Expanding Menus And New Locations Will Attract More Guests In 2025

Key Takeaways

• Menu innovation and operational improvements are boosting guest traffic and restaurant-level margins, enhancing revenue and net margins.
  
• Expansion plans and strategic programs aim to drive growth in frequency, sales, and total revenue through new restaurants and increased customer engagement.
  
• Future labor cost increases, execution risks from restaurant expansion, inflationary pressures, and refinancing challenges could negatively impact Cheesecake Factory's financial stability and margins.

Catalysts

Operates and licenses restaurants in the United States and Canada.

• Ongoing menu innovation, including the rollout of more than 20 new items, is expected to drive guest traffic without the need for discounting, potentially increasing revenue and net margins.
  
• Expansion plans for 2025, with as many as 25 new restaurants and additional international openings under licensing agreements, are set to increase total revenue.
  
• Flower Child's strong comparable sales growth and operational improvements suggest potential for accelerated growth, which could enhance the overall earnings profile.
  
• Improvements in labor productivity and management and staff retention are contributing to higher restaurant-level margins, supporting growth in net margins.
  
• The Cheesecake Factory's focus on executing catering and reward program strategies is expected to drive frequency and sales, thereby positively impacting revenue and earnings.

Cheesecake Factory Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cheesecake Factory's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $223.4 million (and earnings per share of $4.65) by about March 2028, up from $156.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.8x on those 2028 earnings, up from 16.1x today. This future PE is lower than the current PE for the US Hospitality industry at 23.9x.
• Analysts expect the number of shares outstanding to grow by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.64%, as per the Simply Wall St company report.

Cheesecake Factory Future Earnings Per Share Growth

Risks

• Though the company highlighted improvements in labor productivity and retention, any future instability or increases in labor costs could impact restaurant-level margins and net income negatively.
  
• The company's reliance on opening a high number of new restaurants (25 planned for 2025) introduces significant execution risk, which could impact net margins if not managed properly, especially given the higher preopening costs.
  
• Despite short-term cost advantages, persistent inflation in low to mid-single digits across commodities and labor could squeeze profit margins if not offset by sufficient pricing power or operational efficiencies.
  
• The negative mix impact, particularly in alcohol sales at North Italia, suggests potential issues in maintaining customer spending per visit, which could limit comparable sales growth and overall revenue.
  
• The necessity to refinance or manage convertible debt, such as the one due in June, could introduce financial uncertainty and affect earnings if market conditions or borrowing costs change unexpectedly.

Valuation

• The analysts have a consensus price target of $57.0 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 $67.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.3 billion, earnings will come to $223.4 million, and it would be trading on a PE ratio of 17.8x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of $49.0, the analyst price target of $57.0 is 14.0% 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.