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Cheesecake Factory's Sweeter Prospects

By Jeremy MacNealy – Updated Nov 15, 2016 at 12:10AM

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Smaller restaurants are performing better than expected for the restaurateur.

The Cheesecake Factory (NASDAQ:CAKE) may have much more expansion opportunity than previously believed. That's good news for long-term-minded shareholders.

All along, the restaurateur's top executives have been telling investors that they estimated the U.S. market could hold roughly 200 Cheesecake Factory units. In recent quarters, the company has used sites which offer, on average, 5% less seating productivity than older restaurants. The more limited layout gives the concept greater opportunity to fill out existing markets, while penetrating smaller markets like Albany and Omaha.

Based on remarks from management in its fourth-quarter earnings conference call, these newer, smaller units are performing much better than expected. This suggests that the U.S. market can likely sustain more than the previously estimated 200 Factory locations. It also means there's ample growth left in this concept; at the close of the 2006 calendar year, it had just 123 units in operation.

More room for new story growth is good news for Cheesecake Factory, because sales growth from units opened for more than a year is starting to flatline. In the fourth quarter, same-store sales for Factory concepts increased just 0.4% year over year.

In the long term, management expects annual comps growth for the entire company, including its upscale concept Grand Lux Cafe, in a narrow 1%-to-2% range. That means the 18% top-line increase management forecasts for 2007 will be driven primarily by new unit openings.

Cheesecake Factory will open as many as 21 new locations in 2007, including a handful of its Grand Lux sites. As in previous years, most of these openings will take place in the second half of the year. From there, it takes anywhere from 90 to 120 days for these locations to reach management's desired level of profitability.

Between the company's better-than-expected long-term expansion opportunities and its highly differentiated concept, which stands out from other casual diners such as Applebee's (NASDAQ:APPB), Ruby Tuesday (NYSE:RI), and Darden (NYSE:DRI) brands, investors have good reason to take a closer look at Cheesecake Factory.

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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
CAKE
$28.43 (-2.44%) $0.71
Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
DRI
$122.39 (-2.44%) $-3.06

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