Business Context and Reporting Period
The Cheesecake Factory Incorporated filed an unaudited Form 10-Q for the 13 and 26 weeks ended June 30, 2020, compared with July 2, 2019. The company operated 293 restaurants across The Cheesecake Factory, North Italia and Fox Restaurant Concepts brands, plus two bakery facilities. Results were materially affected by COVID-19-related closures, capacity restrictions and the shift toward off-premise sales.
Financial Performance and Position
| Metric | 13 Weeks Ended June 30, 2020 | 13 Weeks Ended July 2, 2019 | 26 Weeks Ended June 30, 2020 | 26 Weeks Ended July 2, 2019 |
|---|---|---|---|---|
| Revenue | $295.9 million | $602.6 million | $911.0 million | $1,202.1 million |
| Operating income/(loss) | $(83.7) million | $40.1 million | $(273.8) million | $70.2 million |
| Net income/(loss) | $(56.5) million | $35.5 million | $(192.7) million | $62.5 million |
| Diluted EPS | $(1.61) | $0.79 | $(4.72) | $1.39 |
| Operating cash flow | Not separately presented for the quarter | $(35.7) million | $83.8 million |
- Quarterly revenue declined 50.9%; first-half revenue declined 24.3%.
- GAAP net margin was negative 19.1% in the quarter and negative 21.2% for the first half, compared with positive margins of 5.9% and 5.2%, respectively, in the prior-year periods.
- First-half cost ratios increased year over year: cost of sales to 23.4% from 22.5%, labor to 39.5% from 36.2%, other operating costs to 31.8% from 25.1%, and G&A to 8.7% from 6.4%.
- Cash and cash equivalents increased to $250.2 million at June 30, 2020 from $58.4 million at December 31, 2019, primarily from preferred-stock proceeds and credit-facility borrowings.
- Capital expenditures were $29.4 million in the first half, compared with $29.4 million in the prior-year period.
- At June 30, 2020, long-term debt was $376.0 million, with only $0.6 million of net borrowing availability after considering outstanding debt and standby letters of credit. Reported liquidity was $254.1 million, and the company stated that it was in compliance with applicable amended-facility covenants.
- Total assets were $2.87 billion and stockholders’ equity was $351.9 million, excluding $204.1 million of separately classified Series A convertible preferred stock.
Material Changes Versus the Prior Comparable Period
- The Cheesecake Factory comparable sales declined 56.9% in the quarter and 35% in the first half. Customer traffic declined 71.7% and 45%, respectively, partly offset by average-check growth of 14.8% and 10%.
- Off-premise sales represented approximately 79% of restaurant sales in the quarter and 41% in the first half.
- North Italia comparable sales declined approximately 59% in the quarter and 17% in the first half.
- First-half impairment and lease-termination expense was $194.3 million, including $79.4 million of goodwill impairment, $101.0 million of trade-name and trademark impairment, $2.3 million of licensing-asset impairment and $8.9 million primarily related to restaurant long-lived assets.
- The company recorded $2.3 million of acquisition-related costs in the first half, partially offset by a $5.4 million benefit from acquisition-related contingent consideration, compensation and amortization.
- On April 20, 2020, the company issued $200 million of Series A convertible preferred stock, incurring $10.3 million of issuance costs. The preferred stock carries a 9.5% annual dividend, payable in cash or in kind, and was convertible at $22.23 per common share, subject to stated limitations.
- Common dividends and share repurchases were suspended. The company repurchased only 12,413 shares during the quarter to satisfy employee tax-withholding obligations.
- Cash used in operations changed from $83.8 million of cash provided in the prior-year first half to $35.7 million of cash used.
Guidance, Outlook, Commentary and Risks
- As of July 29, 2020, 208 restaurants had indoor dining with limited capacity, 47 operated outdoors only, 22 were off-premise only and 16 were closed.
- Management stated that current sales trends and reduced G&A expenses resulted in approximately breakeven operating cash flow at the company level, but additional restrictions or weaker consumer demand could prevent sufficient cash generation until restaurants reopen at approximately 50% capacity.
- The company suspended new-unit development and was evaluating the timing and quantity of openings. Eight locations were under development, and estimated cash capital expenditures were approximately $10 million to $15 million per quarter for the remainder of fiscal 2020.
- Management expects approximately $50 million of cash tax refunds from CARES Act net-operating-loss carryback claims, which it expects to file during fiscal 2021.
- The company believes cash on hand, expected operating cash flow, anticipated tax refunds and available borrowings should be sufficient to meet short-term obligations over the following 12 months; however, borrowing availability was nearly exhausted at quarter-end.
- The amended credit facility provided covenant relief through the specified recovery period, substituted liquidity tests during portions of 2020 and early 2021, limited capital expenditures to $90 million during the covenant-relief period, and restricted dividends, repurchases, acquisitions and additional debt.
- Key risks include renewed or prolonged COVID-19 restrictions, restaurant closures, labor availability, supply interruptions, consumer spending weakness, landlord disputes and rent obligations, covenant compliance, limited borrowing capacity, commodity and interest-rate volatility, and further asset impairments.
- The company disclosed a $4.2 million California wage citation and an $8.0 million IRS tax deficiency dispute; it has not reserved for either matter because the outcomes or potential liabilities could not be reasonably estimated.
Most Important Facts for Investors to Verify
- Whether restaurant sales and traffic recover sufficiently under capacity restrictions and whether off-premise demand remains durable.
- Actual cash burn, borrowing availability and compliance with the amended facility’s liquidity and post-relief financial covenants.
- The timing and collectability of the anticipated approximately $50 million CARES Act tax refunds.
- The potential dilution, dividend burden and redemption or conversion economics of the Series A convertible preferred stock, including approximately 9.2 million potential common shares at June 30, 2020.
- Whether additional impairments, lease-termination costs or landlord litigation arise as operating assumptions are revised.
- Progress on reopening the 16 closed restaurants, staffing formerly furloughed employees and resuming new-unit development.