The Cheesecake Factory Gets Ready for 2013

Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Cheesecake Factory (NASDAQ: CAKE) looks like a restaurant that's prepared for an unknown economic climate next year. Earnings growth strongly outpacing revenue growth suggests a major focus on cost reduction and efficiency. A recent dividend introduction shows that the restaurant expects to sustain its income improvements. The Cheesecake Factory also has some expansion plans that show promise. Four factors show why an investment in The Cheesecake Factory could pay off.

Insider Buy

Forbes contributor DividendChannel noted that Director Herbert Simon bought 25,000 shares of the company at $32.82 each back in August. The Cheesecake Factory's insider ownership of 6.77% surpasses Darden Restaurants's (NYSE: DRI) 0.68% insider ownership, although DineEquity (NYSE: DIN) has higher insider ownership at 16.03%. Insiders at The Cheesecake Factory might have noticed that this restaurant already demonstrated effective cost controls this year.

Efficiency Gains

The Cheesecake Factory's third quarter 2012 financial results highlight the chain's increased efficiency. Cost of sales during the first three quarters of 2012 shrank to 24.6% of revenue, after this category made up 25.3% of revenue during the period in 2011. The Cheesecake Factory managed to reduce costs during a year when other restaurants paid higher prices for food because of the severe drought. Labor costs also dipped slightly during the period, from 32.5% to 32.3% of revenue. As a result, The Cheesecake Factory's net income increased from $66 million for the first three quarters of 2011 to $76 million for the first three quarters of 2012.

The Cheesecake Factory definitely looks more profitable now, after reporting 32% higher income for the quarter along with 5.4% revenue growth. DineEquity also looks like it has become more efficient, with 18.2% weaker revenue and 266.6% higher income last quarter, although The Cheesecake Factory looks a lot better on the top line. Darden Restaurants doesn't look like it achieved major efficiency gains recently, with 4.8% higher revenue last quarter and a 3.9% earnings gain. The Cheesecake Factory's income growth occurred even while the restaurant continued to invest in new concepts.

Restaurant Concepts

The Cheesecake Factory actually introduced two additional concepts, Grand Lux Cafe and RockSugar PanAsian Kitchen. The company built more Grand Lux Cafe restaurants so far, 14 in total, but these restaurants didn't perform as well as the regular Cheesecake Factory restaurants during the last quarter. While Cheesecake Factory restaurants racked up a 2.9% comparable store sales gain, the Grand Lux Cafes reported 2% weaker results.

There's only one RockSugar PanAsian Kitchen at the moment, so this restaurant probably won't have a big impact by itself on a company that runs 177 restaurants. A recent decision by Chipotle (NYSE: CMG) shows why The Cheesecake Factory's shareholders should still watch RockSugar PanAsian Kitchen. L. Wayne Hicks, at Denver Business Journal, reported that after building its first ShopHouse Asian restaurant in the Washington DC area last year, Chipotle will now build a second ShopHouse in the DC area and another ShopHouse in Santa Monica. Expansion prospects for ShopHouse could suggest opportunity for RockSugar PanAsian Kitchen, and with The Cheesecake Factory's relatively low current store count, a few more RockSugar PanAsian Kitchen restaurants could make a difference.

Dividend

The Cheesecake Factory introduced a 12 cent quarterly dividend in the second quarter of 2012, so calculating the restaurant's expected yield and payout requires some extrapolation. If the company maintains this rate, its annual dividend would reach 48 cents. At $33.42 a share, a forward P/E of 15.54 implies annual earnings of $2.15, which produces an expected payout ratio of 22 percent and a forward yield of 1.4%.

Higher yields are available in the restaurant business, as Darden Restaurants has a 4.3% forward yield. DineEquity stopped paying dividends, but Yahoo! Finance lists a 3.9% five year average yield for the company, so this restaurant might also offer a high yield if it brought its dividend back. Lisa Baertlein at Reuters reported that DineEquity mentioned debt levels as the reason for its 2008 dividend cut, although the recession also hit restaurants very hard at the time. Nevertheless, the Cheesecake Factory has lots of room to raise its dividend right now, and additional efficiency improvements could free up even more cash for dividends.

Takeaway

An insider buy doesn't make the case by itself, but it definitely suggests confidence in the company. The Cheesecake Factory's recent results also help make the case, since both expansion bills and supply chain costs could have placed pressure on the restaurant's margins. Concept restaurants don't look as promising in the short term, although they do demonstrate some flexibility. The dividend announcement also shows that The Cheesecake Factory's managers are confident about its future performance. The factors that helped The Cheesecake Factory achieve better earnings last quarter could keep this restaurant on track to deliver next year as well.


enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill and Darden Restaurants. Motley Fool newsletter services recommend Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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