The Cheesecake Factory cheesecake dessert.
The Cheesecake Factory

Same-store sales at Cheesecake Factory restaurants declined 23.3 percent in Q3, but were down only 10 percent in September.

Cheesecake Factory Prepares to Close RockSugar

The brand debuted in 2008 in the Century City mall in Los Angeles.

The Cheesecake Factory launched RockSugar Southeast Asian Kitchen 12 years ago within a shopping mall in Century City, California—a Los Angeles neighborhood adjacent to Beverly Hills, and not far from where the original Cheesecake Factory debuted in 1978.

The brand, which took its name from a common Southeast Asian ingredient, was designed to capitalize on popular Asian food trends, yet differentiated from the vast competition. Namely, P.F. Chang’s. It didn’t feature Chinese or Japanese dishes, electing instead to focus on less mainstream Southeast Asian flavors.

With prices slightly above Cheesecake Factory, it was billed as a “chef-driven fine-casual restaurant concept.” The second store opened December 2017 in Chicago’s Oakbrook Center. A little over two years later, a day before 2020, that venue closed.

Now, Cheesecake Factory is preparing to discontinue operations at the lone remaining restaurant by year’s end. During Q3, the company recorded pre-tax impairment of assets and lease termination expense of $10.4 million, $5.4 million of which was cash lease termination expense associated with a Cherry Hill, New Jersey, Grand Lux Cafe location closing, and RockSugar exiting. Additionally, a Flower Child in Rockville, Maryland, won’t reopen as well.

The company did not comment further on RockSugar's future.

Past the closures, Cheesecake Factory turned in a promising Q3 report Thursday.

Same-store sales at Cheesecake Factory restaurants declined 23.3 percent as the company shouldered coronavirus-related charges of $2.6 million, for costs such as sick pay, additional sanitation, and PPE. Yet by September, comps were down just 10 percent. The leap arrived as Cheesecake Factory started to reopen additional dining rooms.

In Q4 to date (through October 27), units with reopened indoor dining rooms recaptured, on average, roughly 90 percent of prior-year annualized sales volumes, the company said, supported by 40 percent off-premises sales mix. Including locations with only reopened patios and off-premises-only operating models, fiscal Q4 results are tracking negative 7 percent, year-over-year. This would equate to about $9.5 million average-unit volumes. The only full-service chain in America ahead of that figure in 2019, among the 50 top-grossing chains, was Cheesecake Factory itself, at $10.7 million.

Notably, 20 Cheesecake Factory restaurants reported positive same-store sales Q3.

A lead reason for the boost: As of Friday, about 90 percent of the company’s restaurants across all of its concepts, including 187 Cheesecake Factorys, were operating with reopened indoor dining rooms with limited capacity. On average, Cheesecake Factory locations are open at 50 percent. Roughly 7 percent systemwide, including 17 Cheesecake Factory stores, are serving guests with reopened patios with social distance-friendly layouts. Only two (one Cheesecake Factory) are off-premises only, and five across the company’s system are currently closed.

Cheesecake Factory directs North Italia and a collection within the Fox Restaurant Concepts subsidiary for a total of 295 restaurants.

Additionally, amid reopenings, the company is holding nearly 90 percent of elevated COVID off-premises sales at Cheesecake Factory locations.

The company opened two Florida Child units, in Houston and Oklahoma City, in Q3. Cheesecake Factory expects to debut as many as 12–14 restaurants next year, spread across its portfolio, with $105 million in CapEx on the table.

CFO Matt Clark said Cheesecake Factory could accelerate growth as early as 2022—something it hinted at before the crisis, when it committed to a 6–7 percent range long-term.

“I think we definitely have the concepts to accomplish that and I think we have the balance sheet to accomplish that and the teams to accomplish that,” he said. “I think that the real estate environment will be there with lots of opportunities. … but based on what happens with the virus and we want to move forward in a way that we're taking every opportunity we can, but also making sure we're positioning ourselves for the long-term.”

President David Gordon said Thursday Cheesecake Factory installed glass partitions at about 50 restaurants. Additional locations are lined up in coming weeks, which will eventually cover two-thirds of the footprint.

Of current trends, the ability to hold off-premises sales fueled optimism.

“I believe this indicates that a meaningful increase in off-premise sales driven by our digital platforms could be a longer-term sales driver as we emerge from the pandemic,” Gordon said.

In turn, Cheesecake Factory has focused marketing to raise awareness and drive sales into slower dayparts, like lunch.

Gordon said the brand’s $15 lunch special, which included a slice of cheesecake, “saw a tremendous guest response, thereby increasing awareness of our lunch offerings, while successfully driving sales to the late afternoon shoulder period.”

Given October was National Dessert Month, Cheesecake Factory rolled a series of deals, from $5 cheesecake to a Treat or Treat promotion where guests could get a free slice of Reese's Peanut Butter Chocolate Cake Cheesecake or Hershey's Chocolate Bar Cheesecake with any order of $30 or more placed through DoorDash or the company’s site.

Gordon said Cheesecake Factory’s marketing resonated with delivery guests, leading to strong growth. About 40 percent of the company’s off-premises mix is stemming from the option.

“We've had specific success driving new customers to the Cheesecake Factory as well as strong reorder rates. We also continue to see an overall customer order frequency increase, supporting strong return on investment on our marketing campaigns this year,” Gordon said.

He added Cheesecake Factory’s breadth of menu has represented a key differentiator during COVID, just as it always has. Only now it’s spreading to new channels.

While many chains are simplifying menus, Cheesecake Factory is actually growing offerings. It recently launched a “Timeless Classics” menu card insert nationally after a test in Southern California. It highlights prior-fan favorites and offers up nostalgia “at a time when the consumer craves just that,” Gordon said. He also noted it centers on “compelling price points” to infuse additional value into Cheesecake Factory’s lineup.

Gordon said the special card “will be out there for a while.” Then the brand will decide if it wants to move some to the main menu or not, based on how they perform. It will get back to its regular cadence of menu updates next winter. Either way, Cheesecake Factory has no plans to scale back.

With off-premises, he said this fact helped the company retain off-premises business. “So I think the value of the menu and the breadth of the menu is the reason for that,” Gordon said. “If you're a family of four, you can easily order a couple of entrees and appetizer, complimentary bread, and it's a great value. And you can turn around three days later and try an entirely different type of cuisine, again, from The Cheesecake Factory. So that's one of the reasons we think that it's been as sticky … and we would anticipate that we can keep the majority of that business, even as the restaurants be open.”

October marked a year since Cheesecake Factory purchased North Italia and FRC. Currently, 21 North Italia locations have indoor dining rooms open and two are up for outdoor dining. Q4 to date, same-store sales are down 4 percent, buoyed by 25 percent off-premises sales mix. Forty-nine FRC locations restored dining rooms, while one is open for outdoor dining, and three have remained closed.

“When we acquired FRC, we believed it presented a unique opportunity to serve as an incubation engine for concepts of the future,” Gordon said. Along those lines, the brand plans to launch a pop-up virtual concept December in the Phoenix market. It’s also plotting a Flower Child pop-up early next year with a streamlined menu primarily focused on off-premises, with some limited indoor capacity. Gordon said they’ll use the opportunity to test “a number of digital elements.”

“These are two great examples of how we can continue to harness FRC's creativity and experiment at a very cost-effective manner,” he said.

FRC and North Italia contributed $63.9 million of revenue in Q3. FRC’s sales per operating week, including Flower Child, were about $61,120 in the quarter.

The company’s total revenues of $517.7 million (including $17.8 million in external bakery sales) compared to $586.5 million in the year-ago period. Net loss and diluted net loss per share were $28.3 million and 76 cents, respectively.