As Expected, Sales Slide at The Cheesecake Factory
Call it a lack of communication. On Wednesday afternoon, following The Cheesecake Factory’s earnings review, the brand responded to its first negative gains after 29 positive quarters with a leveled view. The chain isn’t going to roll out promotions, deals, or short-term initiatives to turn around comparable-restaurant sales, which fell 0.5 percent in the second quarter. Rather, it’s all about getting the word out.
“I think, for us, people may not realize the true value of The Cheesecake Factory, and not just in the portion sizes but in some of the price points that really are very attractive, if not very competitive, even in today's environment,” said Matthew Eliot Clark, executive vice president and chief financial officer, in a conference call. “And so I don't know that we need to do deals or promotions.”
The Cheesecake Factory warned in June, ahead of its presentation at the William Blair 37th Annual Growth Stock Conference in Chicago, that sales were headed south. The brand released updated second-quarter expectations that predicated same-store sales declines of about 1 percent, a notice that sent shares tumbling more than 6 percent in premarket trading. The reality turned out to be a bit less pronounced, although the declining numbers were still significant.
The softer-than-expected sales environment was driven by what David Overton, chairman and chief executive officer, referred to as volatile week-to-week sales trends indicative of consumer uncertainty. Unfavorable weather in the East and Midwest also negatively impacted the brand, he said.
However, Overton added, The Cheesecake Factory’s healthy average sales volumes of $10.7 million and undeniable customer loyalty present a clear path to optimism.
In May, Harris Poll’s 29th edition of its EquiTrend Study, which collects data from more than 100,000 U.S. consumers, pinned The Cheesecake Factory as the No. 1 choice in casual dining. It rode high scores in quality and purchase consideration, and the restaurant resonated with younger guests.
Clark said in the call that The Cheesecake Factory isn’t suffering on this perception front in any way. “We know we're delivering the food, the experience, and all of those attributes internally,” he said. “We also do research on guest visitation. And one of the things that we're seeing there is our frequent guests are coming in more often. So everything we're doing is resonating with our core guests and I think speaks to the destination component of Cheesecake Factory.”
The issue at hand, he said, is the value-driven consumer. Clark said the brand needs to focus on delivering that message to guests.
“We just know that value is much more top of mind and that the competitive set is just broadcasting that message with a lot of noise ... Rest assured that the portion sizes haven't changed one bit. The quality of the product hasn't changed one bit. So I think that the guests see it that way,” he said.
The question then becomes: How is The Cheesecake Factory going to bridge this customer gap? One target area, Clark said, will be social media.
During National Cheesecake Day, Overton said the brand secured a record 65 broadcast TV segments, achieved more than 285 million media impressions, and “generated tremendous social media engagement.” It served as a blueprint, in some ways, of things to come.
“We just want to make sure that we also get through the message that anybody can come in and enjoy [The Cheesecake Factory] at a reasonable price. … We’ve always been a word-of-mouth company,” Clark said. “Today, social media is the word-of-mouth, and we think that can be effective.”
Clark said the Southeast, Midwest, and Northeast have reported slower sales than other regions. California remains one of the stronger markets, as does Texas and the Northwest. “I think that speaks more to a consumer-driven reflex than it does anything that we're doing with the brand and we're executing on all the pieces that we want to. So we still see lines at the door on the weekends and at night, and I think it's just a little bit across-the-board,” he said.
The Cheesecake Factory still expects to open as many as eight company-owned stores in fiscal 2017, including one relocation in Hackensack, New Jersey, which opened in June. Additionally, it predicts to open as many as four units under licensing agreements intentionally, including the May opening of the first Hong Kong store.
The Cheesecake Factory continues to expand national delivery as well. Delivery via a third-party partner is currently offered in about 60 percent of locations and Overton said he expects the brand to achieve 90 percent saturation. “At the same time, we are working on further improvement to our to-go process, including online ordering capability, which could be in pilot by the end of the year,” he said.
The company is also selling Cheesecake Factory cupcake and cookie mix at Walmart stores nationwide, as well as a number of grocery chains. Overton said additional products will launch later this year and into 2017.
Total revenues were $569.9 million in the second quarter compared to $558.9 million in the prior year quarter. Net income and diluted net income per share were $38.2 million and 78 cents, respectively.
Clark said The Cheesecake Factory hasn't seen a negative impact from listing calories on its menus.
"We just celebrated National Cheesecake Day, and I've got to tell you, our guests were ordering a heck of a lot of cheesecake. So I'm not sure that they're concerned," he said. "I think David said, and I think we believe this is still true, that when people go out to eat, they want to get everything, all the calories that they're ordering and paying for."
The overall negative climate of malls isn't a serious culprit, either, the chain said. "What our research would suggest is those guests that are our core guests, and we skew a little bit higher in the income scale for that, are going to the mall as much or more than they used to," Clark said. "... Our guests are still coming to us as a destination, right? And if you look at the gap in retail traffic to where we're at, it's not really relatable in our minds."
Clark said the third quarter has produced soft sales thus far, and the chain is assuming comparable sales declines of 1—2 percent, as well as adjusted diluted earnings per share between 60—64 cents.
“Despite the short-term softness we're experiencing, we believe our long-term outlook remains positive. We continue to carry out our mission of absolute guest satisfaction in the restaurants, while focusing on adapting the business to the current environment as we have done throughout our nearly 40-year history,” he said.