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Cheesecake Factory (CAKE) Comps Growth Helps Amid High Costs

The Cheesecake Factory Incorporated CAKE is benefiting from robust comps growth, sales-building efforts, expansion and digitalization. Consequently, in the past three months, the company’s shares have gained 8.5% compared with the industry’s increase of 5%. However, high costs continue to impact negatively. Let’s delve deeper.

Growth Drivers

Robust comps growth bodes well for CAKE. During third-quarter fiscal 2022, comps at Cheesecake Factory restaurants increased 1.1% year over year compared with a 41.1% increase reported in the prior-year quarter. Also, comps had increased 9.5% from the 2019 levels. From the start of the fiscal third quarter to Oct 25, comps at Cheesecake Factory (across all operating models) increased approximately 2.8% year over year and 14% from the fiscal 2019 levels.

The company is also focusing on expansion efforts to drive growth. During the fiscal third quarter, the company opened The Cheesecake Factory in Katy, TX, a North Italia in Dunwoody, GA, and a Fly Bye in Phoenix, AZ. In fiscal 2022, the company anticipates opening as many as 13 new restaurants, comprising three Cheesecake Factory restaurants, four North Italia restaurants and six FRC restaurants (including three Flower Child locations).

This Zacks Rank #3 (Hold) company is benefiting from strong off-premise sales. Off-premise sales contributed approximately 23% to the company’s restaurant sales during third-quarter fiscal 2022. It continues to perform well in the delivery channel.

In order to boost consumer convenience, the company has implemented operational changes and technology upgrades, which include contactless menu and payment technology, and text paging. We believe that a boost in customer count coupled with a targeted off-premise marketing will drive the channel’s performance further in the upcoming periods.

Zacks Investment Research
Zacks Investment Research

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High costs remain a concern. Pre-opening costs of outlets — given the company’s unit expansion plans, expenses related to sales initiatives, higher labor expenses and additional cleaning costs — are likely to affect profits.

During the third quarter, the cost of sales, as a percentage of revenues, increased 270 basis points (bps) year over year to 25.2%. The increase was primarily driven by commodity inflation and higher menu pricing. Labor expenses, as a percentage of total revenues, amounted to 37.4%, up 30 bps from the year-ago quarter’s levels.

Other operating costs, as a percentage of total revenues, came in at 27.7%, up 100 bps from the prior-year quarter’s levels.  We expect total costs and expenses to increase 12.4% year over year in fourth-quarter 2022.

Key Picks

Some better-ranked stocks in the Zacks Retail – Restaurants industry are Wingstop Inc. WING, Chuy's Holdings, Inc. CHUY and Chipotle Mexican Grill, Inc. CMG.

Wingstop sports a Zacks Rank #1 (Strong Buy). WING has a long-term earnings growth rate of 11%. Shares of WING have declined 6.1% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.1% and 16.4%, respectively, from the comparable year-ago period’s levels.

Chuy’s Holdings currently carries a Zacks Rank #2 (Buy). CHUY has a trailing four-quarter earnings surprise of 18.6%, on average. Shares of CHUY have decreased 1.7% in the past year.

The Zacks Consensus Estimate for Chuy’s Holdings’ 2023 sales and EPS suggests growth of 8.6% and 11.7%, respectively, from the corresponding year-ago period’s levels.

Chipotle currently carries a Zacks Rank #2. CMG has a trailing four-quarter earnings surprise of 4.1%, on average. The stock has declined 11.8% in the past year.

The Zacks Consensus Estimate for Chipotle’s 2022 sales and EPS suggests growth of 15.1% and 31%, respectively, from the corresponding year-ago period’s levels.

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