Cheesecake Factory (CAKE) Dividend Suspended

The Cheesecake Factory Incorporated (CAKE) is another restaurant stock that suspended its dividend in response to the coronavirus pandemic. The brand is popular in the casual dining space. The company is also a popular one in the investment community with over 14 thousand followers on Seeking Alpha. The company was also a dividend growth stock and a Dividend Challenger.

But the Cheesecake Factory is one of those companies that suspended its dividend in response to the challenges of COVID-19. This was not surprising as in March and April 2020 local government restrictions closed many restaurants or at least severely limited their operations. The need to preserve liquidity and reduce cash flow requirements led many restaurant chains to suspend their dividend. This included the Cheesecake Factory which suspended its dividend on May 5^th. More recently, some restaurants have reinstated their dividend albeit at lower levels than before the pandemic. The Cheesecake Factory has not yet done so.

Overview of Cheesecake Factory

The Cheesecake Factory was founded in 1972 in California. The restaurant company operates in the casual dining space. The company has four operating segments: The Cheesecake Factory restaurants, North Italia, other FRC, and other. As of February 26, 2020, it owned and operated 294 restaurants in the United States and Canada under the brands of The Cheesecake Factory (205 owned and 26 licensed) and North Italia (23 locations); and a collection of Fox Restaurant Concepts or FRC, which serves as an incubator.  The company also has Cheesecake Factory restaurants in the Middle East, China, and Mexico that operate under licensing arrangements. The restaurant company also operates bakeries that makes cheesecakes and other baked goods for its restaurants, international licensees, and other customers. Total revenue was about $2,483 million in 2019.

Cheesecake Factory Dividend

Cheesecake Factory started paying a regular quarterly cash dividend of $0.12 per share in 2012. From that time it grew rapidly to $0.36 per share in 2020. The eight consecutive years of dividend growth made the stock a Dividend Challenger. Before the dividend was suspended the yield was over 3% and the payout ratio was between 50% and 60%.

Impact of COVID-19 on the Restaurant Business

In general, COVID-19 has certainly devastated the restaurant business. March and April were particularly bad months as many were forced to close temporarily. Reportedly, by early-May the coronavirus pandemic resulted in over 5.9 million lost jobs in six weeks. Total employment dropped from slightly over 12 million to roughly 6.4 million int eh restaurant business. To put this in perspective, the restaurant business had about 6.5 million jobs in 1990, twenty years ago. According to S&P Global, based on data from the U.S. Census Bureau, restaurant sales in March were down -28.7% and were down an astounding -48.7% in April.

However, many states allowed restaurants to operate as essential businesses since they served food, but with only for carry out or delivery business. This permitted many restaurants to at least to keep the doors open and muddle through the most difficult months. Even in states where they were permitted to remain open customers remained wary reducing traffic for seated dining. Data from Open Table reported an almost 100% reduction on a year-over-year basis for seated visitors in March and April, which was the bottom.

The net effect was that many restaurants suspended or cut their dividend. The list that I update on a weekly basis contains a good number of casual dining restaurant companies and a few fast food restaurant companies. Even Cracker Barrel (CBRL), which is a long-time dividend growth stock and a former Dividend Contender had to cut its regular and special dividend. Other restaurant chains, such as Darden Restaurants (DRI), also suspended their dividends.

The onset of warm months permitted patio dining and more recently States are increasingly allowing limited indoor dining. Further, the significant amount of federal stimulus helped drive retail sales across all categories including restaurants. The net effect has been that revenue, cash flow, and earnings have improved. Although not yet returned to pre-pandemic levels it was enough to reinstate the dividend for some restaurant companies. However, The Cheesecake Factory is currently not one of these companies.

Cheesecake Factory Dividend Suspended

The Cheesecake Factory’s sales were under pressure as early as mid-March as coronavirus cases started to spread across the U.S. As a group, restaurant chain stocks experienced days with large declines in the double-digits. By March 25^th, The Cheesecake Factory informed its landlords that it could not make rent payments on April 1^st for any of its storefronts. This was attributed to a severe decline in restaurant traffic resulting in decreased cash flow. March comparable sales fell -46%.

On May 5^th the company suspended its dividend during its Q1 2020 earnings release. This was related to terms in its credit facility to enhance liquidity. Specifically, the company stated:

To preserve liquidity and in conjunction with the terms of the credit facility amendment, the Company’s Board of Directors has suspended the quarterly dividend on its common stock, as well as share repurchases.

From the first quarter earnings call transcripts, the CFO stated:

With regard to capital allocation, to preserve liquidity and in conjunction with the terms of the credit facility amendment, the Board has suspended the quarterly dividend on our common stock as well as share repurchases. As David discussed, we have also suspended new unit development until more clarity on the restaurant industry operating environment emerges. We anticipate approximately $5 million of necessary maintenance CapEx per quarter, and this is incorporated in the estimated cash burn that I discussed.

Final Thoughts on Cheesecake Factory Dividend Suspended

There really is no easy fix for the restaurant business. In many states, they are for the most part still operating with limited seating, outdoor patio dining, dividers, masks for employees, enhanced cleaning and disinfection protocols, etc. It is likely that delivery, carry out, and limited seating is not sufficient for many casual dining restaurants to survive. The business is already known to have thin margins. The cold weather months will limit outdoor patio dining. Customers remain risk averse about indoor dining. Additionally, the likelihood of additional federal stimulus is not that high despite some progress in the past week.

Data from Yelp has indicated that 60% of businesses on Yelp have closed their doors during the pandemic and restaurants have been hit the hardest. By August 31^st, nearly 163,700 businesses on Yelp have closed and 32,100 were restaurants, and close to 19,600 or 61% have closed permanently.

However, The Cheesecake Factory will likely be a survivor. The company has recaptured a fairly large percentage (at end of Q2 2020) of its pre-pandemic sales averaging between 80% – 90% depending on the location of the specific restaurant and level of restrictions. The company is popular with casual diners and receives high reviews from consumers. Further, the check size is moderate meaning that many customers may still dine there even during times of economic distress. I expect that the dividend will be restored by the first half of 2021, although it may be at a lower level than before the pandemic. It will likely be a few years before the dividend surpasses the pre-pandemic level.

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