Shares of Cheesecake Factory (NASDAQ:CAKE) received a nice lift in October after it reported its financial results, which included its 15th consecutive quarter of positive comparable-store sales. Like other casual restaurant chains, Cheesecake Factory has benefited from higher customer spending on dining out. The National Restaurant Association estimated that industry sales will rise 3.8% this year. The company has also been upping its new store openings domestically as well as planning further expansion into the Middle East and Latin America. So, should investors climb aboard for the ride?
What's the value?
Cheesecake Factory has leveraged the Overton family cheesecake recipe into a thriving chain of roughly 180 restaurants around the country. In contrast with other restaurant chains, the company embraces a diverse menu that offers approximately 200 menu choices, providing it with the ability to capture diners' spending at a full range of price points. As its name suggests, though, consumers come to Cheesecake Factory for desserts, which account for 15% of total sales.
In fiscal year 2013, Cheesecake Factory has posted a small top-line gain, up 4.4%, as comparable-store sales rose slightly and the company opened a few new stores. More important, its operating profitability improved due to the dual effects of subdued commodity price inflation and an ability to pass through small menu price increases. The overall result was strong operating cash flow, $150 million in the current period, which management is using to repurchase shares and selectively expand toward a goal of 300 domestic locations.
Looking for bigger footprints
While Cheesecake Factory is a consistently profitable enterprise, its growth seems somewhat hamstrung by its propensity to place restaurants in destination spots, like high-traffic malls and tourist areas. In addition, its Grand Lux Cafe upscale dining concept has had difficulty attracting sufficient customer volumes, as evidenced by management's decision to close three underperforming locations earlier this year. As such, investors should look at chains capable of operating a greater mass of restaurants in their operating areas, like Bloomin' Brands (NASDAQ:BLMN) and Buffalo Wild Wings (NASDAQ:BWLD).
Bloomin' Brands, a former leveraged buyout, returned to the public markets in August 2012 and has been lighting up the charts, more than doubling from its $11 initial public offering price. The company has spent the past few years building a diverse portfolio of brands, from Outback Steakhouse on the low end to Fleming's Prime Steakhouse and Wine Bar on the high end. While Bloomin' Brands gets the majority of its total sales from its Outback Steakhouse concept, its diversification is paying off. Its Bonefish Grill concept has taken the mantle as the company's growth engine and accounts for more than half of its new store openings.
In fiscal year 2013, Bloomin' Brands has posted a small top-line gain of 3%, benefiting from both higher comparable-store sales and additions to its base of restaurants. While higher beef prices have hurt the company's gross margin in the current period, it has maintained profitability through menu price increases and cost savings initiatives at the restaurant level.
The result has been improved operating cash flow, which Bloomin' Brands is primarily using to expand the Bonefish Grill concept domestically and the Outback Steakhouse concept in select international growth markets, like Brazil.
Meanwhile, Buffalo Wild Wings continues to ride a high growth trajectory, with revenues up 25.6% in fiscal year 2013, as it continues to build out a national restaurant base and leverages its close association with pro and college sports. The company's fortunes are inextricably tied to the popularity of chicken wings, accounting for roughly 41% of total sales, and management's success at marketing its locations as community gathering spots for watching sporting events.
The company's operating profitability has declined in the current period due to higher labor costs stemming from its guest service initiatives. However, Buffalo Wild Wings' solid operating cash flow is providing funds to plow back into new store openings, with a goal of expanding its operating footprint by 10% in fiscal year 2014.
The bottom line
Cheesecake Factory generates solid operating profitability, with a higher operating margin than either Bloomin' Brands or Buffalo Wild Wings, but its growth opportunities are limited by its careful site selection process for its locations. As such, investors should stick with its competitors that can operate in a greater number of geographies both in the U.S. and abroad, which should lead to economies of scale for their companies and growing profits for their shareholders.