Will Soft Comps Hurt Cheesecake Factory (CAKE) Q3 Earnings?

The Cheesecake Factory Inc. (NASDAQ:CAKE) is scheduled to report third-quarter fiscal 2017 numbers on Nov 1, after market close.

Last quarter, the company delivered a positive earnings surprise of 2.63%. In fact, the company witnessed earnings beat/meet in three of the trailing four quarters, with an average positive surprise of 4.00%.

However, the recent hurricanes — Harvey and Irma — are likely to impact the performance of restaurant companies in the third quarter. Shares of a number of restaurants including Cheesecake Factory plummeted after the storms hit the United States. In the past three months, the company’s shares lost 5.7% comparing unfavorably with the industry’s gain of 3%.



In addition to the hurricane woes, Cheesecake factory is plagued by declining sales. Lately, in the United States, consumer preference toward spending on dine out services have been volatile and the restaurant space is bearing the brunt of soft comps and declining traffic.

In fact, the company expects a 1% to 2% decline in comps for third-quarter fiscal 2017. Moreover, for the current quarter, the Zacks Consensus Estimate for comps decline is pegged at 1.6%. Notably, in the year-ago quarter, the company witnessed comps growth of 1.7%.

Moreover, Cheesecake Factory is dealing with the underperformance of its Grand Lux Café. The company has been raising menu prices at the segment over the past few quarters, which is affecting comps due to lower traffic. This trend is expected to persist in the to-be-reported quarter.

In fact, in the last reported quarter, the Grand Lux segment saw comps decline of 1.3%. For the current quarter, the consensus estimate for segment’s comps calls for a decline of 1.6%.

Nevertheless, the company's initiatives to boost sales and traffic like menu innovation, roll out of an improved server training program, launch of mobile payment app and increased focus on delivery service are likely to somewhat boost comps and drive the top line. In fact, the consensus estimate for current-quarter sales is projected at $562.8 million, reflecting a 0.5% year-over-year increase.

Meanwhile, higher labor costs, pre-opening costs of outlets and expenses related with the execution of the initiatives are expected to keep profits under pressure.

Management expects fiscal third-quarter adjusted earnings per share in the range of 60 cents to 64 cents. Meanwhile, theconsensus estimate for the same is pegged at 60 cents, reflecting a year-over-year decline of 13.7%.

Also, a 1.6% decline in current-quarter earnings estimates over the past two months adds to analysts’ pessimism over the stock.

Meanwhile, per our predictive quantitative model, Cheesecake Factory does not have the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: Cheesecake Factory has an Earnings ESP of -2.29%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Cheesecake Factory currently has a Zacks Rank #4 (Sell). As it is we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The Cheesecake Factory Incorporated Price and EPS Surprise

The Cheesecake Factory Incorporated Price and EPS Surprise | The Cheesecake Factory Incorporated Quote

Stocks to Consider

Here is a list of companies in the industry, which, as our model shows, have the right combination of elements to post an earnings beat this quarter.

El Pollo Loco Holdings, Inc. (NASDAQ:LOCO) has an Earnings ESP of +1.65% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Noodles & Company (NASDAQ:NDLS) has an Earnings ESP of +66.6% and a Zacks Rank #3 (Hold).

DineEquity, Inc. (NYSE:DIN) has an Earnings ESP of +5.14% and a Zacks Rank #3.

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