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Cheesecake Factory (CAKE) Down 24% in 6 Months: Is a Revival Likely?

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The past six months have been tough for The Cheesecake Factory Incorporated CAKE. In the same time frame, the company’s shares have fallen 23.8%, compared with the industry’s gain of 0.5%. The coronavirus pandemic, high costs, low traffic and rise in the cost of sales inflation have impacted the company’s performance.

However, a robust off-premise business model, menu innovation, contactless menu, operational changes and other technology upgrades bode well. Let’s delve deeper and analyze the factors as to why investors should retain Cheesecake Factory.

Factors Likely to Drive Growth

Cheesecake Factory has been committed to bolstering sales to stay afloat amid the competitive environment. Menu innovation and advanced digital capabilities are the primary strengths of the company. Going forward, it intends to carry on with menu innovation by adding new Super Food items and the famous indulgences of The Cheesecake Factory. Super Foods program has increased consumer awareness of brands. Meanwhile, the company launched its Timeless Classics special menu card nationally.

During the first, the second and the third quarter of fiscal 2021, comps at Cheesecake Factory (across all operating models) increased approximately 220%, 150% and 41.1%, respectively, year over year. Comps in the first, the second and the third quarters climbed 7%, 7.8% and 8.3%, respectively, from 2019 levels. Solid off-premise sales contributed significantly to the company’s performance.

The company’s robust comps performance in the first, the second and the third quarter of fiscal 2021 continues in the fourth quarter. Since the start of the fiscal fourth quarter to Nov 2, 2021, comps at Cheesecake Factory (across all operating models) increased approximately 20% year over year. Comps improved 10.5% from 2019 levels.

Even though the company has reopened the majority of dining rooms with limited capacity, off-premise operations continue to act as tailwinds for overall sales. Off-premise sales contributed approximately 45% and 40% to the company’s restaurant sales in the fiscal third and fourth-quarter 2020, respectively. In the first, the second and the third quarter of fiscal 2021, off-premise contributed approximately 43%, 27% and 28%, respectively, to Cheesecake Factory’s total restaurant sales. The company stated that the off-premise sales mix (as of the third quarter of fiscal 2021) remains elevated from the pre-pandemic level of 15% (as of the third quarter of fiscal 2019).

The Zacks Rank #3 (Hold) company has been focusing on expansion efforts. During the fiscal third quarter, the company opened four new restaurants, including North Italia and Flower Child in Phoenix, North Italia in Nashville and Blanco in Chicago. It opened a Cheesecake Factory restaurant in Shanghai under a licensing agreement. Subsequent to quarter-end, the company opened the North Italia store in the Orlando area, Blanco and Culinary Dropout in Denver and one Cheesecake Factory restaurant in Huntsville, AL. Despite the pandemic and associated challenges, the company achieved its development objective of opening 14 new restaurants (across its concepts) in fiscal 2021.

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Key Picks

Some better-ranked stocks in the same space include Chuy's Holdings, Inc. CHUY, Arcos Dorados Holdings Inc. ARCO and McDonald's Corporation MCD.

Chuy's Holdings currently carries a Zacks Rank #2 (Buy). CHUY has reported better-than-expected earnings in each of the trailing four quarters, the average surprise being 52.7%. Shares of the company have increased 13.1% so far this year.

The Zacks Consensus Estimate for Chuy's Holdingscurrent financial-year sales and EPS suggests growth of 23.8% and 115.5%, respectively, from the year-ago period’s levels. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Arcos Dorados carries a Zacks Rank #2. ARCO has a long-term earnings growth of 42.9%. Shares of the company have increased 13.1% so far this year.

The Zacks Consensus Estimate for Arcos Dorados current financial-year sales and EPS suggests growth of 31% and 112.5%, respectively, from the year-ago period’s levels.

McDonald’s carries a Zacks Rank #2. A robust drive-thru presence and investments in delivery and digitization in the past few years have helped the company to tide over the pandemic. The company has a trailing four-quarter earnings surprise of 6.8%, on average.

The Zacks Consensus Estimate for McDonald's current financial year sales and EPS suggests growth of 20.9% and 55.7%, respectively, from the year-ago period’s levels. MCD has rallied 28% in the past year.


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