Despite strong third quarter 2013 results posted on Oct 23,
2013, we reaffirmed our Neutral recommendation on
The Cheesecake Factory Inc.
) based on the cautious outlook for 2014.
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Why the Reiteration?
The top line during the quarter marginally surpassed the Zacks
Consensus Estimate and was up 3.5% year over year driven by
rising comps. Earnings also surpassed our expectation with a
year-over-year increase of 6.1%. Moreover, earnings and comps
were within the company's guided range.
Cheesecake is one of the most recognized upscale casual
restaurants that tap all dining preferences from lunch and dinner
day parts to the mid-afternoon and late-night day part. The
company is well positioned to sustain its same-stores sales
growth driven by improved guest traffic. Moreover, the company's
pricing actions, introduction of a new menu and the resurgence of
high-end consumers are encouraging.
In the domestic market, management is focusing on formats of
different sizes and scales to cater to local demand. Its smaller
units are generating better-than-expected returns, encouraging
the company to increase its focus on smaller sites to spur return
The company is also expanding its footprint internationally,
either through licensing agreements or by opening company-owned
restaurants. The company has restaurants under licensing
agreements in the Middle East that have been registering
higher-than-expected volume growth. Moreover, Cheesecake has
regularly been returning wealth to shareholders via dividends and
In spite of the positives, continued underperformance at the
Grand Lux Café brand, higher food cost outlook for 2014 and
regular guidance cuts remain concerns. Despite strong results,
the company tightened its 2013 earnings per share guidance to the
range of $2.10-$2.13 from $2.10-$2.15 expected earlier,
anticipating lower external bakery sales. During 2014, the
company expects earnings to be negatively impacted by higher food
costs. It expects cost inflation in the range of 4.0% to 5.0% in
2014 due to the rising cost of shrimp and salmon.
Despite the strong results, the estimates for 2014 have moved
down over the last 60 days. The Zacks Consensus Estimate for 2014
has declined 2.5% to $2.38 over the same time frame due to the
company's cautious guidance.
Other Stocks to Consider
The company presently has a short-term Zacks Rank #3 (Hold). Some
better-ranked stocks in the industry include
Buffalo Wild Wings Inc.
Burger King Worldwide, Inc.
Cracker Barrel Old Country Store, Inc.
). All these stocks carry a Zacks Rank #2 (Buy).