Why Cheesecake Factory Took a $353M Gamble on Fox Restaurants
As The Cheesecake Factory wrapped up its second quarter of fiscal 2019, it announced a multi-million dollar deal to acquire Fox Restaurant Concepts and the remaining interest of North Italia. Instead of continuing as an investor, The Cheesecake Factory’s leadership decided it would be more beneficial to acquire renowned restaurateur Sam Fox’s company.
The transactions will be completed for $308 million in cash at closing, with an additional $45 million due ratably over the next four years, the company announced. The Cheesecake Factory previously invested $88 million in North Italia and Fox’s fast casual Flower Child in a three-year span as it geared up for the bigger deal. It’s expected to close toward the end of Q3.
The company will spend $130 million in cash for the remaining interest in North Italia, bringing total consideration to roughly $174 million. The Cheesecake Factory is also paying about $178 million in cash at closing for the rest of Fox Restaurant Concepts, which includes 45 restaurants across seven states and Washington, D.C.
North Italia, in particular, gives The Cheesecake Factory a channel to grow a true emerging brand.
“North Italia turns a modern lens on Italian cooking and the upscale casual-dining segment,” The Cheesecake Factory's president David Gordon said during a July 31 conference call. “We believe the unique structure of these transactions will accelerate our growth potential while enabling us and FRC [Fox Restaurant Concepts] to maintain our focus on our core businesses.”
Was the overall $353 million price tag a gamble for The Cheesecake Factory? Wells Fargo analyst Jon Tower pointed out that most acquisitions failed to “deliver on the synergies that they projected at the beginning of the acquisition.” He pressed The Cheesecake Factory’s executives on how this wouldn’t be the case for this deal.
The Cheesecake Factory’s chief financial officer, Matt Clark, admitted that Tower was right and previous acquisitions weren’t always smooth, but after three years of collaborating and investing in North Italia, the company feels confident it can build off momentum as well as ignite new growth.
“I think we have taken a very unique approach in the world of restaurant M&A that may or may not have gone right,” Clark said. “We have dated for three years before this marriage and we are also maintaining Sam Fox’s team in Phoenix as a stand-alone entity so that we don't disrupt that. We are just, as we always do at The Cheesecake Factory, taking a slightly different approach that we think is unique and value-driving.”
The Cheesecake Factory's total revenue for Q2 was $602.6 million. Its comparable sales increased 1 percent during the quarter. However, the brand struggled with traffic as it took a 2.8 percent dip for Q2. The company expects the new concepts to contribute an additional $450 million in incremental revenue in 2020, Clark said.
“We realized the true potential of this relationship as we worked through the integration process for our planned acquisition of North Italia,” Gordon said. “It became evident that the combination of two of the most experiential and entrepreneurial restaurant companies could drive even greater value as one organization.”
Existing North Italia locations are performing well and same-store sales have sustained in the mid-single-digits throughout 2019, Clark said. The 20-unit chain appreciates average-unit volumes of $7 million.
And North Italia’s footprint extends nationwide, proving it can scale in various markets. The restaurants spread across nine states currently. Clark said there is significant whitespace for the “on-trend Italian concept” to grow into.
The acquisition is not getting in the way of North Italia’s expansion, either. A new location opened in Virginia at the end of July and another store is set to open in the next two months. Two new restaurants are planned to debut in Q4.
“With Italian cuisine, the No. 1 ethnic food category in the United States, coupled with strong national reception of the North Italia concept to date, we believe there is potential for 200 domestic locations over time,” Clark said. “This supports our plan for 20 percent-plus annual unit growth for the concept.”
“We'll leverage all our expertise in growing a brand to grow North appropriately across the country,” Gordon added.
The relationship between the two brands is symbiotic. Bringing a fresh, innovative chain into a legacy operation will help North Italia grow by leveraging The Cheesecake Factory’s sizable resources and infrastructure.
“We expect to be even better positioned to provide our guests with exceptional dining experiences, offer growth and opportunities for our respective teams, and maximize long-term value for our shareholders,” Gordon said.
Along with expansion, leadership from both brands continue to work together to build out all aspects of North Italia. The Cheesecake Factory has enjoyed success in growing its off-premises mix. Currently, the channel makes up 16 percent of total sales for the brand. Delivery accounts for 35 percent of that business and online ordering 13 percent.
Gordon sees the potential to grow North Italia’s off-premises business to The Cheesecake Factory’s levels. The brand is working with Fox to evaluate deals, such as The Cheesecake Factory’s relationship with DoorDash, and begin implementing them at North Italia.
“We've already talked to some of the markets that use DoorDash today and there will be opportunities to continue to grow that business as well,” Gordon said.
The Cheesecake Factory felt confident in the acquisition because of the relationship it’s built with Fox and his team over the past three years. Fox, a 10-time James Beard Award semifinalist for restaurateur of the year, is an established leader and concept develeoper, and will continue to lead his group post merger.
“Sam and his team are going to operate the business just as they have been,” Clark said. “I think all the great things that they already do to be a world-class talent provider, they will continue to do that. This is not about a synergy situation but more about the growth opportunity. The philosophy that we share around that will continue and I think that the people knowing that we're working together will only benefit each other.