Cheesecake Factory Inc
) adjusted earnings of 54 cents per share in the second quarter
of 2013 increased 5.9% year over year on the back of an improved
top line. Earnings per share, however, missed the Zacks Consensus
Estimate of 57 cents by 5.3% and also fell short of the guided
range of 55 cents - 57 cents.
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Cheesecake's revenues increased 3.4% year over year to $470.1
million but fell short of the Zacks Consensus Estimate of $475.0
million by 1.1%. The company's positive comparable
restaurant sales (comps) growth backed the year-over-increase in
the top line.
We believe that lower-than-expected comps growth led to the
top-line miss, which consequently had an impact on the bottom
line as well.
Inside the Headline Numbers
Comps grew 0.8% in the reported quarter, lower than the guided
range of 1%-2% growth. While an early Easter and spring breaks
had benefited Cheesecake in the first quarter of 2013, the shift
of the holidays to the first quarter hit about $2 million of
sales in the second quarter.
Comps nudged up 0.9% at Cheesecake Factory restaurant concept and
0.1% at the company's another concept, Grand Lux Cafe.
Operating margin in the second quarter fell 20 basis points (bps)
year over year to 8.8% hurt by higher labor expense due to higher
payroll taxes and overhead ratio.
At the end of the second quarter of 2013, the company operated
175 restaurants. This year, management aims to open as many as 8
to 10 new company-owned restaurants. Internationally, the
restaurateur expects to open 1 The Cheesecake Factory restaurant
in the Middle East during fiscal 2013 under a licensing
Dividend Hike & Authorization for Buyback
The company hiked its dividend by 17% to 14 cents per share. This
equates to an annual payout of 56 cents per share payable on Aug
20, 2013 to shareholders of record as of Aug 7, 2013. The
company's forward annualized dividend yield comes to 1.53% as of
Jul 24, 2013.
After repurchasing 1.3 million shares in the first half of the
year, the company targets to spend as much as $125 million for
share repurchases in the second half. In addition, the company
extended its share repurchase authorization by 7.5 million shares
to 48.5 million shares.
For the third quarter of 2013, earnings per share are guided
between 51 cents - 53 cents. Comparable store sales are expected
to be flat to up 1%.
For 2013, the company reduced its earnings per share guidance to
the range of $2.10-$2.15 from the range of $2.12-$2.18 owing to
the second quarter miss.
The target for comps growth was also slashed to the range of
1%-1.5% from the range of 1.5%-2.5%. Guidance for operating
margin remained unchanged at an increase of 50 bps.
Cheesecake is also on its way to attain historically peak margin
levels in 2013 driven by international expansion, strong
performance of its three new Middle East units and lower food
Management now projects food cost inflation to be about 2.0% in
2013, down from the previous estimate of 2.5%. Prior to this,
with the release of first-quarter earnings, management had
lowered its food cost inflation outlook to 2.5% from the prior
guidance of 3%.
Since the past year, Cheesecake has been suffering on the sales
front. While the restaurateur kicked off 2013 on a high note by
beating the estimate on both counts, it again disappointed this
time. The continued comps underperformance by Grand Lux Café and
the latest slash in guidance remain a concern.
However, we believe, a relatively benign food cost outlook,
international expansion as well as improvement on the margin
front should bode well for this Zacks Rank #2 (Buy) company over
the long term. Shareholder friendly steps like dividend hike and
extension of the buyback program may also inspire optimism around
Some other companies from the restaurant sector that are worth a
AFC Enterprises Inc.
Jack in the Box Inc.
Dunkin' Brands Group Inc.
), all carrying a Zacks Rank #2.