<DAILY DOUBLE>
Thursday, July 15, 1999
Cheesecake Factory Inc.
(Nasdaq: CAKE)
Phone: 818-871-3000
Website: www.thecheesecakefactory.com
Price (7/14/99): $29 1/8
HOW DID IT DOUBLE?
How sweet it is! As the investment community continues to shun the high-volume destination eateries, Cheesecake Factory has Wall Street coming back for seconds. Unlike some theme-restaurant peers, Cheesecake has never really had a popularity problem. As a matter of fact, it has reported 27 consecutive quarters of same-store sales growth.
No, what has always held the moderately upscale restaurant chain back is the inconsistency of delivering that top-line growth to the bottom line. Back in 1994, two years after the company went public, it was reporting impressive net margins of 8.5%. As the chain expanded beyond its core California markets and invested in a state-of-the-art baking facility, costs ran out of control. Two years later, margins had shrunk to 3.7%.
Thankfully, like one of the company's plentiful servings, there eventually was a bottom. Margins bounced back to 4.8% in 1997. While they have yet to return to the 1994 highs, the company has been more consistent annually while still erratic quarterly. In December, Cheesecake missed analyst expectations. For the March quarter, it surpassed them.
However, the company's impressive streak of favorable comps has finally won over a jaded public that has seen executive and patron defections at chains like Planet Hollywood (NYSE: PHL) and Rainforest Cafe (Nasdaq: RAIN). Cheesecake claims to have lost only one general manager over the last three years. Keeping employees happy and customers even happier has meant keeping its shareholders the happiest of all. With the shares fluffed up like an egg white, the believers have lined up for their just desserts.
BUSINESS DESCRIPTION
The first Cheesecake Factory opened in Beverly Hills in 1978. The Overton family ran a successful baked goods factory and son David thought showcasing the product lines at the retail level would be a success.
Three more California locations and a 1991 opening in Washington, D.C. followed, before the September 1992 initial public offering.
Today the company owns and operates 29 locations in the United States. It also runs the Grand Lux eatery at the new Venetian Hotel in Las Vegas and operates Cheesecake Factory Express quick-service locations at Disney's (NYSE: DIS) growing chain of DisneyQuest entertainment centers.
The restaurants have an extensive menu featuring more than 200 items. In 1995, the company completed its margin-killer 60,000 square foot bakery facility. From there it has expanded its institutional foodservice operations beyond warehouse clubs, adding clients like Sysco (NYSE: SYY) and even competing chains like Olive Garden and Red Lobster parent Darden Restaurants (NYSE: DRI).
FINANCIAL FACTS
Income Statement
12-month sales: $280.5 million
12-month income: $14.7 million*
12-month EPS: $0.72*
Profit Margin: 5.2%
Market Cap: $600 million
(*Excludes accounting changes)
Balance Sheet
Cash: $42.5 million
Current Assets: $56.9 million
Current Liabilities: $31.6 million
Long-term Debt: N/A
Ratios
Price-to-earnings: 40.5
Price-to-sales: 2.1
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Determined to grow restaurant space at a 25% clip over the next few years, and tacking on another 3-4% for menu price hikes, which consumers seem to be having no problem digesting, the company has become a legitimate growth story. In an industry where survival is a challenge always tugging at the coattails of confidence, Cheesecake Factory has become a reliable equity.
So, when the shares were beaten down to the low teens back in September's market correction, it was a natural to bounce back strong when the market sentiment shifted. While the shares were hit hard earlier this year when the company pre-announced a dismal close to the 1998 fiscal year, that too served as an opportunity to pick up the discounted shares at a good price in a moment of short-term flux.
WHERE TO FROM HERE?
Analyst estimates, which again have proven reliable on an annual basis but iffy by the quarter, are calling for the company to earn $0.96 per share this year and $1.20 next year. That is exactly 25% earnings growth -- in line with the company's stated objectives of unit growth.
The company can't live in the past, despite the pleasant possibilities. If Cheesecake were to find a way to rekindle those 1994 net margins, earnings next year would ring up closer to $1.70 a share. That won't happen, but the company will probably be a consistent 25% a year grower -- probably better -- from here on out. A more ambitious rollout of DisneyQuest beyond its three announced locations would add some serious licensing residuals to the company's coffers. Meanwhile, the company has yet to test international waters.
Potential is the 201st item being served up by Cheesecake -- it's something that a well-researched Fool might want to consider ordering.
--Rick Aristotle Munarriz
(tmfedible@aol.com)
Check out the Daily Double Message Board
The Fool is hiring. Answer the call.
| Recent Daily Double Headlines | |
| 12/20/00 | BARRA New Industry Standard |
| 12/18/00 | Footstar Dances the Double |
| 12/14/00 | Ciena's Double Connection |
| 12/11/00 | Coors Brews a Double |
| 12/07/00 | MapInfo Charts New Territory |
| Daily Double Archives » | |
RSS Headlines
Fool UK
