The Cheesecake Factory Inc. (CAKE) posted dismal fourth-quarter 2014 results wherein both earnings and revenues missed the respective Zacks Consensus Estimate. Shares of the company dipped 5.9% in the after-market trading session on Feb 11, as dismal results and increased expenses as well as lowered earnings guidance for 2015 hit investors’ confidence.
The company's adjusted earnings of 48 cents per share missed the Zacks Consensus of 60 cents by 20%. Also, earnings were lower than the company’s guidance of 58 to 62 cents and decreased 15.8% year over year. The downside reflects higher expenses.
The restaurateurs' revenues increased 5.2% year over year to $499.7 million, mainly due to unit growth. However, it missed the Zacks Consensus Estimate of $510 million by 2%, mainly due to sluggish comps.
Inside the Headline Numbers
Comps increased 1.4%, which was lower than 1.8% growth in the last quarter, but better than comps growth of 1.1% in the year ago quarter. Further, it was at the mid-point of management’s expectation of 1% to 2% increase.
Total costs and expenses increased 7.9% to $464.9 million as cost of sales and labor expenses and other operating costs and expenses rose. Cost of sales ratio increased 90 basis points (bps) to 25.3% due to higher dairy costs. Labor expense ratio went up 90 bps to 32.5% due to higher medical costs. Pre-opening expenses were $5.5 million, down 13.7% year over year.
Full-Year Results
For 2014, earnings were $1.96 per share, down 6.6% year over year. Revenues for the year came in at $19.8 billion, up 5.3% from 2013.
Store Update
In 2014, 10 restaurants were opened, with five in the fourth quarter alone.
Internationally, one restaurant was unveiled in the Middle East in the quarter.
In fiscal 2015, the company plans to open 11 company-owned restaurants domestically. In addition, four restaurants will be unveiled in the Middle East and Mexico under licensing agreements.
Share Repurchase and Dividend Update
In 2014, the company repurchased 3.1 million shares of its common stock for $140.5 million. The company’s board of directors also declared a quarterly dividend of 16.5 cents per share. The dividend will be paid on Mar 10, 2015 to shareholders of record at the close of business on Feb 25.
2015 Guidance
Cheesecake Factory expects earnings per share in a range of $2.08 to $2.20 in 2015, down from the prior expectation of earnings per share in the range of $2.35 to $2.45. However, the company upped its comps growth guidance of 1.5% to 2.5%, from the prior range of 1–2%.
The company’s food cost inflation expectation is within 1–2% owing to higher beef and chicken prices, partially offset by year-over-year decline in dairy and seafood costs.
First-Quarter 2015 Guidance
For first quarter, the company expects earnings per share between 47 cents and 50 cents, based on an estimated comps growth range of 3% and 4%.
Our Take
Though Cheesecake Factory reported the 20th consecutive quarter of positive comps in the fourth quarter of 2014, continued underperformance of the Grand Lux Cafe remains a major concern. Moreover, higher food costs are affecting the restaurateur’s performance.
Also, the U.S. Department of Agriculture expects the ongoing drought in California to continue to have a significant effect on fruit, vegetable, dairy and egg prices. This would worsen the situation not only for Cheesecake Factory but other restaurant chains like Dunkin' Brands Group, Inc. (DNKN) and Panera Bread Company (PNRA) as well.
However, the company’s pricing actions, menu innovations and international expansion in regions with growth potential should offset these negatives to some extent.
Cheesecake Factory currently carries a Zacks Rank #2 (Buy). Kona Grill Inc. (KONA) is a better-ranked restaurant stock sporting a Zacks Rank #1 (Strong Buy).
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