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Cheesecake Factory (CAKE) Falls on View Cut, Q2 Earnings Top

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Shares of The Cheesecake Factory Inc. (CAKE - Free Report) declined over 6% in afterhours trading on Aug 2, after the company reported mixed second-quarter fiscal 2017 results. Further, a lowered fiscal 2017 outlook due to prevailing challenging restaurant environment led to the slump in the stock price.

Earnings and Revenue Discussion

Adjusted earnings of 78 cents per share surpassed the Zacks Consensus Estimate of 76 cents by 2.6%. However, earnings remained flat on a year-over-basis.

Sales of $569.9 million fell slightly short of the Zacks Consensus Estimate of $570.3 million but rose nearly 2% year over year.
 

The Cheesecake Factory Incorporated Price, Consensus and EPS Surprise

 

The Cheesecake Factory Incorporated Price, Consensus and EPS Surprise | The Cheesecake Factory Incorporated Quote

Inside the Headlines

In conjunction to the company’s previously announced guidance, comps at Cheesecake Factory restaurants declined 0.5%, whereas both the year-ago quarter and the preceding quarter marked 0.3% growth in comps. Menu price increase of 2.2% was more than offset by a 2.4% decline in traffic and negative mix of 0.3%.

We note that in June, the company revealed that it expects comps decline of roughly 1% at Cheesecake Factory restaurants in second-quarter fiscal 2017, after previously projecting an increase in the band of 1% to 2%.

The company witnessed heightened volatility in week to week sales trends in the quarter, indicative of uncertainty in the part of many customers. Particularly, weakness at its U.S. restaurants in the East and Midwest led to the soft sales. Unfavorable weather conditions in these regions also reduced patio usage -- a big draw for the chain. This, in turn, more than offset positive comps experienced in key markets of California, Texas and Florida.

Cost of sales ratio decreased 10 basis points (bps) year over year to 22.6%. This was primarily attributable to the favorability across various categories. Meanwhile, labor expense ratio was 33.9%, 70 bps higher year over year owing to elevated hourly wage rates.

General and administrative expenses accounted for 6.2% of revenues in the second quarter, 20 bps down from the prior-year quarter level. Notably, pre-opening expenses were roughly $1.3 million, down from $2.3 million in the year-ago quarter.

Dividend Hike

The board of directors announced a 21% increase in the quarterly dividend from 24 cents to 29 cents per share, payable on Aug 29, 2017, to shareholders of record as of Aug 16, 2017. This adds up to an annual dividend of $1.16, representing a dividend yield of 2.5%. The dividend increase underscores the stability in the company’s cash flow generation.

Third-Quarter Fiscal 2017 Outlook

For the fiscal third quarter, adjusted earnings per share are guided in the range of 60 cents to 64 cents based on an anticipated comps decline of 1% to 2% at Cheesecake Factory restaurants.

Fiscal 2017 Guidance

The company slashed its fiscal 2017 adjusted earnings per share projection and now expects earnings in the range of $2.62 to $2.70, compared with $2.93 to $3.02 guided previously. Notably, the Zacks Consensus Estimate for fiscal 2017 earnings is pegged at $2.83.

Moreover, the company now expects comps to decline approximately 1% while the previous guidance called for comps growth in the range of 0.5% to 1.5%.

Meanwhile, the company continues to assume a wage rate inflation of roughly 5% in 2017. Capital expenditures for the year are now projected in the range of $125–$135 million (earlier $125–$140 million). The company continues to expect to open eight company-owned restaurants in fiscal 2017.

Currently, Cheesecake Factory carries a Zacks Rank #5 (Strong Sell).

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

Peer Releases

Darden Restaurants, Inc.’s (DRI - Free Report) fourth-quarter fiscal 2017 adjusted earnings of $1.18 per share outpaced the Zacks Consensus Estimate of $1.15 by 2.6%. Further, the bottom line rose 7.3% year over year on the back of higher revenues and lower share count.

Chipotle Mexican Grill, Inc.’s (CMG - Free Report) second-quarter 2017 adjusted earnings of $2.32 per share outpaced the Zacks Consensus Estimate of $2.16 by 7.4%. The figure also increased significantly from the prior-year quarter earnings of 87 cents on a substantial rise in revenues.

Buffalo Wild Wings, Inc.’s (BWLD - Free Report) second-quarter 2017, adjusted earnings of 66 cents fell short of the Zacks Consensus Estimate of $1.01 by 34.6%. The figure also decreased significantly from the prior-year quarter earnings of $1.27, given high wing costs, increased operating expenses and lower-than-expected same store sales.

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