What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-03 · 139 added, 117 removed, 223 unchanged (53% of the section changed)

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These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (together with the Securities Act, the “Acts”).

This includes, without limitation, the effects of the COVID-19 pandemic on our financial condition and our results of operation, financial guidance and projections and statements with respect to the acquisition of North Italia and Fox Restaurant Concepts LLC and expectations regarding accelerated and diversified revenue growth as a result of the acquisition of North Italia and FRC, as well as expectations of our future financial condition, results of operations, sales, cash flows, plans, targets, goals, objectives, performance, growth potential, competitive position and business;

This includes, without limitation, the effects of the COVID-19 pandemic on our financial condition and our results of operation, including our expectation with respect to our ability to reopen and keep open our restaurants, financial guidance and projections and statements with respect to the acquisition of North Italia and Fox Restaurant Concepts LLC and expectations regarding accelerated and diversified revenue growth as a result of the acquisition of North Italia and FRC, as well as expectations of our future financial condition, results of operations, sales, cash flows, plans, targets, goals, objectives, performance, growth potential, competitive position and business;

and our ability to:

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the rapidly evolving nature of the COVID-19 pandemic and related containment measures, including the potential for a complete shutdown of our restaurants, international licensee restaurants and our bakery operations;

demonstrations, political unrest, potential damage to or closure of the Company's restaurants and potential reputational damage to the Company or any of its brands;

demonstrations, political unrest, potential damage to or closure of our restaurants and potential reputational damage to us or any of our brands;

economic, public health and political conditions that impact consumer confidence and spending, including the impact of the COVID-19 pandemic and other health epidemics or pandemics on the global economy;

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Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by law.

COVID-19 Pandemic

This discussion and analysis, which contains forward-looking statements, should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes in Part I, Item 1 of this report and with the following items included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019:

The below discussion and analysis, which contains forward-looking statements, should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes in Part I, Item 1 of this report and with the following items included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019:

the audited consolidated financial statements and related notes in Part IV, Item 15;

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The inclusion of supplementary analytical and related information herein may require us to make estimates and assumptions to enable us to fairly present, in all material respects, our analysis of trends and expectations with respect to our results of operations and financial position.

COVID-19 Pandemic

The Company is subject to risks and uncertainties as a result of the outbreak of, and local, state and federal governmental responses to, the COVID-19 pandemic which was declared a National Public Health Emergency on March 13, 2020.

We have experienced significant disruptions to our business due to suggested and mandated social distancing and shelter-in-place orders, which resulted in the temporary closure of a number of restaurants across our portfolio while the remaining locations shifted to an off-premise only operating model on an interim basis.

In late April 2020, certain jurisdictions began allowing the reopening of restaurant dining rooms.

In late April 2020, certain jurisdictions began allowing the reopening of restaurant dining rooms , and we began to reopen dining rooms across our concepts the second week of May.

However, restrictions on the type of operating model and occupancy capacity continue to change.

We began to reopen dining rooms across our concepts the second week of May.

The following table presents the number of restaurants and their operating model as of July 29, 2020:

The following table presents the number of restaurants and their operating model as of October 29, 2020:

The Cheesecake

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Currently closed

In our initial response to the pandemic, the Company and its Board of Directors implemented the following measures to preserve liquidity and enhance financial flexibility:

(1) On average, The Cheesecake Factory restaurants with reopened dining rooms are operating at 50% capacity.

In our initial response to the pandemic, the Company and its Board implemented the following measures to preserve liquidity and enhance financial flexibility:

● Eliminated non-essential capital expenditures and expenses;

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● Suspended the dividend on our common stock and share repurchases.

We cannot predict how long the COVID-19 pandemic will last or whether it will reoccur, what additional restrictions may be enacted, to what extent we can maintain off-premise sales volumes or if individuals will be comfortable returning to our dining rooms during or following social distancing protocols and what long-lasting effects the COVID-19 pandemic may have on the restaurants industry as a whole.

The extent of the reopening process, along with the potential impact of the COVID-19 pandemic on consumer spending behavior, will determine the significance of the impact to our operating results and financial position.

In the first quarter of fiscal 2020, these considerable developments triggered the need to perform impairment assessments of our long-lived assets, goodwill and other intangible assets and a revaluation of contingent consideration associated with the acquisition of Fox Restaurant Concepts LLC.

During the third quarter of fiscal 2020, we called back to work a majority of our staff members who were previously furloughed, and restored Board, executive and corporate support staff compensation.

In addition, we resumed new unit development on a limited basis and will continue to evaluate the pace and quantity of new unit development as more clarity on the restaurant industry operating environment emerges.

The extent of the reopening process, along with the potential impact of the COVID-19 pandemic on economic conditions and consumer spending behavior, will determine the significance of the impact to our operating results and financial position.

Future changes in estimates could further impact the carrying value of these items.

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We are culinary forward and relentlessly focused on hospitality.

We currently own and operate 293 restaurants throughout the United States and Canada under brands including The Cheesecake Factory ® , North Italia ® and a collection within the FRC subsidiary.

We currently own and operate 295 restaurants throughout the United States and Canada under brands including The Cheesecake Factory®, North Italia® and a collection within our FRC subsidiary.

Internationally, 26 The Cheesecake Factory® restaurants operate under licensing agreements.

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Investing in new restaurant development that meets our return on investment criteria is expected to support achieving mid-teens Company-level return on invested capital.

In light of the COVID-19 pandemic, we will continue to evaluate the pace and quantity of new unit development until more clarity on the restaurant industry operating environment emerges.

In light of the COVID-19 pandemic, we will continue to evaluate the pace and quantity of new unit development as more clarity on the restaurant industry operating environment emerges.

Our overall revenue growth is primarily driven by revenues from new restaurant openings and increases in comparable restaurant sales.

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We will continue to evaluate future pricing decisions in light of the COVID-19 operating environment.

On October 2, 2019, we completed the acquisitions of North Italia and FRC, including Flower Child (the “Acquisitions”), which we expect will accelerate and diversify our revenue growth once the restaurant operating environment stabilizes following the COVID-19 pandemic.

On October 2, 2019, we completed the acquisitions of North Italia and FRC, including Flower Child (the “Acquisitions”), which we expect will accelerate and diversify our revenue as once the restaurant operating environment stabilizes following the COVID-19 pandemic.

Margins are subject to fluctuations in commodity costs, labor, restaurant-level occupancy expenses, general and administrative (“G&A”) expenses and preopening expenses.

Our objective is to recapture our pre-COVID-19 margins, and longer-term to drive margin expansion, by maintaining flat restaurant-level margins at The Cheesecake Factory concept, leveraging our bakery operations, international and consumer packaged goods royalty revenue streams and G&A expense over time, and optimizing our restaurant portfolio.

At the Company level, with the current sales trends and our reduced G&A structure, we are approximately breakeven at the operating cash flow level.

When the restaurant industry operating environment normalizes from the COVID-19 impact, we expect the Company to return to positive cash flow generation.

At that point, we plan to maintain a balanced capital allocation strategy, comprised of:

At the Company level, we generated $2.9 million of positive cash flow from operating activities during the third quarter of fiscal 2020.

Our future cash flow performance will depend on the evolving COVID-19 regulatory landscape, as well as economic conditions and consumer behavior.

We would expect cash generation to increase as the operating environment for the full-service segment of the restaurant industry normalizes from the COVID-19 impact.

Longer-term, we plan to employ a balanced capital allocation strategy, comprised of:

investing in new restaurants that are expected to meet our targeted returns, repaying borrowings under our $400 million unsecured revolving credit facility (the “Facility”) and reinstating our dividend and share repurchase program, the latter of which offsets dilution from our equity compensation program and supports our earnings per share growth.

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Facility as amended by a First Amendment (the “Amendment”), dated May 1, 2020, to the Facility (the Facility, as amended by the Amendment, the “Amended Facility”), our Board of Directors suspended the quarterly dividend on our common stock, as well as share repurchases.

At present, our dividends on our common stock and share repurchases are suspended.

Our ability to declare dividends and repurchase shares in the future will be subject to financial covenants under the Amended Facility, among other factors.

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The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any other interim period or for the full fiscal year.

June 30, 2020

September 29, 2020

October 1, 2019

September 29, 2020

October 1, 2019

Costs and expenses:

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Net (loss)/income

Thirteen Weeks Ended June 30, 2020 Compared to Thirteen Weeks Ended July 2, 2019

Revenues decreased 50.9% to $295.9 million for the fiscal quarter ended June 30, 2020 compared to $602.6 million for the comparable prior year period, primarily due to a decrease in comparable restaurant sales, reflecting the effect of the COVID-19 pandemic.

This decline included the impact of 29 locations across our concepts, of which three were The Cheesecake Factory restaurants, that were closed for much of the quarter, partially offset by additional revenue related to the acquired restaurants and new restaurant openings.

Revenue contribution from the acquired concepts in the second quarter of fiscal 2020 totaled $37.2 million.

The Cheesecake Factory comparable sales declined by 56.9%, or $306.9 million, from the second quarter of fiscal 2019 driven by a decline in customer traffic of 71.7%, partially offset by average check growth of 14.8% (based on an increase of 3.1% in menu pricing and a 11.7% positive change in mix).

Sales through the off-premise channel comprised approximately 79% of our restaurant sales during the second quarter of fiscal 2020 given the impact of COVID-19.

Thirteen Weeks Ended September 29, 2020 Compared to Thirteen Weeks Ended October 1, 2019

Revenues decreased 11.7% to $517.7 million for the fiscal quarter ended September 29, 2020 compared to $586.5 million for the comparable prior year period, primarily due to a decrease in comparable restaurant sales, reflecting the effect of the COVID-19 pandemic, partially offset by additional revenue related to the acquired restaurants and new restaurant openings.

Revenue contribution from the acquired concepts in the third quarter of fiscal 2020 totaled $63.9 million.

The Cheesecake Factory comparable sales declined by 23.3%, or $122.7 million, from the third quarter of fiscal 2019 driven by a decline in customer traffic of 40.4%, partially offset by average check growth of 17.1% (based on an increase of 3.0% in menu pricing and a 14.1% positive change in mix).

Sales through the off-premise channel comprised approximately 45% of our restaurant sales during the third quarter of fiscal 2020 given the impact of COVID-19.

We account for each off-premise order as one guest for traffic measurement purposes.

In turn, the high mix of sales in the off-premise channel was the primary driver of the positive change in mix and also contributed to the decline in traffic, along with the broader impact of the COVID-19 pandemic.

We implemented effective menu price increases of approximately 1.5% and 1.6% in the first quarter of fiscal 2020 and third quarter of fiscal 2019, respectively.

The Cheesecake Factory average sales per restaurant operating week decreased 56.6% to $91,314 in the second quarter of fiscal 2020 from $210,183 in the second quarter of fiscal 2019.

Total operating weeks at The Cheesecake Factory restaurants increased 0.6% to 2,640 in the second quarter of fiscal 2020 compared to 2,624 in the prior year.

North Italia comparable sales declined approximately 59% during the second quarter of fiscal 2020.

North Italia average sales per restaurant operating week for the second quarter of fiscal 2020 was $52,718 based on 261 operating weeks.

We implemented effective menu price increases of approximately 1.5% in both the first and third quarters of fiscal 2020, respectively.

The Cheesecake Factory average sales per restaurant operating week decreased 23.2% to $156,643 in the third quarter of fiscal 2020 from $203,996 in the third quarter of fiscal 2019.

Total operating weeks at The Cheesecake Factory restaurants increased 1.3% to 2,662 in the third quarter of fiscal 2020 compared to 2,628 in the prior year.

North Italia comparable sales declined approximately 22% during the third quarter of fiscal 2020.

North Italia average sales per restaurant operating week for the third quarter of fiscal 2020 was $94,561 based on 296 operating weeks.

The Cheesecake Factory restaurants become eligible to enter the comparable sales base in their 19th month of operation.

At June 30, 2020, there were five The Cheesecake Factory restaurants not yet in the comparable sales base.

At September 29, 2020, there were five The Cheesecake Factory restaurants not yet in the comparable sales base.

International licensed locations and restaurants that are no longer in operation, including those which we have relocated, are excluded from comparable sales calculations.

North Italia restaurants become eligible to enter the comparable sales base in their 13th month of operations.

At June 30, 2020 there were eight North Italia restaurants not yet in the comparable sales base.

External bakery sales were $14.7 million for the second quarter of fiscal 2020 compared to $12.4 million in the comparable prior year period.

At September 29, 2020 there were six North Italia restaurants not yet in the comparable sales base.

External bakery sales were $17.8 million for the third quarter of fiscal 2020 compared to $13.8 million in the comparable prior year period.

Cost of Sales

Cost of sales consists of food, beverage, retail and bakery production supply costs incurred in conjunction with our restaurant and bakery revenues, and excludes depreciation, which is captured separately in depreciation and amortization expenses.

As a percentage of revenues, cost of sales was 24.4% and 22.3% in the second quarters of fiscal 2020 and 2019, respectively.

The increase was primarily driven by a shift in sales mix, as well as higher meat and dairy costs, partially due to a variance between the spot market and our contracted pricing.

As a percentage of revenues, cost of sales was 22.8% and 22.7% in the third quarters of fiscal 2020 and 2019, respectively, reflecting a shift in sales mix.

Labor Expenses

As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery direct production labor, including associated fringe benefits, were 41.5% and 36.2% in the second quarters of fiscal 2020 and 2019, respectively.

This increase was primarily due to the cost of maintaining our full restaurant management team in the reduced sales environment, as well as higher group medical insurance costs, reflecting both higher large claims activity and the costs associated with healthcare benefits for our furloughed staff members, partially offset by a benefit from the Employee Retention Credit in the CARES Act.

As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery direct production labor, including associated fringe benefits, were 38.7% and 36.4% in the third quarters of fiscal 2020 and 2019, respectively.

This increase was primarily due to the cost of maintaining our full restaurant management team and group medical benefits in the reduced sales environment, partially offset by lower hourly labor.

Other Operating Costs and Expenses

Other operating costs and expenses consist of restaurant-level occupancy expenses (rent, common area expenses, insurance, licenses, taxes and utilities), other operating expenses (excluding food costs and labor expenses, which are reported separately) and bakery production overhead and distribution expenses.

As a percentage of revenues, other operating costs and expenses were 41.1% and 24.7% in the second quarters of fiscal 2020 and 2019, respectively.

This variance was primarily driven by sales deleverage, increased marketing expenses and costs associated with COVID-19 such as additional cleaning and personal protective equipment.

As a percentage of revenues, other operating costs and expenses were 30.7% and 25.5% in the third quarters of fiscal 2020 and 2019, respectively.

This variance was primarily driven by sales deleverage, increased marketing expenses and costs associated with COVID-19 such as additional sanitation and personal protective equipment.

G&A expenses consist of the restaurant management recruiting and training program, restaurant field supervision, corporate support and bakery administrative organizations, as well as gift card commissions to third-party distributors.

As a percentage of revenues, G&A expenses were 12.1% and 6.2% in the second quarters of fiscal 2020 and 2019, respectively.

This variance was primarily due to sales deleverage, partially offset by lower corporate incentive compensation costs.

As a percentage of revenues, G&A expenses were 7.3% and 6.2% in the third quarters of fiscal 2020 and 2019, respectively.

This variance was primarily due to sales deleverage.

Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses increased to 7.6% in the second quarter of fiscal 2020 from 3.5% in the comparable prior year period due primarily to sales deleverage.

As a percentage of revenues, depreciation and amortization expenses increased to 4.4% in the third quarter of fiscal 2020 from 3.6% in the comparable prior year period due primarily to sales deleverage.

Impairment of Assets and Lease Terminations

During the second quarter of fiscal 2020, we recorded impairment of assets and lease terminations expense of $2.4 million related to lease termination costs for one The Cheesecake Factory restaurant which closed in July 2020.

During the third quarter of fiscal 2020, we recorded impairment of assets and lease terminations expense of $10.4 million related to lease termination costs and accelerated depreciation for two Grand Lux Cafe locations, one that discontinued operations during the quarter and another that is expected to close by the end of the year, RockSugar Southeast Asian Kitchen, which is scheduled to discontinue operations at the end of the year and one Flower Child location that will not reopen following its COVID-related closure.

Acquisition-Related Costs

In the second quarter of fiscal 2020, we recorded $1.1 million of costs to effect and integrate the Acquisitions.

In the third quarter of fiscal 2020 and fiscal 2019, we recorded $39,307 and $3.2 million, respectively, of costs to effect and integrate the Acquisitions.

Acquisition-Related Contingent Consideration, Compensation and Amortization

In the second quarter of fiscal 2020, we recorded a benefit of $0.9 million of acquisition-related contingent consideration, compensation and amortization, reflecting changes in the fair value of the deferred and contingent consideration and compensation liabilities, partially offset by amortization of acquired definite-lived licensing agreements.

In the third quarter of fiscal 2020, we recorded $1.4 million of acquisition-related contingent consideration, compensation and amortization, reflecting changes in the fair value of the deferred and contingent consideration and compensation liabilities and amortization of acquired definite-lived licensing agreements.

Preopening Costs

Preopening costs were $2.1 million and $2.2 million in the second quarters of fiscal 2020 and 2019, respectively.

We opened no restaurants in the second quarter of fiscal 2020 compared to one The Cheesecake Factory restaurant in the comparable prior year period.

Preopening costs were $2.4 million and $2.5 million in the third quarters of fiscal 2020 and 2019, respectively.

We opened two Flower Child restaurants in the third quarter of fiscal 2020 compared to one The Cheesecake Factory restaurant in the comparable prior year period.

Preopening costs include all costs to relocate and compensate restaurant management staff members during the preopening period, costs to recruit and train hourly restaurant staff members, and wages, travel and lodging costs for our opening training team and other support staff members.

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Loss on Investment in Unconsolidated Affiliates

Loss on investment in unconsolidated affiliates, which represented our share of pre-acquisition losses incurred by North Italia and Flower Child was $1.6 million in the second quarter of fiscal 2019.

There was no corresponding amount for the second quarter of fiscal 2020 as we acquired the outstanding equity interests in these concepts in the fourth quarter of fiscal 2019.

Interest and Other Expense, Net

Interest and other expense, net was $2.6 million of expense for the second quarter of fiscal 2020 compared to $24,688 in the comparable prior year period.

This variance was primarily due to increased borrowings to effect the Acquisition and to enhance our financial flexibility in response to the COVID-19 pandemic, as well as a higher interest rate on our Amended Facility.

Loss on investment in unconsolidated affiliates, which represented our share of pre-acquisition losses incurred by North Italia and Flower Child was $10.3 million in the third quarter of fiscal 2019.

There was no corresponding amount for the third quarter of fiscal 2020 as we acquired the outstanding equity interests in these concepts in the fourth quarter of fiscal 2019.

Interest and Other (Expense)/Income, Net

Interest and other expense, net was $2.9 million of expense for the third quarter of fiscal 2020 compared to $6,051 of income in the comparable prior year period.

This variance was primarily due to increased borrowings to effect the Acquisitions and to enhance our financial flexibility in response to the COVID-19 pandemic, as well as a higher interest rate on our Amended Facility.

Income Tax (Benefit)/Provision

Our effective income tax rate was 34.5% and 7.6% for the second quarters of fiscal 2020 and 2019, respectively.

Our effective income tax rate was 25.0% and 3.2% for the third quarters of fiscal 2020 and 2019, respectively.

The increase resulted primarily from a lower proportion of employment credits in relation to pre-tax (loss)/income and a benefit arising from the expected carryback of our anticipated fiscal 2020 loss to prior years when the federal statutory rate was 35%.

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The 14% rate benefit is reflected primarily in the annual effective tax rate, although the portion representing prior year temporary differences that are estimated to reverse in fiscal 2020 and become part of the fiscal 2020 loss carryback was recognized as a discrete item in the first quarter of fiscal 2020.

Twenty-Six Weeks Ended June 30, 2020 Compared to Twenty-Six Weeks Ended July 2, 2019

Revenues decreased 24.3% to $911.0 million for the first half of fiscal 2020 compared to $1,202.1 million for the comparable prior year period, primarily due a decline in comparable restaurant sales, reflecting the impact of the COVID-19 pandemic, partially offset by additional revenue related to the acquired restaurants and new restaurant openings.

Revenue contribution from the acquired concepts in the first half of fiscal 2020 totaled $121.3 million.

The Cheesecake Factory comparable sales declined by 35%, or $375.7 million, from the first half of fiscal 2019 driven by a decline in customer traffic of 45%, partially offset by average check growth of 10% (based on an increase of 3.1% in menu pricing and a 6.9% positive change in mix).

Sales through the off-premise channel comprised approximately 41% of our restaurant sales during the first half of fiscal 2020 given the impact of COVID-19.

We account for each off-premise order as one guest for traffic measurement purposes.

Thirty-Nine Weeks Ended September 29, 2020 Compared to Thirty-Nine Weeks Ended October 1, 2019

Revenues decreased 20.1% to $1,428.7 million for the first three quarters of fiscal 2020 compared to $1,788.7 million for the comparable prior year period, primarily due to a decline in comparable restaurant sales, reflecting the impact of the COVID-19 pandemic, partially offset by additional revenue related to the acquired restaurants and new restaurant openings.

Revenue contribution from the acquired concepts in the first three quarters of fiscal 2020 totaled $185.1 million.

The Cheesecake Factory comparable sales declined by 31.1%, or $498.4 million, from the first three quarters of fiscal 2019 driven by a decline in customer traffic of 43.5%, partially offset by average check growth of 12.4% (based on an increase of 3.1% in menu pricing and a 9.3% positive change in mix).

Sales through the off-premise channel comprised approximately 43% of our restaurant sales during the first three quarters of fiscal 2020 given the impact of COVID-19.

We implemented effective menu price increases of approximately 1.5% and 1.6% in the first quarter of fiscal 2020 and third quarter of fiscal 2019, respectively.

The Cheesecake Factory average sales per restaurant operating week decreased 34.6% to $137,286 in the first half of fiscal 2020 from $210,073 in the first half of fiscal 2019.

Total operating weeks at The Cheesecake Factory restaurants increased 1.5% to 5,314 in the first half of fiscal 2020 compared to 5,237 in the prior year.

North Italia comparable sales declined approximately 17% during the first half of fiscal 2020.

North Italia average sales per restaurant operating week for the first half of fiscal 2020 was $80,348 based on 551 operating weeks.

External bakery sales were $28.5 million for the first half of fiscal 2020 compared to $25.3 million in the comparable prior year period.

The Cheesecake Factory average sales per restaurant operating week decreased 30.9% to $143,747 in the first three quarters of fiscal 2020 from $208,042 in the first three quarters of fiscal 2019.

Total operating weeks at The Cheesecake Factory restaurants increased 1.4% to 7,976 in the first three quarters of fiscal 2020 compared to 7,865 in the prior year.

North Italia comparable sales declined approximately 32% during the first three quarters of fiscal 2020.

North Italia average sales per restaurant operating week for the first three quarters of fiscal 2020 was $85,315 based on 847 operating weeks.

External bakery sales were $46.3 million for the first three quarters of fiscal 2020 compared to $39.1 million in the comparable prior year period.

Cost of Sales

As a percentage of revenues, cost of sales was 23.4% and 22.5% in the first half of fiscal 2020 and 2019, respectively.

The increase was primarily driven by a shift in sales mix, as well as higher meat, produce and dairy costs, partially due to a variance between the spot market and our contracted pricing.

As a percentage of revenues, cost of sales was 23.2% and 22.6% in the first three quarters of fiscal 2020 and 2019, respectively.

The increase was primarily driven by a shift in sales mix, as well as higher dairy costs.

Labor Expenses

As a percentage of revenues, labor expenses were 39.5% and 36.2% in the first half of fiscal 2020 and 2019, respectively.

As a percentage of revenues, labor expenses were 39.2% and 36.3% in the first three quarters of fiscal 2020 and 2019, respectively.

Other Operating Costs and Expenses

As a percentage of revenues, other operating costs and expenses were 31.8% and 25.1% in the first half of fiscal 2020 and 2019, respectively.

This variance was primarily driven by sales deleverage, increased marketing expenses and costs associated with COVID-19 such as additional cleaning and personal protective equipment, partially offset by lower restaurant incentive compensation costs.

As a percentage of revenues, G&A expenses were 8.7% and 6.4% in the first half of fiscal 2020 and 2019, respectively.

As a percentage of revenues, other operating costs and expenses were 31.4% and 25.2% in the first three quarters of fiscal 2020 and 2019, respectively.

This variance was primarily driven by sales deleverage, increased marketing expenses and costs associated with COVID-19 such as additional sanitation and personal protective equipment, partially offset by lower restaurant incentive compensation costs.

As a percentage of revenues, G&A expenses were 8.2% and 6.3% in the first three quarters of fiscal 2020 and 2019, respectively.

This variance was primarily due to sales deleverage, partially offset by lower corporate incentive compensation costs.

Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses increased to 5.1% in the first half of fiscal 2020 from 3.6% in the comparable prior year period due primarily to sales deleverage.

As a percentage of revenues, depreciation and amortization expenses increased to 4.8% in the first three quarters of fiscal 2020 from 3.6% in the comparable prior year period due primarily to sales deleverage.

Impairment of Assets and Lease Terminations

During the first half of fiscal 2020, we recorded $194.3 million of impairment of assets and lease termination expense related to the impairment of goodwill, trade names, trademarks and licensing agreements associated with the Acquisitions and long-lived assets for one The Cheesecake Factory, one North Italia, two Other FRC and four Other restaurants, as well as lease terminations costs for one The Cheesecake Factory restaurant which closed in July 2020.

During the first three quarters of fiscal 2020, we recorded $204.7 million of impairment of assets and lease terminations expense related to the impairment of goodwill, trade names, trademarks and licensing agreements associated with the Acquisitions and long-lived assets for one The Cheesecake Factory, one North Italia, two Other FRC and four Other restaurants, as well as lease termination costs and accelerated depreciation for one The Cheesecake Factory restaurant, two Grand Lux Cafe locations, RockSugar Southeast Asian Kitchen and one Flower Child location.

See Notes 3 and 4 of Notes Condensed Consolidated Financial Statements in Part 1, Item 1 of this report for further discussion of our long-lived and intangible assets, respectively.

We recorded no impairment of assets and lease terminations expense in the first half of fiscal 2019.

We recorded no impairment of assets and lease terminations expense in the first three quarters of fiscal 2019.

Acquisition-Related Costs

In the first half of fiscal 2020, we recorded $2.3 million of costs to effect and integrate the Acquisitions.

In the first three quarters of fiscal 2020 and fiscal 2019, we recorded $2.3 million and $3.2 million, respectively, of costs to effect and integrate the Acquisitions.

Acquisition-Related Contingent Consideration, Compensation and Amortization

In the first half of fiscal 2020, we recorded a benefit of $5.4 million in acquisition-related contingent consideration, compensation and amortization, reflecting a $5.8 million decrease in the fair value of the contingent consideration and compensation liabilities primarily related to impact of the COVID-19 pandemic, partially offset by an increase of $0.1 million in the deferred consideration liability and $0.3 million in amortization of acquired definite-lived licensing agreements.

In the first three quarters of fiscal 2020, we recorded a benefit of $4.0 million in acquisition-related contingent consideration, compensation and amortization, reflecting a $5.6 million decrease in the fair value of the contingent consideration and compensation liabilities primarily related to impact of the COVID-19 pandemic, partially offset by an increase of $1.2 million in the deferred consideration liability and $0.4 million in amortization of acquired definite-lived licensing agreements.

Preopening Costs

Preopening costs were $5.2 million and $4.3 million in the first half of fiscal 2020 and 2019, respectively.

We opened one North Italia and one Flower Child in the first half of fiscal 2020 compared to one The Cheesecake Factory restaurant and our initial location of Social Monk Asian Kitchen in the comparable prior year period.

Preopening costs were $7.6 million and $6.9 million in the first three quarters of fiscal 2020 and 2019, respectively.

We opened one North Italia and three Flower Child locations in the first three quarters of fiscal 2020 compared to two The Cheesecake Factory restaurants and our initial location of Social Monk Asian Kitchen in the comparable prior year period.

Loss on Investment in Unconsolidated Affiliates

Loss on investment in unconsolidated affiliates, which represented our share of pre-acquisition losses incurred by North Italia and Flower Child was $3.1 million in the first half of fiscal 2019.

There was no corresponding amount for the first half of fiscal 2020 as we acquired the outstanding equity interests in these concepts in the fourth quarter of fiscal 2019.

Interest and Other Expense, Net

Interest and other expense, net was $4.1 million of expense for the first half of fiscal 2020 compared to $23,037 in the comparable prior year period.

This variance was primarily due to increased borrowings on our Facility to effect the Acquisition and enhance our financial flexibility in response to the COVID-19 pandemic.

Loss on investment in unconsolidated affiliates, which represented our share of pre-acquisition losses incurred by North Italia and Flower Child was $13.4 million in the first three quarters of fiscal 2019.

There was no corresponding amount for the first three quarters of fiscal 2020 as we acquired the outstanding equity interests in these concepts in the fourth quarter of fiscal 2019.

Interest and Other (Expense)/Income, Net

Interest and other expense, net was $7.0 million of expense for the first three quarters of fiscal 2020 compared to $16,986 in the comparable prior year period.

This variance was primarily due to increased borrowings on our Facility to effect the Acquisitions and enhance our financial flexibility in response to the COVID-19 pandemic.

Income Tax (Benefit)/Provision

Our effective income tax rate was 30.6% and 6.9% for the first half of fiscal 2020 and 2019, respectively.

Our effective income tax rate was 30.0% and 6.2% for the first three quarters of fiscal 2020 and 2019, respectively.

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Non-GAAP Measures

Adjusted net income and adjusted if-converted net income per share are supplemental measures of our performance that are not required by or presented in accordance with GAAP.

Adjusted net income and adjusted net income per share are supplemental measures of our performance that are not required by or presented in accordance with GAAP.

These non-GAAP measures may not be comparable to similarly titled measures used by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

We calculate these non-GAAP measures by eliminating from net (loss)/income and diluted net (loss)/income per share the impact of items we do not consider indicative of our ongoing operations.

We calculate these non-GAAP measures by eliminating from net (loss)/income and diluted net (loss)/income per common share the impact of items we do not consider indicative of our ongoing operations.

To reflect the potential impact of the conversion of our convertible preferred stock into common stock, we exclude the preferred dividend and direct and incremental preferred stock issuance costs, and assume all convertible preferred shares convert to common stock.

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In the future, we may incur expenses or generate income similar to the adjusted items.

Following is a reconciliation from net (loss)/income and diluted net (loss)/income per share to the corresponding adjusted measures (in thousands, except per share data):

June 30, 2020

Following is a reconciliation from net (loss)/income and diluted net (loss)/income per common share to the corresponding adjusted measures (in thousands, except per share data):

September 29, 2020

October 1, 2019

September 29, 2020

October 1, 2019

Net (loss)/income available to common stockholders

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Tax effect of adjustments (2)

Adjusted if-converted net (loss)/income per share (4)

(1) Represents incremental costs associated with the COVID-19 pandemic including healthcare benefits and other expenses associated with furloughed staff members.

These costs were primarily recorded in cost of sales, labor expenses and other operating costs and expenses on the consolidated statements of income.

Adjusted net (loss)/income per share (4)

(1) Represents incremental costs associated with the COVID-19 pandemic such as additional sanitation, personal protective equipment, and healthcare benefits and other expenses associated with furloughed staff members.

For the thirteen weeks ended September 29, 2020, the Company recorded $2.6 million for these costs with approximately $0.4 million reflected in labor expenses, $2.1 million in other operating expenses and $0.1 million in G&A expenses.

For the thirty-nine weeks ended September 29, 2020, the Company recorded $17.6 million for these costs with approximately $2.2 million in cost of sales, $9.9 million reflected in labor expenses, $5.1 million in other operating expenses and $0.4 million in G&A expenses.

(2) Based on the federal statutory rate and an estimated blended state tax rate, the tax effect on all adjustments assumes a 26% tax rate.

(3) Represents the impact of assuming the conversion of preferred stock into common stock (8,996,851 shares), resulting in an assumption of 52,871,297 and 52,820,673 weighted-average shares outstanding on an if-converted basis for the second quarter and first half of fiscal 2020, respectively.

(4) Adjusted if-converted net (loss)/ income per share may not add due to rounding.

(3) Represents the impact of assuming the conversion of preferred stock into common stock (9,163,043 shares and 5,394,188 shares for the thirteen weeks and thirty-nine weeks ended September 29, 2020, respectively), resulting in an assumption of 53,062,945.

and 49,243,370 weighted-average common shares outstanding for the third quarter and first three quarters of fiscal 2020, respectively.

Beginning in the third quarter of fiscal 2020, we revised the method used to calculate the potential impact of the conversion of the Company's preferred stock to common stock for purposes of determining adjusted net (loss)/income per share (non-GAAP).

Instead of assuming preferred shares are converted to common shares as of the beginning of each period presented, we now utilize a weighted average shares outstanding approach to be consistent with the approach used for outstanding common shares.

Under this methodology, the revised adjusted net loss per share for the second quarter of fiscal 2020 was $0.90.

(4) Adjusted net (loss)/ income per share may not add due to rounding.

Fourth Quarter Fiscal 2020 Outlook

With the number of indoor dining rooms we currently have open and should we continue to generate comparable sales levels under continued capacity restrictions at The Cheesecake Factory restaurants at approximately the quarter-to-date through October 27th level of negative 7%, we anticipate generating positive operating profit and earnings per share for the fourth quarter of fiscal 2020.

Based on the above assumptions, we expect to generate positive cash flow from operating activities and anticipate $10 million to $15 million in capital expenditures for the fourth quarter.

A debt repayment of $96.0 million and a $17.3 million acquisition installment payment to FRC were both made in October 2020.

Fiscal 2021 Outlook

For fiscal 2021, we are currently estimating commodity cost inflation of approximately 2%, and while we are still evaluating the potential effects of COVID-19 on the labor environment, we expect hourly wage rate inflation to be slightly more favorable in fiscal 2021 versus recent years based on current governmental roadmaps for minimum wage.

We are in the early stages of developing our initial capital deployment plans for fiscal 2021.

Depending on the course of the pandemic, we could open as many as 12 to 14 new restaurants in fiscal 2021 across our portfolio of concepts.

We anticipate approximately $105 million in capital expenditures to support this level of unit development, as well as required maintenance on our restaurants.

We will refine these assumptions as more clarity on the operating environment emerges.

We will also make a $17.3 million acquisition installment payment to FRC.

Liquidity and Capital Resources

The following table presents, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities (in millions):

June 30, 2020

September 29, 2020

October 1, 2019

Cash (used in)/provided by operating activities

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Treasury stock purchases

During the twenty-six weeks ended June 30, 2020, our cash and cash equivalents increased by $191.7 million to $250.2 million.This increase was primarily attributable to issuance of preferred stock and borrowings on the Amended Facility, partially offset by cash used in operating activities, additions to property and equipment and dividend payments.

Cash flows from operations decreased by $35.7 million from the first half of fiscal 2020 primarily due the impact of the COVID-19 pandemic.

During the thirty-nine weeks ended September 29, 2020, our cash and cash equivalents increased by $185.4 million to $243.8 million.

This increase was primarily attributable to issuance of preferred stock and borrowings on the Amended Facility, partially offset by additions to property and equipment, cash used in operating activities and dividend payments.

Cash flows from operations decreased by $148.9 million from the first three quarters of fiscal 2019 primarily due to the impact of the COVID-19 pandemic.

Typically, our requirement for working capital has not been significant since our restaurant customers pay for their food and beverage purchases in cash or cash equivalents at the time of sale and we are able to sell many of our restaurant inventory items before payment is due to the suppliers of such items.

However, this dynamic shifted during the period as all of our restaurants temporarily closed their dining rooms due to the COVID-19 pandemic.

At the Company level, with the current sales trends and our reduced G&A structure, we are approximately breakeven at the operating cash flow level.

However, the evolving COVID-19 regulatory landscape may impact our restaurant operating models.

We may not be able to generate sufficient cash to cover all of our operations until they can reopen at approximately 50% capacity, and subject to economic conditions and consumer behavior.

Capital expenditures were $29.4 million in the first half of fiscal 2020 and 2019.

We currently have eight locations under development, and we are monitoring operating conditions in their respective markets to determine when to move forward with these new unit openings.

We are continuing to evaluate the pace and quantity of new unit development until more clarity on the restaurant industry operating environment emerges.

We currently estimate cash capital expenditures to be approximately $10 million to $15 million per quarter for the remainder of fiscal 2020 for completion of construction of the units under development and for necessary maintenance on our existing restaurants.

As of June 30, 2020, we maintained the Amended Facility, a $400 million unsecured revolving credit facility, $40 million of which can be used for issuances of letters of credit.

However, this dynamic shifted during the second quarter of fiscal 2020 as all of our restaurants temporarily closed their dining rooms due to the COVID-19 pandemic.

At the Company level, we generated $2.9 million of positive cash flow from operating activities during the third quarter of fiscal 2020.

Our future cash flow performance will depend on the evolving COVID-19 regulatory landscape, as well as economic conditions and consumer behavior.

We would expect cash generation to increase as the operating environment for the full-service segment of the restaurant industry normalizes from the COVID-19 impact.

Capital expenditures were $38.3 million in the first three quarters of fiscal 2020 compared to $46.7 million in the comparable prior year period.

We currently have six locations under development, and we are monitoring operating conditions in their respective markets to determine when to move forward with these new unit openings.

We will continue to evaluate the pace and quantity of new unit development as more clarity on the restaurant industry operating environment emerges.

We currently estimate cash capital expenditures to be approximately $10 million to $15 million in the fourth quarter of fiscal 2020 for completion of construction of the units under development and for necessary maintenance on our existing restaurants.

We expect one The Cheesecake Factory location and two restaurants within our FRC subsidiary to open in the fourth quarter of fiscal 2020.

As of September 29, 2020, we maintained the Amended Facility, a $400 million unsecured revolving credit facility, $40 million of which can be used for issuances of letters of credit.

The Amended Facility, which terminates on July 30, 2024, contains a commitment increase feature that could provide for an additional $125 million in available credit upon our request and the satisfaction of certain conditions.

Certain of our material subsidiaries have guaranteed our obligations under the Facility.

During the first half of fiscal 2020, we increased our borrowings under the Facility to bolster our cash position and enhance financial flexibility.

At June 30, 2020, we had net availability for borrowings of $0.6 million, based on a $376.0 million outstanding debt balance and $23.4 million in standby letters of credit.

During the first three quarters of fiscal 2020, we increased our borrowings under the Facility to bolster our cash position and enhance financial flexibility.

At September 29, 2020, we had net availability for borrowings of $0.6 million, based on a $376.0 million outstanding debt balance and $23.4 million in standby letters of credit.

The Facility limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, and sets forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters.

As of June 30, 2020, we were in compliance with the covenants set forth in the Amended Facility.

As of September 29, 2020, we were in compliance with the covenants set forth in the Amended Facility.

(See Note 7 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.)

In addition, as further discussed in Note 11 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report, to increase our liquidity given the impact of the COVID-19 pandemic on our operations, we issued 200,000 shares of Series A Convertible Preferred Stock on April 20, 2020 for an aggregate purchase price of $200 million.

In fiscal 2012, our Board approved the initiation of a cash dividend to our stockholders, which is subject to quarterly Board approval.

Future decisions to pay or to increase or decrease dividends are at the discretion of the Board and will be dependent on our operating performance, financial condition, capital expenditure requirements, limitations on cash distributions pursuant to the terms and conditions of the Facility and applicable law, and other such factors that the Board considers relevant.

Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 53.0 million shares at a total cost of $1,696.0 million through June 30, 2020 with 12,413 repurchased during the second quarter of fiscal 2020 to satisfy tax withholding obligations on vested restricted share awards.

In fiscal 2012, our Board approved the initiation of a cash dividend to our common stockholders, which is subject to quarterly Board approval.

Future decisions to pay or to increase or decrease dividends on our common stock are at the discretion of the Board and will be dependent on our operating performance, financial condition, capital expenditure requirements, limitations on cash distributions pursuant to the terms and conditions of the Facility and applicable law, and other such factors that the Board considers relevant.

Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 53.0 million shares at a total cost of $1,696.4 million through September 29, 2020 with 12,567 repurchased at a cost of $0.4 million during the third quarter of fiscal 2020 to satisfy tax withholding obligations on vested restricted share awards.

Our share repurchase authorization does not have an expiration date, does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time.

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The timing and number of shares repurchased are also subject to legal constraints and financial covenants under the Facility that limit share repurchases based on a defined ratio.

Our objectives regarding share repurchases are to offset the dilution to our shares outstanding that results from equity compensation grants and to supplement our earnings per share growth.

(See Note 11 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our repurchase authorization and methods.)

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Facility, our Board of Directors suspended the quarterly dividend on our common stock, as well as share repurchases.

To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Facility, our Board suspended the quarterly dividend on our common stock, as well as share repurchases.

(See Note 7 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our Facility.)

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We are also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years ending October 2, 2024.

As of June 30, 2020, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties.

As of September 29, 2020, we had no financing transactions, arrangements or other relationships with any unconsolidated entities or related parties.

Additionally, we had no financing arrangements involving synthetic leases or trading activities involving commodity contracts.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis