Rising Labor Costs And Competition Will Weaken Long Term Outlook

Key Takeaways

• Shifting consumer preferences, labor cost pressures, and declining mall traffic threaten both sales growth and operating margins.
  
• Supply chain disruptions and intense industry competition are expected to further compress margins and erode market share.
  
• Operational excellence, menu innovation, digital investments, and financial flexibility are supporting customer growth, stable margins, and resilience across domestic and international expansion.

Catalysts

Operates and licenses restaurants in the United States and Canada.

• Intensifying consumer preference for healthier, lower-calorie foods is likely to continually erode demand for Cheesecake Factory's signature indulgent, high-calorie offerings, putting persistent pressure on same-store sales growth as menus struggle to align with dominant dietary trends, resulting in muted topline revenue and more frequent negative traffic comps.
  
• Accelerating labor market tightness and wage inflation-due to demographic shifts and minimum wage legislation-are set to drive up labor costs for Cheesecake Factory, which relies on a large and complex in-restaurant team, leading to compressed operating margins and ultimately lower net earnings over the medium to long term.
  
• The business remains highly dependent on physical, high-footprint locations in malls and urban centers, which face structural declines as consumer shopping shifts toward e-commerce and foot traffic stalls, exposing Cheesecake Factory to ongoing risk of underperforming units and stagnant revenue from core stores.
  
• Ongoing supply chain disruptions and persistent commodity price inflation, exacerbated by new tariffs, threaten to create volatility in input costs for critical items; despite short-term mitigation, these pressures will likely compress gross margins when cost mitigation levers have run their course.
  
• Rapid growth in fast-casual, specialty, and digital-first competitors will continue to fragment the industry, stealing market share from traditional casual dining brands; this competitive onslaught is expected to erode pricing power and brand relevance for Cheesecake Factory, leaving future revenues and net margins at risk of stagnation or decline.

Cheesecake Factory Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Cheesecake Factory compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Cheesecake Factory's revenue will grow by 6.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.3% today to 5.6% in 3 years time.
• The bearish analysts expect earnings to reach $243.6 million (and earnings per share of $4.91) by about July 2028, up from $156.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.0x on those 2028 earnings, down from 21.7x today. This future PE is lower than the current PE for the US Hospitality industry at 24.5x.
• Analysts expect the number of shares outstanding to decline by 2.64% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.62%, as per the Simply Wall St company report.

Cheesecake Factory Future Earnings Per Share Growth

Risks

• Continued strong operational execution and best-in-class retention have driven margin expansion and enhanced guest satisfaction, suggesting sustainable improvements in restaurant-level profitability and supporting long-term growth in adjusted net income margins.
  
• The company is accelerating new unit growth with a robust development pipeline across multiple brands domestically and abroad, opening as many as 25 new restaurants in 2025, which will drive future revenue and earnings growth if execution remains solid.
  
• Ongoing and successful menu innovation-including more value-oriented and diverse menu offerings-has driven both PR and customer engagement, positioning the company to capture shifts in consumer preferences and broaden its customer base, supporting stable or increasing revenues.
  
• Investment in digital ordering platforms and a successful rollout of the Cheesecake Rewards loyalty program are increasing customer engagement and spend, opening additional levers for driving frequency and check size, which should strengthen topline sales and potentially operating leverage.
  
• Strong financial flexibility, evidenced by favorable refinancing, a robust liquidity position, and disciplined capital returns through share repurchases and dividends, increases the company's ability to weather macroeconomic uncertainty and invest in long-term growth, supporting shareholder value and resilience in earnings and margins.

Valuation

• The assumed bearish price target for Cheesecake Factory is $45.08, which represents two standard deviations below the consensus price target of $62.41. This valuation is based on what can be assumed as the expectations of Cheesecake Factory's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $75.0, and the most bearish reporting a price target of just $45.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.3 billion, earnings will come to $243.6 million, and it would be trading on a PE ratio of 11.0x, assuming you use a discount rate of 9.6%.
• Given the current share price of $68.51, the bearish analyst price target of $45.08 is 52.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.