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Item 7. Management’s Discussion and Analysis

2024-02-26 compared with 2023-02-27 · 90 added, 136 removed, 224 unchanged (50% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), which contains forward-looking statements, should be read in conjunction with our audited consolidated financial statements and related notes in Part IV, Item 15 of this report, the “Risk Factors” included in Part I, Item 1A of this report and the cautionary statements included throughout this report.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), which contains forward-looking statements, should be read in conjunction with our audited consolidated financial statements and related notes in Part IV, Item 15 of this report, the “Risk Factors” included in Part I, Item 1A of this report and the cautionary statements included throughout this report.

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.

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes.

Fiscal year 2022 consisted of 53 weeks, while fiscal year 2021 consisted of 52 weeks.

Fiscal years 2023 and 2021 each consisted of 52 weeks, while fiscal year 2022 consisted of 53 weeks.

Fiscal year 2024 will consist of 52 weeks.

The following MD&A includes a discussion comparing our results in fiscal 2023 to fiscal 2022.

For a discussion comparing our results from fiscal 2021 to fiscal 2020, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 28, 2021, filed with the SEC on February 22, 2022.

COVID-19 Pandemic , Geopolitical and Other Macroeconomic 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 fiscal years 2021 and 2022, our revenues were negatively impacted during periods of accelerating case counts during which we incurred increased restaurant staff absenteeism and temporary shifts in consumer behavior, such as changes in customer traffic or the mix between on-premise and off-premise channels.

We have incurred and may continue to incur additional costs to address government regulations and the safety of our staff members and customers.

In addition, we experienced labor shortfalls relative to our sales levels in certain parts of our workforce and/or geographies as we reopened our dining rooms after the lifting of mandatory social-distancing regulations related to the COVID-19 pandemic.

During fiscal 2021, we also began to experience certain supply shortages and transportation delays largely attributable to impacts of the COVID-19 pandemic.

These shortages continued in fiscal 2022 and were exacerbated by geopolitical unrest.

The aggregate impact of these and other geopolitical and macroeconomic factors contributed to significantly increased commodity and wage inflation and other increased costs.

We have also encountered delays in opening new restaurants due to supply chain challenges, as well as to longer lead times in obtaining licenses and permits and in the timeline required to complete the overall leasing process with landlords.

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, disruptions in the supply chain and delay in new restaurant openings.

If these factors significantly impact our cash flow in the future, we may again implement mitigation actions such as suspending share repurchases, not declaring future dividends, increasing borrowings under our credit facility or modifying our operating strategies.

Any of these measures may have an adverse impact on our business and materially adversely affect our financial performance.

For a discussion comparing our results from fiscal 2022 to fiscal 2021, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended January 3, 2023, filed with the SEC on February 27, 2023.

Geopolitical and Other Macroeconomic Impacts to our Operating Environment

During fiscal 2021 and 2022, the COVID-19 pandemic continued to affect our business during periods of accelerated case counts in which we experienced increased restaurant staff absenteeism and temporary shifts in consumer behavior, such as changes in customer traffic or the mix between on-premise and off-premise channels.

Along with the COVID-19 pandemic, our operating results were impacted by geopolitical and macroeconomic events, causing supply chain challenges and significantly increased commodity and wage inflation.

Some of these factors continued to impact our operating results in fiscal 2023, contributing to significantly increased commodity and other costs.

We also encountered delays in opening new restaurants primarily due to delays in permitting and landlord readiness, as well as supply chain challenges.

The ongoing impact of geopolitical and macroeconomic events could lead to further shifts in consumer behavior, wage inflation, staffing challenges, product and services cost inflation, disruptions in the supply chain and delay in new restaurant openings.

Any of these factors may have an adverse impact on our business and materially adversely affect our financial performance.

The Cheesecake Factory Incorporated is a leader in experiential dining.

We are culinary forward and relentlessly focused on hospitality.

We currently own and operate 318 restaurants throughout the United States and Canada under brands including The Cheesecake Factory ® (210 locations), North Italia ® (33 locations), Flower Child ® (30 locations) and a collection of other FRC brands (35 locations).

We currently own and operate 334 restaurants throughout the United States and Canada under brands including The Cheesecake Factory ® (216 locations), North Italia ® (37 locations), Flower Child ® (32 locations) and additional brands within our FRC portfolio (41 locations).

Internationally, 33 The Cheesecake Factory ® restaurants operate under licensing agreements.

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Investing in new Company-owned restaurant development is our top long-term capital allocation priority, with a focus on opening our concepts in premier locations within both new and existing markets.

We plan to continue expanding The Cheesecake Factory and North Italia concepts, and in addition, our FRC subsidiary serves as an incubation engine, creating additional concepts for potential future growth.

For The Cheesecake Factory concept, we target an average cash-on-cash return on investment of approximately 20% to 25% at the unit level, calculated by dividing restaurant-level profit (earnings before interest, taxes, depreciation and amortization and preopening costs) by our cash investment.

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.

We plan to continue expanding The Cheesecake Factory and North Italia concepts, and in addition, our FRC subsidiary serves as an incubation engine, innovating new food, dining and hospitality experiences to create fresh, exciting concepts.

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.

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 and improving the pick-up experience, augmenting our marketing programs, including our Cheesecake Rewards TM program, enhancing our training programs and leveraging our customer satisfaction measurement platform.

Average check variations are 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 and also implemented an incremental price increase in the fourth quarter of fiscal 2022 to support our longer-term restaurant-level margin objectives.

Future near-term pricing actions are likely to be at levels above historical norms to keep pace with any significant cost increases.

Prior to fiscal 2022, we targeted menu price increases of approximately 2% to 3% annually, utilizing a market-based strategy to help mitigate cost pressure in higher-wage geographies.

In fiscal years 2022 and 2023, we implemented menu price increases above our historical levels, including an incremental price increase in the fourth quarter of fiscal 2022, to help offset significant inflationary cost pressures.

Current and 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.

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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 Revolver 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.

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 Revolver 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 Loan Agreement and applicable law.

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Results of Operations

The following table presents, for the periods indicated, information from our consolidated statements of income/(loss) expressed as percentages of revenues.

The following table presents, for the periods indicated, information from our consolidated statements of income expressed as percentages of revenues.

Costs and expenses:

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Impairment of assets and lease termination expenses

Acquisition-related contingent consideration, compensation and amortization expense

Acquisition-related contingent consideration, compensation and amortization expenses

Preopening costs

Total costs and expenses

Income/(loss) from operations

Income from operations

Interest and other expense, net

Income/(loss) before income taxes

Income before income taxes

Income tax benefit

Net income/(loss)

Dividends on Series A preferred stock

Undistributed earnings allocated to Series A preferred stock

Net income/(loss) available to common stockholders

Fiscal 2023 Compared to Fiscal 2022

Revenues increased 12.8% to $3,303.2 million for fiscal 2022, including approximately $78.4 million contributed by the 53rd week, compared to $2,927.5 million for fiscal 2021, primarily due to an increase in comparable restaurant sales, reflecting the impact of the COVID-19 pandemic in fiscal 2021, as well as additional revenue related to new restaurant openings.

The Cheesecake Factory comparable sales increased by 7.0%, or $162.5 million, from fiscal 2021 and increased 10.6% from fiscal 2019.

The increase from fiscal 2021 was primarily driven by increased customer traffic of 6.8% primarily due to the impact of the COVID-19 pandemic in the prior year, and an increase in average check of 0.2% (based on an increase of 5.9% in menu pricing, partially offset by a 5.7% negative change in mix).

Revenues increased 4.1% to $3,439.5 million for fiscal 2023, compared to $3,303.2 million for fiscal 2022, which included approximately $78.4 million contributed by the 53rd week, due to an increase in comparable restaurant sales, as well as additional revenue related to new restaurant openings.

The Cheesecake Factory average sales per restaurant operating week increased 3.0% to $235,701 in fiscal 2023 from $228,741 in fiscal 2022.

Total operating weeks at The Cheesecake Factory restaurants decreased 0.4% to 11,010 in fiscal 2023 compared to 11,052 in the comparable prior year period.

Excluding the impact of the 53rd week in fiscal 2022, total operating weeks increased 1.6% compared to 10,841 in the prior year.

The Cheesecake Factory comparable sales increased by 3.0%, or $73.6 million, from fiscal 2022 and increased 13.9% from fiscal 2019 on an operating week basis.

The increase from fiscal 2022 was primarily driven by an increase in average check of 4.0% (based on an increase of 9.4% in menu pricing, partially offset by a 5.4% negative change from menu mix), partially offset by decreased customer traffic of 1.0%.

We implemented effective menu price increases of approximately 3.5% and 2.0% in the first and third quarters of fiscal 2023, respectively.

We are in the process of implementing an approximate 2.5% price increase in the first quarter of fiscal 2024.

Sales through the off-premise channel comprised approximately 22% of our restaurant sales during fiscal 2023 as compared to 25% in fiscal 2022.

However, off-premise sales mix remains elevated versus the pre-pandemic level of 16% during fiscal 2019, even as customers continue to return to on-premise dining.

However, off-premise sales mix remains elevated versus the pre-pandemic level of 16% during fiscal 2019.

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

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In turn, the lower mix of sales in the off-premise channel during fiscal 2023 compared to fiscal 2022 comprised approximately 1% of the negative change in mix with a positive correlative impact to traffic.

We implemented effective menu price increases of approximately 3.25%, 4.25% and 2.8% in the first, third and fourth quarters of fiscal 2022, respectively.

The Cheesecake Factory average sales per restaurant operating week increased 7.3% to $228,741 in fiscal 2022 from $213,165 in fiscal 2021.

Total operating weeks at The Cheesecake Factory restaurants increased 2.7% to 11,052 in fiscal 2022 compared to 10,758 in the comparable prior year period.

Excluding the impact of the 53rd week in fiscal 2022, total operating weeks increased 0.8% to 10,841.

North Italia comparable sales increased approximately 15% from fiscal 2021 and increased approximately 22% compared to fiscal 2019.

The increase from fiscal 2021 was primarily driven by increased customer traffic of 11% primarily due to the impact of the COVID-19 pandemic in the prior year, and an increase in average check of 4.0% (based on an increase of 5.5% in menu pricing, partially offset by a 1.5% negative impact from mix).

In addition, both traffic and mix declined relative to the higher traffic levels and incident rates associated with the post pandemic surge that benefited fiscal 2022.

However, incident rates remained elevated versus pre-pandemic levels, and traffic outperformed the broader casual dining industry despite the softening sales environment.

North Italia average sales per restaurant operating week increased 5.0% to $149,727 in fiscal 2023 from $142,532 in fiscal 2022.

Total operating weeks at North Italia increased 7.8% to 1,729 in fiscal 2023 compared to 1,604 in the prior year.

Excluding the impact of the 53rd week in fiscal 2022, total operating weeks increased 16.2% to 1,571.

Excluding the impact of the 53rd week in fiscal 2022, total operating weeks increased 10.1% compared to 1,571 in the prior year.

North Italia comparable sales increased approximately 8% from fiscal 2022 and increased approximately 31% compared to fiscal 2019 on an operating week basis.

The increase from fiscal 2022 was primarily driven by an increase in average check of approximately 5% (based

on an increase of 8% in menu pricing, partially offset by a 3% negative impact from mix), as well as increased customer traffic of 3%.

We implemented effective menu price increases of approximately 4.0% and 3.7% in the second and fourth quarters of fiscal 2023, respectively.

Flower Child sales per restaurant operating week increased 6.5% to $79,714 in fiscal 2023 from $74,852 in fiscal 2022.

Total operating weeks at Flower Child increased 4.2% to 1,599 in fiscal 2023 compared to 1,534 in the prior year.

Excluding the impact of the 53rd week in fiscal 2022, total operating weeks increased 6.4% compared to 1,503 in the prior year.

Flower Child sales increased 11.0% to $127.5 million for fiscal 2023, compared to $114.8 million for fiscal 2022.

Excluding the impact of the 53rd week in fiscal 2022, total sales increased 13.1% compared to $112.7 million in the prior year.

Other FRC average sales per restaurant operating week decreased 2.0% to $138,469 in fiscal 2023 from $141,316 in fiscal 2022.

Average sales per restaurant operating week are impacted by new restaurant openings as well as the concept mix.

Total operating weeks at Other FRC increased 13.4% to 1,906 in fiscal 2023 compared to 1,681 in the prior year.

Excluding the impact of the 53rd week in fiscal 2022, total operating weeks increased 15.7% compared to 1,647 in the prior year.

Other FRC sales increased 11.1% to $263.9 million for fiscal 2023, compared to $237.6 million for fiscal 2022.

Excluding the impact of the 53rd week in fiscal 2022, total sales increased 13.5% compared to $232.6 million in the prior year.

Restaurants become eligible to enter the comparable sales base in their 19 th month of operation.

At January 3, 2023, there were four The Cheesecake Factory restaurants and eight North Italia restaurants not yet in the comparable sales base.

At January 2, 2024, there were nine 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.

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Food and beverage costs consist of raw materials and ingredients used in the food and beverage products sold in our restaurants and to our third-party bakery customers.

As a percentage of revenues, food and beverage costs were 24.6% for fiscal 2022 compared to 22.3% for fiscal 2021, primarily due to inflation across most categories in excess of menu price increases (1.9%).

Beginning in the fourth quarter of fiscal 2022, we retitled this income statement line item from “Cost of Sales” to “Food and Beverage Costs.” This is a title change only, and there is no difference in the classification of items within this category of costs.

As a percentage of revenues, food and beverage costs were 23.4% for fiscal 2023 compared to 24.6% for fiscal 2022, primarily due to menu price increases in excess of inflation across most categories (1.0%).

The Cheesecake Factory restaurant menus are among the most diversified in the foodservice industry and, accordingly, are not overly dependent on a few select commodities.

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As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery production labor, including associated fringe benefits, were 35.7% and 36.7% in fiscal 2023 and fiscal 2022, respectively.

This increase was primarily due to wage rate inflation in excess of menu price increases (0.8%), offset by a decrease in group medical insurance costs due to lower claim activity (0.8%) in fiscal 2022.

This decrease was primarily due to menu price increases in excess of wage rate inflation and improved staffing levels (1.0%).

For new restaurants, labor expenses are typically higher for a period of time after opening while our management team becomes more accustomed to predicting and managing the sales volumes at the new restaurants.

Other Operating Costs and Expenses

Other operating costs and expenses consist of all other restaurant-level operating costs, the major components of which are occupancy expenses (rent, common area expenses, insurance, licenses, taxes and utilities), dining room and to-go supplies, repairs and maintenance, janitorial expenses, credit card processing fees, marketing including delivery commissions, and incentive compensation, as well as bakery production overhead.

Other operating costs and expenses consist of all other restaurant-level operating costs, the major components of which are occupancy expenses (rent, common area expenses, insurance, licenses, taxes and utilities), dining room and to-go supplies, repairs and maintenance, janitorial expenses, credit card processing fees, marketing including delivery commissions, incentive compensation, and bakery production overhead.

As a percentage of revenues, other operating costs and expenses were 26.8% and 26.7% in fiscal 2023 and fiscal 2022, respectively.

This variance was primarily driven by sales leverage within occupancy and building costs (0.2%) and increased restaurant-level incentive compensation expense (0.2%).

This variance was primarily driven by higher marketing costs, including launch costs related to our Cheesecake Rewards TM program (0.3%), partially offset by a decrease in off-premise costs due to sales mix (0.2%).

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 6.3% and 6.2% for fiscal 2023 and fiscal 2022, 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 were 2.8% in fiscal 2022 compared to 3.1% in fiscal 2021 primarily due to sales leverage.

Impairment of Assets and Lease Termination Expenses

During fiscal 2023, we recorded impairment of assets and lease termination expenses of $29.5 million primarily related to the impairment of long-lived assets for three The Cheesecake Factory (one previously partially impaired), one North Italia (previously partially impaired), one Other FRC and two Other restaurant lease terminations.

During fiscal 2022, we recorded impairment of assets and lease terminations expense of $31.4 million primarily related to the impairment of long-lived assets for three The Cheesecake Factory, one Other FRC and three Other restaurants that are primarily located in areas which have not fully recovered from the pandemic.

During fiscal 2021, we recorded impairment of assets and lease terminations expense of $18.1 million primarily related to the impairment of long-lived assets for three The Cheesecake Factory and two Other restaurants.

See Notes 1 and 6 of Notes to Consolidated Financial Statements in Part 1V, Item 15 of this report for further discussion of our long-lived and intangible assets.

Acquisition-Related Contingent Consideration, Compensation and Amortization Expense/(Benefit)

We recorded a $13.4 million and $19.5 million of expense during fiscal 2022 and 2021, respectively, of acquisition-related contingent consideration, compensation and amortization.

Acquisition-Related Contingent Consideration, Compensation and Amortization Expense

We recorded $11.7 million and $13.4 million of expense during fiscal 2023 and 2022, respectively, of acquisition-related contingent consideration, compensation and amortization.

In fiscal 2023, the fair value of the contingent consideration and compensation liability decreased by $3.1 million due to a payment of $13.0 million per the FRC acquisition agreement, partially offset by $9.9 million increase in the fair value primarily stemming from a change in the volatility factors, as well as an increase in fiscal 2023 revenues and estimated future revenues utilized in the calculation and amortization.

In fiscal 2022, the fair value of the contingent consideration and compensation liability increased by $4.7 million due to a $11.9 million increase in the fair value primarily stemming from a change in the volatility factors, as well as an increase in fiscal 2022 revenues and estimated future revenues utilized in the calculation and amortization, partially offset by a payment of $7.2 million per the FRC acquisition agreement.

In fiscal 2021, we recorded a $15.3 million increase in the contingent consideration and compensation liability due to the impact of an amendment to the FRC acquisition agreement that, among other things, extended the measurement period through fiscal 2026, as well as to an increase in fiscal 2021 revenues and estimated future revenues utilized in the fair value calculation.

Preopening Costs

Preopening costs were $25.4 million for fiscal 2023 compared to $16.8 million for fiscal 2022.

We opened 13 restaurants in fiscal 2022 comprised of three The Cheesecake Factory, four North Italia, three Other FRC and three Other locations compared to 14 restaurants in fiscal 2021 comprised of two The Cheesecake Factory, six North Italia, four Other FRC and two Other locations.

We opened 16 restaurants in fiscal 2023 comprised of six The Cheesecake Factory, three North Italia, six Other FRC, and one Flower Child location compared to 13 restaurants in fiscal 2022 comprised of three The Cheesecake Factory, four North Italia, three Other FRC, and three Flower Child locations.

Restaurant-level 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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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.

The increase in preopening cost from fiscal 2021 primarily relates to a higher number of managers in reserve for pending openings, partially offset by decreased number of openings.

The increase in preopening cost from fiscal 2022 primarily relates to a higher number of openings and the mix of new restaurant openings.

Fiscal 2023 was also negatively impacted by delays in the timing of new restaurant openings that resulted in additional costs.

Interest and Other Expense, Net

Interest and other expense, net was $8.6 million in fiscal 2023 compared to $6.0 million in fiscal 2022.

This decrease was primarily due to higher interest expense in the prior year ($3.5 million), mainly related to our interest rate swap, which was terminated in June 2021.

This increase was primarily due to higher interest on our Revolver Facility ($3.5 million), partially offset by higher interest income due to higher cash balances in interest bearing accounts ($1.1 million).

Income Tax Benefit

In fiscal 2023, we had an income tax benefit of $1.3 million, an effective tax rate of (1.3%), compared to an income tax benefit of $10.2 million, an effective tax rate of (31.1%), in fiscal 2022.

The change was due primarily to a higher proportion of employment credits in relation to income before income taxes (48.7%) and our reserve for uncertain tax positions in fiscal 2021 (12.6%).

These favorable factors were partially offset by a higher proportion of non-deductible losses as compared to non-taxable gains in fiscal 2021 on our investments in variable life insurance contracts used to support our non-qualified deferred compensation plan (“Non-Qualified Plans”) in relation to income before income taxes (12.6%), the benefit to our net operating loss carryback recorded in fiscal 2021 of our decision to accelerate payment of certain FICA taxes deferred pursuant to the CARES Act (6.3%), a tax shortfall in fiscal 2022 related to equity compensation (5.5%) and a higher proportion of state taxes expense in relation to income before income taxes (4.7%).

The change was due primarily to a smaller proportion of employment credits in relation to income before income taxes (49.4%), offset by a higher proportion of non-taxable gains as compared to non-deductible losses in fiscal 2022 on our investments in variable life insurance contracts used to support our non-qualified

deferred compensation plan (“Non-Qualified Plans”) in relation to income before income taxes (12.1%), a lower tax shortfall in fiscal 2023 related to equity compensation (4.0%) and a lower proportion of state taxes expense in relation to income before income taxes (3.5%).

(See Note 17 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of income taxes.)

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We calculate these non-GAAP measures by eliminating from net income and diluted net 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 exclude the preferred dividend and assume all convertible preferred shares have been converted into common stock.

(See Note 15 of Notes to Condensed Consolidated Financial Statements in Part IV, Item 15 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.

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.

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

Net income available to common stockholders

Dividends on Series A preferred stock

Net income attributed to Series A preferred stock

COVID-19 related costs (1)

Impairment of assets and lease termination expenses

Acquisition-related contingent consideration, compensation and amortization expenses

Termination of interest rate swap

Uncertain tax positions

Tax effect of adjustments (1)

Adjusted net income

Diluted net income per common share

Dividends on Series A preferred stock

Net income attributable to Series A preferred stock

Assumed impact of potential conversion of Series A preferred stock into common stock (3)

COVID-19 related costs (1)

Diluted net income

Impairment of assets and lease termination expenses

Acquisition-related contingent consideration, compensation and amortization expenses

Termination of interest rate swap

Uncertain tax positions

Tax effect of adjustments (1)

Adjusted net income per share (2)

(1) Represents incremental costs associated with the COVID-19 pandemic such as additional sanitation, personal protective equipment, sick and vaccination pay, and healthcare benefits.

During fiscal 2021, we recorded $4.9 million for these costs with approximately $4.6 million reflected in labor expenses and $0.3 million in other operating expenses.

(1) 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 Series A preferred stock into common stock (0 and 4,431,140 shares for fiscal 2022 and fiscal 2021, respectively), resulting in an assumption of 50,414,160 and 51,959,879 weighted-average common shares outstanding for fiscal 2022 and fiscal 2021, respectively.

(2) Adjusted net income per share may not add due to rounding.

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This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act, and Section 21E of the Exchange Act and should be read in conjunction with our consolidated financial statements and related notes in Part IV, Item 15 of this report, the “Risk Factors” included in Part I, Item 1A of this report and the cautionary statements included throughout this report.

Based on recent trends and assuming no material operating or consumer disruptions, we anticipate total revenue for fiscal 2023 to be approximately $3.5 billion to $3.6 billion, with The Cheesecake Factory average sales per location reaching approximately $13 million.

Based on recent trends and assuming no material operating or consumer disruptions, we anticipate total revenue for fiscal 2024 to be approximately $3.6 billion.

Including the 2.5% February 2024 price increase, we will have 4.5% pricing in The Cheesecake Factory menu, and we will evaluate the level of pricing for the summer menu based on inflationary trends.

During fiscal 2023, we currently estimate total inflation across our commodities, total labor (factoring in the latest trends in wage rates and channel mix, as well as in other components such as payroll taxes and benefits) and other operating costs and expenses to be in the mid-single digit range.

During fiscal 2024, we currently estimate total inflation across our commodities, total labor (factoring in the latest trends in wage rates and channel mix, as well as in other components such as payroll taxes and benefits) and other operating costs and expenses to be in the low to mid-single digit range.

However, there remains measurable risk associated with cost fluctuations driven by the current environment.

We estimate preopening costs of approximately $24 million.

Based on these factors, we expect fiscal 2023 net income margin of approximately 4% at the mid-point of the estimated revenue range.

We plan to open as many as 20 to 22 new restaurants in fiscal 2023, including five to six The Cheesecake Factory restaurants, five to six North Italia restaurants and 10 restaurants within our FRC business, which includes three to four Flower Child locations.

We estimate G&A expenses to be consistent with fiscal 2023 as a percent of sales and preopening costs of approximately $28 million.

Based on these factors, we expect fiscal 2024 net income margin of approximately 4.25% at the estimated revenue.

We plan to open as many as 22 new restaurants in fiscal 2024, including three The Cheesecake Factory restaurants, six to seven North Italia restaurants, six to seven Flower Child locations and six to seven restaurants within our Other FRC business.

We anticipate approximately $180 to $200 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.

Total revenue for the first quarter of fiscal 2023 are expected to be approximately $850 million to $880 million.

We anticipate commodity inflation of approximately 10% to 12% and expect labor inflation of approximately 6%.

Based on these factors, we expect first quarter fiscal 2023 net income margin of approximately 3% to 3.5%.

Total revenues for the first quarter of fiscal 2024 are expected to be between $875 million to $895 million, including the impact from the inclement weather quarter-to-date.

We anticipate commodity inflation to be in the low-single digit range and expect labor inflation to be in the mid-single digit range.

Based on these factors, we expect first quarter fiscal 2024 net income margin of approximately 3.5% at the mid-point of the estimated revenue range.

Liquidity and Capital Resources

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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 then-existing credit facility and issued convertible 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 then-existing credit facility.

Similar to many restaurant and retail chain store operations, we utilize operating lease arrangements for all of our restaurant locations.

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Acquisition-related deferred consideration and compensation

Convertible debt issuance, net of issuance cost

Common stock issuance, net of issuance cost

Borrowings on credit facility

Repayments on credit facility

Series A preferred stock cash-settled conversion

Series A preferred stock dividends paid

Proceeds from exercises of stock options

Common stock dividends paid

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Cash Provided by Operating Activities

Cash flows from operations decreased by $51.1 million from fiscal 2021 primarily due to lower net income, the timing of payroll disbursements in relation to the fiscal 2022 versus 2021 year-end dates, higher gift card redemptions and lower accrued incentive compensation.

These factors were partially offset by collection of our fiscal 2020 net operating loss carryback refund in fiscal 2022, the payback in fiscal 2021 of payroll taxes that were deferred in fiscal 2020 under the CARES Act and higher non-cash impairment expense in fiscal 2022.

Cash flows from operations increased by $56.5 million from fiscal 2022 primarily due to higher net income, a higher payroll accrual due to the timing of payments and higher incentive compensation accrued in fiscal 2023 compared to fiscal 2022 and the collection of our fiscal 2020 net operating loss carryback refund in fiscal 2022.

These factors were partially offset by timing of accounts payable disbursements in relation to the fiscal 2022 versus 2021 year-end dates and higher sales tax payments in the first quarter fiscal 2023 due to the 53rd week of fiscal 2022 year.

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.

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Capital expenditures also included $47.8 million and $51.8 million for our existing restaurants and $5.4 million and $5.6 million for bakery and corporate capacity and infrastructure investments in fiscal 2023 and 2022, respectively.

We expect to open as many as 20 to 22 new restaurants in fiscal 2023 across our portfolio of concepts.

We opened 16 restaurants in fiscal 2023 comprised of six The Cheesecake Factory, three North Italia, six Other FRC and one Flower Child location compared to 13 restaurants in fiscal 2022 comprised of three The Cheesecake Factory, four North Italia, three Other FRC and three Flower Child locations.

We expect to open as many as 22 new restaurants in fiscal 2024 across our portfolio of concepts, with approximately 75% of the openings occurring in the second half of fiscal 2024.

We anticipate approximately $180 to $200 million in capital expenditures to support this level of unit development, as well as required maintenance on our restaurants.

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During fiscal 2023 and 2022, we made payments of $11.3 million and $11.1 million, respectively, for deferred consideration related to the FRC acquisition.

During fiscal 2022, we also made a payment of $7.2 million for deferred consideration and contingent consideration related to the FRC acquisition.

During fiscal 2023 and 2022, we also made payments of $13.0 million and $7.2 million, respectively for deferred consideration and contingent consideration related to the FRC acquisition.

Convertible Senior Notes

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At January 2, 2024, the conversion rate for the Notes was 13.4936 shares of common stock per $1,000 principal amount of the Notes, which represents a conversion price of approximately $74.11 per share of common stock.

In connection with the cash dividend that was declared by our Board on February 16, 2023, on March 21, 2023 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.

In connection with the cash dividend that was declared by our Board on February 15, 2024, on March 5, 2024 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 10 of Notes to Consolidated Financial Statements in Part IV, Item 15 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.

Credit Facility

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

During fiscal 2021, we utilized a portion of the net proceeds from our Notes and common share offerings to reduce the balance on our then-existing credit facility by $150.0 million.

On October 6, 2022, we repaid the outstanding balance under the prior credit facility and borrowed the same amount on the Revolver Facility.

In November 2023, we borrowed $15.0 million on the Revolver Facility and repaid it in December 2023.

As of January 2, 2024, we had net availability for borrowings of $236.5 million, based on a $130.0 million outstanding debt balance and $33.5 million in standby letters of credit under the Revolver Facility.

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(See Note 10 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our long-term debt.)

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 15 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our preferred stock.)

Common Stock Dividends

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On October 26, 2022, our Board increased the authorization to repurchase our common stock by 5.0 million shares to 61.0 million shares.

Under this authorization, we have cumulatively repurchased 55.1 million shares at a total cost of $1,765.6 million through January 3, 2023.

We repurchased 2.0 million shares at a cost of $63.1 million during fiscal 2022 compared to 0.1 million shares at a cost of $5.8 million fiscal 2021.

This increase is primarily 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 Loan Agreement.

Under this authorization, we have cumulatively repurchased 56.5 million shares at a total cost of $1,811.7 million, excluding excise tax through January 2, 2024.

We repurchased 1.4 million shares at a cost of $46.1 million, excluding excise tax during fiscal 2023 compared to 2.0 million shares at a cost of $63.1 million fiscal 2022.

This increase is primarily 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 Loan Agreement.

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.

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Long-term debt

Acquisition-related deferred consideration

Uncertain tax positions (2)

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Amounts exclude agreements that are cancelable without significant penalty.

Also includes the commitments associated with the third bakery production facility.

The FRC acquisition agreement also included a contingent consideration provision which is payable annually from 2022 through 2027 and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia and Flower Child with considerations made in the event we undergo a change in control or divest any FRC brand (other than North Italia and Flower Child) during the five years after closing.

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Contingent Consideration and Compensation Liability

The Acquisition agreement included a contingent consideration provision, a portion of which was considered part of the acquisition consideration and the remainder of which was considered future compensation expense.

The FRC acquisition agreement included a contingent consideration provision, a portion of which was considered part of the acquisition consideration and the remainder of which was considered future compensation expense.

This contingent consideration and compensation is payable annually from 2022 through 2027 and is based on achievement of revenue and profitability targets for the FRC brands other than North Italia and Flower Child.

The fair value of the contingent consideration and compensation liability is determined utilizing a Monte Carlo model based on estimated future revenues, margins, volatility factors and discount rates, among other variables and estimates and has no minimum or maximum payment.

The undiscounted range of outcomes per the Monte Carlo model was $0 to $276.0 million at January 3, 2023 and $0 to $204.0 million at December 28, 2021.

During fiscal 2022, the fair value of the contingent consideration and compensation liability increased by $4.7 million to $28.6 million due to an $8.3 million increase in the fair value primarily stemming from a change in the volatility factors, as well as an increase in fiscal 2022 revenues and estimated future revenues utilized in the calculation and amortization, partially offset by a payment of $7.2 million per the FRC acquisition agreement.

The undiscounted range of outcomes per the Monte Carlo model was $2.6 million to $235.4 million at January 2, 2024 and $0 to $276.0 million at January 3, 2023.

During fiscal 2023, the fair value of the contingent consideration and compensation liability decreased by $3.1 million to $25.5 million due to a payment of $13.0 million per the FRC acquisition agreement, partially offset by $9.9 million increase in the fair value primarily stemming from a change in the volatility factors, as well as an increase in fiscal 2023 revenues and estimated future revenues utilized in the calculation, and amortization.

The fair value of the contingent consideration and compensation liability is highly subjective, and results could change materially if different estimates and assumptions were used.

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First, we determine if, based on qualitative factors, it is more likely than not that an impairment exists.

Factors considered include, but are not limited to, historical financial performance, assumptions related to the COVID-19 pandemic, wage, product and services inflation, competitive environment, macroeconomic and industry conditions, results of prior impairment tests and share price performance.

Factors considered include, but are not limited to, historical financial performance, wage, product and services inflation, competitive environment, macroeconomic and industry conditions, results of prior impairment tests and share price performance.

Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.

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Key assumptions include projected revenue growth and operating expenses, discount rates, royalty rates and other factors that could affect fair value or otherwise indicate potential impairment.

Estimates of revenue growth and operating expenses are based on internal projections and consider historical performance and forecasted growth, including assumptions related to the COVID-19 pandemic, the cost environment and macroeconomic and industry conditions.

Estimates of revenue growth and operating expenses are based on internal projections and consider historical performance and forecasted growth, including assumptions related to the cost environment and macroeconomic and industry conditions.

The discount rate is based on the estimated cost of capital that reflects the risk profile of the related business.

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We did not record any impairment charges related to indefinite-lived intangible assets in fiscal 2023, 2022 or 2021.

We recorded impairment charges related to indefinite-lived intangible assets of $180.8 million in fiscal 2020.

(See Note 1 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of these impairments.)

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These estimates are subjective and our ability to realize future cash flows and asset fair values is affected by factors such as changes in economic conditions and operating performance.

In fiscal 2023, we recorded $29.5 million of expense primarily related to the impairment of three The Cheesecake Factory (one previously impaired), one North Italia (previously impaired), one Other FRC and two Other restaurant lease terminations.

In fiscal 2022, we recorded $31.4 million of expense primarily related to the impairment of three The Cheesecake Factory, one Other FRC and three Other restaurants.

In fiscal 2021, we recorded $16.3 million of expense primarily related to the impairment of long-lived assets for three The Cheesecake Factory and two Other restaurants.

In fiscal 2020, we recorded $36.2 million of expense primarily related to the impairment of one The Cheesecake Factory, one North Italia, two Other FRC and six Other restaurants, as well as lease termination costs and accelerated depreciation for one The Cheesecake Factory and seven Other restaurants.

(See Note 1 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion related to long-lived asset impairment.)

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These judgments may produce materially different amounts of operating lease assets and liabilities, rent expense and interest expense than would be reported if different assumptions were used.

We compute income taxes based on estimates of our federal, state and foreign tax liabilities.

Our estimates include, but are not limited to, effective state and local income tax rates, allowable tax credits, depreciation expense allowable for tax purposes, the tax deductibility of certain other items and applicable valuation allowances on deferred tax assets.

Our estimates are made based on the best available information at the time we prepare our consolidated financial statements.

In making our estimates, we consider the impact of legislative and judicial developments.

As these developments evolve, we update our estimates, which, in turn, may result in adjustments to our effective tax rate.

We anticipate realization of a significant portion of our deferred tax assets through the reversal of existing deferred tax liabilities.

Realization of some of our deferred tax assets, in particular those which have statutorily limited time periods within which they must be used, is dependent on generating sufficient taxable income in the relevant jurisdictions prior to expiration of these time periods.

Although realization is not assured, management believes it is more likely than not that our deferred tax assets, net of valuation allowances, will be realized.

The amount of deferred tax assets considered realizable could be reduced, however, if estimates of future earnings and taxable income in the carryforward periods are reduced.

Uncertain tax positions taken or expected to be taken in a tax return are recognized (or derecognized) in the financial statements when it is more likely than not that the position would be sustained on its technical merits upon examination by tax authorities, taking into account available administrative remedies and litigation.

Assessment of uncertain tax positions requires significant judgments relating to the amounts, timing and likelihood of resolution.

Recent Accounting Pronouncements

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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-K

Item 7. Management’s Discussion and Analysis