The Cheesecake Factory announced an exclusive licensing agreement with Maxim’s Caterers Limited for the development of at least 14 restaurants over the next 10 years in Asia, with the first location expected to open in 2015. While today’s announcement covers development in Hong Kong, Macau, Taiwan, and China, the agreement has the potential to eventually be expanded to include Japan, South Korea, Malaysia, Singapore, and Thailand.
Maxim’s Caterers Limited is an experienced operator of other concepts in Asia, including a long-standing partnership with Starbucks (SBUX $71.02; Outperform), dating back to 2000, which currently encompasses about 150 locations in Hong Kong, Macau, and Vietnam, and previously included several Southern China markets (which were purchased by Starbucks in late 2013).
Maxim’s joins two other international licensees for The Cheesecake Factory, including Alshaya in the Middle East and Alsea in Mexico and Latin America. Ultimately, we expect The Cheesecake Factory to partner with just a few highly qualified and sophisticated licensees for all of its global market expansion given the complexity of operating The Cheesecake Factory’s high-volume concept.
Internationally, The Cheesecake Factory has opened four locations in the Middle East with Alshaya, while its first location in Mexico is scheduled to open with partner Alsea later in 2014. Early evidence suggests that similar to its presence in the United States, The Cheesecake Factory is a highly desired traffic draw in malls, with A-plus locations and tremendous consumer reception. While management has not quantified the specifics of its licensing agreements, management has indicated that each licensed location should generate roughly $0.01 in EPS on an annual basis assuming similar average unit volumes as in the United States. This implies a flowthrough of just over 7.5% of sales (including royalties as well as any profits from the sales of cheesecakes to licensees). Importantly, international locations so far appear to be achieving volumes in excess of those in the United States, and we believe earnings accretion of $0.015 per restaurant is likely achievable.
While we view today’s announcement as another validation of the portability of The Cheesecake Factory overseas and continue to view the company as one of the best operators in casual dining with some of the strongest growth prospects, we view the stock as fairly valued at 19 times our 2014 EPS estimate.
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