What happened
Casual dining restaurant chain The Cheesecake Factory (CAKE 0.26%) is raising $475 million, but it's not going toward growing or operating the business. Rather, the company will use the money to simplify its stock structure. That's a lot of cash with little perceived benefit to common shareholders, which is why the stock was down 10% as of 11:45 a.m. EDT.
So what
Prior to today's drop, The Cheesecake Factory stock was trading near its all-time high, so it's a little hard to criticize management for taking advantage of its high stock price to raise cash. The company is looking to raise $175 million from selling new shares to the public. The other $300 million will come from offering convertible senior notes that will be due in 2026.
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There are 200,000 outstanding Series A convertible preferred shares of The Cheesecake Factory. The company is buying out 150,000 of these for $447 million. The remaining 50,000 are converting to common shares and getting $10.4 million on top. There could be a little money left over, depending on how much it actually raises -- today's announcement is just the plan. But if there is extra cash, the company will look to pay down a little debt.
As a reminder, these 200,000 shares were issued during 2020 to increase The Cheesecake Factory's liquidity as the restaurant industry faced a very uncertain operating environment.
Now what
The Cheesecake Factory reported a net loss of $277 million in 2020. But if it's any consolation, much of this was due to noncash impairment charges on its assets. Full-year revenue was down only 20% year over year, which is better than how some other casual-dining chains did. Furthermore, its long-term debt actually decreased $10 million to $280 million, which is manageable.
Finally, The Cheesecake Factory is back to growth. On June 2 the company noted that sales for the second quarter of 2021 were trending higher than where they were two years ago, before the pandemic. Therefore, it's fair to say it didn't need a capital raise for corporate purposes right now. The stock is down today mainly because of dilution, which will hopefully not be an issue in the near future.
