Placing a Buy Order For Cheesecake Factory (NASDAQ:CAKE) Here May be a Cakewalk

The coronavirus pandemic has had a profound impact on the restaurant industry and The Cheesecake Factory (NASDAQ: CAKE) has been no exception.

Closed dining rooms, furloughed workers, and dramatically lower sales were certainly not what the chef ordered for 2020. The uncertain environment caused management to suspend new location development, dividends, and share buybacks.

But sometimes companies emerge stronger from adversity. With a thriving off-premise business, this appears to be on the menu at Cheesecake Factory.

Analysts estimate that a return to earnings growth at the company may not happen until after 2021. It will certainly be tough to grow the bottom line without opening any new locations.

But amid a sharp decline in dine-in sales, pick-up and delivery sales have flourished. This suggests that as the restaurant operating environment normalizes, Cheesecake Factory will multiple growth levers at its disposal.

Digitalization, Off-Premise Sales Diversifying Growth Profile

While some view the recent technology initiatives as desperate moves to stay relevant in the post-pandemic economy, there is more to it. Cheesecake Factory's online ordering, pick-up service, and delivery platform may become its most important growth engine.

Even in the restaurant space, consumer preferences are evolving rapidly towards online channels. Regardless of the risks associated with the current pandemic, people have shown an increasing appetite for convenience that appears to be here to stay.

Even prior to the pandemic off-premise sales were surging. Cheesecake Factory's off-premise sales accounted for 17% of total sales in 2019 and 22% in the first quarter of 2020. This compares to 12% and 14% in 2017 and 2018, respectively. Off-premise sales doubled from $2 million in the first quarter to $4 million in April 2020.

Its mobile payment app CakePay has performed well driving robust pickup and delivery sales. A partnership with food delivery service Door Dash has not just kept the company alive but bodes well for where the industry is headed. While some consumers will still prefer a dine-in experience, others will crave the convenience and safety of delivery. This should continue to drive incremental sales for Cheesecake Factory.

Its well-established digital capabilities have given Cheesecake Factory a competitive advantage throughout the COVID-19 crisis and will continue to give it a leg up on the competition as the global economy improves.

 Traditional Restaurants Also Have Growth Opportunities

While the off-premise business has taken center stage, eventually it will play more of a supporting role as the dine-in business returns to health. This will give Cheesecake Factory a more diversified revenue model.

Last month the company announced that approximately 25% of its restaurants had reopened and that around 75% of prior year sales had been recaptured. Both figures have likely gone up since. It had targeted the reopening of 65% of its dining rooms by mid-June.

Some argue that as dining rooms reopen sales will simply shift from online channels to restaurants creating a zero-sum game. But there have yet to be any signs of a slowdown in delivery and pickup demand since reopening. People that enjoy the Cheesecake Factory brand are unlikely to abandon digital channels for restaurant dining and in fact many will opt for some combination of both.

There are currently 206 company-owned locations in the U.S. and 26 licensed international restaurants. Management's post-COVID growth strategy includes expanding to 300 U.S. and as many as 10 Canadian locations.

Cheesecake Factory's restaurant expansion has the potential to deliver growth because the economics of the investment is favorable. The restaurants average $10.7 million in annual sales, have a restaurant-level margin of 18%, and produce a cash-on-cash return of 20% to 25%.

There is also room for growth in international licensing. This growth lever is a no brainer because it requires no capital expenditure and each overseas licensed restaurant boosts the company's EPS by a penny.

Cheesecake Factory Second Quarter Results May be Hard to Digest

When Cheesecake Factory reports second-quarter 2020 results on July 29^th, the main course won't be appetizing, but the dessert may.

The consensus forecast is for a net loss of $1.07 per share compared to earnings per share (EPS) of $0.82 in the second quarter of 2019.

This and other second-quarter figures will not be sweet, but underlying trends in off-premise growth and an improved outlook would be easier for investors to digest.

Cheesecake Factory has a strong history of sales outperformance. It has outperformed the Knapp-Track Index, a restaurant sales and guest count tracking service, every year since 2008 including during the economic downturn of 2008-2010. There's no reason to believe this pattern won't continue in the current recessionary environment.

The company is in a strong liquidity position with nearly $260 million of cash that should help it survive even a prolonged recession. Long-term debt of $380 million needs a flavorful reduction, but it has the financial strength to accomplish this over time.

When the economy full recovers Cheesecake Factory will have a proven restaurant model with a side of established off-premise growth. In the meantime, it will continue to lean on its off-premise business for the foreseeable future.

Digital sales have comprised 80% of overall sales in recent months. Management has noted that it has the liquidity to perform solely as an off-premise operating model for at least another 1 to 2 years. 

Should Cheesecake Factory Investors Place a Reservation Now or Later?

At this point, a full economic recovery may be dependent on confirmation of a viable COVID-19 vaccine. Although many companies are racing to develop vaccines, most are in the early stages. But some are not.

A breakthrough development around COVID-19 vaccines and treatments would do wonders for restaurant stocks. The pace at which consumers return to their favorite dining spots would likely quicken. People would be more comfortable not only dining out but spending more on meals.

A swift shift from fast casual and quick service restaurant demand to casual dining demand could unfold. This trend would fall right into Cheesecake Factory's lap.

At depressed levels, investors have a chance to purchase a dining category leader with new growth tools in its kitchen. Its innovation and an extensive menu of 250-plus made from scratch items have always been competitive advantages. Going forward it will have the opportunity to leverage this differentiation in the off-premise channel.

This ultimately means investors have a choice of waiting for major vaccine news and paying more for stocks like Cheesecake Factory or getting in while uncertainty is high and sentiment low.

Short-term traders may understandably prefer to invest in companies that have more certain near-term catalysts. But for patient investors with a longer time horizon, taking a bite of Cheesecake Factory at current levels may turn out to be a cakewalk.