Cheesecake Factory's (NASDAQ:CAKE) restaurants and financial performance have operated in tandem like clockwork over the past few years. Its third-quarter results, released after the market close Tuesday, have proved to be no exception -- and investors are gobbling up its shares, which were up more than 10% in Wednesday's midday trading.
That's really saying something, because the restaurant industry has taken its beatings lately in the market. Lone Star Steakhouse (NASDAQ:STAR), Applebee's (NASDAQ:APPB), and CEC Entertainment (NYSE:CEC) all have share prices that have fallen 10% or more since the start of the year.
In its third quarter ended Sept. 27, Cheesecake Factory delivered a sales increase of 18% over last year. Operating income, net income, and diluted earnings per share all increased in the low 40% range. Very impressive.
The only disappointment during the quarter was that comparable restaurant sales at its flagship restaurants increased by only 1% over last year. That's despite a 2.1% increase in menu prices. If you back out that price increase, comps were actually down slightly.
The company has attributed the lackluster same-store sales performance to hurricanes Katrina and Rita and stated on its earnings call that adding back the estimated $3.1 million in lost sales gets comps back up to 2.1%, or in line with the menu price increase. While I normally brush comments like that aside, I'm willing to give Cheesecake Factory a free pass for one quarter.
This low same-store sales growth points to an important aspect of Cheesecake Factory's future growth -- something with which investors should familiarize themselves. The company does not believe it has much room in its existing restaurants to squeeze out increased sales. The restaurants are basically running at capacity, particularly during peak meal times. This means that Cheesecake's continued growth, which investors have come to expect, must come almost exclusively from new restaurant openings.
Investors who jumped in to buy shares Wednesday will want to pay close attention to the company's ability to meet its schedule for opening new stores -- 18 by the end of FY 2005 and another 21 in FY 2006. In addition, investors should carefully analyze the performance of the new restaurants to see whether they operate as solidly as the company's other restaurants. Cheesecake Factory is still a fantastic business, but the company's trailing P/E of 36.8 doesn't leave much wiggle room for a slip-up.
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Nathan Parmelee has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
