The Cheesecake Factory Incorporated

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A full-service restaurant company that primarily owns and operates upscale casual dining restaurants and bakeries and also sells a variety of consumer products at grocery stores and other retail locations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview The Cheesecake Factory Incorporated (CAKE) operates within the restaurant and consumer-packaged goods sectors. Their primary business is upscale casual dining restaurants that offer a wide variety of food and beverage items, including an assortment of cheesecakes. They also sell desserts and other baked goods through retail channels.

  • Revenue Streams: CAKE’s revenue is primarily derived from:
    • Restaurant Sales: The largest portion, representing meals, drinks, and desserts sold at their restaurants.
    • Consumer Packaged Goods (CPG): Sales from their branded products sold in grocery stores, retail outlets, and through licensing agreements. This includes cheesecakes, desserts, baked goods, and other branded products.
    • Other: Other sources of revenue, including licensing and international sales.
  • Industry Trends: * The restaurant industry is experiencing increased competition from new concepts and alternative dining options. * There is a focus on digital integration, with restaurants leveraging online ordering, delivery, and mobile technologies to improve customer experience and boost revenue. * The trend of healthier food choices has seen some consumers migrate to more healthy brands.
  • Margins:
    • Operating margins for the restaurant business is typically in the high single to low double digit percentages.
    • Gross margins for CPG goods are higher than the restaurant business.
    • Margins will typically be affected by food costs, operating expenses and promotional activities.
  • Competitive Landscape:
    • The industry is highly competitive, with many chains, both national and local, as well as independent restaurants.
    • Competition comes from other casual dining chains, fast-food restaurants, and fast-casual alternatives.
    • Brands such as Red Lobster, TGI Fridays, Chili’s, Olive Garden and Applebee’s are key competitors in casual dining.
    • Consumer packaged goods also face a strong competition from grocery stores offering private-label and other branded desserts.
    • Companies have also been experimenting with delivery and the use of third parties.
  • What Makes the Company Different?
    • The Cheesecake Factory brand stands for an upscale casual dining experience with a broad menu and large portions.
    • The company’s proprietary cheesecakes and a wide dessert selection are key differentiators.
    • A multi-channel distribution approach including restaurant, CPG, and licensing sales provides a broader market access.

Financial Performance The company’s recent quarterly financials show:

  • Revenue Increased to $892 million for the third quarter of 2024, compared to $794.6 million in the same period of the prior year.
  • Comparable restaurant sales decreased by -1.3%.
  • Net income per share was 0.79 cents, compared to 0.57 cents in the same period of prior year.
  • Increased revenues were driven by increased guest traffic and pricing power, though there has been a decline in traffic.

  • The company is focused on controlling costs, and some cost efficiencies could be found in restaurant operating costs as well as CPG costs.

  • Balance Sheet Health:
    • Total assets at $2.8 billion are greater than total liabilities at $1.3 billion.
    • Cash and cash equivalents are around $80 million while total debt amounts to $419 million
    • The current ratio (current assets / current liabilities) is at 1.4, which is in a good range.
    • The company’s assets are not excessive, and liability levels are not worrisome. A large part of the assets come from property and equipment, goodwill and intangible assets.
    • The debt-to-equity ratio is at 46.9% which is a moderate level.
    • Overall, the company shows a healthy balance sheet, with enough liquidity and leverage.
  • Recent Concerns/Controversies: * The restaurant business has been affected by labor shortages, supply chain issues and inflation. * They are experiencing above average levels of inflation that is affecting margins across the board. * Consumer spending has been relatively lower, though people are still willing to spend on dining options. * The cost of their CPG sales has increased too. * Share buyback programs have reduced the outstanding shares and supported the share prices.

Moat Analysis Assessing CAKE’s competitive advantage:

  • Intangible Assets: The brand recognition of “The Cheesecake Factory” is very high. Consumers have strong expectations related to the dining experience and the quality of desserts. However, other well known chains have been giving them a tough time, and are getting a growing market share.
  • Switching Costs: The switching costs for consumers are low, which are detrimental to CAKE’s moat, meaning consumers can switch to other restaurants with little friction. Although their menu offerings are somewhat unique, it doesn’t prevent consumers from going to other establishments, because food offerings are all similar, in general, in various different restaurant.
  • Network Effects: There is virtually no network effect in place.
  • Cost Advantages: There is very limited cost advantages that the company has, stemming from economies of scale, for their products.

Given these factors, CAKE has a Narrow Moat (2/5), primarily based on brand recognition and somewhat a unique menu, yet switching costs are very low, and the company has had a difficult time adapting to recent challenges.

  • Legitimate Risks to the Moat:
    • Changing consumer preferences: Consumers could shift their preferences to different dining options, making the chain less appealing.
    • Increased Competition: A new restaurant chain offering similar menu and quality might take market share.
    • Reduced brand appeal: A loss of quality in their food or service may harm their brand name.
    • Increased Food or Operating Costs: Rising ingredient and operating costs can severely affect profit margins, potentially decreasing the attractiveness of the business.
    • Economic Downturn: A severe downturn can severely affect discretionary spending and reduce the value of the business.
  • Business Resilience
  • The business is vulnerable to industry shifts, such as consumer preferences, cost inflation, and competition. However, its brand power helps them to remain competitive.
  • The multiple-channels of distribution are helpful to absorb shocks on one stream of revenue, however, many of the products are similar which does not provide complete protection from these factors.
  • The business has been tested by the high inflation environment of 2023 and proven its ability to pass costs on to consumers.

Understandability Rating: 2/5 The business is easy to understand with respect to operations, but it is somewhat complicated to understand the sources of competitive advantage, and how all pieces of the financial statements link together. The various financial reporting elements for various segments and their impact on overall profits is also difficult to understand by any average Joe.

Balance Sheet Health Rating: 4/5 The balance sheet shows decent liquidity, a moderate amount of debt, and manageable amounts of liabilities. The company manages its debt well and doesn’t seem to be overly leveraged. The only problem is that the most valuable assets that they have are intangible assets, and in general these assets are vulnerable to competitors and do not offer strong moat characteristics.