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High Costs to Affect Cheesecake Factory's (CAKE) Q1 Earnings

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The Cheesecake Factory Inc. CAKE is scheduled to report first-quarter 2018 financial numbers on Apr 25, after market close.

The company’s aggressive sales building strategies and a sincere effort in expansion are expected to reflect in the to-be-reported quarter’s revenues. However, despite the installation of a cost management system, high expenses from labor, pre-opening and administration might have had dented margins, and in turn affected first-quarter earnings.

A challenging operating environment has been affecting the company’s performance of late and its shares have declined 14.7% in the past year, underperforming the industry’s gain of 10.8%.

Let’s find out how the first-quarter results will shape up.

Encouraging Top-Line Picture

Even though revenues declined year over year in 2017, Cheesecake Factory’s commitment to boost sales encourages us. The Zacks Consensus Estimate for revenues for the first quarter of 2018 is pegged at $582.1 million, indicating growth of 3.3% from the prior-year quarter.

This expected increase in revenues is based on the company’s heavy investments to improve guest experience, in turn stabilizing its sales trends starting from the fourth quarter of 2017. In order to boost comps, the company is focusing on improving its speed of service and training servers so that they render higher level of service. In addition to labor productivity, the company is majorly focusing on menu innovation and food efficiency.

Cheesecake Factory is preparing 50 menus under its Super Foods program, fresh from scratch in the restaurants, to increase consumer awareness of the brand. The company is also leveraging its brand power through the launch of products in the CPG channel. Also, the restaurant’s technology-enabled initiatives are doing well owing to positive feedback on its mobile payment app, CakePay. The company is also witnessing incremental sales from its delivery service, which is being rolled out nationwide. Presently, about 90% of Cheesecake Factory restaurants offer third-party delivery.

Cheesecake Factory also continues to improve its to-go business including online ordering capability, which could be in pilot by the end of the year. This is anticipated to be a major contributor to growth of the company’s strong off-premise sales channels. In 2017, the company’s takeout business increased to 12% of sales.

The improved sales building strategies are also indicating comps growth in the to-be-reported quarter. The consensus estimate for comps at Cheesecake Factory restaurants for the first quarter of 2018 is growth of 0.8% against the prior quarter’s comps decline of 0.9%. The company expected comps to grow in the range of 0.5-1.5% in the quarter.

High Costs to Dent Earnings

Cheesecake Factory, like most other restaurant operators, is bearing the brunt of high costs associated with labor, pre-opening, and other general and administrative expenses. As a result, the company’s profits have been under pressure.

Total costs and expenses as a percentage of revenues increased 200 basis points (bps) year over year in 2017. The trend is expected to continue in the first quarter of 2018 as well.

Meanwhile, the company expects adjusted earnings per share in the range of 66-70 cents in the first quarter, whereas the consensus estimate pegs earnings at 68 cents, reflecting a decline of 5.6% from the year-ago quarter.

Our Quantitative Model Does Not Predict a Beat

Cheesecake Factory does not have the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: The company has an Earnings ESP of -2.47%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: The restaurant has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The Cheesecake Factory Incorporated Price and EPS Surprise

The Cheesecake Factory Incorporated Price and EPS Surprise | The Cheesecake Factory Incorporated Quote

Stocks to Consider

Here are some companies in the restaurant space, which per our model have the right combination of elements to post an earnings beat this quarter.

Domino's DPZ has an Earnings ESP of +0.38% and holds a Zacks Rank #3. The company is scheduled to report first-quarter results on Apr 26, before market open.

Brinker EAT holds a Zacks Rank #3 and has an Earnings ESP of +1.66%. The company is expected to release fiscal third-quarter 2018 results on Apr 24.

Wingstop WING carries a Zacks Rank #3 and has an Earnings ESP of +3.80%. Wingstop is scheduled to release first-quarter results on May 3, after market close.

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