The Cheesecake Factory(CAKE) - 2019 Q4 - Annual Report

PART I Item 1. Business The Cheesecake Factory operates 294 restaurants across multiple brands in the US and Canada, with 26 international licensed locations, a bakery division, and recently acquired North Italia and Fox Restaurant Concepts to diversify revenue growth General The company was founded in 1972 as a bakery and incorporated in 1992 to consolidate its restaurant and bakery operations - The Cheesecake Factory Incorporated was founded in 1972 as a small bakery and incorporated in Delaware in 1992 to consolidate restaurant and bakery businesses[7] - The company utilizes a 52/53-week fiscal year, with fiscal years 2019, 2018, and 2017 each consisting of 52 weeks[10] The Cheesecake Factory The Cheesecake Factory offers a distinctive, high-quality dining experience with an extensive menu at moderate prices, appealing to a diverse customer base - The Cheesecake Factory restaurants offer a distinctive, high-quality dining experience with an extensive, innovative menu (approx. 250 items) at moderate prices, appealing to a diverse customer base[11][12] - Off-premise consumption represented approximately 16% of restaurant sales in fiscal year 2019, with delivery service available at nearly all restaurants and online ordering at all domestic locations[11] - Alcoholic beverage sales accounted for 12% of The Cheesecake Factory restaurant sales in fiscal year 2019, while dessert sales (approx. 45 varieties of cheesecakes) represented 16%[11][13] Competitive Positioning The Cheesecake Factory operates in the upscale casual dining segment, focusing on innovative food, unique layouts, and personalized service - The Cheesecake Factory operates in the upscale casual dining segment, characterized by freshly prepared, innovative food, unique restaurant layouts, and personalized service, aiming for high average sales per square foot[15][16] - The average check per customer was approximately $23.50 in fiscal 2019, up from $22.60 in 2018 and $21.85 in 2017[18] - The company plans to target menu price increases of approximately 2% to 3% annually to offset operating cost increases, with near-term increases expected at the higher end of this range[17] New Restaurant Site Selection and Development The company targets high-quality, high-profile restaurant sites with flexible designs to accommodate diverse urban and suburban layouts - The company targets high-quality, high-profile restaurant sites with a balanced mix of retail, entertainment, residences, tourism, and businesses, with flexible designs to accommodate various urban and suburban layouts[20][22] - New restaurants typically range from 7,500 to 10,000 interior square feet, with additional patio seating, and the development and opening process usually takes six to eighteen months[23][24] - The company aims to reach approximately 300 Company-owned and operated The Cheesecake Factory restaurants domestically, plus 8-10 locations in Canada[22] Unit Economics Unit economics for The Cheesecake Factory restaurants involve high development costs due to distinctive design and initial sales fluctuations The Cheesecake Factory Average Sales per Location and Productive Square Foot | Metric | Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | | :----------------------------------- | :---------- | :---------- | :---------- | | Average sales per location (millions) | $10.7 | $10.7 | $10.6 | | Average sales per productive square foot | $986 | $978 | $962 | - Total costs for leasehold improvements and FF&E are targeted at approximately $900 to $1,000 per interior square foot for The Cheesecake Factory restaurants, higher than typical casual dining due to distinctive design[26] - New restaurants often experience an initial 'honeymoon' effect with higher sales volumes, which gradually adjust downward to normal run-rate levels within three to six months, and require time to achieve targeted operating margins[28] Restaurant Operations, Management and Staffing Restaurant operations emphasize detailed procedures, food line management, and experienced leadership to execute a complex menu - The company emphasizes detailed operating procedures, food line management systems, and cooking methods to execute its complex menu, relying on experienced General Managers (GMs) and Executive Kitchen Managers (EKMs) with over ten years of experience[29] - Each restaurant is typically staffed with one GM, one EKM, and six to ten additional managers, overseeing approximately 170 hourly staff members[29][32] - The Cheesecake Factory was named to Fortune magazine's '100 Best Companies to Work For®' for the seventh consecutive year in February 2020, and also recognized for 'Best Workplaces for Women®,' 'Diversity®,' and 'Millennials®' in 2019[19][33][86] Preopening Costs for New Restaurants Preopening costs for new restaurants average $1.7 million to $2.0 million, covering management, staff, and support expenses - Preopening costs for a typical restaurant in an established market average approximately $1.7 million to $2.0 million, covering management relocation, staff recruitment and training, and support team expenses[34] - These costs can fluctuate significantly based on the number and timing of openings, location, size, staffing needs, and unexpected delays, with the most significant portion incurred in the two months prior to and the month of opening[35] Expansion of Licensed Locations The company expands internationally through licensing agreements for 26 The Cheesecake Factory restaurants in various markets - The company has licensing agreements with three operators for 26 international The Cheesecake Factory® restaurants in selected markets (Kuwait, Mexico, Hong Kong, etc.)[36][37] - Licensees invest capital to build and operate restaurants, and the company receives initial development fees, site and design fees, and ongoing royalties based on sales, plus bakery product purchases[36] - Each international licensed location is projected to contribute approximately $0.01 in annual EPS once operational for a full year[36] Consumer Packaged Goods The company leverages its brand into consumer packaged goods through partnerships, offering products like 'Brown Bread' and ice cream - Since 2017, the company has leveraged The Cheesecake Factory® brand into consumer packaged goods, partnering with third-party manufacturers to offer products like 'Brown Bread,' baking mixes, refrigerated puddings, and ice cream under The Cheesecake Factory At Home® mark[41] North Italia and Fox Restaurant Concepts The acquisition of North Italia and Fox Restaurant Concepts aims to accelerate and diversify revenue growth in experiential dining - The acquisition of North Italia and FRC (including Flower Child and other brands) on October 2, 2019, is expected to accelerate and diversify revenue growth, aligning with the company's strategy in experiential dining[42] - North Italia, an upscale casual Italian concept, has potential for 200 domestic locations with approximately 20% annual unit growth, targeting average sales of $7 million per location or $1,200 per square foot[43][44] - FRC's largest concept, Flower Child (fast casual), offers diversification, with other growth concepts like The Henry, Culinary Dropout, and Blanco. FRC restaurants generate approximately $1,000 per square foot on average[45][46] Bakery Operations Bakery operations produce cheesecakes and desserts for restaurants, licensees, and third-party customers from two production facilities - The company operates two bakery production facilities (Calabasas Hills, CA, and Rocky Mount, NC) producing approximately 70 varieties of cheesecakes and baked desserts for its restaurants, international licensees, and third-party customers[47][48] - The bakery operations are crucial for brand positioning, quality control, and profitability, also selling products to external foodservice operators, retailers, and distributors under various brands[49][50] Other Concepts The company operates Grand Lux Cafe, RockSugar, and Social Monk Asian Kitchen, with no current plans for further expansion - The company also operates Grand Lux Cafe, RockSugar Southeast Asian Kitchen, and Social Monk Asian Kitchen, but currently has no plans for additional locations for these concepts[52] Purchasing and Distribution The company sources ingredients from multiple suppliers to mitigate supply shortages and price volatility, maintaining minimal inventory - The company sources quality ingredients and supplies from reliable sources at competitive prices, utilizing multiple qualified suppliers to mitigate supply shortages and price volatility[56][58] - Restaurants maintain minimal inventory levels due to the perishable nature of ingredients, with most items delivered multiple times per week by independent foodservice distributors[57] - The company negotiates short-term and long-term agreements for principal commodities but had no hedging contracts in place as of fiscal 2019[59] Information Technology Technology solutions enhance financial controls, cost management, and customer experience, including robust data security measures - Technology solutions provide financial controls, cost management, and enhanced customer experience, including a business intelligence solution for operational metrics and performance indicators[60] - Restaurant systems support online ordering, delivery integration, kitchen management for efficiency, and a recipe viewer for consistent food preparation[61][62] - The company employs a multi-discipline security incident response plan, cybersecurity awareness training, cyber risk insurance, and encryption/tokenization for credit card transactions to protect data[64] Marketing and Advertising Marketing relies on reputation, high-profile locations, and digital engagement rather than extensive national advertising or discounting - The Cheesecake Factory primarily relies on reputation, high-profile locations, media exposure, and word-of-mouth, rather than significant paid national advertising or discounting[65] - A social media and digital marketing strategy is used for customer engagement, including platforms like Facebook, Instagram, and Google search advertising, with targeted TV commercials tested in 2019[65] - North Italia and FRC utilize localized marketing programs focusing on awareness, frequency, and brand engagement through store-level marketing, public relations, and digital channels[67] Seasonality and Quarterly Results Seasonal fluctuations generally do not materially impact quarterly results, but various factors can affect year-over-year comparisons - Seasonal fluctuations generally do not materially impact quarterly results, but year-over-year comparisons can be affected by new restaurant openings, preopening costs, holidays, weather, and the 2019 FRC acquisition[68] Food Safety and Quality Assurance Food safety processes mitigate contamination risks and ensure compliance through audits and regulatory inspections - The company's food safety processes aim to mitigate contamination risks and ensure compliance, verified by routine management reviews, third-party audits, and regulatory inspections[69] - Bakery facilities are Safe Quality Food (SQF) certified, and suppliers are selected based on sanitation, operations, and food safety practices, with annual audits[69][70] Government Regulation The company is subject to extensive federal, state, local, and foreign regulations across various operational aspects - The company is subject to numerous federal, state, local, and foreign laws, including those for alcoholic beverage control, health, sanitation, environmental, labor, immigration, zoning, and public safety[71] - International operations add regulations like antitrust, tax, anti-boycott, import/export, privacy laws, USA Patriot Act, and Foreign Corrupt Practices Act[72] - Compliance with food safety regulations (e.g., Federal Food, Drug and Cosmetic Act, Food Safety Modernization Act) and nutritional labeling under the Patient Protection and Affordable Care Act of 2010 is required[73] Trade Names, Trademarks and Other Intellectual Property The company owns and registers valuable intellectual property, including trade names and trademarks, and actively opposes infringements - The company owns and registers various intellectual property, including 'The Cheesecake Factory,' 'North Italia,' and Fox Restaurant Concepts subsidiary trademarks, which are considered valuable for marketing[78] - The policy is to pursue registration of important intellectual property and vigorously oppose infringements, though not all trademarks are registered in every country[78] Charitable Giving The company engages in charitable giving through its foundation, staff volunteering, and food donations to local rescue operations - The Oscar and Evelyn Overton Charitable Foundation has raised $3.7 million for the City of Hope Comprehensive Cancer Center since its inception, including $0.3 million in fiscal 2019[79] - Staff members volunteer for the annual Thanksgiving Day Feast, serving meals to low-income individuals, and the company donates surplus food to local food rescue operations (over 5.2 million pounds since 2007)[80][81] - The company contributed $0.3 million to Feeding America® in fiscal 2019 through cheesecake sales, bringing total contributions to $4.9 million over twelve years, and staff collected 250,000 pounds of peanut butter[82] Sustainability The company is developing a sustainability program to implement meaningful changes aligned with its culture and values - The company is developing a sustainability program aligned with its culture and values, focusing on identifying and implementing meaningful changes across its business operations[84] Employees As of December 31, 2019, the company employed approximately 46,250 staff members across its restaurant, bakery, and corporate operations - As of December 31, 2019, the company employed approximately 46,250 staff members, with 44,900 in restaurants, 700 in bakery operations, and 650 in corporate/field supervision[86] - Staff members are not covered by collective bargaining agreements, and relations are considered favorable, contributing to the company being named a '100 Best Companies to Work For®' for seven consecutive years[86] Executive Officers of the Registrant Key executive officers include the Chairman & CEO, President, EVP & CFO, President of Bakery, and EVP, General Counsel & Secretary - Key executive officers include David Overton (Chairman & CEO), David M. Gordon (President), Matthew E. Clark (EVP & CFO), Keith T. Carango (President of Bakery), and Scarlett May (EVP, General Counsel & Secretary)[87][88][89][90][91] Item 1A. Risk Factors This section outlines significant risks including economic conditions, sales growth challenges, reputational damage, rising costs, acquisition integration, IT failures, and regulatory compliance that could harm financial performance - Economic and political conditions impacting consumer confidence and spending pose a risk to customer traffic and average check amounts[93][94] - Inability to grow comparable restaurant sales due to increased competition, changing consumer habits, and an oversupply of restaurants could adversely affect financial performance[95][96] - Significant labor cost inflation from minimum wage increases, benefit costs, and a diminishing labor pool, if not offset, could materially increase operating costs[103][104][105] - Food safety concerns, food-borne illnesses, pandemics (like coronavirus), and other diseases could reduce customer traffic, disrupt the supply chain, or lead to litigation[119][120][122] - Information technology system failures or network security breaches could interrupt operations, increase costs, and lead to litigation, especially with newly acquired concepts[125][126][127] - Failure to realize anticipated benefits from the North Italia and FRC acquisition, including integration difficulties and unanticipated costs, could materially adversely affect financial performance[135][136][137] - Substantial indebtedness incurred for the acquisition could limit future financing and increase vulnerability to adverse economic conditions[189][191] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report Item 2. Properties The company owns its corporate support center and two bakery facilities, while all 294 company-owned restaurants operate on leased properties - The company owns its corporate support center (88,000 sq ft main, 19,000 sq ft training) and one bakery facility (60,000 sq ft) in Calabasas Hills, California[201] - A second bakery facility (100,000 sq ft) is owned in Rocky Mount, North Carolina, and a development/design department (29,000 sq ft) in Irvine, California[201] - As of March 11, 2020, the company operated 294 Company-owned restaurants across various brands (206 Cheesecake Factory, 50 FRC, 23 North Italia, 13 Grand Lux Cafe, 1 RockSugar, 1 Social Monk Asian Kitchen), all on leased properties[202] The Cheesecake Factory Company-Owned Restaurants by Location (as of March 11, 2020) | Location | of Restaurants | | :---------------- | :--------------- | | Alabama | 1 | | Arizona | 6 | | California | 39 | | Colorado | 3 | | Connecticut | 4 | | Delaware | 1 | | District of Columbia | 1 | | Florida | 19 | | Georgia | 5 | | Hawaii | 2 | | Idaho | 1 | | Illinois | 6 | | Indiana | 2 | | Iowa | 1 | | Kansas | 1 | | Kentucky | 2 | | Louisiana | 1 | | Maryland | 6 | | Massachusetts | 7 | | Michigan | 2 | | Minnesota | 2 | | Missouri | 3 | | Nebraska | 1 | | Nevada | 5 | | New Jersey | 10 | | New Mexico | 1 | | New York | 12 | | North Carolina | 4 | | Oklahoma | 2 | | Ohio | 7 | | Oregon | 2 | | Pennsylvania | 5 | | Puerto Rico | 1 | | Rhode Island | 1 | | South Carolina | 1 | | Tennessee | 5 | | Texas | 16 | | Utah | 2 | | Virginia | 7 | | Washington | 5 | | Wisconsin | 3 | | Ontario, Canada | 1 | | Total | 206 | Item 3. Legal Proceedings Legal proceedings are summarized in Note 14 of the Consolidated Financial Statements - Legal proceedings information is summarized in Note 14 of the Consolidated Financial Statements[204] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with dividend decisions based on financial performance and an active share repurchase program in place - Common stock is traded on The Nasdaq Global Select Market under the symbol CAKE[205] - As of February 21, 2020, there were approximately 1,000 holders of record and an estimated 43,500 beneficial stockholders[205] - The Board's decisions on dividends depend on operating performance, financial condition, capital expenditure requirements, and limitations under the New Facility[206] Common Stock Purchases (Thousand Shares, except per share data) | Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | | :------------------------- | :----------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :----------------------------------------------------------------------------- | | October 2 — November 5, 2019 | — | $ — | — | 3,090 | | November 6 — December 3, 2019 | 8 | 43.59 | — | 3,082 | | December 4 — December 31, 2019 | 2 | 42.93 | — | 3,080 | | Total | 10 | | — | | - Through December 31, 2019, the company cumulatively repurchased 52.9 million shares at a total cost of $1,693.1 million under a Board authorization of up to 56.0 million shares[208] Price Performance Graph This graph compares the company's five-year total return against relevant market and industry indices - The graph compares the company's common stock cumulative five-year total return against the S&P 400 Midcap Index, NASDAQ US Benchmark TR Index, and Nation's Restaurant News Index, assuming a $100 initial investment and dividend reinvestment[210] Cumulative Five-Year Total Return (12/31/14 = $100) | Index | 12/31/14 | 12/31/15 | 12/30/16 | 12/29/17 | 12/31/18 | 12/31/19 | | :------------------------------------- | :------- | :------- | :------- | :------- | :------- | :------- | | The Cheesecake Factory Incorporated | $100 | $93 | $123 | $101 | $93 | $86 | | S&P 400 Midcap Index | $100 | $96 | $114 | $131 | $114 | $142 | | NASDAQ US Benchmark TR Index | $100 | $100 | $114 | $138 | $130 | $171 | | Nation's Restaurant News Index | $100 | $114 | $115 | $137 | $147 | $177 | Item 6. Selected Financial Data This section summarizes key financial data for the past five fiscal years, including income, balance sheet, and restaurant performance metrics Selected Financial Data (Fiscal Years 2015-2019, in thousands, except per share data) | Statements of Income Data: | 2019 | 2018 | 2017 | 2016 | 2015 | | :----------------------------------- | :----------- | :----------- | :----------- | :----------- | :----------- | | Revenues | $2,482,692 | $2,332,331 | $2,260,502 | $2,275,719 | $2,100,609 | | Cost of sales | 561,783 | 532,880 | 519,388 | 526,628 | 504,031 | | Labor expenses | 899,667 | 834,134 | 777,595 | 759,998 | 684,818 | | Other operating costs and expenses | 631,613 | 566,825 | 552,791 | 540,365 | 500,640 | | General and administrative expenses | 160,199 | 154,770 | 141,533 | 146,042 | 137,402 | | Depreciation and amortization expenses | 88,133 | 95,976 | 92,729 | 88,010 | 85,563 | | Impairment of assets and lease terminations | 18,247 | 17,861 | 10,343 | 114 | 6,011 | | Acquisition-related costs | 5,270 | — | — | — | — | | Acquisition-related contingent consideration, compensation and amortization expenses | 1,033 | — | — | — | — | | Preopening costs | 13,149 | 10,937 | 13,278 | 13,569 | 16,898 | | Total costs and expenses | 2,379,094 | 2,213,383 | 2,107,657 | 2,074,726 | 1,935,363 | | Income from operations | 103,598 | 118,948 | 152,845 | 200,993 | 165,246 | | Gain/(loss) on investments in unconsolidated affiliates | 39,233 | (4,754) | (479) | — | — | | Interest and other expense, net | (2,497) | (6,783) | (5,900) | (9,225) | (5,894) | | Income before income taxes | 140,334 | 107,411 | 146,466 | 191,768 | 159,352 | | Income tax provision/(benefit) | 13,041 | 8,376 | (10,926) | 52,274 | 42,829 | | Net income | $127,293 | $99,035 | $157,392 | $139,494 | $116,523 | | Net income per share: Basic | $2.90 | $2.19 | $3.35 | $2.91 | $2.39 | | Diluted | $2.86 | $2.14 | $3.27 | $2.83 | $2.30 | | Weighted average shares outstanding: Basic | 43,949 | 45,263 | 46,930 | 47,981 | 48,833 | | Diluted | 44,545 | 46,215 | 48,152 | 49,372 | 50,605 | | Cash dividends declared per common share | $1.38 | $1.24 | $1.06 | $0.88 | $0.73 | | Balance Sheet Data (at end of period): | | | | | | | Cash and cash equivalents | $58,416 | $26,578 | $6,008 | $53,839 | $43,854 | | Total assets | 2,840,593 | 1,314,133 | 1,333,060 | 1,293,319 | 1,233,346 | | Total long-term debt and deemed landlord financing liability, including current portion | 290,000 | 118,610 | 113,527 | 104,868 | 91,343 | | Total stockholders' equity | 571,742 | 571,059 | 613,530 | 603,207 | 588,539 | | Restaurant Data: | | | | | | | The Cheesecake Factory comparable restaurant sales | 0.8% | 1.7% | (0.8)% | 1.2% | 2.6% | | The Cheesecake Factory restaurants open at year-end | 206 | 201 | 199 | 194 | 187 | - Fiscal 2016 consisted of 53 weeks, which increased revenues by approximately $54.7 million and diluted net income per share by $0.07[214] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and results, covering revenue drivers, expense management, capital allocation, future outlook, and the impact of the FRC acquisition - The company's strategy focuses on customer satisfaction, menu innovation, service, and operational execution, aiming for competitive performance and sustainable growth[220] - Top capital allocation priority is investing in new Company-owned restaurant development, targeting average cash-on-cash returns of 20-25% for The Cheesecake Factory, 35% for North Italia, and 25-30% for FRC concepts[221] - Overall revenue growth is driven by new restaurant openings and increases in comparable restaurant sales, influenced by customer traffic and average check[222] - The company aims to stabilize margins and drive expansion by maintaining flat restaurant-level margins at The Cheesecake Factory, leveraging bakery operations, international and consumer packaged goods royalty streams, and optimizing the restaurant portfolio[225] - The long-term financial objective is 13% to 14% total return to shareholders, on average, supported by domestic and international growth, debt repayment, share repurchases, and dividends[227] General This section provides a general overview of the MD&A, focusing on fiscal 2019 results compared to fiscal 2018 - This MD&A section compares fiscal 2019 results to fiscal 2018; for 2018 vs. 2017, refer to the prior year's 10-K[217] - The Cheesecake Factory Incorporated operates 294 restaurants in the US and Canada under various brands, plus 26 international licensed locations, and a bakery division[218] - The acquisition of North Italia and the remaining FRC business was completed on October 2, 2019, with acquired businesses' results included in consolidated financial statements from that date[219] Overview The company's strategy focuses on menu innovation, service, and operational execution to drive sustainable performance and manage expenses - The company's strategy focuses on menu innovation, service, and operational execution to differentiate itself and drive sustainable performance, while prudently managing expenses and leveraging purchasing power[220] - For The Cheesecake Factory concept, the strategy to increase comparable restaurant sales involves offering innovative, high-quality menu items, focusing on service and hospitality, and providing convenient off-premise dining options[223] - Menu price increases of approximately 2% to 3% annually are planned to offset operating cost increases, balancing margin protection and customer traffic levels[224] Results of Operations This section details the company's financial performance, including revenues, cost of sales, and operating expenses, highlighting acquisition and accounting impacts Consolidated Statements of Income Data (as % of revenues) | Metric | 2019 (%) | 2018 (%) | 2017 (%) | | :------------------------------------------------------------------- | :------- | :------- | :------- | | Revenues | 100.0 | 100.0 | 100.0 | | Cost of sales | 22.6 | 22.8 | 23.0 | | Labor expenses | 36.3 | 35.8 | 34.4 | | Other operating costs and expenses | 25.5 | 24.3 | 24.4 | | General and administrative expenses | 6.5 | 6.6 | 6.2 | | Depreciation and amortization expenses | 3.5 | 4.1 | 4.1 | | Impairment of assets and lease terminations | 0.7 | 0.8 | 0.5 | | Acquisition-related costs | 0.2 | — | — | | Acquisition-related contingent consideration, compensation and amortization expenses | 0.0 | — | — | | Preopening costs | 0.5 | 0.5 | 0.6 | | Total costs and expenses | 95.8 | 94.9 | 93.2 | | Income from operations | 4.2 | 5.1 | 6.8 | | Gain/(loss) on investments in unconsolidated affiliates | 1.6 | (0.3) | (0.0) | | Interest and other expense, net | (0.1) | (0.2) | (0.3) | | Income before income taxes | 5.7 | 4.6 | 6.5 | | Income tax provision/(benefit) | 0.6 | 0.4 | (0.5) | | Net income | 5.1 | 4.2 | 7.0 | Revenues Revenues increased by 6.5% in fiscal 2019, driven by acquired restaurants, new openings, and positive comparable sales - Revenues increased 6.5% to $2,482.7 million in fiscal 2019 from $2,332.3 million in fiscal 2018, primarily due to acquired restaurants, new openings, and positive comparable restaurant sales[229] - Acquired concepts contributed $92.0 million in Q4 2019, with North Italia showing ~4% comparable sales growth. The Cheesecake Factory comparable sales increased 0.8% ($17.5 million), driven by 4.0% average check growth (3.1% menu pricing, 0.9% mix) offset by 3.2% traffic decline[230] - The Cheesecake Factory average sales per restaurant operating week increased 0.8% to $207,310 in fiscal 2019 from $205,660 in fiscal 2018[230] Cost of Sales Cost of sales as a percentage of revenues decreased in fiscal 2019, with a diversified menu mitigating commodity volatility - Cost of sales as a percentage of revenues decreased to 22.6% in fiscal 2019 from 22.8% in fiscal 2018[232] - The Cheesecake Factory's diversified menu helps mitigate commodity cost volatility, with principal categories including general grocery, dairy, produce, seafood, poultry, meat, and bread[233] Labor Expenses Labor expenses as a percentage of revenues increased in fiscal 2019 due to higher hourly wage rates - Labor expenses as a percentage of revenues increased to 36.3% in fiscal 2019 from 35.8% in fiscal 2018, primarily due to higher hourly wage rates[233] - Labor expenses are typically higher for new restaurants until management adapts to sales volumes[234] Other Operating Costs and Expenses Other operating costs and expenses as a percentage of revenues increased in fiscal 2019, driven by higher rent and marketing costs - Other operating costs and expenses as a percentage of revenues increased to 25.5% in fiscal 2019 from 24.3% in fiscal 2018[236] - This increase was mainly driven by higher rent expense due to the adoption of new lease accounting standards and increased marketing costs, partially offset by lower general liability costs[236] G&A Expenses General and administrative expenses as a percentage of revenues slightly decreased in fiscal 2019 - General and administrative (G&A) expenses as a percentage of revenues decreased to 6.5% in fiscal 2019 from 6.6% in fiscal 2018[237] Depreciation and Amortization Expenses Depreciation and amortization expenses as a percentage of revenues decreased in fiscal 2019 due to new lease accounting standards - Depreciation and amortization expenses as a percentage of revenues decreased to 3.5% in fiscal 2019 from 4.1% in fiscal 2018, primarily due to the adoption of the new lease accounting standard[237] Impairment of Assets and Lease Terminations The company recorded $18.2 million in impairment and lease termination expenses in fiscal 2019 for several restaurant locations - In fiscal 2019, the company recorded $18.2 million in impairment of assets and lease termination expense, related to two The Cheesecake Factory restaurants, one Grand Lux Cafe, Social Monk Asian Kitchen, and the closure of one Grand Lux Cafe and one RockSugar Southeast Asian Kitchen[237] - In fiscal 2018, $17.9 million was recorded for impairment and lease terminations, affecting one The Cheesecake Factory, one Grand Lux Cafe, one RockSugar Southeast Asian Kitchen, and the closure of two The Cheesecake Factory restaurants[237] Acquisition-Related Costs Acquisition-related costs of $5.3 million were recorded in fiscal 2019 for the North Italia and FRC integration - In fiscal 2019, $5.3 million in costs were recorded for the acquisition and integration of North Italia and FRC[238] Acquisition-Related Contingent Consideration, Compensation and Amortization Expenses Acquisition-related contingent consideration, compensation, and amortization expenses totaled $1.0 million in fiscal 2019 - In fiscal 2019, $1.0 million was recorded for acquisition-related expenses, including changes in fair value of deferred and contingent consideration/compensation liabilities, and amortization of acquired licensing agreements[238] Preopening Costs Preopening costs increased to $13.1 million in fiscal 2019 due to a higher number of new restaurant openings - Preopening costs increased to $13.1 million in fiscal 2019 from $10.9 million in fiscal 2018[239] - Nine restaurants opened in fiscal 2019 (five Cheesecake Factory, one Social Monk Asian Kitchen, one North Italia, two Flower Child), compared to five in fiscal 2018 (four Cheesecake Factory, one Grand Lux Cafe)[239] Gain/(loss) on Investments in Unconsolidated Affiliates A $39.2 million gain on investments in unconsolidated affiliates was recorded in fiscal 2019, primarily from the FRC acquisition - The company recorded a $39.2 million gain on investments in unconsolidated affiliates in fiscal 2019, a significant change from a $4.8 million loss in fiscal 2018[240] - This variance was primarily due to a $52.7 million gain on investments in North Italia and Flower Child upon acquiring remaining equity interests, partially offset by increased pre-acquisition losses from these concepts[240] Interest and Other Expense, Net Net interest and other expense decreased to $2.5 million in fiscal 2019 due to new lease accounting standards - Interest and other expense, net, decreased to $2.5 million in fiscal 2019 from $6.8 million in fiscal 2018[241] - This reduction was mainly due to the adoption of the new lease accounting standard, eliminating deemed landlord financing liabilities and associated interest expense, partially offset by higher interest expense from increased outstanding debt[241] Income Tax Provision/(Benefit) The effective income tax rate increased to 9.3% in fiscal 2019, primarily due to FICA tip credit changes - The effective income tax rate increased to 9.3% in fiscal 2019 from 7.8% in fiscal 2018[242] - This change was primarily driven by a lower proportion of FICA tip credit relative to pre-tax income, partially offset by non-taxable gains on variable life insurance contracts[242] Non-GAAP Measures Non-GAAP measures like adjusted net income and diluted EPS are used for decision-making, excluding non-recurring items - Adjusted net income and adjusted diluted net income per share are non-GAAP measures used for financial and operational decision-making, excluding items not indicative of ongoing operations[243] Reconciliation of Net Income to Adjusted Net Income (in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | | :------------------------------------------------------------------- | :----------- | :----------- | :----------- | | Net income | $127,293 | $99,035 | $157,392 | | Impairment of assets and lease terminations | 18,247 | 17,861 | 10,343 | | Loss on investment in unconsolidated affiliates | 13,439 | 4,754 | 479 | | Gain on investment in unconsolidated affiliates | (52,672) | — | — | | Acquisition-related costs | 5,270 | — | — | | Acquisition-related contingent consideration, compensation and amortization expenses | 1,033 | — | — | | Tax effect of adjustments | 3,818 | (5,880) | (4,329) | | One-time tax benefit items | — | — | (38,525) | | Adjusted net income | $116,428 | $115,770 | $125,360 | | Diluted net income per share | $2.86 | $2.14 | $3.27 | | Impairment of assets and lease terminations | 0.41 | 0.39 | 0.21 | | Loss on investment in unconsolidated affiliates | 0.30 | 0.10 | 0.01 | | Gain on investment in unconsolidated affiliates | (1.18) | — | — | | Acquisition-related costs | 0.12 | — | — | | Acquisition-related contingent consideration, compensation and amortization expenses | 0.02 | — | — | | Tax effect of adjustments | 0.09 | (0.13) | (0.09) | | One-time tax benefit items | — | — | (0.80) | | Adjusted diluted net income per share | $2.61 | $2.51 | $2.60 | Fiscal 2020 Outlook The fiscal 2020 outlook projects adjusted diluted net income per share between $2.70 and $2.86, with accelerated new unit growth - For fiscal 2020, estimated adjusted diluted net income per share is between $2.70 and $2.86, excluding acquisition-related costs and contingent consideration/compensation/amortization[248] - Assumed comparable sales growth for The Cheesecake Factory restaurants is 1% to 2%, with North Italia and FRC contributing approximately $425 million in revenue[248] - New unit growth is planned to accelerate with up to 20 new restaurants (six Cheesecake Factory, six North Italia, eight FRC brands including four Flower Child), plus up to four international licensed locations[249] - Fiscal 2020 estimates include 2% food inflation, 5.5% wage rate inflation, and an effective tax rate of approximately 9%. Net capital expenditures are projected between $130 million and $140 million[248][250] Liquidity and Capital Resources The company maintains a strong balance sheet, funding capital requirements through operating cash flows, credit facilities, and landlord contributions - The company aims to maintain a strong balance sheet to support operations, unit growth, and financial flexibility, primarily funding capital requirements through operating cash flows, credit facilities, and landlord contributions[251][253] - Cash and cash equivalents increased by $31.8 million to $58.4 million in fiscal 2019, driven by operating activities and credit facility borrowings, partially offset by the FRC acquisition, capital expenditures, dividends, and share repurchases[254] Summary of Key Cash Flows (in millions) | Metric | 2019 | Fiscal Year 2018 | 2017 | | :--------------------------------------- | :-------- | :--------------- | :-------- | | Cash provided by operating activities | $218.8 | $291.3 | $238.8 | | Additions to property and equipment | $(73.8) | $(102.9) | $(120.8) |\n| Growth capital provided to unconsolidated affiliates | $(3.0) | $(25.0) | $(18.0) | | Acquisition, net of cash acquired | $(261.7) | $— | $— | | Net borrowings on credit facility | $280.0 | $— | $10.0 | | Deemed landlord financing proceeds | $— | $21.8 | $12.1 | | Proceeds from exercise of stock options | $7.7 | $8.6 | $9.0 | | Cash dividends paid | $(60.7) | $(56.3) | $(49.9) | | Treasury stock purchases | $(51.0) | $(109.3) | $(123.0) | - As of December 31, 2019, the company had a $400 million unsecured revolving credit facility (New Facility) with $90.6 million net availability, used to fund the FRC acquisition and subject to financial covenants[255] Contractual Obligations and Commercial Commitments This section details contractual obligations and commercial commitments, including operating leases, long-term debt, and acquisition-related deferred consideration Undiscounted Contractual Obligations and Commercial Commitments (as of December 31, 2019, in millions) | | Total | Less 1 Year | Due by 1-3 Years | 4-5 Years | More than 5 Years | | :-------------------------------------- | :------- | :---------- | :--------------- | :-------- | :---------------- | | Contractual obligations: | | | | | | | Operating leases liabilities | $2,030.5 | $122.3 | $249.8 | $242.6 | $1,415.8 | | Long-term debt | 290.0 | — | — | 290.0 | — | | Deferred consideration | 57.0 | 17.3 | 28.5 | 11.2 | — | | Uncertain tax positions | 0.7 | — | 0.7 | — | — | | Purchase obligations | 118.2 | 87.3 | 24.0 | 6.9 | — | | Real estate obligations | 176.1 | 37.6 | 15.0 | 11.1 | 112.4 | | Total | $2,672.5 | $264.5 | $318.0 | $561.8 | $1,528.2 | | Other commercial commitments: | | | | | | | Standby letters of credit | $19.4 | $19.4 | $— | $— | $— | - The acquisition agreement includes a contingent consideration provision payable on the fifth anniversary of the Closing Date, based on FRC brands' revenue and profitability targets, and requires financing to FRC to support these targets[262] Critical Accounting Policies Critical accounting policies involve significant judgment and estimates for business combinations, intangible assets, leases, self-insurance, and income taxes - Critical accounting policies involve significant judgment and estimates, including business combinations (fair value allocation of acquired assets/liabilities), contingent consideration (Monte Carlo model for fair value), intangible assets (annual impairment testing), long-lived assets (impairment assessment based on cash flows), leases (lease term and incremental borrowing rate), self-insurance liabilities (claims estimates), and income taxes (federal, state, foreign tax liabilities and uncertain tax positions)[263][264][265][266][267][269][270][271][272] Recent Accounting Pronouncements This section refers to Note 1 for a summary of recent accounting pronouncements - This section refers to Note 1 of the Notes to Consolidated Financial Statements for a summary of new accounting standards[273] Impact of Inflation Inflation on food, labor, and supplies can impact financial results, with the company attempting to offset increases through pricing and productivity - Inflation on food costs, labor, and other supplies can adversely impact financial results. The company attempts to offset increases by raising menu prices, employing efficient purchasing, and improving productivity, though success is not assured[274] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from commodity price volatility and interest rate changes on funded debt, with no hedging contracts in fiscal 2019 - The company purchases food and commodities at market prices, subject to volatility. It mitigates risk by using multiple suppliers and negotiating agreements, but had no hedging contracts in fiscal 2019[275] - A hypothetical 1% increase in food costs would have negatively impacted cost of sales by $5.6 million in fiscal 2019 and $5.4 million in fiscal 2018[275] - Exposure to market risk from interest rate changes on funded debt (New Facility) means a hypothetical 1% rise would increase annual interest expense by $2.9 million based on December 31, 2019, borrowings[275] - Market risk also exists for investments in variable life insurance contracts supporting the ESP, where a hypothetical 10% decline in market value would have reduced net income by $1.9 million at December 31, 2019[275] Item 8. Financial Statements and Supplementary Data Consolidated financial statements and supplementary data are located in Part IV, Item 15 - Consolidated financial statements are filed in Part IV, Item 15 of this report[276] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Information on changes in and disagreements with accountants was previously reported in a Form 8-K filed on March 7, 2018 - Information regarding changes in and disagreements with accountants was previously reported in a Form 8-K filed on March 7, 2018[276] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective, excluding newly acquired businesses from the 2019 assessment - The CEO and CFO concluded that disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2019[278] - Management concluded that internal control over financial reporting was effective as of December 31, 2019, based on COSO criteria[281] - North Italia and FRC businesses were excluded from the assessment of internal controls over financial reporting as of December 31, 2019, representing 28.3% of total assets and 3.7% of total revenues[282] - No other material changes in internal control over financial reporting occurred during fiscal year 2019, with material changes from the acquisitions to be disclosed in future annual assessments[284][285] Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of December 31, 2019 - Disclosure controls and procedures are designed to ensure timely and accurate reporting of information required under the Securities Exchange Act of 1934[277] - Management, including the CEO and CFO, evaluated and concluded that these controls were effective at the reasonable assurance level as of December 31, 2019[277][278] Management's Report on Internal Control over Financial Reporting Management concluded that internal control over financial reporting was effective, excluding newly acquired businesses from the assessment - Management is responsible for establishing and maintaining adequate internal control over financial reporting, designed to provide reasonable assurance regarding financial reporting reliability[280] - Based on an evaluation using COSO criteria, management concluded that internal control over financial reporting was effective as of December 31, 2019[281] - The acquired North Italia and FRC businesses were excluded from this assessment, representing 28.3% of total assets and 3.7% of total revenues in the 2019 consolidated financial statements[282] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred in fiscal 2019, apart from acquisition-related adjustments - No material changes in internal control over financial reporting occurred during fiscal year 2019, other than those associated with the acquisition of North Italia and FRC[284][285] - Material changes resulting from the acquisitions will be disclosed in or prior to the first annual assessment of internal control over financial reporting that includes these entities[284] Item 9B. Other Information There is no other information to report in this section PART III Item 10. Directors, Executive Officers and Corporate Governance This section incorporates information on directors, executive officers, and corporate governance from the company's proxy statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the proxy statement for the annual meeting of stockholders[287] - The company has adopted a 'Code of Ethics for Executive Officers, Senior Financial Officers and Directors' and a 'Code of Ethics and Code of Business Conduct' for other employees, available on its website[286] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the company's proxy statement - Executive compensation details are incorporated by reference from the sections 'Directors Compensation,' 'Executive Compensation,' and 'Compensation Committee Interlocks and Insider Participation' in the Proxy Statement[288] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership and equity compensation plan information is incorporated by reference from the company's proxy statement - Information on security ownership and equity compensation plans is incorporated by reference from the sections 'Beneficial Ownership of Principal Stockholders and Management' and 'Equity Compensation Plan Information' in the Proxy Statement[289] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the company's proxy statement - Information on related party transactions and director independence is incorporated by reference from the sections 'Policies Regarding Review, Approval or Ratification of Transactions with Related Persons' and 'The Board and Corporate Governance' in the Proxy Statement[290] Item 14. Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the company's proxy statement - Information on principal accounting fees and services is incorporated by reference from the section 'Independent Registered Public Accounting Firm Fees and Services' in the Proxy Statement[291] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K report - The consolidated financial statements are filed as part of this report[292] - All financial statement schedules have been omitted as they are not applicable, not required, or the information is otherwise supplied in the financial statements or notes[292] - Exhibits required are listed in the exhibit index[293] Item 16. Form 10-K Summary There is no Form 10-K summary to report INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on financial statements and internal controls, noting critical audit matters and the exclusion of acquired businesses from the control assessment - KPMG LLP provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting for The Cheesecake Factory Incorporated as of December 31, 2019[298](index=2