Cheesecake Factory Embraces Off-Premise Model Amid Rising Costs

Cheesecake Factory Stock

The Cheesecake Factory Incorporated (NASDAQ:CAKE) is strategically leveraging its off-premise business model, coupled with aggressive unit expansion efforts and the success of Fox Restaurant Concepts (FRC). Additionally, its commitment to digital initiatives has been a driving force. Nevertheless, the company is not without its challenges, as inflationary pressures and an unpredictable macroeconomic environment loom as concerns. Let’s explore these developments in greater detail.

Driving Growth

The Cheesecake Factory continues to witness significant growth in its off-premise sales segment. In the second quarter of fiscal 2023, off-premise sales accounted for an impressive 22% of the company’s total restaurant sales. Notably, off-premise average weekly sales doubled in comparison to fiscal 2019 levels. The company has proactively implemented operational enhancements and technology upgrades to enhance customer convenience. Innovations such as contactless menus, payment technology, and text paging have all contributed to this success. The outlook is optimistic, with expectations of further growth in this channel driven by increased customer engagement and targeted off-premise marketing efforts.

In pursuit of expansion, the Cheesecake Factory has ambitious plans for fiscal 2023. It aims to open around 20 new restaurants, including six Cheesecake Factory establishments, five North Italia restaurants, and nine FRC restaurants (including three Flower Child locations). To support this expansion, the company has allocated a substantial budget of $160-$170 million in capital expenditure. With a robust pipeline, the company anticipates a 7% increase in unit growth in the upcoming year.

The increased focus on Fox Restaurant Concepts (FRC) has yielded positive results. FRC’s concept sales have steadily grown, and off-premise volumes have remained solid. In the fiscal second quarter of 2023, FRC (excluding Flower Child) reported sales of $65.7 million, marking an impressive 9.5% increase compared to the previous year. FRC’s average weekly sales, including Flower Child, reached $142,300, and external bakery sales contributed $15.4 million to the company’s revenue.

In the same quarter, FRC successfully launched its brick-and-mortar location of Fly Bye, a fast-casual dining concept, in the Phoenix market, achieving remarkable sales figures. Encouraged by positive customer feedback, the company has plans to open more Fly Bye locations in the near future.

Challenges Ahead

Despite these promising developments, the Cheesecake Factory faces its share of challenges. The company operates in the competitive landscape of the Zacks Retail – Restaurants industry, alongside major players like Chipotle Mexican Grill, Inc. (CMG), McDonald’s Corporation (NYSE:MCD), and Restaurant Brands International Inc. (QSR). Inflationary pressures, supply chain bottlenecks, and the unpredictable macroeconomic climate have all had an impact.

During the fiscal second quarter, the company encountered delays in opening new restaurants due to supply chain disruptions, permitting delays, construction challenges, landlord readiness issues, and equipment availability constraints. These challenges, combined with commodity inflation, have presented hurdles. The company remains cautious about the persisting uncertainties in the macroeconomic environment, expecting these headwinds to continue for some time.

For the third quarter of fiscal 2023, the company anticipates experiencing low single-digit commodity inflation and mid-single-digit labor inflation. Additionally, the model predicts a 2% year-over-year increase in the total cost of sales to $826.9 million for fiscal 2023.

A Glimpse at Other Stocks

In addition to Cheesecake Factory, several other players in the industry are poised for growth:

  • Chipotle Mexican Grill, Inc. (NYSE:CMG) is capitalizing on digital initiatives, Chipotlane expansions, and culinary enhancements. The company’s emphasis on menu innovation has been well-received. Its revamped online ordering site, online payment options for catering, and collaborations with renowned third-party providers for delivery have all contributed to increased digital orders and guest satisfaction. The company’s focus on refining pickup times logic and exploring robotics-based autonomous vehicle delivery promises enhanced customer experiences.
  • McDonald’s Corporation (NYSE:MCD) is benefiting from its digital efforts, menu innovations, and expansion strategies. The company’s loyalty program and drive-thru channels are key drivers of growth. In the second quarter of 2023, digital sales accounted for $8 billion from the top six markets, contributing 40% to the company’s system-wide sales. McDonald’s continues to enhance its digital experience with “MyMcDonald’s,” transforming various service channels. Additionally, it maintains a strong focus on continued digital innovation to boost customer engagement, digital acquisition, and customer frequency.
  • Restaurant Brands International Inc. (NYSE:QSR) is capitalizing on strong comparable sales growth, expansion initiatives, and menu innovations. The company’s digitalization efforts are also showing promise. In the second quarter of 2023, significant investments were made in advertising and digital initiatives. These investments aim to improve creative messaging, ad testing, and technology upgrades, including indoor digital menu boards, point-of-sale systems, and printers. Streamlining products and simplifying menu boards are additional strategies aimed at enhancing order accuracy and overall customer satisfaction.

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