Company Spotlight :: The Cheesecake Factory

5/15/2019    ::    Ticker: CAKE    ::    Div. Yield: 2.71%    ::    Closing Price: $47.23

COMPANY DESCRIPTION

Headquartered in Calabasas Hills, CA, The Cheesecake Factory is involved in the restaurant and baking industry. David Overton, CEO and Chairman of the Board, founded the company with his parents in 1978. Today they own and operate over 200 upscale yet casual dining restaurants in 36 states and Puerto Rico under the names ‘The Cheesecake Factory,’ ‘Grand Lux Café,’ ‘RockSugar Southeast Asian Kitchen,’ and ‘Social Monk Asian Kitchen.’

COMPANY HIGHLIGHTS AND FINANCIALS

With strong brand recognition and customer loyalty, The Cheesecake Factory is a leader in the upscale, casual, and eclectic dining space. In 2018, their sales surpassed US$2.3 billion. Though mature, the company’s core Cheesecake Factory brand offers consistent sales growth and cash flows which they supplement by diversifying their restaurant portfolio across dining concepts. Fueling growth outside of their core brand, expansion plans involve healthy but fast casual dining opportunities via the brand Flower Child, which features locally sourced ingredients for vegetarian and vegan customers, and Social Monk, which is a modern Asian kitchen experience. They additionally hold a minority stake in North Italia, which focuses on upscale, made-from-scratch Italian cuisine in a modern urban atmosphere. The Cheesecake Factory plans to acquire the entire brand in late 2019 and open six new North Italia restaurants per year over the next few years (there 
are currently 23 locations).

​KEY POINTS

• Diversified domestic and foreign growth opportunities
• Strong balance sheet with little debt
• Strong history of raising dividends
• Consistent returns on capital and free cash flow generation
• Compelling valuations based on historical operating metrics and future growth projections

VALUATION AND RISKS

The Cheesecake Factory is trading at attractive valuation levels. At their current sales and cash flow multiples, they are trading at a 20% discount compared to their historical operating performance. Investor concerns over rising wage costs and core brand growth are putting short-term pressure on shares. Based on conservative growth assumptions that The Cheesecake Factory will grow cash flows in tandem with broad economic growth, shares should be valued at close to $65, not the mid $40’s. These growth rate assumptions are much lower than their historical operating performance. If our assumptions turn out to be incorrect, we believe this supplies a margin of safety.
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Risks that we will monitor going forward involve growth rates of new concept restaurants and wage inflation pressures. Weighing both potential rewards and risks, we are optimistic that The Cheesecake Factory is a good long-term investment. 

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Patrick Mason, Investment Analyst, Cairn Investment Group

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