On Mar 20, we issued an updated research report on The Cheesecake Factory Incorporated CAKE.
The Cheesecake Factory posted dismal fourth-quarter 2014 results on Feb 11 wherein both earnings and revenues missed the respective Zacks Consensus Estimate, mainly due to sluggish comps. The company's adjusted earnings of 48 cents per share were lower than the company’s guidance of 58 to 62 cents and decreased 15.8% year over year. The downside resulted from higher expenses. On the other hand, the restaurateurs' revenues increased 5.2% year over year to $499.7 million, mainly due to unit growth.
Comps increased 1.4%, lower than 1.8% growth in the last quarter, but better than 1.1% rise in the year-ago quarter. 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.
Given the lower-than-expected results, higher food costs and other expenses, the company cut its earnings guidance for 2015. The overall cost environment for food commodities has been under pressure due to domestic and worldwide agricultural supply and demand imbalance and other macroeconomic factors. Going forward, the company expects food cost inflation in the range of 1–2% in 2015 owing to higher beef and chicken prices, which would hurt profits.
Meanwhile, continued underperformance of Grand Lux Cafe segment remains a matter of concern for the company. Comps at Grand Lux Cafe segment have been continuously declining for the past few quarters as the company has been consistently increasing menu prices. This increase amid a soft consumer spending environment has been hurting traffic and thereby, comps.
Nevertheless, despite challenging economic conditions, Cheesecake Factory has been expanding in the domestic as well as international markets. Notably, the restaurants opened over the past three years are performing better than the erstwhile locations. Apart from the domestic market, the company is, of late, foraying into lucrative markets like the Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico and Chile.
Also, the company is committed to boost its sales and improve margins to survive in the competitive environment. In order to boost comps, the company is focusing on improving its speed of service and training its servers to render higher level of service. Also, the company is capitalizing on technology and building a mobile app for quick payments. Meanwhile, the company is evaluating different approaches to limit its costs. Amid the current soft environment, such efforts to control costs would help to discipline margins of this Zacks Rank #4 (Sell) company in the near term.
Some better-ranked stocks in the same industry include Cracker Barrel Old Country Store, Inc. CBRL, Dave & Buster's Entertainment, Inc. PLAY and BJ's Restaurants, Inc. BJRI. All these stocks sport a Zacks Rank #1 (Strong Buy).
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