CHEESECAKE FACTORY INC - Quarter Report: 2012 July (Form 10-Q)

Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 3, 2012

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 0-20574

 

THE CHEESECAKE FACTORY INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

 

(818) 871-3000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of July 25, 2012, 53,687,108 shares of the registrant’s Common Stock, $.01 par value, were outstanding.

 

 

Table of Contents

 

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

INDEX

 

			Page Number
PART I.	FINANCIAL INFORMATION
	Item 1.	Unaudited Financial Statements:
		Consolidated Balance Sheets	3
		Consolidated Statements of Comprehensive Income	4
		Consolidated Statement of Stockholders’ Equity	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
	Item 4.	Controls and Procedures	20
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	22
	Item 1A.	Risk Factors	22
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
	Item 6.	Exhibits	23
Signatures			24

 

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PART I.         FINANCIAL INFORMATION

Item 1.            Financial Statements

 

THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

		July 3, 2012			January 3, 2012
ASSETS
Current assets:
Cash and cash equivalents		$	48,416		$	48,211
Accounts receivable		10,248			11,334
Income tax receivable		3,943			5,472
Other receivables		25,221			32,096
Inventories		31,476			28,210
Prepaid expenses		35,580			36,498
Deferred income taxes		10,312			14,574
Total current assets		165,196			176,395
Property and equipment, net		756,065			758,503
Other assets:
Intangible assets, net		15,721			14,674
Prepaid rent		49,682			49,490
Other		26,088			23,508
Total other assets		91,491			87,672
Total assets		$	1,012,752		$	1,022,570
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	22,137		$	36,159
Other accrued expenses		163,853			187,081
Total current liabilities		185,990			223,240
Deferred income taxes		105,301			103,927
Deferred rent		74,988			69,742
Deemed landlord financing liability		54,301			55,086
Other noncurrent liabilities		31,413			27,822
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued		¾			¾
Junior participating cumulative preferred stock, $.01 par value, 150,000 shares authorized; none issued		¾			¾
Common stock, $.01 par value, 250,000,000 shares authorized; 86,949,039 and 85,863,313 issued at July 3, 2012 and January 3, 2012, respectively		869			859
Additional paid-in capital		481,755			455,339
Retained earnings		866,098			816,977
Treasury stock, 33,095,777 and 31,196,128 shares at cost at July 3, 2012 and January 3, 2012, respectively		(787,963		)	(730,422		)
Total stockholders’ equity		560,759			542,753
Total liabilities and stockholders’ equity		$	1,012,752		$	1,022,570

 

See the accompanying notes to the consolidated financial statements.

 

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

 

		Thirteen Weeks Ended July 3, 2012			Thirteen Weeks Ended June 28, 2011			Twenty-Six Weeks Ended July 3, 2012			Twenty-Six Weeks Ended June 28, 2011
Revenues		$	454,749		$	430,746		$	890,503		$	849,511
Costs and expenses:
Cost of sales		111,019			109,924			218,617			214,588
Labor expenses		146,086			139,469			289,066			276,967
Other operating costs and expenses		108,870			103,392			214,758			206,666
General and administrative expenses		26,278			24,208			54,943			48,473
Depreciation and amortization expenses		18,509			17,483			36,807			34,936
Preopening costs		3,017			1,108			5,123			2,868
Total costs and expenses		413,779			395,584			819,314			784,498
Income from operations		40,970			35,162			71,189			65,013
Interest and other (expense)/income, net		(838		)	(1,094		)	(1,986		)	(2,496		)
Income before income taxes		40,132			34,068			69,203			62,517
Income tax provision		11,733			9,320			20,082			17,313
Net income		28,399			24,748			49,121			45,204
Other comprehensive income, net		¾			¾			¾			¾
Comprehensive income		$	28,399		$	24,748		$	49,121		$	45,204
Net income per share:
Basic		$	0.53		$	0.44		$	0.92		$	0.79
Diluted		$	0.52		$	0.42		$	0.89		$	0.76
Weighted average shares outstanding:
Basic		53,155			56,554			53,417			57,517
Diluted		55,091			58,595			55,376			59,543

 

See the accompanying notes to the consolidated financial statements.

 

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

		Shares of Common Stock		Common Stock			Additional Paid-in Capital			Retained Earnings			Treasury Stock			Total
Balance, January 3, 2012		85,863		$	859		$	455,339		$	816,977		$	(730,422	)	$	542,753
Net income		—		—			—			49,121			—			49,121
Issuance of common stock from stock options exercised		833		8			17,899			—			—			17,907
Tax impact of stock options exercised, net of cancellations		—		—			2,095			—			—			2,095
Stock-based compensation		—		—			6,422			—			—			6,422
Issuance of restricted stock, net of forfeitures		253		2			—			—			—			2
Purchase of treasury stock		—		—			—			—			(57,541		)	(57,541		)
Balance, July 3, 2012		86,949		$	869		$	481,755		$	866,098		$	(787,963	)	$	560,759

 

See the accompanying notes to the consolidated financial statements.

 

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Twenty-Six Weeks Ended July 3, 2012			Twenty-Six Weeks Ended June 28, 2011
Cash flows from operating activities:
Net income		$	49,121		$	45,204
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		36,807			34,936
Deferred income taxes		5,637			3,316
Stock-based compensation		6,274			5,946
Tax impact of stock options exercised, net of cancellations		2,095			600
Excess tax benefit related to stock options exercised		(2,008		)	(497		)
Other		391			412
Changes in assets and liabilities:
Accounts receivable		1,086			10,383
Other receivables		6,875			7,323
Inventories		(3,266		)	(9,212		)
Prepaid expenses		918			3,121
Other assets		(2,727		)	(1,764		)
Accounts payable		(14,022		)	6,051
Income taxes receivable/payable		1,528			2,091
Other accrued expenses		(14,450		)	(13,796		)
Cash provided by operating activities		74,259			94,114
Cash flows from investing activities:
Additions to property and equipment		(34,419		)	(30,176		)
Additions to intangible assets		(1,285		)	(358		)
Cash used in investing activities		(35,704		)	(30,534		)
Cash flows from financing activities:
Deemed landlord financing proceeds		201			1,612
Deemed landlord financing payments		(925		)	(820		)
Proceeds from exercise of stock options		17,907			7,475
Excess tax benefit related to stock options exercised		2,008			497
Purchase of treasury stock		(57,541		)	(95,030		)
Cash used in financing activities		(38,350		)	(86,266		)
Net change in cash and cash equivalents		205			(22,686		)
Cash and cash equivalents at beginning of period		48,211			81,619
Cash and cash equivalents at end of period		$	48,416		$	58,933
Supplemental disclosures:
Interest paid		$	2,245		$	2,065
Income taxes paid		$	12,669		$	11,248

 

See the accompanying notes to the consolidated financial statements.

 

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THE CHEESECAKE FACTORY INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Basis of Presentation and Significant Accounting Policies

 

The accompanying consolidated financial statements include the accounts of The Cheesecake Factory Incorporated (referred to herein as the “Company,” “we,” “us” and “our”) and its wholly owned subsidiaries prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  The financial statements presented herein have not been audited by an independent registered public accounting firm, but include all material adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for the fair statement of the financial condition, results of operations and cash flows for the period.  However, these results are not necessarily indicative of results for any other interim period or for the full fiscal year.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to the rules of the Securities and Exchange Commission (“SEC”).  The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2012 filed with the SEC on February 29, 2012.

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions for the reporting periods covered by the financial statements.  These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities.  Actual results could differ from these estimates.

 

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31st for financial reporting purposes.  Fiscal 2012 consists of 52 weeks and will end on January 1, 2013.  Fiscal 2011, which ended on January 3, 2012, was a 53-week year, with an additional week in the fourth quarter.

 

Certain reclassifications have been made to prior year amounts to conform to current year presentation.

 

Recent Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that eliminated the previous option to report other comprehensive income and its components in the statement of changes in equity.  Companies can elect to present items of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements.  There are no changes to the accounting for items within comprehensive income.  This standard impacts presentation only and became effective for us in the first quarter of fiscal 2012.

 

2.  Inventories

 

Inventories consisted of (in thousands):

 

		July 3, 2012			January 3, 2012
Restaurant food and supplies		$	12,870		$	12,717
Bakery finished goods and work in progress		13,546			9,991
Bakery raw materials and supplies		5,060			5,502
Total		$	31,476		$	28,210

 

3.  Long-Term Debt

 

In December 2010, we entered into a five-year credit agreement (“Facility”) that provides us with revolving loan commitments totaling $200 million, including letter of credit subfacility commitments that total $35 million.  The Facility contains a commitment increase feature that could provide for an additional $50 million in available credit upon our request and the satisfaction of certain conditions.  In conjunction with our entry into the Facility, we terminated our prior credit facility dated April 2007, as amended March 2008 and January 2009.  We had no outstanding borrowings under the Facility at July 3, 2012 or January 3, 2012.

 

Borrowings under the Facility bear interest at a floating rate based on LIBOR, plus a spread ranging from 1.75% to 2.25%, depending on our ratio of debt plus eight times rent (“Adjusted Debt”) to trailing 12-month earnings before interest, taxes, depreciation, amortization, rent and noncash stock option expense (“EBITDAR”), as defined in the agreement.  In addition, we pay a commitment fee ranging from 0.3% to 0.4%, also depending on our ratio of Adjusted Debt to EBITDAR, calculated on the average unused portion of the Facility.

 

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We are obligated to maintain certain financial covenants, which include a maximum Adjusted Debt to trailing 12-month EBITDAR ratio (“Adjusted Debt Ratio”) of 4.0, as well as a trailing 12-month minimum EBITDAR to interest and rental expense ratio (“EBITDAR Ratio”) of 1.9.  At July 3, 2012, our Adjusted Debt and EBITDAR Ratios were 2.7 and 2.9, respectively.  Therefore, we were in compliance with the financial covenants in effect under the Facility at that date.

 

Availability under the Facility is reduced by outstanding standby letters of credit, which are used to support our self-insurance programs.  As of July 3, 2012, we had net availability for borrowings of $176 million, based upon a zero outstanding debt balance and $24 million in standby letters of credit.  Our Facility limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined leverage ratio.

 

4. Commitments and Contingencies

 

Within the ordinary course of our business, we are subject to private lawsuits, government audits, administrative proceedings and other claims.  These matters typically involve claims from guests, staff members and others related to operational issues common to the foodservice industry.  A number of these claims may exist at any given time, and some of the claims may be pled as class actions.  From time to time, we are also involved in lawsuits with respect to infringements of, or challenges to, our registered trademarks.  We could be affected by adverse publicity and litigation costs resulting from such allegations, regardless of whether these allegations are valid or whether we are legally determined to be liable. At this time, we believe that the final disposition of any pending lawsuits, audits, proceedings and claims will not have a material adverse effect individually or in the aggregate on our financial position, results of operations or liquidity.  It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, audits, proceedings or claims.

 

(1)          It is our policy to capitalize the portion of stock-based compensation costs for our internal development and construction, legal, and facilities departments that relates to capitalizable activities such as the design and construction of new restaurants, remodeling existing locations, lease, intellectual property and liquor license acquisition activities and equipment installation.  Capitalized stock-based compensation is included in property and equipment, net and other assets on the consolidated balance sheets.

 

Stock Options

 

The weighted average fair value at the grant date for options issued during the second quarter of fiscal 2012 and 2011 was $12.34 and $12.11 per option, respectively.  The fair value of options at the grant date was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions for the second quarter of fiscal 2012 and 2011, respectively: (a) an expected option term of 6.1 and 6.0 years, (b) expected stock price volatility of 39.8% and 39.0%, (c) a risk-free interest rate of 1.1% and 2.0%, and (d) no dividend yield on our stock.

 

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Stock option activity during the twenty-six weeks ended July 3, 2012 was as follows:

 

		Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
		(In thousands)		(Per share)			(In years)		(In thousands)
Outstanding at January 3, 2012		8,827		$	23.51		4.8		$	58,857
Granted		482		$	29.30
Exercised		(833	)	$	21.51
Forfeited or cancelled		(109	)	$	23.22
Outstanding at July 3, 2012		8,367		$	24.05		4.6		$	70,559
Exercisable at July 3, 2012		4,430		$	27.30		3.6		$	24,010

 

The total intrinsic value of options exercised during the thirteen and twenty-six weeks ended July 3, 2012 was $3.7 million and $8.1 million, respectively.  The total intrinsic value of options exercised during the thirteen and twenty-six weeks ended June 28, 2011 was $2.3 million and $3.7 million, respectively.  As of July 3, 2012, the total unrecognized stock-based compensation expense related to unvested stock options was $18.8 million, which we expect to recognize over a weighted average period of approximately 2.4 years.

 

Restricted Shares and Restricted Share Units

 

Restricted share and restricted share unit activity during the twenty-six weeks ended July 3, 2012 was as follows:

 

		Shares		Weighted Average Fair Value
		(In thousands)		(Per share)
Outstanding at January 3, 2012		826		$	20.40
Granted		420		29.88
Vested		(175	)	13.98
Forfeited		(7	)	19.59
Outstanding at July 3, 2012		1,064		$	25.20

 

Fair value of our restricted shares and restricted share units is based on our closing stock price on the date of grant.  The weighted average fair value at the grant date for restricted shares and restricted share units issued during the second quarter of fiscal 2012 and fiscal 2011 was $31.08 and $29.86, respectively.  The fair value of shares that vested during the thirteen and twenty-six weeks ended July 3, 2012 was $1.2 million and $2.4 million, respectively.  The fair value of shares that vested during the thirteen and twenty-six weeks ended June 28, 2011 was $0.8 million and $0.9 million, respectively.  As of July 3, 2012, total unrecognized stock-based compensation expense related to unvested restricted shares and restricted share units was $19.9 million, which we expect to recognize over a weighted average period of approximately 3.8 years.

 

6.  Net Income Per Share

 

At July 3, 2012 and June 28, 2011, 1.1 million and 0.7 million shares, respectively, of restricted stock issued to employees were unvested, and therefore excluded from the calculation of basic earnings per share for the fiscal quarters ended on those dates. Diluted net income per share includes the dilutive effect of outstanding equity awards, calculated using the treasury stock method.  Assumed proceeds from in-the-money options include windfall tax benefits, net of shortfalls, calculated under the “as-if” method as prescribed by FASB Accounting Standards Codification (“ASC”) 718, “Compensation — Stock Option Compensation.”

 

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		Thirteen Weeks Ended July 3, 2012			Thirteen Weeks Ended June 28, 2011			Twenty-Six Weeks Ended July 3, 2012			Twenty-Six Weeks Ended June 28, 2011
		(In thousands, except per share data)
Net income		$	28,399		$	24,748		$	49,121		$	45,204
Basic weighted average shares outstanding		53,155			56,554			53,417			57,517
Dilutive effect of equity awards		1,936			2,041			1,959			2,026
Diluted weighted average shares outstanding		55,091			58,595			55,376			59,543
Basic net income per share		$	0.53		$	0.44		$	0.92		$	0.79
Diluted net income per share		$	0.52		$	0.42		$	0.89		$	0.76

 

Shares of common stock equivalents of 2.7 million and 2.9 million for the thirteen and twenty-six weeks ended July 3, 2012 and 2.4 million and 2.6 million for the thirteen and twenty-six weeks ended June 28, 2011, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.

 

7.  Segment Information

 

Our management reviews discrete financial information for The Cheesecake Factory, Grand Lux Cafe, RockSugar Pan Asian Kitchen and the bakery for decision-making purposes.  However, based on quantitative thresholds set forth in ASC 280, “Segment Reporting”, The Cheesecake Factory is our only business that meets the criteria of a reportable operating segment.  Although not required, we present segment information for the bakery separately from our restaurant concepts because the bakery is a distinctively different business, and we believe information regarding this segment is useful to readers.  The bakery segment produces baked desserts and other products for our restaurants and for other foodservice operators, retailers and distributors.  Bakery sales to our restaurants are recorded at prices similar to third-party national accounts.  Unallocated corporate expenses, assets and capital expenditures are presented below as reconciling items to the amounts presented in the consolidated financial statements.

 

Segment information is presented below (in thousands):

 

		Thirteen Weeks Ended July 3, 2012			Thirteen Weeks Ended June 28, 2011			Twenty-Six Weeks Ended July 3, 2012			Twenty-Six Weeks Ended June 28, 2011
Revenue:
Restaurants		$	442,919		$	416,549		$	867,921		$	823,452
Bakery		30,154			28,110			56,327			53,947
Intercompany bakery sales		(18,324		)	(13,913		)	(33,745		)	(27,888		)
Total		$	454,749		$	430,746		$	890,503		$	849,511
Income from operations:
Restaurants		$	64,396		$	56,621		$	119,920		$	108,518
Bakery		1,986			1,885			3,796			2,885
Corporate		(25,412		)	(23,344		)	(52,527		)	(46,390		)
Total		$	40,970		$	35,162		$	71,189		$	65,013
Depreciation and amortization:
Restaurants		$	16,819		$	15,819		$	33,427		$	31,597
Bakery		629			640			1,274			1,291
Corporate		1,061			1,024			2,106			2,048
Total		$	18,509		$	17,483		$	36,807		$	34,936
Capital expenditures:
Restaurants		$	14,435		$	18,523		$	26,025		$	26,947
Bakery		1,784			512			4,892			633
Corporate		1,851			636			3,502			2,596
Total		$	18,070		$	19,671		$	34,419		$	30,176

 

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		July 3, 2012			January 3, 2012
Total assets:
Restaurants		$	814,946		$	835,393
Bakery		66,818			61,382
Corporate		130,988			125,795
Total		$	1,012,752		$	1,022,570

 

8.  Subsequent Events

 

Cash Dividends

 

On July 23, 2012, our Board of Directors approved the initiation of a cash dividend to our stockholders.  A quarterly dividend of $0.12 per share will be paid on August 21, 2012 to the stockholders of record on August 8, 2012 of each share of our common stock.  Future dividends will be subject to Board approval.  Based on shares outstanding at July 25, 2012, the total dividend payment will be approximately $6.4 million.

 

Other

 

Our lease for The Cheesecake Factory restaurant located in Brentwood, California expires on October 4, 2012, in accordance with its terms, and we elected not to renew it.  Costs related to this expiration are expected to be minimal, and we do not expect it to impact our comparable sales and earnings per share assumptions for fiscal 2012 or future years.

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

Certain information included in this Form 10-Q and other materials filed or to be filed by us with the 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 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.  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 are intended to identify forward-looking statements.  These statements, and any other statements that are not historical facts, 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, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Acts”).

 

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 contained 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 January 3, 2012).  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 reasonable, any of the assumptions could be incorrect, 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.  Except as may be required by law, we do not undertake any obligation to modify or revise any forward-looking statement to take into account or otherwise reflect subsequent events or circumstances arising after the date that the forward-looking statement was made.

 

General

 

This discussion and analysis should be read in conjunction with our interim unaudited consolidated financial statements and related notes included in this Form 10-Q in Part I, Item 1, and with the following items included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2012: the audited consolidated financial statements and related notes in Part IV, Item 15, the “Risk Factors” included in Part I, Item 1A and the cautionary statements included throughout the report.  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 taken as a whole.

 

As of August 10, 2012, we operated 173 upscale, casual, full-service dining restaurants: 158 under The Cheesecake Factory® mark, 14 under the Grand Lux Cafe® mark and one under the RockSugar Pan Asian Kitchen® mark.  We also operated two bakery production facilities.

 

The Cheesecake Factory is an upscale, casual dining concept that offers more than 200 menu items including appetizers, pizza, seafood, steaks, chicken, burgers, pasta, specialty items, salads, sandwiches, omelettes and desserts, including approximately 40 varieties of cheesecake and other baked desserts.  Grand Lux Cafe and RockSugar Pan Asian Kitchen are also upscale, casual dining concepts offering approximately 200 and 80 menu items, respectively.  In contrast to many chain restaurant operations, substantially all of our menu items (except certain desserts manufactured at our bakery production facilities) are prepared on the restaurant premises using high quality, fresh ingredients based on innovative and proprietary recipes.  We believe our restaurants are recognized by consumers for offering value with generous food portions at moderate prices.  Our restaurants’ distinctive, contemporary design and decor create a high-energy ambiance in a casual setting.  Our restaurants typically range in size from 7,000 to 15,000 interior square feet, provide full liquor service and are generally open seven days a week for lunch and dinner, as well as Sunday brunch.

 

In January 2011, we announced our initial expansion plans outside of the United States. We entered into an exclusive licensing agreement with a Kuwait-based company to build and operate The Cheesecake Factory restaurants in the Middle East. The agreement provides for the development of 22 restaurants over five years in the United Arab Emirates, Kuwait, Bahrain, Qatar and the Kingdom of Saudi Arabia, with the opportunity to expand the agreement to include other markets in the Middle East and North Africa, Central and Eastern Europe, Russia and Turkey. This licensing agreement includes an initial development fee, site and design fees and ongoing royalties on our licensee’s restaurant sales. The transaction also includes an agreement to supply bakery products branded under The Cheesecake Factory trademark to such restaurants.  We expect to open as many as three locations in the Middle East in fiscal 2012, but do not expect these openings to have a material impact on our financial results in fiscal 2012.

 

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Overview

 

In addition to being highly competitive, the restaurant industry is affected by changes in consumer tastes and discretionary spending; changes in general economic conditions; public safety conditions; demographic trends; weather conditions; the cost and availability of food products, labor and energy; and government regulations.  Accordingly, as part of our strategy we must constantly evolve and refine the critical elements of our restaurant concepts to protect our competitiveness and to maintain and enhance the strength of our brands.

 

Our strategy is driven by our commitment to guest satisfaction and is focused primarily on menu innovation and operational execution to continue to differentiate ourselves from other restaurant concepts, as well as drive competitively strong performance that is sustainable.  Financially, we are focused on prudently managing expenses at our restaurants, bakery facilities and corporate support center.  We are also committed to allocating capital in a manner that will maximize profitability and returns.  Investing in new restaurant development that meets our return on investment criteria is our top capital allocation priority with a focus on opening our restaurant concepts in premier locations within both existing and new markets.

 

In evaluating and assessing the performance of our business, we believe the following are key performance indicators that should be taken into consideration:

 

·                   Comparable Restaurant Sales and Overall Revenue Growth.  Changes in comparable restaurant sales come from variations in guest traffic, as well as in check average (as a result of menu price increases and/or changes in menu mix).  Our strategy is to grow guest traffic by continuing to offer innovative, high quality menu items that offer guests a wide range of options in terms of flavor, price and value.  In addition, we focus on service and hospitality with the goal of delivering an exceptional guest experience.

 

Our philosophy with regard to menu pricing is to use price increases to help offset key operating costs in a manner that balances protecting both our margins and guest traffic levels.  With regard to our menu mix, it has been influenced by a couple of factors, including a slight reduction in the number of guests ordering non-alcoholic beverages.  Additionally, with our menu continually evolving, we experience some shifting of menu preferences as our guests try new items.  This shifting can also have an impact on menu mix, and, therefore, on our check average.  Over time, and as the economy strengthens, we expect menu mix to stabilize, allowing us to capture more of the menu price increases we implement.

 

Comparable restaurant sales growth, in addition to revenue from new restaurant openings and increases in third-party bakery sales, drive our overall revenue growth.  In the future, we expect royalties from international locations also to contribute to our revenue growth.

 

·                  Income from Operations Expressed as a Percentage of Revenues (“Operating Margins”).  Operating margins are subject to fluctuations in commodity costs, labor, restaurant-level occupancy expenses, general and administrative expenses (“G&A”), and preopening expenses.  Our objective is to gradually increase our operating margins by capturing fixed cost leverage from comparable restaurant sales increases, maximizing our purchasing power as our business grows, and operating our restaurants as productively as possible by retaining the efficiencies we gained through the implementation of cost management initiatives.

 

By efficiently scaling our restaurant and bakery support infrastructure and improving our internal processes, we work toward growing G&A expenses at a slower rate than revenue growth over the long-term, which should also contribute to operating margin expansion.  However, G&A as a percentage of revenues may vary from quarter to quarter.

 

·                  Return on Investment.  Return on investment measures our ability to make the best decisions regarding our allocation of capital.  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 through operational execution and disciplined cost management.  Our objective is to deploy capital in a manner that will maximize our return on investment.

 

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Results of Operations

 

The following table sets forth, for the periods indicated, information from our consolidated statements of comprehensive 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 Weeks Ended July 3, 2012		Thirteen Weeks Ended June 28, 2011		Twenty-Six Weeks Ended July 3, 2012		Twenty-Six Weeks Ended June 28, 2011
Revenues		100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Cost of sales		24.4		25.5		24.5		25.3
Labor expenses		32.1		32.4		32.5		32.6
Other operating costs and expenses		23.9		24.0		24.1		24.3
General and administrative expenses		5.8		5.6		6.2		5.7
Depreciation and amortization expenses		4.1		4.1		4.1		4.1
Preopening costs		0.7		0.2		0.6		0.3
Total costs and expenses		91.0		91.8		92.0		92.3
Income from operations		9.0		8.2		8.0		7.7
Interest and other (expense)/income, net		(0.2	)	(0.3	)	(0.2	)	(0.3	)
Income before income taxes		8.8		7.9		7.8		7.4
Income tax provision		2.6		2.2		2.3		2.1
Net income		6.2	%	5.7	%	5.5	%	5.3	%

 

Thirteen Weeks Ended July 3, 2012 Compared to Thirteen Weeks Ended June 28, 2011

 

Revenues

 

Revenues increased 5.6% to $454.7 million for the thirteen weeks ended July 3, 2012 compared to $430.7 million for the thirteen weeks ended June 28, 2011.

 

Restaurant sales increased 6.3% to $442.9 million compared to $416.5 million in the prior year second quarter.  Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased by 1.7%, or $7.0 million, from the second quarter of fiscal 2011, driven primarily by average check growth, as well as an increase in guest traffic of 0.5%. The Cheesecake Factory and Grand Lux Cafe restaurants become eligible to enter our comparable sales calculations in their 19th month of operation.  At July 3, 2012, there were eight The Cheesecake Factory restaurants not yet in our comparable sales base.

 

Comparable sales at The Cheesecake Factory restaurants increased 2.1% from the prior year second quarter driven primarily by an increase in average check, as well as improved guest traffic.  We implemented effective menu price increases of approximately 1.0% and 1.3% during the first quarter of fiscal 2012 and third quarter of fiscal 2011, respectively.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, The Cheesecake Factory menu included a 2.3% increase in pricing for the thirteen weeks ended July 3, 2012.  This increase in menu pricing was partially offset by changes in menu mix due to check management by our guests, as well as some shifting of menu preferences as our guests try new items.

 

Comparable sales at our Grand Lux Cafe restaurants decreased 2.9% from the prior year second quarter driven by lower guest traffic, partially offset by an increase in average check.  During the second quarter of fiscal 2012, we implemented an effective menu price increase of approximately 1.2%.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, the Grand Lux Cafe menu included a 1.2% increase in pricing for the thirteen weeks ended July 3, 2012.  This increase in menu pricing was offset by changes in menu mix due to check management by our guests, as well as some shifting of menu preferences as our guests try new items.

 

We generally update and reprint our menus twice a year.  As part of these menu updates, we evaluate the need for price increases based on those operating cost and expense increases of which we are aware or that we can reasonably expect.  While menu price increases can contribute to higher comparable restaurant sales in addition to offsetting margin pressure, we carefully consider all potential price increases in light of the extent to which we believe they will be accepted by our restaurant guests.

 

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Additionally, other factors outside of our control, such as general economic conditions, inclement weather, timing of holidays, and competitive and other factors, including those referenced in Part I, Item lA, “Risk Factors,” of our Annual Report on Form 10-K for the year ended January 3, 2012, can impact comparable sales.

 

Total restaurant operating weeks increased 4.4% to 2,225 for the thirteen weeks ended July 3, 2012 due to the opening of eight new restaurants during the trailing 15-month period.  Average sales per restaurant operating week increased approximately 1.9% to $199,100 in the second quarter of fiscal 2012 compared to the second quarter of fiscal 2011.

 

Bakery sales to other foodservice operators, retailers and distributors (“Bakery sales”) decreased 16.9% to $11.8 million for the thirteen weeks ended July 3, 2012 compared to $14.2 million for the comparable period of last year due primarily to a decline in sales to our warehouse club accounts.  We strive to develop and maintain long-term, growing relationships with our bakery customers, based largely on our 39-year reputation for producing high quality and creative baked desserts.  However, it is difficult to predict the timing of bakery product shipments and contribution margins on a quarterly basis, as the purchasing plans of our large-account customers, who constitute a majority of our bakery sales, may fluctuate.

 

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 decreased to 24.4% in the second quarter of fiscal 2012 compared to 25.5% in the comparable period of last year.  This improvement was primarily due to lower costs for dairy, produce and fish.

 

Our restaurant menus are among the most diversified in the foodservice industry and, accordingly, are not overly dependent on a few select commodities.  Changes in costs for one commodity can sometimes be counterbalanced by cost changes in other commodity categories.  The principal commodity categories for our restaurants include produce, poultry, meat, fish and seafood, dairy, bread and general grocery items.

 

We attempt to negotiate short-term and long-term agreements for our principal commodity, supply and equipment requirements, depending on market conditions and expected demand.  However, we are currently unable to contract for extended periods of time for some of our commodities such as many dairy and certain fish and grocery items (excluding cream cheese used in our bakery operations).  Consequently, these commodities can be subject to unforeseen supply and cost fluctuations.  Cream cheese is the most significant commodity used in our bakery products.  We have contracted for a substantial portion of our fiscal 2012 cream cheese requirements and plan to purchase cream cheese on the spot market as necessary to supplement our contracted amounts.

 

As has been our past practice, we will carefully consider opportunities to introduce new menu items and implement selected menu price increases to help offset any expected cost increases for key commodities and other goods and services utilized by our operations.

 

We have taken steps to qualify multiple suppliers and enter into agreements for some of the key commodities used in our restaurant and bakery operations.  However, there can be no assurance that future supplies and costs for these commodities will not fluctuate due to weather and other market conditions outside of our control.  For new restaurants, cost of sales will typically be higher during the first three to four months of operations until our management team becomes accustomed to optimally predicting, managing and servicing the sales volumes at the new restaurant.

 

Labor Expenses

 

As a percentage of revenues, labor expenses, which include restaurant-level labor costs and bakery direct production labor, including associated fringe benefits, decreased to 32.1% in the second quarter of fiscal 2012 compared to 32.4% in the second quarter of fiscal 2011.  Lower group medical insurance costs were partially offset by higher payroll taxes and other labor-related costs.

 

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, selling and distribution expenses.  As a percentage of revenues, other operating costs and expenses decreased to 23.9% for the thirteen weeks ended July 3, 2012 from 24.0% for the thirteen weeks ended June 28, 2011. This reduction was primarily due to lower debit card transaction fees.

 

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General and Administrative Expenses

 

General and administrative (“G&A”) expenses consist of the restaurant management recruiting and training program, as well as the restaurant field supervision, bakery administrative, and corporate support organizations.  As a percentage of revenues, G&A expenses increased to 5.8% for the thirteen weeks ended July 3, 2012 versus 5.6% for the comparable period of fiscal 2011 due primarily to a higher fiscal 2012 accrual for corporate performance bonuses.

 

Depreciation and Amortization Expenses

 

As a percentage of revenues, depreciation and amortization expenses were 4.1% for both the thirteen weeks ended July 3, 2012 and the comparable period of last year.

 

Preopening Costs

 

Preopening costs were $3.0 million for the thirteen weeks ended July 3, 2012 compared to $1.1 million in the comparable period of the prior year.  We incurred preopening costs to open one The Cheesecake Factory restaurant in the second quarter of fiscal 2012.  No restaurants were opened in the second quarter of fiscal 2011.

 

Preopening costs include all costs to relocate and compensate restaurant management employees during the preopening period; costs to recruit and train hourly restaurant employees; wages, travel and lodging costs for our opening training team and other support employees; and straight-line minimum base rent during the build-out and in-restaurant training periods.  Also included in preopening costs 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.

 

Interest and Other (Expense)/Income, Net

 

Interest and other expense, net decreased to $0.8 million for the second quarter of fiscal 2012 compared to $1.1 million for the comparable period last year.  This decrease was primarily due to $0.4 million in proceeds we received from a variable life insurance contract used to support our Executive Savings Plan (“ESP”), a non-qualified deferred compensation plan.  Interest expense included $0.8 million in the second quarter of fiscal 2012 compared to $0.9 million for the second quarter of fiscal 2011 associated with landlord construction allowances deemed to be financing in accordance with accounting guidance.

 

Income Tax Provision

 

Our effective income tax rate was 29.2% for the second quarter of fiscal 2012 compared to 27.4% for the comparable prior year period.  This increase was attributable to a lower proportion of employment credits in relation to pretax income primarily due to the expiration of the Hiring Incentives to Restore Employment (“HIRE”) Act retention credit at the end of fiscal 2011 and increased state taxes in relation to pretax income.

 

Twenty-Six Weeks Ended July 3, 2012 Compared to Twenty-Six Weeks Ended June 28, 2011

 

Revenues

 

Revenues increased 4.8% to $890.5 million for the twenty-six weeks ended July 3, 2012 compared to $849.5 million for the twenty-six weeks ended June 28, 2011.

 

Restaurant sales increased 5.4% to $867.9 million compared to $823.5 million for the same period of the prior year.  Comparable sales at The Cheesecake Factory and Grand Lux Cafe restaurants increased by 2.0%, or $16.4 million, from the first half of fiscal 2011, driven primarily by an increase in guest traffic of 1.2%.

 

Comparable sales at The Cheesecake Factory restaurants increased 2.3% from the first half of fiscal 2011 driven primarily by improved guest traffic, as well as average check growth.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, The Cheesecake Factory menu included a 2.0% increase in pricing for the twenty-six weeks ended July 3, 2012.  This increase in menu pricing was partially offset by changes in menu mix due to check management by our guests, as well as some shifting of menu preferences as our guests try newer items.

 

Comparable sales at our Grand Lux Cafe restaurants decreased 1.3% from the first half of fiscal 2011 driven by lower guest traffic, partially offset by an increase in average check.  On a weighted average basis, based on the timing of our menu roll outs within each quarter, the Grand Lux Cafe menu included a 1.3% increase in pricing for the twenty-six weeks ended July 3, 2012. This increase in menu pricing was partially offset by changes in menu mix due to check management by our guests, as well as some shifting of menu preferences as our guests try newer items.

 

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Total restaurant operating weeks increased 4.2% to 4,437 for the twenty-six weeks ended July 3, 2012.  Average sales per restaurant operating week increased approximately 1.2% to $195,600 compared to the same period of fiscal 2011.  A busy holiday week that usually falls in the first fiscal quarter was captured as the 53rd week of fiscal 2011, thereby shifting a high-volume sales week out of the first quarter of fiscal 2012 and replacing it with an average sales week.  This negatively impacted our average weekly sales in the first half of fiscal 2012 by approximately 0.9% and was partially offset by strong performance at our newer restaurants not yet in our comparable sales base.

 

Bakery sales decreased 13.4% to $22.6 million for the twenty-six weeks ended July 3, 2012 compared to $26.1 million for the comparable period of last year due primarily to a decline in sales to our warehouse club accounts.

 

Cost of Sales

 

As a percentage of revenues, cost of sales decreased to 24.5% in the twenty-six weeks ended July 3, 2012 compared to 25.3% in the comparable period of last year.  This improvement was primarily due to lower costs for dairy, produce and fish.

 

Labor Expenses

 

As a percentage of revenues, labor expenses for the twenty-six weeks ended July 3, 2012 decreased to 32.5% compared to 32.6% in the comparable period of last year.  Lower group medical insurance costs were partially offset by higher payroll taxes and deleveraging from the high-volume sales week shift to fiscal 2011 discussed in the Revenues section above.

 

Other Operating Costs and Expenses

 

As a percentage of revenues, other operating costs and expenses decreased to 24.1% for the twenty-six weeks ended July 3, 2012 from 24.3% for the twenty-six weeks ended June 28, 2011. This decrease was primarily due to lower comparative debit card transaction fees.

 

General and Administrative Expenses

 

As a percentage of revenues, G&A expenses increased to 6.2% for the twenty-six weeks ended July 3, 2012 versus 5.7% for the comparable period of fiscal 2011 due primarily to a higher fiscal 2012 accrual for corporate performance bonuses and an increase in the valuation of our Chief Executive Officer’s retirement benefit in connection with the extension of his employment agreement.

 

Depreciation and Amortization Expenses

 

As a percentage of revenues, depreciation and amortization expenses were 4.1% for both the twenty-six weeks ended July 3, 2012 and the comparable period of last year.

 

Preopening Costs

 

Preopening costs were $5.1 million for the twenty-six weeks ended July 3, 2012 compared to $2.9 million in the comparable period of the prior year.  We incurred preopening costs to open two The Cheesecake Factory restaurants in the first half of fiscal 2012 compared to one The Cheesecake Factory restaurant in the first half of fiscal 2011.

 

Interest and Other (Expense)/Income, Net

 

Interest and other expense, net decreased to $2.0 million for the first half of fiscal 2012 compared to $2.5 million for the comparable period last year.  This decrease was primarily due to $0.4 million in proceeds we received from a variable life insurance contract used to support our ESP.  Interest expense included $1.7 million for the first half of 2012 compared to $1.9 million for the first half of fiscal 2011 associated with landlord construction allowances deemed to be financing in accordance with accounting guidance.

 

Income Tax Provision

 

Our effective income tax rate was 29.0% for the first half of fiscal 2012 compared to 27.7% for the comparable prior year period.  This increase was attributable to a lower proportion of employment credits in relation to pretax income primarily due to the expiration of the HIRE Act retention credit at the end of fiscal 2011 and increased state taxes in relation to pretax income.

 

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Non-GAAP Measures

 

Adjusted net income and adjusted diluted 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 income and diluted net income per share the impact of items we do not consider indicative of our ongoing operations.  We believe these adjusted measures provide additional information to facilitate the comparison of our past and present financial results.  We utilize results that both include and exclude the identified items in evaluating business performance.  However, 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 income and diluted net income per share to the corresponding adjusted measures (in thousands, except per share data):

 

		Thirteen Weeks Ended July 3, 2012			Thirteen Weeks Ended June 28, 2011			Twenty-Six Weeks Ended July 3, 2012			Thirty-Nine Weeks Ended June 28, 2011
Net income		$	28,399		$	24,748		$	49,121		$	45,204
After-tax impact from:
Proceeds from variable life insurance contract (1)		(419		)	—			(419		)	—
Adjusted net income		$	27,980		$	24,748		$	48,702		$	45,204
Diluted net income per share		$	0.52		$	0.42		$	0.89		$	0.76
After-tax impact from:
Proceeds from variable life insurance contract (1)		(0.01		)	—			(0.01		)	—
Adjusted net income per share		$	0.51		$	0.42		$	0.88		$	0.76

 

(1)          Represents the realization of proceeds from one of our variable life insurance contracts used to support our ESP.  This item is non-taxable and was recorded in interest and other (expense)/income.

 

Fiscal 2012 Outlook

 

In fiscal 2012, we plan to open as many as seven to eight new restaurants.  On a year-to-date basis as of August 10, 2012, we have opened two The Cheesecake Factory locations and one Grand Lux Cafe.  In addition to these domestic locations, our licensee plans to open as many as three The Cheesecake Factory restaurants in the Middle East during the second half of this year.  We estimate diluted earnings per share for fiscal 2012 will be between $1.87 and $1.93 based on the assumption that comparable restaurant sales will increase in a range of between 1.5% and 2.5%.  We currently expect food cost inflation of between flat and 1.0% and a corporate tax rate of between 28.5% and 29.5%.

 

We expect cash capital expenditures in fiscal 2012 to range between $95 million and $105 million.  We also plan to repurchase up to $100 million of our common stock, depending on Company performance and market conditions.  On July 23, 2012, our Board of Directors approved the initiation of a cash dividend to our stockholders.  A quarterly cash dividend of $0.12 per share will be paid on August 21, 2012 to the stockholders of record on August 8, 2012 of each share of our common stock.  Future dividends will be subject to Board approval.  On an annualized basis, this dividend payment equates to a payout of approximately 25% of our estimated full year net income.  Based on shares outstanding at July 25, 2012, the quarterly dividend payment will be approximately $6.4 million.

 

For the third quarter of fiscal 2012, we estimate diluted earnings per share will be between $0.47 and $0.49 based on the assumption that comparable restaurant sales will increase in a range between 1.5% and 2.5%.

 

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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):

 

		Twenty-Six Weeks Ended July 3, 2012			Twenty-Six Weeks Ended June 28, 2011
Cash provided by operating activities		$	74.3		$	94.1
Capital expenditures		$	(34.4	)	$	(30.2	)
Proceeds from exercise of stock options		$	17.9		$	7.5
Purchase of treasury stock		$	(57.5	)	$	(95.0	)

 

During the twenty-six weeks ended July 3, 2012, our cash and cash equivalents increased by $0.2 million to $48.4 million.  This increase was primarily attributable to cash provided by operating activities and proceeds from exercises of stock options, partially offset by treasury stock purchases and capital expenditures.

 

For fiscal 2012, we currently estimate our cash outlays for capital expenditures to range between $95 million and $105 million, net of agreed-upon up-front cash landlord construction contributions and excluding $11 million of expected noncapitalizable preopening costs for new restaurants.  The amount reflected as additions to property and equipment in the consolidated statements of cash flows may vary from this estimate based on the accounting treatment of each lease.  Our estimate for capital expenditures for fiscal 2012 contemplates a net outlay of $52 million to $58 million for as many as seven to eight restaurants expected to be opened during fiscal 2012 and estimated construction-in-progress disbursements for anticipated fiscal 2013 openings.  These amounts are net of estimated collections of up-front cash landlord construction contributions.  Expected capital expenditures for fiscal 2012 also include $25 million to $26 million for maintenance and capacity additions to our existing restaurants and $18 million to $21 million for bakery and corporate capacity and infrastructure investments.

 

At July 3, 2012, we had no borrowings outstanding under our $200 million revolving credit facility (“Facility”).  Availability under the Facility is reduced by outstanding standby letters of credit, which are used to support our self-insurance programs.  As of July 3, 2012, we had net availability for borrowings of $176 million, based upon a zero outstanding debt balance and $24 million in standby letters of credit.  In addition, our Facility limits our cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined leverage ratio.  (See Note 3 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.)

 

On October 17, 2011, our Board of Directors increased the authorization to repurchase our common stock by 10.0 million shares to 41.0 million shares.  Under this and previous authorizations, we have cumulatively repurchased a total of 33.1 million shares at a total cost of $788.0 million through July 3, 2012, including 0.5 million shares of our common stock at a cost of $16.7 million during the second quarter of 2012.  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.  Repurchased common stock is reflected as a reduction of stockholder’s equity.

 

On November 1, 2011, our Board of Directors approved the adoption of a trading plan under Rule 10b5-1 (“10b5-1 Plan”) of the Securities Exchange Act of 1934 (the “Act”), which was effective from December 5, 2011 through July 3, 2012.  This 10b5-1 Plan terminated on July 3, 2012, in accordance with its terms.  On May 30, 2012, our Board of Directors approved the adoption of a new 10b5-1 Plan effective from July 5, 2012 through December 31, 2012.

 

On March 1, 2012, our Board of Directors approved the terms of a share repurchase plan (“10b-18 Plan”) under which we were authorized to repurchase shares of our common stock in open market transactions in accordance with Rule 10b-18 of the Act, effective from March 6, 2012 through March 9, 2012. This 10b-18 Plan terminated on March 9, 2012, in accordance with its terms.

 

The timing and number of shares repurchased pursuant to the share repurchase authorization are subject to a number of factors, including legal constraints and financial covenants under our Facility that limit share repurchases based on a defined leverage ratio.  (See Note 3 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.)  Shares may be repurchased in the open market or through privately negotiated transactions at times and prices considered appropriate by us.  Purchases in the open market are made in compliance with Rule 10b-18 of the Act.  We make the determination to repurchase shares based on several factors, including an evaluation of current and future capital needs associated with new restaurant development, current and forecasted cash flows, including dividend payments, a review of our capital structure and cost of capital, our share price and current market conditions.  Our objectives with regard to share repurchases are to offset the dilution to our shares outstanding that results from equity compensation and to supplement our earnings per share growth.

 

On July 23, 2012, our Board of Directors approved the initiation of a cash dividend to our stockholders.  A quarterly dividend of $0.12 per share will be paid on August 21, 2012 to all stockholders of record on August 8, 2012 of each of our common stock.  Future dividends will be subject to Board approval.  Based on shares outstanding at July 25, 2012, the total dividend payment will be approximately $6.4 million.

 

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Based on our current expansion objectives, we believe that during the upcoming 12 months our cash and cash equivalents, combined with expected cash flows provided by operations, available borrowings under our credit facility and expected landlord construction contributions should be sufficient in the aggregate to finance our capital allocation strategy, including capital expenditures, share repurchases and cash dividends, and allow us to consider additional possible capital allocation strategies, such as the acquisition of other growth vehicles.

 

As of July 3, 2012, 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.

 

Recent Accounting Pronouncements

 

See Note 1 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for a summary of new accounting standards.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The following discussion of market risks contains forward-looking statements.  Actual results may differ materially from the following discussion based on general conditions in the financial and commodity markets.

 

We are exposed to market risk from interest rate changes on our funded debt.  This exposure relates to the component of the interest rate on our $200 million Facility that is indexed to three-month LIBOR.  As of July 3, 2012, we had no debt outstanding under the Facility.  Therefore, we had no exposure to interest rate fluctuations on funded debt at that date.  (See Note 3 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for further discussion of our long-term debt.)

 

We are also subject to market risk related to our investments in variable life insurance contracts used to support our ESP to the extent these investments are not equivalent to the related liability.  In addition, because changes in these investments are not taxable, the full impact of gains or losses affects net income.  Based on balances at July 3, 2012 and January 3, 2012, a hypothetical 10% decline in the market value of our deferred compensation asset and related liability would not have impacted income before income taxes.  However, net income would have declined by $1.0 million and $0.9 million, respectively.

 

We purchase food and other commodities for use in our operations, based on market prices established with our suppliers.  Many of the commodities purchased by us can be subject to volatility due to market supply and demand factors outside of our control.  We attempt to negotiate short-term and long-term agreements for our principal commodity, supply and equipment requirements, depending on market conditions and expected demand.  However, we are currently unable to contract for extended periods of time for some of our commodities such as many dairy and certain fish and grocery items (excluding cream cheese used in our bakery operations).  Consequently, these commodities can be subject to unforeseen supply and cost fluctuations.  Substantially all of our food and supplies are available from multiple qualified suppliers, which helps to diversify our overall commodity cost risk.  In addition, we may have the ability to increase menu prices, or vary menu items, in response to food commodity price increases.  We do not use financial instruments to hedge commodity prices, since our purchase arrangements with suppliers, to the extent that we can enter into such arrangements, help control the ultimate cost that we pay.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We have established and maintain disclosure controls and procedures that are designed to ensure that material information relating to the Company and our subsidiaries required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  We carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of July 3, 2012.

 

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Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended July 3, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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