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OFFON

THE CHEESECAKE FACTORY INCORPORATED

(CAKE)
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CHEESECAKE FACTORY INC Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/04/2021 | 04:06pm EST

Forward-Looking Statements

Certain information included in this Form 10-Q and other materials filed or to
be filed by us with the Securities and Exchange Commission ("SEC"), as well as
information included in oral or written statements made by us or on our behalf,
may contain forward-looking statements about our current and presently expected
performance trends, growth plans, business goals and other matters.



These statements may be contained in our filings with the SEC, in our press
releases, in other written communications, and in oral statements made by or
with the approval of one of our authorized officers. These statements are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act
of 1933, as amended (the "Securities Act"), and Section 21E of the Securities
Exchange Act of 1934, as amended (together with the Securities Act, the "Acts").
This includes, without limitation, statements regarding corporate social
responsibility and in our corporate social responsibility ("CSR") report, the
effects of the COVID-19 pandemic on our financial condition and our results of
operations, including our expectations with respect to our ability to reopen and
keep open our restaurants, our fiscal 2021 and 2022 outlook, financial guidance,
projections, expectations and statements with respect to the acquisition of
North Italia and Fox Restaurant Concepts LLC ("FRC"), as well as expectations of
our future financial condition, results of operations, sales, cash flows, plans,
targets, goals, objectives, performance, growth potential, competitive position
and business; and our ability to: leverage our competitive strengths, including
investing in or acquiring new restaurant concepts and expanding The Cheesecake
Factory® brand to other retail opportunities; deliver comparable sales growth;
provide a differentiated experience to customers; outperform the casual dining
industry and increase our market share; leverage sales increases and manage flow
through; manage cost pressures, including increasing wage rates, insurance costs
and legal expenses, and stabilize margins; grow earnings; remain relevant to
consumers; attract and retain qualified management and other staff; manage risks
associated with the magnitude and complexity of regulations in the jurisdictions
where our restaurants are located; increase shareholder value; find suitable
sites and manage increasing construction costs; profitably expand our concepts
domestically and in Canada, and work with our licensees to expand our concept
internationally; support the growth of North Italia and the FRC brands; and
utilize our capital effectively. These forward-looking statements may be
affected by various factors including: the rapidly evolving nature of the
COVID-19 pandemic and related containment measures, including the potential for
a complete shutdown of our restaurants, international licensee restaurants and
our bakery operations; supply chain disruptions; demonstrations, political
unrest, potential damage to or closure of our restaurants and potential
reputational damage to us or any of our brands; economic, public health and
political conditions that impact consumer confidence and spending, including the
impact of the COVID-19 pandemic and other health epidemics or pandemics on the
global economy; acceptance and success of The Cheesecake Factory in domestic and
international markets; acceptance and success of North Italia, the FRC brands
and our other concepts; the risks of doing business abroad through Company-owned
restaurants and/or licensees; foreign exchange rates, tariffs and cross border
taxation; changes in unemployment rates; changes in laws impacting our business,
including laws and regulations related to COVID-19 impacting restaurant
operations and customer access to off- and on-premises dining; increases in
minimum wages and benefit costs, including the cost of group medical insurance;
the economic health of our landlords and other tenants in retail centers in
which our restaurants are located, and our ability to successfully manage our
lease arrangements with landlords; unanticipated costs that may arise in
connection with a return to normal course of business, including potential
negative impacts from furlough actions; the economic health of suppliers,
licensees, vendors and other third parties providing goods or services to us;
the timing of new unit development; compliance with debt covenants; strategic
capital allocation decisions including any share repurchases or dividends; the
ability to achieve projected financial results; economic and political
conditions that impact consumer confidence and spending; the resolutions of
uncertain tax positions with the Internal Revenue Service and the impact of tax
reform legislation; adverse weather conditions in regions in which our
restaurants are located; factors that are under the control of government
agencies, landlords and other third parties; the risk, costs and uncertainties
associated with opening new restaurants; and other risks and uncertainties
detailed from time to time in our filings with the SEC. Such forward-looking
statements include all other statements that are not historical facts, as well
as statements that are preceded by, followed by or that include words or phrases
such as "believe," "plan," "will likely result," "expect," "intend," "will
continue," "is anticipated," "estimate," "project," "may," "could," "would,"
"should" and similar expressions. These statements are based on our current
expectations and involve risks and uncertainties which may cause results to
differ materially from those set forth in such statements.

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In connection with the "safe harbor" provisions of the Acts, we have identified
and are disclosing important factors, risks and uncertainties that could cause
our actual results to differ materially from those projected in forward-looking
statements made by us, or on our behalf. (See Part II, Item 1A of this report,
"Risk Factors," and Part I, Item 1A, "Risk Factors," included in our Annual
Report on Form 10-K for the fiscal year ended December 29, 2020.) These
cautionary statements are to be used as a reference in connection with any
forward-looking statements. The factors, risks and uncertainties identified in
these cautionary statements are in addition to those contained in any other
cautionary statements, written or oral, which may be made or otherwise addressed
in connection with a forward-looking statement or contained in any of our
subsequent filings with the SEC. Because of these factors, risks and
uncertainties, we caution against placing undue reliance on forward-looking
statements. Although we believe that the assumptions underlying forward-looking
statements are currently reasonable, any of the assumptions could be incorrect
or incomplete, and there can be no assurance that forward-looking statements
will prove to be accurate. Forward-looking statements speak only as of the date
on which they are made, and we undertake no obligation to publicly update or
revise any forward-looking statements or to make any other forward-looking
statements, whether as a result of new information, future events or otherwise,
unless required to do so by law.



The below discussion and analysis, which contains forward-looking statements,
should be read in conjunction with our interim unaudited condensed consolidated
financial statements and related notes in Part I, Item 1 of this report and with
the following items included in our Annual Report on Form 10-K for the fiscal
year ended December 29, 2020: the audited consolidated financial statements and
related notes in Part IV, Item 15; the "Risk Factors" included in Part I, Item
1A; the "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included in Part II, Item 7; and the cautionary statements
included throughout this Form 10-Q. The inclusion of supplementary analytical
and related information herein may require us to make estimates and assumptions
to enable us to fairly present, in all material respects, our analysis of trends
and expectations with respect to our results of operations and financial
position.



COVID-19 Pandemic



We are subject to continued risks and uncertainties as a result of the outbreak
of, and local, state and federal governmental responses to, the COVID-19
pandemic which was declared a National Public Health Emergency in March 2020. We
experienced 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 the remaining locations shifted
to an off-premise only operating model on an interim basis. In the second
quarter of fiscal 2020, certain jurisdictions began allowing the reopening of
restaurant dining rooms, and we began to reopen dining rooms across our
concepts. While restrictions on the type of permitted operating model and
occupancy capacity may continue to change, currently nearly all of our
restaurants were operating with no indoor dining restrictions. We cannot predict
how long the COVID-19 pandemic will last, whether vaccines will be effective at
eliminating or slowing the spread of the virus or variants, whether it will
reoccur or whether variants will spike, what additional restrictions may be
enacted, to what extent we can maintain sales volumes during or following any
resumption of mandated social distancing protocols or vaccination or masks
mandates and what long-lasting effects the COVID-19 pandemic may have on the
restaurant industry as a whole. The ongoing effects of the COVID-19 pandemic,
including, but not limited to, labor-related impacts, supply chain disruptions
and consumer behavior, will determine the significance of the impact to our
operating results and financial position.



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 308 restaurants throughout the United States and Canada under brands
including The Cheesecake Factory®, North Italia® and a collection within our FRC
business. Internationally, 29 The Cheesecake Factory® restaurants operate under
licensing agreements. Our bakery division operates two facilities that produce
quality cheesecakes and other baked products for our restaurants, international
licensees and third-party bakery customers.



Overview



Our strategy is driven by our commitment to customer satisfaction and is focused
primarily on menu innovation, service and operational execution to continue to
differentiate ourselves from other restaurant concepts, as well as to drive
competitively strong performance that is sustainable. Financially, we are
focused on prudently managing expenses at our restaurants, bakery facilities and
corporate support center, and leveraging our size to make the best use of our
purchasing power.



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Investing in new Company-owned restaurant development is our top long-term
capital 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. For The Cheesecake Factory concept, we target an average
cash-on-cash return on investment of approximately 20% to 25% at the unit level.
We target an average cash-on-cash return on investment of approximately 35% for
the North Italia concept and 25% to 30% for the FRC concepts. Returns are
affected by the cost to build restaurants, the level of revenues that each
restaurant can deliver and our ability to maximize the profitability of
restaurants. Investing in new restaurant development that meets our return on
investment criteria is expected to support achieving mid-teens Company-level
return on invested capital.



Our overall revenue growth is primarily driven by revenues from new restaurant
openings and increases in comparable restaurant sales. Changes in comparable
restaurant sales come from variations in customer traffic as well as in average
check.


For The 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 increase in 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 update The Cheesecake Factory restaurant menus twice a 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 targeted menu price increases of approximately 2% to 3%
annually, utilizing a market-based strategy to help mitigate cost pressure in
higher-wage geographies. Currently, our menu pricing is at the higher end of
this range.



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 program, the latter of which offsets dilution from our
equity compensation program and supports our earnings per share growth. At
present, our dividends on our common stock and share repurchases are suspended.
Our ability to declare common dividends and repurchase shares in the future will
be subject to financial covenants under our Amended Credit Agreement, among
other factors.



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 repayment and an
anticipated capital return program will support our long-term financial
objective of 13% to 14% total return to shareholders, on average. We define our
total return as earnings per share growth plus our dividend yield.



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Results of Operations



The following table presents, for the periods indicated, information from our
condensed consolidated statements of income/(loss) expressed as percentages of
revenues. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for any other interim
period or for the full fiscal year.




                                                      Thirteen              Thirteen            Thirty-Nine           Thirty-Nine
                                                    Weeks Ended           Weeks Ended           Weeks Ended           Weeks Ended
                                                 September 28, 2021    September 29, 2020    September 28, 2021    September 29, 2020
Revenues                                                      100.0 %               100.0 %               100.0 %               100.0 %

Costs and expenses:
Cost of sales                                                  22.5                  22.8                  22.0                  23.2
Labor expenses                                                 37.1                  38.7                  36.5                  39.2
Other operating costs and expenses                             26.7                  30.7                  27.1                  31.4
General and administrative expenses                             6.1                   7.3                   6.4                   8.2
Depreciation and amortization expenses                          3.0                   4.4                   3.1                   4.8
Impairment of assets and lease expiration                         -                   2.0                   0.0                  14.3
Acquisition-related costs                                         -                     -                     -                   0.2
Acquisition-related contingent consideration
and amortization                                                0.1                   0.3                   0.6                 (0.3)
Preopening costs                                                0.4                   0.5                   0.5                   0.6
Total costs and expenses                                       95.9                 106.7                  96.2                 121.6
Income/(loss) from operations                                   4.1                 (6.7)                   3.8                (21.6)
Interest and other expense, net                               (0.2)                 (0.6)                 (0.4)                 (0.5)
Income/(loss) before income taxes                               3.9                 (7.3)                   3.4                (22.1)
Income tax (benefit)/provision                                (0.4)                 (1.8)                   0.1                 (6.6)
Net income/(loss)                                               4.3                 (5.5)                   3.3                (15.5)
Dividends on Series A preferred stock                             -                 (0.9)                 (0.9)                 (0.6)
Direct and incremental Series A preferred
stock issuance cost                                               -                     -                     -                 (0.7)
Undistributed earnings allocated to Series A
preferred stock                                                   -                     -                 (0.3)                     -
Net income/(loss) available to common
stockholders                                                    4.3 %               (6.4) %                 2.1 %              (16.8) %



Thirteen Weeks Ended September 28, 2021 Compared to Thirteen Weeks Ended September 29, 2020



Revenues


Revenues increased 45.7% to $754.5 million for the fiscal quarter ended September 28, 2021 compared to $517.7 million for the comparable prior year period, primarily due to the effect of the COVID-19 pandemic on prior year sales.


The Cheesecake Factory comparable sales increased by 41.1%, or $170.1 million,
from the third quarter of fiscal 2020 and increased 8.3% from the third quarter
of fiscal 2019. The increase from fiscal 2020 was primarily driven by increased
customer traffic of 47.7% primarily due to the impact of the COVID-19 pandemic
in the prior year, partially offset by a decline in average check of 6.6% (based
on a 9.6% negative change in mix partially offset by an increase of 3.0% in menu
pricing). 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 28% of our restaurant sales during the third
quarter of fiscal 2021 as compared to 45% in the third quarter of 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 elevated versus the
pre-pandemic level of 15% during the third quarter of fiscal 2019. The
Cheesecake Factory average sales per restaurant operating week increased 40.7%
to $220,362 in the third quarter of fiscal 2021 from $156,643 in the third
quarter of fiscal 2020. Total operating weeks at The Cheesecake Factory
restaurants increased 1.0% to 2,689 in the third quarter of fiscal 2021 compared
to 2,662 in the prior year.

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North Italia comparable sales increased approximately 38% from the third quarter
of fiscal 2020 and increased approximately 8% compared to the third quarter of
fiscal 2019. North Italia average sales per restaurant operating week increased
34.4% to $127,098 in the third quarter of fiscal 2021 from $94,561 in the third
quarter of fiscal 2020. Total operating weeks at North Italia increased 17.9% to
349 in the third quarter of fiscal 2021 compared to 296 in the prior year.
Revenues for North Italia, Flower Child and the other FRC brands totaled $112.4
million in the third quarter of fiscal 2021.

Restaurants become eligible to enter the comparable sales base in their 19th
month of operation. At September 28, 2021, there were two The Cheesecake Factory
restaurants and five 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 $16.7 million for the third quarter of fiscal 2021 compared to $17.8 million in the comparable prior year period.

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 22.5% and 22.8% in the
third quarters of fiscal 2021 and 2020, respectively, reflecting a shift in
sales mix within the restaurants, a lower proportion of third-party bakery
revenues and pricing leverage, partially offset by increased costs related to
buying in the spot market to meet volume needs that exceeded our contracted
levels.



Labor Expenses


As a percentage of revenues, labor expenses, which include restaurant-level
labor costs and bakery direct production labor, including associated fringe
benefits, were 37.1% and 38.7% in the third quarters of fiscal 2021 and 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, partially offset by
higher group medical costs, wage rates, training labor and overtime in the
third
quarter of fiscal 2021.


Other Operating Costs and Expenses




Other operating costs and expenses consist of restaurant-level occupancy
expenses (rent, common area expenses, insurance, licenses, taxes and utilities),
marketing, including delivery commissions, other operating expenses (excluding
food costs and labor expenses, which are reported separately) and bakery
production overhead and distribution expenses. As a percentage of revenues,
other operating costs and expenses were 26.7% and 30.7% in the third quarters of
fiscal 2021 and 2020, respectively. This variance was primarily driven by sales
leverage.

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 6.1% and 7.3% in
the third quarters of fiscal 2021 and 2020, respectively. This variance was
primarily driven by sales leverage and expense management.

Depreciation and Amortization Expenses




As a percentage of revenues, depreciation and amortization expenses decreased to
3.0% in the third quarter of fiscal 2021 from 4.4% in the comparable prior year
period due primarily to sales leverage.



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Impairment of Assets and Lease Terminations




During the third quarter of fiscal 2021, we recorded no impairment of assets and
lease terminations expense. In the third quarter of fiscal 2020, we recorded
impairment of assets and lease terminations expense of $10.4 million related to
lease termination costs and accelerated depreciation for two Grand Lux Cafe
locations, RockSugar Southeast Asian Kitchen and one Flower Child location.

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




We recorded $0.7 million and $1.4 million during the third quarter of fiscal
2021 and 2020, respectively, of acquisition-related contingent consideration,
compensation and amortization, reflecting changes in the fair value of the
deferred and contingent consideration and compensation liabilities, partially
offset by amortization of acquired definite-lived licensing agreements.

Preopening Costs




Preopening costs were $3.2 million and $2.4 million in the third quarters of
fiscal 2021 and 2020, respectively. We opened two North Italia, one Other FRC
location and one Other location in the third quarter of fiscal 2021 compared to
two Other restaurants in the comparable prior year period. Preopening costs
include all costs to relocate and compensate restaurant management staff members
during the preopening period, costs to recruit and train hourly restaurant staff
members, and wages, travel and lodging costs for our opening training team and
other support staff members. Also included are expenses for maintaining a roster
of trained managers for pending openings, the associated temporary housing and
other costs necessary to relocate managers in alignment with future restaurant
opening and operating needs, and corporate travel and support activities.
Preopening costs can fluctuate significantly from period to period based on the
number and timing of restaurant openings and the specific preopening costs
incurred for each restaurant.

Interest and Other Expense, Net




Interest and other expense, net was $1.8 million and $2.9 million for the third
quarters of fiscal 2021 and 2020, respectively. This increase was primarily due
to the lower borrowings outstanding on our Amended Facility.

Income Tax (Benefit)/Provision

Our effective income tax rate was (10.5%) and 25.0% for the third quarters of
fiscal 2021 and 2020, respectively. The decrease resulted primarily from a
higher proportion of employment credits in relation to pre-tax income/(loss) in
fiscal 2021, a benefit in the prior year arising from the expected carryback of
our anticipated fiscal 2020 loss to prior years when the federal statutory rate
was 35% and a benefit recorded in the third quarter of fiscal 2021 arising from
an increase to our fiscal 2020 loss carryback as a result of repaying 100% of
the FICA taxes that were deferred in fiscal 2020 under the Coronavirus Aid,
Relief and Economic Security Act ("the CARES Act.")

Thirty-Nine Weeks Ended September 28, 2021 Compared to Thirty-Nine Weeks Ended September 29, 2020




Revenues

Revenues increased 50.5% to $2,150.8 million for the first three quarters of
fiscal 2021 compared to $1,428.7 million for the comparable prior year period,
primarily due to the effect of the COVID-19 pandemic on prior year sales.

The Cheesecake Factory comparable sales increased by 48.0%, or $539.3 million,
from the first three quarters of fiscal 2020 and increased 1.9% from the first
three quarters of fiscal 2019. The increase from fiscal 2020 was primarily
driven by increased customer traffic of 42.9% primarily due to the impact of the
COVID-19 pandemic in the prior year period and average check growth of 5.1%
(based on an increase of 3.0% in menu pricing and a 2.1% positive change in
mix). Sales through the off-premise channel comprised approximately 33% of our
restaurant sales during the first three quarters of fiscal 2021 as compared to
43% in the first three quarters of fiscal 2020. However, off-premise sales mix
remains elevated versus the pre-pandemic level of 16% during the first three
quarters of fiscal 2019. The Cheesecake Factory average sales per restaurant
operating week increased 46.6% to $210,801 in the first three quarters of fiscal
2021 from $143,747 in the first three quarters of fiscal 2020. Total operating
weeks at The Cheesecake Factory restaurants increased 1.0% to 8,058 in the first
three quarters of fiscal 2021 compared to 7,976 in the prior year period.

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North Italia comparable sales increased approximately 53% from the first three
quarters of fiscal 2020 and increased approximately 5% compared to the first
three quarters of fiscal 2019. North Italia average sales per restaurant
operating week increased 44.4% to $123,211 in the first three quarters of fiscal
2021 from $85,315 in the first three quarters of fiscal 2020. Total operating
weeks at North Italia increased 15.7% to 980 in the first three quarters of
fiscal 2021 compared to 847 in the prior year period. Revenues for North Italia,
Flower Child and the other FRC brands totaled $314.4 million in the third
quarter of fiscal 2021.

External bakery sales were $48.8 million for the first three quarters of fiscal 2021 compared to $46.3 million in the comparable prior year period.

Cost of Sales

As a percentage of revenues, cost of sales was 22.0% and 23.2% in the first three quarters of fiscal 2021 and 2020, respectively, reflecting a shift in sales mix within the restaurants, a lower proportion of third-party bakery revenues and pricing leverage, partially offset by increased costs related to buying in the spot market to meet volume needs that exceeded our contracted levels.

Labor Expenses


As a percentage of revenues, labor expenses were 36.5% and 39.2% in the first
three quarters of fiscal 2021 and 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, partially offset by higher wage rates and overtime in
the first three quarters of fiscal 2021.

Other Operating Costs and Expenses

As a percentage of revenues, other operating costs and expenses were 27.1% and
31.4% in the first three quarters of fiscal 2021 and 2020, respectively. This
variance was primarily driven by sales leverage, partially offset by increased
restaurant-level incentive compensation expense.

G&A Expenses

As a percentage of revenues, G&A expenses were 6.4% and 8.2% in the first three quarters of fiscal 2021 and 2020, respectively. This variance was primarily driven by sales leverage and expense management, partially offset by higher corporate incentive compensation expense.

Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses decreased to 3.1% in the first three quarters of fiscal 2021 from 4.8% in the comparable prior year period due primarily to sales leverage.

Impairment of Assets and Lease Terminations


During the first three quarters of fiscal 2021, we recorded impairment of assets
and lease terminations expense of $0.6 million related to lease termination
costs for two Other restaurants, one of which closed during the fourth quarter
of fiscal 2020 and one that closed at the beginning of the first quarter of
fiscal 2021. During the first three quarters of fiscal 2020, we recorded $204.7
million of impairment of assets and lease terminations expense related to the
impairment of goodwill, trade names, trademarks and licensing agreements
associated with the Acquisitions and long-lived assets for one The Cheesecake
Factory, one North Italia, two Other FRC and four Other restaurants, as well as
lease termination costs and accelerated depreciation for one The Cheesecake
Factory restaurant, two Grand Lux Cafe locations, RockSugar Southeast Asian
Kitchen and one Flower Child location.

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


In the first three quarters of fiscal 2021, we recorded $12.6 million of
acquisition-related contingent consideration, compensation and amortization,
primarily related to the impact of an amendment in the second fiscal quarter to
the Acquisition agreement that, among other things, extended the measurement
period through fiscal 2026. In the first three quarters of fiscal 2020, we
recorded a benefit of $4.0 million in acquisition-related contingent
consideration, compensation and amortization, primarily due to a decrease in the
fair value of the contingent consideration and compensation liabilities related
to impact of the COVID-19 pandemic.

Preopening Costs


Preopening costs were $9.8 million and $7.6 million in the first three quarters
of fiscal 2021 and 2020, respectively. We opened one The Cheesecake Factory,
five North Italia, two Other FRC and two Other locations in the first three
quarters of fiscal 2021 compared to one North Italia and three Other locations
in the comparable prior year period.

Interest and Other Expense, Net


Interest and other expense, net was $9.2 million and $7.0 million for the first
three quarters of fiscal 2021 and 2020, respectively. This increase was
primarily due to the termination of the interest rate swap, partially offset by
lower borrowings outstanding on our Amended Facility.

Income Tax Provision/(Benefit)


Our effective income tax rate was 2.6% and 30.0% for the first three quarters of
fiscal 2021 and 2020, respectively. The decrease resulted primarily from a
higher proportion of employment credits in relation to pre-tax income/(loss) in
fiscal 2021, a benefit in the prior year arising from the expected carryback of
our anticipated fiscal 2020 loss to prior years when the federal statutory rate
was 35% and a benefit recorded in 2021 arising from an increase to our fiscal
2020 loss carryback as a result of repaying 100% of the FICA taxes that were
deferred in fiscal 2020 under the CARES Act. This decrease was partially offset
by a reserve for an uncertain tax position recorded in fiscal 2021 related to
tenant improvement allowances.

Non-GAAP Measures


Adjusted net income and adjusted net income per share are supplemental measures
of our performance that are not required by or presented in accordance with
GAAP. These non-GAAP measures may not be comparable to similarly titled measures
used by other companies and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with GAAP. We
calculate these non-GAAP measures by eliminating from net 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 on June 15, 2021, we
exclude the preferred dividend and assume all convertible preferred shares have
been converted into common stock. (See Note 9 of Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this report for further discussion of
our preferred stock.) We use these non-GAAP financial measures for financial and
operational decision-making and as a means to evaluate period-to-period
comparisons. Our inclusion of these adjusted measures should not be construed as
an indication that our future results will be unaffected by unusual or
infrequent items. In the future, we may incur expenses or generate income
similar to the adjusted items.



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  Table of Contents

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




                                                                             Thirteen               Thirteen              Thirty-Nine            Thirty-Nine
                                                                           Weeks Ended             Weeks Ended            Weeks Ended            Weeks Ended
                                                                        September 28, 2021     September 29, 2020     September 28, 2021      September 29, 2020
Net income/(loss) available to common stockholders                     $   
         32,680    $          (33,184)    $            45,798    $          (239,837)
Dividends on preferred stock                                                              -                  4,838                 18,661                   8,532
Direct and incremental preferred stock issuance costs                                     -                      -                      -               

10,257

Net income attributable to Series A preferred stock                        
              -                      -                  5,804                       -
COVID-19 related costs (1)                                                                -                  2,558                  4,917                  17,579
Impairment of assets and lease terminations                                
              -                 10,402                    594                 204,731
Acquisition-related costs                                                                 -                     39                      -                   2,343

Acquisition-related contingent consideration, compensation and amortization expenses/(benefit)

                                                         685                  1,439                 12,592               

(3,992)

Termination of interest rate swap                                                         -                      -                  2,354               

-

Uncertain tax position related to tenant improvement allowances                           -                      -                  2,471               

-

Tax effect of adjustments (2)                                              
          (178)                (3,754)                (5,318)                (57,372)
Adjusted net income/(loss)                                             $             33,187    $          (17,662)    $            87,873    $           (57,759)
Diluted net income/(loss) per common share                             $               0.64    $            (0.76)    $              0.96    $          

(5.47)

Dividends on preferred stock                                                              -                   0.09                   0.35               

0.17

Direct and incremental preferred stock issuance costs                                     -                      -                      -               

0.21

Net income attributable to Series A preferred stock                                       -                      -                   0.11               

-

Assumed impact of potential conversion of preferred stock into
common stock (3)                                                                          -                   0.13                 (0.11)                    0.60
COVID-19 related costs (1)                                                                -                   0.05                   0.09                    0.36
Impairment of assets and lease terminations                                
              -                   0.20                   0.01                    4.16
Acquisition-related costs                                                                 -                   0.00                      -                    0.05

Acquisition-related contingent consideration, compensation and amortization expenses

                                                                  0.01                   0.03                   0.23               

(0.08)

Termination of interest rate swap                                                         -                      -                   0.04               

-

Uncertain tax position related to tenant improvement allowances                           -                      -                   0.05               

-

Tax effect of adjustments (2)                                                        (0.00)                 (0.07)                 (0.10)               

(1.17)

Adjusted if-converted net income/(loss) per share (4)                  $   
           0.65    $            (0.33)    $              1.64    $             (1.17)

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

pay, and healthcare benefits associated with furloughed staff members.

(2) Based on the federal statutory rate and an estimated blended state tax rate,

the tax effect on all adjustments assumes a 26% tax rate.

Represents the impact of assuming the conversion of preferred stock into

common stock (0 and 5,908,187 shares for the thirteen and thirty-nine weeks

ended September 28, 2021, respectively), resulting in an assumption of

51,112,650 and 53,582,824 weighted-average common shares outstanding for the (3) thirteen and thirty-nine weeks ended September 28, 2021. Represents the

impact of assuming the conversion of preferred stock into common stock

(9,163,043 and 5,394,188 shares for the thirteen and thirty-nine weeks ended

September 29, 2020, respectively), resulting in an assumption of 53,062,945

and 49,243,370 weighted-average common shares outstanding for the thirteen

and thirty-nine weeks ended September 29, 2020.

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




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Fourth Quarter Fiscal 2021 Outlook




Fourth quarter-to-date through November 2, 2021, The Cheesecake Factory
restaurant comparable sales increased approximately 20% and 10.5% compared to
the comparable period in fiscal 2020 and fiscal 2019, respectively. In the
fourth quarter of fiscal 2021, we anticipate about a 1% negative comparable
sales impact given that our 2021 fiscal year will end on December 28th and the
balance of the high-volume sales week between Christmas and New Year's Day will
move into the first quarter of fiscal 2022. Fourth quarter-to-date through
November 2, 2021, North Italia comparable sales increased approximately 20% and
14.5% compared to the comparable period in fiscal 2020 and fiscal 2019,
respectively.

We currently estimate cost of sales inflation of approximately 6% in the fourth
quarter of fiscal 2021, which is approximately three percentage points higher
than the third quarter of fiscal 2021. We expect labor as a percent of sales to
be slightly favorable to the third quarter of fiscal 2021 and other operating
expenses to be favorable to the third quarter of fiscal 2021 by as much as 0.75%
of revenues. In addition, we estimate G&A of approximately $47 million and
preopening of approximately $5 million in the fourth quarter of fiscal 2021. We
estimate our tax rate for the fourth quarter of fiscal 2021 to be approximately
5%.

Fiscal 2022 Outlook

Looking ahead to fiscal 2022, due to the disruptions in the supply chain
impacting the restaurant industry and the broader economy, our purchasing team
is still in the process of contracting as you would expect in these
circumstances. The labor market is also dynamic, and we are currently
anticipating inflation, inclusive of known minimum wage increases, to be similar
to the 5% level we have experienced in our restaurants on a year-to-date basis
during fiscal 2021.

We currently have 3% pricing in The Cheesecake Factory menu and plan to remain
at that level for the remainder of the fiscal 2021. Should the cost pressures
prove to not be transitory in nature, we will implement pricing actions above
our historical levels at our menu change during the first quarter of fiscal 2022
to protect margins.

We plan to open as many as 20 new restaurants in fiscal 2022, including five The
Cheesecake Factory restaurants, seven North Italia restaurants and eight
restaurants within our FRC business, which includes three Flower 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.

Liquidity and Capital Resources




During the first three quarters of fiscal 2021, our cash and cash equivalents
decreased by $23.1 million to $131.0 million. The following table presents, for
the periods indicated, a summary of our key cash flows from operating, investing
and financing activities (in millions):


                                                                   Thirty-Nine            Thirty-Nine
                                                                   Weeks Ended            Weeks Ended
                                                                September 28 2021     September 29, 2020

Cash provided by/(used in) operating activities                $             119.2    $            (32.7)
Additions to property and equipment                                         (49.2)                 (38.3)
Convertible debt issuance, net of issuance cost                              334.9                      -
Common stock issuance, net of issuance cost                                  167.1                      -
Net borrowings/(repayments) on credit facility                             (150.0)                   86.0
Series A preferred stock issuance, net of issuance cost                          -                  189.7
Series A preferred stock cash-settled conversion                           (443.8)                      -
Series A preferred stock dividends paid                                     (18.7)                      -
Proceeds from exercise of stock options                                    
  24.8                    0.1
Common stock dividends paid                                                  (0.3)                 (15.8)
Treasury stock purchases                                                     (5.2)                  (3.2)




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  Table of Contents

Cash Provided by/(Used in) Operating Activities

Cash flows from operations increased by $151.9 million from the first three
quarters of fiscal 2020 primarily due to a lesser impact from the COVID-19
pandemic during the first three quarters of fiscal 2021, partially offset by the
payback of $36.5 million of payroll taxes that were deferred in fiscal 2020
under the CARES Act. Our future cash flow performance will depend on the ongoing
effects of the COVID-19 pandemic, including, but not limited to, labor-related
impacts, supply chain disruptions and consumer behavior.

Property and Equipment




Capital expenditures were $49.2 million and $38.3 million in the first three
quarters of fiscal 2021 and 2020, respectively. We opened ten restaurants in the
fiscal 2021 period comprised of one The Cheesecake Factory, five North Italia,
two Other FRC and two Other locations, of which a portion of the development was
completed in fiscal 2020, compared to one North Italia and three Flower Child
restaurants during the comparable prior year period. We currently estimate
fiscal 2021 cash capital expenditures to be approximately $80 million.



Convertible Senior Notes



On June 15, 2021, we issued $345.0 million 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 5 of Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this report for further discussion of
the Notes.)



Common Stock Issuance



On June 15, 2021, we issued 3.125 million shares of our common stock for $175.0
million. In connection with the issuance, we incurred direct and incremental
costs of $8.0 million.



Revolving Facility



On March 30, 2021, we entered into an Amended Credit Agreement, which terminates
on July 30, 2024, and consists of a $400 million revolving loan facility (the
"Revolving Facility"), including a $40 million sublimit for letters of credit.
The Amended Credit Agreement also provides the ability to increase the Revolving
Facility in an amount not to exceed (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 of September 28, 2021, we were in compliance with the covenants set
forth in the Revolving Facility. (See Note 5 of Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 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 at September 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.

                                       30

  Table of Contents



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 9 of
Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this
report for further discussion of our preferred stock.)

Common Stock Dividends

To preserve liquidity during the COVID-19 pandemic and in conjunction with the
terms of the Amended Credit Agreement, in March 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.



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 $1,702.0 million through September 28, 2021 with 100,081 shares
repurchased at a cost of $5.2 million during the first three quarters of fiscal
2021 to satisfy tax withholding obligations on vested restricted share awards.
Our objectives with regard to share repurchases have been to offset the dilution
to our shares outstanding that results from equity compensation grants and to
supplement our earnings per share growth. Our share repurchase 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, in March 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. (See Note 9 of
Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this
report for further discussion of our repurchase authorization and methods.)


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.



As of September 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.



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  Table of Contents

Recent Accounting Pronouncements

See Note 1 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a summary of new accounting standards.

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Financials (USD)
Sales 2021 2 929 M - -
Net income 2021 84,1 M - -
Net Debt 2021 275 M - -
P/E ratio 2021 19,4x
Yield 2021 0,01%
Capitalization 1 853 M 1 853 M -
EV / Sales 2021 0,73x
EV / Sales 2022 0,63x
Nbr of Employees 42 500
Free-Float -
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Number of Analysts 17
Last Close Price 35,52 $
Average target price 47,54 $
Spread / Average Target 33,8%
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Managers and Directors
David M. Overton Chairman & Chief Executive Officer
David M. Gordon Manager
Matthew Eliot Clark Chief Financial Officer & Executive Vice President
Jerome I. Kransdorf Lead Independent Director
Alexander L. Cappello Independent Director
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