Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
Certain information included in this Form 10-Q and other materials filed or to be filed by us with the Securities and Exchange Commission (“SEC”), as well as information included in oral or written statements made by us or on our behalf, may contain forward-looking statements about our current and presently expected performance trends, growth plans, business goals and other matters.
These statements may be contained in our filings with the SEC, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers. 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, statements regarding corporate social responsibility (“CSR”) and in our CSR report, the effects of the COVID-19 pandemic on our financial condition and our results of operations, accelerated and diversified revenue growth as a result of the acquisition of North Italia and Fox Restaurant Concepts LLC (“FRC”), financial guidance and projections as well as expectations of our future financial condition, our focus on returning to pre-pandemic margins, results of operations, sales, target growth rates, cash flows, quarterly dividends, menu pricing, corporate strategy, plans, targets, goals, objectives, performance, growth potential, competitive position and business, and statements regarding our ability to: leverage our competitive strengths, including investing in or acquiring new restaurant concepts and expanding The Cheesecake Factory® brand to other retail opportunities; maintain our aggregate sales volumes; deliver comparable sales growth; provide a differentiated experience to customers; leverage sales increases and manage flow through; manage inflation and other cost pressures, including, but not limited to, impacts to wage rates, commodities and services costs, utilities expenses, insurance costs and legal expenses, and stabilize margins; grow earnings; remain relevant to consumers; attract and retain qualified management and other staff; manage risks associated with the magnitude and complexity of regulations in the jurisdictions where our restaurants are located; increase shareholder value; find suitable sites and manage increasing construction costs; profitably expand our concepts domestically and in Canada, and work with our licensees to expand our concept internationally; support the growth of North Italia and other FRC restaurants; operate Social Monk Asian Kitchen and other concepts; and utilize our capital effectively and continue to issue cash dividends and repurchase our shares. These forward-looking statements may be affected by various factors including: 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; supply chain disruptions and inflation; the geopolitical environment, 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; acceptance and success of The Cheesecake Factory in international markets; acceptance and success of North Italia and the FRC concepts, Social Monk Asian Kitchen and other concepts; the risks of doing business abroad through Company-owned restaurants and/or licensees; foreign exchange rates, tariffs and cross border taxation; changes in unemployment rates; changes in laws impacting our business, including laws and regulations related to COVID-19 impacting restaurant operations and customer access to off- and on-premises dining; increases in minimum wages and benefit costs; the economic health of our landlords and other tenants in retail centers in which our restaurants are located, and our ability to successfully manage our lease arrangements with landlords; unanticipated costs that may arise in connection with a return to normal course of business; the economic health of suppliers, licensees, vendors and other third parties providing goods or services to us; the timing of our new unit development; compliance with debt covenants; strategic capital allocation decisions including any share repurchases or dividends; the ability to achieve projected financial results; the resolution of uncertain tax positions with the Internal Revenue Service and the impact of tax reform legislation; adverse weather conditions in regions in which our restaurants are located; factors that are under the control of government agencies, landlords and other third parties; the risks, costs and uncertainties associated with opening new restaurants; and other risks and uncertainties detailed from time to time in our filings with the SEC. Such forward-looking statements include all other statements that are not historical facts, as well as statements that are preceded by, followed by or that include words or phrases such as “believe,” “plan,” “will likely result,” “expect,” “intend,” “will continue,” “is anticipated,” “estimate,” “project,” “may,” “could,” “would,” “should” and similar expressions. These statements are based on our current expectations and involve risks and uncertainties which may cause results to differ materially from those set forth in such statements.
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In connection with the “safe harbor” provisions of the Acts, we have identified and are disclosing important factors, risks and uncertainties that could cause our actual results to differ materially from those projected in forward-looking statements made by us, or on our behalf. (See Part II, Item 1A of this report, “Risk Factors,” and Part I, Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2021.) These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC. Because of these factors, risks and uncertainties, we caution against placing undue reliance on forward-looking statements. Although we believe that the assumptions underlying forward-looking statements are currently reasonable, any of the assumptions could be incorrect or incomplete, and there can be no assurance that forward-looking statements will prove to be accurate. 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.
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 28, 2021: the audited consolidated financial statements and related notes in Part IV, Item 15; the “Risk Factors” included in Part I, Item 1A; the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7; and the cautionary statements included throughout this Form 10-Q. 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 and Other Impacts to our Operating Environment
We have experienced significant disruptions to our business as federal, state and local restrictions have fluctuated over time to mitigate the spread of the COVID-19 virus. While most of our restaurants operated with no restrictions on indoor dining during the 2021 fiscal year and 2022 fiscal year to date, our operations were notably impacted during periods of accelerating case counts which led to restaurant staff quarantines and a shift in consumer behavior towards sheltering-in-place and social distancing. We have incurred and may continue to incur additional costs to address government regulations and the safety of our staff members and customers. During fiscal year 2022 to date, along with COVID-19, our operating results have been impacted by geopolitical and other macroeconomic factors, leading to increased commodity and wage inflation and other increased costs.
The ongoing effects of COVID-19 and its variants, along with other geopolitical and macroeconomic events could lead to further government mandates, including but not limited to capacity restrictions, shifts in consumer behavior, wage inflation, staffing challenges, product and services cost inflation and disruptions in the supply chain. If these factors significantly impact our cash flow in the future, we may again implement mitigation actions such as suspending share repurchases and dividends, increasing borrowings on our credit facility or modifying our operating strategies. Some of these measures may have an adverse impact on out business.
General
The Cheesecake Factory Incorporated is a leader in experiential dining. We are culinary forward and relentlessly focused on hospitality. We currently own and operate 314 restaurants throughout the United States and Canada under brands including 210 The Cheesecake Factory ® , 32 North Italia ® restaurants and a collection within our FRC business. Internationally, 29 The Cheesecake Factory ® restaurants operate under licensing agreements. Our bakery division operates two facilities that produce quality cheesecakes and other baked products for our restaurants, international licensees and third-party bakery customers.
Overview
Our strategy is driven by our commitment to customer satisfaction and is focused primarily on menu innovation, service and operational execution to continue to differentiate ourselves from other restaurant concepts, as well as to drive competitively strong performance that is sustainable. Financially, we are focused on prudently managing expenses at our restaurants, bakery facilities and corporate support center, and leveraging our size to make the best use of our purchasing power.
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Investing in new Company-owned restaurant development is our top long-term capital deployment priority, with a focus on opening our concepts in premier locations within both new and existing markets. We expect our acquisition of North Italia and FRC to further accelerate and diversify our growth opportunities. For The Cheesecake Factory concept, we target an average cash-on-cash return on investment of approximately 20% to 25% at the unit level. We target an average cash-on-cash return on investment of approximately 35% for the North Italia concept and 25% to 30% for the FRC concepts. Returns are affected by the cost to build restaurants, the level of revenues that each restaurant can deliver and our ability to maximize the profitability of restaurants. 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.
Our overall revenue growth is primarily driven by revenues from new restaurant openings and increases in comparable restaurant sales. For The Cheesecake Factory concept, our strategy is to increase comparable restaurant sales by growing average check and maintaining customer traffic through (1) continuing to offer innovative, high quality menu items that offer customers a wide range of options in terms of flavor, price and value, (2) focusing on service and hospitality with the goal of delivering an exceptional customer experience and (3) continuing to provide our customers with convenient options for off-premise dining, as we believe there is opportunity for a longer-term elevation of our off-premise mix compared to pre-COVID-19 pandemic levels. We are continuing our efforts on a number of initiatives, including menu innovation, a greater focus on increasing customer throughput in our restaurants, leveraging our gift card program, working with a third party to provide delivery services for our restaurants, increasing customer awareness of our online ordering capabilities, augmenting our marketing programs, enhancing our training programs and leveraging our customer satisfaction measurement platform.
Average check is driven by menu price increases and/or changes in menu mix. We generally update The Cheesecake Factory menus twice each year, and our philosophy is to use price increases to help offset key operating cost increases in a manner that balances supporting both our margin objectives and customer traffic levels. In prior years, we have targeted menu price increases of approximately 2% to 3% annually, utilizing a market-based strategy to help mitigate cost pressure in higher-wage geographies. Due to the inflationary cost pressures we are experiencing, we implemented menu price increases above our historical levels in the first and third quarters of fiscal 2022 to support our longer-term restaurant-level margin objectives and are in the process of implementing an incremental price increase in the fourth quarter of fiscal 2022. Future near-term pricing actions may also be at levels above historical norms to keep pace with any significant cost increases. In addition, on a regular basis, we carefully consider opportunities to adjust our menu offerings or ingredients to help manage product availability and cost.
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 pandemic margins and longer-term to drive margin expansion, by leveraging incremental sales to increase 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.
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 Revolving Facility and returning capital to shareholders through our dividend and share repurchase programs, the latter of which offsets dilution from our equity compensation program and supports our earnings per share growth. Future decisions to pay or to increase or decrease dividends or to repurchase shares are at the discretion of the Board and will be dependent on a number of factors, including limitations pursuant to the terms and conditions of the Fourth Amended Credit Agreement and applicable law.
Longer-term, we believe our domestic revenue growth (comprised of our targeted annual unit growth of 7%, in aggregate across concepts, and comparable sales growth), combined with margin expansion, planned debt repayments and an anticipated capital return program will support our long-term financial objective of 13% to 14% total return to shareholders, on average. We define our total return as earnings per share growth plus our dividend yield.
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Results of Operations
The following table presents, for the periods indicated, information from our condensed consolidated statements of (loss)/income expressed as percentages of revenues. 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.
Thirteen
Thirteen
Thirty-Nine
Thirty-Nine
Weeks Ended
Weeks Ended
Weeks Ended
Weeks Ended
September 27, 2022
September 28, 2021
September 27, 2022
September 28, 2021
Revenues
100.0
%
100.0
%
100.0
%
100.0
%
Costs and expenses:
Cost of sales
25.2
22.5
24.5
22.0
Labor expenses
37.4
37.1
37.1
36.5
Other operating costs and expenses
27.7
26.7
26.7
27.1
General and administrative expenses
6.4
6.1
6.2
6.4
Depreciation and amortization expenses
2.9
3.0
2.8
3.1
Impairment of assets and lease termination expenses
—
—
0.0
0.0
Acquisition-related contingent consideration, compensation and amortization expenses
0.1
0.1
0.1
0.6
Preopening costs
0.6
0.4
0.4
0.5
Total costs and expenses
100.3
95.9
97.8
96.2
(Loss)/income from operations
(0.3)
4.1
2.2
3.8
Interest and other expense, net
(0.1)
(0.2)
(0.1)
(0.4)
(Loss)/income before income taxes
(0.4)
3.9
2.1
3.4
Income tax (benefit)/provision
(0.1)
(0.4)
0.2
0.1
Net (loss)/income
(0.3)
4.3
1.9
3.3
Dividends on Series A preferred stock
—
—
—
(0.9)
Undistributed earnings allocated to Series A preferred stock
—
—
—
(0.3)
Net (loss)/income available to common stockholders
(0.3)
%
4.3
%
1.9
%
2.1
%
Thirteen Weeks Ended September 27, 2022 Compared to Thirteen Weeks Ended September 28, 2021
Revenues
Revenues increased 3.9% to $784.0 million for the fiscal quarter ended September 27, 2022 compared to $754.5 million for the comparable prior year period, primarily due to an increase in comparable restaurant sales, as well as additional revenue related to new restaurant openings.
The Cheesecake Factory comparable sales increased by 1.1%, or $6.3 million, from the third quarter of fiscal 2021 and increased 9.5% from the third quarter of fiscal 2019. The increase from fiscal 2021 was primarily driven by an increase in average check of 1.0% (based on an increase of 6.0% in menu pricing, partially offset by 5.0% negative impact from mix) and increased customer traffic of 0.1%. Sales through the off-premise channel comprised approximately 23% of our restaurant sales during the third quarter of fiscal 2022 as compared to 28% in the third quarter of fiscal 2021. Off-premise sales mix remains elevated versus the pre-pandemic level of 15% during the third quarter of fiscal 2019, even as customers continue to return to on-premise dining. We account for each off-premise order as one customer for traffic measurement purposes. Therefore, average check is generally higher for off-premise orders as most are for more than one customer. In turn, the lower mix of sales in the off-premise channel during the third quarter of fiscal 2022 compared to the prior year third quarter comprised approximately 2% of the negative change in mix with a positive correlative impact to traffic. We implemented effective menu price increases of approximately 3.25% and 4.25% in the first and third quarters of fiscal 2022, respectively, and are in the process of implementing an incremental 2.8% price increase in the fourth quarter of fiscal 2022. The Cheesecake Factory average sales per restaurant operating week increased 1.1% to $222,884 in the third quarter of fiscal 2022 from $220,362 in the third quarter of fiscal 2021. Total operating weeks at The Cheesecake Factory restaurants increased 0.6% to 2,705 in the third quarter of fiscal 2022 compared to 2,689 in the prior year.
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North Italia comparable sales increased approximately 10% from the third quarter of fiscal 2021 and increased 18% from the third quarter of fiscal 2019. The increase from fiscal 2021 was primarily driven by increased customer traffic of 5%, as well as an increase in average check of 5% (based on an increase of 8% in menu pricing, partially offset by a 3% negative impact from mix). We implemented effective menu price increases of approximately 2.0% and 5.5% in the fourth quarter of fiscal 2021 and second quarter of fiscal 2022, respectively, and are in the process of implementing a 4.3% price increase in the fourth quarter of fiscal 2022. North Italia average sales per restaurant operating week increased 7.8% to $136,994 in the third quarter of fiscal 2022 from $127,098 in the third quarter of fiscal 2021. Total operating weeks at North Italia increased 13.2% to 395 in the third quarter of fiscal 2022 compared to 349 in the prior year.
Restaurants become eligible to enter the comparable sales base in their 19th month of operation. At September 27, 2022, there were three The Cheesecake Factory restaurants and seven North Italia 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.
Cost of Sales
Cost of sales consists of food, beverage 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 25.2% and 22.5% in the third quarters of fiscal 2022 and 2021, respectively, primarily due to inflation across most categories in excess of menu price increases (2.6%).
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 37.4% and 37.1% in the third quarters of fiscal 2022 and 2021, respectively. This increase was primarily due to increased staffing levels compared to the prior year (0.5%), as well as wage rate inflation in excess of menu price increases (0.3%) and training costs (0.2%), partially offset by a decline in group medical insurance costs due to lower claim activity (0.7%) in the third quarter of fiscal 2022.
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), marketing, including delivery commissions, 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 27.7% and 26.7% in the third quarters of fiscal 2022 and 2021, respectively. This variance was primarily driven by utilities (0.5%) and building maintenance expense (0.4%) inflation in excess of menu price increases.
G&A Expenses
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 6.4% and 6.1% in the third quarters of fiscal 2022 and 2021, respectively. This variance was primarily driven by higher travel and meeting expenses as we return to more normalized business operations (0.3%).
Depreciation and Amortization Expenses
As a percentage of revenues, depreciation and amortization expenses decreased to 2.9% in the third quarter of fiscal 2022 from 3.0% in the comparable prior year period due primarily to sales leverage.
Acquisition-Related Contingent Consideration, Compensation and Amortization Expenses
We recorded $1.1 million and $0.7 million of acquisition-related contingent consideration, compensation and amortization during the third quarters of fiscal 2022 and 2021, respectively, reflecting changes in the fair value of the deferred and contingent consideration and compensation liabilities, and amortization of acquired definite-lived licensing agreements.
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Preopening Costs
Preopening costs were $4.3 million and $3.2 million in the third quarters of fiscal 2022 and 2021, respectively. We opened one The Cheesecake Factory, one North Italia and one Other FRC locations in the third quarter of fiscal 2022 compared to two North Italia, one Other FRC location and one Other location 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. Also included are expenses for maintaining a roster of trained managers for pending openings, the associated temporary housing and other costs necessary to relocate managers in alignment with future restaurant opening and operating needs, and corporate travel and support activities. Preopening costs can fluctuate significantly from period to period based on the number, mix and timing of restaurant openings and the specific preopening costs incurred for each restaurant.
Interest and Other Expense, Net
Interest and other expense, net was $1.3 million and $1.8 million for the third quarters of fiscal 2022 and 2021, respectively.
Income Tax (Benefit)/Provision
Our effective income tax rate was 31.9% and (10.5%) for the third quarters of fiscal 2022 and 2021, respectively. The increase was primarily due to a cumulative benefit recorded in the fiscal 2022 third quarter tax provision resulting from a decline in annual forecasted pre-tax income from the second quarter to the third quarter of fiscal 2022, a benefit recorded in the third quarter of fiscal 2021 arising from an increase to our fiscal 2020 loss carryback as a result of repaying 100% of the FICA taxes that were deferred in fiscal 2020 under the Coronavirus Aid, Relief and Economic Security Act (“the CARES Act”) and higher nondeductible losses in the third quarter of fiscal 2022 as compared to the comparable prior year period on our investments in variable life insurance contracts used to support our non-qualified deferred compensation plan (“ESP”). These factors were partially offset by a higher proportion of employment credits in relation to pre-tax income in the third quarter of fiscal 2022.
Thirty-Nine Weeks Ended September 27, 2022 Compared to Thirty-Nine Weeks Ended September 28, 2021
Revenues
Revenues increased 12.1% to $2,410.4 million for the three quarters of 2022 compared to $2,150.8 million for the comparable prior year period, primarily due to an increase in comparable restaurant sales, reflecting the impact of the COVID-19 pandemic in the first three quarters of fiscal 2021, as well as additional revenue related to new restaurant openings.
The Cheesecake Factory comparable sales increased by 8.2%, or $137.3 million, from the first three quarters of fiscal 2021 and increased 10.2% from the first three quarters of fiscal 2019. The increase from fiscal 2021 was primarily driven by increased customer traffic of 9.2% primarily due to the impact of the COVID-19 pandemic in the prior year, partially offset by a decline in average check of 1.0% (based on a 5.8% negative impact from mix, partially offset by an increase of 4.8% in menu pricing). Sales through the off-premise channel comprised approximately 25% of our restaurant sales during the first three quarters of fiscal 2022 as compared to 33% in the comparable prior year period as more customers have returned to on-premise dining, whereas consumer behavior had shifted towards the off-premise channel during the prior year period due to the pandemic. However, off-premise sales mix remains elevated versus the pre-pandemic level of 16% during the first three quarters of fiscal 2019. The lower mix of sales in the off-premise channel during the first three quarters of fiscal 2022 versus the comparable prior year third quarter comprised approximately 4% of the negative change in mix with a positive correlative impact to traffic. The Cheesecake Factory average sales per restaurant operating week increased 8.4% to $228,470 in the first three quarters of fiscal 2022 from $210,801 in the first three quarters of fiscal 2021. Total operating weeks at The Cheesecake Factory restaurants increased 0.7% to 8,113 in the first three quarters of fiscal 2022 compared to 8,058 in the comparable prior year period.
North Italia comparable sales increased approximately 17% from the first three quarters of fiscal 2021 and increased approximately 21% from the first three quarters of fiscal 2019. The increase from fiscal 2021 was primarily driven by increased customer traffic of 14%, as well as an increase in average check of 3% (based on an increase of 5% in menu pricing, partially off by a 2% negative impact from mix). North Italia average sales per restaurant operating week increased 15.1% to $141,833 in the first three quarters of fiscal 2022 from $123,211 in the first three quarters of fiscal 2021. Total operating weeks at North Italia increased 17.3% to 1,150 in the first three quarters of fiscal 2022 compared to 980 in the prior year.
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Cost of Sales
As a percentage of revenues, cost of sales was 24.5% and 22.0% in the first three quarters of fiscal 2022 and 2021, respectively, primarily due to inflation across most categories in excess of menu price increases (2.2%).
Labor Expenses
As a percentage of revenues, labor expenses were 37.1% and 36.5% in the first three quarters of fiscal 2022 and 2021, respectively. This increase was primarily due to wage rate inflation in excess of menu price increases (0.9%), partially offset by a decrease in group medical insurance costs due to lower claim activity (0.6%) in the first three quarters of fiscal 2022.
Other Operating Costs and Expenses
As a percentage of revenues, other operating costs and expenses were 26.7% and 27.1% in the first three quarters of fiscal 2022 and 2021, respectively. This variance was primarily driven by sales leverage within occupancy and building costs (0.3%).
G&A Expenses
As a percentage of revenues, G&A expenses were 6.2% and 6.4% in the first three quarters of fiscal 2022 and 2021, respectively. This variance was primarily driven by lower corporate incentive compensation expense (0.2%).
Depreciation and Amortization Expenses
As a percentage of revenues, depreciation and amortization expenses decreased to 2.8% in the first three quarters of fiscal 2022 from 3.1% in the comparable prior year period due primarily to sales leverage.
Impairment of Assets and Lease Terminations Expenses
During the first three quarters of fiscal 2022, we recorded impairment of assets and lease terminations expense of $0.3 million related to lease termination costs and accelerated depreciation for two Grand Lux Cafe locations that closed during the first quarter of fiscal 2022. During the first three quarters of fiscal 2021, we recorded impairment of assets and lease terminations expense of $0.6 million related to lease termination costs for two Other restaurants, one of which closed during the fourth quarter of fiscal 2020 and one that closed at the beginning of the first quarter of fiscal 2021.
Acquisition-Related Contingent Consideration, Compensation and Amortization Expenses
We recorded $2.9 million and $12.6 million during the first three quarters of fiscal 2022 and 2021, respectively, of acquisition-related contingent consideration, compensation and amortization. This decrease is primarily related to the impact of an amendment to the FRC acquisition agreement in the second quarter of fiscal 2021 that, among other things, extended the measurement period through fiscal 2026.
Preopening Costs
Preopening costs were $9.0 million and $9.8 million in the first three quarters of fiscal 2022 and 2021, respectively. We opened one The Cheesecake Factory, two North Italia, one Other FRC and one Other location in the first three quarters of fiscal 2022 compared to one The Cheesecake Factory, five North Italia restaurants, two Other FRC and two Other locations in the comparable prior year period.
Interest and Other Expense, Net
Interest and other expense, net was $3.9 million and $9.2 million for the three quarters of fiscal 2022 and 2021, respectively. This decrease was primarily due to higher interest expense in the prior year ($4.1 million), mainly related to our interest rate swap, which was terminated in June 2021 ($3.3 million).
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Table of Contents
Income Tax (Benefit)/Provision
Our effective income tax rate was 7.4% and 2.6% for the first three quarters of fiscal 2022 and 2021, respectively. The increase resulted primarily from nondeductible losses in the first three quarters of fiscal 2022 as compared to non-taxable gains in the comparable prior year period on our investments in variable life insurance contracts used to support our ESP and a benefit recorded in 2021 arising from an increase to our fiscal 2020 loss carryback as a result of repaying 100% of the FICA taxes that were deferred in fiscal 2020 under the CARES Act, partially offset by a higher proportion of employment credits in relation to pre-tax income in the first three quarters of fiscal 2022 and our reserve for an uncertain tax position recorded in the comparable prior year period.
Non-GAAP Measures
Adjusted net (loss)/income and adjusted if- converted net (loss)/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 available to common stockholders 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 Series A preferred stock into common stock for the period that it was outstanding prior to the conversion on June 15, 2021, we excluded the preferred dividend and assumed all convertible preferred shares had been converted into common stock. (See Note 9 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our preferred stock.) We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. Our inclusion of these adjusted measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items. In the future, we may incur expenses or generate income similar to the adjusted items.
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Table of Contents
Following is a reconciliation from net (loss)/income available to common stockholders and diluted net (loss)/income per common share to the corresponding adjusted measures (in thousands, except per share data):
Thirteen
Thirteen
Thirty-Nine
Thirty-Nine
Weeks Ended
Weeks Ended
Weeks Ended
Weeks Ended
September 27, 2022
September 28, 2021
September 27, 2022
September 28, 2021
Net (loss)/income available to common stockholders
$
(2,398)
$
32,680
$
46,421
$
45,798
Dividends on Series A preferred stock
—
—
—
18,661
Net income attributable to Series A preferred stock
—
—
—
5,804
COVID-19 related costs (1)
—
—
—
4,917
Impairment of assets and lease termination expenses
—
—
313
594
Acquisition-related contingent consideration, compensation and amortization expenses
1,081
685
2,920
12,592
Termination of interest rate swap
—
—
—
2,354
Uncertain tax position
—
—
—
2,471
Tax effect of adjustments (2)
(281)
(178)
(840)
(5,318)
Adjusted net (loss)/income
$
(1,598)
$
33,187
$
48,814
$
87,873
Diluted net (loss)/income per common share
$
(0.05)
$
0.64
$
0.92
$
0.96
Dividends on Series A preferred stock
—
—
—
0.35
Net income attributable to Series A preferred stock
—
—
—
0.11
Assumed impact of potential conversion of Series A preferred stock into common stock (3)
—
—
—
(0.11)
COVID-19 related costs (1)
—
—
—
0.09
Impairment of assets and lease termination expenses
—
—
0.01
0.01
Acquisition-related contingent consideration, compensation and amortization expenses
0.02
0.01
0.06
0.23
Termination of interest rate swap
—
—
—
0.04
Uncertain tax positions
—
—
—
0.05
Tax effect of adjustments (2)
(0.01)
(0.00)
(0.02)
(0.10)
Adjusted if-converted net (loss)/income per share (4)
$
(0.03)
$
0.65
$
0.96
$
1.64
(1) Represents incremental costs associated with the COVID-19 pandemic such as additional sanitation, personal protective equipment, sick and vaccination pay, and healthcare benefits associated with furloughed staff members.
(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 (0 and 5,908,167 shares for the thirteen and thirty-nine weeks ended September 28, 2021, respectively), resulting in an assumption of 51,112,650 and 53,582,824 weighted-average common shares outstanding for the thirteen and thirty-nine weeks ended September 28, 2021.
(4) Adjusted net (loss)/income per share may not add due to rounding.
Fiscal 2022 Outlook
Based on our fiscal 2022 year-to-date performance and recent trends, we anticipate total revenue for the fourth quarter of fiscal 2022 to be approximately $900 million to $930 million, including the impact of the 53rd operating week. Fourth quarter-to-date through October 25, 2022, The Cheesecake Factory comparable sales increased approximately 2.8% and 14.0% compared to the comparable periods in fiscal 2021 and fiscal 2019, respectively. Fourth quarter-to-date through October 25, 2022, North Italia comparable sales increased approximately 9% and 25% compared to the comparable periods in fiscal 2021 and fiscal 2019, respectively.
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We are currently estimating the following expenses for the fourth quarter of fiscal 2022. However, there remains measurable risk associated with cost fluctuations driven by the current environment. We anticipate commodity inflation of approximately 15% and expect net labor inflation of approximately 5% when factoring in wage rates and channel mix, among other components such as payroll taxes and benefits. We anticipate other operating costs and expenses as a percentage of revenues to be approximately 25.5%. In addition, we expect G&A expenses of approximately $55 million to $56 million, preopening costs of approximately $7 million and depreciation and amortization expenses of approximately $25 million in the fourth quarter of fiscal 2022, including the 53rd operating week, and are utilizing a tax rate of 8% for modeling purposes.
We plan to open as many as 13 new restaurants in fiscal 2022, including three The Cheesecake Factory restaurants, four North Italia restaurants and as many as six restaurants within our FRC business, which includes three Flower Child locations. We anticipate approximately $130 million in cash capital expenditures to support this level of unit development, as well as required maintenance on our restaurants. Restaurant opening dates may be impacted by supply chain challenges and permit approval delays.
Fiscal 2023 Outlook
Based on our fiscal 2022 year-to-date performance and recent trends, we anticipate total revenue for fiscal 2023 to be approximately $3.5 billion to $3.6 billion. We anticipate commodity and net labor inflation to be in the mid-single digit range.
We plan to open as many as 21 to 24 new restaurants in fiscal 2023, including four to five The Cheesecake Factory restaurants, seven to eight North Italia restaurants and ten to eleven restaurants within our FRC business, which includes three to four Flower Child locations. We anticipate approximately $150 million to $170 million in cash capital expenditures to support this level of unit development, as well as required maintenance on our restaurants.
Liquidity and Capital Resources
Our corporate financial objectives are to maintain a sufficiently strong and conservative balance sheet to support our operating initiatives and unit growth while maintaining financial flexibility to provide the financial resources necessary to protect and enhance the competitiveness of our restaurant and bakery brands and to provide a prudent level of financial capacity to manage the risks and uncertainties of conducting our business operations under various economic and industry cycles. Typically, cash flows generated from operating activities are our principal source of liquidity, which we use to finance our restaurant expansion plans, ongoing maintenance of our restaurants and bakery facilities and investment in our corporate and information technology infrastructures. However, given the impact of the COVID-19 pandemic on our operations, during fiscal 2020 we increased borrowings under our credit facility and issued convertible Series A preferred stock to increase our liquidity. During fiscal 2021, we used net proceeds from issuing convertible senior notes and additional common stock to fund the repurchase of the majority of our Series A preferred stock and the conversion of the remaining Series A preferred stock into common stock, simplifying our capital structure and eliminating future convertible preferred stock dividends. We also utilized a portion of the net proceeds to reduce borrowings under our credit facility.
Similar to many restaurant and retail chain store operations, we utilize operating lease arrangements for all of our restaurant locations. Accordingly, our lease arrangements reduce, to some extent, our capacity to utilize funded indebtedness in our capital structure. We are not limited to the use of lease arrangements as our only method of opening new restaurants. However, we believe our operating lease arrangements continue to provide appropriate leverage for our capital structure in a financially efficient manner.
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During the first three quarters of fiscal 2022, our cash and cash equivalents decreased by $56.5 million to $133.2 million. The following table presents, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities (in millions):
Thirty-Nine
Thirty-Nine
Weeks Ended
Weeks Ended
September 27, 2022
September 28, 2021
Cash provided by operating activities
$
98.9
$
119.2
Additions to property and equipment
(78.1)
(49.2)
Acquisition-related deferred consideration and compensation
(7.2)
—
Convertible debt issuance, net of issuance cost
—
334.9
Common stock issuance, net of issuance cost
—
167.1
Repayments on credit facility
—
(150.0)
Series A preferred stock cash-settled conversion
—
(443.8)
Series A preferred stock dividends paid
—
(18.7)
Proceeds from exercise of stock options
0.1
24.8
Common stock dividends paid
(28.3)
(0.3)
Treasury stock purchases
(41.5)
(5.2)
Cash Provided by Operating Activities
Cash flows from operations decreased by $20.3 million from the first three quarters of fiscal 2021 primarily due to lower net income and higher fiscal year-end 2021 liabilities related to increased sales and staffing levels that were paid in the first three quarters of fiscal 2022 compared to those accrued at fiscal year-end 2020 and paid in the first three quarters of fiscal 2021. These factors were partially offset by collection of our fiscal 2020 net operating loss carryback refund.
Property and Equipment
Capital expenditures for new restaurants, including locations under development, were $36.9 million and $23.6 million for the first three quarters of fiscal 2022 and 2021, respectively. Capital expenditures also included $37.3 million and $21.7 million for our existing restaurants and $3.9 million and $3.9 million for bakery and corporate capacity and infrastructure investments in the first three quarters of fiscal 2022 and 2021, respectively. We currently anticipate fiscal 2022 capital expenditures to be approximately $130 million.
Acquisition-Related Deferred Consideration and Compensation
During the first quarter of fiscal 2022, we made a payment of $7.2 million for contingent consideration and compensation related to the FRC acquisition.
Convertible Senior Notes
On June 15, 2021, we issued $345.0 million in aggregate principal amount of convertible senior notes (“Notes”), which will mature on June 15, 2026, unless earlier repurchased, redeemed or converted. The net proceeds from the sale of the Notes were approximately $334.9 million after deducting issuance costs related to the Notes. At September 27, 2022, the conversion rate for the Notes was 12.9717 shares of common stock per $1,000 principal amount of the Notes, which represents a conversion price of approximately $77.09 per share of common stock. In connection with the cash dividend that was declared by our Board on October 26, 2022, on November 14, 2022 we will adjust the conversion rate (which is expected to increase) and the conversion price (which is expected to decrease) of the Notes in accordance with the terms. (See Note 5 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of the Notes.)
Common Stock Issuance
On June 15, 2021, we issued 3.125 million shares of our common stock for $175.0 million. In connection with the issuance, we incurred direct and incremental costs of $8.0 million.
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Credit Facility
On March 30, 2021, we entered into an amendment to our existing loan agreement (the “Amended Credit Agreement,”) which terminates on July 30, 2024, and consists of a $400 million revolving loan facility (the “Revolving Facility”), including a $40 million sublimit for letters of credit. The Amended Credit Agreement also provides the ability to increase the Revolving Facility in an amount not to exceed $200 million. The funding of any such increases are subject to receipt of lender commitments and satisfaction of customary conditions precedent. Certain of our material subsidiaries have guaranteed our obligations under the Amended Credit Agreement.
The Amended Credit Agreement contains customary affirmative and negative covenants, including limits on cash dividends and share repurchases with respect to our equity interests, and restrictions on indebtedness, liens, investments, sales of assets, fundamental changes and other matters. The Amended Credit Agreement also contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgements, cross defaults to material indebtedness and events constituting a change of control. The occurrence of an event of default could result in the termination of commitments under the Revolving Facility, the declaration that all outstanding loans are immediately due and payable in whole or in part and the requirement of cash collateral deposits in respect of outstanding letters of credit. Our compliance with the financial covenants set forth in the Revolving Facility as of September 27, 2022 was measured under the Fourth Revolving Facility, and as such date we were in compliance with such financial covenants.
In the second quarter of fiscal 2021, we utilized a portion of the net proceeds from our Notes and common share offerings to reduce the balance on our Revolving Facility by $150.0 million. At September 27, 2022, we had net availability for borrowings of $238.5 million, based on a $130.0 million outstanding debt balance and $31.5 million in standby letters of credit.
On October 6, 2022, we entered into a Fourth Amended and Restated Loan Agreement (the “Fourth Amended Credit Agreement” and the revolving credit facility provided thereunder, the “Fourth Revolving Facility”). The Fourth Amended Credit Agreement amends and restates in its entirety our prior Amended Credit Agreement. The Fourth Revolving Facility, which terminates on October 6, 2027, provides us with revolving loan commitments that total $400 million, of which $50 million may be used for issuances of letters of credit. The Fourth Revolving Facility contains a commitment increase feature that, subject to certain conditions precedent, could provide for an additional $200 million in revolving loan commitments. Our obligations under the Fourth Revolving Facility are unsecured. Certain of our material subsidiaries have guaranteed our obligations under the Fourth Revolving Facility. On October 6, 2022 we repaid the outstanding balance under the Revolving Facility and borrowed the same amount on the Fourth Revolving Facility. As of the date of this report, we had net availability for borrowings of $238.5 million, based on a $130.0 million outstanding debt balance and $31.5 million in standby letters of credit under the Fourth Revolving Facility.
Under the Fourth Revolving Facility, we are subject to financial covenants as of the last day of each fiscal quarter. We are also subject to customary events of default that, if triggered, could result in acceleration of the maturity of the Fourth Revolving Facility. Subject to certain exceptions, the Fourth Revolving Facility also limits distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined ratio, and also sets forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters.
(See Notes 5 and 13 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt and the October 6, 2022 amendment.)
Series A Preferred Stock
During the second quarter of fiscal 2021, we paid a cash dividend on our Series A preferred stock of $5.1 million. Additionally, during the second quarter of fiscal 2021, we paid $457.3 million in connection with the cash-settled conversion of 150,000 shares of our outstanding Series A preferred stock (effected through a repurchase agreement), and the share-settled conversion of the remaining 50,000 shares of our outstanding Series A preferred stock into 2,400,864 shares of our common stock, of which $13.6 million was deemed to be a dividend. (See Note 9 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our preferred stock.)
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Common Stock Dividends
Common stock dividends of $28.3 million and $0.3 million were paid in the first three quarters of fiscal 2022 and 2021, respectively. The increase is primarily due to the resumption of our quarterly dividend in the second quarter of fiscal 2022 after the suspension that began in fiscal 2020 due to the impact of COVID-19 on our business and in conjunction with the terms of our Amended Credit Agreement. As further discussed in Note 13 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report, in October 2022, our Board declared a quarterly dividend to be paid in the fourth quarter of fiscal 2022. 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 Fourth Amended Credit Agreement and applicable law, and other such factors that the Board considers relevant.
Share Repurchases
Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 54.5 million shares at a total cost of $1,744.0 million through September 27, 2022. We repurchased 1.3 million shares at a cost of $41.5 million during the first three quarters of fiscal 2022 compared to 0.1 million shares at a cost of $5.2 million during the comparable fiscal 2021 period. $26.2 million of the increase is due to the resumption of our share repurchase program in the second quarter of fiscal 2022 after the suspension that began in fiscal 2020 due to the impact of COVID-19 on our business and in conjunction with the terms of our Amended Credit Agreement. The remaining variance represents the change in repurchases made to satisfy tax withholding obligations on vested restricted share awards.
Our objectives with regard to share repurchases have been to offset the dilution to our shares outstanding that results from equity compensation grants and to supplement our earnings per share growth. Our share repurchase program 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. Future decisions to repurchase shares are at the discretion of the Board and are based on several factors, including current and forecasted operating cash flows, capital needs associated with new restaurant development and maintenance of existing locations, dividend payments, debt levels and cost of borrowing, obligations associated with the FRC acquisition, our share price and current market conditions. The timing and number of shares repurchased are also subject to legal constraints and covenants under the Fourth Amended Credit Agreement that limit share repurchases based on a defined ratio. (See Notes 9 and 13 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our repurchase authorization and methods and increased authorized amount under our share repurchase program, respectively.)
Cash Flow Outlook
We believe that our cash and cash equivalents, combined with expected cash flows provided by operations and available borrowings under the Revolving Facility, will provide us with adequate liquidity for the next 12 months and the foreseeable future.
As of September 27, 2022, 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.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions for the reporting periods covered by the financial statements. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities. Actual results could differ from these estimates. Our critical accounting estimates have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended December 28, 2021.
Recent Accounting Pronouncements
See Note 1 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a summary of new accounting standards.
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