Takeaway: CAKE is on our best idealist as a SHORT.

CAKE told its landlords that it wouldn't be paying rent for April. Our cash burn analysis pointed to liquidity challenges this year, but the burn is faster than we thought.

The coming rent battle between landlord and tenant

A number of restaurants and retailers have already started to litigate rent payments during this period with malls and shopping centers closed and customer traffic down so significantly. Restaurants and retailers that anticipate bankruptcy won't pay rents, because it will be re-negotiated in the bankruptcy courts anyway. Other chains are looking for deferrals, reductions or possibly forgiveness. Few chains have business interruption insurance that covers a situation like a pandemic. The rent obligation is generally strongly written into leases, but there could be some questions when the mall is itself closed. Malls and strip centers have co-tenancy clauses so they can't ignore all the pleas from tenants and see a rash of store closings at once. Rent for March was previously paid which is in part why so many chains announced closings until the end of the month. Rent for April is due next week and there will many calls placed between tenants and landlords in the coming week.

Not paying rent

In a letter to its landlords, the Cheesecake Factory said it would not be making its April rent payments. The letter reported by several news sources on Wednesday was written on March 18th. Management explained in the letter, "The severe decrease in restaurant traffic has severely decreased our cash flow and inflicted a tremendous financial blow to our business." It's not a question of whether the Cheesecake Factory owes the rent. The company said on March 23 that all but two of the Cheesecake Factory brand restaurants will continue to operate off-premise sales. Even though off-premise was only 17% of the Cheesecake Factory's sales before the dine-in areas were closed, being able to employ a small number of employees and cover some fixed costs is considerable cash savings.

Rent is largely fixed, but not a large expense

Rent should be considered as mostly fixed for a restaurant chain like The Cheesecake Factory. Only ~14% of what the Cheesecake Factory reports as rent expense is based on a percentage of sales. The Cheesecake Factory generates some of the highest sales per square foot of any restaurant chain. For the Cheesecake Factory rent expense works out to only be about 6% of sales. Not making its rent payments could conserve about ~$40mm in cash per quarter. However, as desired of a tenant as the company is it would be difficult to see an extended period of rent deferrals before landlords took more aggressive action. Allowing a tenant with the financial resources of the Cheesecake Factory to defer rent also sets a precarious precedent for the property owners' other tenants. 

Liquidity will be tested

In all of the three sales scenarios we ran for the Cheesecake Factory it needed additional sources of cash this year as seen below:

CAKE | Not Paying Rent - Like Having Your Own Cake and Eating It - cake32520

On March 23 the company said it drew upon the $90mm available on its revolving credit facility and curtailed planned unit growth. A suspension of its dividend may be imminent as it would save $16mm a quarter. In its history the Cheesecake Factory has been conservative when managing its balance sheet, but the acquisition of Fox Restaurants last year for $308mm added a turn of leverage. The company has the ability to draw upon another $200mm in an expansion of its credit facility which we think could also be likely.

We based many of the assumptions we made in our calculations on Darden's guidance for cash burn provided on last week's conference call. 

For additional detail about our liquidity calculations for other casual diners please see our presentation "Surviving the Restaurant Pandemic" CLICK HERE