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Why Is Cheesecake Factory (CAKE) Down 16.4% Since the Last Earnings Report?

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About a month has gone by since the last earnings report for The Cheesecake Factory Incorporated (CAKE - Free Report) . Shares have lost about 16.4% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Cheesecake Factory Beats on Q2 Earnings, Revenues Lag

Cheesecake Factory reported mixed second-quarter fiscal 2017 results wherein earnings surpassed the Zacks Consensus Estimate, while revenues lagged the same.

Earnings and Revenue Discussion

Adjusted earnings of $0.78 per share surpassed the Zacks Consensus Estimate of $0.76 by 2.6%. However, earnings remained flat on a year-over-year 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.

Inside the Headlines

In conjunction with 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, previously projecting an increase of 1% to 2%.

The company witnessed heightened volatility in week to week sales trends, indicative of uncertainty among 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 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, the 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.

Third-Quarter Fiscal 2017 Outlook

For the fiscal third quarter, adjusted earnings per share are projected in the range of $0.60 to $0.64 based on an anticipated comps decline of 1% to 2% at Cheesecake Factory restaurants.

The dividend increase underscores the stability in the company’s cash flow generation.

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 band of $125–$135 million (earlier $125–$140 million). The company plans to open eight company-owned restaurants in fiscal 2017.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the past month as none of them issued any earnings estimate revisions.

VGM Scores

Currently, the stock has a strong Growth Score of A, though it is lagging a bit on the momentum front with a C. However, the stock was allocated a grade of B on the value side, putting it in the top second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for value and to a lesser degree momentum.

Outlook

The stock has a Zacks Rank #5 (Strong Sell). We are expecting a below average return from the stock in the next few months.



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