Cost Control to Favor Cheesecake Factory (CAKE) Q2 Earnings

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The Cheesecake Factory Inc. CAKE is scheduled to report second-quarter 2018 results on Jul 31, after the closing bell.

The company's aggressive sales building strategies along with concerted expansion efforts are expected to reflect in the to-be-reported quarter's revenues. Moreover, despite high expenses from labor, pre-opening and administration, the installation of a cost management system might have had favored margins. This in turn is likely to have bolstered second-quarter earnings.

Notably, shares of the company have gained 19.1% in the past year, outperforming the industry 's collective growth of 2.5%.

Let's find out how the second-quarter results will shape up.

Encouraging Top-Line Picture

Cheesecake Factory is committed to boost its sales in order to stay afloat in the competitive environment. The company has been investing heavily to improve guest experience. This in turn has started stabilizing the company's sales trend since the beginning of fourth-quarter 2017. In the first quarter of 2018, total revenues grew 4.8% year over year on the back of increased comparable sales and the trend is likely to have continued in the second quarter as well. The Zacks Consensus Estimate for second-quarter revenues is pegged at $589.9 million, reflecting growth of 3.5% from the year-ago quarter.

In order to boost comps, the company is focusing on improving its service speed and also training its servers so that they are able to render higher level of service. In addition to labor productivity, the company is primarily focusing on menu innovation and food efficiency. Cheesecake Factory is preparing 50 menus, under its Super Foods program, fresh from scratch in the restaurants, to increase consumer awareness of the brand.

Moreover, the company's technology-enabled initiatives are doing well with feedback on its mobile payment app, CakePay, being positive. The company is also witnessing incremental sales from its delivery service, which continues to roll out nationwide. Presently, about 95% of Cheesecake Factory restaurants offer third-party delivery. The company also continues to improve its to-go business including online ordering capability, which could be in pilot by the end of the year. This is anticipated to be a major contributor to growth of the company's strong off-premise sales channels.

Earnings to Gain From Improved Margins

Although high costs from opening outlets and other sales initiatives are of concern, we believe that Cheesecake Factory's cost cutting efforts are likely to have favored second-quarter earnings. In the first quarter, earnings declined 22.2% year over year due to higher-than-expected insurance cost. However, the trend is like to revert given efficient cost management.

The company is evaluating different approaches to limit its 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. Amid the tricky operating environment, such efforts to control costs are likely to help improve margins.

Subsequently, the consensus estimate for second-quarter earnings is pegged at 81 cents, suggesting an increase of 3.9% from the year-ago quarter.

Our Quantitative Model Predicts a Beat

Cheesecake Factory has 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.

Zacks ESP:  The company has an Earnings ESP of +1.01%. You can uncover the best stocks to buy or sell before they're reported with our  Earnings ESP Filter .

Zacks Rank:  The restaurant 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 and EPS Surprise

The Cheesecake Factory Incorporated Price and EPS Surprise | The Cheesecake Factory Incorporated Quote

Other Stocks to Consider

Here are some companies in the restaurant space, which, per our model, have the right combination of elements to post an earnings beat this quarter.

McDonald's MCD has an Earnings ESP of +0.39% and a Zacks Rank #3. The company is scheduled to report quarterly results on Jul 26.

Wendy's WEN is slated to report quarterly numbers on Aug 7. The company, carrying a Zacks Rank #2 (Buy), has an Earnings ESP of +1.59%.

Brinker EAT has a Zacks Rank #3 and an Earnings ESP of +1.47%. The restaurant is expected to release quarterly results on Aug 9.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Symbols: CAKE , MCD , WEN , EAT

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