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Cheesecake Factory Rides on Menu Innovation Amid High Costs

Zacks Equity Research
The restaurant industry is buzzing, thanks to recent partnerships with delivery channels like DoorDash, Grubhub, Postmates and Uber Eats, rollout of self-service kiosks and loyalty programs.

The Cheesecake Factory Incorporated CAKE banks on extensive menu innovation and expansion strategies to drive topline growth. The company is committed to bolstering its sales in order to stay afloat in the competitive environment. However, rising expenses have been a major concern for the company.

In the first quarter of 2019, Cheesecake Factory’s earnings and revenues were driven by comps growth. The company’s sales-building initiatives as well as cost containment also provided a boost to the company’s quarterly results.

Sales Building Efforts Aid

Cheesecake Factory’s efforts to improve guest experience have been stabilizing sales trend from the fourth quarter of 2017. In 2018, total revenues grew 3.2% compared with the prior-year level, on the back of increased comparable sales. In the first quarter of 2019, the company’s revenues increased 2.5% year over year. Notably, menu-innovation and advanced digital capabilities are the primary fortes of the company.

On the menu innovation front, Super Foods program has increased consumer awareness of brands. The company launched its brown bread in grocery stores in the Southeast with nationwide distribution capabilities. Going forward, the company intends to carry on with menu innovation by adding new Super Food items as well as the famous indulgences of The Cheesecake Factory.

Cheesecake Factory’s technology-enabled initiatives are doing well with feedback on its mobile payment app, CakePay, being positive. The company continues to improve its to-go business including online ordering capability. This is a major contributor to growth of the company’s strong off-premise sales channels. Resultantly, its off-premise business reached 14% of total sales in 2018 compared with 12% in 2017. Also, in the first quarter of 2019, off-premise business reached 16% of total sales.

In order to boost comps, Cheesecake Factory is focusing on improving its speed of service and training its servers so that they render higher level of service. In the first quarter, earnings and revenues improved year over year on increased comparable sales. While comps at Cheesecake Factory restaurants increased 1.3% in the quarter, the same rose 2.1% in the year-ago quarter.

Concerns

Of late, Cheesecake Factory’s profits have been under pressure owing to a rising wage rates scenario. Moreover, pre-opening costs of outlets given the company’s unit expansion plans, and expenses related to sales initiatives are adding to the costs and likely to hurt profits. In 2018, labor expense ratio was 35.8%, up 140 bps from the previous year. 

Moreover, in the first quarter of 2019, cost of sales ratio decreased 30 basis points (bps) year over year to 22.7%. Meanwhile, labor expense ratio was 36.2%, up 40 bps from the year-ago quarter. Other operating costs were 25.6% of revenues, up 80 bps from the year-ago quarter. General and administrative (G&A) expenses accounted for 6.5% of revenues, down 20 bps from the prior-year quarter. Notably, pre-opening expenses increased 20 bps year over year to 0.4% in the first quarter.

For 2019, the company projects food inflation of 1-2%, particularly across poultry, dairy, bread and seafood. Wage inflation is anticipated to be about 6%.

Meanwhile, the industry is highly competitive, with bigwigs like McDonald’s MCD, Domino’s DPZ and Starbucks SBUX making pragmatic use of advanced technologies to innovate across value chains. Amid such stiff competition, Cheesecake Factory is continuously facing pressure to innovate and strategize its offerings.

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The Cheesecake Factory Incorporated (CAKE) : Free Stock Analysis Report
 
Domino's Pizza Inc (DPZ) : Free Stock Analysis Report
 
Starbucks Corporation (SBUX) : Free Stock Analysis Report
 
McDonald's Corporation (MCD) : Free Stock Analysis Report
 
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