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MarketScreener Homepage  >  Equities  >  Nasdaq  >  The Cheesecake Factory Incorporated    CAKE

THE CHEESECAKE FACTORY INCORPORATED

(CAKE)
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Cheesecake Factory Incorporated : INC Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

11/06/2020 | 05:04pm 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, the effects of the COVID-19 pandemic on our
financial condition and our results of operation, including our expectation with
respect to our ability to reopen and keep open our restaurants, financial
guidance and projections and statements with respect to the acquisition of North
Italia and Fox Restaurant Concepts LLC and expectations regarding accelerated
and diversified revenue growth as a result of the acquisition of North Italia
and 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 other FRC restaurants;
operate Social Monk Asian Kitchen; and utilize our capital effectively and
continue to increase cash dividends and repurchase our shares. 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; 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 international markets; acceptance and success of North Italia and the
FRC concepts, Social Monk Asian Kitchen and 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; 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 the
resumption of our new unit development; compliance with debt covenants;
strategic capital allocation decisions including share repurchases and
dividends; the ability to achieve projected financial results; economic and
political conditions that impact consumer confidence and spending; 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 31, 2019.) 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 31, 2019: 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



The Company is subject to 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 on March 13,
2020. We have experienced significant disruptions to our business due to
suggested and mandated social distancing and shelter-in-place orders, which
resulted in 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 late April 2020, certain jurisdictions began
allowing the reopening of restaurant dining rooms , and we began to reopen
dining rooms across our concepts the second week of May. However, restrictions
on the type of operating model and occupancy capacity continue to change. The
following table presents the number of restaurants and their operating model as
of October 29, 2020:




                                        The Cheesecake
                                            Factory          North Italia    Other FRC    Other     Total
Indoor dining with limited capacity                 187 (1)            21           24        36       268
Outdoor only with social distancing                  17                 2  
         -         1        20
Off-premise only                                      1                 -            -         1         2
Currently closed                                      -                 -            1         4         5
Total                                               205                23           25        42       295

(1) On average, The Cheesecake Factory restaurants with reopened dining rooms are

    operating at 50% capacity.



In our initial response to the pandemic, the Company and its Board implemented the following measures to preserve liquidity and enhance financial flexibility:

? Eliminated non-essential capital expenditures and expenses;

? Suspended new unit development;

? Reduced Board, executive and corporate support staff compensation;

? Furloughed approximately 41,000 hourly staff members;

Engaged in discussions with our landlords regarding ongoing rent obligations,

? including the potential deferral, abatement and/or restructuring of rent

otherwise payable during the period of the COVID-19 pandemic related closure;

? Increased borrowings under our revolving credit facility;

? Raised additional equity capital; and

? Suspended the dividend on our common stock and share repurchases.


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During the third quarter of fiscal 2020, we called back to work a majority of
our staff members who were previously furloughed, and restored Board, executive
and corporate support staff compensation. In addition, we resumed new unit
development on a limited basis and will continue to evaluate the pace and
quantity of new unit development as more clarity on the restaurant industry
operating environment emerges.



We cannot predict how long the COVID-19 pandemic will last or whether it will
reoccur, what additional restrictions may be enacted, to what extent we can
maintain off-premise sales volumes or if individuals will be comfortable
returning to our dining rooms during or following social distancing protocols
and what long-lasting effects the COVID-19 pandemic may have on the full-service
segment of the restaurant industry. The extent of the reopening process, along
with the potential impact of the COVID-19 pandemic on economic conditions and
consumer spending behavior, will determine the significance of the impact to our
operating results and financial position.



In the first quarter of fiscal 2020, these considerable developments triggered
the need to perform impairment assessments of our long-lived assets, goodwill
and other intangible assets and a revaluation of contingent consideration
associated with the Acquisitions. Future changes in estimates could further
impact the carrying value of these items. (See Notes 3 and 4 for further
discussion of impairment of long-lived and intangible assets, respectively. See
Note 9 for further discussion of the revaluation of contingent consideration.)



See "Risk Factors" included in Part II, Item 1A for further discussion of risks associated with the COVID-19 pandemic.



General


The Cheesecake Factory Incorporated is a leader in experiential dining. We are
culinary forward and relentlessly focused on hospitality. We currently own and
operate 295 restaurants throughout the United States and Canada under brands
including The Cheesecake Factory®, North Italia® and a collection within our FRC
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.



Overview



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


Investing in new Company-owned restaurant development is our top long-term
capital allocation priority, with a focus on opening our concepts in premier
locations within both new and existing markets. 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 about 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. In light of the COVID-19 pandemic, we
will continue to evaluate the pace and quantity of new unit development as more
clarity on the restaurant industry operating environment emerges.



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. We are continuing our efforts on a number of
initiatives, including a greater focus on increasing customer throughput in our
restaurants, leveraging the success of 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.

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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. We will continue to evaluate future pricing decisions in light of
the COVID-19 operating environment.



On October 2, 2019, we completed the acquisitions of North Italia and FRC,
including Flower Child (the "Acquisitions"), which we expect will accelerate and
diversify our revenue as once the restaurant operating environment stabilizes
following the COVID-19 pandemic.



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 margins, and
longer-term to drive margin expansion, by maintaining flat 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.



At the Company level, we generated $2.9 million of positive cash flow from
operating activities during the third quarter of fiscal 2020. Our future cash
flow performance will depend on the evolving COVID-19 regulatory landscape, as
well as economic conditions and consumer behavior. We would expect cash
generation to increase as the operating environment for the full-service segment
of the restaurant industry normalizes from the COVID-19 impact. Longer-term, 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 $400 million unsecured revolving credit facility (the
"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 dividends and
repurchase shares in the future will be subject to financial covenants under the
Amended Facility, among other factors.



Longer-term, we believe our domestic revenue growth (comprised of our annual
unit growth and comparable sales growth), combined with international 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
consolidated statements of income 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 29, 2020    October 1, 2019    September 29, 2020    October 1, 2019
Revenues                                            100.0 %            100.0 %               100.0 %            100.0 %

Costs and expenses:
Cost of sales                                        22.8               22.7                  23.2               22.6
Labor expenses                                       38.7               36.4                  39.2               36.3
Other operating costs and expenses                   30.7               25.5                  31.4               25.2
General and administrative expenses                   7.3                6.2                   8.2                6.3
Depreciation and amortization
expenses                                              4.4                3.6                   4.8                3.6
Impairment of assets and lease
expiration                                            2.0                  -                  14.3                  -
Acquisition-related costs                               -                0.6                   0.2                0.2
Acquisition-related contingent
consideration and amortization                        0.3                 
-                 (0.3)                  -
Preopening costs                                      0.5                0.4                   0.6                0.4
Total costs and expenses                            106.7               95.4                 121.6               94.6
(Loss)/income from operations                       (6.7)                4.6                (21.6)                5.4
Loss on investments in
unconsolidated affiliates                               -              (1.8)                     -              (0.7)
Interest and other expense, net                     (0.6)                  -                 (0.5)                  -
(Loss)/income before income taxes                   (7.3)                2.8                (22.1)                4.7
Income tax (benefit)/provision                      (1.8)                0.1                 (6.6)                0.3
Net (loss)/income                                   (5.5) %              2.7 %              (15.5) %              4.4 %



Thirteen Weeks Ended September 29, 2020 Compared to Thirteen Weeks Ended October 1, 2019




Revenues



Revenues decreased 11.7% to $517.7 million for the fiscal quarter ended September 29, 2020 compared to $586.5 million for the comparable prior year period, primarily due to a decrease in comparable restaurant sales, reflecting the effect of the COVID-19 pandemic, partially offset by additional revenue related to the acquired restaurants and new restaurant openings.




Revenue contribution from the acquired concepts in the third quarter of fiscal
2020 totaled $63.9 million. The Cheesecake Factory comparable sales declined by
23.3%, or $122.7 million, from the third quarter of fiscal 2019 driven by a
decline in customer traffic of 40.4%, partially offset by average check growth
of 17.1% (based on an increase of 3.0% in menu pricing and a 14.1% positive
change in mix). Sales through the off-premise channel comprised approximately
45% of our restaurant sales during the third quarter of fiscal 2020 given the
impact of COVID-19. We account for each off-premise order as one guest for
traffic measurement purposes. In turn, the high mix of sales in the off-premise
channel was the primary driver of the positive change in mix and also
contributed to the decline in traffic, along with the broader impact of the
COVID-19 pandemic. We implemented effective menu price increases of
approximately 1.5% in both the first and third quarters of fiscal 2020,
respectively. The Cheesecake Factory average sales per restaurant operating week
decreased 23.2% to $156,643 in the third quarter of fiscal 2020 from $203,996 in
the third quarter of fiscal 2019. Total operating weeks at The Cheesecake
Factory restaurants increased 1.3% to 2,662 in the third quarter of fiscal 2020
compared to 2,628 in the prior year. North Italia comparable sales declined
approximately 22% during the third quarter of fiscal 2020. North Italia average
sales per restaurant operating week for the third quarter of fiscal 2020 was
$94,561 based on 296 operating weeks.



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  Table of Contents
The Cheesecake Factory restaurants become eligible to enter the comparable sales
base in their 19th month of operation. At September 29, 2020, there were five
The Cheesecake Factory 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. North Italia restaurants become eligible to enter the
comparable sales base in their 13th month of operations. At September 29, 2020
there were six North Italia restaurants not yet in the comparable sales base.



External bakery sales were $17.8 million for the third quarter of fiscal 2020 compared to $13.8 million in the comparable prior year period.



Cost of Sales



Cost of sales consists of food, beverage, retail 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 22.8% and
22.7% in the third quarters of fiscal 2020 and 2019, respectively, reflecting a
shift in sales mix.



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 38.7% and 36.4% in the third quarters of fiscal 2020 and 2019,
respectively. This increase was primarily due to the cost of maintaining our
full restaurant management team and group medical benefits in the reduced sales
environment, partially offset by lower hourly labor.



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),
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 30.7% and
25.5% in the third quarters of fiscal 2020 and 2019, respectively. This variance
was primarily driven by sales deleverage, increased marketing expenses and costs
associated with COVID-19 such as additional sanitation and personal protective
equipment.



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 7.3% and 6.2% in
the third quarters of fiscal 2020 and 2019, respectively. This variance was
primarily due to sales deleverage.



Depreciation and Amortization Expenses




As a percentage of revenues, depreciation and amortization expenses increased to
4.4% in the third quarter of fiscal 2020 from 3.6% in the comparable prior year
period due primarily to sales deleverage.



Impairment of Assets and Lease Terminations




During 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, one that
discontinued operations during the quarter and another that is expected to close
by the end of the year, RockSugar Southeast Asian Kitchen, which is scheduled to
discontinue operations at the end of the year and one Flower Child location that
will not reopen following its COVID-related closure.



Acquisition-Related Costs


In the third quarter of fiscal 2020 and fiscal 2019, we recorded $39,307 and $3.2 million, respectively, of costs to effect and integrate the Acquisitions.



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Acquisition-Related Contingent Consideration, Compensation and Amortization

In the third quarter of fiscal 2020, we recorded $1.4 million of acquisition-related contingent consideration, compensation and amortization, reflecting changes in the fair value of the deferred and contingent consideration and compensation liabilities and amortization of acquired definite-lived licensing agreements.



Preopening Costs



Preopening costs were $2.4 million and $2.5 million in the third quarters of
fiscal 2020 and 2019, respectively. We opened two Flower Child restaurants in
the third quarter of fiscal 2020 compared to one The Cheesecake Factory
restaurant 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.



Loss on Investment in Unconsolidated Affiliates




Loss on investment in unconsolidated affiliates, which represented our share of
pre-acquisition losses incurred by North Italia and Flower Child was $10.3
million in the third quarter of fiscal 2019. There was no corresponding amount
for the third quarter of fiscal 2020 as we acquired the outstanding equity
interests in these concepts in the fourth quarter of fiscal 2019.



Interest and Other (Expense)/Income, Net




Interest and other expense, net was $2.9 million of expense for the third
quarter of fiscal 2020 compared to $6,051 of income in the comparable prior year
period. This variance was primarily due to increased borrowings to effect the
Acquisitions and to enhance our financial flexibility in response to the
COVID-19 pandemic, as well as a higher interest rate on our Amended Facility.



Income Tax (Benefit)/Provision

Our effective income tax rate was 25.0% and 3.2% for the third quarters of
fiscal 2020 and 2019, respectively. The increase resulted primarily from a lower
proportion of employment credits in relation to pre-tax (loss)/income and a
benefit arising from the expected carryback of our anticipated fiscal 2020 loss
to prior years when the federal statutory rate was 35%. Without the carryback
provisions of the CARES Act, we would expect the fiscal 2020 loss to provide a
tax benefit at the statutory rate of 21%. The 14% rate benefit is reflected
primarily in the annual effective tax rate, although the portion representing
prior year temporary differences that are estimated to reverse in fiscal 2020
and become part of the fiscal 2020 loss carryback was recognized as a discrete
item in the first quarter of fiscal 2020.



Thirty-Nine Weeks Ended September 29, 2020 Compared to Thirty-Nine Weeks Ended October 1, 2019



Revenues



Revenues decreased 20.1% to $1,428.7 million for the first three quarters of
fiscal 2020 compared to $1,788.7 million for the comparable prior year period,
primarily due to a decline in comparable restaurant sales, reflecting the impact
of the COVID-19 pandemic, partially offset by additional revenue related to the
acquired restaurants and new restaurant openings.



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Revenue contribution from the acquired concepts in the first three quarters of
fiscal 2020 totaled $185.1 million. The Cheesecake Factory comparable sales
declined by 31.1%, or $498.4 million, from the first three quarters of fiscal
2019 driven by a decline in customer traffic of 43.5%, partially offset by
average check growth of 12.4% (based on an increase of 3.1% in menu pricing and
a 9.3% positive change in mix). Sales through the off-premise channel comprised
approximately 43% of our restaurant sales during the first three quarters of
fiscal 2020 given the impact of COVID-19. In turn, the high mix of sales in the
off-premise channel was the primary driver of the positive change in mix and
also contributed to the decline in traffic, along with the broader impact of the
COVID-19 pandemic. The Cheesecake Factory average sales per restaurant operating
week decreased 30.9% to $143,747 in the first three quarters of fiscal 2020 from
$208,042 in the first three quarters of fiscal 2019. Total operating weeks at
The Cheesecake Factory restaurants increased 1.4% to 7,976 in the first three
quarters of fiscal 2020 compared to 7,865 in the prior year. North Italia
comparable sales declined approximately 32% during the first three quarters of
fiscal 2020. North Italia average sales per restaurant operating week for the
first three quarters of fiscal 2020 was $85,315 based on 847 operating weeks.



External bakery sales were $46.3 million for the first three quarters of fiscal 2020 compared to $39.1 million in the comparable prior year period.



Cost of Sales


As a percentage of revenues, cost of sales was 23.2% and 22.6% in the first three quarters of fiscal 2020 and 2019, respectively. The increase was primarily driven by a shift in sales mix, as well as higher dairy costs.



Labor Expenses



As a percentage of revenues, labor expenses were 39.2% and 36.3% in the first
three quarters of fiscal 2020 and 2019, respectively. This increase was
primarily due to the cost of maintaining our full restaurant management team in
the reduced sales environment, as well as higher group medical insurance costs,
reflecting both higher large claims activity and the costs associated with
healthcare benefits for our furloughed staff members, partially offset by a
benefit from the Employee Retention Credit in the CARES Act.



Other Operating Costs and Expenses

As a percentage of revenues, other operating costs and expenses were 31.4% and
25.2% in the first three quarters of fiscal 2020 and 2019, respectively. This
variance was primarily driven by sales deleverage, increased marketing expenses
and costs associated with COVID-19 such as additional sanitation and personal
protective equipment, partially offset by lower restaurant incentive
compensation costs.



G&A Expenses



As a percentage of revenues, G&A expenses were 8.2% and 6.3% in the first three
quarters of fiscal 2020 and 2019, respectively. This variance was primarily due
to sales deleverage, partially offset by lower corporate incentive compensation
costs.


Depreciation and Amortization Expenses

As a percentage of revenues, depreciation and amortization expenses increased to 4.8% in the first three quarters of fiscal 2020 from 3.6% in the comparable prior year period due primarily to sales deleverage.

Impairment of Assets and Lease Terminations

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. See Notes 3 and 4 of Notes Condensed Consolidated Financial
Statements in Part 1, Item 1 of this report for further discussion of our
long-lived and intangible assets, respectively. We recorded no impairment of
assets and lease terminations expense in the first three quarters of fiscal
2019.

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Acquisition-Related Costs

In the first three quarters of fiscal 2020 and fiscal 2019, we recorded $2.3
million and $3.2 million, respectively, of costs to effect and integrate the
Acquisitions.

Acquisition-Related Contingent Consideration, Compensation and Amortization

In the first three quarters of fiscal 2020, we recorded a benefit of $4.0 million in acquisition-related contingent consideration, compensation and amortization, reflecting a $5.6 million decrease in the fair value of the contingent consideration and compensation liabilities primarily related to impact of the COVID-19 pandemic, partially offset by an increase of $1.2 million in the deferred consideration liability and $0.4 million in amortization of acquired definite-lived licensing agreements.

Preopening Costs


Preopening costs were $7.6 million and $6.9 million in the first three quarters
of fiscal 2020 and 2019, respectively. We opened one North Italia and three
Flower Child locations in the first three quarters of fiscal 2020 compared to
two The Cheesecake Factory restaurants and our initial location of Social Monk
Asian Kitchen in the comparable prior year period.

Loss on Investment in Unconsolidated Affiliates


Loss on investment in unconsolidated affiliates, which represented our share of
pre-acquisition losses incurred by North Italia and Flower Child was $13.4
million in the first three quarters of fiscal 2019. There was no corresponding
amount for the first three quarters of fiscal 2020 as we acquired the
outstanding equity interests in these concepts in the fourth quarter of fiscal
2019.

Interest and Other (Expense)/Income, Net


Interest and other expense, net was $7.0 million of expense for the first three
quarters of fiscal 2020 compared to $16,986 in the comparable prior year period.
This variance was primarily due to increased borrowings on our Facility to
effect the Acquisitions and enhance our financial flexibility in response to the
COVID-19 pandemic.

Income Tax (Benefit)/Provision


Our effective income tax rate was 30.0% and 6.2% for the first three quarters of
fiscal 2020 and 2019, respectively. The increase resulted primarily from a lower
proportion of employment credits in relation to pre-tax (loss)/income and a
benefit arising from the expected carryback of our anticipated fiscal 2020 loss
to prior years when the federal statutory rate was 35%. Without the carryback
provisions of the CARES Act, we would expect the fiscal 2020 loss to provide a
tax benefit at the statutory rate of 21%. The 14% rate benefit is reflected
primarily in the annual effective tax rate, although the portion representing
prior year temporary differences that are estimated to reverse in fiscal 2020
and become part of the fiscal 2020 loss carryback was recognized as a discrete
item in the first quarter of fiscal 2020.

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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 (loss)/income and
diluted net (loss)/income 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 convertible preferred stock into common stock, we
exclude the preferred dividend and direct and incremental preferred stock
issuance costs, and assume all convertible preferred shares convert to common
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.


Following is a reconciliation from net (loss)/income and diluted net (loss)/income 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 29, 2020      October 1, 2019      September 29, 2020      October 1, 2019

Net (loss)/income available to common stockholders $ (33,184)

$ 16,090 $ (239,837) $ 78,584 Dividends on preferred stock

                                         4,838                    -                   8,532                    -
Direct and incremental preferred stock issuance
costs                                                                    -                    -                  10,257                    -
COVID-19 related costs (1)                                           2,558                    -                  17,579                    -
Impairment of assets and lease terminations                         10,402                    -                 204,731                    -
Acquisition-related costs                                               39                3,190                   2,343                3,190
Acquisition-related contingent consideration,
compensation and amortization expenses                               1,439                    -                 (3,992)                    -
Loss on investments in unconsolidated affiliates                         -               10,345                       -               13,439
Tax effect of adjustments (2)                                      (3,754)              (3,519)                (57,372)              (4,323)
Adjusted net (loss)/income                             $          (17,662)    $          26,106    $           (57,759)    $          90,890

Diluted net (loss)/income per common share             $            (0.76)    $            0.36    $             (5.47)    $            1.76
Dividends on preferred stock                                          0.09                    -                    0.17                    -
Direct and incremental preferred stock issuance
costs                                                                    -                    -                    0.21                    -

Assumed impact of potential conversion of preferred stock into common stock (3)

                                           0.13                    -                    0.60                    -
COVID-19 related costs (1)                                            0.05                    -                    0.36                    -
Impairment of assets and lease terminations                           0.20                    -                    4.16                    -
Acquisition-related costs                                                -                 0.07                    0.05                 0.07
Acquisition-related contingent consideration,
compensation and amortization expenses                                0.03                    -                  (0.08)                    -
Loss on investments in unconsolidated affiliates                         -                 0.23                       -                 0.30
Tax effect of adjustments (2)                                       (0.07)               (0.08)                  (1.17)               (0.10)
Adjusted net (loss)/income per share (4)               $            (0.33)    $            0.59    $             (1.17)    $            2.04


Represents incremental costs associated with the COVID-19 pandemic such as

additional sanitation, personal protective equipment, and healthcare benefits

and other expenses associated with furloughed staff members. For the thirteen

weeks ended September 29, 2020, the Company recorded $2.6 million for these (1) costs with approximately $0.4 million reflected in labor expenses, $2.1

million in other operating expenses and $0.1 million in G&A expenses. For the

thirty-nine weeks ended September 29, 2020, the Company recorded $17.6

million for these costs with approximately $2.2 million in cost of sales,

$9.9 million reflected in labor expenses, $5.1 million in other operating

    expenses and $0.4 million in G&A expenses.


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  Table of Contents

(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 (9,163,043 shares and 5,394,188 shares for the thirteen weeks

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 third quarter and first three quarters of fiscal 2020,

respectively. Beginning in the third quarter of fiscal 2020, we revised the (3) method used to calculate the potential impact of the conversion of the

Company's preferred stock to common stock for purposes of determining

adjusted net (loss)/income per share (non-GAAP). Instead of assuming

preferred shares are converted to common shares as of the beginning of each

period presented, we now utilize a weighted average shares outstanding

approach to be consistent with the approach used for outstanding common

shares. Under this methodology, the revised adjusted net loss per share for

the second quarter of fiscal 2020 was $0.90.

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

Fourth Quarter Fiscal 2020 Outlook

With the number of indoor dining rooms we currently have open and should we continue to generate comparable sales levels under continued capacity restrictions at The Cheesecake Factory restaurants at approximately the quarter-to-date through October 27th level of negative 7%, we anticipate generating positive operating profit and earnings per share for the fourth quarter of fiscal 2020.


Based on the above assumptions, we expect to generate positive cash flow from
operating activities and anticipate $10 million to $15 million in capital
expenditures for the fourth quarter. A debt repayment of $96.0 million and a
$17.3 million acquisition installment payment to FRC were both made in October
2020.

Fiscal 2021 Outlook

For fiscal 2021, we are currently estimating commodity cost inflation of
approximately 2%, and while we are still evaluating the potential effects of
COVID-19 on the labor environment, we expect hourly wage rate inflation to be
slightly more favorable in fiscal 2021 versus recent years based on current
governmental roadmaps for minimum wage.

We are in the early stages of developing our initial capital deployment plans
for fiscal 2021. Depending on the course of the pandemic, we could open as many
as 12 to 14 new restaurants in fiscal 2021 across our portfolio of concepts. We
anticipate approximately $105 million in capital expenditures to support this
level of unit development, as well as required maintenance on our restaurants.
We will refine these assumptions as more clarity on the operating environment
emerges. We will also make a $17.3 million acquisition installment payment to
FRC.

Liquidity and Capital Resources




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 29, 2020October 1, 2019
Cash (used in)/provided by operating activities         $            (32.7)    $           116.2
Additions to property and equipment                                  (38.3)               (46.7)
Growth capital provided to unconsolidated affiliates                      -               (25.5)
Net borrowings on credit facility                                      86.0                325.0
Preferred stock issuance, net of issuance costs                       189.7                    -
Proceeds from exercise of stock options                                 0.1
                 6.5
Cash dividends paid                                                  (15.8)               (45.0)
Treasury stock purchases                                              (3.2)               (50.6)




During the thirty-nine weeks ended September 29, 2020, our cash and cash
equivalents increased by $185.4 million to $243.8 million. This increase was
primarily attributable to issuance of preferred stock and borrowings on the
Amended Facility, partially offset by additions to property and equipment, cash
used in operating activities and dividend payments.



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  Table of Contents
Cash flows from operations decreased by $148.9 million from the first three
quarters of fiscal 2019 primarily due to the impact of the COVID-19 pandemic.
Typically, our requirement for working capital has not been significant since
our restaurant customers pay for their food and beverage purchases in cash or
cash equivalents at the time of sale and we are able to sell many of our
restaurant inventory items before payment is due to the suppliers of such items.
However, this dynamic shifted during the second quarter of fiscal 2020 as all of
our restaurants temporarily closed their dining rooms due to the COVID-19
pandemic. At the Company level, we generated $2.9 million of positive cash flow
from operating activities during the third quarter of fiscal 2020. Our future
cash flow performance will depend on the evolving COVID-19 regulatory landscape,
as well as economic conditions and consumer behavior. We would expect cash
generation to increase as the operating environment for the full-service segment
of the restaurant industry normalizes from the COVID-19 impact.



Capital expenditures were $38.3 million in the first three quarters of fiscal
2020 compared to $46.7 million in the comparable prior year period. We opened
one North Italia and three Flower Child locations in the first three quarters of
fiscal 2020 compared to two The Cheesecake Factory restaurants and our initial
location of Social Monk Asian Kitchen in the comparable prior year period. We
currently have six locations under development, and we are monitoring operating
conditions in their respective markets to determine when to move forward with
these new unit openings. We will continue to evaluate the pace and quantity of
new unit development as more clarity on the restaurant industry operating
environment emerges. We currently estimate cash capital expenditures to be
approximately $10 million to $15 million in the fourth quarter of fiscal 2020
for completion of construction of the units under development and for necessary
maintenance on our existing restaurants. We expect one The Cheesecake Factory
location and two restaurants within our FRC subsidiary to open in the fourth
quarter of fiscal 2020.



As of September 29, 2020, we maintained the Amended Facility, a $400 million
unsecured revolving credit facility, $40 million of which can be used for
issuances of letters of credit. The Amended Facility, which terminates on July
30, 2024, contains a commitment increase feature that could provide for an
additional $125 million in available credit upon our request and the
satisfaction of certain conditions. Certain of our material subsidiaries have
guaranteed our obligations under the Facility. During the first three quarters
of fiscal 2020, we increased our borrowings under the Facility to bolster our
cash position and enhance financial flexibility. At September 29, 2020, we had
net availability for borrowings of $0.6 million, based on a $376.0 million
outstanding debt balance and $23.4 million in standby letters of credit. The
Facility limits cash distributions with respect to our equity interests, such as
cash dividends and share repurchases, and sets forth negative covenants that
restrict indebtedness, liens, investments, sales of assets, fundamental changes
and other matters. As of September 29, 2020, we were in compliance with the
covenants set forth in the Amended Facility. (See Note 7 of Notes to Condensed
Consolidated Financial Statements in Part I, Item 1 of this report for further
discussion of our long-term debt.)



In addition, as further discussed in Note 11 of Notes to Condensed Consolidated
Financial Statements in Part I, Item 1 of this report, to increase our liquidity
given the impact of the COVID-19 pandemic on our operations, we issued 200,000
shares of Series A Convertible Preferred Stock on April 20, 2020 for an
aggregate purchase price of $200.0 million less issuance costs of $10.3 million.



In fiscal 2012, our Board approved the initiation of a cash dividend to our
common stockholders, which is subject to quarterly Board approval. Future
decisions to pay or to increase or decrease dividends on our common stock 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 Facility and
applicable law, and other such factors that the Board considers relevant.



Under authorization by our Board to repurchase up to 56.0 million shares of our
common stock, we have cumulatively repurchased 53.0 million shares at a total
cost of $1,696.4 million through September 29, 2020 with 12,567 repurchased at a
cost of $0.4 million during the third quarter of fiscal 2020 to satisfy tax
withholding obligations on vested restricted share awards. 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. We make the determination to repurchase shares 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
Acquisitions, 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 Facility that limit share repurchases based on a defined
ratio. (See Note 11 of Notes to Condensed Consolidated Financial Statements in
Part I, Item 1 of this report for further discussion of our repurchase
authorization and methods.)



To preserve liquidity during the COVID-19 pandemic and in conjunction with the
terms of our Amended Facility, our Board suspended the quarterly dividend on our
common stock, as well as share repurchases. (See Note 7 of Notes to Condensed
Consolidated Financial Statements in Part I, Item 1 of this report for further
discussion of our Facility.)

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  Table of Contents


The Acquisitions included a provision for contingent consideration which is
payable on October 2, 2024 and is based on achievement of revenue and
profitability targets for the FRC brands other than North Italia and Flower
Child, with considerations made in the event we undergo a change in control or
divest any FRC brand (other than North Italia and Flower Child). We are also
required to provide financing to FRC in an amount sufficient to support
achievement of these targets during the five years ending October 2, 2024.

As of September 29, 2020, 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.




Based on our current projections, we believe that during the upcoming 12 months
our cash and cash equivalents, combined with expected cash flows provided by
operations, anticipated cash refunds from our net operating loss carryback
claims and available borrowings under the Amended Facility, should be sufficient
in the aggregate to meet our short-term obligations. See Note 13 of Notes to
Condensed Consolidated Financial Statements in Part I, Item 1 of this report for
discussion of our income taxes.



See "Risk Factors" included in Part II, Item 1A for further discussion of risks associated with the COVID-19 pandemic.

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 2020 2 039 M - -
Net income 2020 -97,9 M - -
Net Debt 2020 286 M - -
P/E ratio 2020 -21,8x
Yield 2020 0,85%
Capitalization 1 879 M 1 879 M -
EV / Sales 2020 1,06x
EV / Sales 2021 0,80x
Nbr of Employees 46 250
Free-Float 43,0%
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Mean consensus OUTPERFORM
Number of Analysts 20
Average target price 35,63 $
Last Close Price 41,22 $
Spread / Highest target 16,4%
Spread / Average Target -13,6%
Spread / Lowest Target -36,9%
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Managers and Directors
NameTitle
David M. Overton Chairman & Chief Executive Officer
David M. Gordon President
Matthew Eliot Clark Chief Financial Officer & Executive Vice President
Jerome I. Kransdorf Lead Independent Director
Alexander L. Cappello Independent Director
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