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Cheesecake Factory (CAKE) Banks on Expansion Amid Competition

Zacks Equity Research

The Cheesecake Factory Incorporated CAKE banks on various sales-building initiatives and expansion strategies to drive incremental revenues. However, high costs associated with restaurant operations and intense competition from other restaurant chains are potential headwinds.

Shares of Cheesecake Factory have lost 9.8% over the past year, underperforming the industry’s rally of 5.5%. The decline in share price can be attributable to the company’s lower-than-expected earnings in two out of the trailing four quarters, the average miss being 7.6%. Further, earnings estimates for 2019 were revised downward by 1.1%.


Top-Line Initiatives Bode Well

Cheesecake Factory is committed to bolstering its sales in order to stay afloat in a competitive environment. The company’s efforts to improve guest experience have been stabilizing sales trend from the fourth quarter of 2017. In the first nine months of 2018, total revenues grew 4.5% compared with the prior-year level, on the back of increased comparable sales. In order to boost comps, the company is focusing on improving its speed of service and training its servers so that they render higher level of service. In addition to labor productivity, the restaurant is primarily focusing on menu innovation and digital improvements.

Cheesecake Factory has been expanding in the domestic as well as international markets. The company is of late foraying into lucrative markets like the Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico, Kuwait, Lebanon and Chile. In 2018, the company plans to open five company-owned restaurants — including one Grand Lux Café. In the third quarter, it opened Cheesecake Factory in Lynnwood and a Grand Lux Cafe in Atlanta. Internationally, the company plans to open restaurants in Mexico in the first quarter of 2019. Overall, management believes that there is potential for 300 Cheesecake Factory locations in 2019, expecting to drive at least 3% unit growth.

Cost Management Effort — A Positive

Cheesecake Factory is evaluating different approaches to limit its costs. It installed a cost management system with substantial capabilities across production, planning, and inventory management a few years ago to help analyze usage and waste. The company’s portfolio management and diversification are expected to support restaurant level margins over time. The long-term aim of management is to recapture the historical average adjusted operating margin of roughly 7.5%.

The company plans to achieve it by stabilizing the formal margins and leveraging its bakery infrastructure, international and consumer packaged goods revenue streams, and G&A over time. Amid the current retail environment, such efforts to control costs would help improve margins.

Concerns

The restaurant space is highly competitive as numerous restaurant operators like Darden DRI, BJ’s Restaurants BJRI, and Brinker EAT are adopting advanced and prudent strategies to increase their sales. In fact, going by the current retail scenario, adapting to shifting demand has become a major precedent for retailers.

Additionally, Cheesecake Factory’s profits have been under pressure, owing to rising wage rate scenario. Moreover, pre-opening costs of outlets, given the company’s unit expansion plans and expenses related to sales initiatives, are adding to costs and likely to hurt profits.

Cheesecake Factory currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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