Stores aren't just outperforming 2020, they're beating 2019 levels as well.

The phrase “pent-up demand” has been tossed about by restaurants in recent weeks. Stimulus checks lined consumers’ pockets and could ultimately hike sector sales as much as 30 percent, according to Rabobank and Earnest Research. The country reported an average of 2.7 million daily vaccinations over the past week, the CDC recently said. And more than 40 percent of Americans have received at least one shot. It’s even higher—54 percent—for people 18 and older. More than half of adults received one in 34 states and the District of Columbia.

The week that ended April 28 also marked the fifth consecutive period two-year comp sales growth was positive for restaurants, according to Black Box Intelligence, with the most recent seven-day run representing the best sales and traffic results in well over a year.

So there’s something concrete to this “pent-up demand” mantra beyond just a hopeful rallying cry. And then there’s what’s happening at The Cheesecake Factory.

The casual company reported Q1 results Wednesday afternoon that revealed some promising trends. Same-store sales increased 2.8 percent, year-over-year, yet remained down 10.4 percent relative to Q1 2019.

However, fiscal 2021 Q2 quarter-to-date through April 27 (basically comparing to the depths of COVID last year, when comps plunged 56.9 percent in Q2 2020), the company’s comps jumped a jaw-dropping 220 percent. While a staggering result, the two-year view might be more notable. Relative to the same period in fiscal 2019, The Cheesecake Factory’s comps are up 7 percent, despite the fact stores, on average, are operating at 60 percent indoor capacity (about two-thirds of those units include patios).

There remain “a handful” of restaurants at 25 percent, perhaps nine or 10, CFO Matt Clark said Wednesday. And the difference between stores running at 50 and 75 percent is significant, roughly high-single digit comps and as much as 10 percent or more in certain spots. As Clark put it simply, “definitely there’s room [to grow], right?”

Oppenheimer & Company analyst Brian Bittner said the brand’s trend against 2019 levels proved “just incredible demand out there.”

Is it stimulus, off-premises, or something more sustainable?

“You know, nobody has that crystal ball,” Cheesecake Factory CEO David Overton said. “I think, you know, we typically get a little less benefit from stimulus than [those brands] sort of lower down in the price ticket. It does feel when we look at the trend, the last four weeks have been remarkably consistent which is a hallmark of The Cheesecake Factory, and is really good leading indicator for me.”

“And I’m into the statistics and look at the daypart, the day of the week, the geography,” he added. “When I start to see aggregated numbers behave in a very normalized fashion, week over week, I think that that’s a very positive signal. I don’t know that’s permanently sustainable, but it certainly feels like the momentum is there outside of the stimulus money.”

By mid-March, nearly all Cheesecake Factory restaurants, as well as the company’s other concepts, were open for some measure of indoor dining. The kicker, though, remains dollar volume coming outside the four walls.

As dine-in returns, The Cheesecake Factory continues to drive off-premises sales equating to more than $4 million on average, per unit, on an annualized basis. Before COVID, it was closer to $1.7 or $1.8 million. The Q1 rate is down from nearly $5 million the previous quarter, but understandably so considering 20 percent more of the system added dine-in service.

Still, $4 million is more than an average Cracker Barrel raked in before the pandemic.

A recent Cheesecake Factory in Washington, D.C. generated opening-week sales north of $230,000, and that was at 25 percent indoor dining capacity.

Weekly sales in March at restaurants with reopened dining rooms measured to about $11.5 million AUVs, outpacing 2019 numbers of $10.76 million, which were industry leading.

If restaurants maintained Q1 sales (including March) all year long, the chain would be looking at $10.4 million AUVs.

But returning to the recent 220 percent comps burst Q2 through April 27, Cheesecake Factory restaurants are averaging $222,500 per week. Pull that across a full year, and stores would report $11.6 million on average, per unit, on an annualized basis.

The inflection point for The Cheesecake Factory came in March with California reopenings. The demand piece was always part of it. “Mostly what we’ve seen is a very stable trend after reopening,” Clark said. “And, we typically build slowly during this quarter with seasonality. And then, just from our consumer perspective, it looks and feels like people are going to want to get out and celebrate graduations and do some things like that.”

Cheesecake Factory Employees Stand In Front Of The Restaurant

“Our operators are doing a great job of retaining the people that we have,” CEO David Overton said. “And that’s been something that we’ve talked about since the beginning of COVID—that retention will be key once we get to this point.”

To-go and delivery currently account for a third of The Cheesecake Factory’s total sales. That was about 40 percent last quarter, suggesting there’s significant staying power for the channel, even in the face of recovered consumer mobility. It’s almost sure to slide back further as dine-in capacity lifts, but imagining it going all the way back to pre-virus norms is difficult at this point.

The brand curtailed off-premises marketing recently as sales strengthened in March and April. Basically, The Cheesecake Factory has gotten far enough and crossed enough adoption gaps that it doesn’t have to. “We believe the appeal, quality, and increased awareness of our offering has enabled us to drive the highest level of off-premises sales dollars and maintain the highest level of off-premises sales when indoor dining rooms reopen relative to our publicly traded casual-dining peers,” Gordon said. “And our ability to sustain off-premise sales around these levels for over a year reinforces our belief that a meaningful increase in off-premise sales could be a longer-term sales driver for The Cheesecake Factory as we emerged from the pandemic.”

Executives have talked at length about the topic over the past year, as you might expect. What’s to credit for the sustained volume? There are several triggers. One being the brand did not scale back its menu in any fashion. The breadth of offerings, Gordon said earlier, enabled it to differentiate in the off-premises channel, just like it did with dine-in before coronavirus. The reasons are just a bit different.

With off-premises, it unlocks order frequency and repeat business since the company doesn’t bank on one product. Also, variety allowed Cheesecake Factory to target dayparts at its own directive. It could market and push awareness toward burgers, for instance, if it wanted to compete at lunch. In Q4 2020, the brand tried a $15 lunch special that included a slice of cheesecake—an effort that drove higher incremental sales attachment compared to a September pilot. It also diverted sales to late afternoon shoulder periods.

Broadly, including dine-in, the daypart conversation has evolved for the brand of late.

“One of the things that I would point out that I think is good positive for us is the biggest growth we’ve had in dayparts, if I look at the most recent trends is the midafternoon,” Clark said. “And so, lunch was even slightly bigger than dinner, too. And have been two areas rebuilding the shoulders, right? And then, the other thing I would say is that from a comp perspective, we are seeing outsized performance in the middle of the week. So that’s also positive because were the areas of pressure have been for us at the middle of the day and in the middle of the week. And we are seeing outsized gains there recaptured.”

One of the most notable off-premises levers for The Cheesecake Factory might actually be value, which generally isn’t a company hallmark. The sheer size of the brand’s off-premises lineup gives it the ability to present value across the menu and offer flexibility with pricing, particularly in markets where wage pressure continues to ratchet up.

A range of price points and offerings made it so families can order, “easily one, two or three times a week,” Gordon noted.

Additionally, The National Restaurant Association said in its 2021 State of the Industry Report that 52 percent of adults, including 63 percent of millennials, said they’re more likely today to incorporate restaurant fare into their home-prepared meal.

In other terms, “blended meals” are on the rise—the idea of adding a main dish, side, or dessert, into an at-home occasion. And The Cheesecake Factory was built for such a movement.

But the pricing note can’t be understated, either. The company runs low single digit, 2–5 percent or so, on its delivery menu specifically. Clark was asked Wednesday by Wells Fargo analyst Jon Tower, “why not make that transaction itself either margin or penny—profit accretive, or even margin neutral to accretive to an in-store transaction.”

Or, phrased another way, why not raise delivery prices to offset margin pressure?

“The way we think about it is agnostic to the guest’s experience,” Clark said. “I mean, I think that David has grown this company targeting absolute guest satisfaction. And we think that if it’s basically margin neutral, it is a fair proposition and will drive the business, and we’ll make our money that way.”

“And that’s where we’re at today,” Clark continued. “And so, the more that other companies take more pricing, the better off we’re going to be actually, is where we sit. So I think it’s a little bit of a contrarian view, but it seems to be working pretty well for us.”

The Cheesecake Factory can also take this approach because of scale and leverage, and its partnership with DoorDash. For example, when the company mentioned curtailing marketing, that doesn’t include top-of-app preference and some of the normal considerations it gets as an exclusive partner. Cutting back instead referred to promotional activities, like discounting cheesecakes.

But the overall off-premises flow has been relatively consistent in terms of where sales are coming from.

It’s stemmed 40 percent delivery, 30 percent online ordering, and 30 percent pickup. “And we do take a little bit of extra pricing as was referenced low-single business for delivery,” Overton said. “So when you put all of those pieces together, the off-premises business, it basically ends up around the same margin as on-premises. And so, we’re pretty agnostic about where we drive the sales as long as we’re getting them.”

Another thing helping the brand, Overton said, is that it’s at 90–96 percent of pre-COVID staffing levels, despite the challenged hiring market. It was recently recognized as one of the Fortune 100 Best Companies to Work For for the eighth consecutive year. The company ranked No. 35 and was the only restaurant brand included.

“Fortunately, we made the strategic decision on the management staff inside to keep all of our managers in place, which is enabling us to be able to execute, I think, as well as the operators are executing today,” Overton said.

On the current state and being above 90 percent, he added, “I don’t know that we have as much catch-up to do, perhaps as some others in our space. We’ve always paid a very competitive wage. We have a very strong career continuum that shows advancement opportunities. We’ve also taken this opportunity to bring back a couple of our recruiters to help at the hourly level, the restaurants so they can stay focused on operations. So, really good about our plan in place.”

Overton said he doesn’t see the current staffing situation negatively impacting sales moving forward.

“Our operators are doing a great job of retaining the people that we have,” he said. “And that’s been something that we’ve talked about since the beginning of COVID—that retention will be key once we get to this point.”

Oreo Slice From The Cheesecake Factory

Off-premises sales continue to push the brand’s AUVs up.

Cheesecake Factory posted revenues of $627.42 million in Q1, compared to $615.11 million in the prior year. The brand recorded COVID related charges of $4.9 million on costs such as sick and vaccination pay, healthcare, and meal benefits for furloughed staff, as well as additional sanitation and PPP.

As noted, nearly all, including 206 Cheesecake Factory locations are back on line with dine-in offerings. Only one is operating as off-premise only. Two are currently closed, with plans to reopen by the end of Q2.

Overton said the company is on track to open as many as 15 new restaurants across its portfolio this year. This would unfold as two Cheesecake Factory stores, six North Italias, and six Fox Restaurant Concept venues (two Flower Childs).

Speaking of North Italia, an acquisition completed in October 2019, the brand opened a Birmingham, Alabama, store in Q1—a new market—and a second Miami-area location debuted subsequent to quarter’s end.

Currently, all North Italia locations offer indoor dining and are holding off-premises mix of 20 percent. Comps are up 8 percent Q2 quarter-to-date versus 2019 levels.

The company remains committed to a 200-store figure it previously suggested. “There hasn’t been a market that we moved into yet where it’s caused us to pause and say perhaps that 200 number is not realistic. We think it certainly is realistic. We’ll could continue to grow North at about a 20 percent growth rate,” Overton said. “And we’ve seen that guests are responding to it in a very favorable way. So, we’re very, very bullish on the future.”

Flower Child, FRC’s fast-casual flagship, tested a digital-forward pop-up format earlier this year in Arizona that featured in-store kiosks. The tech features artificial intelligence that learns individual guest behaviors, Gordon said, and the company plans to incorporate the platform at future openings.

Casual Dining, Chain Restaurants, Chef Profiles, Feature, Finance, The Cheesecake Factory