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Here's Why You Should Retain Cheesecake Factory (CAKE) Stock

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The Cheesecake Factory Incorporated (CAKE - Free Report) is likely to benefit from its off-premise business model, strong comps growth and Fox Restaurant Concepts. Also, the focus on the development pipeline bode well. However, inflationary pressures and supply chain challenges pose concerns.

Let us discuss the factors highlighting why investors should retain the stock for the time being.

Factors Driving Growth

Cheesecake Factory continues to benefit from its robust off-premise sales. In the third quarter of fiscal 2022, off-premise contributed 23% to Cheesecake Factory’s total restaurant sales. Also, off-premise average weekly sales doubled compared with fiscal 2019 levels. It continues to perform well in the delivery channel. To boost consumer convenience, the company implemented operational changes and technology upgrades, including a contactless menu and payment technology and text paging. We believe that a boost in customer count and targeted off-premise marketing will likely drive the channel’s performance further.

The company is also benefiting from impressive comps performance. During the first quarter of fiscal 2022, comps at Cheesecake Factory restaurants increased 20.7% year over year. In the prior-year quarter, comps had increased 2.8% year over year. Solid off-premise sales coupled with an increase in average check and customer traffic contributed to the company’s performance. Nevertheless, the company stated that the momentum had continued in fourth-quarter fiscal 2022. From the start of the fiscal third quarter to Oct 25, comps at Cheesecake Factory (across all operating models) increased approximately 2.8% year over year and 14% from fiscal 2019 levels.

Cheesecake Factory continues to focus on the development front to drive growth. In fiscal 2022, the company anticipates opening as many as 13 new restaurants, comprising three Cheesecake Factory restaurants, four North Italia restaurants and six FRC restaurants (including three Flower Child locations). Also, it anticipates opening a Cheesecake Factory restaurant internationally under a licensing agreement. To this end, the company set aside $130 million in capex to support its restaurants’ unit development and maintenance. With a strong pipeline, the company anticipates achieving unit growth of 7% in the upcoming year.

Increased focus on Fox Restaurant Concepts (or FRC) bodes well. The in-restaurant kiosk technology enables a faster ordering experience and features artificial intelligence that learns individual guest behavior to provide an enhanced experience. FRC plans to incorporate this technology at future Flower Child locations, complementing the traditional ordering mechanism. During the second quarter of fiscal 2022, FRC opened its brick-and-mortar location of Fly Bye (a fast-casual dining concept) in the Phoenix market and reported solid sales from the same. The outlet offered Detroit-enhanced stretch-style pizza and crispy chicken. The company stated that it intends to open more Fly Bye locations. Given the solid customer feedback, CAKE remains optimistic and anticipates the initiative to drive growth in the upcoming periods.


Zacks Investment Research
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Shares of Cheesecake Factory have plunged 21.1% in the past year compared with the industry’s 9.9% fall. The downside was mainly caused by commodity and wage inflation, supply chain challenges and a challenging macro environment. Although most dining services are open, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation regularly to gauge the impacts of COVID-19.

Cheesecake Factory has been continuously incurring increased expenses, which have been detrimental to margins. During the third quarter, the cost of sales, as a percentage of revenues, increased 270 basis points (bps) year over year to 25.2%. The increase was primarily driven by commodity inflation and higher menu pricing. Labor expenses, as a percentage of total revenues, amounted to 37.4%, up 30 bps from the year-ago quarter’s levels. Other operating costs, as a percentage of total revenues, came in at 27.7%, up 100 bps from the prior-year quarter’s levels. For fiscal 2022, the company anticipates commodity inflation in the range of 14-15% annually. Labor inflation is expected at 5% for fiscal 2022.

Zacks Rank & Key Picks

Cheesecake Factory currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Retail-Wholesale sector are Tecnoglass Inc. (TGLS - Free Report) , Wingstop Inc. (WING - Free Report) and Chuy's Holdings, Inc. (CHUY - Free Report) .

Tecnoglass currently sports a Zacks Rank #1. Shares of the company have gained 9.3% in the past year.

The Zacks Consensus Estimate for TGLS’ 2023 sales and EPS suggests growth of 11.2% and 9%, respectively, from the year-ago period’s levels.

Wingstop carries a Zacks Rank #2 (Buy). WING has a long-term earnings growth rate of 12%. Shares of WING have decreased 16% in the past year.

The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.4% and 16.1%, respectively, from the comparable year-ago period’s levels.

Chuy’s Holdings currently carries a Zacks Rank #2. CHUY has a trailing four-quarter earnings surprise of 18.6%, on average. Shares of CHUY have declined 4.3% in the past year.

The Zacks Consensus Estimate for Chuy’s Holdings 2023 sales and EPS suggests growth of 8.6% and 11.2%, respectively, from the corresponding year-ago period’s levels.

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