Here's Why You Should Retain Cheesecake Factory (CAKE) Stock
The Cheesecake Factory Incorporated CAKE is likely to benefit from strong comps growth, its off-premise business model and unit-expansion efforts. Also, the focus on FRC-related differentiated concepts bodes well. However, uncertain macroeconomic environments are a concern.
Let us discuss the factors highlighting why investors should retain the stock for now.
Factors Driving Growth
Cheesecake Factory is benefiting from impressive comps performance. In the fiscal third quarter, comps at Cheesecake Factory restaurants rose 2.4% year over year (lower than our expectation of 3.4% growth) compared with 1.1% in the prior-year quarter. The upside was primarily driven by an increase in average check of 3.4% (based on an increase of 9.5% in menu pricing, partially offset by a 6.1% negative impact from the menu mix). Comps rose 12.6% from 2019 levels (on an operating week basis). For the 39-week ended Oct 3, 2023, comps at Cheesecake Factory restaurants increased 3.2% year over year compared with 8.2% a year ago. Given the elevated incident rates and traffic (above pre-pandemic levels), the momentum is likely to continue in the upcoming period.
The company is benefiting from robust off-premise sales. Off-premise sales contributed approximately 21% to the company’s restaurant sales during the third quarter of fiscal 2023. It continues to perform well in the delivery channel. To boost consumer convenience, the company implemented operational changes and technology upgrades, which include a contactless menu, payment technology and text paging. We believe that a boost in customer count and targeted off-premise marketing will drive the channel’s performance in the upcoming periods.
The company emphasizes FRC-related differentiated concepts and emerging brands to drive growth. During the fiscal third quarter, FRC unveiled its culinary dropout in Charlotte, NC, and reported solid sales from the same. Year to date, the company opened nine locations, with average sales of more than $200,000 per week. Given the attractive unit economics and strong cash-on-cash returns, the company is optimistic and anticipates testing the geographic portability in the upcoming periods. It expects to open a new location in Atlanta (2023) and two to three locations across the Southeast, Texas and Southern California (over the next two years).
Cheesecake Factory continues to focus on the development front to drive growth. For the fiscal 2023, the company expects to open about 16 new restaurants comprising five Cheesecake Factory restaurants, four North Italia restaurants and as many as seven FRC restaurants (including a Flower Child location). It also stated plans to open four to six new restaurants in the first quarter of fiscal 2024. The company projected $175-$200 million in capex to support the unit development and maintenance of its restaurants. With a strong pipeline, the company anticipates achieving unit growth of 7% in the upcoming year.
Concerns
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Cheesecake Factory’s shares have declined 11.5% in the past year against the industry’s growth of 3.1%. A volatile macroeconomic environment primarily caused the downside.
During the fiscal third quarter, the company’s performance was impacted by persistent macroeconomic challenges. During the quarter, the company reported delays in opening new restaurants due to supply chain challenges and delays in permitting, construction, landlord readiness and equipment availability. This and commodity inflation added to the negatives. The company is cautious about the ongoing uncertain macroeconomic environment. It anticipates the headwinds to persist for some time.
Zacks Rank & Key Picks
Cheesecake Factory currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector include:
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The Zacks Consensus Estimate for Wingstop’s 2024 sales and earnings per share (EPS) suggests rises of 15.6% and 17.2%, respectively, from the year-ago period’s levels.
Brinker International, Inc. EAT sports a Zacks Rank #1. It has a trailing four-quarter earnings surprise of 223.6%, on average. Shares of EAT have increased 2.6% in the past year.
The Zacks Consensus Estimate for EAT’s fiscal 2024 sales and EPS indicates a 5% and a 26.2% rise, respectively, from the year-ago period’s levels.
FAT Brands Inc. FAT currently carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 36.6%, on average. The stock has declined 14.5% in the past year.
The Zacks Consensus Estimate for FAT Brands’ 2024 sales and EPS suggests an increase of 35.6% and 27.4%, respectively, from the year-ago period’s levels.
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The Cheesecake Factory Incorporated (CAKE) : Free Stock Analysis Report
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