Calculated Expansions And Innovative Loyalty Programs Propel The Company To New Heights

Key Takeaways

• Expansion and new openings of diverse brands are set to bolster revenue growth through enhanced market penetration and customer base expansion.
  
• Focus on food efficiencies and labor productivity is improving restaurant-level profitability, signaling potential for net margin enhancement.
  
• Strategy focusing on new openings and marketing investments amidst challenges like location closures and aggressive discounting by competitors could pressure earnings and market share.

Catalysts

Operates and licenses restaurants in the United States and Canada.

• Continuation of The Cheesecake Factory's expansion and new restaurant openings, particularly with diverse brands like North Italia and Flower Child, is expected to boost revenue growth through increased market penetration and customer base expansion, impacting total revenue.
  
• Enhanced focus on improving food efficiencies, labor productivity, overtime, and wage management within restaurants has translated into higher restaurant-level profitability, notably achieving a 4-wall margin of 17.7%, signaling potential for continued improvement in net margins.
  
• Strategic closure of underperforming locations and subsequent openings in high demand areas, like the restaurant in Orem, Utah, indicate a proactive approach to optimizing store locations for better sales and profit margins.
  
• The Cheesecake Factory’s efforts towards driving comparable sales growth, with a 1.4% increase this quarter outperforming the casual dining industry, suggest a competitive advantage that could lead to sustained revenue growth.
  
• The introduction and positive reception of The Cheesecake Factory Rewards program, marked by strong membership enrollment and engagement, hints at an innovative customer loyalty strategy that could drive repeat business and higher average spends per visit, positively affecting future earnings.

Assumptions

• Analysts are assuming Cheesecake Factory's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 5.1% in 3 years time.
• Analysts expect earnings to reach $208.7 million (and earnings per share of $4.4) by about September 2027, up from $116.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2027 earnings, down from 15.8x today. This future PE is lower than the current PE for the US Hospitality industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 9.43%, as per the Simply Wall St company report.

Risks

• The closure of two Cheesecake Factory locations due to lease exits and condemnation risks impacting revenue by reducing the number of operating units and potentially affecting brand visibility.
  
• A noted softness in the retail segment and updated sales projections for lesser-established concepts more in line with broader casual dining trends could lead to reduced revenue growth expectations for these segments.
  
• The impact of aggressive discounting by competitors within the casual dining sector might influence consumer behavior, potentially affecting Cheesecake Factory's market share and revenues if not addressed.
  
• Investments in the Cheesecake Factory rewards program and other marketing initiatives, while potentially driving engagement and traffic, may increase operating expenses, impacting net margins if not offset by a corresponding rise in sales.
  
• The reliance on new restaurant openings for growth, with plans to open as many as 22 new restaurants in 2024, involves significant capital expenditure and execution risk, which could affect earnings if these new locations do not perform as expected or if there are delays in opening schedules.

Valuation

• The analysts have a consensus price target of $40.56 for Cheesecake Factory based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $29.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.1 billion, earnings will come to $208.7 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of $36.04, the analyst's price target of $40.56 is 11.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.