Cheesecake Factory (CAKE) Hurt By High Costs, Macro Woes

On Aug 14, we issued an updated research report on The Cheesecake factory Incorporated (NASDAQ:CAKE) .

Earlier this month, the company posted mixed second-quarter fiscal 2017 results, wherein the bottom line outpaced the Zacks Consensus Estimate while the top line lagged the same.

Lower Sales & Higher Costs

Over the past few quarters, the U.S. restaurant space has not been too enticing for investors. Despite economic growth, somewhat lower energy prices and higher income, consumers increased their spending only modestly on dining out, which resulted in low consumption over the past few quarters. This is because, along with wage growth, inflation is on the rise, which translates to lower real income and thus less disposable income.

Consequently, same-store sales growth has been dull in a difficult sales environment. Traffic too has been weak. In fact, the second quarter of 2017 marked the sixth consecutive quarter of negative comp sales for the restaurant industry as a whole. As a result, the company’s sales have been under pressure. In fact, after posting 29 straight quarters of positive comps at The Cheesecake Factory restaurants, the company posted a decline in comps in second-quarter 2017.

Moreover, high labor costs, pre-opening costs of outlets given the company’s unit expansion plans and expenses related to sales initiatives are raising expenses and are likely to hurt profits. In fact, the company expects a year-over-year decline in operating margins in 2017 given the labor cost pressure and a less favorable commodity environment.

Slashed 2017 Guidance

At its fiscal second quarter conference call, the company lowered its fiscal 2017 outlook due to a challenging restaurant environment.

It now expects earnings in the range of $2.62 to $2.70, compared with $2.93 to $3.02 guided previously.

Moreover, the company now expects comps to decline approximately 1%, while the previous guidance called for comps growth in the range of 0.5% to 1.5%.

Some Respite

Nevertheless, the company is committed to boosting sales and improving margins to survive in the competitive environment. In this regard, continual focus on menu innovation, rollout of an improved server training program, launch of mobile payment app and increased emphasis on delivery bode well. Meanwhile, the company is evaluating different approaches to limit its costs which should help improve margins.

Moreover, despite challenging economic conditions, Cheesecake Factory has been expanding in the domestic as well as international markets. Entry into many lucrative markets should further boost traffic and comps.

Bottom Line

A challenging industry backdrop along with rising costs remain top concerns for Cheesecake Factory along with restaurant companies like Buffalo Wild Wings Inc. (NASDAQ:BWLD) , Jack in the Box Inc. (NASDAQ:JACK) and Shake Shack Inc. (NYSE:SHAK) .

Thus, despite various strategic initiatives undertaken by the company, we would like to remain on the sidelines in the near term, given the soft sales environment.

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