Today’s recommendations include a company growing from successful restaurants and desserts, and some profit-taking on a previous recommendation.
Buy: The Cheesecake Factory (CAKE)
From Hendershot Investments
The Cheesecake Factory (CAKE) owns and operates more than 200 full-service, casual dining restaurants throughout the U.S. and Puerto Rico, including 189 restaurants under The Cheesecake Factory name, 12 Grand Lux Cafes and one RockSugar Pan Asian Kitchen.
Over the last 38 years, The Cheesecake Factory has developed a strong brand as an upscale, casual dining restaurant appealing to a broad demographic range. The Cheesecake Factory is known for excellent service and offering generous portions from an extensive menu of more than 200 items which includes about 50 varieties of its legendary and signature cheesecakes.
The firm’s strong brand identity results in a significant level of dessert sales that account for about 16% of total sales and are five times higher than most restaurant dessert sales. For calorie conscious customers, a supplementary SkinnyLicious menu offers about 50 items at 590 calories or less.
Substantially all menu items, except the desserts made at the company’s bakery operations, are prepared daily with high quality, fresh ingredients using innovative and proprietary recipes. The entire menu is updated twice a year for customer appeal and pricing.
The Cheesecake Factory has been named to Fortune Magazine’s list of the 100 Best Companies to Work For® for three consecutive years thanks to a talented management team with careers that span between 11-26 years with the company. David Overton, the founder’s son, remains the company’s Chairman and CEO and owns more than 7% of the business.
Cash flow from operations has approximated $200 million each year over the last five years. Management is continuing to expand stores at a disciplined pace to provide for future growth. At the same time, the company is returning substantially all free cash flow after capital expenditures to shareholders in the form of dividends and share repurchases.
The Cheesecake Factory has generated positive comparable store sales growth for more than six years as it gains market share. For fiscal 2016, comparable store sales growth is expected to be about 1% with the company increasing its expected 2016 EPS outlook to $2.70-$2.76.
Management expects solid long-term growth with a goal of operating 300 restaurant locations in the U.S. while accelerating growth in international markets. In fiscal 2016, the company plans to open as many as eight domestic restaurants while opening four to five licensed restaurants internationally. This includes the first The Cheesecake Factory restaurant in China which opened in June 2016 at the Shanghai Disney Resort.
During the second quarter, the company rolled out nationally its mobile payment app, CakePay, which improves convenience both for guests and servers. The Cheesecake Factory was selected by MasterCard for an upcoming national advertising campaign which should generate significant awareness for both CakePay and the restaurants.
Long-term investors hungry for a HIquality company with a strong brand, consistent cash flows, a rapidly growing dividend and solid growth should consider ordering a slice of The Cheesecake Factory. Buy.
Ingrid R. Hendershot, Hendershot Investments, www.hendershotinvestments.com, 703-361-6130, September 2016