Cheesecake Factory (CAKE) Debuts In Canada, Expands Footprint

A challenging industry backdrop has been hampering the performance of most restaurant chains and The Cheesecake Factory Inc. (NASDAQ:CAKE) is no exception.

Nonetheless, the company has been expanding in domestic as well as international markets. Also, it remains focused on opening its restaurants at high grade sites to hit targeted returns.

Recently, the company announced the opening of its first restaurant in Toronto, Canada. The restaurant offers over 250 menu items including Saturday and Sunday Brunch. More than 50 cheesecakes and desserts are also available here.

Cheesecake Factory currently has 211 company-owned restaurants. Of these restaurants, 197 are operated under The Cheesecake Factory brand, 13 under the Grand Lux café brand and one under the RockSugar Pan Asian Kitchen brand. Internationally, the company operates 18 The Cheesecake Factory restaurants under licensing agreements. It also manages two bakery production facilities.

Apart from expanding its presence in domestic market, the company is foraying into lucrative markets like the Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico, Kuwait, and Lebanon and Chile. This is in line with the company’s strategy to keep up with industry peers like Buffalo Wild Wings, Inc. (NASDAQ:BWLD) and Brinker International Inc. (NYSE:EAT) .

In 2017, the company is set to open eight company-owned restaurants along with four to five restaurants internationally, under licensing agreements. Further, it expects to open four to six domestic restaurants in 2018 including one Grand Lux Café as well as four to five international restaurants.

However, Cheesecake Factory’s shares have declined 24.5% year to date, as against the industry’s growth of 10.7%.

Given the prevailing challenging restaurant environment, Cheesecake Factory’s sales have also come under pressure. Evidently, the company witnessed a comps decline in the last two reported quarters, after posting 29 consecutive quarters of positive comps at The Cheesecake Factory restaurants. Moreover, continued consumer spending uncertainty might continue to weigh on the company’s comps and in turn sales.

Additionally, higher labor and pre-openings costs along with expenses related to sales initiatives are likely to pressurize profits in the near term.

Yet, efforts to boost comps via increased focus on menu innovation, food efficiency, improving its speed of service and training its servers are encouraging. Various technology-enabled initiatives coupled with focus on driving sales via off-premise channels also bode well.

Furthermore, Cheesecake Factory is one of the most recognized upscale casual restaurants operating in the United States. Its differentiated menu, operational distinction and unique ambiance appeal to customers too.

We thus expect this Zacks Rank #5 (Strong Sell) company’s continuous expansion plans to add to the top line and boost its overall performance.

A better-ranked stock in this sector is Arcos Dorados Holdings Inc. (NYSE:ARCO) holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Arcos Dorados’ 2017 earnings moved up 13.2%, over the past 60 days.

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