The Cheesecake Factory Has a Bright Future

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While most people have heard of The Cheesecake Factory (NASDAQ: CAKE  ) , many of them have never experienced what it is like to dine at one or are even aware that the company does so much more than sell cheesecake. For those who have dined at The Cheesecake Factory in any given location, they will tell you that the average wait on a Saturday night can be an hour or more and the restaurant has a wideassortment of breakfast, lunch, and dinner entrees ranging from American foods to Mexican to Chinese, etc.. While the restaurant has already achieved success among its loyal customers The Cheesecake Factory has a large growth potential to gain more loyal customers who have yet to experience its large proportions, quality foods, warm and inviting atmosphere, and also its exceptional service.

Bringing cheesecake to the people
Even the most loyal customers to The Cheesecake Factory are unaware of the restaurant chain's story from its original start over fifty years ago. The owners, Oscar and Evelyn Overton, realized they had an excellent cheesecake recipe in the late 1940's while residing in Detroit, Michigan. Evelyn opened a small cheesecake shop within Detroit, but soon moved cooking operations to the basement of her home where she sold her cheesecake to local, well-known restaurants. Then, Oscar and Evelyn moved their business to Los Angeles in 1972 to take a chance on achieving greater financial success.

It was in Los Angeles that the idea of The Cheesecake Factory as a full-service, casual dining restaurant soon emerged as their popularity soared among Los Angeles's locals and tourists. The idea to transition to being a full service restaurant came from the founders' son David, who spearheaded the transition, and The Cheesecake Factory we know today was born. This American success story has grown from these humble beginnings to currently operating 170 full-service restaurants throughout the United States and Carribean. . 

Alot more room to run
The Cheesecake Factory competes in the casual dining space within the restaurant industry. Its competitors include Applebees, Longhorn Steakhouse, Red Lobster, and Olive Garden to name a few. All of these popular restaurant brands are conveniently owned by just two companies: Darden Restaurants (NYSE: DRI  ) and DineEquity (NYSE: DIN  ) . Looking at some basic metrics of these three companies reveals a shocking story.

  Revenue Net Income Restaurant Count Market Capitalization
The Cheesecake Factory  $1.8 billion  $98.42 million  177  $2.35 billion
Darden Restaurants,  $8.55 billion  $412 million  2,138  $6.8 billion
DineEquity  $849 million  $127.67 million  3,600  $1.41 billion

The Cheesecake Factory, despite being less than one tenth the size of Darden Resurants in restaurant count, produces just under a fourth of both its revenues and profits.  A comparison to DineEquity, owner of both Applebee's and IHOP, is trickier as over 99% of its restaurants are franchised out.

Comparing these three companies becomes even more astonishing when one reviews their returns on capital. A return on equity comparison is inaccurate as both DineEquity and Darden are so highly leveraged but a an organization's return on capital removes the mask of overleverage. Last year The Cheesecake Factory generated a return on capital of 18% while DineEquity and Darden produced 10.8% and 7.5% returns on capital, respectively. Even if the domestic market could profitably hold just 500 Cheesecake Factories, making it one fourth the size of Darden in terms of restaurant count, that would mean many more years of growth ahead for shareholders of The Cheesecake Factory. 

Cheesecake for everyone
Although The Cheesecake Factory has far fewer restaurants than its competitors Darden Restaurants and DineEquity, customers still choose to dine at The Cheesecake Factory over the others. In fact, according to Forbes' 2013 annual report titled "America's Best Chain Restaurants, The Cheesecake Factory took first place among restaurants such as Longhorn Steakhouse owned by Darden Restaurants and Applebee's which is owned and operated by DineEquity. The Cheesecake Factory scored the highest for the number of menu items offered to its customer, quality of food, and best value for the money based on its large portion sizes. It is no mystery as to why The Cheesecake Factory has gained high praise from its loyal and newest customers.

The Cheesecake Factory will continue to thrive despite its competition and the economy due to its competitive advantage, including its number of menu options, food quality, atmosphere, and value for the money. Its expansion throughout the United States as well as its emergence into other countries will further increase its footprint and net income.  The Cheesecake Factory's financial success with just 177 restaurants is impressive in and of itself. Foolish investors should certainly take a look at the company's shares as it continues to outperform its much larger peers. 

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Related Tickers

9/30/2016 10:55 AM
CAKE $49.67 Up +0.08 +0.16%
The Cheesecake Fac… CAPS Rating: ***
DIN $78.62 Up +0.46 +0.59%
DineEquity CAPS Rating: **
DRI $61.10 Up +0.47 +0.78%
Darden Restaurants CAPS Rating: ***