The Cheesecake Factory's Development Future is Brighter Than Ever

The overall goal is to reach 7 percent annual unit growth.

April 28, 2022 Ben Coley

When it comes to the post-COVID landscape, The Cheesecake Factory said it’s operating on the belief that “stable, agile brands will be best equipped to weather volatility and thrive.”

The opportunity for market share is certainly presenting itself, with roughly 100,000 restaurants closing since the start of the pandemic. That means a lot more whitespace.

The Cheesecake Factory ended Q1 with 208 U.S. company-owned restaurants, but the brand believes it has room for 300 domestic locations. For the 29-unit North Italia, the brand said there’s room for 200 U.S. stores over time.

In 2022, the company expects to open 15-16 restaurants, including four Cheesecake Factories, four to five North Italias, and seven Fox Restaurant Concepts restaurants, including three to four Flower Child locations. One Cheesecake Factory should open internationally under a licensing agreement, as well. The brand is spending roughly $150 million in capital expenditures to support this growth, as well as required maintenance.

The Cheesecake Factory targets between 7,000-10,000 square feet and restaurant-level margins of 18 percent. The cash capital expenditure investment exceeds $8 million, and the cash-on-cash return is estimated to be between 20-25 percent.

The overall goal is to reach 7 percent annual unit growth, including roughly 3 percent for The Cheesecake Factory, 20 percent or more for North Italia, and 15-20 percent for Fox Restaurant Concepts.

“We are maintaining a very healthy level of liquidity and a cushion in our outstanding expectations for cash flow, such that we will continue with our growth plans no matter what,” said CFO Matthew Clark, when asked how the company will respond if the macroeconomic environment becomes less favorable.

“I think that what we're seeing is that that is the right course of action because the consumer demand will be there,” he added. “And our new units continue to outperform our expectation. So I think we feel good. I think we have confidence that we can buffer against that given the strength of our trends. And so we know whatever it comes to happen, we'll be prepared.”

Same-store sales in the first quarter increased 20.7 percent year-over-year and grew roughly 8.2 percent in Q2 through April 26. (Note, Clark said The Cheesecake Factory prefers 2021 comparisons because its lapping the reopening of dining rooms).

The Cheesecake Factory earned roughly $225,000 in average weekly sales in Q1, or an $11.7 million annualized AUV, and about $240,000 in Q2 quarter-to-date, or $12.5 million annualized AUV.

At North Italia, comps rose 32 percent year-over-year in the first quarter, and 18 percent in the second quarter through April. The chain had average weekly sales of $139,900 in Q1, or $7.3 million annualized AUV. Fox Restaurant Concepts, including Flower Child, brought in average weekly sales of $111,000, or $5.8 million annualized AUV.

Off-premises mixed 28 percent in Q1 for The Cheesecake Factory and 13 percent at North Italia. As for dining rooms, the company is seeing between 85-90 percent of its pre-pandemic in-restaurant traffic, which equates to about $1.5 million more to gain in annualized AUV.

“The one thing that has occurred, which is what we thought would happen is that consumer demand for our brands would exit the Omicron surge even stronger,” Clark said. “And so once again, I think we've seen that occur. Certainly our Q2 to-date sales trends I think are very good and would indicate that even at a slightly lower level than that, we would still be in really good shape. So, I think that the business strength can absorb a little bit of uncertainty, regardless of what happens.”

Cheesecake Factory

Clark described the staffing situation as “good, but it’s not perfect.” There are pockets of opportunities where the chain could use a few more staff members. In March, the restaurant industry employed 11.54 million workers, which is roughly 750,000 people shy of where it was in February 2020, calling into question whether employment at food and drink places will truly ever return to normal.

But the full-service chain finds itself in a better position than most, with roughly 1 percent more staff members than it had just prior to the pandemic—an increase of more than 3 percent compared to the end of 2021. In Q1, The Cheesecake Factory drove sequential improvement in manager and hourly retention rates and experienced momentum in its hourly application flow.

The chain was recently named to Fortune’s 100 Best Companies to Work For” for the ninth straight year.

The Cheesecake Factory projects 6 percent labor inflation in 2022, which is up slightly from previous guidance. CEO David Overton attributed that bump to continued increases in pay across the industry.

“I think we are happy that our staffing levels are roughly 1 percent better than pre-pandemic,” Overton said. “Obviously, with the sales levels where they are, we want that to continue. … Most importantly, we want to stay competitive. And wages certainly across the industry have gone up and not just our industry, but whether that's retail or others, they continue to pay competently as well.”

“So we're not going to fall behind,” he added. “We want to make sure that all of our operators know what the competitive market looks like. We provide them with information on a monthly basis so they can see what the pay rates are and the geographies around them, and proactively taking care of people and the way that we have historically.”

Commodity inflation is projected to be in the low-to-mid double digits, a 1-1.5 percent increase over the company’s prior outlook because of geopolitical turmoil. The Cheesecake Factory plans to take another menu price increase toward the middle of Q3.

The chain is evaluating the level of pricing needed to regain 2019 four-wall margins in the latter half of 2022, and right now, the chain assumes that would be 1.5-2 percent.

“While current inflation in our industry is unprecedented, we continue to believe the strategic pricing plan we're implementing remains appropriate and can deliver solid earnings per share and help recover profit margins in 2022, while importantly, protecting our brands to enable long-term market share gains,” Clark said.

Total revenues were $793.7 million in the first quarter compared to $627.4 million last year. Net income was $23.2 million.