Business Context and Reporting Period
Company: The Cheesecake Factory Incorporated
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Thirteen and thirty-nine weeks ended September 28, 1999
Operations: As of November 5, 1999, the Company operated 32 upscale casual dining restaurants, one Grand Lux Cafe, two Cheesecake Factory Express locations, and a bakery production facility. The Company operates on a 52/53-week fiscal year.
Key Financial Metrics
| Metric (in thousands) | 13 Weeks Ended Sept 28, 1999 |
39 Weeks Ended Sept 28, 1999 |
39 Weeks Ended Sept 29, 1998 |
|---|---|---|---|
| Total Revenues | $91,854 | $252,445 | $192,351 |
| Net Income | $5,823 | $14,714 | $4,669 |
| Diluted EPS | $0.27 | $0.70 | $0.23 |
| Operating Cash Flow | N/A | $26,787 | $21,706 |
| Cash & Equivalents (End) | $25,349 | $25,349 | $26,342 |
| Long-Term Debt | $0 | $0 | $0 |
| Current Ratio | 1.95:1 | 1.95:1 | 2.2:1 |
Note: Net income for the 39-week period in 1998 included a one-time cumulative effect of a change in accounting principle of $6,347 (net of tax), which reduced reported net income for that period.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 34% for the quarter and 31% for the year-to-date period compared to the prior year. Restaurant sales grew 34% (quarter) and 31% (YTD), driven by a 3.4% increase in comparable restaurant sales and significant contributions from new openings.
- Profitability: Operating income increased 75% for the quarter ($8.3M vs $4.7M) and 49% for the YTD period ($20.8M vs $13.9M). Operating margins improved to 9.1% for the quarter and 8.2% for the YTD period.
- Cost Management: Restaurant cost of sales as a percentage of sales decreased to 25.9% (from 26.6% prior year quarter) due to menu price increases and lower commodity costs. Labor expenses as a percentage of revenue decreased slightly to 30.3% (quarter) and 30.5% (YTD) due to leveraging fixed costs against higher volumes.
- Capital Expenditures: Additions to property and equipment increased to $29.1 million for the 39-week period in 1999, compared to $21.3 million in the prior year, reflecting aggressive expansion.
Guidance, Outlook, and Risks
- Expansion Plans: The Company estimates total capital expenditure requirements for fiscal 1999 to range between $33 million and $35 million. The objective is to increase total restaurant productive square feet and operating weeks by at least 25% during fiscal 1999 and 2000.
- Liquidity: The Company maintains a $25 million revolving credit facility with no borrowings outstanding as of November 5, 1999. Management believes cash on hand, operating cash flows, and available credit are sufficient to fund operations through fiscal 2000.
- Year 2000 Compliance: The Company is in the final testing and implementation phases of its Year 2000 plan. Estimated total costs are less than $300,000. Risks include potential failures of mission-critical supplier systems.
- Key Risks: Risks include competition in the upscale casual segment, volatility in raw material costs (specifically dairy), adverse weather impacting patio seating, and the ability to raise prices to offset cost increases.
Investor Verification Checklist
- Comparable Sales Growth: Verify the sustainability of the 3.4% comparable restaurant sales increase and the impact of the 2% menu price increase implemented in February 1999.
- Capital Expenditure Execution: Monitor the $33-$35 million capital expenditure budget against actual spending to ensure expansion targets (8 new restaurants in fiscal 1999) are met without straining liquidity.
- Commodity Costs: Track dairy and poultry costs, which have been volatile, to assess potential margin compression in future quarters.
- Year 2000 Readiness: Confirm the completion of testing for mission-critical internal systems and the receipt of compliance confirmations from key suppliers prior to the end of fiscal 1999.
- Debt Covenants: Review the terms of the $25 million credit facility expiring May 31, 2000, to ensure continued compliance with financial ratios.