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investment findings
Cheesecake Factory (NASDAQ: Cake) reported mixed F2Q2022 financial results. Despite the rise in COVID-19 cases, there was a substantial increase in customer demand for experiential dining, resulting in decreased customer demand, continued sales, and significant improvement in staffing levels. Revenue and same-store sales associated with all three of the Company’s brands on a year-over-year basis, and compared to F2Q2019. In addition, annual average unit volumes associated with Cheesecake Factory restaurants, in particular, expanded to ~$12.3 million relative to the $11.7 million associated with the first quarter. However, although CAKE increased menu prices during this period, driven by inflationary pressures related to energy prices, commodity costs (dairy and production), and hourly wages, margins across the board compared to the same quarter last year. contracted. The firm opened two restaurants during the second quarter, each associated with Northern Italia and FRC Concepts.
In the coming quarters, despite the expected decline in discretionary spending, we anticipate that the sales momentum experienced by CAKE’s brands during recent quarters will continue, with the company’s customers earning >$100K, and richer and higher are educated. In addition, restaurants across all of the firm’s concepts are located in highly prized real estate in economically upscale districts. In addition, menu innovation at the start of the third quarter is likely to have a favorable impact on sales, including a summer menu and a new cheesecake variety, a classic Basque cheesecake that’s crustless, with a charred top and a creamy crust. The center resembles a custard, and is served with berries and fresh cream.
With respect to margins, we anticipate gradual expansion, and expect this figure to continue to pre-pandemic levels, driven by lower fixed costs/dollar sales, potential menu price increases, continued increase in front-line staffing levels. Revenue due to the improvement is based on leverage. , reduction in commodity costs, and stabilizing hourly wages at the restaurant level, and improved economies of scale associated with advertising, digital platforms, and administrative expenses at the corporate level. In addition, given that the Company continues to buy shares every quarter, we expect some decline in the number of outstanding shares for the year. Taking into account the factors described above, in our judgment, for FY22, earnings and free cash flow are expected to increase on a year-on-year basis.
CAKE plans to launch 15 new restaurants across its concepts across the year. Management expects revenue for F3Q2022 to be between $785 million and $805 million, reflecting year-over-year growth of 5.3% from the midpoint of estimates, and a range of $3.32 billion to $3.37 billion for FY2022. in, indicating an annual growth of 14%. from the midpoint of the projection.
For a long time, the company has committed to ~7% annual net new unit growth, which includes ~1% to ~3% year-on-year growth in the cheesecake factory footprint, ~20% annual growth. Number of North Italia ~15% to ~20% expansion in FRC concept restaurant base every year including Restaurant, and Flower Child. Incremental revenue from the launch of new stores will be supported by comparable sales growth: menu innovation, a continued uptrend in off-premises sales, and loyalty programs (linked to all brands of cakes), which we expect to roll out, In the near future. As revenues expand, and related to economies of scale: corporate spending, digital platforms, and advertising, leverage at the restaurant and corporate levels will kick-in, reflected in higher margins, which in turn will ensure growth over the long term. profit and free cash flow.
Given that F2Q2022 results only improved our belief that CAKE is likely to meet and exceed our conservative 10-year normalized revenue growth rate of ~6% and 10-year straight-lined operating cash flow margin of ~10.7% Well, we’ve been bullish on this stock. Therefore, we are maintaining our 1-year price target for Cake at $71/share. Repeat purchase rating. (Please see our initiation report “The Cheesecake Factory: Undervalued with Little Downside Risk Over the Medium Term” and related notes for our long-term opinion on the stock).
Highlights of the second quarter
F2Q2022 Result Summary. For the quarter, revenue came in at ~$833 million (+8.3% compared to F2Q2021), below the consensus estimate of $838 million, and earnings per share was $0.50 ($0.31 during the same quarter of the prior year), missing analysts’ $0.78 Estimate . In addition, comparable sales at Cheesecake Factory and North Italia Restaurant increased 4.7% and 12% relative to F2Q2021. Net income for the period was ~$25.7 million, a decrease of 24% compared to the same quarter last year. CAKE generated ~$54 million in operating cash flow during this period.
The impact of the economic slowdown may be less. According to management, during the financial meltdown of 2007-2008, CAKE prospered, exiting the period with better sales and margins. Overall, the effect was mixed between regions, with regions exhibiting a decline between ~1% to ~20%. The result is not surprising as the firm’s clients have always been rich and well-educated. In addition, Cake’s restaurants are located in generally affluent neighborhoods.
Still, the company plans to lean on value deals, rewards programs and promotions in the coming months to mitigate any repercussions of a potential slowdown. The strategy would be to launch an additional menu with lower-priced items, reintroduce promotions on cheesecakes and delivery orders that appeared to appeal to customers during the pandemic, and launch loyalty programs that allow cakes to be sold. Will present you with opportunities to appeal to customers through rewards. Through repeat ordering and predictive sales that generate promotions based on guests’ prior purchase history. In addition, menu prices range from $5 to $30 and that portion size is typically large enough to support sharing among guests, there are other elements that allow customers to stay away from discretionary spending despite a drop in discretionary spending. Can encourage you to eat cake.
Furthermore, statistical data shows that consumers typically save for experiential dining opportunities during economic downturns, traveling to quick service restaurants in anticipation of dining at table-service restaurants. Furthermore, given that unit economics favors cakes compared to its closest competitors, White Table Cloths independent full-service mom-and-pop restaurants, the company untouched for the most part from a major impact in case of financial crisis. appears to be. Reveal Overall, based on the only significant value proposition CAKE’s concepts are providing guests with fine food and excellent customer service at a reasonable price, in our opinion, its restaurants are likely to retain most of their foot traffic during a potential economic downturn. keep.
Additional concepts of firing on all cylinders. During the second quarter, Northern Italia’s comparable sales increased 12% compared to F2Q2021 and 22% compared to F2Q2019, with annual average unit volumes associated with mature locations increasing to ~$9 million. In addition, the brand’s restaurant margins were up 13% overall and 16.4% at its mature restaurants, driven by periodic price increases to offset inflationary trends. Similarly, FRC Concepts experienced substantial progress in its top-line and bottom-line performance during the second quarter. The group, including Flower Child, had average weekly sales of $116,000. Overall, restaurants in Northern Italia and FRC Concepts generated sales of ~$147 million as of F2Q2022.
FRC Concepts launched its first fly by restaurant in Phoenix, Arizona a few weeks ago, featuring stretch pizzas and crispy chicken served up in Detroit style. With sales for the first two weeks exceeding expectations, Keck plans to open an additional fly by location in the latter part of the year. The concept began as a pop-up ghost kitchen in one of the FRC concepts at culinary drop-off locations during the first phases of the pandemic, and began to enjoy significant customer demand.
Furthermore, there was a bullish outlook on the future prospects of CAKE Flower Child. Management indicated that the firm is working on plans to accelerate footprint growth, including a strategy to launch in new markets, fill key leadership positions and leverage the supply chain to optimize restaurant-level margins . Overall, given the growth in revenue and profits in recent quarters associated with The FRC Concepts, driven by Flower Child Restaurants for the most part, we are satisfied with the progress of the brand and believe the group is well positioned for continued success.
Accelerated new unit development remains on track. With significant resources available to CAKE, including $195 million in cash and equivalents, as well as additional capital from a revolving credit facility, management indicated that the already directed rapid footprint of a potential economic downturn is likely to affect growth plans. is unlikely. While the pace of growth may moderate due to commodity cost inflation, labor shortages and supply-chain restrictions, CAKE believes the ~7% annual footprint growth target for FY2023 is achievable. In that regard, it is noteworthy that the firm currently has more active construction sites than ever in its history, indicating the opening of a significant number of new restaurants over the next few years.
For FY2022, CAKE has set a new unit growth target of 15 restaurants, including five Cheesecake Factory locations (including one out-licensed international restaurant), four North Italia locations and seven FRC Concept locations, including three Flower Child Locations included. Cake brands are one of a kind and it seems prudent to rapidly monetize customer demand associated with your restaurant. Therefore, we are pleased that the Management intends to take advantage of any ensuing economic slowdown by acquiring the highest quality real estate at discounted prices with a view to maximize shareholder returns.
The balance sheet remains strong. At the end of F2Q2022, the Company had cash and cash equivalent balances of ~$195 million and long-term debt of ~$475 million on its balance sheet. CAKE can borrow an additional ~$238 million to operate under a revolving credit facility, it is available. Given its funding position, we believe the firm is well equipped to operate efficiently and execute on its significant footprint growth goals. During the second quarter, CAKE repurchased 360K shares for an amount of ~$10.9 million. In addition the company declared a dividend of $0.27/share for the period.
ground level
CAKE is at the edge of a breakout. Based on business trends associated with its brands, we expect the firm’s revenue and earnings to grow rapidly over the next three to five years. Further, even as we face a slowdown during the next several quarters, we believe that although demand may subside somewhat due to macroeconomic conditions, the CAKE brand enjoys strong customer appeal. , its restaurants are likely to outperform the competition.
Overall, there is a disconnect between the current market value of the company’s shares and its intrinsic value, determined by the future value of its three restaurant chains. Therefore, we suggest that investors view losses in CAKE’s stock due to market volatility, as an opportunity for declining dollar-average cost on shares to generate a nearly guaranteed significant return on capital.