The Cheesecake Factory Incorporated (CAKE Quick QuoteCAKE - Free Report) is likely to benefit from its off-premise business model, unit-expansion efforts and Fox Restaurant Concepts. Also, the focus on digital initiatives bodes well. However, inflationary pressures and a volatile macro environment pose concerns.

Let’s delve deeper.

Growth Catalysts

Cheesecake Factory continues to benefit from its robust off-premise sales. In the second quarter of fiscal 2023, off-premise contributed 22% to Cheesecake Factory’s total restaurant sales. Also, off-premise average weekly sales doubled compared with fiscal 2019 levels. The company implemented operational changes and technology upgrades to boost consumer convenience, including a contactless menu, payment technology and text paging. We believe a boost in customer count and targeted off-premise marketing will likely drive the channel’s performance further.

Cheesecake Factory continues to focus on the development front to drive growth. In fiscal 2023, the company expects to open about 20 new restaurants comprising six Cheesecake Factory restaurants, five North Italia restaurants and nine FRC restaurants (including three Flower Child locations). To this end, the company set aside $160-$170 million in capex to support its restaurant's unit development and maintenance. With a strong pipeline, the company anticipates achieving unit growth of 7% in the upcoming year.

Increased focus on Fox Restaurant Concepts (or FRC) bodes well. FRC concept sales have continued to build and off-premise volumes were solid. During the fiscal second quarter of 2023, FRC (excluding Flower Child) recorded sales of $65.7 million, marking a 9.5% increase compared with the prior year's levels. FRC's (including Flower Child) average weekly sales were $142,300, and external bakery sales amounted to $15.4 million.

During the fiscal second quarter, FRC opened its brick-and-mortar location of Fly Bye (a fast-casual dining concept) in the Phoenix market and reported impressive sales. Given the solid customer feedback, the company remains optimistic and anticipates opening more Fly Bye locations in the upcoming periods.

Concerns

Cheesecake Factory, which shares space with Chipotle Mexican Grill, Inc. (CMG Quick QuoteCMG - Free Report) , McDonald's Corporation (MCD Quick QuoteMCD - Free Report) and Restaurant Brands International Inc. (QSR Quick QuoteQSR - Free Report) in the Zacks Retail - Restaurants industry — has been affected by inflationary pressures, supply chain challenges and a challenging macro environment.

During the fiscal second quarter, the company reported delays in opening new restaurants due to supply chain challenges and delays in permitting, construction, landlord readiness and equipment availability. This and commodity inflation added to the negatives. The company is cautious about the ongoing uncertain macroeconomic environment. It anticipates the headwinds to persist for some time.

For third-quarter fiscal 2023, the company anticipates commodity inflation in the low single digits. Labor inflation for the same quarter is expected at mid-single digits. For fiscal 2023, our model predicts the total cost of sales to rise 2% year over year to $826.9 million.

A Brief Review of the Other Stocks

Chipotle will likely benefit from digital initiatives, Chipotlane add-ons and culinary improvements. Also, the emphasis on menu innovation bodes well. The company has redesigned and simplified the online ordering site, enabled online payment for catering and collaborated with several well-known third-party providers for delivery. There has also been a significant increase in digital orders and guest satisfaction since the rollout of its “Smarter Pickup Times” technology. To drive growth, the company emphasizes testing changes to the more brilliant pickup times logic (based on different sales and deployment levels). The company also focuses on robotics-based autonomous vehicles for delivery, which will likely enhance the customer experience in the upcoming periods.

McDonald's benefits from its digital efforts, menu innovation and expansion initiatives. Also, focus on the loyalty program and drive-thru channels bodes well. During the second quarter of 2023, digital dales (from the top six markets) came in at $8 billion, contributing 40% to the company’s system-wide sales. The company's "MyMcDonald's" digital experience growth engine is transforming its dine-in, drive-through, takeout, delivery and curbside pickup services. In the United States, 95% of its restaurants offer drive-thru facilities. The company intends to focus on continued digital innovation to boost customer engagement and drive digital acquisition and customer frequency.

Restaurant Brands benefits from strong comparable sales growth, expansion initiatives and menu innovation. Also, the focus on digitalization efforts bodes well. During the second quarter of 2023, the company emphasized investments concerning fuel-to-flame advertising and digital investment. This initiative paves the path for improvements in creative messaging and ad testing and installing indoor digital menu boards, point-of-sale systems and printers. It also emphasized investments concerning kitchen equipment upgradation (with toasters and fryers) and property improvements (like parking lot repairs and lighting). The company emphasizes streamlining its products and simplifying its menu boards to boost order accuracy and overall customer satisfaction.