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Cheesecake Beats, Guides Higher

Zacks Equity Research

Cheesecake Factory Inc. (CAKE) reported adjusted earnings of 51 cents a share in the second quarter of 2012, outpacing the Zacks Consensus Estimate of 49 cents and the year-ago earnings of 42 cents. On a GAAP basis, earnings per share were 52 cents versus 42 cents recorded in the year-earlier quarter.

Cheesecake Factory’s revenues spiked 5.6% year over year to $454.7 million but lagged the Zacks Consensus Estimate of $457.0 million. The upside in the top line was attributable to a rise in comps.

Inside the Headline Numbers

Comparable restaurant sales grew 1.7% in the reported quarter, reflecting growth for the tenth consecutive quarter buoyed by broad-based improvements across regions and day parts. Comparable store sales increased 2.1% at Cheesecake Factory but slid 2.9% at Grand Lux Cafe.

Operating margin in the second quarter expanded 80 basis points (bps) year over year to 9.0% mainly due to a benign cost structure. Cost of sales, as a percentage of revenue, declined 110 bps due to favorable dairy, fish and produce costs. Other operating costs and expenses fell 10 bps. Labor expenses decreased 30 bps to 32.1% and depreciation and amortization expenses were flat year over year. These positives were partially offset by a 20-bp rise in general and administrative expenses and 50-bp increase in pre-opening costs.


Cheesecake Factory ended the quarter with cash and cash equivalents of $48.4 million. Shareholders' equity was $560.8 million.

Share Repurchase

The company bought back 543,502 shares in the second quarter at a cost of approximately $16.7 million.


In the reported quarter, this California-based company instated a cash dividend distribution program. It will pay a quarterly dividend of 12 cents per share on August 21, 2012 to shareholders of record on August 8. On an annualized basis, the program represents a payout of around 25% of its full-year net income.

Store Update

In the second quarter, the company opened one Cheesecake Factory unit. Year-to-date, the company operates 173 restaurants.


For the third quarter of 2012, diluted earnings per share are expected to range between 47 cents and 49 cents, while comparable sales are projected between 1.5% and 2.5%.

For 2012, management expects comps in the range of 1.5% to 2.5% while the earnings per share estimate was increased to the range of $1.87 to $1.93 from $1.83 to $1.91. This is the second time that Cheesecake raised its full-year 2012 guidance. Earlier, management had increased the range from $1.80-$1.90 to $1.83-$1.91. The company reiterated its target of buying back approximately $100 million shares in 2012.

The company expects to open seven to eight new outlets in the U.S in 2012.

Our Take

Cheesecake’s focus on enhancing shareholder value through buyback and quarterly dividend, increased earnings per share guidance, cost containment efforts, checking food cost inflation, as well as international expansion is quite encouraging. However, margin expansion for the full-year could be muted due to higher minimum wage costs, and higher payroll taxes and corporate tax rate. Additionally, the recent comps underperformance by Grand Lux Café remains another concern.

Cheesecake Factory which competes with the likes of Cosi Inc. (COSI) currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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