We expect casual dining restaurant chain, The Cheesecake Factory Incorporated (CAKE), to beat expectations when it reports fourth-quarter and full-year 2014 results on Feb 11. Last quarter, the company posted a negative earnings surprise of 15.79%. Let us see what is in store for the company this quarter.
Why a Likely Positive Surprise?
Our proven model shows that Cheesecake Factory is likely to beat earnings because it has the right combination of two key components.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +3.33%. This is a very meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: Cheesecake Factory has a Zacks Rank #2 (Buy). Note that stocks with Zacks Rank #1, 2 and 3 have a significantly higher chance of beating earnings. Meanwhile, the Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Cheesecake Factory’s Zacks Rank #2 and +3.33% ESP makes us confident of an earnings beat.
What is Driving the Better-than-Expected Earnings?
Cheesecake Factory’s revenues have surpassed the Zacks Consensus Estimate in three out of the last five quarters.
Comps increased 1.8% in the last quarter, better than the previous as well as 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 and we expect the trend to reflect in the fourth-quarter results.
We also expect the company’s efforts to expand in key emerging markets to translate into revenue growth in the to-be-reported quarter. These would also help it to offset some of the headwinds in the near term. In fact, restaurants opened over the past three years have exceeded the performance of the existing base of restaurants. The company also remains focused on opening its restaurants at high-grade sites to hit target returns. We expect the company to reap benefits from the unit growth.
However, the company’s earnings have missed the consensus mark over the past four quarters due to higher expenses. Particularly, food costs continue to hurt margins. Moreover, with the company striving to expand its presence worldwide, pre-opening expenses would add to the company’s costs.
Other Stocks to Consider
Here are some other companies in the restaurant sector which you may consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:
Kona Grill Inc. (KONA), with an Earnings ESP of +11.11% and a Zacks Rank #1 (Strong Buy).
El Pollo Loco Holdings, Inc. (LOCO), with an Earnings ESP of +8.33% and a Zacks Rank #2.
DineEquity, Inc. (DIN), with an Earnings ESP of +6.14% and a Zacks Rank #2.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment