Now known in some circles for something beyond its array of cheesecakes, 2,000 calorie dishes, and cruise ship-meets-Las Vegas décor, The Cheesecake Factory (CAKE) added a second consecutive quarter of negative healthcare news, a cost that’s hidden in most companies’ income statements. The impact of this quarter’s negative healthcare surprise was $4,600,000, or 44% of their total 16% earnings per share miss. That, along with wage inflation and other costs, sent shares down over 12% on August 1st, erasing over $300M in market capitalization.
Why the breakdown of healthcare costs? High-cost claimants. CAKE, like most large companies, self-insures its claims and adds stop-loss, or reinsurance, to protect against any big outlier claims (most companies with 10,000+ employees have reinsurance that often beings when a participant’s claims exceed $500,000+ per year, something that is typically seen 3-4 times in a group of 10,000 people). According to CFO Matt Clark, on the negative charge: “the real driver is – we’ve talked about before – are the big claims, and those are over $50,000, and they just tend to be, I’ll call it, bumpy.” By my calculations 1, healthcare trend would have to have been in the 16%+ year-over-year, or roughly 3x healthcare market trends to show such a meaningful quarterly loss.
In May I wrote about The Cheesecake Factory and whether they’re in the business of healthcare. I followed it up with a letter to the CFO, both as a shareholder and someone who’s interested in healthcare, recommending they plausibility test all health programs and cut what doesn’t work (e.g., do you see a 20% reduction in ER visits with Telemedicine?), improve their open enrollment guide, provide an alternative to traditional wellness (something fun like Quizzify), simplify programs, and benchmark plan design values, premium cost sharing, HSA contributions, and strategies with their peers, while of course recognizing that in food businesses, they are unique. Their benefit programs can be found here. CAKE has a gem of a workforce, with positions at kitchen manager and above management tenure at 12-20 years+. This while average tenure in the US continues to slide. That loyalty is amazing; they average $10.8M in sales per restaurant and incredible cash-on-cash return of 20-25% for its 200+ restaurants, leading dessert sales, and Spartan discipline with growth and new site selection.
Healthcare is typically a top 3-4 cost. In restaurants, it’s after labor, food, and rent. When it becomes something with recurring negative surprises (beyond the industry trends), it’ll become an issue. When healthcare brings positive changes, enough to warrant good surprises on earnings calls (read: real savings), something that’s statistically validated, then they will be “in the healthcare business.”