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Cheesecake Beats Earnings & Rev in Q3

Zacks Equity Research

Cheesecake Factory Inc.’s (CAKE) adjusted earnings of 52 cents per share in the third quarter of 2013 increased 6.1% year over year on the back of an improved top line. Earnings per share also beat the Zacks Consensus Estimate of 51 cents by a penny and were within the company’s guided range of 51 cents – 53 cents.

Cheesecake’s revenues increased 3.5% year over year to $469.7 million, marginally beating the Zacks Consensus Estimate of $469.0 million.  Positive comparable restaurant sales (comps) growth backed the year-over-increase in top line.

Inside the Headline Numbers

Comps grew 0.8% in the reported quarter, within the guided range of flat to up 1%.

Comps nudged up 1.0% at Cheesecake Factory restaurant concept but fell 2.6% at the company’s other concept, Grand Lux Cafe.

Despite improvement in gross margin due to favorable food costs, operating margin in the third quarter fell 50 basis points (bps) year over year to 8.2%, hurt by higher operating expenses.
Store Update

At the end of the third quarter of 2013, the company operated 176 restaurants with 2 new units opened in the third quarter. This year management aims to open as many as 9 new company-owned restaurants versus its prior guidance of 8 – 10 openings. Internationally, the restaurateur expects to open one The Cheesecake Factory restaurant in the Middle East under a licensing agreement.

Share Buyback

During the third quarter, the company bought back 2.1 million shares of its common stock at a cost of $90.2 million.

After repurchasing 3.4 million shares in the first nine months of the year for $135.5 million, the company targets to spend as much as $65 million for share repurchases in the fourth quarter. This indicates an additional $30 million of capital allocation compared to its previous guidance. Overall, Cheesecake Factory targets share buyback worth $200 million.

Guidance for Fourth-Quarter 2013

For the fourth quarter of 2013, earnings per share are guided between 57 cents – 60 cents. Comparable store sales are expected to be up in the range of 1.5%--2.5%.

Guidance for 2013

For 2013, the company tightened its earnings per share guidance to a range of $2.10—$2.13 from $2.10—$2.15 expected earlier, anticipating lower external bakery sales. Prior to this, the company had lowered its earnings guidance in the second quarter as well.

The target for comps growth was maintained in the range of 1%–1.5%. Guidance for operating margin remained unchanged at an increase of 50 bps. Operation margin growth in 2013 is likely to be driven by international expansion, strong performance of its international units and lower food costs.

Guidance for 2014

Management issued guidance for 2014. For 2014, earnings per share are guided between $2.29 and $2.41. Comparable store sales are expected to be up in the range of 1.0%-2.0%.

Food costs are expected to flare up in the coming year owing to the scarcity of shrimp and salmon. Higher cost of shrimp and to some extent salmon is expected to hurt earnings per share by 7 – 10 cents. However, management expects to weather these costs by pricing actions.

It expects to open as many as 10 to 12 company-owned restaurants including one re-location. In addition, 3–5 restaurants are expected to be opened in the Middle East and Mexico under licensing agreements.

Our Take

Cheesecake Factory beat the Zacks Consensus Estimate on both counts and seems to be back on track after a disappointing second quarter. Shareholder friendly steps like a solid buyback program also inspire optimism around the stock.

However, continued underperformance at the Grand Lux Café and a stringent food cost outlook for 2014 remain a concern. We would like to see some more constructive developments before being too optimistic on the stock. Cheesecake currently carries a Zacks Rank #3 (Hold).

Some other companies from the restaurant sector that are worth a look include Bob Evans Farms, Inc.  (BOBE), Cracker Barrel Old Country Store, Inc. (CBRL) and Dunkin' Brands Group Inc. (DNKN), all carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on CBRL
Read the Full Research Report on CAKE
Read the Full Research Report on BOBE
Read the Full Research Report on DNKN

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