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Here's Why Hold Strategy is Apt for Cheesecake Factory (CAKE)

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Zacks Equity Research
·4 min read
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Shares of The Cheesecake Factory Incorporated CAKE have surged 81.4% in the past six months, compared with the industry’s rally of 26.8%. The company has been benefiting from sales building efforts, robust off-premise sales and menu innovation. However, higher costs and dismal traffic remain concern.

Growth Triggers

Cheesecake Factory has been gaining from sales building initiatives. Menu innovation and advanced digital capabilities are the primary fortes 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 plans to launch its Timeless Classics special menu card nationally.

Moreover, nearly after one year of closing Fox Restaurant Concepts or FRC acquisition, the same has not only reinforced its confidence and helped it navigate through the ongoing pandemic but also paved the path for long-term growth. In a bid to offer concepts of the future, the FRC is planning to launch a pop-up virtual concept (inspired by the Dilbert menu) via the off-premise channel in the Phoenix market. It is also planning to launch a Flower Child pop-up in early 2021. These are likely to offer streamlined menus (focused on the off-premise channel) and limited indoor seating capacity. Moreover, testing of some digital initiatives are in the pipeline. Notably, the company remains optimistic regarding consumers response toward these initiatives.

The company is also gaining from robust off-premise sales. The company signed an exclusive national delivery partnership with DoorDash. It expects to reap benefits from these collaborative marketing opportunities. The company is also witnessing incremental sales from its delivery service, which continues to roll out nationwide. It continues to improve its to-go business including online ordering capability. This has been a major contributor to growth of the company’s strong off-premise sales channels. Consequently, its off-premise business accounted 14% of total sales in 2018 compared with 12% in 2017. Further, off-premise business made up 17% of total sales in fourth-quarter 2019. Although the company has reopened the majority of dining rooms with limited capacity, off-premise operations continue to drive overall sales. Off-premise sales contributed approximately 45% of the company’s restaurant sales during fiscal third-quarter 2020.

 

Concerns

The coronavirus outbreak is hurting the industry. The restaurant industry has been grappling with declining traffic for quite some time now. We believe the coronavirus outbreak has further elevated the traffic concerns.

High costs remain a headwind. 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 hurt profits. For fiscal third-quarter 2020, cost of sales — as a percentage of revenues — increased 10 basis points (bps) year over year to 22.8%. Meanwhile, labor expenses — as a percentage of total revenues — was 38.7%, up 230 bps from the year-ago quarter. Other operating costs represented 30.7% of revenues compared with 25.5% in the prior-year quarter.

Zacks Rank & Key Picks

Cheesecake Factory currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Jack in the Box Inc. JACK, Arcos Dorados Holdings Inc. ARCO and Yum! Brands, Inc. YUM. Jack in the Box sports a Zacks Rank #1, while Arcos Dorados and Yum! Brands carry a Zacks Rank #2 (Buy).

Jack in the Box has a three-five year earnings per share growth rate of 10.6%.

Arcos Dorados and Yum! Brands’ 2021 earnings are expected to rise 127.3% and 12.1%, respectively.

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