The Cheesecake Factory Incorporated (CAKE) is slated to report its third quarter 2014 results on Oct 22. Last quarter, it posted a negative surprise of 3.28% due to higher expenses. Let’s see how things are shaping up for this announcement.
Factors to Consider
Cheesecake Factory’s earnings have been missing the Zacks Consensus Estimate consecutively over the past three quarters owing to higher expenses. Particularly, food costs would hurt the margins of the company. Rising food costs have been a concern for most of the restaurant companies. Higher dairy, shrimp and salmon costs that have been hurting the results of the company over the past few quarters would continue to dampen results in the upcoming quarter.
Moreover, with the company making efforts to expand worldwide, pre-opening expenses are likely to increase. Another headwind for the company is its Grand Lux Café that is consistently posting sluggish performance over the past few quarters. Segment comps have been declining for long due to lower guest traffic and we expect the trend to continue.
However, despite the miss in the second quarter, overall comps increased 1.2%, better than the comps posted in the previous quarter as well as comps in the year-ago quarter. The improved comps reflect average check growth. In fact, the company has been reporting positive comps since the beginning of 2013.
We expect the company’s efforts to expand in key emerging markets to lead to economic growth. These would also help it to offset some of the headwinds in the near term. As evidence, restaurants opened over the past three years have exceeded the performance of its existing base of restaurants. The company also remains focused on opening its restaurants at high grade sites to hit targeted returns.
Given the positives, the company expects earnings per share in the range of 55 cents to 58 cents per share for the third quarter, which is up year over year. The Zacks Consensus Estimate is currently pegged at 57 cents.
Earnings Whispers?
Our proven model does not conclusively show that Cheesecake Factory will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP (Expected Surprise Prediction) and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here as you will see below.
Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 57 cents per share. Hence, the difference is 0.00%.
Zacks Rank: Cheesecake Factory Zacks Rank #3 (Hold) when combined with a 0.00% ESP makes surprise prediction difficult.
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Other Stocks to Consider
Here are some other companies which you may consider as as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Burger King Worldwide, Inc. (BKW) has an Earnings ESP of +3.70% and a Zacks Rank #2 (Buy).
Dunkin' Brands Group, Inc. (DNKN) has an Earnings ESP of +2.13% and a Zacks Rank #3 (Hold).
Buffalo Wild Wings Inc. (BWLD) has an Earnings ESP of +0.94% and a Zacks Rank #3.
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