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Cheesecake Factory Banks on Off-Premise Sales, Costs High

Zacks Equity Research
·5 min read

The Cheesecake Factory Incorporated CAKE continues to focus on off-premise services and digitization to revive the top line. Moreover, the company stated that it possesses enough liquidity to survive the coronavirus pandemic for some time. In the past three months, shares of the company have rallied 20.9% compared with the industry’s 6.7% growth. However, rise in labor and other operating expenses along with coronavirus-related woes are concerns.

Let us delve into factors highlighting why investors should hold on to the stock for the time being.

Factors Driving Growth

Cheesecake Factory has implemented several sales-building initiatives which have contributed to the company’s performance in the past few weeks. On Jun 2, the company provided an operational update, thereafter witnessing significant improvement in its business. 

With 25% of its dining rooms reopened, the company’s restaurants have recaptured approximately 75% of prior-year sales levels (on average). This indicates continued strength in off-premise sales and dine-in business. 

Although comps for the fiscal second quarter to date (through May 31) were down by approximately 63%, the company is generating weekly off-premise sales on average of nearly $4 million per unit on an annualized basis. Going forward, the company expects to reopen majority of its dining rooms with limited capacity. 

Cheesecake Factory’s technology-enabled initiatives are doing well with feedback on its mobile payment app, CakePay, being positive. The company signed an exclusive national delivery partnership with DoorDash. It expects to reap benefits from these collaborative marketing opportunities. The company is also witnessing incremental sales from its delivery service, which continues to roll out nationwide.

The company continues to improve its to-go business that includes online ordering capability. This is a major contributor to growth of the company’s strong off-premise sales channels. Hence, its off-premise business contributed 14% to total sales in 2018 compared with 12% in 2017. Further, off-premise business comprised 17% of total sales in fourth-quarter 2019. The uptrend continued in first-quarter 2020, as off-premise sales made up nearly 22% of Cheesecake Factory sales. The off-premise sales are currently the backbone of the company as dine-in services have been closed due to the pandemic. Currently, digitalization represents 80% of the company’s sales.

The Zacks Rank #3 (Hold) company stated that it possesses enough liquidity to survive the coronavirus pandemic for some time. As of Apr 30, 2020, the company’s cash balance totaled nearly $260 million. The company anticipates $40 million cash inflow in fiscal 2021 from the NOL carryback provision in The CARES Act. At the end of first-quarter 2020, the company had long-term debt of $380 million. The company believes that it has sufficient liquidity to withstand an off-premise-only operating model for the next 18 to 24 months.

Concerns

The coronavirus outbreak has rattled the Retail - Restaurants industry, and Cheesecake Factory is not immune to the aftereffects. Thanks to the uncertainty of the crisis, the company suspended its dividend payout and share buyback programs. Also, dismal traffic due to social distancing protocols is likely to hurt the company going forward.

Moreover, the company has been continuously shouldering increased expenses, which have been detrimental to margins. Higher marketing expenses and costs related to sales-boosting initiatives are putting pressure on the company’s margins. The company is also facing high general and administrative expenses.

In first-quarter 2020, labor costs — as a percentage of sales — increased 250 basis points (bps) to 38.7%. Other operating costs (as a percentage of sales) were 27.3%, up 170 bps year over year.

Zacks Rank & Key Picks

Cheesecake Factory currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Dine Brands Global, Inc. DIN, Papa John's International, Inc. PZZA and Yum China Holdings, Inc. YUMC, each sporting a Zacks Rank #1.

Earnings in 2021 for Dine Brands are expected to surge 206.6%.

Papa John's has a three to five-year earnings per share growth rate of 8%.

Yum China has a trailing four-quarter earnings surprise of 62.9%, on average. The company’s earnings beat the Zacks Consensus Estimate in the last four quarters.

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The Cheesecake Factory Incorporated (CAKE) : Free Stock Analysis Report
 
DINE BRANDS GLOBAL, INC. (DIN) : Free Stock Analysis Report
 
Papa Johns International, Inc. (PZZA) : Free Stock Analysis Report
 
Yum China Holdings Inc. (YUMC) : Free Stock Analysis Report
 
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