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Cheesecake Factory in Neutral Lane

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We remain Neutral on restaurant company The Cheesecake Factory Inc. (CAKE). Although the company’s earnings and revenue growth in the second quarter of 2013, a benign food cost outlook and international expansion plan impress us, the company’s inability to meet the Zacks Consensus Estimate on both counts and a trimmed outlook for the full year keep us on the sidelines at the current level.

Why the Reiteration?

On Jul 24, 2013, Cheesecake Factory reported second-quarter 2013 earnings of $0.54 per share, up 5.9% year over year. Improvement in the top line contributed to the year-over-year earnings growth during the quarter. Revenues grew 3.4% year over year, driven by positive comparable stores sales.

While Cheesecake is susceptible to higher input costs like all other restaurant companies, management commented that commodity inflation has moderated on an annualized basis. Management has been lowering its food cost inflation outlook for the past three quarters.

We also view the company’s initiative to expand beyond the U.S positively. The company started its overseas expansion in Aug 2012 by venturing into Dubai and has already opened three restaurants in the Middle East in 2012. In Aug 2013, the company opened a restaurant in Puerto Rico. Cheesecake has extensive expansion plans in various countries of the Middle East and Latin America over the long term.

However, despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. Following lower-than-expected second-quarter results, management trimmed its guidance for comps and earnings for full year 2013. Despite an expected decline in cost of sales for 2013, a cut in earnings per share guidance is a concern. Further, the sales scenario is also not quite encouraging mainly due to weak consumer spending.

The Cheesecake Factory currently carries a Zacks Rank #3 (Hold). Other players in the restaurant industry, which look attractive at current levels, include The Wendy’s Co. (WEN - Free Report) , AFC Enterprises Inc. and Burger King Worldwide Inc. , all carrying a Zacks Rank #2 (Buy).


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