Cheesecake Factory Sales-Building Plan In Place, Costs High

The Cheesecake Factory Inc. (NASDAQ:CAKE) continues to focus on expansion and sales-building. In order to counter high cost of operations, the company focuses on increasing labor productivity and has installed a cost management system. Moreover, upward earnings estimate for 2018 over the past 30 days reflects analysts’ optimism over the stock’s potential.

Factors Driving Growth

Cheesecake Factory continues to focus on expanding in both domestic and international markets. For this year, the company has plans to open five company-owned restaurants, including one Grand Lux Café. In fact, in the third quarter, the company launched Cheesecake Factory in Lynnwood and a Grand Lux Cafe in Atlanta. Internationally, the company plans to open restaurants in Mexico in the first quarter of 2019. Overall, management believes there is potential for 300 Cheesecake Factory locations in 2019, that would drive at least 3%-unit growth.

The company’s effort to expand margins through cost-cutting strategies seems encouraging. Under such plans, the company installed a cost management system with substantial capabilities across production, planning and inventory management to help analyze usage and waste. The company aims to achieve adjusted operating margin of roughly 7.5% by leveraging its bakery infrastructure, international and consumer packaged goods revenue streams, and G&A over time. We believe such efforts to control costs will help improve margins.

The company is also focusing on increasing labor productivity by improving speed of service and training its servers. In addition, the restaurant is primarily focusing on menu innovation and digital improvements.

Technology-driven initiatives and delivery services across the nation are boosting sales. In the third quarter of 2018, the company signed an exclusive national delivery partnership with DoorDash. Meanwhile, Cheesecake Factory also continues to improve its to-go business, including online ordering capability. This is expected to enhance the company’s strong off-premise sales channels.

Headwinds

Cheesecake Factory’s profits have been under pressure owing to rising wage rates. Moreover, pre-opening cost of outlets, given the company’s unit expansion plans, and expenses related to sales initiatives are likely to hurt profits.

In the third quarter of 2018, labor expense ratio was 35.2%, up 30 basis points (bps) from the year-ago quarter. General and administrative expenses accounted for 6.5% of revenues in the quarter that increased 10 bps from a year ago. Heading into 2019, the company projects food inflation of 1-2%, particularly across poultry, dairy, bread and seafood, while wage inflation is anticipated at 6%.

High dependency on consumer discretionary spending and intense competition add to the concerns.

Shares of Cheesecake Factory have underperformed the industry in the past year. The stock has gained 10.7% compared with the industry’s rise of 12.4%.

Zacks Rank & Stocks to Consider

Cheesecake Factory carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Retail-Restaurants industry are Papa Murphy's Holdings, Inc. (NASDAQ:FRSH) , The Habit Restaurants, Inc. (NASDAQ:HABT) and BJ's Restaurants, Inc. (NASDAQ:BJRI) . While Papa Murphy's and Habit Restaurants sport a Zacks Rank #1 (Strong Buy), BJ's Restaurants carries a Zacks Rank #2 (Buy) .You can see the complete list of today’s Zacks #1 Rank stocks here.

Papa Murphy's has an expected earnings growth rate of 160% for the current year.

Habit Restaurants reported better-than-expected earnings in two of the trailing three quarters, the average beat being 66.7%.

BJ's Restaurants has an expected earnings growth rate of 64.5% for the current year.

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