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Why Is Cheesecake Factory (CAKE) Down 6.9% Since Last Earnings Report?

Zacks Equity Research
3M (MMM) closed the most recent trading day at $172.84, moving -0.29% from the previous trading session.

A month has gone by since the last earnings report for Cheesecake Factory (CAKE). Shares have lost about 6.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cheesecake Factory due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Cheesecake Factory Q4 Earnings & Revenues Miss Estimates

Cheesecake reported lower-than-expected results for the fourth quarter of 2018. Earnings missed the Zacks Consensus Estimate after beating the same in the third quarter. Revenues missed estimates for two consecutive quarters.

Adjusted earnings of 60 cents per share missed the Zacks Consensus Estimate of 61 cents by 1.6%. The bottom line, however, improved 13.2% from the prior-year quarter.

Earnings and revenues in the reported quarter were driven by comps growth at the Cheesecake Factory restaurants. The company’s sales-building initiatives as well as cost containment helped the quarter’s results.

Detailed Revenue Discussion

Total revenues were $585.2 million, which missed the consensus estimate of $594 million by 1.5%. However, the top line improved 2.3% year over year on the back of increased comparable sales.

Comps at Cheesecake Factory restaurants increased 1.9% while the same declined 0.9% in the year-ago quarter.

Costs in Detail

Cost of sales ratio decreased 40 basis points (bps) year over year to 23%. Meanwhile, labor expense ratio was 35.8%, up 130 bps from the year-ago quarter.

Other operating costs were 24% of revenues, down 70 bps from the year-ago quarter. General and administrative (G&A) expenses accounted for 6.3% of revenues in fourth-quarter 2018, up 20 bps from the prior-year quarter. Notably, pre-opening expenses declined 40 bps year over year to 0.9% in the fourth quarter.

Balance Sheet

As of Jan 1, 2019, cash and cash equivalents totaled $26.6 million compared with $6 million as of Jan 2, 2018.

In the fourth quarter of 2018, Cheesecake Factory repurchased approximately 1 million shares of its common stock for $48.4 million. In 2018, the company bought back approximately 2.3 million shares of its common stock for $109.3 million.

In the fourth quarter, the company’s board of directors declared a quarterly cash dividend of 33 cents per share of the common stock. The dividend is payable on Mar 19, 2019, to shareholders of record at the close of business on Mar 4, 2019.

Development Details

Cheesecake Factory opened three Cheesecake Factory restaurants in the fourth quarter, meeting the target of opening five restaurants in 2018. Two restaurants were opened internationally under licensing agreements in 2018.

Q1 Outlook

For the first quarter, adjusted earnings per share are estimated to be 58-62 cents based on anticipated comps of 0.5-1.5% at Cheesecake Factory restaurants. Comps are expected to bear a negative effect of about 75 bps from the shift of Easter and the associated spring break vacations. The Zacks Consensus Estimate for earnings is pegged at 62 cents, at the high point of the company’s guided range.

2019 Guidance

Cheesecake Factory expects earnings per share of $2.54-$2.70. The Zacks Consensus Estimate for earnings in 2019 is pegged at $2.68, above the midpoint of the company’s guided range. Meanwhile, the company expects comps to grow 1-2%.

Food and wage inflations in 2019 are expected to be up 1-2% and 6%, respectively.

For 2019, Cheesecake Factory continues to expect capital expenditure between $90 million and $100 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, Cheesecake Factory has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Cheesecake Factory has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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