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Cheesecake Factory (CAKE) Banks on Off-premise Model, Costs High

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·5 min read
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  • CAKE
  • DRI
  • PZZA
  • KRUS

The Cheesecake Factory Incorporated CAKE is likely to benefit from off-premise business model, solid comps growth and unit-expansion initiatives. However, a rise in cost of sales inflation along with coronavirus-related woes is a concern.

Let us discuss the factors highlighting why investors should retain on to the stock for the time being.

Factors Driving Growth

Cheesecake Factory continues to benefit from its robust off-premise sales. In the first, the second and the third quarter of fiscal 2021, off-premise contributed approximately 43%, 27% and 28%, respectively, to Cheesecake Factory’s total restaurant sales. The company stated that the off-premise sales mix (as of third-quarter fiscal 2021) remains elevated from the pre-pandemic level of 15% (as of the third quarter of fiscal 2019). Also, off-premise average weekly sales have doubled compared with fiscal 2019 levels. It continues to perform well in the delivery channel. In order to boost consumer convenience, the company implemented operational changes and technology upgrades, which include contactless menu and payment technology as well as text paging. We believe that a boost in customer count coupled with targeted off-premise marketing is likely to drive the channel’s performance in the upcoming periods.

The company is also benefiting from impressive comps performance. During the first, the second and the third quarter of fiscal 2021, comps at Cheesecake Factory (across all operating models) increased approximately 220%, 150% and 41.1%, respectively, year over year. Comps in the respective quarters climbed 7%, 7.8% and 8.3%, respectively, from 2019 levels. Solid off-premise sales were a primary contributor to the company’s performance. Nevertheless, the company stated that the momentum had continued in fourth-quarter fiscal 2021. Since the start of the fiscal fourth quarter to Nov 2, 2021, comps at Cheesecake Factory (across all operating models) increased approximately 20% year over year. Comps also increased 10.5% from 2019 levels.

The Zacks Rank #3 (Hold) company continues to focus on the development front to drive growth. During the fiscal third quarter, the company opened four new restaurants, including North Italia and Flower Child in Phoenix, North Italia in Nashville and Blanco in Chicago. It also opened a Cheesecake Factory restaurant in Shanghai under a licensing agreement. Subsequent to the quarter end, the company opened the North Italia store in the Orlando area, Blanco and Culinary Dropout in Denver and one Cheesecake Factory restaurant in Huntsville, AL. Despite the pandemic and associated challenges, the company achieved its development objective of opening 14 new restaurants (across its concepts) in fiscal 2021. Also, the company witnessed solid demand with respect to its openings. Going forward, it expects to open 20 new restaurants with anticipated modeling at five Cheesecake Factory restaurants, seven North Italias, four Flower Child locations and four FRC restaurants. With a strong pipeline in place, the company anticipates achieving unit growth of 7% in the upcoming year.

Nearly after a year of closing its acquisition, Fox Restaurant Concepts or FRC not only reinforced its confidence and strength amid the ongoing pandemic, but also paved the path for long-term growth. The in-restaurant kiosk technology enables a faster ordering experience and features artificial intelligence that learns individual guest behaviour to provide an enhanced experience. FRC plans to incorporate this technology at future Flower Child locations, complementing the traditional ordering mechanism. On its third-quarter conference call, the company announced that FRC delivered stronger sales and margin performance during the quarter and fourth quarter-to-date sales have improved further.

Concerns

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Shares of Cheesecake Factory have fallen 6.5% in the past year against the industry’s 8.4% growth. The dismal performance was caused by the coronavirus pandemic. Although the company resumed operations in all of its restaurants, the possibility of additional outbreaks can lead to reduced capacity, implementation of social distancing protocols as well as further suspension of in-restaurant dining operations.

Moreover, fluctuations in commodity costs, labor, restaurant-level occupancy expenses, general and administrative expenses and preopening expenses are a concern. For fourth-quarter fiscal 2021, the company anticipates cost of sales inflation to be 6%. The figure suggests a rise of three percentage points from the previous quarter’s levels.

Key Restaurant Picks

Papa John's International, Inc. PZZA currently carries a Zacks Rank #2 (Buy). The company has been benefiting from its off-premise business model. Sales at off-premise business model have exceeded pre-pandemic levels. We believe that a boost in customer count coupled with targeted off-premise marketing is likely to drive the channel’s performance in the upcoming periods.

Papa John's has reported better-than-expected earnings in three of the trailing four quarters, the average surprise being 27.2%. The company’s fiscal 2021 earnings is likely to witness growth of 138.6%. PZZA stock has gained 48.2% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Darden Restaurants, Inc. DRI currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 15.3%, on average. Shares of the company have gained 21.2% in the past year.

The Zacks Consensus Estimate for Darden Restaurants’ current financial year sales and earnings per share (EPS) suggests an improvement of 32.5% and 76.8%, respectively, from the year-ago period’s levels.

Kura Sushi USA, Inc. KRUS carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 15.6%, on average. Shares of the company have soared 225.1% in the past year.

The Zacks Consensus Estimate for Kura Sushi’s current financial-year sales and EPS suggests growth of 108% and 85.7%, respectively, from the year-ago period’s levels.


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