What is Cheesecake Factory Not Telling Us?
The Cheesecake Factory (CAKE) folks have been making the rounds of investment conferences this month with a respectable growth story backed by evidence of good execution so far. So why do Wall Street consensuses remain so lukewarm on its shares, even as its share price this year collects nearly twice the gains of the market at large, as seen in a stock chart? It may have more to do with what Cheesecake isn’t saying than what it is.
The company runs some 162 Cheesecake Factory restaurants, a chain at the higher end of casual dining known for its whopping 200 or so menu choices. The company’s cautious domestic expansion and modest, but steady, same store sales gains have more than doubled earnings in the past three years. The company plans to open eight to 10 more Cheesecake Factories in the U.S. this year. Chief Financial Officer Douglas Benn and his team are presenting a company aiming for 13% to 16% annual earnings-per-share growth for the next few years.
For investors, though, the most exciting part of this story concerns long-term expansion plans for Cheesecake Factories overseas. The company has licensing agreements for 12 restaurants in Latin America and 22 in the Middle East, and it is looking for a partner in Asia. What little we know about Cheesecake performance overseas so far suggests that international expansion could do wonders for Cheesecake’s bottom line.
The three Cheesecake Factories open overseas so far – they’re in Dubai and Kuwait -- raked in sales volumes that “far exceed” those of U.S. locations, Benn told analysts at the latest earnings conference. Each of the three contributed more than 1 cent per share to Cheesecake’s annual earnings; a significant amount considering its diluted earnings per share last year was $1.78. With that formula, just six Middle Eastern Factories would have contributed at least 2.4% of the entire company’s earnings. Benn says the three helped profit margins more than his team had expected, which is important to his goal of returning operating margins to 9.5%.
The trouble is, the corporate people are sharing very few financial details of these incredible overseas Cheesecake Factories. That “more than 1 cent per share” contribution figure was a bone Benn threw to analysts and declined to further quantify. The company had previously forecast a $0.01 annual contribution from each Middle East location open more than a year, and it’s sticking with that guidance. With 162 eateries and $1.78 a share in profit, one cent per eatery isn't exactly telling us a lot.
In earnings reports, the company doesn’t break out performance for overseas Cheesecake Factories in a meaningful way, such as quantifying royalty fees or actual revenues and profits.
Cheesecake’s also operates an 11-restaurant chain called Grand Lux Cafe, and it just reported a 0.9% decline in same stores sales for the quarter. There’s not much in the public financial reports either on these stores either. Its revenues and profits are lumped into an “other” category with a few small operations, including those Cheesecake Factory overseas restaurants so far. But unlike Cheesecake international, the company hasn’t made Grand Lux the centerpiece of its future growth.
Cheesecake shares remain awash in hold ratings by analysts who consider its shares fully valued. Yet on a forward price to earnings ratio, Cheesecake is one of the cheaper shares among its competitors – BJ’s Restaurants (BJRI), DineEquity (DIN), Brinker International (EAT) and Buffalo Wild Wings (BWLD).
Cheesecake’s own optimism about its future surely stems in large part from the secret numbers it’s seeing from Cheesecake restaurants overseas. Investors have a hard time feeling the excitement when denied such hardcore data; it makes them wonder if today’s pretty numbers are really the result of things that can be repeated for similarly good fortune in the future. With so much of Cheesecake’s growth dependent on what’s buried in those figures, perhaps it’s time to share the dream in a little more detail.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org. You can also request a demonstration of YCharts Platinum.
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