Cheesecake Factory Strategic Plans Bode Well: Should You Hold?

Shares of The Cheesecake Factory Incorporated (NASDAQ:CAKE) are riding high on strategic initiatives, menu innovations, technology-enabled efforts and expansion plans. Evidently, the stock has rallied 15.2% in the past six months, outperforming the industry’s 0.9% upside. However, rise in costs and lower-than-expected first-quarter 2018 earnings raise concerns. Let’s delve deeper.

Hidden Catalysts

Cheesecake Factory’s efforts to boost its sales amid a competitive environment are commendable. Also, the company has been investing heavily to improve guest experience. This, in turn, started stabilizing its sales trend since the fourth quarter of 2017. In first-quarter 2018, total revenues were up 4.8% year over year owing to increased comparable sales. In order to boost comps, Cheesecake Factory is focusing on increasing its service speed apart from service enhancement. Additionally, it is focusing on menu innovation and food efficiency alongside labor productivity.

Under its Super Foods program, Cheesecake Factory is preparing 50 menus fresh from scratch in the restaurants to increase consumer awareness of the brand. To this end, the company seems to make the most of its brand power via launch of products in the CPG channel. Cheesecake Factory launched its brown bread in grocery stores across Southeast with nationwide distribution capabilities. Going ahead, it intends to carry on with menu innovation by adding new Super Food items and the famous indulgences of The Cheesecake Factory.

The Zacks Rank #3 (Hold) company’s technology-enabled initiatives are also doing well. This is evident from the positive feedback received on its mobile payment app, CakePay. Moreover, Cheesecake Factory is witnessing incremental sales from its delivery service, which continues to roll out nationwide. Presently, about 95% of the company’s restaurants offer third-party delivery. In the meantime, Cheesecake Factory continues to improve its to-go business, including online ordering capability, which could be in pilot by the end of 2018.

Further, Cheesecake Factory has been expanding in domestic and international markets despite challenging economic conditions. In fact, the restaurants opened over the past three years are performing better than the erstwhile locations. The company’s focus on opening its restaurants at high grade sites to hit targeted returns is impressive as well. Of late, Cheesecake Factory has also been foraying into lucrative markets like the Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico, Kuwait and Lebanon and Chile.

Concerns

Recently, Cheesecake Factory’s profits have been under pressure due to a rising wage rates scenario. Given the company’s unit expansion plans, pre-opening costs of outlets and expenses related to sales initiatives are too adding to the costs and might hurt profits.

In the first quarter of 2018, cost of sales ratio increased 10 basis points (bps) year over year to 23%. Meanwhile, the labor expense ratio was 35.7%, up 1300 bps from the year-ago quarter. The metric was primarily driven by higher hourly labor, including more wages, overtime and training costs. General and administrative expenses accounted for 6.6% of revenues in first-quarter 2018, up 20 bps from the prior-year quarter. This uptick can be attributed to higher marketing costs, repairs and maintenance, and additional workers' comp insurance costs. Notably, pre-opening expenses were 0.2% of the total revenues, down 10 bps from the year-ago quarter. For 2018, the company expects food inflation of more than 3%, particularly across poultry, dairy, bread and seafood. Wage inflation is anticipated to be about 5% in the current year.

Key Picks

Some better-ranked stocks in the same space are Wingstop Inc. (NASDAQ:WING) , Dine Brands Global, Inc. (NYSE:DIN) and BJ's Restaurants, Inc. (NASDAQ:BJRI) . All these three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop has an impressive long-term earnings growth rate of 19.5%.

Dine Brands Global has reported better-than-expected earnings in the trailing four quarters, with an average beat of 7.8%.

BJ's Restaurants has an impressive long-term earnings growth rate of 15.3%.

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