Cheesecake Factory's Weak Trends Take A Slice Out Of Q2 Results

Cheesecake Factory Inc CAKE reported second-quarter adjusted earnings that exceeded estimates while revenues were shy of estimates. Citing the challenging restaurant environment, the company lowered its 2017 adjusted EPS guidance.

Stephens noted that first-quarter comps were -0.5 percent, its first in 27 quarters, versus the 1 percent drop the company preannounced. The 0.5 percent drop was accounted for by a 2.4 percent drop in traffic, a 0.3 percent decline in mix and a 2.2 percent positive impact from pricing.

The company said on the call the April shift benefited the first part of the quarter, but softening industry and weather hurt May, and June proceeded with a slightly negative run rate.

Cheesecake Factory also spoke of uncertainty affecting sales and weakness within the lower demographics of its customer base. Stephens thinks it might be difficult for the company to regain its historical gap with peers in the near term, given increased discounting by the industry and increased consumer conditioning toward price points.

However, the firm attributed the earnings beat to better cost of goods sales, labor controls and lower G&A.

See also: The Restaurant Sector Q2 Earnings Cheat Sheet

Meanwhile, Stephens analyst Will Slabaugh expressed surprise at the company suggesting that the weakness would continue into the third quarter. The company estimates a 1 to 2 percent drop in third-quarter comps, with the firm stating the guidance might be indicating either building macro issues or value pressures the company's menu isn't well positioned to confront.

Stephens lowered its third-quarter comps and adjusted EPS estimates to -1.3 percent and 66 cents, respectively. While maintaining its 2017 comps estimate at -0.6 percent, the firm lowered its 2017 adjusted earnings per share estimate to $2.65.

"While we like the LT potential and general stability of the CAKE brand in more normal macro environments, we remain on the sidelines in the near term as we evaluate the Company's changed momentum," Stephens said.

Good Value for Patient Investors

Baird analyst David Tarantino said, with the stock likely to pull back on the guidance reset, the prospective valuation metrics on the company could represent a good value for patient investors.

"However, we would like to see signs of better top-line trends before adopting a more constructive near-term investment recommendation," the analyst added.

Stephens remained Equal-Weight on shares of Cheesecake Factory and it lowered its price target from $55 to $48.

Baird maintained its Neutral rating, with the price target going down from $57 to $49.