Zacks_Analysts' Blog : Cheesecake Factory Misses Estimates - Analyst Blog

Calabasas Hills, California-based Cheesecake Factory Inc. (CAKE) reported earnings of 36 cents a share in the third quarter of fiscal 2011, lagging the Zacks Consensus Estimate by 2 cents and the year-ago quarter earnings by a penny. Hurricane Irene and cost inflation were primarily responsible for the miss.

Cheesecake’s revenues spiked 2.9% year over year to $430.4 million, but were below the Zacks Consensus Estimate of $435.0 million. The upside in the top line was attributable to a rise in comps. The company is also focusing on sales-driven initiatives like new menu offerings, value-added services and improved food quality to attract customers.

Inside the Headline Numbers

Comparable restaurant sales inched up 0.8% in the reported quarter, reflecting positive growth for the seventh consecutive quarter given the higher consumer demand arising from the reviving economy. However, comparable restaurant sales growth was spoiled by Hurricane Irene. Excluding the impact of Hurricane Irene, comps growth was 1.2%. Comparable store sales jumped 0.8% at Cheesecake Factory and 0.9% at Grand Lux Cafe.

Operating margin in the third quarter contracted 50 basis points (bps) year over year to 7.0%, as cost of sales, as a percentage of revenue, jumped 100 bps due to higher food costs, partially offset by a 50-bp dip in labor, 20-bp fall in general and administrative expenses and 20-bp plunge in depreciation and amortization expenses.

Financial Position

Cheesecake ended the quarter with cash and cash equivalents of $19.7 million. The company has no debt on its balance sheet. Shareholders' equity at the end of the reported quarter was $532.0 million.

The company repurchased 1.8 million shares in the third quarter and raised its share repurchase authorization by $20 million to $145 million–$170 million in 2011.

Outlook

Cheesecake expects to achieve mid-teens earnings per share growth annually over the next five years, driven by positive comps and unit growth.

The company currently operates 168 restaurants and out of seven new restaurants planned for 2011, six have already come up and one is scheduled to open in early December. In 2012, the company expects to open 7 to 10 new restaurants.

Our Take

We expect estimates to move up in the coming days, given the focus on enhancing shareholder value, new restaurant development, international expansion and earnings per share growth in the mid-teens range. However, margins will continue to remain under pressure due to food cost inflation. The Zacks Consensus Estimates for 2011 and 2012 are pegged at $1.66 and $1.87, respectively.

One of Cheesecake’s primary competitors, Domino's Pizza Inc. (DPZ) reported third quarter 2011 adjusted earnings of 35 cents per share, surpassing the Zacks Consensus Estimate by 2 cents and the year-ago quarter's adjusted earnings by 8 cents.