On Friday, UBS analyst Dennis Geiger updated the price target for Cheesecake Factory (NASDAQ:CAKE), increasing it to $36.00 from the previous $32.00 while maintaining a Sell rating on the stock. The adjustment comes ahead of the company's third-quarter results expected on October 29, which are predicted to align with market projections, including positive same-store sales (sss) and moderate margin expansion.
The analyst's expectations for the upcoming quarterly report include same-store sales of approximately 1%, closely aligned with the consensus of 1.2%, and operating margins that meet the consensus estimate of 3.2%. The focus for investors, as outlined by the analyst, will be on insights into fourth-quarter-to-date traffic and sales trends, including any impacts from hurricanes in regions where the company has significant exposure, thoughts on fourth-quarter margins, and the fiscal year 2025 guidance, which is anticipated to be consistent with consensus.
Despite the likelihood of sustained elevated pricing supporting fourth-quarter margins, UBS expressed concern about the potential risks of Cheesecake Factory returning to pre-pandemic restaurant margins of over 16% in the coming years. These concerns are based on factors such as pricing normalization, continued pressure on traffic, and labor cost headwinds.
The analyst also addressed the speculation regarding an activist investor's proposal to spin off North Italia, Flower Child, and Culinary Dropout brands, deeming it unlikely in the near term due to each brand's early life cycle stage, overhead cost pressures, and a market capitalization that may be too small to be relevant.
While acknowledging that Cheesecake Factory's margin and overall performance this year have surpassed expectations, the UBS analyst remains cautious. The caution stems from the stock's recent gains, which are up 20% year-to-date, a more owned than usual positioning, and potential risks to sales from a still challenging macroeconomic environment.
In other recent news, Cheesecake Factory has shown strong financial performance with a 24% year-over-year increase in adjusted earnings per share and a 1.4% rise in comparable restaurant sales in the second quarter of fiscal 2024. The company's ambitious expansion plans include opening 22 new locations in 2024.
Citi has maintained a Neutral rating on the company, suggesting that a potential split of the company's brands might not be beneficial for shareholders. This comes in response to JCP Investment Management's proposal for Cheesecake Factory to consider dividing its business.
Deutsche Bank has reiterated its Hold rating on Cheesecake Factory, highlighting the company's expectations for margin expansion by 2025. Piper Sandler, on the other hand, has raised its price target for the company to $39, while maintaining a neutral stance.
The company anticipates total revenues for fiscal 2024 to be around $3.58 billion, with a net income margin between 4.3% and 4.4%. These recent developments offer insights into Cheesecake Factory's financial health and future plans.
InvestingPro Insights
Recent data from InvestingPro sheds additional light on Cheesecake Factory's financial position and market performance. The company's market capitalization stands at $2.11 billion, with a P/E ratio of 17.05, indicating moderate investor expectations. Notably, Cheesecake Factory's revenue for the last twelve months as of Q2 2024 was $3.5 billion, with a modest growth of 2.74%.
InvestingPro Tips highlight that Cheesecake Factory is trading at a low P/E ratio relative to its near-term earnings growth, which could be attractive to value investors. This aligns with the analyst's cautious stance, suggesting potential upside if the company continues to exceed expectations. Additionally, the stock has shown significant momentum, with a one-year price total return of 40.73%, outpacing the year-to-date performance mentioned in the article.
It's worth noting that InvestingPro offers 7 additional tips for Cheesecake Factory, providing a more comprehensive analysis for investors looking to delve deeper into the company's prospects.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.