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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 April 2, 2019

 

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)

 

Delaware		51-0340466
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

 

 

(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 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 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x		Accelerated filer   o
Non-accelerated filer   o		Smaller reporting company   o
		Emerging growth company   o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   o

 

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

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of Each Class		Trading Symbol		Name of Each Exchange on which Registered
Common Stock, par value $.01 per share		CAKE		Nasdaq Global Select Market

 

As of April 29, 2019, 45,209,476 shares of the registrant’s Common Stock, $.01 par value per share, were outstanding.

 

 

Table of Contents

 

THE CHEESECAKE FACTORY INCORPORATED

IND EX

 

			Page Number
PART I	FINANCIAL INFORMATION
	Item 1.	Unaudited Financial Statements:
		Condensed Consolidated Balance Sheets	1
		Condensed Consolidated Statements of Income	2
		Condensed Consolidated Statements of Comprehensive Income	3
		Condensed Consolidated Statement of Stockholders’ Equity	4
		Condensed Consolidated Statements of Cash Flows	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
	Item 4.	Controls and Procedures	19
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	20
	Item 1A.	Risk Factors	20
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
	Item 6.	Exhibits	21
Signatures			22

 

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.    Financial Statements.

 

THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

 

		April 2, 2019			January 1, 2019
ASSETS
Current assets:
Cash and cash equivalents		$	22,529		$	26,578
Accounts receivable		17,742			20,928
Other receivables		28,446			68,193
Inventories		42,028			38,886
Prepaid expenses		46,771			40,645
Total current assets		157,516			195,230
Property and equipment, net		763,884			913,275
Other assets:
Intangible assets, net		20,094			26,209
Prepaid rent		—			34,961
Operating lease assets		968,741			—
Investments in unconsolidated affiliates		81,317			79,767
Other		84,528			64,691
Total other assets		1,154,680			205,628
Total assets		$	2,076,080		$	1,314,133
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	36,394		$	49,071
Income taxes payable		31			712
Gift card liabilities		145,745			172,336
Operating lease liabilities		93,151			—
Other accrued expenses		171,315			194,381
Total current liabilities		446,636			416,500
Deferred income taxes		43,048			52,123
Deferred rent liabilities		—			79,697
Deemed landlord financing liabilities		—			113,095
Long-term debt		20,000			10,000
Operating lease liabilities		946,786			—
Other noncurrent liabilities		77,366			71,659
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value, 250,000,000 shares authorized; 97,384,233 and 96,621,990 issued at April 2, 2019 and January 1, 2019, respectively		974			967
Additional paid-in capital		840,120			828,676
Retained earnings		1,355,060			1,384,494
Treasury stock, 52,037,545 and 51,791,941 shares at cost at April 2, 2019 and January 1, 2019, respectively		(1,653,211		)	(1,642,140		)
Accumulated other comprehensive loss		(699		)	(938		)
Total stockholders’ equity		542,244			571,059
Total liabilities and stockholders’ equity		$	2,076,080		$	1,314,133

 

See the accompanying notes to the condensed consolidated financial statements.

 

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

		Thirteen Weeks Ended April 2, 2019			Thirteen Weeks Ended April 3, 2018
Revenues		$	599,481		$	584,697
Costs and expenses:
Cost of sales		136,187			134,220
Labor expenses		217,310			209,575
Other operating costs and expenses		153,221			144,976
General and administrative expenses		39,123			39,274
Depreciation and amortization expenses		21,362			24,002
Preopening costs		2,130			1,099
Total costs and expenses		569,333			553,146
Income from operations		30,148			31,551
Loss on investment in unconsolidated affiliates		(1,450		)	(89		)
Interest and other income/(expense), net		2			(1,417		)
Income before income taxes		28,700			30,045
Income tax provision		1,716			4,016
Net income		$	26,984		$	26,029
Net income per share:
Basic		$	0.61		$	0.57
Diluted		$	0.60		$	0.56
Weighted average shares outstanding:
Basic		44,255			45,552
Diluted		44,984			46,574

 

See the accompanying notes to the condensed consolidated financial statements.

 

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

		Thirteen Weeks Ended April 2, 2019			Thirteen Weeks Ended April 3, 2018
Net income		$	26,984		$	26,029
Other comprehensive loss:
Foreign currency translation adjustment		239			(246		)
Other comprehensive gain/(loss)		239			(246		)
Total comprehensive income		$	27,223		$	25,783

 

See the accompanying notes to the condensed consolidated financial statements

 

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

For the thirteen weeks ended April 2, 2019:

 

		Shares of Common Stock		Common Stock			Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
Balance, January 1, 2019		96,622		$	967		$	828,676		$	1,384,494		$	(1,642,140	)	$	(938	)	$	571,059
Cumulative effect of adopting the pronouncement related to lease accounting, net of tax		—		—			—			(41,466		)	—			—			(41,466		)
Balance, January 1, 2019, as adjusted		96,622		967			828,676			1,343,028			(1,642,140		)	(938		)	529,593
Net income		—		—			—			26,984			—			—			26,984
Foreign currency translation adjustment		—		—			—			—			—			239			239
Cash dividends declared Common stock, $0.33 per share		—		—			—			(14,952		)	—			—			(14,952		)
Stock-based compensation		350		3			5,907			—			—			—			5,910
Common stock issued under stock-based compensation plans		412		4			5,537			—			—			—			5,541
Treasury stock purchases		—		—			—			—			(11,071		)	—			(11,071		)
Balance, April 2, 2019		97,384		$	974		$	840,120		$	1,355,060		$	(1,653,211	)	$	(699	)	$	542,244

 

For the thirteen weeks ended April 3, 2018:

 

		Shares of Common Stock		Common Stock			Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
Balance, January 2, 2018		95,412		$	954		$	799,862		$	1,345,666		$	(1,532,864	)	$	(88	)	$	613,530
Cumulative effect of adopting the pronouncement related to revenue recognition, net of tax		—		—			—			(3,560		)	—			—			(3,560		)
Balance, January 2, 2018, as adjusted		95,412		954			799,862			1,342,106			(1,532,864		)	(88		)	609,970
Net income		—		—			—			26,029			—			—			26,029
Foreign currency translation adjustment		—		—			—			—			—			(246		)	(246		)
Cash dividends declared Common stock, $0.29 per share		—		—			—			(13,280		)	—			—			(13,280		)
Stock-based compensation		334		4			6,079			—			—			—			6,083
Common stock issued under stock-based compensation plans		211		2			538			—			—			—			540
Treasury stock purchases		—		—			—			—			(34,903		)	—			(34,903		)
Balance, April 3, 2018		95,957		$	960		$	806,479		$	1,354,855		$	(1,567,767	)	$	(334	)	$	594,193

 

See the accompanying notes to the condensed consolidated financial statements.

 

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THE CHEESECAKE FACTORY INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

		Thirteen Weeks Ended April 2, 2019			Thirteen Weeks Ended April 3, 2018
Cash flows from operating activities:
Net income		$	26,984		$	26,029
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization expenses		21,362			24,002
Deferred income taxes		1,792			1,157
Stock-based compensation		5,847			6,013
Loss from investments in unconsolidated affiliates		1,450			89
Changes in assets and liabilities:
Accounts and other receivable		43,295			44,594
Income taxes receivable/payable		(681		)	13,668
Inventories		(3,142		)	1,601
Prepaid expenses		(10,621		)	3,630
Operating lease assets/liabilities		1,130			—
Other assets		(5,896		)	1,276
Accounts payable		(11,623		)	(3,645		)
Gift card liabilities		(26,594		)	(25,814		)
Other accrued expenses		(9,787		)	(17,657		)
Cash provided by operating activities		33,516			74,943
Cash flows from investing activities:
Additions to property and equipment		(13,351		)	(30,688		)
Additions to intangible assets		(96		)	(307		)
Investments in unconsolidated affiliates		(3,000		)	—
Loans made to unconsolidated affiliates		(11,000		)	—
Cash used in investing activities		(27,447		)	(30,995		)
Cash flows from financing activities:
Deemed landlord financing proceeds		—			3,610
Deemed landlord financing payments		—			(1,251		)
Borrowings on credit facility		20,000			30,000
Repayments on credit facility		(10,000		)	(10,000		)
Proceeds from exercise of stock options		5,541			540
Cash dividends paid		(14,628		)	(13,168		)
Treasury stock purchases		(11,071		)	(34,903		)
Cash used in financing activities		(10,158		)	(25,172		)
Foreign currency translation adjustment		40			17
Net change in cash and cash equivalents		(4,049		)	18,793
Cash and cash equivalents at beginning of period		26,578			6,008
Cash and cash equivalents at end of period		$	22,529		$	24,801
Supplemental disclosures:
Interest paid		$	316		$	2,030
Income taxes paid		$	566		$	610
Construction payable		$	2,670		$	3,538
Non-cash operating:
Settlement of sale-leaseback accounting		$	—		$	471
Non-cash investing:
Settlement of landlord sale-leaseback accounting		$	—		$	(4,056	)
Non-cash financing:
Settlement of landlord financing obligation for sale-leaseback leases		$	—		$	3,585
Deemed landlord financing proceeds		$	—		$	406

 

See the accompanying notes to the condensed consolidated financial statements.

 

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THE CHEESECAKE FACTORY INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.  Significant Accounting Policies

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements include the accounts of The Cheesecake Factory Incorporated and its wholly owned subsidiaries (referred to herein collectively as the “Company,” “we,” “us” and “our”) and are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All intercompany accounts and transactions for the periods presented have been eliminated in consolidation. The unaudited financial statements presented herein 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 that may be achieved 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 condensed 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 1, 2019 filed with the SEC on March 4, 2019 (“fiscal 2018 10-K”) .

 

We utilize a 52/53-week fiscal year ending on the Tuesday closest to December 31 for financial reporting purposes. Fiscal 2019 consists of 52 weeks and will end on December 31, 2019. Fiscal 2018, which ended on January 1, 2019, was also a 52-week year.

 

Beginning with our fiscal 2018 10-K, we separately disclosed our investments in unconsolidated affiliates on the consolidated balance sheet and our related share of losses on the consolidated statement of income and statement of cash flow. Corresponding balances for the first fiscal quarter of 2018 were reclassified to conform to the current presentation.

 

Beginning with our fiscal 2018 10-K, we corrected an error in our consolidated statements of income by reclassifying complimentary meals out of revenue and other operating expenses. We also reclassified the associated cost of complimentary meals from other operating expenses to cost of sales and labor. The reclassifications had no impact on previously reported income from operations or net income. Corresponding balances for the first fiscal quarter of 2018 were reclassified to conform to the current presentation.

 

Use of Estimates

 

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.

 

Recent Accounting Pronouncements

 

We adopted FASB Accounting Standards Codification (“ASC”) Topic 842, “Leases”, as of January 2, 2019, using the alternative transition method and recorded a cumulative effect adjustment to beginning retained earnings without restating prior periods. We elected the package of practical expedients which allowed us to carry forward our historical lease classification, our assessment of whether a contract is or contains a lease and our initial direct costs for any leases that existed prior to adoption of the new standard. In addition, we elected the hindsight practical expedient, which lengthened the lease term for certain of our leases to include renewal options, and the short-term lease exclusion. Adoption of the new standard resulted in the recognition of operating lease assets and liabilities of $975.1 million and $1,045.4 million, respectively, and a reduction to retained earnings of $41.5 million, net of tax. All prior lease-related balances of $39.2 million of prepaid rent, $140.2 million in property and equipment, net, $6.2 million of intangible assets, net, $82.1 million of deferred rent liabilities and $118.7 million of deemed landlord financing have been reclassified into operating lease assets or are eliminated upon ASC 842 adoption.

 

Leases

 

We currently lease all our restaurant locations, generally with initial terms of 20 years plus two five-year renewal options. Our leases typically require contingent rent above the minimum base rent payments based on a percentage of revenues, have escalating minimum rent requirements over the term of the lease and require payment for various expenses incidental to the use of the property. A majority of our leases provide for a reduced level of overall rent obligation should specified co-tenancy requirements not be satisfied. We expend cash for leasehold improvements and furniture, fixtures, and equipment to build out and equip our leased premises. We may also expend cash for structural additions that we make to leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed to us by our landlords as construction contributions. If obtained, landlord construction contributions usually take the form of up-front cash, full or partial credits against our future minimum or percentage rents, or a combination thereof. We do not meet any of the accounting criteria for being the owner of the asset under construction. Many of our leases provide early termination rights permitting us to terminate the lease prior to expiration in the event our revenues are below a stated level for a period of time, generally conditioned upon repayment of the unamortized landlord contributions.

 

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In addition to leases for our restaurant locations, we also lease automobiles and certain equipment that is used in the restaurants, bakeries and corporate office. The automobile leases are the only non-real estate leases included in our operating lease assets and liabilities. All other leases are immaterial or qualify for the short-term lease exclusion.

 

The assessment of whether a contract is or contains a lease is performed at contract inception. A lease is defined as a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is defined as having both the right to obtain substantially all the economic benefits from the use of the asset and to direct how and for what purpose the asset is used.

 

At lease commencement, we evaluate each lease to determine its appropriate classification as an operating or finance lease. All our restaurant and automobile leases are classified as operating leases. For restaurant leases existing at transition, we will continue to apply our historical practice of excluding executory costs, and only minimum base rent will be factored into the initial operating lease liability and corresponding lease asset. For restaurant leases beginning after adoption of ASC 842, we have elected the single lease component practical expedient. Operating lease assets and liabilities are recorded on the balance sheet at lease commencement based on the present value of minimum base rent and other fixed payments over the reasonably certain lease term. The difference between the amounts we expend for structural costs and the construction contributions received from our landlords is recorded as an adjustment to the operating lease asset. Lease terms include the build-out period for our leases where no rent payments are typically due under the terms of the lease, as well as options to renew when we deem we have significant economic incentive to exercise the extension. When determining if we have a significant economic incentive, we consider relevant factors, such as contractual, asset, entity and market-based considerations. Option periods are included in the lease term for the majority of our leases. Termination rights have not been factored into the lease terms since based on our probability assessment we are reasonably certain we will not terminate our leases.

 

We cannot determine the interest rate implicit in our leases because we do not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, we use our incremental borrowing rate as the discount rate for our leases. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. Because we do not generally borrow on a collateralized basis, we derive an appropriate incremental borrowing rate using the interest rate we pay on our non-collateralized borrowings, adjusted for the amount of the lease payments, the lease term and the effect of designating specific collateral with a value equal to the unpaid lease payments for that lease. We apply the incremental borrowing rate on a portfolio basis given the impact of applying it on a lease by lease basis would be immaterial.

 

We monitor for events or changes in circumstances that require reassessment of our leases. When a reassessment results in the re-measurement of a lease liability, a corresponding adjustment is made to the carrying amount of the operating lease asset. We also assess the potential impairment of our operating lease assets under long-lived asset impairment guidance in ASC 360.

 

Rent expense included in our operating lease assets is recognized on a straight-line basis. Contingent rent expense is recorded as incurred to the extent it exceeds minimum base rent per the lease agreement. Other variable rent expense is recognized as incurred.

 

The reasonably certain lease term and the incremental borrowing rate for each restaurant location require judgment by management and can impact the classification and accounting for a lease as operating or finance, as well as the value of the operating lease asset and liability. These judgments may produce materially different amounts of rent expense than would be reported if different assumptions were used.

 

During the first quarter of fiscal 2019, two leases were executed, each has an initial term of 20 years plus two five-year renewal options and includes allowances for tenant improvements. The leases are expected to commence in the second quarter of fiscal 2019. The undiscounted fixed payments over the initial terms are $16.4 million. We will assess the reasonably certain lease term at lease commencement date.

 

2.  Inventories

 

Inventories consisted of (in thousands):

 

		April 2, 2019			January 1, 2019
Restaurant food and supplies		$	19,182		$	18,362
Bakery finished goods and work in progress		16,327			13,845
Bakery raw materials and supplies		6,519			6,679
Total		$	42,028		$	38,886

 

3.  Gift Cards

 

The following tables present information related to gift cards (in thousands):

 

Gift card liabilities:

 

		Thirteen Weeks Ended April 2, 2019			Thirteen Weeks Ended April 3, 2018
Beginning balance		$	172,336		$	163,951
Activations		20,373			21,744
Redemptions and breakage		(46,964		)	(47,561		)
Ending balance		$	145,745		$	138,134

 

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Gift card contract assets: (1)

 

		Thirteen Weeks Ended April 2, 2019			Thirteen Weeks Ended April 3, 2018
Beginning balance		$	23,388		$	23,814
Deferrals		2,596			2,721
Amortization		(4,711		)	(4,817		)
Ending balance		$	21,273		$	21,718

 

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(1)                 Included in prepaid expenses on the condensed consolidated balance sheets.

 

4.  Leases

 

Components of lease expense were as follows (in thousands):

 

		Thirteen weeks ended April 2, 2019
Operating		$	26,427
Variable		16,335
Short-term		77
Total		$	42,839

 

Rent expense on all operating leases (under ASC 840) was as follows (in thousands):

 

		Thirteen weeks ended April 3, 2018
Straight-lined minimum base rent		$	20,747
Contingent rent		5,095
Common area maintenance and taxes		9,929
Total		$	35,771

 

Supplemental cash flow information related to leases (in thousands, except percentages):

 

		Thirteen weeks ended April 2, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases		$	24,213
Right-of-use assets obtained in exchange for new operating lease liabilities		5,768
Weighted-average remaining lease term — operating leases (in years)		17.2
Weighted-average discount rate — operating leases		5.2		%

 

As of April 2, 2019, the maturities of our operating lease liabilities are as follows (in thousands):

 

2019		$	73,887
2020		97,801
2021		95,773
2022		94,253
2023		93,107
Thereafter		1,174,579
Total future lease payments		$	1,629,400
Less: Interest		589,463
Present value of lease liabilities		$	1,039,937

 

As of January 1, 2019, the aggregate minimum annual lease payments under operating leases (under ASC 840), including amounts characterized as deemed landlord financing payments, were as follows (in thousands):

 

2019		$	93,792
2020		91,808
2021		88,829
2022		86,925
2023		81,929
Thereafter		495,091
Total		$	938,374

 

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5.  Long-Term Debt

 

We maintain a $200 million unsecured revolving credit facility (the “Facility”), $50 million of which may be used for issuances of letters of credit. Availability under the Facility is reduced by outstanding letters of credit, which are used to support our self-insurance programs. The Facility, which matures on December 22, 2020, contains a commitment increase feature that could provide for an additional $100 million in available credit upon our request and subject to the participating lenders electing to increase their commitments or new lenders being added to the Facility. Certain of our significant subsidiaries guarantee our obligations under the Facility. During the first quarter of fiscal 2019, we utilized the Facility to fund a portion of our stock repurchases. At April 2, 2019, we had net availability for borrowings of $159.3 million, based on a $20.0 million outstanding debt balance and $20.7 million in standby letters of credit.

 

We are subject to certain financial covenants under the Facility requiring us to maintain (i) a maximum “Net Adjusted Leverage Ratio” of 4.0 and (ii) a minimum EBITDAR (earnings before interest, taxes, depreciation and amortization, and rent) to interest and rental expense ratio (“EBITDAR Ratio”) of 1.9, with each of the capitalized terms in this Note 5 having the same meaning as defined in the Facility. The Facility limits cash distributions with respect to our equity interests, such as cash dividends and share repurchases, based on a defined ratio, and also sets forth negative covenants that restrict indebtedness, liens, investments, sales of assets, fundamental changes and other matters. Our Net Adjusted Leverage and EBITDAR Ratios were 3.1 and 2.5, respectively, at April 2, 2019, and we were in compliance with all covenants in effect at that date.

 

Borrowings under the Facility bear interest, at our option, at a rate per annum equal to either (i) the Adjusted LIBO Rate plus a margin ranging from 1.00% to 1.75% based on our Net Adjusted Leverage Ratio or (ii) the sum of (a) the highest of (1) the rate of interest publicly announced by JPMorgan Chase Bank as its prime rate in effect, (2) the greater of the Federal Funds Effective Rate or the Overnight Bank Funding Rate, in either case plus 0.5%, and (3) the one-month Adjusted LIBO Rate plus 1.0%, plus (b) a margin ranging from 0.00% to 0.75% based on our Net Adjusted Leverage Ratio. We also pay customary fees on the unused portion of the Facility and on our outstanding letters of credit.

 

6. Commitments and Contingencies

 

On December 10, 2015, a former restaurant management employee filed a class action lawsuit in the Los Angeles County Superior Court, alleging that the Company improperly classified its managerial employees, failed to pay overtime, and failed to provide accurate wage statements, in addition to other claims. The lawsuit seeks unspecified penalties under the California Labor Code Private Attorney General Act in addition to other monetary payments (Tagalogon v. The Cheesecake Factory Restaurants, Inc.; Case No. BC603620). On April 29, 2016, we filed a response to the complaint. We intend to vigorously defend this action. However, it is not possible at this time to reasonably estimate the outcome of or any potential liability from this matter and, accordingly, we have not reserved for any potential future payments.

 

On June 7, 2018, the California Department of Industrial Relations issued a $4.2 million wage citation jointly against the Company and its vendor that provides janitorial services to eight of our Southern California restaurants, alleging that the janitorial vendor or its subcontractor failed to comply with various provisions of the California Labor Code (Wage Citation Case No. 35-CM-188798-16). The wage citation seeks to recover penalties and other monetary payments on behalf of the employees that worked for this vendor or its subcontractor. On June 28, 2018, we filed an appeal of the wage citation. We intend to vigorously defend this action. However, it is not possible at this time to reasonably estimate the outcome of or any potential liability from this matter and, accordingly, we have not reserved for any potential future payments.

 

On June 22, 2018, the Internal Revenue Service issued a Notice of Deficiency in which they disallowed $8.0 million of our §199 Domestic Production Activities Deduction for tax years 2010, 2011 and 2012. On September 11, 2018 we petitioned the United States Tax Court for a redetermination of the deficiency. The tax court has assigned docket number 18150-18 to our case. We intend to vigorously defend our position in litigation and based on our analysis of the law, regulations and relevant facts, we have not reserved for any potential future payments.

 

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 customers, staff members and others related to operational and employment 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 and other intellectual property, both domestically and abroad. We could be affected by adverse publicity and litigation costs resulting from such allegations, regardless of whether they are valid or whether we are legally determined to be liable.

 

At this time, we believe that the amount of reasonably possible losses resulting from 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. Legal costs related to such claims are expensed as incurred.

 

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7. Stockholders’ Equity

 

On February 13, 2019, our Board of Directors (“Board”) approved a quarterly cash dividend of $0.33 per share that was paid on March 19, 2019 to the stockholders of record at the close of business on March 4, 2019. Future decisions to pay or to increase or decrease dividends are at the discretion of the Board and will be dependent on our operating performance, financial condition, capital expenditure requirements, limitations on cash distributions pursuant to the terms and conditions of our Facility and applicable law, and such other factors that our Board considers relevant. (See Note 5 for further discussion of our Facility.)

 

Under authorization by our Board to repurchase up to 56.0 million shares of our common stock, we have cumulatively repurchased 52.0 million shares at a total cost of $1,653.2 million through April 2, 2019, including 0.2 million shares at a cost of $11.1 million repurchased during the first quarter of fiscal 2019. Repurchased common stock is reflected as a reduction of stockholders’ equity in treasury stock.

 

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. Shares may be repurchased in the open market or through privately negotiated transactions at times and prices considered appropriate by us. 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 and growth capital contributions to North Italia and Flower Child, a review of our capital structure and cost of capital, our share price and current market conditions. The timing and number of shares repurchased are also subject to legal constraints and financial covenants under our Facility that limit share repurchases based on a defined ratio. (See Note 5 for further discussion of our long-term debt.) Our objectives regarding share repurchases are to offset the dilution to our shares outstanding that results from equity compensation grants and to supplement our earnings per share growth.

 

8.  Stock-Based Compensation

 

On April 5, 2017, our Board approved an amendment to our 2010 Stock Incentive Plan to increase the number of shares of common stock available for grant under the plan to 12.7 million shares from 9.2 million shares. This amendment was approved by our stockholders at our annual meeting held on June 8, 2017. This is our only stock-based incentive plan pursuant to which awards are currently granted, and approximately 1.9 million of these shares were available for grant as of April 2, 2019.

 

The following table presents information related to stock-based compensation, net of forfeitures (in thousands):

 

		Thirteen Weeks Ended April 2, 2019			Thirteen Weeks Ended April 3, 2018
Labor expenses		$	1,720		$	1,599
Other operating costs and expenses		69			64
General and administrative expenses		4,058			4,350
Total stock-based compensation		5,847			6,013
Income tax benefit		1,438			1,500
Total stock-based compensation, net of taxes		$	4,409		$	4,513
Capitalized stock-based compensation (1)		$	63		$	70

 

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

 

Stock Options

 

The weighted average fair value at the grant date for options issued during the first quarter of fiscal 2019 and 2018 was $9.90 and $11.58 per share, respectively. The fair value of options was estimated utilizing the Black-Scholes valuation model with the following weighted average assumptions for the first quarter of fiscal 2019 and 2018, respectively: (a) an expected option term of 6.9 in both years, (b) expected stock price volatility of 26.3% and 27.8%, (c) a risk-free interest rate of 2.6% and 2.8% and (d) a dividend yield on our stock of 2.9% and 2.5%.

 

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Stock option activity during the thirteen weeks ended April 2, 2019 was as follows:

 

		Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (1)
		(In thousands)		(Per share)			(In years)		(In thousands)
Outstanding at January 1, 2019		1,799		$	45.03		4.1		$	5,606
Granted		300		46.03
Exercised		(189	)	29.38
Forfeited or cancelled		—		—
Outstanding at April 2, 2019		1,910		$	46.74		4.8		$	5,587
Exercisable at April 2, 2019		1,071		$	45.03		3.3		$	4,592

 

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(1)               Aggregate intrinsic value is calculated as the difference between our closing stock price at fiscal period end and the exercise price, multiplied by the number of in-the-money options and represents the pre-tax amount that would have been received by the option holders, had they all exercised their options on the fiscal period end date.

 

The total intrinsic value of options exercised during the thirteen weeks ended April 2, 2019 and April 3, 2018 was $3.4 million and $0.4 million, respectively. As of April 2, 2019, total unrecognized stock-based compensation expense related to unvested stock options was $9.1 million, which we expect to recognize over a weighted average period of approximately 4.7 years.

 

Restricted Shares and Restricted Share Units

 

Restricted share and restricted share unit activity during the thirteen weeks ended April 2, 2019 was as follows:

 

		Shares		Weighted Average Fair Value
		(In thousands)		(Per share)
Outstanding at January 1, 2019		1,702		$	48.08
Granted		359		46.03
Vested		(241	)	46.17
Forfeited		(22	)	47.70
Outstanding at April 2, 2019		1,798		$	47.91

 

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 for restricted shares and restricted share units issued during the first quarter of fiscal 2019 and fiscal 2018 was $46.03 and $47.06, respectively. The fair value of shares that vested during the thirteen weeks ended April 2, 2019 and April 3, 2018 was $11.1 million and $10.4 million, respectively. As of April 2, 2019, total unrecognized stock-based compensation expense related to unvested restricted shares and restricted share units was $46.8 million, which we expect to recognize over a weighted average period of approximately 3.3 years.

 

9.  Net Income Per Share

 

Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, reduced by unvested restricted stock awards. As of both April 2, 2019 and April 3, 2018, 1.8 million shares of restricted stock issued to staff members were unvested and, therefore, excluded from the calculation of basic earnings per share for the fiscal periods ended on those dates. Diluted net income per share includes the dilutive effect of outstanding equity awards, calculated using the treasury stock method. Shares of common stock equivalents of 2.0 million and 1.7 million for April 2, 2019 and April 3, 2018, respectively, were excluded from the diluted calculation due to their anti-dilutive effect.

 

		Thirteen Weeks Ended April 2, 2019			Thirteen Weeks Ended April 3, 2018
		(In thousands, except per share data)
Net income		$	26,984		$	26,029
Basic weighted average shares outstanding		44,255			45,552
Dilutive effect of equity awards		729			1,022
Diluted weighted average shares outstanding		44,984			46,574
Basic net income per share		$	0.61		$	0.57
Diluted net income per share		$	0.60		$	0.56

 

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10.  Segment Information

 

For decision-making purposes, our management reviews discrete financial information for The Cheesecake Factory, Grand Lux Cafe, RockSugar Southeast Asian Kitchen and Social Monk Asia Kitchen restaurants, our bakery division, consumer packaged goods and international licensing operations. 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. The other segments noted above are combined in “Other.” Unallocated corporate expenses, assets and capital expenditures are presented below as reconciling items to the amounts presented in the condensed consolidated financial statements.

 

Segment information is presented below (in thousands):

 

		Thirteen Weeks Ended April 2, 2019			Thirteen Weeks Ended April 3, 2018
Revenues:
The Cheesecake Factory restaurants		$	548,633		$	535,123
Other		50,848			49,574
Total		$	599,481		$	584,697
Income/(loss) from operations:
The Cheesecake Factory restaurants		$	61,245		$	61,566
Other		5,325			6,362
Corporate		(36,422		)	(36,377		)
Total		$	30,148		$	31,551
Depreciation and amortization:
The Cheesecake Factory restaurants		$	17,608		$	20,190
Other		2,402			2,548
Corporate		1,352			1,264
Total		$	21,362		$	24,002
Additions to property and equipment:
The Cheesecake Factory restaurants		$	11,892		$	19,466
Other (1)		683			10,578
Corporate		776			644
Total		$	13,351		$	30,688

 

		April 2, 2019			January 1, 2019
Total assets:
The Cheesecake Factory restaurants		$	1,585,203		$	928,345
Other		227,060			164,972
Corporate		263,817			220,816
Total		$	2,076,080		$	1,314,133

 

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(1)               The thirteen weeks ended April 3, 2018 include costs related to an infrastructure modernization of our California bakery facility.

 

11.  Subsequent Events

 

On April 25, 2019, our Board declared a quarterly cash dividend of $0.33 per share to be paid on May 29, 2019 to the stockholders of record at the close of business on May 16, 2019.

 

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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 Securities and Exchange Commission (“SEC”), as well as information included in oral or written statements made by us or on our behalf, may contain forward-looking statements about our current and presently expected performance trends, growth plans, business goals and other matters.

 

These statements may be contained in our filings with the SEC, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers. These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (together with the Securities Act, the “Acts”). This includes, without limitation, financial guidance and projections and statements with respect to expectations of our future financial condition, results of operations, cash flows, plans, targets, goals, objectives, performance, growth potential, competitive position and business; and our ability to: leverage our competitive strengths, including investing in or acquiring new restaurant concepts and expanding The Cheesecake Factory ®  brand to other retail opportunities; deliver comparable sales growth; provide a differentiated experience to customers; outperform the casual dining industry and increase our market share; leverage sales increases and manage flow through; manage cost pressures, including increasing wage rates, insurance costs and legal expenses, and stabilize margins; grow earnings; remain relevant to consumers; attract and retain qualified management and other staff; manage risks associated with the magnitude and complexity of regulations in the jurisdictions where our restaurants are located; increase shareholder value; find suitable sites and manage increasing construction costs; profitably expand our concepts domestically and in Canada, and work with our licensees to expand our concept internationally; support the growth of North Italia and Flower Child restaurants; operate Social Monk Asian Kitchen; and utilize our capital effectively and continue to increase cash dividends and repurchase our shares. These forward-looking statements also may be affected by factors outside of our control including: economic and political conditions that impact consumer confidence and spending; impact of recently enacted tax reform; acceptance and success of The Cheesecake Factory in international markets; acceptance and success of the North Italia, Flower Child and Social Monk Asian Kitchen concepts; the risks of doing business abroad through Company-owned restaurants and/or licensees; foreign exchange rates, tariffs and cross border taxation; changes in unemployment rates; changes in laws impacting our business, including increases in minimum wages and benefit costs; the economic health of our landlords and other tenants in retail centers in which our restaurants are located; the economic health of suppliers, licensees, vendors and other third parties providing goods or services to us; adverse weather conditions in regions in which our restaurants are located; factors that are under the control of government agencies, landlords and other third parties; the risk, costs and uncertainties associated with opening new restaurants; and other risks and uncertainties detailed from time to time in our filings with the SEC. Such forward-looking statements include all other statements that are not historical facts, as well as statements that are preceded by, followed by or that include words or phrases such as “believe,” “plan,” “will likely result,” “expect,” “intend,” “will continue,” “is anticipated,” “estimate,” “project,” “may,” “could,” “would,” “should” and similar expressions. These statements are based on our current expectations and involve risks and uncertainties which may cause results to differ materially from those set forth in such statements.

 

In connection with the “safe harbor” provisions of the Acts, we have identified and are disclosing important factors, risks and uncertainties that could cause our actual results to differ materially from those projected in forward-looking statements made by us, or on our behalf. (See Part II, Item 1A of this report, “Risk Factors,” and Part I, Item 1A, “Risk Factors,” included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2019.) These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC. Because of these factors, risks and uncertainties, we caution against placing undue reliance on forward-looking statements. Although we believe that the assumptions underlying forward-looking statements are currently reasonable, any of the assumptions could be incorrect or incomplete, and there can be no assurance that forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by law.

 

General

 

This discussion and analysis, which contains forward-looking statements, should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes in Part I, Item 1 of this report and with the following items included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2019: the audited consolidated financial statements and related notes in Part IV, Item 15; the “Risk Factors” included in Part I, Item 1A; the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7; and the cautionary statements included throughout this 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.

 

Our business operates in the upscale casual dining segment of the restaurant industry. As of May 6, 2019, we operated 219 Company-owned restaurants: 202 under The Cheesecake Factory ®  mark, 14 under the Grand Lux Cafe ®  mark, two under the RockSugar Southeast Asian Kitchen ®  mark and one under the Social Monk Asian Kitchen TM  mark. In addition, 20 The Cheesecake Factory branded restaurants in the Middle East, Mexico, the Chinese Mainland and the Special Administrative Region of Hong Kong were operated by third parties under licensing agreements; one location in the Middle East closed in preparation for a relocation later in fiscal 2019. We also operated two bakery production facilities that produce desserts for our restaurants, international licensees and third-party bakery customers. We are selectively pursuing other means to leverage our competitive strengths, including investing in or acquiring new restaurant concepts (such as North Italia ®  and Flower Child ® ), expanding The Cheesecake Factory ®  brand to other retail opportunities through The Cheesecake Factory At Home ®  consumer packaged goods and evaluating the future potential of Social Monk Asian Kitchen, our new fast casual concept.

 

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Overview

 

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

 

Investing in new Company-owned restaurant development is our top capital allocation priority, with a focus on opening our concepts in premier locations within both new and existing markets in the United States and Canada. We target an average cash-on-cash return on investment of approximately 20% to 25% at the unit level. Returns are affected by the cost to build restaurants, the level of revenues that each restaurant can deliver and our ability to maximize the profitability of restaurants. Investing in new restaurant development that meets our return on investment criteria is expected to support achieving mid-teens Company-level return on invested capital.

 

Our domestic revenue growth (comprised of our annual unit growth and comparable sales growth), combined with international expansion, contribution from our incremental growth opportunities, stabilization and expansion of our operating margins, a robust share repurchase program and our dividend supports our long-term financial objective of 13% to 14% total return to shareholders, on average. We define our total return as earnings per share growth plus our dividend yield. The following are the key performance levers that we believe will contribute to achieving our goals:

 

·              Grow Overall Revenues.  Our overall revenue growth is primarily driven by revenues from new restaurant openings, increases in comparable restaurant sales, and royalties and bakery sales from additional licensed international locations. Changes in comparable restaurant sales come from variations in customer traffic, as well as in average check.

 

Our strategy is to increase comparable restaurant sales by growing average check and stabilizing customer traffic through (1) continuing to offer innovative, high quality menu items that offer customers a wide range of options in terms of flavor, price and value (2) focusing on service and hospitality with the goal of delivering an exceptional customer experience and (3) continuing to provide our customers with convenient options for off-premise dining. We are continuing our efforts on a number of initiatives, including a greater focus on increasing customer throughput in our restaurants, leveraging the success of our gift card program, working with a third party to provide delivery services for our restaurants, increasing customer awareness of our online ordering capabilities, augmenting our marketing programs, enhancing our training programs and leveraging our customer satisfaction measurement platform.

 

Average check is driven by menu price increases and/or changes in menu mix. We generally update and reprint our menus twice a year, and our philosophy is to use price increases to help offset key operating cost increases in a manner that balances protecting both our margins and customer traffic levels. We plan to continue targeting menu price increases of approximately 2% to 3% annually going forward, utilizing a market-based strategy to help mitigate cost pressure in higher-wage geographies, and expect near-term increases to be at the higher end of this range.

 

In addition, we are selectively pursuing a number of incremental growth opportunities. These include: our investments in North Italia ®  and Flower Child ® ; consumer packaged goods opportunities, including The Cheesecake Factory At Home ® -branded Famous “Brown Bread,” coffee creamer, baking mixes, confections and refrigerated puddings; and the opening of the first location of Social Monk Asian Kitchen ® , which will allow us to test the concept and evaluate its future potential.

 

·                 Stabilize and Expand Margins. Margins are subject to fluctuations in commodity costs, labor, restaurant-level occupancy expenses, general and administrative (“G&A”) expenses and preopening expenses. Our objective is to stabilize our margins, and longer-term to drive margin expansion by maintaining flat restaurant-level margins, leveraging our bakery operations, international and consumer packaged goods royalty revenue streams and G&A expense over time, and optimizing our restaurant portfolio.

 

·                 Return Capital to Shareholders . We have historically generated a significant amount of free cash flow, which we define as cash flow provided by operating activities less net capital expenditures and our growth capital contributions to North Italia ®  and Flower Child ® . We plan to balance these growth investments with continued return of capital to shareholders via our dividend and share repurchase program, the latter of which offsets dilution from our equity compensation program and supports our earnings per share growth. Our ability to declare dividends and repurchase shares is subject to financial covenants under our Facility.

 

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Results of Operations

 

The following table presents, for the periods indicated, information from our condensed consolidated statements of income expressed as percentages of revenues. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any other interim period or for the full fiscal year.

 

		Thirteen Weeks Ended April 2, 2019		Thirteen Weeks Ended April 3, 2018
Revenues		100.0	%	100.0	%
Costs and expenses:
Cost of sales		22.7		23.0
Labor expenses		36.2		35.8
Other operating costs and expenses		25.6		24.8
General and administrative expenses		6.5		6.7
Depreciation and amortization expenses		3.6		4.1
Preopening costs		0.4		0.2
Total costs and expenses		95.0		94.6
Income from operations		5.0		5.4
Loss on investments in unconsolidated affiliates		(0.2	)	(0.0	)
Interest and other income/(expense), net		(0.0	)	(0.3	)
Income before income taxes		4.8		5.1
Income tax provision		0.3		0.6
Net income		4.5	%	4.5	%

 

Thirteen Weeks Ended April 2, 2019 Compared to Thirteen Weeks Ended April 3, 2018

 

Revenues

 

Revenues increased 2.5% to $599.5 million for the thirteen weeks ended April 2, 2019 compared to $584.7 million for the thirteen weeks ended April 3, 2018, primarily due to new restaurant openings and positive comparable restaurant sales.

 

Comparable sales at The Cheesecake Factory restaurants increased by 1.3%, or $6.8 million, from the first quarter of fiscal 2018. This compares to the casual dining industry which experienced a comparable sales increase of 0.9%, as measured by Knapp Track. Our comparable sales growth was driven by average check growth of 3.8% (based on increases of 3.0% in menu pricing and 0.8% in mix), partially offset by a decline in customer traffic of 2.5%. We implemented effective menu price increases of approximately 1.6% and 1.5% in the first quarter of fiscal 2019 and third quarter of fiscal 2018, respectively. The Cheesecake Factory average sales per restaurant operating week increased 1.5% to $209,963 in the first quarter of fiscal 2019 from $206,851 in the first quarter of fiscal 2018. Total operating weeks at The Cheesecake Factory restaurants increased 1.0% to 2,613 for the thirteen weeks ended April 2, 2019 compared to 2,587 for the comparable prior year period.

 

Restaurants become eligible to enter our comparable sales base in their 19th month of operation. At April 2, 2019, there were eight The Cheesecake Factory restaurants, one Grand Lux Cafe, one RockSugar Southeast Asian Kitchen and one Social Monk Asian Kitchen not yet in our comparable sales base. International licensed locations and restaurants that are no longer in operation, including those which we have relocated, are excluded from our comparable sales calculations.

 

External bakery sales were $12.9 million for the first quarter of fiscal 2019 compared to $12.4 million in the comparable prior year period.

 

Cost of Sales

 

Cost of sales consists of food, beverage, retail and bakery production supply costs incurred in conjunction with our restaurant and bakery revenues, and excludes depreciation, which is captured separately in depreciation and amortization expenses. As a percentage of revenues, cost of sales was 22.7% for the first quarter of fiscal 2019 compared to 23.0% for the comparable period of fiscal 2018, primarily driven by lower dairy costs.

 

The Cheesecake Factory 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 sometimes can be offset by cost changes in other commodity categories. The principal commodity categories for our restaurants include general grocery items, dairy, produce, seafood, poultry, meat and bread. (See the discussion of our contracting activities in Item 3 — “Quantitative and Qualitative Disclosures About Market Risk.”)

 

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