THE CHEESECAKE FACTORY INCORPORATED
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.
The following MD&A includes a discussion comparing our results in fiscal 2021 to
fiscal 2020. For a discussion comparing our results from fiscal 2020 to fiscal
2019, 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 29, 2020 , filed with the SEC on February 24,
2021 .
COVID-19 Pandemic
Beginning inMarch 2020 , COVID-19 and measures to prevent its spread led to significant disruptions to our business as suggested and mandated social distancing and shelter-in-place orders led to the temporary closure of a number of restaurants across our portfolio while our remaining locations shifted to an off-premise only operating model on an interim basis. Reopening of restaurant dining rooms resumed, generally at reduced capacity, at various points sinceMay 2020 . While restrictions on the type of permitted operating model and occupancy capacity may continue to change, currently nearly all of our restaurants are operating with no capacity restrictions on indoor dining. The ongoing effects of COVID-19 and its variants, including, but not limited to, consumer behavior, capacity restrictions, mask and vaccination mandates, wage inflation, our ability to continue to staff our restaurants and disruptions in the supply chain, will determine the impact to our operating results and financial position. The impact to our operations has been most notable during the periods of greatest accelerating COVID-19 case counts. We have incurred and will continue to incur additional costs to address government regulations and the safety of our staff members and customers. During fiscal 2020, we implemented the following measures to preserve liquidity and enhance financial flexibility in response to the impacts of COVID-19 on our business:
Eliminated non-essential capital expenditures and expenses, suspended new unit
? development and reduced board, executive and corporate support staff
compensation for approximately two quarters;
? Furloughed approximately 41,000 hourly staff members, a majority of whom we
called back to work in the third quarter of fiscal 2020;
Engaged in discussions with our landlords regarding ongoing rent obligations,
? including the potential deferral, abatement and/or restructuring of rent
otherwise payable during the period of the COVID-19 pandemic related closure;
? Increased borrowings under our credit facility, which were repaid during fiscal
2020;
? Issued convertible preferred stock, which was either repurchased or converted
into common stock during fiscal 2021; and
? Suspended the dividend on our common stock and share repurchases with such
suspensions continuing through fiscal 2021.
We may take additional mitigation actions in the future such as raising additional financing, not declaring future dividends, further suspending capital spending, implementing additional furloughs or modifying our operating strategies. Some of these measures may have an adverse impact on our business.
See Item 1A - Risk Factors - Risks Related to the COVID-19 Pandemic.
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 306 restaurants throughoutthe United States andCanada under brands including 208 The Cheesecake Factory®, 29 North Italia® and a collection within ourFox Restaurant Concepts 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. 41 Table of Contents 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. 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 expect our acquisition of North Italia and FRC to further accelerate and diversify our growth opportunities. ForThe 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. Changes in comparable restaurant sales come from variations in customer traffic as well as in average check. ForThe Cheesecake Factory concept, our strategy is to increase comparable restaurant sales by growing average check and stabilizing 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 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 updateThe 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 protecting both our margins and customer traffic levels. We have historically 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 cost pressures we are currently experiencing, particularly in commodities, in the first quarter of fiscal 2022, we implemented price increases above our historical levels to protect margins. We will continue to consider the cost environment when evaluating future menu price 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.
On
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 reinstating our dividend
and share repurchase programs, the latter of which offsets dilution from our
equity compensation program and supports our earnings per share growth. Our
Board is actively evaluating capital distribution strategies for fiscal 2022.
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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. (See Item 1A
- Risk Factors - "Our stock price could be adversely affected if our performance
falls short of our financial guidance and/or market expectations.")
Results of Operations
The following table presents, for the periods indicated, information from our
consolidated statements of income/(loss) expressed as percentages of revenues.
Fiscal Year
2021 2020 2019
Revenues 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of sales 22.3 23.1 22.6
Labor expenses 36.6 39.3 36.3Other operating costs and expenses 27.0 31.1
25.5
General and administrative expenses 6.4 7.9
6.5
Depreciation and amortization expenses 3.1 4.6
3.5
Impairment of assets and lease termination expenses 0.6 11.1
0.7
Acquisition-related costs - 0.1
0.2
Acquisition-related contingent consideration, compensation and amortization expense/(benefit) 0.7 (0.2)
0.0
Preopening costs 0.5 0.5 0.5
Total costs and expenses 97.2 117.5 95.8
Income/(loss) from operations 2.8 (17.5)
4.2
Gain on investments in unconsolidated affiliates - -
1.6
Interest and other expense, net (0.4) (0.5)
(0.1)
Income/(loss) before income taxes 2.4 (18.0)
5.7
Income tax (benefit)/provision (0.1) (5.2)
0.6
Net income/(loss) 2.5 (12.8)
5.1
Dividends on Series A preferred stock (0.6) (0.7)
-
Direct and incremental Series A preferred stock issuance cost - (0.5)
-
Undistributed earnings allocated to Series A preferred stock (0.2) -
-
Net income/(loss) available to common stockholders 1.7 % (14.0)
% 5.1 %
Fiscal 2021 Compared to Fiscal 2020
Revenues
Revenues increased 47.6% to
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The Cheesecake Factory comparable sales increased by 44.0%, or $686.6 million ,
from fiscal 2020 and increased 3.3% from fiscal 2019. The increase from fiscal
2020 was primarily driven by increased customer traffic of 41.4% primarily due
to the impact of the COVID-19 pandemic in the prior year, and an increase in
average check of 2.6 % (based on an increase of 3.0% in menu pricing, partially
offset by a 0.4% negative change in mix). We implemented effective menu price
increases of approximately 1.5% in both the first and third quarters of fiscal
2021. Sales through the off-premise channel comprised approximately 32% of our
restaurant sales during fiscal 2021 as compared to 43% in fiscal 2020 as many
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 higher than the pre-pandemic
level of 16% during fiscal 2019. 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 of these orders are for more than one
customer. In turn, the lower mix of sales in the off-premise channel in fiscal
2021 was the primary driver of the negative change in mix and also contributed
to the increase in traffic, along with the broader impact of the COVID-19
pandemic. The Cheesecake Factory average sales per restaurant operating week
increased 43.1% to $213,165 in fiscal 2021 from $148,939 in fiscal 2020. Total
operating weeks at The Cheesecake Factory restaurants increased 1.1% to 10,758
in fiscal 2021 compared to 10,642 in the prior year.
North Italia comparable sales increased approximately 48% from fiscal 2020 and
increased approximately 7% compared to fiscal 2019. The increase from fiscal
2020 was primarily driven by increased customer traffic of 45% primarily due to
the impact of the COVID-19 pandemic in the prior year, and an increase in
average check of 3.0% (based on an increase of 3.5% in menu pricing, partially
offset by a 0.5% negative change in mix). North Italia average sales per
restaurant operating week increased 42.0% to $127,146 in fiscal 2021 from
$89,515 in fiscal 2020. Total operating weeks at North Italia increased 18.0% to
1,352 in fiscal 2021 compared to 1,146 in the prior year. Revenues for North
Italia, Flower Child and the other FRC brands totaled $444.0 million in fiscal
2021.
Restaurants become eligible to enter the comparable sales base in their 19th
month of operation. At December 28, 2021 , there were three The Cheesecake
Factory restaurants and six 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.
External bakery sales were
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 22.3% for fiscal 2021 compared to 23.1% for fiscal 2020, primarily reflecting a shift in sales mix within the restaurants and a lower proportion of third-party bakery revenues (0.4%) and pricing leverage (0.7%). These factors were partially offset by increased costs related to buying in the spot market to meet volume needs that exceeded our contracted levels (0.2%).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. Changes in costs for one commodity sometimes can be offset by cost changes in other commodity categories. The principal commodity categories for our restaurants include general grocery items, dairy, produce, seafood, poultry, meat and bread. (See the discussion of our contracting activities in Part II, Item 7A - "Quantitative and Qualitative Disclosures About Market Risk.")
For new restaurants, cost of sales is typically higher for a period of time after opening until our management team becomes more accustomed to predicting, managing and servicing the sales volumes at these restaurants.
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 36.6% and 39.3% in fiscal 2021 and fiscal 2020, respectively.
This decrease was primarily due to deleverage in the prior year when costs
associated with the COVID-19 pandemic, including maintaining our full restaurant
management team and healthcare benefits for our furloughed staff members, were
incurred in the reduced sales environment, as well as pricing leverage (3.6%).
These factors were partially offset by higher training costs (0.2%), wage rates
and overtime (0.7%) in fiscal 2021.
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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 restaurant-level occupancy expenses (rent, common area expenses, insurance, licenses, taxes and utilities), marketing, including delivery commissions, and 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 27.0% and 31.1% in fiscal 2021 and fiscal 2020, respectively. This variance was primarily driven by sales leverage within occupancy and building costs (3.7%) and pricing leverage (0.8%), partially offset by increased restaurant-level incentive compensation expense (0.6%). 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 7.9% for fiscal 2021 and fiscal 2020, respectively. This variance was primarily driven by sales leverage and expense management (2.1%), partially offset by higher corporate incentive compensation expense (0.4%).
Depreciation and Amortization Expenses
As a percentage of revenues, depreciation and amortization expenses were 3.1% in fiscal 2021 compared to 4.6% in fiscal 2020 primarily due to sales leverage.
Impairment of Assets and Lease Termination Expenses
During fiscal 2021, we recorded impairment of assets and lease terminations
expense of
During fiscal 2020, we recorded$219.3 million of impairment of assets and lease termination expenses primarily related to the impairment of goodwill, trade names, trademarks and licensing agreements associated with the Acquisition and long-lived assets for oneThe Cheesecake Factory , one North Italia, two Other FRC and six Other restaurants, as well as lease termination costs and accelerated depreciation for oneThe Cheesecake Factory and seven Other restaurants.
See Notes 7 and 8 of Notes to Consolidated Financial Statements in Part 1V, Item 15 of this report for further discussion of our long-lived and intangible assets, respectively.
Acquisition-Related Contingent Consideration, Compensation and Amortization Expenses/(Benefit)
In fiscal 2021, we recorded$19.5 million of acquisition-related contingent consideration, compensation and amortization expenses, primarily related to the impact of an amendment to the 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. In fiscal 2020, we recorded a benefit of$3.9 million in acquisition-related contingent consideration, compensation and amortization (benefit)/expenses, reflecting a$5.7 million decrease in the fair value of the contingent consideration and compensation liabilities primarily related to the impact of the COVID-19 pandemic, partially offset by an increase of$1.4 million in the Acquisition-related deferred consideration liability and$0.4 million in amortization of acquired definite-lived licensing agreements. 45 Table of Contents Preopening Costs Preopening costs were$13.7 million for fiscal 2021 compared to$10.5 million for fiscal 2020. We opened 14 restaurants in fiscal 2021 comprised of twoThe Cheesecake Factory , six North Italia, four Other FRC and two Other locations compared to seven restaurants in fiscal 2020 comprised of oneThe Cheesecake Factory , one North Italia, two Other FRC and three Other locations. 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. The increase in preopening costs from fiscal 2020 primarily relates to the increased number of openings, partially offset by the mix toward concepts with lower preopening costs and a lower number of managers in reserve for pending openings.
Interest and Other Expense, Net
Interest and other expense, net was$10.7 million in fiscal 2021 compared to$8.6 million in fiscal 2020. This increase was primarily due to the termination of the interest rate swap ($2.5 million ), as well as favorability across several categories, partially offset by lower borrowings outstanding on our Amended Facility ($1.7 million ).
Income Tax (Benefit)/Provision
In fiscal 2021, we had an income tax benefit of$0.8 million , an effective tax rate of (1.1%), compared to an income tax benefit of$102.7 million , an effective tax rate of 28.8%, in fiscal 2020. The significant change was due primarily to the fact that we had$71.6 million in income before income taxes in fiscal 2021 compared to a loss before income taxes of$356.0 million in fiscal 2020. The variance was also driven by a higher proportion of employment credits and non-taxable gains on our investments in variable life insurance contracts used to support our non-qualified deferred compensation plan in relation to income/(loss) before income taxes, as well as a benefit arising from our decision to pay all FICA taxes deferred under the Coronavirus Aid, Relief and Economic Security Act ("the CARES Act") earlier than required, which increased the amount of our 2020 loss carryback to prior years when the federal statutory rate was 35%. These favorable factors were partially offset by a higher proportion of state taxes expense as compared to state taxes benefit in relation to income/(loss) before income taxes, the benefit in the prior year of our fiscal 2020 loss carryback and a reserve for uncertain tax positions in fiscal 2021. (See Note 20 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of income taxes.)
Non-GAAP Measures
Adjusted net income/(loss) and adjusted diluted net income/(loss) 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 income/(loss) and diluted net income/(loss) 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 onJune 15, 2021 , we exclude the preferred dividend and assume all convertible preferred shares have been converted into common stock. (See Note 17 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. 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. 46
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Following is a reconciliation from net income/(loss) and diluted net income/(loss) per common share to the corresponding adjusted measures (in thousands, except per share data):
Fiscal Year
2021 2020 2019
Net income/(loss) available to common stockholders $ 49,131 $ (277,107) $ 127,293
Dividends on Series A preferred stock 18,661 13,485 -
Direct and incremental Series A preferred stock issuance costs - 10,257 -
Net income attributed to Series A preferred stock to apply if-converted method
4,581 - -
COVID-19 related costs (1) 4,917 22,963 -
Impairment of assets and lease termination expenses 18,139 219,333 18,247
Acquisition-related costs - 2,699 5,270
Acquisition-related contingent consideration, compensation and amortization expense/(benefit) 19,510 (3,872) 1,033 Termination of interest rate swap
2,354 - -
Uncertain tax positions 7,139 - -
Gain on investments in unconsolidated affiliates - - (39,233)
Tax effect of adjustments (2) (11,679) (62,692) 3,818
Adjusted net income/(loss) $ 112,753 $ (74,934) $ 116,428
Diluted net income/(loss) per common share $ 1.01 $ (6.32) $ 2.86
Dividends on Series A preferred stock 0.35 0.27 -
Direct and incremental Series A preferred stock issuance costs - 0.20 -
Net income attributable to Series A preferred stock to apply if-converted method
0.09 - -
Assumed impact of potential conversion of Series A preferred stock into common stock (3)
(0.08) 0.80 -
COVID-19 related costs (1) 0.09 0.46 -
Impairment of assets and lease termination expenses 0.34 4.36 0.41
Acquisition-related costs - 0.05 0.12
Acquisition-related contingent consideration, compensation and amortization expense/(benefit) 0.37 (0.08) 0.02 Termination of interest rate swap
0.04 - -
Uncertain tax positions 0.13 - -
Gain on investments in unconsolidated affiliates - - (0.88)
Tax effect of adjustments (2) (0.22) (1.25) 0.09
Adjusted net income/(loss) per share (4) $ 2.13 $ (1.49) $ 2.61 Represents incremental costs associated with the COVID-19 pandemic such as
additional sanitation, personal protective equipment, sick and vaccination
pay, healthcare benefits and other expenses associated with furloughed staff
members. During fiscal 2021, we recorded
(1) approximately
other operating expenses. During fiscal 2020, we recorded
these costs with approximately
reflected in labor expenses,
(2) Based on the federal statutory rate and an estimated blended state tax rate,
the tax effect on all adjustments assumes a 26% tax rate.
Represents the impact of assuming the conversion of Series A preferred stock
into common stock (4,431,140 and 6,390,210 shares for fiscal 2021 and fiscal
(3) 2020, respectively), resulting in an assumption of 51,959,879 and 50,258,815
weighted-average common shares outstanding for fiscal 2021 and fiscal 2020,
respectively.
(4) Adjusted net income/(loss) per share may not add due to rounding.
Fiscal 2022 Outlook
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.
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Based on extrapolating recent trends and assuming no material disruptions from COVID-19 or other factors, we anticipate total revenue for fiscal 2022 to be approximately$3.3 billion to$3.4 billion , withThe Cheesecake Factory average sales per location reaching just over$12 million , including the impact of the 53rd operating week. We remain committed to protecting our longer-term restaurant-level margins and will take appropriate actions, including additional menu pricing to offset structural and permanent costs, as needed. However, we will likely continue to absorb short-term cost fluctuations driven by the current environment. Including theFebruary 2022 price increase, we currently have 4.75% pricing inThe Cheesecake Factory menu and depending on inflationary trends will evaluate our pricing needs for the fall menu. During fiscal 2022, we expect commodity inflation of low double digits and anticipate net labor inflation of approximately 5% when factoring in wage rates and channel mix, among other components such as payroll taxes and benefits. We also anticipate other operating costs and expenses as a percentage of revenues to range from 25.0% to 25.5% and G&A expenses to be approximately$210 million . We estimate preopening costs of approximately$19 million and depreciation and amortization expenses of approximately$90 million and are utilizing a tax rate of approximately 13% for modeling purposes. We plan to open as many as 17 to 19 new restaurants in fiscal 2022, including fiveThe Cheesecake Factory restaurants, five to seven North Italia restaurants and seven restaurants within our FRC business, which includes threeFlower Child locations. We anticipate approximately$150 million in cash capital expenditures to support this level of unit development, as well as required maintenance on our restaurants. We expect our first quarter restaurant-level margins to be at their lowest level of the fiscal 2022 primarily due to the timing of the first quarter price increase and the projected cadence of commodity inflation we expense to lessen over the course of the fiscal year.
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 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 fiscal 2021, our cash and cash equivalents increased by$35.5 million to$189.6 million . The following table presents, for the periods indicated, a summary of our key cash flows from operating, investing and financing activities (in millions): Fiscal Year 2021 2020
Cash provided by operating activities$ 213.0 $
2.9
Additions to property and equipment (66.9)
(50.3)
Convertible debt issuance, net of issuance cost 334.9
-
Common stock issuance, net of issuance cost 167.1
-
Net repayments on credit facility (150.0)
(10.0)
Series A preferred stock issuance, net of issuance costs -
189.7
Series A preferred stock cash-settled conversion (443.8)
-
Series A preferred stock dividends paid (18.7)
-
Acquisition-related deferred consideration (17.0)
(17.3)
Proceeds from exercises of stock options 24.8
0.6 Common stock dividends paid (0.3) (15.8) Treasury stock purchases (5.8) (3.6)
Cash Provided by Operating Activities
Cash flows from operations increased by$210.1 million from fiscal 2020 primarily due to a lesser impact of the COVID-19 pandemic, partially offset by the payback of$36.5 million of payroll taxes that were deferred in fiscal 2020 under the CARES Act. 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. This dynamic shifted in fiscal 2020 in the reduced sales environment but returned to the historical pattern in fiscal 2021.
Property and Equipment
Capital expenditures for new restaurants, including locations under development as of each fiscal year-end, were$31.7 million ,$31.7 million and$40.5 million for fiscal 2021, 2020 and 2019, respectively. Capital expenditures also included$30.1 million ,$16.6 million and$29.4 million for our existing restaurants and$5.1 million ,$2.0 million and$3.9 million for bakery and corporate capacity and infrastructure investments in fiscal 2021, 2020 and 2019, respectively. We opened 14 restaurants in fiscal 2021 comprised of twoThe Cheesecake Factory , six North Italia, four Other FRC and two Other locations compared to seven restaurants in fiscal 2020 comprised of oneThe Cheesecake Factory , one North Italia, two Other FRC and three Other locations. We expect to open as many as 17 to 19 new restaurants in fiscal 2022 across our portfolio of concepts. We anticipate approximately$150 million in capital expenditures to support this level of unit development, as well as required maintenance on our restaurants.
Convertible Senior Notes
OnJune 15, 2021 , we issued$345.0 million in aggregate principal amount Notes. The initial conversion rate for the Notes was 12.7551 shares of common stock per$1,000 principal amount of the Notes, which represents an initial conversion price of approximately$78.40 per share of common stock. The net proceeds from the sale of the Notes were approximately$334.9 million after deducting issuance costs related to the Notes. (See Note 12 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of the Notes.)
Common Stock Issuance
OnJune 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 . 49 Table of Contents Revolving Facility OnMarch 30, 2021 , we entered into an Amended Credit Agreement, which terminates onJuly 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 (a) during the Covenant Relief Period (as defined below)$125 million and (b) thereafter,$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. As ofDecember 28, 2021 , we were in compliance with the covenants set forth in the Revolving Facility. (See Note 12 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our long-term debt.) During the first quarter of fiscal 2020, we increased our borrowings under our Revolving Facility to bolster our cash position and enhance financial flexibility. 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, such that atDecember 28, 2021 , we had net availability for borrowings of$240.1 million , based on a$130.0 million outstanding debt balance and$29.9 million in standby letters of credit.
Series A Preferred Stock
During the second quarter of fiscal 2020, we issued 200,000 shares of Series A preferred stock for an aggregate purchase price of$200.0 million to increase our liquidity given the impact of the COVID-19 pandemic on our operations. In connection with the issuance, we incurred direct and incremental costs of$10.3 million . During the first quarter of fiscal 2021, we declared a cash dividend of$25.35 per share on the Series A preferred stock. 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 17 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our preferred stock.) 50 Table of Contents Common Stock Dividends
To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of the Amended Credit Agreement, inMarch 2020 , our Board suspended the quarterly dividend on our common stock. Prior to this suspension, our Board declared cash dividends of$0.36 per common share for the first quarter of fiscal 2020. Cash dividends of$0.3 million paid in the first quarter of fiscal 2021 represent dividends previously accrued on restricted stock awards that vested during the quarter. 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 Amended Credit Agreement and applicable law, and other such factors that the Board considers relevant. Our Board is considering the reinstatement of our dividend program in fiscal 2022. However, the decision to reinstate the dividend as well as the amount of any dividend have yet to be determined.
Share Repurchases
Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 53.1 million shares at a total cost of$1,702.5 million throughDecember 28, 2021 . During fiscal 2021 and 2020, we repurchased 0.1 million and 0.1 million shares of our common stock at a cost of$5.8 million and$3.6 million , respectively, in conjunction with satisfying 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 authorization does not have an expiration date, does not require us to purchase a specific number of shares and may be modified, suspended or terminated at any time. To preserve liquidity during the COVID-19 pandemic and in conjunction with the terms of our Amended Credit Agreement, inMarch 2020 , our Board suspended share repurchases. 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 Acquisition, our share price and current market conditions. The timing and number of shares repurchased are also subject to legal constraints and financial covenants under the Amended Credit Agreement that limit share repurchases based on a defined ratio. Our Board is actively evaluating share repurchase strategies for fiscal 2022. (See Note 17 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our repurchase authorization and methods.)
Contractual Obligations and Commercial Commitments
The following table summarizes our undiscounted contractual obligations and
commercial commitments as of
Payment Due by Period
Less than More than
Total 1 Year 13 Years 45 Years 5 Years
Contractual obligations
Recorded contractual obligations:
Operating leases liabilities (1) $ 2,004.8 $ 135.2 $ 265.9 $ 260.4 $ 1,343.3
Long-term debt 466.0 - 130.0 336.0 -
Acquisition-related deferred consideration 22.5 11.3 11.2 - -
Uncertain tax positions (2) 4.8 - 4.8 - -
Unrecorded contractual obligations:
Purchase obligations (3) 139.5 107.7 23.0 7.4 1.4
Real estate obligations (4) 151.6 40.4 13.8 9.3 88.1
Total $ 2,789.2 $ 294.6 Other commercial commitments Standby letters of credit$ 29.9 $ 29.9
$ - $ - $ -
Includes
(1) reasonably certain of being exercised. (See Note 13 in Notes to Consolidated
Financial Statements in Part IV, Item 15 of this report for discussion of
leases.)
Represents liability for uncertain tax positions. (See Note 20 of Notes to
(2) Consolidated Financial Statements in Part IV, Item 15 of this report for
further discussion of income taxes.)
51
Table of Contents
Includes obligations for inventory purchases, equipment purchases,
(3) information technology and other miscellaneous commitments. Amounts exclude
agreements that are cancelable without significant penalty.
Real estate obligations include construction commitments, net of up-front
(4) landlord construction contributions, and legally binding minimum lease
payments for leases signed but not yet commenced. Amounts exclude agreements
that are cancelable without significant penalty.
The 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 andFlower Child with considerations made in the event we undergo a change in control or divest any FRC brand (other than North Italia andFlower Child ) during the five years after Closing. The liability for this contingent consideration provision was$23.9 million atDecember 28, 2021 . See Note 3 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for discussion of the fair value measurement for this liability. We are also required to provide financing to FRC in an amount sufficient to support achievement of these targets during the five years after Closing.
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 ofDecember 28, 2021 , 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
Critical accounting policies are those we believe are most important to portraying our financial condition and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. We consider the following policies to be the most critical in understanding the judgment that is involved in preparing our consolidated financial statements.
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. 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 andFlower Child . The fair value of the contingent consideration and compensation liability is determined utilizing aMonte 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 theMonte Carlo model was$0 to$204.0 million atDecember 28, 2021 and$0 to$32.0 million atDecember 29, 2020 . The fair value of the contingent consideration and compensation liabilities increased$16.4 million during fiscal 2021 primarily due to the impact of an amendment to the 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. 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.
Indefinite-Lived Intangible Assets
Goodwill and other indefinite-lived intangible assets are tested for impairment annually or on an interim basis if events or changes in circumstances between annual tests indicate a potential impairment. 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, a significant decline in expected future cash flows, including assumptions related to the COVID-19 pandemic, unanticipated competition, changes in management or key personnel, macroeconomic and industry conditions and the legal and regulatory environment. If the qualitative assessment indicates that it is more likely than not that an impairment exists, then a quantitative assessment is performed. 52 Table of Contents The quantitative assessments require the use of estimates and assumptions regarding future cash flows and asset fair values. For the goodwill impairment test, the estimated fair value of the reporting units is determined using a blend of the income approach using a discounted cash flow analysis and the market capitalization approach. The fair value of the trade names, trademarks and licensing agreements is estimated using the relief from royalty method. 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, industry economics and the business environment. The discount rate is based on the estimated cost of capital that reflects the risk profile of the related business. These estimates, as well as the selection of comparable companies and valuation multiples used in the market approaches, 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. These fair value assessments could change materially if different estimates and assumptions were used. We recorded impairment charges of$1.3 million and$183.1 million in fiscal 2021 and 2020, respectively. The fiscal 2021 charges primarily related to impairment of licensing agreements, while the fiscal 2020 charges related primarily to impairment of our goodwill, trade names and trademarks. (See Note 8 in Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for further discussion of our intangible assets.)
Long-Lived Assets
We assess the potential impairment of our long-lived assets on an annual basis or whenever events or changes in circumstances indicate that the carrying value of the assets or asset group may not be recoverable. Factors considered include, but are not limited to, negative cash flow, significant underperformance relative to historical or projected future operating results, significant changes in the manner in which an asset is being used, an expectation that an asset will be disposed of significantly before the end of its previously estimated useful life and significant negative industry or economic trends. Assessing whether impairment testing is warranted and, if so, determining the amount of expense require the use of estimates and assumptions regarding future cash flows, including assumptions related to the COVID-19 pandemic, and asset fair values. Key assumptions include projected revenue growth and operating expenses, as well as forecasting asset useful lives and selecting an appropriate discount rate. Estimates of revenue growth and operating expenses are based on internal projections and consider the restaurant's historical performance, the local market economics and the business environment. The discount rate is based on the yield curve rate forU.S. Treasury securities with a duration that coincides with the period covered by the cash flows. 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 2021, we recorded$16.3 million of expense primarily related to the impairment of long-lived assets for threeThe Cheesecake Factory and two Other restaurants. In fiscal 2020, we recorded$36.2 million of expense primarily related to the impairment of oneThe Cheesecake Factory , one North Italia, two Other FRC and six Other restaurants, as well as lease termination costs and accelerated depreciation for oneThe 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.) Leases The reasonably certain lease term and the incremental borrowing rate for each restaurant location require judgment by management and can impact the classification and accounting for a lease as operating or finance, the value of the operating lease asset and liability and the term over which leasehold improvements for each restaurant are depreciated. 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. 53 Table of Contents Income Taxes 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
See Note 1 of Notes to Consolidated Financial Statements in Part IV, Item 15 of this report for a summary of new accounting standards.
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