The Cheesecake Factory Is Padding Profits With New International Licensing Deals

| About: The Cheesecake (CAKE)


The Cheesecake Factory adds new deal to bring 14 licensed restaurants to Asia.

Combined with two existing deals (Middle East, Mexico & Chile), this brings minimum international total to 50.

Each licensed location is bringing over $0.01 in earnings per share annually.

If you're an entrepreneur or seasoned restaurant owner in the United States, you can't own a franchise of popular chain The Cheesecake Factory (NASDAQ:CAKE). That's because the chain doesn't franchise, instead insisting on owning all 169 locations in the United States. In international markets, The Cheesecake Factory is taking a different approach with licensing, which will soon reward investors.

The Cheesecake Factory announced recently a new licensing deal with Maxim's Caterers Limited, a Hong Kong-based food company. The deal calls for a minimum of 14 restaurants to open over the next 10 years. The deal includes the rights for The Cheesecake Factory in Hong Kong, Macau, Taiwan, and China. The deal also comes with the opportunity to expand into the countries of Japan, South Korea, Malaysia, Singapore, and Thailand. The first restaurant is scheduled to open in fiscal 2015.

Maxim's was selected by The Cheesecake Factory thanks to its success with other brands, like Starbucks (NASDAQ:SBUX). The company has its own brands and also licenses other brands into countries like Hong Kong, China, and Vietnam. The company has a total of 840 restaurants and cafes open in the region.

This deal is huge for The Cheesecake Factory, as it takes its popular brand to the Asian region for the first time. The initial deal calls for 14 locations in four different countries. However, I see this deal far eclipsing that total if the initial concepts are successful. The expansion opportunities consist of five additional countries. My initial thought is the deal should bring restaurants to China and possibly a Macau casino, which could be the biggest sales restaurant in the company.

The international deal adds on to the two other large deals signed by The Cheesecake Factory. In 2012, the company opened its first international location with a restaurant in Dubai. That deal now has four Middle East locations open, out of a planned 22 licensed units. Under a deal with M.H. Alshaya Co., The Cheesecake Factory will expand into countries like United Arab Emirates, Kuwait, Bahrain, Qatar, and Saudi Arabia. This deal also includes the rights to expand further in the Middle East, North Africa, Central and Eastern Europe, Russia, and Thailand. This is the company's biggest international deal signed and also the only one that has actual locations opened.

One of the keys for fiscal 2014 and 2015 is the additional locations that will open under a licensing deal in Mexico and Chile. That deal calls for 12 locations to open in the two countries, and the potential to expand into Argentina, Brazil, Colombia, and Peru.

With these three international licensing deals, The Cheesecake Factory will open a minimum of 50 locations over the next 10 years. The good news for investors is the current Middle East locations have been extremely successful and are bringing profits to the bottom line.

A Forbes article from 2013 lists the Middle East locations with sales that "far exceed" the sales of U.S. locations. Each Middle East location is planned to bring $0.01 in profits per share to the bottom line. At that time, the locations were bringing just above $0.01 per share for fiscal 2013. With share buybacks and increased sales at the international locations, the contribution to profits could actually be closer to $0.02 per share, per licensed restaurant.

The Cheesecake Factory believes:

International expansion will become an increasingly meaningful driver to achieving our goal of delivering mid-teens earnings per share growth over time as the number of restaurants operated by our licensees gradually increases.

In April, The Cheesecake Factory had 181 total locations of its three brands. There were 169 company owned Cheesecake Factory locations, 11 Grand Lux Café, and one RockSugar Pan Asian Kitchen. There was also four international Cheesecake Factory locations.

First quarter earnings were not great for The Cheesecake Factory. The company reported revenue of $481.4 million, on a small increase in comparable sales of 0.9%. Same store sales grew 1.2% at The Cheesecake Factory locations, while the company's Grand Lux Café brand saw a same store sales decline of 2.9%.

In the first quarter, the company opened only one new company-owned location. For the full fiscal year, the company plans on opening 10 company-owned locations in the United States. Plans also call for three to four locations to open in the Middle East and Mexico for the fiscal year. This would bring the international total to the 7 to 8 range.

Analysts on Yahoo Finance see the company posting earnings per share of $2.29 in the current fiscal 2014. Revenue is expected to rise 6.4% to $2.0 billion. In fiscal 2015, earnings are seen hitting $2.69, with revenue growing 8% to $2.2 billion. The company currently has a market capitalization of $2.2 billion, putting shares about even with their annual sales. The Cheesecake Factory has released its own guidance of earnings per share. The company plans on earnings between $2.24 and $2.33 per share in fiscal 2014, based on same store sales growth of 1% to 2%.

I think earnings estimates for fiscal 2014 are right in the range of $2.28 to $2.29. However, I believe the earnings in fiscal 2015 could be beaten with the likelihood of more than 10 international locations being opened. This would bring in between $0.17 and $0.18 to the bottom line, likely more than analysts are accounting for.

Shares of The Cheesecake Factory are down 7% in 2014, after a dismal first quarter earnings report. In 2013, shares shot up a remarkable 77%, so it is likely some investors are taking profits and hopping into other high-growth names. The decline in 2014 is offering long-term investors a great buy-in price. This is a great restaurant chain that has plenty of room to expand in the United States, is seeing same store sales growth in a tough industry, and has definite plans to expand its brand internationally.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.