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Why Is Cheesecake Factory (CAKE) Up 23.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Cheesecake Factory (CAKE - Free Report) . Shares have added about 23.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Cheesecake Factory due for a pullback? 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 catalysts.

Cheesecake Factory Q1 Earnings Top Estimates, Fall Y/Y

The Cheesecake Factory  reported preliminary first-quarter fiscal 2020 results, wherein both the top and the bottom lines beat the Zacks Consensus Estimate. 

The company reported preliminary results on an adjusted basis, which do not include impairments of long-lived assets, goodwill and other intangible assets and the revaluation of contingent consideration associated with the acquisition of Fox Restaurant Concepts as well as corresponding tax effects as a result of the impact of COVID-19. The company has also delayed the filing of 10-Q as evaluation is in process. The aforementioned items are non-cash in nature and impact on reported results is likely to be material.

In the quarter under review, adjusted earnings came in at 4 cents per share, comparing favorably with the Zacks Consensus Estimate of a loss of 46 cents. However, the bottom line plummeted 93.5% from the prior-year number. This downside can be primarily attributed to higher operating and acquisition-related costs.  

Let’s take a closer look at the numbers.

Detailed Revenue Discussion

Total revenues of $615.1 million in the reported quarter beat the Zacks Consensus Estimate of $614 million. Moreover, the top line improved 2.6% year over year. Notably, the company benefited from the acquisitions of North Italia and Fox Restaurant Concepts on Oct 2, 2019.

However, comps at Cheesecake Factory restaurants declined 12.9% against 1.3% growth recorded in the year-ago quarter.

Costs in Detail

Cost of sales, as a percentage of revenues, increased 20 basis points (bps) year over year to 22.9% in the first quarter. Meanwhile, labor expenses, as a percentage of total revenues, was 38.7%, up 250 bps from the year-ago quarter.

Other operating costs represented 27.3% of revenues, up 170 bps from the year-ago quarter. General and administrative (G&A) expenses accounted for 7.1% of revenues, up 60 bps from the prior-year quarter. In the first quarter, pre-opening expenses accounted for 0.5% of revenues, up 10 bps year over year.

Balance Sheet

As of Mar 31, 2020, Cheesecake Factory’s cash and cash equivalents totaled $81 million compared with $58.4 million as of Dec 31, 2019.

Moreover, on Apr 20, the company announced the closing of $200 million convertible preferred investment from affiliates of Roark Capital. As of Apr 30, 2020, the company’s cash balance totaled nearly $260 million.

Long-term debt totaled $380 million in the fiscal first quarter.

However, due to uncertainty revolving around the COVID-19 pandemic, the company has suspended its share repurchase activity as well as dividend payment program.

Developmental Details

During the fiscal first quarter, the company opened one North Italia and one Flower Child restaurant.

However, going forward, the company has suspended new unit developments until more clarity on the restaurant industry operating environment emerges.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 37.25% due to these changes.

VGM Scores

At this time, Cheesecake Factory has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Cheesecake Factory has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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