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Firm's menu needs price hike, experts say

Cheesecake Factory should rely on its customer base, not a new chain, for growth.

May 26, 2008|Jerry Hirsch | Times Staff Writer

Cheesecake Factory Inc. has big hopes for its new Asian restaurant, but it won't be looking to RockSugar Pan Asian Kitchen to reignite growth at the company, once a Wall Street star.

RockSugar opens June 19 in Century City, just as its parent company is facing investor discontent over a sagging stock price, declining profit and falling sales at its established restaurants.

Analysts say price increases at its 141 Cheesecake Factory restaurants, rather than the creation of a new Asian chain, will be what puts the company back on a growth track.

Brian Moore, an analyst at Wedbush Morgan Securities Inc. in Los Angeles, said RockSugar was not a bad idea. But, he said, the company wouldn't be able to open enough locations and do so at a fast-enough pace to provide a panacea for its growth woes.

What Cheesecake Factory really needs to do is get more money from its loyal customers who jam the restaurants with long waits for lunch and dinner and worry less about marginal traffic from young people and seniors, groups that would be more sensitive to higher prices, Moore said.

Cheesecake Factory has raised prices about 3% over the last year. But the company plans to ease up below that target as the economy slows. Moore has watched what other chains have done and believes that the company could be more aggressive. The chain has asked a consultant to conduct a price increase study and advise the company how to squeeze more from its menu.

It also is exploring other ways to grow.

Later this year, it will test the feasibility of opening catering units at two of its restaurants. It is experimenting with home delivery in Los Angeles and Orange counties. It is pushing its takeout menu and trying to devise new products in an effort to boost what each customer spends beyond the average $18 Cheesecake Factory collects now.

Like other restaurant chains, Cheesecake Factory is experiencing declines in states hit hardest by the housing slump and mortgage meltdown -- including Florida and California -- and in regions such as the Inland Empire that are plagued by rampant residential real-estate foreclosures.

"We were pretty perfect for many years, and when you fall from that to anything less there is going to be rumbling from Wall Street," Chief Executive David Overton said.

First-quarter profit fell to $14.3 million from $18.4 million a year earlier. Although revenue increased 10% to $393.8 million -- helped by new restaurant openings and sales of its baked goods, sales at restaurants open at least 18 months fell 1.8% in the quarter.

Once a Wall Street darling, shares of Cheesecake Factory have sagged 18% this year because of rising food costs and a general slump in casual dining caused by high gasoline prices and declining consumer sentiment. The stock is trading at barely half the $38.48 peak reached on Feb. 2, 2006.

That has attracted the attention of billionaire corporate activist investor Nelson Peltz, who in December won Federal Trade Commission permission to make a major investment in Cheesecake Factory. Peltz and his partners have accumulated about a 10% stake in the company through stock and derivative securities and came under FTC review because of their investments in other restaurant companies.

Not everyone is down on the company. Brent M. Wilsey of Wilsey Asset Management said he liked its annual sales growth and low debt level compared with other restaurant chains.

But even at current levels, the stock is still a tad pricey, he said. "I would recommend investors to be patient and try to buy this company under $20."

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jerry.hirsch@latimes.com

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