On Nov 15, 2014, Zacks Investment Research downgraded The Cheesecake Factory Incorporated (CAKE) to a Zacks Rank #5 (Strong Sell). Estimates have been declining ever since the company announced mixed third quarter 2014 results on Oct 22. Earnings missed the Zacks Consensus Estimate and the company lowered its earnings guidance for 2014. This was the fourth consecutive quarter of earnings miss and the third consecutive quarter of guidance cut.
Why the Downgrade?
In the third quarter 2014, Cheesecake Factory’s adjusted earnings of 48 cents per share were lower than the company’s guidance of 55 to 58 cents per share and decreased 7.7% year over year. The downside reflected a rise in expenses.
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.
Meanwhile, the company lowered its earnings expectation for full year 2014 due to anticipation of higher input costs. The company now expects 2014 earnings per share in the range of $2.07 to $2.11, down from the previous expectation of $2.19 to $2.25. The lowered guidance reflects an expected increase in cost of cream cheese and some additional costs related to self-insured group medical coverage. The company expects food cost inflation to be approximately 4% owing to higher cream cheese and overall diary costs. Earlier the company expected food cost inflation at the higher end of the 3% to 4% range.
Also, the continued underperformance of Grand Lux Cafe – one of the company’s segments– remains a matter of concern. Though the company reported the 19th consecutive quarter of positive comparable sales, segment comps at Grand Lux Cafe have continued to decline over the past few quarters. We believe the company needs to adopt some sales building measures to reinvigorate the brand.
Other Stocks to Consider
Some better-ranked stocks in the restaurant industry include BJ's Restaurants, Inc. (BJRI), DineEquity, Inc. (DIN) and Ruby Tuesday, Inc. (RT). All these stocks sport a Zacks Rank #1 (Strong Buy).
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
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment