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On May 29, 2014, we issued an updated research report on The Cheesecake Factory Incorporated (CAKE - Analyst Report).

On Apr 23, this restaurant chain posted mixed first quarter 2014 results with earnings missing the Zacks Consensus Estimate and revenues beating the same. Adjusted earnings of 43 cents per share declined 8.5% year over year and missed the company’s guidance of 48 cents to 50 cents per share owing to inclement weather and a holiday shift during the first quarter of 2014 as well as costs associated with a pending settlement of a legal claim.

The restaurateur’s revenues increased 4.0% year over year to $481.4 million driven by improved comps. Comps increased 0.9% year over year and were more or less flat sequentially. Further, it was in line with management’s guidance range of 0.9% to 1.0%. Comps reflect average check growth of 2.2% owing to an increase of 2.0% in pricing and 0.2% change in mix. However, this was partially offset by a decline of 1.3% in guest traffic. Comps compared unfavorably with the year-ago increase of 1.4% owing to a negative impact of approximately 2.0% due to severe winter storms and the result of a holiday shift relative to the prior year.

The company has been reporting positive comps since the beginning of 2013.  Going forward, we expect the company to remain well positioned with its pricing actions, menu innovations, and international expansion in regions with potential for growth. Moreover, the company’s cash deployment strategy instills confidence in its fundamentals.

However, continued underperformance of Grand Lux Café, one of the company’s segments, remains a matter of concern. With the exception of the second quarter of 2013, comps at Grand Lux Cafe declined in all other quarters of 2013 and also in the first quarter of 2014. We believe that the company needs to adopt some sales building measures to reinvigorate the brand.

Meanwhile, like all other restaurant chains, Cheesecake is also vulnerable to food costs. The company expects food cost inflation in the range of 3.0% to 4.0% in 2014, owing to higher meat and dairy costs. Food costs were up 0.4% in April, the fourth straight month of increase. In fact, in April, beef prices hit their highest level in almost three decades. These factors indicate that inflation may be creeping up, thereby compounding concerns for restaurant chains. Weak consumer spending also adds to the woes.

Cheesecake Factory presently has a Zacks Rank #4 (Sell). Some better-ranked stocks worth considering in the restaurant industry include Buffalo Wild Wings Inc. (BWLD - Analyst Report), Burger King Worldwide, Inc. (BKW - Analyst Report) and Carrols Restaurant Group, Inc. (TAST - Snapshot Report). While Buffalo Wild Wings sports a Zacks Rank #1 (Strong Buy), Burger King Worldwide and Carrols Restaurant Group carry a Zacks Rank #2 (Buy).
 

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