Restaurant company Cheesecake Factory (NASDAQ:CAKE) reported results in line with analysts' expectations in Q1 CY2024, with revenue up 2.9% year on year to $891.2 million. It made a non-GAAP profit of $0.73 per share, improving from its profit of $0.61 per share in the same quarter last year.
The Cheesecake Factory (CAKE) Q1 CY2024 Highlights:
- Revenue: $891.2 million vs analyst estimates of $889.9 million (small beat)
- EPS (non-GAAP): $0.73 vs analyst estimates of $0.64 (14.6% beat)
- Gross Margin (GAAP): 41.2%, up from 40.2% in the same quarter last year
- Same-Store Sales were down 0.6% year on year (in line with expectations)
- Store Locations: 336 at quarter end, decreasing by 12 over the last 12 months
- Market Capitalization: $1.73 billion
Celebrated for its delicious (and free) brown bread, gigantic portions, and delectable desserts, Cheesecake Factory (NASDAQ:CAKE) is an iconic American restaurant chain that also owns and operates a portfolio of separate restaurant brands.
Cheesecake Factory’s origins trace back to 1972 when founder David Overton opened The Cheesecake Factory Bakery, where he produced cheesecakes and other desserts for local restaurants. The company was officially founded when David opened his first restaurant in Beverly Hills, California, expanding its menu to include sandwiches and salads.
Since its humble beginnings, Cheesecake Factory has stretched its menu (typically over 21 pages) to accommodate a wide range of tastes and preferences. Diners can indulge in anything from the Macaroni and Cheese Burger to Shrimp and Chicken Gumbo or even Orange Chicken. Most importantly, there are now over 40 different types of cheesecake creations to choose from, including Ultimate Red Velvet and Chocolate Caramelicious.
As Cheesecake Factory has grown to include over 200 locations across the United States, it’s also used its profits to acquire complementary restaurant banners. These include Italian eatery North Italia, upscale American-inspired Grand Lux Cafe, and holding company Fox Restaurant Concepts, which owns over 10 unique restaurant chains.
The target market for restaurants in the Cheesecake Factory family is suburban areas, and each is designed to create an inviting ambiance for its guests regardless of the occasion.
Sit-Down Dining
Sit-down restaurants offer a complete dining experience with table service. These establishments span various cuisines and are renowned for their warm hospitality and welcoming ambiance, making them perfect for family gatherings, special occasions, or simply unwinding. Their extensive menus range from appetizers to indulgent desserts and wines and cocktails. This space is extremely fragmented and competition includes everything from publicly-traded companies owning multiple chains to single-location mom-and-pop restaurants.
Multi-brand full-service restaurant competitors include Bloomin’ Brands (NASDAQ:BLMN), Brinker International (NYSE:EAT), Darden (NYSE:DRI), Dine Brands (NYSE:DIN), and Texas Roadhouse (NASDAQ:TXRH).Sales Growth
The Cheesecake Factory is one of the larger restaurant chains in the industry and benefits from a strong brand, giving it customer mindshare and influence over purchasing decisions.
As you can see below, the company's annualized revenue growth rate of 8% over the last five years was decent as it opened new restaurants and grew sales at existing, established dining locations.
This quarter, The Cheesecake Factory grew its revenue by 2.9% year on year, and its $891.2 million in revenue was in line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 6.1% over the next 12 months, an acceleration from this quarter.
Same-Store Sales
A company's same-store sales growth shows the year-on-year change in sales for its restaurants that have been open for at least a year, give or take. This is a key performance indicator because it measures organic growth and demand.
The Cheesecake Factory's demand within its existing restaurants has generally risen over the last two years but lagged behind the broader sector. On average, the company's same-store sales have grown by 2.8% year on year. With positive same-store sales growth amid an increasing number of restaurants, The Cheesecake Factory is reaching more diners and growing sales.
In the latest quarter, The Cheesecake Factory's year on year same-store sales were flat. By the company's standards, this growth was a meaningful deceleration from the 5.7% year-on-year increase it posted 12 months ago. We'll be watching The Cheesecake Factory closely to see if it can reaccelerate growth.
Number of Stores
When a chain like The Cheesecake Factory is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. The last 12 months have been an exception, however, as The Cheesecake Factory closed 12 locations, bringing its total restaurant count to 336 in the most recently reported quarter.
Over the last two years, The Cheesecake Factory has opened new restaurants and averaged 2.6% annual growth in new locations, higher than other restaurant businesses. Comparisons, however, should be taken with a grain of salt as the industry is quite mature. Analyzing a restaurant's location growth is important because expansion means The Cheesecake Factory has more opportunities to feed customers and generate sales.
Gross Margin & Pricing Power
We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.
The Cheesecake Factory's gross profit margin came in at 41.2% this quarter. in line with the same quarter last year. This means the company makes $0.40 for every $1 in revenue before accounting for its operating expenses.
The Cheesecake Factory has great unit economics for a restaurant company, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see above, it's averaged an impressive 40.1% gross margin over the last eight quarters. Its margin has also been trending up over the last 12 months, averaging 5.5% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more stable input costs (such as ingredients and transportation expenses).
Operating Margin
Operating margin is a key profitability metric for restaurants because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
In Q1, The Cheesecake Factory generated an operating profit margin of 4.4%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.
Zooming out, The Cheesecake Factory was profitable over the last two years but held back by its large expense base. Its average operating margin of 2.3% has been paltry for a restaurant business. However, The Cheesecake Factory's margin has improved, on average, by 2 percentage points each year, an encouraging sign for shareholders. The tide could be turning.EPS
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q1, The Cheesecake Factory reported EPS at $0.73, up from $0.61 in the same quarter a year ago. This print beat Wall Street's estimates by 14.6%.
On the bright side, Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 12.7% year-on-year increase in EPS.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).
The Cheesecake Factory's five-year average ROIC was 2.7%, somewhat low compared to the best restaurant companies that consistently pump out 15%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, The Cheesecake Factory's ROIC has significantly increased. This is a good sign, and we hope the company can continue improving.
Balance Sheet Risk
As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.
The Cheesecake Factory reported $60.22 million of cash and $470.6 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.
With $246.6 million of EBITDA over the last 12 months, we view The Cheesecake Factory's 1.7x net-debt-to-EBITDA ratio as safe. We also see its $8.43 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.
Key Takeaways from The Cheesecake Factory's Q1 Results
We were impressed by how significantly The Cheesecake Factory blew past analysts' gross margin expectations this quarter. We were also glad its EPS outperformed Wall Street's estimates. On the other hand, same store sales was just in line. Overall, we still think this was a solid quarter. The stock is up 3.8% after reporting and currently trades at $35.25 per share.
Is Now The Time?
The Cheesecake Factory may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of The Cheesecake Factory, we'll be cheering from the sidelines. Although its revenue growth has been decent over the last five years, its relatively low ROIC suggests it has struggled to grow profits historically. And while its new restaurant openings show it's growing its brand, the downside is its operating margins reveal poor profitability compared to other restaurants.
The Cheesecake Factory's price-to-earnings ratio based on the next 12 months is 10.8x. While there are some things to like about The Cheesecake Factory and its valuation is reasonable, we think there are better opportunities elsewhere in the market right now.
Wall Street analysts covering the company had a one-year price target of $36.07 per share right before these results (compared to the current share price of $35.25).
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