Yahoo Finance The Cheesecake Factory Incorporated (NASDAQ:CAKE) Q4 2023 Earnings Call Transcript
The Cheesecake Factory Incorporated (NASDAQ:CAKE) Q4 2023 Earnings Call Transcript February 21, 2024
The Cheesecake Factory Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Christa and I will be your conference operator today. At this time, I would like to welcome everyone to The Cheesecake Factory Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Etienne Marcus, Vice President of Finance and Investor Relations. Etienne, you may begin your conference.
Etienne Marcus: Good afternoon and welcome to our fourth quarter fiscal 2023 earnings call. On the call with me today are David Overton, our Chairman and Chief Executive Officer; and Matt Clark, our Executive Vice President and Chief Financial Officer. David Gordon, our President is serving on jury duty and is unable to join us on today's call. Before we begin, let me quickly remind you that during this call, items will be discussed that are not based on historical facts and are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could be materially different from those stated or implied in forward-looking statements as a result of the factors detailed in today’s press release, which is available on our website at investors.thecheesecakefactory.com and in our filings with the Securities and Exchange Commission.
All forward-looking statements made on this call speak only as of today's date, and the company undertakes no duty to update any forward-looking statements. In addition, during this conference call, when discussing comparable sales, we will be referring to comparable sales on an operating week basis, unless specifically stated otherwise. We will also be presenting results on an adjusted basis, which excludes impairment of assets and lease terminations and acquisition-related expenses. An explanation of our use of non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures appear in our press release on our website as previously described. David Overton will begin today's call with some opening remarks, then Matt will provide a business update, review our fourth quarter results in detail and finish up with some commentary on our outlook for the first quarter and full year 2024.
Before opening the call up to questions. With that, I'll turn the call over to David Overton.
David Overton: Thank you, Etienne. We finished the year on a strong note, with continued improvement across many facets of our business, resulting in solid financial performance, including revenues in line with expectations and better than anticipated profit margins. Fourth quarter revenues were 877 million led by comparable sales at the Cheesecake Factory restaurants up 2.5% versus the prior year, and 14% versus 2019. Once again meaningfully outpacing the casual dining industry and demonstrating the strength and consistency of our brands. To this point, Cheesecake Factory restaurants delivered the highest average weekly sales in the company's history in the last week of the fourth quarter. Our top-line performance is a reflection of our steadfast focus on menu innovation, maintaining the contemporary design and decor of our restaurants and delivering exceptional food quality, service and hospitality.
Further building on the outstanding execution delivered by our operations team, we exceeded our expectations and labor productivity, food efficiency and wage management contributing towards restaurant level profit margin of 16.1% at the Cheesecake Factory not only exceeding our projections, but also surpassing fourth quarter 2019 margin levels. On the development front, we successfully opened nine new restaurants during the fourth quarter including 3 Cheesecake factories, 3 North Italia's and 3 FRC restaurants. Additionally, 2 Cheesecake Factory restaurants open internationally under licensing agreements, 1 in China and our first location in Thailand. Subsequent to quarter end, we opened a North Italia restaurant in Houston, Flower Child in the Dallas market and 1 Cheesecake Factory restaurant internationally under a licensing agreement in Mexico.
And lastly this morning we opened our newest culinary dropout in Atlanta. We are looking to build on this momentum and while the development conditions have not been fully normalized, we are aiming to further accelerate our unit growth. At this time we're planning to open as many as 22 new restaurants in 2024, including as many as 3 to 4 Cheesecake factories, 6 to 7, North Italia's, 6 to 7 Flower Child and 6 to FRC restaurants. As we look ahead, we remain intently focused on leveraging our competitive strength, the scale of our business, our differentiated brands, and the best-in-class operators to drive additional shareholder value and market share gains. With that, I'll now turn the call over to Matt.
Matt Clark: Thank you, David. Let me first provide a high-level recap of our fourth quarter results versus our expectations. I outlined last quarter. Total revenues of $877 million finished essentially at the midpoint of the range we provided. Adjusted net income margin of 4.5% exceeded the 4.25% guidance we provided. And we returned $22.9 million to our shareholders in the form of dividends and stock repurchases. For the year, we delivered total revenues of $3.44 billion a 6.7% increase over 2022 after excluding the impact of the additional week in fiscal 2022. And adjusted earnings per share of $2.69 a significant improvement over fiscal 2022 and above 2019 adjusted EPS. Now turning to some specific details around the quarter.
Fourth quarter, total sales at the Cheesecake Factory restaurants were $658 million with comparable sales of 2.5% versus the prior year, and 14% versus 2019, a slight increase from the third quarter. Importantly, the improvement was driven by better traffic and menu mix as year-over-year menu pricing declined. Q4 on-premise incident rates remained above 2019 levels, and by the same amount as in the third quarter, demonstrating stability, even as we continue lapping a heightened spending from last year. And off-premise sales, totaled 22% of sales for the fourth quarter in line with a full year percentage of sales. Total sales for North Italia were $67.2 million, with fourth quarter comparable sales increasing 7% from the prior year and 34% versus 2019, resulting in annualized AUVs of $7.9 million.
Restaurant level profit margin for the adjusted mature North Italia locations was 15.8% up 330 basis points from the previous quarter. The margin improvement was supported by a 3.7% menu price increase in October. Other FRC sales totaled $70.9 million, and sales pe operating week were $138,500. Flower Child sales totaled $30.4 million, and sales per operating week were $75,500 and external bakery sales were $16.6 million during the fourth quarter of fiscal 2023. Now moving to year-over-year expense variance commentary. In the fourth quarter, we continued to realize measurable year-over-year improvement across several key line items in the P&L. Specifically, cost of sales decreased 170 basis points, primarily driven by higher menu pricing, then commodity inflation.
Labor decreased 50 basis points supported by pricing leverage and improved staffing levels partially offset by lapping lower medical insurance expenses. Other operating expenses increased 20 basis points, driven by higher marketing costs, which includes the rewards program. G&A decreased 10 basis points and depreciation decreased 20 basis points as a percent of sales. Reopening costs were $9.6 million in the quarter compared to $7.8 million in the prior year period. We opened up nine restaurants during the fourth quarter versus eight restaurants in the fourth quarter of 2022. Higher pre-opening costs for the quarter was driven by the one more opening delays in opening dates, and the mix of concepts. And in the fourth quarter, we recorded a net expense of $35.6 million primarily related to impairment of assets and lease terminations expense, and FRC acquisition related expenses.
Fourth quarter GAAP diluted net income per share was $0.26 cents, adjusted diluted net income per share was $0.80. Now turning to our balance sheet on capital allocation, the company ended the quarter with total available liquidity of approximately $293 million, including a cash balance of about $56 million, and approximately $236.5 million available on a revolving credit facility. Total debt outstanding was unchanged at $475 million, in principle. CapEx totaled approximately $52 million during the fourth quarter for new unit development and maintenance. During the quarter, we completed approximately $9.8 million in share repurchases and returned $13.1 million to shareholders via our dividend. Before I move to our outlook, let me provide a brief update on our Cheesecake rewards program.
Early demand continues to exceed our internal expectations. And we remain encouraged by the level of member activity and engagement we are seeing. As we said previously, we're taking a very deliberate approach as we develop the program and therefore do not anticipate seeing a measurable impact to sales for at least the first year or so. We are continuing to test acquisition tactics and activation campaigns to better understand the key elements that are resonating with rewards members and most effectively increasing membership enrollment, engagement and driving frequency. Now, let me turn to our outlook. While we will not be providing specific comparable sales and earnings guidance. We will provide our updated thoughts on our underlying assumptions for Q1 2024 and full year 2024.
For Q1 2024, assuming no material operating or consumer disruptions, we anticipate total revenues to be between $875 million and $895 million. This essentially assumes a continuation of fourth quarter trends, as well as the impact from the inclement weather quarter-to-date. Next, at this time, we expect effective commodity inflation of low single digits for Q1, as our broad market basket continues to stabilize. We're modeling net total labor inflation of mid-single digits, when factoring the latest trends in wage rates and minimum wage increases as well as other components of labor. G&A is estimated to be between $57 million and $58 million. Depreciation is estimated to be between approximately $24 million and $25 million. Based on these assumptions, we would anticipate net income margin to be about 3.5% at the midpoint of the sales range.
This includes higher pre-opening expense than the prior year period to support our planned restaurant openings, which we expect to be approximately $6 million. Now for the full year. Based on similar assumptions, and no material operating or consumer disruptions, we would anticipate total revenues for fiscal 2024 to be approximately $3.6 billion. For sensitivity purposes, we're using a range of plus or minus 1%. We currently estimate total inflation across our commodity baskets, labor and other operating expenses to be in the low to mid-single digit range and fairly consistent across the quarters. We are estimating G&A to be about flat year-over-year as a percent of sales and appreciation to be about $100 million for the year. And given our unit growth expectations, we're estimating pre-opening expenses to be approximately $28 million, which includes support for some early 2025 openings.
As we have said previously, our goal is to effectively offset inflation with menu pricing to support our margin objectives. Assuming we achieve this goal, input costs and consumer trends remain consistent and there are no other material exogenous factors, we would expect full year net income margin of approximately 4.25% at the revenue level I provided. With regard to development, as David Overton highlighted earlier, we plan to open as many as 22 new restaurants this year across our portfolio of concepts, with approximately three quarters of the openings occurring in the second half of the year. And we would anticipate approximately $180 million to $200 million in CapEx to support this year's and some of next year's unit development, as well as required maintenance on our restaurants.
In closing, our business remains healthy, with top-line trends substantially stabilizing, improving profit margins, normalizing input costs and solid operational execution. We are looking to build on this momentum and believe we are poised to once again generate our historically consistent operational and financial results and to make meaningful additional steps in 2024 towards our longer term goals in the key areas of value creation, growing restaurant comparable sales, expanding restaurant operating margins, and accelerating accretive unit growth. With that said, we'll take your questions.
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