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Cheesecake Factory Misses on Earnings, Shares Drop

Zacks Equity Research

Share price of California-based The Cheesecake Factory Inc. (CAKE) declined almost 3% on Apr 23 after the company’s fiscal first-quarter results missed expectations and the company lowered its guidance for 2014.

The company’s adjusted earnings of 43 cents per share declined 8.5% year over year. Earnings were affected by inclement weather and a holiday shift during the first quarter of fiscal 2014, as well as costs associated with a pending settlement of a legal claim.

Earnings per share also missed the company’s guidance of 48 to 50 cents.  Further, it missed the Zacks Consensus Estimate of 49 cents by 12.2%. The downside reflected higher expenses.

The company’s adjusted earnings excluded a $186,000 pre-tax charge related to the planned relocation of one The Cheesecake Factory restaurant.

The restaurateurs’ revenues increased 4.0% year over year to $481.4 million driven by positive comps. Further, it beat the Zacks Consensus Estimate of $477.0 million by 0.9%.

Inside the Headline Numbers

Comps increased 0.9% year over year and were stable from the previous quarter. Further, it was in line with management’s guidance range of 0.9% to 1.0%. However, it was worse that the year ago increase of 1.4%. Comps were negatively impacted by approximately 2.0% due to severe winter storms and result of a holiday shift relative to the prior year.

Comps increased 1.2% at the Cheesecake Factory restaurant concept but declined 2.9% at the other concept — Grand Lux Cafe.

Cost of sales ratio increased 10 basis points (bps) to 24.8% and labor expense ratio was up 50 bps to 33.1%. The increase was due to reduced efficiencies caused by winter storms and the sales fluctuations resulting from the holiday shift. Pre-opening expenses were $2.2 million, up 70.0% year over year.

Store Update

The company opened one restaurant in the reported quarter, consistent with its targets, and expects to open 10 company-owned restaurants in fiscal 2014. Internationally, the company expects to open three to four restaurants in the Middle East and Mexico under licensing agreements.

Guidance for Q2

For the second quarter of 2014, the company estimates earnings per share in the range of 59 cents and 62 cents based on an assumed range of comparable sales between 1.5% and 2.5%.

Guidance for 2014

Based on a comps range of 1.0% to 2.0%, the company lowered its earnings guidance to a range of $2.24 to 2.33 per share for 2014. The company expects food cost inflation in 2014 to range between 3% and 4%, driven by higher shrimp and salmon costs.

Our Take

In our view, the company remains well positioned with its pricing actions, menu introduction and international expansion. However, continued underperformance of the Grand Lux Cafe remains a major concern. We believe the company needs to adopt some sales building measures to reinvigorate the brand.

Cheesecake Factory currently carries a Zacks Rank #3 (Hold).

Among other restaurants, The Wendy's Co. (WEN) is scheduled to report its earnings on May 8, while Jamba, Inc. (JMBA) is expected to report on Apr 29. Another restaurateur, Burger King Worldwide, Inc. (BKW) is scheduled to report its earnings on Apr 25.

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