Cheesecake Factory Q2
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Cheesecake Factory Q2
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(FOOL CONFERENCE CALL SYNOPSIS)* By Debora Tidwell (MF Debit)
The Cheesecake Factory, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CAKE)") else Response.Write("(NASDAQ: CAKE)") end if %> UNION CITY, Ca., August 1, 1996/FOOLWIRE/ --- The Cheesecake Factory announced their Q2 1996 results after the market close yesterday. Topline performance for the quarter continued extremely strong with total revenues advancing about 38% to $39.2 million. The company's net income for the quarter was $2.1 million or $0.19 per share, down about $300,000 or $0.03 a share versus the same quarter last year. This was $0.02 per share below analyst expectations.
Total restaurant sales and bakery sales were each up 38% for the quarter. Their comparable restaurant sales advanced 6.3% for the quarter which was a huge gain over the 2.6% increase in comparable restaurant sales last year. The estimated operating cash flow for their ongoing restaurant operations increased by about 34% for the quarter and the total company's EBITDA increased 27%.
As expected their earnings comparisons were unfavorably impacted by growth related costs and expenses which totalled about $1.5 million on a pre-tax basis or amounted to roughly $0.09 per share on an after-tax basis. The first unfavorable comparison related to the timing and amount of their restaurant pre-opening cost amortization which unfavorably impacted their pre-tax income comparisons by about $636,000 or $0.04 per share. The company amortizes their pre-opening costs in full over the 12-month period following the openings of their respective restaurants. Second, higher fixed and semi-fixed costs related to the estimated four-fold capacity increase of their new bakery production facility represented approximately $430,000 or $0.03 per share for the quarter. Fixed and semi-fixed costs include items such as depreciation, amortization, insurance, utilities, property taxes, maintenance expenses, and items of that nature. Finally, incremental operating expenses of a transitional nature were experienced in the bakery during the quarter which totalled approximately $398,000 or about another $0.02 per share. Most of this incremental expense was related to extra labor costs that were incurred as they brought all their equipment online in the new facility.
As they assess the company's results for the past couple of quarters, it struck them that their earnings comparisons would clearly have been favorable for those periods if they weren't growing the company and trying to build a strong foundation for future growth. The numbers indicate that the ramp-up of their restaurant expansion plan, coupled with the costs associated with the major investment in their strategic asset -- their new bakery production facility -- are clearly creating some unfavorable earnings comparisons this year. They believe these unfavorable comparisons will begin to abate as they move into 1997. But, they also recognize that their primary objective is to leverage these investments as timely and profitably as they possibly can.
Every one of their restaurants in their comparable base has experienced a sales increase for both the quarter and the year-to-date periods ended June 30th and they think this is a remarkable performance given the intense competition in the industry today. They think it is a strong testimonial to the continuing popularity of the Cheesecake Factory restaurant concept.
Cost of sales for the restaurants was 25.3% for the quarter, slightly favorable compared to recent trends. Cost of sales for the bakery was up slightly to about 42% of their sales versus 41.4% of sales for the same quarter last year. This was principally due to slightly higher ingredient usage as they brought the new production equipment online in the new facility. The company's labor cost increased to almost 32% of total revenues versus about 30% for the same quarter last year and that was principally due to the higher labor costs they ran in the bakery during the quarter as a result of the transition and the start-up of all their equipment in the new bakery. They think the labor costs will return more to a normal level by the end of the year.
Their occupancy and G&A expenses were essentially on trend for the quarter. Depreciation and amortization expense increased dramatically and increased about 85% quarter-over-quarter to $2.6 million or about 6.6% of total revenues. That increase of $1.2 million consists of about $600,000 for the pre-opening expense amortization and another $300,000 to the increased depreciation related to the new bakery production facility. They think that their pre-opening expense comparisons will begin to gradually level out aas they make progress toward their goal of opening at least 5 to 6 new restaurants each year, with the openings occurring more evenly throughout the year. However, it is clear that the earnings comparisons will continue to be unfavorable for this particular cost category during the remainder of FY 1996. Likewise, they think that the impact of the higher fixed and semi-fixed costs in the new bakery production facility will create some unfavorable earnings comparisons until they can match up on a more apples to apples basis for these items starting in FY 1997.
Interest income was down about $193,000 for the quarter which is a direct reflection of less interest-bearing marketable securities on hand which results from their capital expenditure program and the new bakery production facility. Their effective tax rate was also adjusted to 32.5% on a year-to-date basis which reflects their estimate of additional tax credits that they expect this year.
Their liquidity position remains satisfactory. As of June 30th they had about $15.3 million in cash and short-term investments on hand. Their capital expenditures for the 6 months ended June 30th were about $8 million and they think total capital expenditures for FY 1996 will be in the range of about $20 million. In addition to cash and investments on hand and their cash flow from operations and landlord construction contributions when they are available, they have a $10 million revolving credit facility in place and have drawn $3 million down on the facility as of today and will continue to use it from time to time to optimally manage the company's liquidity position.
Chicago, in the John Hancock, continues to be the leader of their restaurants. They just opened an outdoor patio that seats 60 and soon that will move up to 80. It would have had the all-time high week in their company if it wasn't for Atlanta. Chicago, last week, hit its high so far at $292,000. Their Atlanta store, because of the Olympics, broke a $300,000 week -- the first time for the company. Although the Olympics started out slow for many restaurants, the last weekend continues to have record-breaking sales in the Atlanta restaurant. Houston is moving up nicely. They have seen some new highs, in fact last week was a new high for the Houston store. They are very happy with Chestnut Hill and believe that they will probably track close to the $8 million range. Old Orchard had a very nice opening. It was somewhere in the $180,000s with absolutely no advertising. Baltimore opened on the 20th and they were delightfully surprised with their sales. They did close to $120,000 just on the first weekend and this will be the first week that it is open for both lunch and dinner.
Kansas City is well under construction and they are looking for a Q4 opening there. They hope Pasadena will open by the end of the year. And they just completed their lease for their expansion in Boca Raton which gives them another 4,000 square feet to work with and, by high season in Miami, they should have that expansion done and look forward to more sales there (which is one of their best restaurants on a per-square-foot basis).
In Q1 1997, they should have Denver open and they still have the LAX dessert outlets, of which they should have one opened in November 1996 and another one in December, and then possibly February for the third dessert outlet to open. Westbury Long Island should have a grand opening date around August 1st of 1997. In Las Vegas, they are hoping for a Labor Day grand opening at the Forum shops in 1997.
Other letters of intent that have been signed where they are working on the leases include the Taj Mahal in Atlantic City where they will open on the Boardwalk. They have a Dallas site on Beltline that hopefully could be a 1997 opening. They are in the middle of negotiating the lease for the restaurant in Tysons Corners in Virginia, which is a freestanding building. They think it will be them and a large bookstore user on the corner of Route 7 and International. They have signed a letter of intent for Aventura Mall, a new entertainment section they are building of that complex, which will be an early 1998 opening. And then possibly a site in south Miami. They have Oakbrook, which they have been working on and are close to concluding, which should be a Q1 1997 opening if all goes well. They are not looking at franchising right now because they believe that the restaurant concept is too difficult to implement through a franchise at this point. They will look into it again when they develop a scaled-down version of the restaurant.
They are very happy with their 6.3% comp store sales increase. They have had good weather in California so they are happy with their success there. As far as the bakery goes, their transition is complete and they have moved all of their baking into the new factory and they are now producing in one place. Many of the startup inefficiencies are gone, certainly not all of them, as they work through eadh of their products and understand how to do the work that was done in a non-automated factory now using their automation and the stations they built to finish their cakes and complete them. They hired a director of manufacturing with quite a bit of experience in both baking and food manufacturing. They have also hired a controller and director of finance for the bakery.
Dairy products have gone up. They have been able to raise the prices for their cakes in the restaurants and have been dealing with various companies and have been able to get the increases back. But they don't think dairy prices will stabilize or come down much before the end of the year.
They are ready to put in their EDI function for their mail order in their computer system because, besides their own mail order they have their cakes in several other catalogs that will be featured for the holiday season and are already taking orders for their pumpkin and pumpkin pecan cheesecakes. Last in the bakery is that they are through some negotiations with various warehouse clubs to take on more divisions of the country and anticipate some new and increased sales into the rest of the year for their bakery because now they are able to start selling those cakes.
They have a standard recipe cost system which has been rolled out to all their restaurants and their operators are beginning to use it effectively to manage their food costs. The learning curve has been overcome and they believe that over time that particular system will identify some opportunities for them to work on in the food cost area. In the bakery area they have a cost accounting system that is partially implemented at this point. They expect to wrap up full implementation of that system over the next 30-45 days. That is really tied to the final settling of all of the equipment and processes in their bakery production operation. It is very hard to layer in a cost accounting system in full until you get all the moving parts in the bakery and processes really nailed down. So that will be in place very shortly. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |