Cheesecake Matches EPS, Lags Rev
Cheesecake Factory Inc. (CAKE) reported earnings of 49 cents a share in the third quarter of 2012, in line with the Zacks Consensus Estimate but above the year-ago earnings of 36 cents per share.
Cheesecake Factory’s revenues spiked 5.4% year over year to $453.8 million but lagged the Zacks Consensus Estimate of $458.0 million. The upside in the top line was attributable to a rise in comps.
Inside the Headline Numbers
Comparable restaurant sales grew 2.5% in the reported quarter, reflecting growth for the 11th consecutive quarter buoyed by increment in guess count. Comparable store sales increased 2.9% at Cheesecake Factory but slid 2.0% at Grand Lux Cafe.
Operating margin in the third quarter expanded 170 basis points (bps) year over year to 8.7% mainly due to a benign cost structure. Cost of sales, as a percentage of revenue, declined 80 bps due to favorable dairy, fish and produce costs. General and administrative expenses fell 60 bps. Labor expenses decreased 20 bps, pre-opening costs plunged 50-bps and depreciation and amortization expenses were flat year over year. These positives were partially offset by a 40-bps rise in other operating costs and expenses.
Liquidity
Cheesecake Factory ended the quarter with cash and cash equivalents of $56.4 million. Shareholders' equity was $575.7 million.
Share Repurchase
The company bought back 530,450 shares in the third quarter at a cost of approximately $17.4 million.
The company plans to return around $90—$100 million of free cash flow to shareholders in fiscal 2012 in the form of share repurchases.
Store Update
The company currently operates 173 restaurants, including the two units opened during the third quarter.
The company expects to unveil as many as eight restaurants in fiscal 2012, of which four units have already been opened. The company made its international debut with the opening of its first The Cheesecake Factory restaurant in Dubai in August, 2012 under a licensing agreement. The company is slated to open three new units in the Middle East in fiscal 2012.
At present, management aims to open as many as 8 to 10 new company-owned restaurants in fiscal 2013.
Guidance
For 2012, management expects earnings per share growth in the range of 14%–16% as compared to 2011.
For 2013, earnings per share are expected in the range of $2.10—$2.18 while comparable sales are projected in the range of 1.5%–2.5%.
Our Take
Cheesecake’s focus on enhancing shareholders’ value through buyback and quarterly dividend, revival in guest count, cost containment efforts, relatively benign food cost inflation, as well as international expansion is quite encouraging.
However, the upcoming fourth quarter will likely face some headwinds from tough year-over-year comparison as the fourth quarter of 2011 had an extra week. Additionally, the recent comps underperformance by Grand Lux Café remains another concern.
Cheesecake Factory which competes with the likes of Panera Bread Co. (PNRA) currently carries a Zacks #3 Rank that translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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