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CAKE's 2Q Earnings Lag Est; Cuts FY View

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Cheesecake Factory Inc.’s (CAKE - Free Report) adjusted earnings of 54 cents per share in the second quarter of 2013 increased 5.9% year over year on the back of an improved top line. Earnings per share, however, missed the Zacks Consensus Estimate of 57 cents by 5.3% and also fell short of the guided range of 55 cents – 57 cents.

Cheesecake’s revenues increased 3.4% year over year to $470.1 million but fell short of the Zacks Consensus Estimate of $475.0 million by 1.1%.  The company’s positive comparable restaurant sales (comps) growth backed the year-over-increase in the top line.

We believe that lower-than-expected comps growth led to the top-line miss, which consequently had an impact on the bottom line as well.

Inside the Headline Numbers

Comps grew 0.8% in the reported quarter, lower than the guided range of 1%–2% growth. While an early Easter and spring breaks had benefited Cheesecake in the first quarter of 2013, the shift of the holidays to the first quarter hit about $2 million of sales in the second quarter.

Comps nudged up 0.9% at Cheesecake Factory restaurant concept and 0.1% at the company’s another concept, Grand Lux Cafe.

Operating margin in the second quarter fell 20 basis points (bps) year over year to 8.8% hurt by higher labor expense due to higher payroll taxes and overhead ratio.  

Store Update

At the end of the second quarter of 2013, the company operated 175 restaurants. This year, management aims to open as many as 8 to 10 new company-owned restaurants. Internationally, the restaurateur expects to open 1 The Cheesecake Factory restaurant in the Middle East during fiscal 2013 under a licensing agreement.

Dividend Hike & Authorization for Buyback

The company hiked its dividend by 17% to 14 cents per share. This equates to an annual payout of 56 cents per share payable on Aug 20, 2013 to shareholders of record as of Aug 7, 2013. The company’s forward annualized dividend yield comes to 1.53% as of Jul 24, 2013.

After repurchasing 1.3 million shares in the first half of the year, the company targets to spend as much as $125 million for share repurchases in the second half. In addition, the company extended its share repurchase authorization by 7.5 million shares to 48.5 million shares.


For the third quarter of 2013, earnings per share are guided between 51 cents – 53 cents. Comparable store sales are expected to be flat to up 1%.

For 2013, the company reduced its earnings per share guidance to the range of $2.10—$2.15 from the range of $2.12—$2.18 owing to the second quarter miss.

The target for comps growth was also slashed to the range of 1%–1.5% from the range of 1.5%–2.5%. Guidance for operating margin remained unchanged at an increase of 50 bps.

Cheesecake is also on its way to attain historically peak margin levels in 2013 driven by international expansion, strong performance of its three new Middle East units and lower food costs.

Management now projects food cost inflation to be about 2.0% in 2013, down from the previous estimate of 2.5%. Prior to this, with the release of first-quarter earnings, management had lowered its food cost inflation outlook to 2.5% from the prior guidance of 3%.

 Our Take

Since the past year, Cheesecake has been suffering on the sales front. While the restaurateur kicked off 2013 on a high note by beating the estimate on both counts, it again disappointed this time. The continued comps underperformance by Grand Lux Café and the latest slash in guidance remain a concern.  

However, we believe, a relatively benign food cost outlook, international expansion as well as improvement on the margin front should bode well for this Zacks Rank #2 (Buy) company over the long term. Shareholder friendly steps like dividend hike and extension of the buyback program may also inspire optimism around the stock.

Some other companies from the restaurant sector that are worth a look include AFC Enterprises Inc. , Jack in the Box Inc. (JACK - Free Report) and Dunkin' Brands Group Inc. (DNKN - Free Report) , all carrying a Zacks Rank #2.

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