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Cheesecake Factory (CAKE) Raised to Buy: What's Driving It?

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On Sep 26, Zacks Investment Research upgraded the California-based restaurant chain The Cheesecake Factory Incorporated (CAKE - Free Report) by a notch to a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cheesecake Factory is one of the most recognized upscale casual restaurants operating in the U.S. The company’s second-quarter 2016 results beat the Zacks Consensus Estimate for bottom-line performance, whereas the top-line lagged the same.

The second quarter marked Cheesecake Factory’s 26th consecutive quarter for positive comps. Moreover, earnings have surpassed the Zacks Consensus Estimate in all of the trailing four quarters, with an average surprise of 8.5%.

The company also raised its earnings guidance for full-year 2016 at its second-quarter conference call. Earnings per share are now expected in the range of $2.70–$2.76, up from the prior guidance of $2.61–$2.70, on the back of a solid bottom-line performance in the second quarter.

CHEESECAKE FACT Price and Consensus


Meanwhile, along with the domestic market, the company is also foraying into lucrative markets like the Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico, Kuwait, Lebanon and Chile.

This is being done to keep pace with the international expansion strategies followed by other restaurant industry giants like Yum! Brands, Inc. (YUM - Free Report) , McDonalds Corporation (MCD - Free Report) and Papa John’s International, Inc. (PZZA - Free Report) .

In 2016, the company plans to open eight company-owned restaurants, along with four to five restaurants internationally, under licensing agreements. Notably, in Jun 2016, it marked its entry in China with the launch of a Cheesecake Factory outlet at the Shanghai Disney Resort. Cheesecake Factory’s entry into this region, that boasts a relatively younger population and a growing middle class with higher disposable income, will further boost guest traffic.

Moreover, the company is committed to increase its sales and improve margins through various initiatives. In order to boost comps, it is focusing on improving its speed of service and training its servers so that they render higher level of service.

Also, in order to capitalize on the latest technology, the company has rolled out its mobile payment app, CakePay. Cheesecake factory has also increased its focus on home and office delivery and is currently piloting a delivery service with a third party in select locations.

However, rising costs of labor and inputs, a soft consumer spending environment in the restaurant sector of the U.S. and persistent underperformance of its Grand Lux Cafe remain potent headwinds.

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