| Analyze This: Cost controls help maximize Cheesecake’s profit
By SARAH
E.
LOCKYER
JEFF FARMER
Jefferies & Co. Farmer called Cheesecake’s work to reduce expenses a “cost control clinic.” He added that an effort to repay $150 million of the company’s credit facility balance also has helped maintain cash. “Food and labor cost favorability drove the [earnings] upside relative to our model with menu development efforts, more favorable commodity contracts, supply chain initiatives, lower cream cheese prices and operational labor efforts all contributing,” he said in a report. “With development in hiatus in 2009, [The Cheesecake Factory] is a free cash flow machine and has quickly improved its capital structure standing relative to many of its casual-dining peers.” JOHN GLASS
Morgan Stanley & Co. Looking forward, Glass noted that Cheesecake’s leading position on both sales and earnings would give it an advantage during the economic recovery. “[Cheesecake] bucked the trend of its casual-dining peers by reporting better than expected [earnings] and [same-store sales],” Glass said in a report. “While we remain cautious [near term] on casual dining given the many prior false hopes of a sales recovery, Cheesecake appears to be one of the very few that is showing consistent progress.” He noted that a return to positive same-store sales could lead to improved earnings, as just 1 percent of comparable-sales improvement could lead to as much as 8 cents to 10 cents per share in earnings, taking into account the company’s leaner cost structure. “This would seem to set up as an ideal play on a recovery,” he said. JOHN IVANKOE
JP Morgan Chase & Co. As talk of a recovery begins and speculation on which companies are poised to prosper takes shape, experts disagree on whether casual dining can again return to its heyday. There also is disagreement on which publicly traded restaurant stocks may bounce back first. “It is difficult to argue against the margin and sales progress achieved at [Cheesecake],” Ivankoe said in a report, “and we particularly commend management for improved guest satisfaction scores during this time. However, we believe greater stock price appreciation remains at other lower-multiple names with lower-set expectations, such as [Darden and Brinker].” He said that a return to peak restaurant margins, about 17 percent in 2002, would be unlikely. Cheesecake currently reports restaurant margins of about 13 percent. “We think consistent escalation of costs such as labor, insurance, utilities and health care matched with several years of declining new unit volumes will prevent such a peak from being realistically achieved,” he noted.—slockyer@nrn.com | 
