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Cost Control to Aid Cheesecake Factory (CAKE) Q4 Earnings

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The Cheesecake Factory Incorporated (CAKE - Free Report) is scheduled to report fourth-quarter 2018 numbers on Feb 20, after the closing bell.

The company’s expansion initiatives and other sales-building efforts, including menu and digital innovations, are likely to have bolstered top-line growth in the fourth quarter. Also, Cheesecake Factory has been trying to control costs and expand profit margins, which are likely to have aided earnings in the to-be-reported quarter.

However, shares of Cheesecake Factory have lost 2.2% over the past year, underperforming the industry’s rally of 14%. The decline in share price can be attributable to the company’s lower-than-expected earnings in two out of the trailing four quarters, the average miss being 7.6%.

Let us find out how the company’s top and bottom lines will shape up in the to-be-reported quarter.


Sales-Building Efforts to Aid Top-Line Growth

In the first three quarters of 2018, Cheesecake Factory’s overall revenues grew 4.5% year over year. We believe that the upside trend in revenues is likely to have continued in the fourth quarter. Subsequently, the Zacks Consensus Estimate for revenues in the fourth quarter is pegged at $594.5 million, reflecting a 4% increase from the year-ago quarter.

This upside in revenues is stemming from the company’s efforts to improve guest experience and drive traffic. In order to boost comps, it is focusing on improving the speed of service and training its servers so that they render a higher level of service. In addition to labor productivity, this restaurant is primarily focusing on menu innovation and digital improvements.

Cheesecake Factory’s technology-enabled initiatives are doing well with feedback on its mobile payment app, CakePay, being positive. In the third quarter of 2018, the company signed an exclusive national delivery partnership with DoorDash. It expects to reap benefits from these collaborative marketing opportunities. The company is also witnessing incremental sales from its delivery service, which continues to roll out nationwide.

Cheesecake Factory has been expanding in domestic as well as international markets. It is of late foraying into lucrative markets like the Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico, Kuwait, Lebanon and Chile. Internationally, the company plans to open restaurants in Mexico in the first quarter of 2019. Overall, management believes that there is potential for 300 Cheesecake Factory locations in 2019, expecting to drive at least 3% unit growth.

Margin Expansion Efforts to Help Bottom Line

Cheesecake Factory is evaluating different approaches to limit costs. It installed a cost management system, with substantial capabilities across production, planning, and inventory management a few years ago to help analyze usage and waste. The company’s portfolio management and diversification are expected to support restaurant level margins over time. The long-term aim of management is to recapture the historical average adjusted operating margin of roughly 7.5%. The company plans to achieve it by stabilizing formal margins and leveraging its bakery infrastructure, international and consumer packaged goods’ revenue streams, and G&A over time. Amid the current retail environment, such efforts to control costs would help improve margins.

We believe that these efforts have helped the company to achieve earnings growth in the to-be-reported quarter. Consequently, the consensus estimate pegs fourth-quarter earnings at 61 cents, suggesting 15.1% growth from the year-ago quarter.

Our Quantitative Model Does Not Predict a Beat

Cheesecake Factory does not have the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Earnings ESP: The company has an Earnings ESP of -0.45%. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Zacks Rank: The restaurant currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

The Cheesecake Factory Incorporated Price, Consensus and EPS Surprise
 

Stocks to Consider

Here are a few stocks from the Restaurant space that investors may consider as our model shows that these have the right combination of elements to post an earnings beat in the fourth quarter.

Jack in the Box (JACK - Free Report) presently carries a Zacks Rank #3 and has an Earnings ESP of +2.55%.

Del Taco (TACO - Free Report) has an Earnings ESP of +4.11% and a Zacks Rank #3.

El Pollo Loco (LOCO - Free Report) has an Earnings ESP of +7.14% and it currently carries a Zacks Rank #2 (Buy).

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