On Dec 9, 2014, we issued an updated research report on The Cheesecake Factory Incorporated (CAKE).
On Oct 22, 2014, this casual and full-service dining restaurant posted mixed third-quarter 2014 results wherein earnings missed the Zacks Consensus Estimate but revenues beat the same.
The company's adjusted earnings of 48 cents per share declined 7.7% year over year and also missed the company’s guidance range owing to higher costs. Like all other restaurant chains, rising food costs are dampening Cheesecake’s profits.
Drought conditions in California, Oklahoma and Texas are driving up cattle prices and thereby prices of dairy products. Notably, butter prices touched a record high in Sep 2014. Going forward, the overall cost environment for food commodities is expected to remain under pressure due to domestic and worldwide agricultural supply and demand imbalance and other macroeconomic factors.
Also, costs related to self-insured group medical coverage and pre-opening costs of outlets are hurting the profitability of the company. Given the scenario, the company has lowered earnings guidance for 2014 thrice this year.
The restaurateurs' revenues increased 6.3% year over year to $499.1 million as it benefited from improved comps. Comps increased 1.8%, better than the previous quarter increase of 1.2% and the year-ago improvement of 0.8%. Further, it was within the management’s guidance range of 1% to 2% increase. Comps reflect average check growth of 2.6%, partially offset by a 0.8% decrease in guest traffic.
Driven by huge demand, Cheesecake Factory has been opening restaurants and plans to continue the trend, going forward. The company remains focused on opening its restaurants at high grade sites to hit targeted returns. The restaurants opened over the past three years are performing better than the erstwhile locations.
Of late, the company is foraying into lucrative markets like Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico and Chile. Also, the company has expanded into East Asia which has been in the limelight for economic growth and healthy investment returns. The region boasts a relatively younger population and a growing middle class with higher disposable income. Therefore, entry into this market has helped the company to boost traffic and improve comps.
However, continued underperformance of the Grand Lux Café and weak consumer spending environment remain headwinds for this Zacks Rank #4 (Sell) company.
Other Stocks to Consider
Some better-ranked stocks in the restaurant industry include Bloomin' Brands, Inc. (BLMN), Bob Evans Farms, Inc. (BOBE) and Cracker Barrel Old Country Store, Inc. (CBRL). All these stocks carry a Zacks Rank #2 (Buy).
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