We remain Neutral on The Cheesecake Factory Inc. (CAKE) over the long term. While second quarter 2011 earnings results, comparable sales growth, cost reduction initiatives and an increase in the share repurchase program are positives, a high unemployment rate, increased pre-opening expenses during the second half of 2011 and inflated commodity costs keep us on the sidelines.
The Cheesecake Factory’s second quarter 2011 earnings were in line with the Zacks Consensus Estimate. The company’s revenue spiked 2.8% year over year but missed the Zacks Consensus Estimate. The upside in the top line was attributable to higher comparable sales growth. The company is also focusing on sales-driven initiatives like new menu offerings, value-added services and improved food quality to attract customers. All dayparts were positive, with major increases in the mid-afternoon and late-night periods, and all key markets including California, Florida, the Midwest, the Southeast and Texas posted impressive results in the second quarter.
Cheesecake Factory also increased its share repurchases target in 2011 to a range of $125 million to $150 million. In the first half of 2011, the company spread investor cheer by repurchasing $95 million shares. During the second quarter of 2011, the company repurchased 1.5 million shares of its common stock at a total cost of approximately $44.4 million.
However, there are some causes of worry. Like all restaurant companies, Cheesecake is exposed to higher input costs. Management expects year-over-year food cost pressures to persist into the third quarter, pushing up total cost of sales by 70–90 basis points on a year-over-year basis. Management projects 4% commodity inflation for 2011. The related impact to total cost of sales will likely have an 11-cent drag on earnings per share this year relative to 2010.
Since the company is in an expansion mode, it will experience increased pre-opening expenses during the second half of 2011. Additionally, Cheesecake Factory’s labor expenses in fourth-quarter 2010 benefited 90–100 bps from the HIRE Act, which will not recur this year.
Cheesecake Factory, which competes with the likes of Panera Bread Co. (PNRA) currently, retains a Zacks #3 Rank, which translates into a short-term Hold rating.
