The Cheesecake Factory Inc. CAKE posted mixed first-quarter 2015 results wherein earnings beat the Zacks Consensus Estimate, but revenues missed the same. Further, the company raised its earnings guidance for 2015.
The company's adjusted earnings of 56 cents per share beat the Zacks Consensus of 49 cents by 14.2%. Also, earnings were higher than the company’s guidance of 47 cents to 50 cents and rose 30.2% year over year, on the back of increased revenues.
The restaurateurs' revenues increased 7.6% year over year to $518 million mainly due to comps growth. However, it marginally missed the Zacks Consensus Estimate of $519 million.
Inside the Headline Numbers
Comps increased 4.2%, better than 1.4% growth in the last quarter and 1.2% improvement in the year-ago quarter. Further, it was higher than management’s expectation of 3% to 4% increase.
Total costs and expenses increased 6.4% to $476.9 million as cost of sales and labor expenses and other operating costs and expenses rose.
Cost of sales ratio, however, decreased 40 basis points (bps) to 24.4%. This was primarily attributable to lower seafood and grocery costs, partially offset by an expected increase in meat and poultry cost. Labor expense ratio went down 10 bps to 33%, as higher sales offset the negative impact of group medical insurance costs.
G&A expenses were 6.4% of revenues in the first quarter, down 10 bps from the prior-year quarter. This was related to lapping a legal settlement in the prior-year quarter, partially offset by a higher corporate bonus accrual and higher equity compensation costs. Pre-opening expenses were $1.5 million, down 35% year over year.
Store Update
Internationally, one restaurant was unveiled in Mexico during the reported quarter.
In 2015, the company plans to open 11 company-owned restaurants domestically. The first company-owned restaurant is expected to be opened in the second quarter. In addition, 3 restaurants will be unveiled in the Middle East and Mexico under licensing agreements.
Share Repurchase and Dividend Update
During the first quarter of 2015, the company repurchased 1.7 million shares of its stock for $80.4 million. The company also declared a quarterly dividend of 16.5 cents per share. The dividend will be paid on May 19, 2015 to shareholders of record at the close of business as on May 6.
2015 Earnings Guidance Up
Cheesecake Factory expects 2015 earnings per share in a range of $2.18 to $2.27, up from the prior guidance of $2.08 to $2.20. However, the company maintained its comps growth guidance of 1.5% to 2.5%.
The company’s food cost inflation expectation is within 1–2% owing to higher beef and chicken prices, partially offset by a year-over-year decline in dairy and seafood costs.
The company expects commodity costs to increase in a range of flat to up 1% in 2015. While overall costs have been down since the company’s last update in February, the food cost inflation still reflects measurably higher costs of beef and to a lesser extent chicken, partially offset by year-over-year favorability in dairy and seafood costs.
The company expects group medical insurance costs to be approximately flat year over year as a percentage of sales in 2015. In addition, the company expects overall wage inflation of approximately $12 million, including about $4 million in minimum wage, reflecting wage rate inflation of about 3%.
Second-Quarter 2015 Guidance
For the second quarter, the company expects earnings per share between 59 cents and 62 cents, based on an estimated comps growth range of 1.5% to 2.5%. The company expects some of the first-quarter sales momentum to continue into the second quarter as well.
Our Take
Though Cheesecake Factory reported the 21st consecutive quarter of positive comps in the first quarter of 2015, continued underperformance of the Grand Lux Cafe remains a major concern. Moreover, higher food costs are affecting the restaurateur’s margins.
Also, the U.S. Department of Agriculture expects the 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 #3 (Hold). Ruby Tuesday, Inc. RT is a better-ranked restaurant stock sporting a Zacks Rank #1 (Strong Buy).
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