Cheesecake Factory's Sales-Building Plans Impress, Costs High

The Cheesecake Factory Inc. (NASDAQ:CAKE) has been undertaking prudent strategies to improve sales and margins. In order to counter high costs and soft consumer demand, the company is focusing on improving its speed of service and training servers, so that it renders higher level of service.

Cheesecake Factory’s fourth-quarter 2017 earnings met analysts’ expectations, while revenues surpassed the same. The top and bottom line, however, declined 5.2% and 20.9%, respectively, due to a difficult operating environment in the U.S. restaurants space.

Also, the company’s shares have declined 20.2% in the past year, comparing unfavorably with the industry’s gain of 16% in the same time period. Moreover, downward earnings estimate revisions raise questions over the stock’s upside potential. Estimates for 2018 have gone down 0.4% over the past month.

Rising Costs Keep Profits Under Pressure

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

In the fourth quarter of 2017, cost of sales ratio increased 20 basis points (bps) year over year to 23.4%. Meanwhile, labor expense ratio was 34.5%, up 90 bps from the year-ago quarter. General and administrative expenses accounted for 6.1% of revenues in fourth-quarter 2017, up 80 bps from the prior-year quarter.

Heading into 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 2018.

Cost-Cutting Strategies & Efforts to Return Shareholders’ Value Seem Encouraging

Cheesecake Factory is evaluating different approaches to limit its costs. It installed a cost management system with substantial capabilities across production, planning and inventory management a few years ago to help analyze usage and waste. Amid the current soft environment, such efforts to control costs should help improve margins.

Moreover, the company continuously returns wealth to shareholders via dividends and share repurchases. Management returned $175 million in cash via share buybacks and dividends in 2017. The company currently has a dividend yield of 2.4%, which is higher than the industry’s average of 2%.

Sales-Building Initiatives Bring Respite

In addition to enhanced labor productivity, Cheesecake Factory is majorly focusing on menu innovation and food efficiency. Under its Super Foods program, the company is preparing 50 menus, fresh from scratch in the restaurants, to increase consumer awareness of the brand. To this end, Cheesecake factory is also leveraging its brand power through launch of products in the CPG channel.

Also, technology-enabled initiatives are driving incremental sales from the company’s delivery service that continues to roll out nationwide. Presently, about 90% of Cheesecake Factory restaurants offer third-party delivery. The restaurant also continues to improve its to-go business including online ordering capability, which could be in pilot by the end of the year. This is anticipated to be a major contributor to the growth of the company’s strong off-premise sales channels. In 2017, the company’s takeout business increased amounting to 12% of sales.

Zacks Rank & Stocks to Consider

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

A few better-ranked stocks in the same space include BJ’s Restaurants (NASDAQ:BJRI) , Darden (NYSE:DRI) and Domino’s (NYSE:DPZ) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BJ’s, Darden and Domino’s earnings for 2018 are expected to grow 27.7%, 18.4% and 48.5%, respectively.

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