We published an analysis on October 22nd, showing almost all the publicly held restaurant companies, comparing their current valuations to those before the pandemic. That chart is provided below, with prices updated to midday on 11/17. Based on the 2/15/20 (pre-pandemic) estimate of 2020 earnings, and today’s estimate of 2021 earnings, it appears that Cheesecake Factory (CAKE) is substantially overvalued, which suggests that CAKE is somehow in a much better fundamental position coming out of the pandemic than going in. The stock is within 10% of its high, but the current consensus estimate for 2021 of $1.58 per share is very much below 2019 results and expectations back in February.

Let’s take a fundamental look at CAKE. Back on February 15th, CAKE was selling at about $41/share, with earnings expected in calendar 2020 in the area of $2.85/share. Trailing EPS, for calendar 2019, had been $2.61/share. This premier operator of large box restaurants (206 CAKE restaurants at 12/31/19, with 39 in CA, 19 in FL, 16 in TX) averaging over $10M per unit (almost 1,000/sq.ft.  has had several years of relatively flat operating results. Comp sales, as shown just below, have been slightly positive, with traffic, adjusting for price, slightly negative:

The table below, from Bloomberg LP, shows the historical EPS trend, as well as the current 2021 consensus EPS estimate, obviously still restrained from working through the pandemic burden.

It should be noted that while Cheesecake Factory Restaurants are the heart of this business, CAKE operates an additional 88 restaurants under the names North Italia, Grand Lux Cafe, Rock Sugar, Social Monk Asian Kitchen and Flower Child.   CAKE also operates two bakery facilities that supply their own restaurants as well as third party customers.  As you can see from the summary financials below, Income From Operations declined over the five years ending 12/19, from $165M to $106M. However, the steady cash flow from operations, combined with an increase of $200M of long term debt (to $290M) allowed the Company to shrink the fully diluted shares outstanding from 50.6M to 44.5M. This process, along with a lower tax rate, allowed earnings per share to do better than Income From Operations or Pretax Earnings.

In addition to the summary results just above, it is relevant that, between 2017 and 2019, Cost of sales was reduced by 40 bp to 22.6% of sales, Labor increased 190bp to 36.3%, Other Operating Costs increased by 110bp. Income From Operations decreased 260 bp to 4.2%, obviously reflecting the deterioration in store level margins.

Having pointed out the above lackluster sales trends and deteriorating profit margins, it cannot be ignored that CAKE restaurants serve the broadest menu in the industry, provide an outstanding value of food and service, and consistently receive very high marks in terms of customer satisfaction. Sales of just below $1000 per square foot are unmatched by any large scale casual dining chain. The Brand’s reputation, in the eyes of customers, is far from diminished.


In terms of cash flow in 2020 and the current balance sheet : the Company took the necessary steps during the heart of the pandemic to assure adequate liquidity. Between 12/31/2019 and 9/29/20, cash increased from $58M to $243M (an increase of $185M, supplied by $200 of convertible preferred stock and an $86M increase in long term debt to $376M).  Cash Generated By Operating Activities  in the thirty nine weeks was a negative  $33M. Management indicated on the conference call that $96M was repaid on the credit line in October out of the 9/29 cash balance, bringing the long term debt balance back to $290M.

Same store sales at Cheesecake Restaurants were down 23.3% in Q3, a lot better than the 56.9% decline of Q2. There was a Loss from Operations of $34.9M, much better than the $83.7M of Q2.  Store level EBITDA margin of 7.8% was also much better than the negative 7.0% of Q2. Most importantly, comps improved sequentially throughout the quarter, from down 32% in July to negative 10% in September, and  running through October 27th at a negative 7%. There are lots of operating details we could provide, but the most important takeaway seems to be that the off-premise effort has apparently been retained even as dining rooms have reopened. Management expressed their confidence that this enlarged off-premise effort can be largely sustained, and the 35% flow through of cash from the incremental Q2 to Q3 sales can be sustained as sales build further. Management guided on the conference call to positive operating profit in Q4, with positive EPS after a 10% tax rate. Looking toward 2021, management indicated that commodity inflation would be about 2%, and wage rate inflation might not be quite as difficult as in recent years. Overall, management seemed to hold out hope that store level margins could be back to pre-pandemic levels (approximately double the 7.8% of Q3),  even at something just short of matching year ago sales (a 95% comp). This seems to be based on their confidence that off-premise sales can be maintained, better margins can be produced by call-in and online ordering (more than offsetting lower margins for deliveries) and labor inflation will be 1-1.5%, rather than the recent 5.5-6.0% annual increase. While we can’t forget that 18% of the Cheesecake restaurants are in lockdown challenged CA, that’s been the case already in the reported numbers and presumably included in management guidance.


Putting it all together, we believe Cheesecake’s fundamentals are within reach (a year or so) of achieving pre-pandemic sales and margins. A large part of our consideration is the newly built satisfaction level of off-premise customers. We also consider that CAKE is in a class by themselves in terms of providing a very broad menu of well prepared food at compelling prices. We don’t doubt that their packaging and service, off premise,  is among the best within casual dining, and the possibility exists that off-premise can be largely sustained even as dine-in rebuilds. It therefore wouldn’t be shocking if two years from now, the AUVs are 10-20% higher than just before the pandemic, and operating margins could return to levels well above 2018 and 2019. Considering that the recovery is well established, CAKE’s operating skills are second to none, and an important new venue is now available to be served from existing facilities, CAKE shares are reasonably priced relative to their peer group.

Roger Lipton



Cheesecake Factory continues to set most of the standards among the full service casual dining restaurants, yet is subject to the operating challenges the entire industry faces: flat to down traffic, costs such as labor and rent rising, and too much competition for the consumer’s food dollar. The one time benefit from lower taxes allowed for an EPS increase during 2018 but pretax operating earnings have been down, and don’t promise to increase by much in 2019. CAKE, selling at 9.4x trailing EBITDA is not expensive but we don’t see a catalyst for much better operating performance, especially in an economy that is clearly slowing.


The Cheesecake Factory concept originated in 1972 as a small bakery in Los Angeles, CA area. In 1978 it opened the first Cheesecake Factory restaurant in Beverly Hills, CA. As of September 2018, the Company operates 215 company owned restaurants: 199 Cheesecake Factory restaurants, 14 Grand Lux Cafe locations, and 2 RockSugar Southeast Asian Kitchen locations. In addition, there are 21 licensed locations worldwide of the Cheesecake Factory concept, with one more (Monterrey, Mexico) scheduled to open in Q1’19. Three additional company operated Cheesecake restaurants were expected to open in Q4’18. The first location of Social Monk Asian Kitchen, a newly developed fast casual concept, is expected to open in Q1’19. As of December 2017, Cheesecake had systemwide sales of $2.2 billion which was an increase of 1.8% over 2016. In 2016, CAKE invested $42M for a minority position in Fox Restaurant Concepts LLC, which operates North Italia and Flower Child, with further obligations to invest growth capital of $42M more over several years.

Cheesecake is among the best long-term performers in the Casual Dining space in several key areas. Cheesecake is ranked number one in AUV with annual sales of $10,700,000 and operating margins of 20.0% store level EBITDA in 2017 (producing somewhat less in ’18, and targeting $10.6M and 18% going forward). In contrast to many restaurant chains, Cheesecake prepares from scratch all menu items except desserts which are produced at their bakery facilities, one of their competitive strengths. In conjunction with making all menu items from scratch, they consistently use high quality fresh ingredients. Cheesecake regularly updates its ingredients and cooking methods to adapt to consumer changes in taste; thus, their menu is always evolving.

Cheesecake places significant emphasis on contemporary interior design and décor. This creates a high energy ambiance in a Casual Dining setting and contributes to their distinctive dining experience. Dining Rooms feature large open-space areas and focus on efficient and friendly service. As a result, Cheesecake appeals to a diverse clientele across a broad demographic range and is classified as a Polished Casual Dining concept.

All menu items are available for take-out which represented 12% of sales in 2017, 13.5% most recently. Cheesecake partners with third party providers for delivery service, most prominently now using Doordash.  Additionally, Cheesecake has implemented online ordering for To-Go sales.

Cheesecake’s dessert menu line offers unique opportunities for add-on sales which as of December 2017 represented 16% of total restaurant sales. Their current menu features 50 varieties of their proprietary cheesecakes. The Company’s bakery division operates two bakery production facilities – one in Calabasas Hills, CA and the other in Rocky Mount, NC.

Grand Lux Cafe concept is Cheesecake’s upscale Casual Dining concept that offers globally inspired cuisine with an ambiance of modern sophistication. Grand Lux Cafe has 13 locations and offers classic American dishes and international favorites. Each Grand Lux Cafe has an on-site bakery and a full service bar. The average check is approximately $22.10.

RockSugar Southeast Asian Kitchen is Cheesecake’s Asian cuisine concept featuring an Asian menu and design elements in an upscale Casual Dining setting.

Consumer Packaged Goods – Given the strong affinity for the Cheesecake brand, the Company is leveraging opportunities in the consumer packaged goods channel. In 2017 Cheesecake partnered with a third party manufacturer to introduce branded cookies, cupcakes and cheesecake mixes as well as a line of confections marketed under the Cheesecake Factory at Home trademark in a variety of retail stores.


Cheesecake’s growth strategy is based on selectively pursuing a variety of means to leverage their competitive strengths; including investing in or acquiring new restaurant concepts (such as Fox’s North India and Flower Child), expanding the Cheesecake Factory brand to other retail opportunities through the Cheesecake Factory at Home consumer package goods and internally developing a Fast Casual concept.

Their strategy is driven by their commitment to customer satisfaction and is focused primarily on menu innovation, service and operational execution that differentiates them from other restaurant concepts. While continuing to focus on customer satisfaction, CAKE is also driven by prudent management of expenses at their restaurants, bakery facilities and corporate support center and leveraging their size to make the best use of  purchasing power.

A large part of Cheesecake’s growth strategy is new company-owned restaurant development, the top priority for capital allocation. Cheesecake focuses on opening new stores in premier locations in the U.S. and Canada. Management targets an average cash on cash return of approximately 20% to 25% at the unit level. Cheesecake’s revenue growth strategy is to increase comparable restaurant sales by growing average check and stabilizing customer traffic through: (1) Continuing to offer innovative, high quality menu items that offer the customers a wide range of options in terms of flavor, price and value; (2) Focusing on service and hospitality with the goal of delivering an exceptional customer experience. Currently, management is working on a number of initiatives including third party delivery, increasing throughput, and leveraging the success of their gift card program, enhancing their training programs, and online ordering process. Current plans are to open about 6 company locations per year, which could be expanded to about 20 units per year, including Grand Lux, Rock Sugar, Social Monk, and the two Fox concepts.

It is thought that long term comp sales growth of 1-2% combined with unit growth of 5% can produce 6-7% top line growth. The targeted model provides total revenues of $3B in 2021, corporate margin after tax of 6%, and EPS of $4.50 per share by 2023. Focus on its people – development, engagement, and retention continue to be an intricate part of their growth strategy. A tribute to this is seen in their being listed (for the fifth year in a row) as one of Fortune Magazine’s 100 top best companies to work for.


The relatively high sales productivity of Cheesecake restaurants provides opportunities to obtain competitive leasing terms from landlords. This aids in creating a strong store level EBITDA. Average unit sales per locations were approximately $10.6 million for fiscal 2017 and $10.7 million for 2016. Average sales per square foot was $962.

In selecting sites, Cheesecake’s current objective is to earn an appropriate ROI and restaurant level EBITDA of 18%. Their goal is to achieve an average return of approximately 20% to 25% for new restaurants. Average cash on cash return for restaurants opened at least 52 weeks was 27% in 2017, 31% in 2016, and 31% in 2015. ROIC was 15% in 2017, 17% in 2016, and 16% in 2015.


Cheesecake historically generates significant amounts of free cash flow. They utilize substantially all of their free cash flow for dividends and share repurchase. The latter of which affects dilution from equity compensation programs and supports their earnings per share growth. Year to date through Q3’18, $1.2 million shares had been purchased, for $60.9M. The quarterly cash dividend of $0.33 per share currently provides an annual yield of about 3%. The common stock (over the last several years) has traded in a broad range between $40 and $65 per share. Longer term, the stock is up substantially from a mid to high single digit range in ’08-’09 and low single digits in the early 90s.


Cheesecake Factory reported a respectable third quarter, consistent with the industry pressures experienced by all operators. Comps were up 1.5%, not enough to offset expense increases. (Grand Lux comps were down 3.1%) Cost of sales was up 10 bp to 23.0%, Labor expenses was up 30 bp to 35.2%, Other Operating Expenses were down 10 bp to 24.8%, G&A was up 10 bp to 6.5%. Interest expense doubled, by 30 bp to 0.6%, leaving pretax income down 70 bp to 5.2%. A lower tax rate (5.7% vs. 19.2%) bailed out the EPS comparison. Pricing in the quarter was 2.9%, mix was a positive 0.6%, and traffic was down 2%, penalized by half of that by the timing of the National Cheesecake Day promotion.

Commentary on the conference call indicated that the wage inflation moderated from earlier in the year and medical costs normalized. Off premise business grew to 13.5% of sales, with the online ordering platform helping. Doordash is being used for delivery. Q4 guidance was provided, including comp sales of 0.5-1.5% at Cheesecake restaurants, diluted EPS of $0.60-$0.64 after a tax rate of 10%. Full year comps will be about 1.5%, EPS at $2.42-$2.46 with a 10% tax rate. Total capex in 2018 will be $80-85M, inclusive of five CAKE openings and $25M invested in the two Fox Restaurant concepts. Capex in 2019 will be $100-100M (6-8 openings), including $20-25M into Fox prior to the potential acquisition in late 2019 of North Italia (within Fox).

Relative to delivery, it is thought that it is 70% incremental. Off premise, at 13.5% of sales, compares to 12% in ’17, and delivery is about 25% of that, phone ordering is about 2/3, and the new online ordering platform generates 10-12% of all of the off premise business.

Management is guiding to flat store level margins in ’19, expecting that wage inflation will moderate somewhat, comps will be up adequately to offset small expense increases. There was no indication on the conference call, as of October 30th, that traffic or sales trends had changed since the end of Q3.

Conclusion: Provided at beginning of this article



We consider Cheesecake Factory (CAKE) and Habit Restaurants (HABT) to be two of the better managed publicly held restaurant companies, CAKE within casual dining full service, and HABT among the QSR/Fast Casual segment. Both companies reported their first quarter results wednesday evening. The numbers, and especially the conference call commentary provide a timely report on Q1, and, most importantly, a view into the short to intermediate term future for the dining industry and the general economy. We consider the restaurant industry to be a valuable leading indicator for the general economy, because the public “walks the talk”, or doesn’t, depending on their willingness to back up the “sentiment surveys” with actual spending. We now have a current view into how the “best of breed” can use “best practices” to build their businesses further, and what it implies for other less skilled restaurant companies and the economy as a whole.

Cheesecake Factory (CAKE)

The news headlines described comp sales up 0.3%, barely less than the estimated (by analysts) 0.6%. “Adjusted” earnings were $0.72 vs. $0.73 estimated. Fully diluted GAAP earnings were $0.71 vs. $0.68 on 49.2M shares O/S vs 50.0M shares a year earlier. The company guided Q2 to $.85-.88, versus a street estimate of $.86, very much in line. For all of ’17, the Company guided to $2.93-$3.02, just a little lower than the previous guidance of $2.95-$3.07. Not too bad, on the surface. If there is a story, it is “how the sausage got made”. The details, from the income statement, include: Cost of Sales lower by 70 bp, labor higher by 90 bp, occupancy and other higher by 70 bp, G&A the same at 6.4% of sales, D&A up by 20 bp, pre-opening expenses lower by 10 bp, Income from Operations DOWN by 90 bp and DOWN year to year by 8.6%. What saved the day was a tax rate of 17% versus 27% a year earlier and 2% fewer shares outstanding due to stock buybacks (“cash being returned to shareholders”), allowing EPS per share to be up by $.03.

The above details are interesting, but we are equally interested in the company commentary on the conference call about “the state of the restaurant world”. In a nutshell: it is still very challenging out there, apparently right up to the present. Comps were slightly positive in Q1, but menu pricing and product mix were up a total of 2.6% so traffic was down 2.3%. The weather and the timing of Easter hurt by about 50 bp, which will presumably come back in Q2. February was the weakest month, apparently typical of the industry, but there was no indication that traffic and sales have rebounded strongly in April. The guidance for ’17 includes an assumption of comp sales between 0.5%-1.5% and, importantly, commodity inflation of 1-2% and wage rate inflation of 5%. The tax rate is expected to be about 23% for ’17, down from 27.3% in ’16, and the shares outstanding is expected to shrink by 4-5% from $100 million of share repurchases. It’s fair to say that the EPS progress (about 6%) this current year is more a result of “financial engineering” than improved operating earnings. There is nothing wrong with that but what it is worth in terms of the stock’s valuation is another subject. (Just sayin’, we have no horse in this particular race at this time.)

Other noteworthy commentary included: “we did not think we were affected by the timing of tax refunds….overall, for the quarter we continued to take share, and we maintained our healthy sales gap to the industry….GDP grew 0.7% in Q1..leads us to believe that 2017…is going to look a lot like 2016…our business is stable. We’re just not seeing any macro lift right now……..we’re not seeing a difference in the malls, per se…in those A locations and most instances…….we would expect to see a year over year decline in operating margin…about the operating margins..we’ll see a little pressure on it. The bottom line margin we shouldn’t (see as much deterioration, after taxes, etc.)……..commodity inflation in Q1 was flat to slightly up..we continue to expect it to be 1-2%..into the next 3 quarters.” There was additional conversation about delivery initiatives, CAKE as a destination rather than an impulse in the malls, trends in Texas and California, etc.et., but we have excerpted above the comments most interesting to us.

Habit Restaurants, Inc. (HABT)

The news headlines included: Comp sales up .9% vs. Street estimates of 0.4%, EPS of $0.09 versus $.08 estimated, Company sees comp sales for ’17 at 2.0%. The headlines of the Company release included Adjusted EBITDA of $9.5M compared to $8.7M in ’16. This predominantly company operated chain is on track with their planned ’17 openings (31-33C + 5-7F), which, as described on their conference call, seem to be meeting or exceeding targeted levels of sales and profitability.

Our affectionately termed Q1 “sausage” in this case included: Franchise revenues up from $144k to $329K in the quarter, growing dramatically but still modest overall. More importantly, Cost of goods was down 90bp, labor was up 110 bp, “occupancy and other expense” was up 100bp, G&A was flat at 9.9%, D&A was up 30 bp, pre-opening expenses were up 10bp. Pretax Income from Operations was 5.3% vs. 6.8% of sales, DOWN about 7% in absolute dollars. You can see that the 150 bp decline was primarily due to higher labor costs and higher “occupancy and other”, partially offset by lower cost of goods (which won’t help going forward). After a higher tax rate of 32% vs. 23% in ’16, Net Income was down about 19% in dollars. Below the net income line, “net income attributable to non-controlling interests” was $1.1 million less this year than last, so the “Net Income attributable to Habit Restaurants, Inc., was $1.843M vs. $1.381M, up 33%. The fully diluted shares outstanding were 20.2M, up from 14.0M in ’16, still affected by pre-IPO calculations, and the fully diluted EPS was $.09 vs. $.10 – compared to the “pro forma” $.09 vs. $.08 shown in analyst presentations.

Once again, we are even more interested in the color commentary from the call to see what’s happening on the ground, and what it looks like going forward. With good reason, management is proud of their result, having posted another positive comp quarter (53 in a row) in a continuing difficult QSR environment. It is pertinent, of course, that menu price was up about 2.2%, partially offset by a negative mix impact, so the average ticket was up about 1.5% and traffic was down about 0.6%. Even adjusted for weather and Easter, as discussed below, traffic was close to flat at best. This trend is better than many competitors are showing, but not exactly Panera in its heyday (and again, most recently) or Wingstop of a couple of years ago. The promotional environment continues, but no worse than it has been. HABT prides itself on not discounting, providing an exceptional level of “hospitality, great every day value of the core menu, plus a continuous flow of interesting Limited Time Offers. They are steadily moving out of their California base, with successful beachheads being established in distant markets such as Florida and New Jersey. Management indicates that the new markets are meeting and beating initial expectations. Their commentary made passing mention of unprecedented amounts of rain in both Northern and Southern California, but the timing of Easter helped a little, so “normalized” traffic might have been about flat, for all intents and purposes.

The most noteworthy comments by management during the call included: “comp sales are expected to increase approximately 2% for ’17.. restaurant contribution margin (EBITDA) expected to be approximately 20% for the full year…commodities will be up 1-2% for the year, primarily driven by short term Q2 pressure on produce combined with escalating ground beef and chicken prices. Our prior expectation was flat for 2017….we continue to expect our average wage rate to increase 6%-8% in 2017” (thank you, California)….”we have been working on labor productivity initiatives that we believe will help to offset some of the commodity inflation……increased amount of strong promotional discounting….by the bar grill category in the full service category……commodity pressure….will have some affect on the ability of traditional burger QSR players maybe not to be able to do as much deep discounting…….with our results over the last 53 quarters…..we don’t have to go there (discounting wars)…..we know the macro environment is going to ebb and flow, but we feel really good about Q1 and…..the outlook for the remainder of the year……our sales trajectory is pretty much in line with the last couple of quarters….in Q2 running up against, running up against our strongest quarter last year….our target on average is $1.4 million for the new traditional stores and for the last three years of openings, we’ve been above that average, exclusive of the drive throughs….which are at higher volumes….stores that aren’t in the compo base but are open more than 12 months are performing at a number that’s significantly higher than the comp totals we reported. ….we are opening in the East, against well entrenched Smashburger and Five Guys, at volumes that are well above their system average…occupancy expenses will be up for the year but not as much as in Q1…..produce is going to be up over 27% in Q2……we feel like we can attain our 20% store level (EBITDA) margin for the year…..with a little bit lower margin in Q2 than we maybe initially thought and a little better in Q3 and Q4.

Bottom line:

These are well run companies,  continuing to cope with a very competitive industry situation and material macro headwinds. Even for these relatively “Best of Breed” companies, traffic gains are hard to come by, Labor Expense continues to rise, Cost of Goods Deflation is behind us, Occupancy Expenses continue upward. Over time, menu prices will rise, as restaurant companies do their best to prevent profit margins and ROIs from collapsing. Unfortunately,  price increases cannot be aggressive in a competitive world and a sluggish economy.  My concluding takeaway, as an analyst and money manager, I wouldn’t shy away from an attractive long term situation because of commodity prices alone, because protein and produce prices can (and do) change in a matter of months. However, traffic trends, competition, labor, and rent concerns are far longer term in nature, and will continue to make life difficult even for the best of operators.