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The Cheesecake Factory Provides Significant Total Return Potential


  • The Cheesecake Factory is a restaurant operator with a strong growth outlook.
  • The company produces high cash flows despite investing for growth.
  • These cash flows allow for compelling shareholder returns.

Article thesis

The Cheesecake Factory (NASDAQ:CAKE) is a compelling total return investment, as it combines a nice dividend, an inexpensive valuation and a positive growth outlook.

The restaurant industry has had a harsh year, but The Cheesecake Factory performed better than its peers. With International expansion continuing, the company will become less dependent on the U.S. market over the years, which could lead to less cyclical results in the future.

Headwinds for the restaurant industry

The Cheesecake Factory operates restaurants in the U.S., and there are several licensed restaurants in the Middle East and Latin America. Due to the majority of the restaurant base being located in the U.S., The Cheesecake Factory is highly dependent on the U.S. restaurant market, though:

source: The Cheesecake Factory presentation

The restaurant industry in the U.S. isn't in the best spot right now. During 2017 comps sales declined by more than two percent, but The Cheesecake Factory performed significantly better:

source: The Cheesecake Factory presentation

The company managed to achieve another year of positive comps sales, although the increase has been the worst over the last couple of years. Rising comps are important for restaurants, as those allow for margin increases: Fixed costs per existing location are not rising, but gross profits increase (all else equal). This combination allows for rising operating margins, which helps drive earnings growth for The Cheesecake Factory.

The Cheesecake Factory has a positive growth outlook

The Cheesecake Factory's restaurant base is still rather small (about 200 locations in the U.S.), which means that there is a lot of potential for more restaurant openings. The company targets a meaningful increase in its restaurant count both domestically as well as internationally.

source: The Cheesecake Factory presentation

Four to six new restaurants in the U.S. will increase the restaurant base by two

This article was written by

Jonathan Weber profile picture

Jonathan Weber holds an engineering degree and has been active in the stock market and as a freelance analyst for many years. He has been sharing his research on Seeking Alpha since 2014. Jonathan’s primary focus is on value and income stocks but he covers growth occasionally.

He is a contributing author for the investing group Cash Flow Club where along with Darren McCammon, they focus on company cash flows and their access to capital. Core features include: access to the leader’s personal income portfolio targeting 6%+ yield, community chat, the “Best Opportunities” List, coverage of energy midstream, commercial mREITs, BDCs, and shipping sectors,, and transparency on performance. Learn More.

Analyst’s Disclosure: I/we 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (9)

Good write up on CAKE; on its prospects, still in question. They have been working to address some recent problems and direction is still a bit mucky. In the US, the problem is with their mall locations. In the past it was a plus for traffic. That may not be the case in the immediate future. A look a different locations appears in order. For me, I continue to eat there but will wait on investing.
Trader 611 profile picture
The international potential for CAKE is what interests me. China in particular. Thanks for the update from Shanghai
Thanks for the post... I enjoyed reading your analysis.

I currently live in Shanghai and put CAKE on my watch list after visiting their first store in mainland China located at the new Shanghai Disney property (in Disney Town). Anecdotally, our experience was very good and there was a 45 minute wait on a random Wednesday in December. A more relevant data point is the high ranking and very positive reviews that the restaurant has on local restaurant review sites/apps (e.g., Bon App).

Given the incredibly positive response to this first restaurant on the mainland, I have every expectation that their local partner in the region is planning a more aggressive expansion in China. From my perspective, this is the single biggest potential growth driver for CAKE going forward. Given the lack of attention on this potential, it could cause a very rapid revision of Street estimates once it starts to play out. I will be watching with interest
Now that is an interesting idea - if CAKE could have another, say, 50 locations across China over five to ten years, OMG.

And other global locations.
Jonathan Weber profile picture
Thanks for your comment Trent, very insightful! I once visited a CAKE restaurant in Dubai which was very full as well. I think international expansion could be a major growth driver, and the respective license partners could indeed increase the speed of new restaurant openings if those restaurants remain successful.
You don't seem to be looking backwards. Every optimistic word you say could have been said five years ago, but even with the foreign licenses which are pure gravy, overall numbers have barely kept up with inflation. CAKE locations are large, and it's not clear how many more locations in the US they can even find - most CAKE expansion now is to new cities that can support at least two or three locations that can share logistics, CAKE is an expert on logistics, it's how they've survived since 2008.

So is that 13.5% per year? I can't imagine who would suggest that. If it's 2.7% per year over five years that's more realistic - but again, that maybe matches inflation, plus rising minimum-wage levels that the company has told us has impacted their margins significantly over the past year or two.

The problem for CAKE is that it's getting hard to keep their big locations utilized outside of peak hours. Even five years ago people would line up and just wait for service, now the overall demand is lower and that makes their business hours even briefer. It's the kind of thing that can undermine their entire model. I would expect to see CAKE close a couple of locations over the next few years - they mostly have long leases, but even so.

I'd be very careful about establishing new positions in CAKE, unless you can accumulate it on dips and use it as much as a trading vehicle as an investment.
Trouble finding retail locations?
Trouble finding those that fit their formula - in recent years basically upper-middle class malls with adjacent theaters. In geographical areas that have at least three of these so they can share logistics, without being so close they don't have their own clientele. Pretty standard stuff, and lots of business have very similar formulas.
Interesting - thanks
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