Kevin Wilde September 14, 2017

Cheesecake Factory (NAS:CAKE)

The Cheesecake Factory (NAS: CAKE)

14-SEP-2017 (EV $1.82B; Mkt Cap $1.88B; 49.0MM shares outstanding; $40.29/share)

STATUS

  • At end of 2016, CAKE had a total of 208 company-owned restaurants (all U.S. based):
    • 194 Cheesecake Factory restaurants
    • 13 Grand Lux
    • 1 Rock Sugar Pan Asian
    • NOTE: Each restaurant has sales of ~ $10.5 annually. Maintenance CapEx over the last 3 years has been between $26MM and $29MM per year.  Bakery & Training center capex has averaged $11MM annually over the last 3 years.
  • 2016 sales of $2.276B.
  • Highly consistent operating margins with 25-year weighted average of 8.0%.
  • Consistently convert 150% of operating income into Cash Flow from Operations.

GROWTH

  • At end of 2016, CAKE also had 15 international locations owned by licensees.
  • In the past:
    • Opened between 8 to 10 new restaurants in the past 5 years @ average cost of $8.0 to $10.5MM per location.
    • Have closed ~ 4 restaurants in the past 5 years (1x Cheesecake Factory + 3x Grand Lux).
    • 15-year median comparable restaurant sales 1.2%.
  • Going forward:
    • CAKE believes that there is room for >300 U.S. company-owned Cheesecake Factory locations.
    • Current plans call for 8 company-owned Canadian locations.
    • CAKE expects to add 3 to 5 international licensed restaurants / year for the foreseeable future.
    • CAKE has an investment in new concept restaurants North Italia and Flower Child; however, I don’t currently put any value on these opportunities because they are an unproven concept.
    • CAKE is also looking at expanding its consumer goods sales and a fast casual restaurant concept; again, I don’t put any value on these opportunities at this time.
    • Expect costs for 8 new company-owned restaurants (ie. Cheesecake Factory + Grand Lux in U.S. & Canada) each year @ $10.5MM each for a total of $84MM; however, expect to only net 7 more restaurants per year due to restaurant closures of 1 per year.
    • Expect revenue / net earnings / free cash flow benefit of 4 new licensed restaurants per year ($0.01 EPS/restaurant * 4 restaurants * 49MM shares = ~$2MM /year) at $0 capex per restaurant.
  • GROWTH SUMMARY:
    • Within 5 years, CAKE should net 35 new company-owned restaurants at an annual capex cost of $84MM. These stores should add sales of $367MM by the end of the 5-year period.
    • Over the next 5 years, same restaurant sales should increase to $2.415B ($2.276B * 1.012^5).
    • Within 5 years, CAKE should add ~20 new licensed restaurants at $0 capex which add $10MM to FCF.

VALUE

  • Sales in 5 years time should total $2.828B (CHECK: 4.4% annual increase is in line with the recent past).
  • Operating Income in 5 years time should total ~$225MM.
  • CFFO in 5 years time should total ~$340MM.
  • New restaurant capex of in 5 years time should be ~$90MM. Maintenance capex in 5 years time should be ~ $50MM.  Working Capital effects should be negligible.  After-tax stock based compensation is likely to ~ $15-20MM in 5 years time.  Hence, free cash flow in 5 years time should be ~ $180MM.
  • CAKE is an above average quality business with average growth prospects and deserves a multiple greater than its current 14x (likely, more than 17x). With $180MM in FCF, it’s market cap should be > $2.5B in 5 years time.  This represents an annualized return from capital gains of > 6.0% (at 17x, > 10.2%).  CHECK: 6.0% matches the revenue growth of 4.4% from new company-owned restaurants + the 1.7% growth equivalent from new licensing restaurants (new licensed restaurants should add $10MM/year in incremental FCF which is equivalent to $208MM in new company-owned restaurant sales).
  • In addition to capital gains, an investor can expect a dividend yield of 2.4% ($45MM) + a buyback yield of ~ 3.4% (Current estimated CFFO of $250MM – $85MM in new restaurant capex – $40MM in maintenance capex – $15MM in stock based compensation – $45MM in dividends = $65MM).
  • Total return after 5 years and without multiple expansion could be ~ 11.8%. With multiple expansion to 17x in 5 years time, total return could be 16% per annum.

KEY RISKS

  • CEO and founder David Overton is now 71 years old. Succession planning is not clear at this time.
  • If international licensing opportunities don’t pan out, then growth will not be as robust.
  • Although there are no signs that the Cheesecake Factory concept is troubled, shifts in consumer tastes could spoil the investment.
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