Cheesecake Factory Misses on Q2 Earnings, Lowers Guidance

The Cheesecake Factory Inc. CAKE posted second quarter 2014 results wherein both earnings and revenues missed the Zacks Consensus Estimate. The company lowered its guidance for 2014. The company's adjusted earnings of 59 cents per share missed the Zacks Consensus of 61 cents by 3.2% possibly due to higher expenses. Also, earnings were at the lower end of the company's guidance of 59 cents to 62 cents per share. However, it increased 9.3% year over year owing to increase in revenues.

The restaurateurs' revenues increased 5.6% year over year to $496.4 million driven by year-over-year growth in comps. However, it missed the Zacks Consensus Estimate of $502.0 million by 1.1%.

Inside the Headline Numbers

Comps increased 1.2%, better than the previous quarter increase of 0.9% and the year-ago increase of 0.8%. However, it was below management's guidance range of 1.5% to 2.5% increase.

Comps increased 1.5% at the Cheesecake Factory restaurant concept, better than the previous quarter increase of 1.2%. Though comps declined 2.7% at Grand Lux Café, the decline was narrower than the previous quarter decline of 2.9%.

Total costs and expenses were up 5.8% to $453.7 million due to an increase in cost of sales and labor expenses. Cost of sales ratio increased 30 basis points (bps) to 24.3% due to higher dairy, shrimp and salmon costs. Labor expense ratio was up 20 bps to 32.4% due to higher medical cost. Pre-opening expenses were $2.6 million, up 4.2% year over year.

Store Update

The company opened one new restaurant and relocated one restaurant during the second quarter of 2014. It expects to open as many as 10 company-owned restaurants in 2014.

Internationally, the first The Cheesecake Factory restaurant was opened in Mexico under a licensing agreement. The company continues to target three to four restaurants openings in the Middle East and Mexico under licensing agreements in 2014.

Share Repurchase and Dividend Update

The board of directors of Cheesecake Factory has increased quarterly dividend by 18.0% to 16.5 cents per share. The increased dividend will be payable on Aug 19, 2014 to shareholders of record at the close of business on Aug 6, 2014.

The company repurchased 0.5 million shares of its common stock at a cost of $24.2 million during the reported quarter. Moreover, it expects to continue to return substantially all of its free cash flow to shareholders in fiscal 2014 in the form of dividends and share repurchases.

Guidance for 2014 Lowered

Cheesecake Factory has lowered its earnings guidance for the second consecutive quarter. The company expects earnings per share in the range of $2.19 to $2.25 compared to its previous expectation of $2.24 to $2.33 per share. The lowered guidance reflects expected increase in cost of cream cheese and some additional costs in the third and fourth quarter of the year related to self-insured group medical coverage based on the claims activity and the number of participants observed in the second quarter. The Zacks Consensus Estimate currently stands at $2.28 per share for 2014.

Also, the company narrowed its comps guidance and expects it in the range of 1.0% to 1.5% compared to the previous guidance of 1.0% to 2.0%.

The company continues to expect food cost inflation at the higher end of the range of 3.0% and 4.0% owing to higher cream cheese and overall diary costs.

Third Quarter Guidance

For the third quarter of 2014, the company estimates earnings per share in the range of 55 cents and 58 cents based on an assumed range of comparable sales between 1.0% and 2.0%. The Zacks Consensus Estimate is currently pegged at 60 cents per share.

Our Take

Cheesecake Factory missed the Zacks Consensus Estimate on both counts in the second quarter. Though the company reported the 18th consecutive quarter of positive comparable sales in the second quarter of 2014, continued underperformance of the Grand Lux Cafe remains a major concern.

Moreover, food costs are becoming a major concern for this restaurateur. In fact, the company had to curtail its earnings guidance for the second consecutive quarter due to higher food costs.

Also, the U.S. Department of Agriculture expects the ongoing drought in California to continue to have large and lasting effects on fruit, vegetable, dairy, and egg prices. This would worsen the situation not only for Cheesecake Factory but also other food chains like Dunkin' Brands Group, Inc. DNKN and Panera Bread Company PNRA.

However, the company's pricing actions, menu innovations, and international expansion in regions with potential for growth would offset these negatives to some extent.

Cheesecake Factory currently carries a Zacks Rank #3 (Hold). Chipotle Mexican Grill, Inc. CMG is a better-ranked stock in the restaurant industry that sports a Zacks Rank #1 (Strong Buy).
 

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