The Cheesecake Factory Inc. (CAKE) posted mixed third-quarter 2014 results wherein earnings missed the Zacks Consensus Estimate, but revenues beat the same. Shares of Cheesecake Factory dipped 2.9% on Oct 23, as the company’s lowered the guidance for 2014 for the third consecutive quarter hit investors’ confidence.
The company's adjusted earnings of 48 cents per share missed the Zacks Consensus of 57 cents by 15.8%. Also, earnings were lower than the company’s guidance of 55 to 58 cents per share and decreased 7.7% year over year. We believe the company’s earnings were hit by a rise in expenses.
The restaurateurs' revenues increased 6.3% year over year to $499.1 million. Further, it beat the Zacks Consensus Estimate of $497 million by 0.5%. the company’s revenues benefitted from a year-over-year growth in comps.
Inside the Headline Numbers
Comps increased 1.8%, better than the previous quarter increase of 1.2% and the year-ago improvement of 0.8%. Further, it was at the higher end of management’s guidance range of 1% to 2% increase.
Comps rose 2.1% at the Cheesecake Factory restaurant concept, better than the previous quarter increase of 1.5%. Though comps decreased 2% at Grand Lux Café, it was narrower than the previous quarter decline of 2.7%.
Total costs and expenses were up 7.9% to $464.9 million due to an increase in cost of sales and labor expenses and other operating costs and expenses. Cost of sales ratio increased 90 basis points (bps) to 24.9% due to higher dairy costs. Labor expense ratio went up 60 bps to 32.7% due to higher medical costs. Pre-opening expenses were $4.0 million, down 5.8% year over year.
Store Update
The company opened six domestic restaurants and one restaurant each in the Middle East and Mexico. It expects to open 10 company-owned restaurants in 2014.
The company targets four international restaurants openings under licensing agreements in the current year.
Share Repurchase and Dividend Update
The company repurchased 0.5 million shares of its common stock for $19.8 million during the reported quarter. Moreover, it expects to continue to return the entire free cash flow to shareholders in fiscal 2014 as dividends and up to $150 million through share repurchases.
2014 Guidance Lowered
Cheesecake Factory has lowered its earnings guidance for the third consecutive quarter. The company expects 2014 earnings per share in the range of $2.07 to $2.11 down from $2.19 to $2.25. The company’s earnings in 2013 was $2.07 per share. The lowered guidance reflects expected increase in cost of cream cheese and some additional costs in the third and fourth quarters of the year related to self-insured group medical coverage based on the claims activity and the number of participants observed in the second quarter.
Also, the company’s comps guidance is roughly 1.5% versus the prior guidance of 1% to 1.5% range.
The company’s food cost inflation expectation to around 4% owing to higher cream cheese and overall diary costs. Earlier, the company expected food cost inflation at the higher end of 3% and 4% range.
Fourth-Quarter Guidance
For the fourth quarter of 2014, the company estimates earnings per share in the range of 58 to 62 cents, up from earnings of 57 cents reported in the fourth-quarter of 2013, based on an assumed range of comparable sales between 1% and 2%.
Our Take
Though the company reported the 19th consecutive quarter of positive comparable sales in the second quarter of 2014, continued underperformance of the Grand Lux Cafe remains a major concern. Moreover, food costs are becoming a major concern for the restaurateur which, in fact, led to the earnings guidance cut for the third consecutive quarter.
Also, the U.S. Department of Agriculture expects the ongoing drought in California to continue to have large and lasting effects on fruit, vegetable, dairy and egg prices. This would worsen the situation not only for Cheesecake Factory but also other restaurant chains like Dunkin' Brands Group, Inc. (DNKN) and Panera Bread Company (PNRA).
However, the company’s pricing actions, menu innovations and international expansion in regions with growth potential would offset these negatives to some extent.
Cheesecake Factory currently carries a Zacks Rank #3 (Hold). Burger King Worldwide, Inc. (BKW) is a better-ranked stock in the restaurant industry that sports a Zacks Rank #2 (Buy).
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