You don't walk into a Cheesecake Factory and expect to walk out a little lighter. The same can't be said of Cheesecake Factory (NASDAQ:CAKE) itself. The casual diner known for its heaping portions and thick menu is getting aggressive about eating its own cooking, but it won't come cheap.
The restaurateur announced a 10 million share buyback this morning. That is in addition to the 2.4 million shares that are still outstanding from its previous repurchase plan. It's a bold move that, if completely executed, would reduce the number of diluted outstanding shares by more than 15%.
However, I did mention that the self-nibbling binge won't come cheap. Cheesecake Factory closed out 2006 with a sparkling balance sheet, free of funded debt and with $134 million in cash and marketable securities. Snapping up 12.4 million shares would consume all of that greenery as well as eating into all of the new $200 million revolving credit facility.
This isn't a rare sight. Leveraged casual dining peers like Brinker (NYSE:EAT) and CBRL Group (NASDAQ:CBRL) took on more debt last year in the pursuit of share buybacks. But Cheesecake Factory is growing at a quicker pace than its rivals. One would think that any available greenbacks would be better suited to expanding the concept.
Then again, maybe heady expansion isn't in the company's best interests for the near term. Cheesecake Factory saw profits dip slightly in 2006. Back out stock-based compensation and the company would be inching forward instead of backward, but that's not the biggest concern here. Same-store sales had grown every single year since the company went public nearly 15 years ago. That streak ended last year. Even attempts to expand its takeout business by embracing the curbside pickup approach found at chains like Applebee's (NASDAQ:APPB) and OSI's (NYSE:OSI) Outback Steakhouse have come up short.
The company is having better luck with its more upscale Grand Lux concept. Comps there soared 7.8% this past quarter. The company is trying to mend its ways, experimenting with slightly smaller dining rooms at its flagship concept, but that isn't enough. Expansion should emphasize the Grand Lux chain on the high end and see what can be done with Cheesecake Factory Express on the low end.
Never heard of Cheesecake Factory Express? Few have. The one and only location rests on the top floor of the DisneyQuest interactive arcade in Disney's (NYSE:DIS) Disney World concept. Having logged about a half-dozen meals there, I can vouch for the quick-service concept. It's not the fancy fare that you will find at the table service eateries, but it's quality fast food that could make waves at a mall food court near you.
So I can applaud the buyback and stomach the near-term debt to make it happen. Let's just hope that the company doesn't forget that its greatest opportunities for growth rest above and beyond its namesake casual dining concept.
Still hungry for more? Check out our own version of a dessert menu:
- Cheesecake Factory's Sweeter Prospects
- Stocks for Mom: Cheesecake Factory
- Cheesecake Factory Banks on Expansion
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Longtime Fool contributor Rick Munarriz is a fan of the crusted chicken Romano at Cheesecake Factory, the caramel chicken at Grand Lux, and the grilled panini sandwiches at CF Express. He does own shares in Cheesecake Factory, Disney, and CBRL Group. Rick is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
