The Cheesecake Factory Inc. (NYSE:CAKE) is probably going to gain from its off-premise business strategy, excellent comps growth, and unit-expansion initiatives. It is also encouraging that FRC-related distinctive concepts and rising brands are being emphasized. But, supply chain issues and inflationary pressures raise questions.
Let’s go over the reasons why stockholders should hold onto their shares for the time being.
What Drives Growth
Impressive comparable performance is helping Cheesecake Factory. In contrast to the 33.8% increase reported in the prior-year quarter, comps at Cheesecake Factory restaurants rose by 4% year over year during the fourth quarter of fiscal 2022. Comps increased 11.4% from the level in 2019. The company’s performance was boosted by strong off-premises sales as well as an increase in average check and client traffic. According to the company, the momentum persisted into the first quarter of the upcoming fiscal year 2023. Comps at Cheesecake Factory (across all operating models) climbed roughly 9.5% over the previous year and 17% from the fiscal 2019 level from the beginning of the first quarter of the current fiscal year to February 21.
The Cheesecake Factory still reaps the rewards of its strong off-premise sales. Off-premise sales made up 23% of all restaurant revenue for Cheesecake Factory in the final quarter of the fiscal year 2023. Off-premise sales, according to the corporation, are still above pre-pandemic levels. The business introduced operational adjustments and technological advancements, such as a contactless menu and payment system, and SMS paging, to increase user convenience. We predict that the channel’s performance in the approaching quarters will be driven by an increase in client count and focused off-premise marketing.
It’s positive that Fox Restaurant Concepts (or FRC) is getting more attention. The in-restaurant kiosk technology speeds up the ordering process and includes artificial intelligence that tracks the behavior of each individual customer to improve the overall experience. Future Flower Child shops will have this technology in addition to the customary ordering process.
To boost expansion, the organization places a focus on new brands and FRC-related distinctive concepts. The fast-casual dining concept Fly Bye was introduced by FRC during the second quarter of its fiscal year, and the company reported strong sales from the site. The restaurant served crispy chicken and pizza with a Detroit flair. The business is still upbeat in this regard and plans to launch more Fly Bye sites in the coming years given the positive consumer feedback.
In order to spur expansion, Cheesecake Factory is putting effort into developing new products. The firm plans to open 20–22 additional restaurants in fiscal 2023, including five–six Cheesecake Factory locations, five–six North Italia locations, and ten FRC outlets (including three to four Flower Child locations). Through a licensing deal, it plans to operate two to three Cheesecake Factory outlets abroad. In order to support the development of new units and the upkeep of its restaurants, the firm budgeted between $165 and $175 million in capital expenditures. The company expects to achieve unit growth of 7% in the forthcoming year thanks to a robust pipeline.
In contrast to the industry’s 8.8% increase over the past year, Cheesecake Factory shares have dropped 12%. Commodity and wage inflation, supply chain issues, and a difficult macro environment were the key causes of the decline. Even though the majority of restaurants are open, business is still slow compared to pre-pandemic levels. The business plans to keep a close eye on the situation to assess COVID-19’s effects.
The margins of Cheesecake Factory have been negatively impacted by ongoing increases in costs. The cost of food and drink as a proportion of revenues climbed 170 basis points (bps) from the previous year to 24.7% during the fourth quarter of the current fiscal year. The rise was mostly caused by rising menu prices and commodity inflation. 6.3% of revenues were made up of general and administrative costs, up from 6.1% in the same quarter last year. The company forecasts commodity inflation in the range of 10-12% annually for the first quarter of fiscal 2023. For the first fiscal quarter, 6% labor inflation is predicted.
Featured Image: Pexels @ Karolina Grabowska