The market was loving The Cheesecake Factory's (NASDAQ:CAKE) third quarter earnings report. Shares were trading up 6% to all-time highs. I've been a fan of the stock for a couple years now, but the latest quarter underscores several of the company's strengths. Here are three reasons to give The Cheesecake Factory a closer look.
In the most recent quarter The Cheesecake Factory increased comp-sales 0.8%. While that gain is modest, it's the 15th consecutive quarter of positive comp-sales. This growth came at a time when many restaurants are seeing slowdowns in consumer spending and restaurant traffic.
Keep in mind that the company hasn't been driving growth by running promotions. Many restaurants do this, but growth often comes at the expense of profit margins. Consider that Darden (NYSE:DRI) banks its ability to grow comparable sales on promotions. It ran promotions across all its brands, which included a three-course Italian dinner for $12.95 at Olive Garden and endless shrimp for $15.99 at Red Lobster.
Specifically, with the endless shrimp promotion $15.99 is the menu price historically. Shrimp are not selling for their historical price right now. The promotion was run in August when shrimp were selling for 56% more than August 2012 due to a shrimp shortage. In an attempt to gain comp-sales, Darden sacrificed margins.
Positive comp-sales without value promotions prove that The Cheesecake Factory is a concept that resonates with consumers, even during a supposed spending slowdown.
New restaurant locations
Restaurant expansion is an often overlooked strength of The Cheesecake Factory. The company plans to open nine new locations before year's end -- less than 6% growth. However, the quality of this growth is impressive.
Consider that the two new locations opened so far this year -- Novi, Michigan and San Juan, Puerto Rico -- each generated over $400,000 in opening week sales. Next year the company plans to open 10-12 new restaurants on its way to its ultimate goal of 300 units -- 89% growth from today's number.
For a little perspective, a company-operated McDonald's (NYSE:MCD) does just over $700,000 in sales a quarter. With the company planning to open around 1,500 locations this year, it's growing about the same rate as The Cheesecake Factory. However, these 1,500 locations won't be as big of a boost for McDonald's as new locations will be for Cheesecake.
Many restaurants are reporting weak consumer spending, so one would think that overall McDonald's would be resonating better with consumers than The Cheesecake Factory. That's not what we've seen. McDonald's has been trying to retain an eroding customer base with limited time initiatives like Mighty Wings and the popular Monopoly game. While these initiatives did help comparable sales, guest traffic at McDonald's was still down last quarter.
So again, The Cheesecake Factory only looks to open 10-12 locations next year, but these locations have big implications for its earnings potential.
The Cheesecake Factory is a strong company financially speaking. It generates huge amounts of free cash flow -- $82 million this year -- and has no debt on the balance sheet. This financial position allows the company to return virtually all of its money to shareholders via dividends and stock buybacks.
This year alone the company plans to spend $200 million to buy back shares. It has already bought back around $135 million this year, leaving $65 million next quarter alone. This will lower the outstanding share count in the high single digits, which in turn will boost earnings per share.
Stock buyback programs are fairly common, but they aren't always followed through on. For example, last year Cracker Barrel (NASDAQ:CBRL) was authorized to buy back $100 million worth of its shares. When the year ended the company had only actually repurchased a relatively measly $14.9 million worth of its shares. Now that the $100 million program has expired, Cracker Barrel's board has authorized a new $50 million repurchase program.
Cracker Barrel isn't in the financial position that The Cheesecake Factory is. The company is aggressively paying down debt -- $125 million in fiscal 2013 -- to put itself on better footing. This hasn't sat well with Biglari Holdings, which instead proposed a $20 per share special dividend. Though this proposal has since been withdrawn, there will still be a shareholder vote on a special dividend.
I think it's a smarter move to pay down the debt instead of paying out special dividends. However, as long as Cracker Barrel has this debt, it will also have to continue choosing between the two. In contrast, The Cheesecake Factory can continue returning the majority of its cash to shareholders.
Love of Cheesecake
As we've seen, The Cheesecake Factory is in a strong position. The brand continues to resonate with consumers, the chain is still growing, and it's returning value to shareholders. Considering it's only trading at a forward P/E of 18, I think the market has been overlooking this one.
Jon Quast has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of Darden Restaurants and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.