The Cheesecake Factory Inc. deployed a smaller footprint with its most recent opening in Oxnard, Calif., testing a scaled down version of its signature concept for possible use in international expansion, executives said Wednesday.
Along with opening its first fast-casual Social Monk Asian Kitchen in February and working toward the acquisition of casual-dining North Italia in the third quarter, the Calabasas Calif.-based company said it opened the smaller 5,500-square-foot restaurant in Oxnard on April 16.
“Our intent originally was to see if the restaurant could operate as fluidly as the 7,200- to 7,500-square-foot restaurant to help our international partners look for real estate sites, most specifically in Asia where the sites tend to be a little bit smaller,” said David Gordon, Cheesecake Factory president, on a first-quarter earnings call.
Gordon said the company wanted to test whether it could execute the menu in a smaller kitchen footprint and maintain the guest experience in less space.
“In the first couple of weeks that the restaurant has been open, I'd say it's currently exceeding our sales per square foot expectations,” Gordon said. “And we've seen that we have more of an even flow of guests throughout the day. The wait times are not that much different than in some of our busiest openings we had at the end of last year, whether in Chattanooga, Tenn., or Lubbock, Texas.”
While the original intent of the smaller restaurant was to test it for expansion abroad, Gordon said The Cheesecake Factory will watch its performance.
“If we do think that we're operating it really, really well, and we get the returns we want, could it possibly lead to some other sites over time? Who knows?” Gordon asked.
And because of the intricacies of The Cheesecake Factory’s menu, Gordon said the company would be unlikely to consider off-premise or ghost kitchens.
“We can execute what we need to do off-premise and even grow those sales in the kitchen designs that we have today, due to their size,” he said. “So we would look to continue to do that and not add any additional cost or any other additional complexity.”
The company’s off-premise sales grew to 16% of the total in the first quarter, an increase of about 2 percentage points over last year’s first quarter.
In those off-premise sales, Gordon said “the check is a little bit higher, whether that's through delivery or even through the digital check through the online ordering channel. We also see the check higher there.” Dessert sales in off-premise orders are close to 20% on delivery vs. 17% to 17.5% in the restaurant, he added.
The Cheesecake Factory has a contract with DoorDash as its exclusive third-party delivery company.
Matthew Clark, Cheesecake Factory chief financial officer, said the company continues to work toward completing a likely third-quarter acquisition of the 18-unit casual-dining North Italia, providing about $20 million to $25 million in growth capital for North Italia and the sibling Flower Child brand it is developing with Phoenix-based Fox Restaurant Concepts LLC. Cheesecake bought a minority stakes in both brands in November 2016.
The 18th North Italia unit opened Wednesday in Dallas, Gordon said.
“As the restaurants have opened across the country, the affinity has been very strong,” he said.
Andy Barish, an analyst with Jefferies, said in note that North Italia units have average unit volumes of about $7 million, compared to Cheesecake’s AUVs of $11 million.
“We model 22 North Italia units at the start of 2020 (growing to 26 by year end), contributing $167 million in revenues in 2020,” Barish noted.
Gordon added The Cheesecake Factory would look to leverage its supply chain, information technology infrastructure and human resources expertise to add value to the North Italia concept.
“We feel good about how they're being handled today and we still think there's some things that we can do to add a lot of value across the bigger company,” he said.
Meanwhile, The Cheesecake Factory opened its long-awaited fast-casual Social Monk Asian Kitchen on Feb. 25 in Westlake Village, Calif., but the company has no immediate plans for a second unit, Gordon said.
“We're working on some points of food cost and labor,” Gordon said. “The sales have been great. We've been very happy with that. How it's received, the decor, the food, all that seems to be quite successful. So as soon as we can get our labor and food costs down a little bit, we'll start looking for the second one. We don't think it's going to take a long time to prove it out, because it's pretty simple, straightforward. It's just all down to profitability in the end.”
For the first quarter ended April 2, The Cheesecake Factory’s net income increased 3.7% to $27 million, or 60 cents a share, from $26 million, or 56 cents a share, in the prior-year period. Revenues rose 2.5% to $599.5 million from $584.7 million in the same quarter last year.
Same-store sales rose 1.3% in the quarter, with 3% pricing increase and a 2.5% traffic decline.
The Cheesecake Factory, founded in 1978, owns and operates 219 restaurants throughout the United States, including Puerto Rico, and Canada: 202 restaurants under The Cheesecake Factory brand, 14 restaurants under the Grand Lux Café banner, two locations of RockSugar Southeast Asian Kitchen and one fast-casual Social Monk.
Internationally, 21 Cheesecake Factory restaurants operate under licensing agreements.
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