Growing nicely by feeding others

Cheesecake Factory an `amazing' success

Huge portions for the hungry


Just as the restaurant industry is growing at its slowest pace in a decade and rivals are scaling back expansion plans, Cheesecake Factory Inc. has plans to grow more aggressively than ever.

The Calabasas Hills, Calif.-based chain's strategy of serving huge portions, offering variety and opening restaurants in affluent neighborhoods will no doubt be tested in the midst of a sluggish economy and declines in eating out.

The chain of 52 Cheesecake Factory outlets - including one in Baltimore's Inner Harbor - and two upscale Grand Lux Cafe restaurants hopes to open 11 namesake outlets and one Grand Lux by year's end. Chief Executive Officer David Overton recently said the company could grow to 200 restaurants in the United States, up from a previous estimate of 150.

Cheesecake Factory executives said the time is right to expand, because consumers have a big appetite for its offerings. The typical outlet generates revenue of $11 million, more than four times the average for a casual-dining restaurant, analysts said.

"We've basically been able to open our doors and customers would come," said Jerry Deitchle the company's chief financial officer.

Cheesecake Factory's strong sales and profits in sweet and sour times have made its stock attractive. Despite the company's strong performance, some industry watchers think the shares are overpriced, however. They closed at $41.98 Friday.

R. Scott Tilghman, an analyst at Ladenburg Thalmann in New York, said Cheesecake will have difficulty maintaining its historic revenue and earnings growth of 25 percent or more, partly because it can't open restaurants fast enough. If sales and profit growth sag, Wall Street could hit the stock, which Tilghman rates "market perform" and values at about $30.

Many restaurant companies have scaled back expansion plans or are growing more cautiously in the face of economic uncertainty and rising unemployment, said Tim Carlin of Technomic Inc., a restaurant consulting company in Chicago.

Outback Steakhouse Inc. plans to open up to 64 restaurants this year, down from 80 last year, according to regulatory filings. Mark D. Kalinowski, an analyst with Salomon Smith Barney, attributes the slowdown partly to the economy. The Tampa, Fla.-based company declined to comment.

Despite the potential roadblocks, analysts said, Cheesecake Factory's expansion makes sense, given the company's popularity and track record with new stores.

Because the chain is such a strong draw to a retail location, landlords often reduce rents and pick up part of the tab for the construction of new restaurants, said Lynne Collier, an analyst with Stephens Inc. in Dallas. They are likely to be even more generous in these tough economic times, with the softening commercial real estate market.

With strong cash flow and no debt, Cheesecake Factory has the resources to expand without overextending itself, said Allan Hickok, an analyst at U.S. Bancorp Piper Jaffray.

"They've opened more than 50 restaurants and never had a clunker, not even close," he said. "That's simply amazing."

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