Cheesecake Factory coconut cream pie cheesecake
Cheesecake Factory

As sales inside and outside stores continue to climb, Cheesecake Factory recently shifted marketing to brand-based messaging in an effort to raise its profile.

Cheesecake Factory Foresees Big Rebound after Omicron

The brand has made a habit of bouncing back after case surges.

The Cheesecake Factory’s Q4 sales were tracking 10.6 percent better than 2019 as the third week of December approached. By the time the period ended on December 28, however, the casual chain dropped to 7.7 percent, illustrating the omicron effect in a rapid window. The brand incurred $3.8 million of incremental costs related to COVID sick time, as well.

But similar to previous case and regulation surges, the brand’s rebound was swift once sentiment improved. Q1 sales through February 15 are up 24.3 percent over the prior year and hiring levels in January rose 10–15 percent compared to Q4. Combined with improved retention, Cheesecake Factory’s total hourly staffing is 2 percent better already just from the end of 2021.

In all, the up-and-down stretch speaks to the challenge and opportunity ahead for the polished chain.

Execs Wednesday called the landscape of running restaurants “volatile,” pointing to everything from inflation to commodities to supply chain and even higher natural gas expenses. CEO David Overton said Cheesecake Factory is currently in the process of rolling out a new menu that includes about a 3.25 percent menu price increase that would put its year-over-year uptick at 4.75 percent. “We will continue to monitor the inflationary environment to determine what level of pricing will be needed during our next menu rollout,” he said. Roughly half of that will come in Q1. In the scenario inflation trends remain elevated, as they are now, the brand could take an incremental 2 percent in price to regain 2019 four-wall margin by the back half of 2022.

READ MORE: New Customers Have Flocked to Cheesecake Factory During Pandemic

CFO Matthew Clark said Cheesecake Factory’s agility to layer in price has always been strong (it typically does twice a year) thanks to an encyclopedia-thick menu that offers tiers from $7.95 to $30 and everything in between. “And frankly, we're targeting, and I think to the benefit of our ability … pricing slightly below both grocery and our competitive set,” he said. “So if anything, we're going to be in a better position relative to consumers coming out of this than most companies in our space.”

The brand is cognizant of how higher prices correlate with guest expectations, which is why the staffing point is so critical. Dine-in net promoter scores improved, brand president David Gordon said, alongside hiring efforts. Experience, service, hospitality, and food quality all bumped.

During the weeks when omicron pulsed, Gordon added, the brand witnessed staffing pressures larger “than we had all the way back to the beginning of the pandemic.” (Cheesecake Factory once furloughed 41,000 workers).

It wasn’t to the point where the company had to adjust hours or close for certain dayparts, minus a restaurant here or there, but the process was challenging—and costly—as people recouped at home or expressed caution in their job hunts. If recent hiring numbers continue, however, “we'd be sitting in a really strong place,” Gordon said.

“And certainly, in no way are any of our staffing needs prohibiting any potential sales at this point,” he added. “I think we feel really good about the restaurants being in a solid staffing position and enabling really strong execution, whether that's for dine-in or for off-premises.”

And there’s no secret why trends flipped upward. Time and time again, Clark said, the brand returns from COVID surges “a little bit stronger than before.”

When mask mandates are lifted, there’s a fast correlation to guest traffic. When restrictions drop and case decline stories grow, “the sales come back really fast,” he said.

“The pent-up demand continues to build,” Clark said. “The execution of our teams relative to the competition has only made us better and more resilient. And I think that the dine-in business is what obviously has regrown with the off-premises remaining stable. So we haven't lost that, but what we continue to recapture over time is the dine-in to support that level of business.”

To that measure, off-premises sales accounted for 27 percent of mix in Q3, an annualized average weekly figure that’s close to twice Cheesecake Factory’s 2019 levels. “We think we can recapture the on-premises dining and keep the off-premises,” Clark reiterated. “So we're seeing both of that happen, which I think is a really positive outlook.” The brand isn’t aiming to outsize its current performance. Rather, it would be happy sticking in the high-20s, mid-20s of mix.

Clark added stimulus payments in 2021 made little difference to the brand’s sales cadence—a sign of long-term viability. Performance was tied to access more than anything else. “And so as soon as you saw a wave of reopenings, our comp stepped up and then we're remarkably consistent throughout the different periods of time, absent really the omicron surge,” he said.

As sales inside and outside stores climbed, Cheesecake Factory shifted marketing to brand-based messaging in an effort to raise its profile. That’s included a refreshed website, launched two weeks ago with a more contemporary look, and a platform that centers on a more ecommerce-forward design that targets higher conversion rates and average order values for online ordering. Additionally, Cheesecake Factory migrated its email database to a fresh CRM system to work hand-in-hand with a rewards program that’s expected to launch in pilot form by the middle of the year.

The same challenges facing Cheesecake Factory are weighing on operators of all sizes, Clark said. But not every restaurant can respond with this array of tactics.

It’s to the point where labor and commodity setbacks are keeping some small and midsized operators on the sideline, he said. There are restaurants closed around Cheesecake Factorys that haven’t reopened because of it.

“The sales momentum that we've built was not because more people closed, but it continues because the dynamic is there's more people that want to go out to eat than restaurant capacity, and it's not coming back quickly,” Clark said.

And to the equipment and permitting delays, and other hurdles of development:

“I mean all of them, just try to build a new restaurant,” Clark said. “If you don't have the scale and the capabilities that The Cheesecake Factory has, well, good luck to you.”

At a tag of $150 million in CapEx, the brand plans to open as many as 17–19 stores in fiscal 2022, including up to five Cheesecake Factory units, five to seven North Italias, and seven other Fox Restaurant Concepts venues (three to four Flower Child locations). Another Cheesecake Factory will open internationally under a licensing agreement.

Barring no further material impact from virus surges, the brand anticipates total revenues for 2022 in the $3.3 to $3.4 billion range, with Cheesecake Factory average-unit volumes climbing beyond $12 million (13 percent higher than 2019’s $10.7 million).

The company expects commodity inflation of low-double digits and is modeling for year-over-year pressure to lessen as the calendar progresses, starting with mid-teens in Q1 and ending with mid- to high-single digit pressure in Q4.

Broadly, the commodity picture is 2–3 percent higher for the year in this outlook than Cheesecake Factory’s previous guidance. To compensate, if those figures remain elevated, the brand will need to take 2 percent in price, as mentioned before. Normally, it takes 1.5 percent in the summer to lap around.

It’s a model that could still change. Yet the “100 percent” goal this year for Cheesecake Factory will be to achieve 2019 operating margins, Clark said. How the brand gets there is a reaction to where external trends head.

“We feel good that over the course of the next six months, we'll get a lot more clarity about where that will be and we'll be able to effectively roll it in,” Clark added of pricing. The chain is actually at a lesser level than this time last year, when it rolled in 3.25 percent on a six-month basis.

“So we feel like the ability to get to 2 percent is very viable,” he said.

Not dissimilar to other chains, urban and travel area stores remain depressed relative to the system. A downtown location, for instance, might be closer to $12 million today instead of $16 million pre-virus, Clark said. There’s a 2–3 percent opportunity for those units to get back to breakeven. Suburban malls, though, are posting “very strong performance.”

“I think the single biggest thing is really the urban tourist areas and opportunity there,” Clark said. “If what we're hearing that people are starting to book flights and hotels again, it could help us out in the back half.”