first half.
- The effective tax rate increased to 29.2% in Q2 and 29.0% year to date, principally because of the expiration of the HIRE Act retention credit and higher state taxes.
Liquidity, Capital Allocation, and Balance Sheet
- Cash and cash equivalents were $48.4 million at July 3, 2012, compared with $48.2 million at January 3, 2012.
- Operating cash flow was $74.3 million, capital expenditures were $34.4 million, and cash used for treasury-stock purchases was $57.5 million during the first 26 weeks.
- The company had no borrowings under its $200 million revolving credit facility and reported $176 million of net borrowing availability after $24 million of standby letters of credit.
- The company reported an adjusted debt ratio of 2.7 versus a maximum covenant of 4.0 and an EBITDAR ratio of 2.9 versus a minimum covenant of 1.9; it was in compliance with its covenants.
- The balance sheet included a $54.3 million deemed landlord financing liability, but no outstanding revolver borrowings.
- The company repurchased approximately 0.5 million shares for $16.7 million in Q2 and had cumulatively repurchased 33.1 million shares for $788.0 million through July 3, 2012.
- On July 23, 2012, the board approved a quarterly dividend of $0.12 per share, or approximately $6.4 million based on July 25 shares outstanding.
Material Changes, Outlook, and Risks
- Management increased fiscal 2012 restaurant-development activity relative to the prior year and planned to open seven to eight new domestic restaurants. As of August 10, two Cheesecake Factory locations and one Grand Lux Cafe had opened.
- Fiscal 2012 guidance called for diluted EPS of $1.87 to $1.93, comparable-sales growth of 1.5% to 2.5%, food-cost inflation between flat and 1.0%, and a corporate tax rate of 28.5% to 29.5%.
- Third-quarter diluted EPS guidance was $0.47 to $0.49, based on comparable-sales growth of 1.5% to 2.5%.
- Fiscal 2012 cash capital expenditures were estimated at $95 million to $105 million, excluding approximately $11 million of noncapitalizable preopening costs. Management also planned to repurchase up to $100 million of common stock, subject to performance, market conditions, and credit-facility restrictions.
- Management expected cash, operating cash flow, available borrowings, and landlord contributions to fund planned capital expenditures, repurchases, and dividends over the next 12 months.
- Q2 net income included a $0.4 million after-tax benefit from proceeds from a variable life insurance contract supporting the Executive Savings Plan. Excluding this item, adjusted diluted EPS was $0.51 versus reported diluted EPS of $0.52.
- Key risks include discretionary consumer spending, competition, weather, labor and energy costs, commodity-price volatility, changing menu preferences, bakery customer concentration and shipment timing, and litigation or regulatory matters.
- The company elected not to renew its Brentwood, California lease, which expires October 4, 2012, and expected minimal costs and no material effect on fiscal 2012 or future comparable sales and EPS assumptions.
- Management stated that pending lawsuits, audits, proceedings, and claims were not expected to have a material adverse effect, although individual periods could be affected by changes in circumstances.
Investor Verification Points
- Verify whether comparable-sales growth and traffic trends support the 1.5% to 2.5% fiscal 2012 outlook, particularly at Grand Lux Cafe.
- Monitor commodity costs, labor inflation, menu pricing, and whether the Q2 gross-margin improvement is sustainable.
- Reconcile planned capital expenditures, new restaurant openings, preopening costs, share repurchases, and the newly initiated dividend against operating cash flow.
- Review covenant calculations and the effect of the credit facility’s distribution restrictions on future repurchases and dividends.
- Separate recurring earnings from the variable life insurance proceeds and assess the continuing decline in external bakery sales.