Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009 (Second Quarter of Fiscal 2009)
Operations: As of August 6, 2009, the Company operated 160 upscale, full-service casual dining restaurants (146 The Cheesecake Factory, 13 Grand Lux Cafe, 1 RockSugar Pan Asian Kitchen) and two bakery production facilities.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended June 30, 2009 |
26 Weeks Ended June 30, 2009 |
13 Weeks Ended July 1, 2008 |
26 Weeks Ended July 1, 2008 |
|---|---|---|---|---|
| Revenues | $407,944 | $800,738 | $407,134 | $800,937 |
| Net Income | $16,569 | $26,588 | $19,101 | $33,430 |
| Diluted EPS | $0.28 | $0.44 | $0.29 | $0.50 |
| Operating Margin | 7.1% | 5.9% | 7.4% | 6.7% |
| Cash from Operations | N/A | $104,075 | N/A | $72,641 |
| Cash & Equivalents (End of Period) | $95,582 | $95,582 | $93,784 | $93,784 |
| Long-Term Debt | $200,000 | $200,000 | $275,000 | $275,000 |
Note: Cash flow data is presented for the 26-week period as the 13-week statement is not explicitly detailed in the provided text.
Material Changes vs. Prior Period
- Revenue: Flat year-over-year for both the quarter (+0.2%) and the first half of the year (-0.02%). Restaurant sales were offset by a 3.2% decline in comparable restaurant sales (driven by reduced guest traffic due to macroeconomic factors) and growth from newer units.
- Profitability: Net income decreased 13.2% for the quarter and 20.5% for the first half compared to the prior year. Operating margins compressed slightly due to de-leveraging of fixed costs against lower sales volumes.
- Expenses:
- Cost of Sales: Improved to 24.3% of revenue (Q2) from 25.7% (prior year Q2) due to favorable commodity pricing and menu engineering.
- Labor: Increased to 33.1% of revenue (Q2) from 32.7% (prior year Q2), primarily due to higher health insurance costs.
- G&A: Increased to 6.5% of revenue (Q2) from 5.0% (prior year Q2), driven by a $2.6 million expense related to the CEO's retirement benefit and corporate bonus accruals.
- Interest Expense: Increased significantly to $7.5 million (Q2) from $4.1 million (prior year Q2), largely due to a $3.3 million charge to unwind an interest rate collar.
- Debt Reduction: The Company repaid $75 million of its credit facility during the first half of 2009, reducing outstanding debt from $275 million to $200 million.
Guidance, Outlook, and Risks
Outlook and Guidance
- Fiscal 2009 EPS: Anticipated diluted earnings per share of $0.80 to $0.86.
- Comparable Sales: Expected to range between -3% and -4% for the full year.
- Capital Expenditures: Estimated at $35 million to $40 million for fiscal 2009.
- Free Cash Flow: Projected at $115 million to $125 million, with plans to repay an additional $125 million of debt (totaling $100 million already repaid plus $25 million repaid in July 2009).
Risks and Contingencies
- Legal Proceedings:
- IRS Audit: Dispute regarding the deductibility of ~$5.1 million in executive compensation; Company has reserved $2.4 million for estimated taxes and interest.
- Employment Litigation: Multiple class-action lawsuits pending regarding wage and hour violations (California) and sexual harassment/discrimination (EEOC charges in Arizona and Ohio). No reserves established as the Company intends to vigorously defend these actions.
- Landlord Bankruptcy: 22% of restaurants are in locations owned/managed by landlords who filed for Chapter 11 protection (e.g., General Growth Properties). No leases have been rejected to date, and operations are not expected to be materially affected.
- Asset Impairment: Monitoring three Grand Lux Cafe locations (combined carrying value $29.1 million) for potential impairment due to the economic environment; no charge taken yet.
Investor Verification Checklist
- Comparable Sales Trend: Verify if the projected -3% to -4% decline in comparable sales holds, as this directly impacts the $0.80-$0.86 EPS guidance.
- Debt Covenant Compliance: Confirm continued compliance with the credit facility covenants (Debt/EBITDA ratio of 1.50:1.00) given the economic headwinds.
- Legal Reserves: Monitor the status of the IRS audit and employment lawsuits to determine if the current $2.4 million reserve is sufficient or if additional provisions are needed.
- Landlord Stability: Track the bankruptcy proceedings of major landlords (22% of locations) for any lease rejections or rent modifications.
- Capital Allocation: Verify the execution of the planned $125 million debt repayment using free cash flow and existing cash balances.