Bear of the Day: The Cheesecake Factory (CAKE)

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Known, of course, for their decadent cheesecakes, The Cheesecake Factory (CAKE - Free Report) is a global restaurant company that owns and operates full-service, casual dining restaurants including the namesake The Cheesecake Factory, Grand Lux Café, and RockSugar Southeast Asian Kitchen.

Since reporting disappointing second quarter earnings results earlier this month, marking an earnings miss for two consecutive quarters, shares of CAKE have been on a downward spiral; CAKE actually fell the most in over 19 years directly after reporting, nosediving as much as 14%.

So what happened? Adjusted earnings of 65 cents missed the Zacks Consensus and declined 16.7% year-over-year, but revenues managed to beat the consensus and grow about 4% from the prior-year period; comparable store sales increased 1.4%.

However, the company cited an overall rise in labor, group medical insurance, and legal costs that deeply affected its bottom line. In CAKE’s conference call, CFO Matthew Clark said that minimum wage increases drove up labor costs to nearly 36% of revenues. Group medical insurance costs hit $4.6 million during the quarter, while the company incurred $4.5 million in legal expenses.

On top of this, Cheesecake Factory cut its full-year EPS guidance from a range of $2.62 to $2.74 to $2.40 to $2.48 per share, suggesting wage pressures may not be over for the restaurant company.

It didn’t take long for analysts to lower their own estimates for 2018, and 11 have slashed their earnings outlook in the last 60 days; our consensus has fallen 23 cents from $2.68 to $2.45. While the consensus estimate for 2019 has dropped as well, earnings could bounce back and grow 11.5% next year.

CAKE is now a #5 (Strong Sell) on the Zacks Rank.

Going forward, there’s no doubt Cheesecake Factory will face some tough headwinds, especially as the overall labor market remains increasingly tight.

But, there is some good news on the horizon. CAKE expects comparable sales to increase between 1.5% to 2% this year, in addition for its top line to remain solid. The company also raised its dividend, hiking it by 14% to $0.33 a quarter; it’s yield now sits at an impressive 2.7%. And, Cheesecake Factory recently announced a partnership with delivery service DoorDash, a move that follows in the footsteps of many other casual-dining chains and one that could lead to a boost in sales.

The broad Retail-Restaurant industry can be rocky at times, but if you’re an investor interested in the space, take a look at BJ’s Restaurant (BJRI - Free Report) or Carrol’s Restaurant Group (TAST - Free Report) , stocks that boast a #1 (Strong Buy) rank with 50% expected earnings growth and a #2 (Buy) rank with 80% expected earnings growth, respectively.

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