Why Is Cheesecake Factory (CAKE) Up 7.6% Since Last Earnings Report?

A month has gone by since the last earnings report for Cheesecake Factory (CAKE - Free Report) . Shares have added about 7.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Cheesecake Factory due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Cheesecake Factory Misses on Q2 Earnings, Trims View

Cheesecake Factory reported second-quarter 2018 results, wherein earnings missed the Zacks Consensus Estimate for the two consecutive quarters. The bottom line also declined sharply from the prior-year quarter number. Following the quarterly results, shares of the company decreased 9% in after-hours trading on Jul 31.

Adjusted earnings of 65 cents per share missed the Zacks Consensus Estimate of 81 cents by 19.8%. The reported figure also declined 16.7% on a year-over-year basis. Particularly, higher-than-expected medical insurance cost along with some legal expenses dented the company’s earnings in the second quarter.

However, Cheesecake Factory’s robust sales-building initiatives aided to the top line. The company extensively started digital and social media campaigns to showcase its high-quality ingredients and preparation techniques besides focusing on menu innovation.

Detailed Revenue Discussion

Total revenues came in at $593.2 million, which surpassed the consensus estimate of $590 million by 0.5%. The top line also improved 4.1% year over year on the back of increased comparable sales.

Comps at Cheesecake Factory restaurants increased 1.4%, whereas the same declined 0.5% in the year-ago quarter. In first-quarter 2018, the company recorded a comps growth of 2.1%.

Cost Details

Cost of sales ratio decreased 10 basis points (bps) year over year to 22.5%. Meanwhile, labor expense ratio was 35.8%, up 190 bps from the year-ago quarter. This upside was primarily driven by higher hourly labor, including more wages, overtime and training costs.

General and administrative (G&A) expenses accounted for 7% of revenues in second-quarter 2018, up 80 bps owing to $4.5 million of legal expenses. According to the company, without these costs, G&A expenses (as a percentage of sales) would have been flat year over year. Notably, pre-opening expenses were 0.3% of total revenues, up 10 bps from the year-ago quarter.

Balance Sheet

As of Jul 3, 2018, cash and cash equivalents amounted to $29.4 million compared with $6 million as of Jan 2, 2018.

Management raised quarterly dividend by 14% to 33 cents per share of common stock. The dividend will be payable Aug 28, 2018 to shareholders of record at the close of business on Aug 15, 2018.

In the first quarter of 2018, Cheesecake Factory repurchased approximately 140,000 shares of its common stock at a cost of $7.1 million.

Third-Quarter 2018 Outlook

For the third quarter, adjusted earnings per share are estimated to be in the range of 56-60 cents based on an anticipated comps outlook within 1.5-2.5% at Cheesecake Factory restaurants.

2018 Guidance

Cheesecake Factory expects earnings per share to be in the $2.40-$2.48 band (down from the previously guided range of $2.62-$2.74). The Zacks Consensus Estimate for 2018 earnings is pegged at $2.69.

Meanwhile, the company expects comps to grow in the range of 1.5-2% compared with previously expected comps growth of 1-2%.

For 2018, Cheesecake Factory continues to expect capital expenditures between $80 million and $90 million.

Additionally, the company expects to open six restaurants in 2018. Internationally, it plans to open three restaurants in the same period.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.95% due to these changes.

VGM Scores

At this time, Cheesecake Factory has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Cheesecake Factory has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.

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