Will The Cheesecake Factory Be Able To Survive The Covid-19 Crisis?

by Trefis Team
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The Cheesecake Factory’s stock (NASDAQ: CAKE) has declined by 36% since the beginning of the year. The restaurant industry is rattled, and Cheesecake Factory is no exception. A Covid recession will impact the company’s revenues, cash flows, and ability to pay dividends. We estimate that a recession that persists through late Q2/early Q3 2020 can reduce the company’s revenues by 20% from $2.5 billion in 2019 to $2 billion in 2020. Many restaurants are closed, while some are running in a takeaway-only mode. Further, lower consumer spending and consumption over the coming months will likely lead to lower demand for food and beverages which can put the mere survival of restaurant companies into question.

Trefis analyzes the potential Impact Of The Covid-19 Recession On The Cheesecake Factory with a focus on the company’s liquidity reserves and concludes that The Cheesecake Factory has a steady financial position and a Covid-19 recession will not have a major impact on the company’s cash reserves in the near term.

Impact On The Cheesecake Factory’s Revenues 

  • If the outbreak of the virus increases, the system-wide sales will decline until the situation improves as people will be averse to entering restaurants. As a result, The Cheesecake Factory‘s revenues could decline by about 20% in FY’20, on account of weaker demand, more focus on essentials, a reduction in meeting friends and colleagues for dinners and drinks, which further reduces demand.
  • In addition to that, the company derives nearly 100% of its revenues from North America, which has become the epicenter of the outbreak – recording the largest numbers of Covid-19 cases across the globe.

Impact On The Cheesecake Factory’s Cash Flows

  • Cheesecake Factory’s cash flows are likely to plunge in FY2020 due to a fall in revenues and reduced profitability.  
  • Elevated costs, coupled with lower revenues, will hurt the company’s bottom line. 
  • We estimate that Free cash flow from operations (FCFO) will go down from $218.8 million in 2019 to $65.8 million in 2020. Also, with expected capital expenditures of $36.9 million for the year, FCFO-CapEx will be $28.9 million in 2020.

Cash Balance Impact

  • This will lead to a 2020 cash balance of $116.6 million – higher than the figure at the end of 2019.
  • This figure assumes $29.2 million in fresh capital raised from external sources.
  • This is also with the assumption that the company will not pay dividends or re-purchase shares. While that may be a disappointment for existing investors, these moves by the company will be essential for its long-term survival.

Conclusion

To sum things up, The Cheescake Factory can weather a recession through Q2 2020 and a 20% decline in revenues by cutting Capex, share repurchases, suspending dividends, and raising fresh capital. 

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

An alternative scenario for The Cheesecake Factory’s cash flows with a 35% decline in revenue instead is detailed as a part of our full analysis.

While The Cheesecake Factory seems to be in a relatively comfortable position to ride the Covid-19 tide, how is the Avis Budget Group placed?

 

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