On Mar 6, 2015, Zacks Investment Research downgraded The Cheesecake Factory Incorporated CAKE to a Zacks Rank #5 (Strong Sell) on negative estimate revisions since the company posted dismal fourth quarter 2014 results on Feb 11. Earnings and revenues for the quarter missed the Zacks Consensus Estimate. In fact, this was the fifth consecutive earnings miss for the company.
Why the Downgrade?
The company's adjusted earnings of 48 cents per share decreased 15.8% year over year and were also lower than the company’s guidance of 58 cents to 62 cents. The downside reflects higher expenses. Though the restaurateurs' revenues increased on a year-over-year basis, it missed the consensus mark by 2%, mainly due to sluggish comps. Comps increased 1.4%, which was lower than 1.8% growth in the previous quarter.
Total costs and expenses increased 7.9% to $464.9 million as cost of sales, labor expenses and other operating expenses rose. Cost of sales ratio increased 90 basis points (bps) to 25.3% due to higher dairy costs. Labor expense ratio also went up 90 bps to 32.5% due to higher medical costs.
Given the high food costs scenario, Cheesecake Factory lowered its earnings guidance for 2015 and expects earnings per share in a range of $2.08 to $2.20 in 2015. The company expects food costs to increase in the range of 1%–2% owing to higher beef and chicken prices, partially offset by a year-over-year decline in dairy and seafood costs.
Other Stocks to Consider
Some better-ranked stocks in the same industry include Cracker Barrel Old Country Store, Inc. CBRL, Dave & Buster's Entertainment, Inc. PLAY and Ignite Restaurant Group, Inc. IRG. All these stocks sport a Zacks Rank #1 (Strong Buy).
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