Restaurant chain The Cheesecake Factory (NASDAQ:CAKE) has been stuck in a "rut" -- one that investors in Starbucks (NASDAQ:SBUX) enjoy, too. Quarter, after quarter, after bloody quarter, the company increases same-store sales (the holy grail of retailing numbers).
To see the benefit of that performance, look at this chart of the stock over the past 10 years. It's fantastic. Can it continue?
The latest quarter saw comparable restaurant revenues increase 3.4% and net income jump 14.3% (meeting analyst expectations). While the company credits bad weather, especially in California, with holding back results, the quarter did benefit from Easter.
For every year since its founding, the company has reported year-over-year, same-store sales gains -- and that has happened in 49 out of 50 quarters. For a restaurant chain that does not use media advertising or discounting, that is a remarkable record and testament to strong customer loyalty.
The company guides investors to expect comparable same-store sales growth that mirrors its average annual pricing increase of 1% to 2%. One reason for that is the lines you see outside its restaurants as customers wait for available seating. The company's high utilization of available seats prevents it from achieving the double-digit growth rates it enjoyed in its earlier years.
High utilization, though, produces high operating margins (such as the 10.5% this quarter). For comparison, Outback Steakhouse (NYSE:OSI) came in at 7.8% for the last 12 months, Darden's (NYSE:DRI) at 7.0%, and Brinker's (NYSE:EAT) trailed at 4.7%.
While the company is planning to drive strong earnings growth through new restaurants (it is adding 13 to the existing 92 over the next three quarters), it has not stopped trying to squeeze more out of the existing stores. It's expanding its use of curbside service at 13 restaurants, since it provides a relatively high-margin venue for growth.
The company also has a new upscale restaurant chain called Grand Lux. Started in 1999 at the Las Vegas Sands' (NYSE:LVS) Venetian Resort in Las Vegas, it rang up first-year sales of $18 million -- nearly twice the namesake chain's average sales (and, like its namesake, without any advertising or discounts). This chain, with just five restaurants, has the capacity to grow sales at even double-digit rates, while the concept builds its own loyal customer base.
There are negatives for investors to consider. The company's stock trades at what I believe to be an inflated 24 times estimated 2006 earnings -- but that is the price of fantastic success. The company is warning investors to expect small percentage increases in same-store sales numbers. But, a down quarter in same-store sales could produce a big drop in the stock price, simply because of the perception that sales were slowing after the long string of quarterly successes -- even if earnings continue to track higher with new restaurant openings.
The company is free of debt, financing all its growth out of earnings and cash (yippee!), and estimates it can easily grow to 200 Cheesecake Factory and 150 Grand Lux locations. That's a lot of growth, and given its success record, the company's stock is worthy of a premium price.
Fool contributor W.D. Crotty does not own shares in any of the companies mentioned here, but he has bellied up to the table at a Cheesecake Factory to enjoy the signature dessert. Click here to see the Fool's disclosure policy.
