THE CHEESECAKE FACTORY INCORPORATED Forward-Looking Statements
Certain information included in this Form 10-Q and other materials filed or to be filed by us with theSecurities 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 theSEC , 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 ofNorth Italia andFox 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 inCanada , 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 ofThe 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 theSEC . 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. 20
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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 endedDecember 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 theSEC . 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 endedDecember 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 inMarch 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 throughoutthe United States andCanada 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. 21 Table of Contents
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 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 updateThe 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 atThe 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. 22 Table of Contents 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
Revenues
Revenues increased 45.7% to
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 atThe Cheesecake Factory restaurants increased 1.0% to 2,689 in the third quarter of fiscal 2021 compared to 2,662 in the prior year. 23 Table of Contents 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. AtSeptember 28, 2021 , there were twoThe 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
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 twoGrand Lux Cafe locations,RockSugar Southeast Asian Kitchen and oneFlower 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
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 atThe 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. 25
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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
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 oneThe Cheesecake Factory , one North Italia, two Other FRC and four Other restaurants, as well as lease termination costs and accelerated depreciation for oneThe Cheesecake Factory restaurant, twoGrand Lux Cafe locations,RockSugar Southeast Asian Kitchen and oneFlower Child location. 26
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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 oneThe 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 onJune 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. 27 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 8,532Direct 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 17,579Impairment of assets and lease terminations
- 10,402 594 204,731
Acquisition-related costs - 39 - 2,343Acquisition-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 - 0.05Acquisition-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
51,112,650 and 53,582,824 weighted-average common shares outstanding for the
(3) thirteen and thirty-nine weeks ended
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
and 49,243,370 weighted-average common shares outstanding for the thirteen
and thirty-nine weeks ended
(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 throughNovember 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 onDecember 28th and the balance of the high-volume sales week between Christmas andNew Year's Day will move into the first quarter of fiscal 2022. Fourth quarter-to-date throughNovember 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 inThe 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 fiveThe Cheesecake Factory restaurants, seven North Italia restaurants and eight 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.
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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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 oneThe 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 threeFlower Child restaurants during the comparable prior year period. We currently estimate fiscal 2021 cash capital expenditures to be approximately$80 million . Convertible Senior Notes OnJune 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 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 . 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 ofSeptember 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 atSeptember 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, 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. 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 throughSeptember 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, 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. (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
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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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