The Cheesecake Factory Reports Preliminary Results for First Quarter of Fiscal 2020

The Cheesecake Factory Incorporated (NASDAQ: CAKE) yesterday reported preliminary financial results for the first quarter of fiscal 2020, which ended on March 31, 2020.

Total revenues were $615.1 million in the first quarter of fiscal 2020 compared to $599.5 million in the first quarter of fiscal 2019. Preliminary net loss and diluted net loss per share were $3.9 million and $0.09, respectively, in the first quarter of fiscal 2020 reflecting the impact of COVID-19. The results in this press release include the acquisition of North Italia and the remaining business of Fox Restaurant Concepts LLC (“FRC”) on October 2, 2019.

The Company recorded pre-tax COVID-19 related charges of $4.0 million primarily related to healthcare and meal benefits for the Company’s furloughed staff members. Excluding the after-tax impact of this and certain other items, adjusted preliminary net income and adjusted diluted preliminary net income per share for the first quarter of fiscal 2020 were $1.6 million and $0.04, respectively. Please see the Company’s reconciliation of non-GAAP financial measures at the end of this press release.

The impact of COVID-19 on the Company’s business has resulted in the need to perform impairment assessments of the Company’s long-lived assets, goodwill and other intangible assets and a revaluation of contingent consideration associated with the acquisition of FRC, which will delay the filing of the Company’s quarterly report on Form 10-Q. These preliminary financial results do not include these items and the corresponding tax effects, all of which are currently being evaluated. While these items are non-cash in nature, the impact on reported results is expected to be material.

Comparable restaurant sales at The Cheesecake Factory restaurants decreased 12.9% in the first quarter of fiscal 2020, reflecting the impact of COVID-19. Currently, 32 locations across the Company’s concepts, including three Cheesecake Factory restaurants, are temporarily closed with the remaining locations shifted to an off-premise only operating model.

“Our first quarter was off to a solid start with comparable sales growth both ahead of plan and outperforming the broader casual dining industry trend, which drove solid restaurant-level margin results through February,” said David Overton, Chairman and Chief Executive Officer. “That trajectory was impacted by the onset of COVID-19 and the associated social distancing and shelter-in-place orders that required us to close our restaurant dining rooms and shift to an off-premise only operating model in March.”

Overton continued, “Our restaurant teams have done a tremendous job executing in this environment in the face of significant adversity, and we have seen sales volumes accelerate. At the same time, we have made very difficult, yet necessary decisions to manage costs and preserve cash, while ensuring that we are well-positioned for the eventual reopening of our restaurant dining rooms, although we expect capacity restrictions for some time as social distancing protocols remain in place. With our experienced management teams, long-standing and strong off-premise business and a strengthened liquidity position, we believe we will continue to be able to effectively manage through and ultimately emerge from this crisis even stronger as we have proven in prior cycles.”

Overton concluded, “I want to thank our teams for everything they are doing to support our business during this unprecedented time. While the duration of COVID-19 and what the reopening of the economy will look like remains uncertain, we look forward to getting our affected staff members back to work as soon as practicable.”

Development

The Company opened the following Company-owned restaurants during the first quarter:

Concept

Number of Units

The Cheesecake Factory

North Italia

1

Fox Restaurant Concepts

 

Flower Child

1

The Company has suspended new unit development until more clarity on the restaurant industry operating environment emerges.

Balance Sheet

As of March 31, 2020, cash and cash equivalents totaled $81.0 million and total debt was $380.0 million.

On April 20, 2020, the Company announced that it closed a $200 million convertible preferred investment from affiliates of Roark Capital. As of April 30, 2020, the Company’s cash balance was approximately $260 million.

On May 1, 2020, the Company entered into an amendment to its revolving credit facility that, among other changes, provides for net adjusted leverage ratio and EBITDAR to interest and rent expense coverage ratio covenant relief through the first quarter of fiscal 2021.

To preserve liquidity and in conjunction with the terms of the credit facility amendment, the Company’s Board of Directors has suspended the quarterly dividend on its common stock, as well as share repurchases.

About The Cheesecake Factory Incorporated

The Cheesecake Factory Incorporated is a leader in experiential dining. We are culinary forward and relentlessly focused on hospitality. Delicious, memorable experiences created by passionate people – this defines who we are and where we are going. We currently own and operate 294 restaurants throughout the United States and Canada under brands including The Cheesecake Factory®, North Italia® and a collection within the Fox Restaurant Concepts subsidiary. Internationally, 26 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.

The Cheesecake Factory Incorporated
Preliminary Condensed Consolidated Financial Statements
(unaudited; in thousands, except per share and statistical data)
             
The following tables present preliminary financial results for the 13 weeks ended March 31, 2020 and do not include impairments of the Company’s long-lived assets, goodwill and other intangible assets and the revaluation of contingent consideration associated with the acquisition of Fox Restaurant Concepts LLC (“FRC”), as well as corresponding tax effects, as a result of the impact of COVID-19, all of which are currently being evaluated. While these items are all non-cash, the impact on reported results is expected to be material.
             
    13 Weeks Ended   13 Weeks Ended
Consolidated Statements of Income   March 31, 2020   April 2, 2019
   

Amount

Percent of
Revenues

 

Amount

Percent of
Revenues

     
Revenues  

$

615,106

 

 

100.0

%

 

$

599,481

 

 

100.0

%

Costs and expenses:            
Cost of sales  

 

140,905

 

 

22.9

%

 

 

136,187

 

 

22.7

%

Labor expenses  

 

237,647

 

 

38.7

%

 

 

217,310

 

 

36.2

%

Other operating costs and expenses  

 

167,971

 

 

27.3

%

 

 

153,221

 

 

25.6

%

General and administrative expenses  

 

43,960

 

 

7.1

%

 

 

39,123

 

 

6.5

%

Depreciation and amortization expenses  

 

23,562

 

 

3.8

%

 

 

21,362

 

 

3.6

%

Impairment of assets and lease terminations(1)  

 

324

 

 

0.1

%

 

 

 

 

0.0

%

Acquisition-related costs  

 

1,236

 

 

0.2

%

 

 

 

 

0.0

%

Acquisition-related contingent consideration, compensation
and amortization expenses(2)
 

 

1,948

 

 

0.3

%

 

 

 

 

0.0

%

Preopening costs  

 

3,119

 

 

0.5

%

 

 

2,130

 

 

0.4

%

Total costs and expenses  

 

620,672

 

 

100.9

%

 

 

569,333

 

 

95.0

%

(Loss)/income from operations  

 

(5,566

)

 

(0.9

)%

 

 

30,148

 

 

5.0

%

Loss on investment in unconsolidated affiliates  

 

 

 

0.0

%

 

 

(1,450

)

 

(0.2

)%

Interest and other (expense)/income, net  

 

(1,518

)

 

(0.3

)%

 

 

2

 

 

0.0

%

(Loss)/income before income taxes  

 

(7,084

)

 

(1.2

)%

 

 

28,700

 

 

4.8

%

Income tax (benefit)/provision(3)  

 

(3,151

)

 

(0.6

)%

 

 

1,716

 

 

0.3

%

Net (loss)/income  

$

(3,933

)

 

(0.6

)%

 

$

26,984

 

 

4.5

%

             
Basic net (loss)/income per share  

$

(0.09

)

   

$

0.61

 

 
Basic weighted average shares outstanding  

 

43,773

 

   

 

44,255

 

 
             
Diluted net (loss)/income per share  

$

(0.09

)

   

$

0.60

 

 
Diluted weighted average shares outstanding  

 

44,137

 

   

 

44,984

 

 
             
(1) Excludes adjustments for impairment of long-lived assets, goodwill and other intangible assets due to COVID-19. The Company’s assessment of these assets is in process.
(2) Excludes the impact of COVID-19 on the revaluation of contingent consideration associated with the acquisition of FRC. The Company’s assessment of this liability is in process.
(3) Excludes the income tax impact of impairments of long-lived assets, goodwill and other intangible assets and the revaluation of contingent consideration associated with the acquisition of FRC.
             
    13 Weeks Ended   13 Weeks Ended
Selected Segment Information   March 31, 2020   April 2, 2019
Revenues:            
The Cheesecake Factory restaurants  

$

488,471

 

   

$

548,633

 

 
North Italia  

 

30,512

 

   

 

 

 
Other FRC  

 

35,583

 

   

 

 

 
Other  

 

60,540

 

   

 

50,848

 

 
Total  

$

615,106

 

   

$

599,481

 

 
             
Preliminary (loss)/income from operations:(1)            
The Cheesecake Factory restaurants  

$

39,275

 

   

$

65,939

 

 
North Italia  

 

(562

)

   

 

 

 
Other FRC  

 

2,975

 

   

 

 

 
Other  

 

(47,254

)

   

 

(35,791

)

 
Total  

$

(5,566

)

   

$

30,148

 

 
             
Preopening costs:            
The Cheesecake Factory restaurants  

$

1,414

 

   

$

1,481

 

 
North Italia  

 

953

 

   

 

 

 
Other FRC  

 

(159

)

   

 

 

 
Other  

 

911

 

   

 

649

 

 
Total  

$

3,119

 

   

$

2,130

 

 
             
Depreciation and amortization:            
The Cheesecake Factory restaurants  

$

17,277

 

   

$

17,608

 

 
North Italia  

 

965

 

   

 

 

 
Other FRC  

 

1,201

 

   

 

 

 
Other  

 

4,119

 

   

 

3,754

 

 
Total  

$

23,562

 

   

$

21,362

 

 
             
(1) Excludes the impact of COVID-19 as it relates to impairments of the Company’s long-lived assets, goodwill and other intangible assets and the revaluation of contingent consideration associated with the acquisition of FRC.  
             
             
The Cheesecake Factory restaurants operating information:            
Comparable restaurant sales  

 

(12.9

)%

   

 

1.3

%

 
Restaurants opened during period  

 

 

   

 

 

 
Restaurants open at period-end  

 

206

 

   

 

201

 

 
Restaurant operating weeks  

 

2,674

 

   

 

2,613

 

 
             
North Italia operating information:            
Comparable restaurant sales  

 

(12.0

)%

   

 

 

 
Restaurants opened during period  

 

1

 

   

 

 

 
Restaurants open at period-end  

 

23

 

   

 

 

 
Restaurant operating weeks  

 

290

 

   

 

 

 
             
Fox Restaurant Concepts (FRC) operating information:            
Restaurants opened during period  

 

1

 

   

 

 

 
Restaurants open at period-end  

 

50

 

   

 

 

 
             
Number of company-owned restaurants:            
The Cheesecake Factory  

 

206

 

       
North Italia  

 

23

 

       
Fox Restaurant Concepts (FRC)  

 

50

 

       
Other  

 

15

 

       
Total  

 

294

 

       
             
Number of international-licensed restaurants:            
The Cheesecake Factory  

 

26

 

       
             
Selected Consolidated Balance Sheet Information  

March 31, 2020

 

December 31, 2019

Cash and cash equivalents    

$

81,023

 

   

$

58,416

 

Long-term debt    

 

380,000

 

   

 

290,000

 

Reconciliation of Non-GAAP Results to Preliminary GAAP Results

In addition to the results provided in accordance with accounting principles generally accepted in the United States of America (“GAAP”) in this press release, the Company is providing non-GAAP measurements which present preliminary net (loss)/income and diluted preliminary net (loss)/income per share excluding the impact of certain items. The non-GAAP measurements are intended to supplement the presentation of the Company’s financial results in accordance with GAAP. These non-GAAP measures are calculated by eliminating from net (loss)/income and diluted net (loss)/income per share the impact of items the Company does not consider indicative of its ongoing operations. The Company uses these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons.

The Cheesecake Factory Incorporated
Reconciliation of Non-GAAP Financial Measures
(unaudited; in thousands, except per share data)
             
             
    13 Weeks Ended   13 Weeks Ended
    March 31, 2020   April 2, 2019
     
Preliminary net (loss)/income (GAAP)(1)    

$

(3,933

)

   

$

26,984

 

COVID-19 related costs(2)    

 

3,955

 

   

 

 

Impairment of assets and lease terminations    

 

324

 

   

 

 

Loss on investment in unconsolidated affiliates(3)    

 

 

   

 

1,450

 

Acquisition-related costs(4)    

 

1,236

 

   

 

 

Acquisition-related contingent consideration,
compensation and amortization expenses(5)
   

 

1,948

 

   

 

 

Tax effect of adjustments(6)    

 

(1,939

)

   

 

(377

)

Adjusted preliminary net income (non-GAAP)    

$

1,591

 

   

$

28,057

 

             
Diluted preliminary net (loss)/income per share (GAAP)    

$

(0.09

)

   

$

0.60

 

COVID-19 related costs    

 

0.09

 

   

 

 

Impairment of assets and lease terminations    

 

0.01

 

   

 

 

Loss on investment in unconsolidated affiliates    

 

 

   

 

0.03

 

Acquisition-related costs    

 

0.03

 

   

 

 

Acquisition-related contingent consideration,
compensation and amortization expenses
   

 

0.04

 

   

 

 

Tax effect of adjustments    

 

(0.04

)

   

 

(0.01

)

Adjusted diluted preliminary net income per share (non-GAAP)    

$

0.04

 

   

$

0.62

 

             
(1) Represents preliminary financial results for the 13 weeks ended March 31, 2020 and does not include the impact of COVID-19 as it relates to impairments of the Company’s long-lived assets, goodwill and other intangible assets and the revaluation of contingent consideration associated with the acquisition of FRC, as well as corresponding tax effects, all of which are currently being evaluated.
(2) Represents incremental costs associated with COVID-19 primarily related to healthcare and meal benefits for furloughed staff members. These costs were recorded in labor expenses and other operating costs and expenses on the consolidated statements of income.
(3) Represents the Company’s share of pre-acquisition losses incurred by North Italia and Flower Child.
(4) Represents costs incurred to effect and integrate the North and FRC acquisition.
(5) Represents changes in the fair value of the deferred consideration and contingent consideration and compensation liabilities related to the North and FRC acquisition, as well as amortization of acquired definite-lived licensing agreements.
(6) Based on the federal statutory rate and an estimated blended state tax rate, the tax effect on all adjustments assumes a 26% tax rate for fiscal 2020 and 2019.