Cheesecake Factory Reports Sweet and Sour Notes

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Patrons Dine At The Cheesecake Factory Restaurant In Kentucky
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When it comes to sheer sales volume in casual dining, it's hard to beat Cheesecake Factory (CAKE). The restaurant chain known for its massive portions and even larger dessert menu leads the industry in sales per restaurant, with the typical eatery generating $10.5 million in annual sales. However, even casual dining's top dog is showing signs of mortality, and that was on display for investors when Cheesecake Factory reported quarterly results after Wednesday's market close.

Revenue climbed 5 percent from the prior year to $499.7 million during the holiday quarter, fueled by the opening of 10 new locations over the past year and a 1.4 percent uptick in comparable-restaurant sales.

Cheesecake Factory has now come through with five years of positive quarterly comps, but this doesn't mean that everything's humming along at the chain. For starters, guest traffic actually declined in 2014. Guests spending more has offset the 1 percent dip in traffic.

Higher Costs for Labor, Supplies

There's also a problem on the bottom line. Net income plunged 26 percent to $24.5 million or 48 cents a share. Analysts were holding out for a profit of 60 cents a share. That's a pretty big miss, but investors should be used to this by now. Cheesecake Factory fell short of Wall Street profit targets during all four quarters of 2014.

There are plenty of factors eating at Cheesecake Factory's margins. Dairy prices spiked this year, and even though those food costs are off their summertime highs, it still has an unfavorable year-over-year impact. Cheesecake Factory is also experiencing high labor costs, including an unusual uptick in group medical claims that have boosted its health insurance expenses.

This isn't Cheesecake Factory at its best, and the stock opened lower on Thursday on the heels of the report. However, it would be a mistake to dismiss one of casual dining's biggest success stories.

Sweet Dreams

Cheesecake Factory still has plenty of room to grow. It feels that the U.S. can support 300 locations, and it's just at 177 locations today. It opened 10 restaurants last year, and it's hoping to open as many as 11 units in 2015. At this pace we're looking at more than a decade before the concept saturates the market, and that's before considering international possibilities: It has three licensing partners exploring ways to grow overseas. Mexico got its first Cheesecake Factory last year, and growth continues in Asia and the Middle East.

This doesn't mean that Cheesecake Factory is resting on its laurels. It points out how it's exploring new concepts either by developing them in-house or through acquisitions. Cheesecake Factory thought it had a great sister concept in the slightly more upscale Grand Lux Cafe brand, but it's been struggling lately. Cheesecake Factory made the unusual move on Wednesday night of announcing that it will no longer break out the comparable-restaurant sales performance at Grand Lux in its quarterly earnings releases and conference call discussions, suggesting that the concept is still challenging. Grand Lux makes up less than 10 percent of the overall revenue, but that didn't stop Cheesecake Factory from talking about the concept when it was doing well.

Cheesecake Factory knows that it needs to work on winning back customers. It's following Chili's and Applebee's by embracing mobile payment options to get fed customers settled up faster. Being able to turn its tables faster is a logical way to keep wait times low and increase traffic, but after coming up short on the bottom line through 2014, the bigger challenge will be margins.

The chain's bottom-line guidance for 2015 is uninspiring. It's eyeing earnings per share between $2.08 and $2.20 this year, below the $2.43 that analysts were forecasting ahead of the report. That's not sitting well with growth investors who were used to Cheesecake Factory's results coming up as big as the chain's signature portions. These are challenging times even for the high-volume rock star of casual dining.

Motley Fool contributor Rick Munarriz owns shares of The Cheesecake Factory, Inc. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. Hungry for some good stocks? To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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