Is It Time to Buy Cheesecake Factory?

11/30/20

By Pearl Wang, MotleyFool

The Cheesecake Factory Inc. (NASDAQ:CAKE) had a strong third quarter (ending Sept. 29), with revenue of $517.7 million versus the consensus estimate of $490 million. Comparable store sales were down 23%, but better than analyst expectations of a decrease of 28% and second quarter's 57% drop. The results were bolstered by strong off-premise sales and a recovery in business at its indoor dining rooms.

While its latest results were impressive and Cheesecake Factory is executing well, there are risks from increased pandemic-related restrictions being placed on restaurants globally. Here's a more detailed look at whether it's a good time to buy shares of Cheesecake Factory.

Oreo cheesecake slice

IMAGE SOURCE: GETTY IMAGES.

Success with off-premise dining

Like most other restaurants, Cheesecake Factory had to concentrate on off-premise dining during the second quarter of this year because of COVID-19 restrictions. Most dining rooms in the U.S. and worldwide had to close, with only take-out and delivery permitted. Impressively, during the third quarter, Cheesecake Factory was able to keep most of its off-premise sales from the second quarter even as its dining rooms reopened.

The restaurant company believes that much of its elevated off-premise sales can be maintained even after dining rooms return to normal operations post-pandemic. President David Gordon said on the third-quarter earnings call, "Even with a meaningful increase in in-person dining capacity, quarter-to-date, we continue to maintain nearly 90% of elevated COVID off-premise sales at Cheesecake Factory restaurants with reopened dining rooms."

Dining rooms operating at reduced capacities

Revenue at the restaurant chain was improving sequentially throughout the third quarter, as additional dining rooms reopened. The reopening combined with continued strength in off-premise sales led to a comparable sales decline of about 10% in September, compared to the full third-quarter comparable sales decrease of 23%.

Cheesecake Factory saw higher demand for in-person dining as restrictions eased up. Remarkably, 17 of its restaurants in Toronto and California operating with patios only have achieved sales levels of over 90% of restaurants with in-person dining for the fourth quarter-to-date period, indicating the popular demand for Cheesecake Factory food.

The company said it has taken steps to improve the safety and comfort of guests. Gordon spoke of these measures on the third-quarter earnings call. " ... we've recently installed glass partitions at approximately 50 Cheesecake Factory restaurants to increase our capacity where jurisdictions allow, while also prioritizing guests' safety and maintaining the upscale look and feel of our restaurants," he said. Gordon also noted that he expects about two-thirds of restaurants to have partitions in the coming weeks.

Although Cheesecake Factory seems to be successful in drawing customers back to indoor dining, most of its indoor dining locations are still operating at 50% capacity. Most restaurants in the U.S. have not returned to full capacity. Currently, with rising cases of COVID-19 in the U.S. and a number of countries worldwide, restrictions may not be lifted in the near term. In fact, there could be even more restrictions enacted.

Cheesecake Factory is still positioned to succeed long-term

While there's uncertainty over new COVID-19 restrictions in some areas of the U.S. and rest of the world, these are likely short-term. Plus Cheesecake Factory has adapted well to current restrictions, as it's managed a revenue recovery with a combination of off-premise dining and partly opening dining rooms. The restaurant company will definitely get a boost in traffic and business once treatments for COVID-19 are widely available. In the fourth quarter-to-date through October 27, the company's been able to recapture about 90% of its prior year's revenue at its restaurants with open dining rooms, indicating the strength of its business and strong resonance with customers.

In terms of the recent restrictions, Chicago announced on November 12 a stay-at-home advisory related to COVID-19, following a curfew set in October that closes non-essential businesses from 11 p.m. to 6 a.m. The curfew currently has no end date. Indoor dining is also not allowed in Chicago, which will dampen business at Cheesecake Factory's restaurants in the area. Other parts of the U.S. like New York City have set similar restrictions or are considering doing so.

One piece of recent news that encouraged investors about a potential return to normalcy and a lifting of restrictions was Pfizer's announcement that its experimental vaccine for COVID-19 was reportedly 90% effective on first analysis. On Nov. 16, Moderna also announced it had an experimental vaccine for COVID-19 that was reportedly over 94% effective in initial studies. However, the safety studies for both are not conclusive, and the vaccines still needs regulatory approval. If more effective treatments were to become available and accepted, restrictions would be lifted for restaurants.

While Cheesecake Factory may be impacted by short-term volatility from COVID-19 restrictions, its success in driving sales with off-premise business and in-person dining with its strong product make this consumer discretionary stock look appealing. Cheesecake Factory's revenue should also see a nice lift when normal dining patterns return, as more treatments for COVID-19 emerge.

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