Cheesecake Factory (CAKE) Q2 Earnings: Will It Disappoint?

The Cheesecake Factory Incorporated (NASDAQ:CAKE) is scheduled to report second-quarter 2016 results on Jul 27, after the closing bell.

Last quarter, Cheesecake Factory posted a 13.33% positive earnings surprise. The company surpassed earnings estimates in all the last four quarters with an average surprise of 8.46%.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Cheesecake Factory’s profits have been under strain owing to a rising wage rates scenario. Moreover, the company’s unit expansion plans, pre-opening costs of outlets and costs related to sales initiatives are hurting margins.

For the second quarter, Cheesecake Factory expects earnings per share between 69 cents and 72 cents.

Nonetheless, various initiatives to improve sales and traffic volumes coupled with innovation in menu should boost comps. With a solid start to 2016 and a moderate increase in prices, the company expects comps to remain flat or grow up to 1% in the second quarter.

In the second quarter, the company has rolled out several top line boosting initiatives which include an enhanced server training program and mobile payment app, CakePay. It has also increased its focus on home and office delivery through the induction of a pilot program of partnerships with third-party providers in select locations.

Earnings Whispers

Our proven model does not conclusively show that Cheesecake Factory is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen.That is not the case here as you will see below.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at -1.41%. This is because the Most Accurate estimate is 70 cents, while the Zacks Consensus Estimate is pegged higher at 71 cents.

Zacks Rank: The Cheesecake Factory has a Zacks Rank #4 (Sell).We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some restaurant companies to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Jack in the Box Inc. (NASDAQ:JACK) has an Earnings ESP of +1.15% and a Zacks Rank #2.

Shake Shack Inc. (NYSE:SHAK) has an Earnings ESP of +7.69% and a Zacks Rank #2.

Bloomin' Brands, Inc. (NASDAQ:BLMN) has an Earnings ESP of +3.33% and a Zacks Rank #3.