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Cheesecake Factory Misses on Earnings & Rev

Zacks Equity Research

The Cheesecake Factory Inc. (CAKE) posted fourth quarter and 2013 results. Adjusted earnings of 57 cents per share increased 11.8% year over year in the fourth quarter of 2013 driven by an increase in revenues and margins. Earnings per share remained at the low end of the company’s guided range of 57 cents to 62 cents per share. However, it missed the Zacks Consensus Estimate of 58 cents by a penny, which we believe was due to higher labor and interest expenses.

Including impairment of assets and lease terminations of 4 cents, GAAP earnings per share were 62 cents, up 55.0% year over year.

Cheesecake’s revenues increased 2.2% year over year to $475.1 million driven by positive comps. However, it missed the Zacks Consensus Estimate of $483.0 million by 1.6%.

Inside the Headline Numbers

Comps remained flat year over year at 0.9% and better than 0.8% reported in the previous quarter. However, it was far below management’s guidance range of 1.5% to 2.5%. Comps were negatively impacted by severe winter storms. Excluding the weather effect, comps were up 1.6% year over year.

Comps increased 1.1% at the Cheesecake Factory restaurant concept but declined 1.1% at the company’s other concept, Grand Lux Cafe.

Cost of sales ratio improved 140 basis points (bps) to 24.4% due to a mix shift between bakery and restaurant sales and continued lower grocery costs. Labor expense ratio was up 30 bps due to reduced efficiencies as a result of winter storms. Pre-opening expenses were $4.9 million, up 2.1% year over year.

Store Update

The company achieved its target of opening 9 company owned restaurants during 2013, including three new restaurants and three relocated restaurants. As of Dec 31, 2013, the company operated 180 restaurants. Internationally, the company unveiled one new The Cheesecake Factory restaurant in Jeddah, Kingdom of Saudi Arabia during the quarter under a licensing agreement.

The company intends to open 10-12 company-owned restaurants in 2014. It plans to open 3 to 5 restaurants overseas in the Middle East and Mexico under licensing agreements.

Full-Year 2013 Update

In full year 2013, Cheesecake’s adjusted earnings per share were $2.10, up 11.7% year over year and at the low end of management’s expected range of $2.10 to $2.13. However, it missed the Zacks Consensus Estimate of $2.11 by a penny.

Revenues grew 3.8% to $1.88 billion. However, it missed the Zacks Consensus Estimate of $1.89 billion by 0.69%. Comps were 1.0% and at the lower end of the management’s guidance. However, it was lower than the year-ago comps of 1.9%.

Guidance for First Quarter 2014

Based on a flat to 1.0% range for comps, the company expects earnings per share in the range of 48 cents to 50 cents in 2014, marginally lower than the Zacks Consensus Estimate of 51 cents. The comps guidance takes into account the impact of storms and Easter in April this year compared with March in the year-ago quarter. This will shift sales from the first quarter to the second.

Guidance for 2014

Based on comps range of 1.0% to 2.0%, the company maintained its earnings guidance range of $2.29 to 2.41 per share for 2014, up from 2013 levels. The Zacks Consensus Estimate of $2.38 falls within the company’s expected range.

In 2014, the company expects higher shrimp and salmon cost to be largely offset by lower costs in other categories. Therefore, it expects food costs to be lower in 2014. It expects inflation in the range of 3.0% to 4.0%, better than the prior expectation of 4.0% to 5.0%.

The company intends to increase menu price by approximately 2.0% in 2014.

Our Take

The Cheesecake Factory missed the Zacks Consensus Estimate for earnings and revenues. However, both the metrics were up year over year. The company is suffering on the sales front due to the impact of bad weather. Cheesecake’s focus on international expansion is quite encouraging.

However, continued underperformance of the Grand Lux Cafe and food cost inflation, though expected to ease in 2014, remain concerns. We believe that the company needs to adopt some sales building measures to reinvigorate the brand. Cheesecake currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry include Buffalo Wild Wings Inc. (BWLD), Carrols Restaurant Group, Inc. (TAST) and Chipotle Mexican Grill, Inc. (CMG). All these stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on CMG
Read the Full Research Report on CAKE
Read the Full Research Report on BWLD
Read the Full Research Report on TAST

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