The Cheesecake Factory Incorporated — Fiscal 2011 Form 10-K
Business context and reporting period
The filing covers the 53-week fiscal year ended January 3, 2012. The fourth quarter ended January 3, 2012 and comprised 14 weeks, compared with 13 weeks in the prior-year quarter. The Company operated 170 restaurants at fiscal year-end—156 Cheesecake Factory, 13 Grand Lux Cafe and one RockSugar Pan Asian Kitchen—and two bakery facilities. Restaurant sales represented approximately 96% of revenue and bakery sales approximately 4%.
Key financial metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $1,757.6 million | $1,659.4 million | +5.9% |
| Income from operations | $133.5 million | $128.2 million | +4.1% |
| Operating margin | 7.6% | 7.7% | -0.1 percentage points |
| Net income | $95.7 million | $81.7 million | +17.1% |
| Diluted EPS | $1.64 | $1.35 | +21.5% |
| Cash provided by operating activities | $196.1 million | $167.1 million | +17.4% |
| Capital expenditures | $76.7 million | $41.8 million | +83.4% |
| Cash and cash equivalents | $48.2 million | $81.6 million | -41.0% |
| Long-term debt and deemed landlord financing | $57.0 million | $53.6 million | +6.3% |
Fiscal 2011 restaurant revenue increased 6.2% to $1,685.0 million. Comparable sales increased 1.8% overall; Cheesecake Factory comparable sales increased 2.0%, while Grand Lux Cafe comparable sales decreased 0.3%. Bakery sales decreased 0.7% to $72.6 million. Cost of sales increased to 25.5% of revenue from 24.9%, primarily because of dairy and grocery commodity pressures. Labor improved slightly to 32.3% from 32.4%, while general and administrative expense declined to 5.5% from 5.8%.
Fourth-quarter revenue was $477.7 million versus $416.7 million in the prior-year quarter, income from operations was $38.2 million versus $30.8 million, net income was $29.9 million versus $21.9 million, and diluted EPS was $0.54 versus $0.36. The extra week contributed approximately $43 million of fiscal 2011 revenue, including approximately $41 million from restaurants.
Interest expense declined to $4.9 million from $16.8 million, primarily because the Company had no revolver borrowings during fiscal 2011 and incurred $7.4 million of interest-rate-collar unwinding costs in fiscal 2010. The effective tax rate was 25.9%, compared with 26.4%.
Material changes versus the prior comparable period
- The Company opened seven restaurants in fiscal 2011 versus three in fiscal 2010, increasing year-end restaurant count from 163 to 170.
- Preopening costs rose to $10.1 million from $5.2 million because of the higher number of openings.
- Capital expenditures increased to $76.7 million, including $46.9 million for new restaurants, $20.0 million for existing restaurants and approximately $9.8 million for bakery and corporate infrastructure.
- The Company recorded a $1.5 million impairment charge for three previously impaired restaurants; no impairment charge was recorded in fiscal 2010.
- Operating cash flow increased, but cash declined by $33.4 million because of $172.1 million of share repurchases and higher capital spending.
- The Company repurchased approximately 6.0 million shares for $172.1 million during fiscal 2011. Cumulative repurchases reached 31.2 million shares costing $730.4 million.
Liquidity, debt and commitments
The Company had no borrowings under its $200 million revolving credit facility at January 3, 2012 and had $182 million of net borrowing availability after $18 million of standby letters of credit. It was in compliance with its financial covenants, including an Adjusted Debt Ratio of 2.7 versus a maximum of 4.0 and an EBITDAR Ratio of 2.8 versus a minimum of 1.9.
Contractual obligations totaled approximately $1.06 billion, including $947.9 million of minimum lease payments, $107.8 million of purchase obligations and $0.7 million of uncertain tax positions. All restaurants are leased; contingent rent generally ranges from 3% to 10% of sales above specified minimums.
Guidance, outlook and unusual items
Management expected fiscal 2012 diluted EPS of $1.80 to $1.90, comparable restaurant sales growth of 1.5% to 2.5%, seven to eight new restaurants including one Grand Lux Cafe, and cash capital expenditures of $100 million to $110 million. Management also planned to use the majority of free cash flow for share repurchases.
The Company entered into an exclusive Middle East licensing agreement covering development of 22 Cheesecake Factory restaurants over five years. Up to three locations were expected to open in fiscal 2012, with no material fiscal 2012 financial impact expected. The arrangement introduces execution, brand-control, supply-chain, regulatory and foreign-market risks.
Fiscal 2011 adjusted net income was $95.1 million, compared with reported net income of $95.7 million, after excluding the after-tax impact of the $1.5 million impairment charge and including a $1.5 million benefit from a partial IRS settlement. The filing states that no material adverse effect was expected from disclosed litigation, but several employment and wage-and-hour matters remained pending or subject to settlement approval.
Principal risks and contingencies
- Consumer discretionary spending, unemployment, housing conditions, competition and traffic trends could affect comparable sales.
- Food, dairy, labor, energy, insurance and occupancy costs could pressure margins; some commodities cannot be contracted for extended periods.
- Restaurant site availability, construction delays, landlord financial condition, lease renewals and potential sales cannibalization could limit growth.
- Third-party bakery sales are less predictable and concentrated among three major warehouse customers.
- Food safety incidents, adverse publicity, data security breaches, litigation and regulatory changes could damage the brand or increase costs.
- Self-insurance liabilities and employment-related claims require significant estimates and could exceed recorded amounts.
- Further restaurant impairment charges may be required if weak locations do not improve.
- The filing identifies no outstanding funded debt at year-end, but covenant compliance and lease obligations remain important liquidity considerations.
Investor verification checklist
- Reconcile fourth-quarter growth with the 14-week period and isolate the effect of the additional week.
- Review comparable-sales trends, guest traffic, average check, menu pricing and mix by concept.
- Assess whether commodity, labor, insurance and occupancy inflation is being offset by pricing and productivity.
- Verify fiscal 2012 openings, capital expenditures, preopening costs and the effect on free cash flow.
- Monitor share repurchases against liquidity needs, covenant restrictions and future development spending.
- Review lease commitments, contingent rent exposure, landlord contributions and renewal or termination provisions.
- Evaluate the Middle East licensee’s execution, bakery supply requirements and brand-control safeguards.
- Review pending employment litigation, self-insurance estimates, tax matters and potential impairment indicators.