Cheesecake Factory (CAKE) Comps Growth Helps Amid High Costs – Nov 23, 2022

The Cheesecake Factory Incorporated (PIE Free Report) benefits from strong comparison growth, sales creation efforts, expansion and digitization. Consequently, in the past three months, the company’s shares have gained 8.5% versus the industry’s 5% rise. However, the high costs continue to have a negative impact. Let’s dig deeper.

growth controllers

The solid growth in compositions bodes well for CAKE. During the third quarter of fiscal 2022, comps at Cheesecake Factory restaurants increased 1.1% year-over-year compared to a 41.1% increase reported in the prior-year quarter. In addition, comps had increased 9.5% from 2019 levels. From the start of the fiscal third quarter through Oct. 25, Cheesecake Factory comparisons (across all operating models) increased approximately 2.8% year-over-year. year-on-year and 14% from fiscal 2019 levels.

The company is also focusing on expansion efforts to fuel growth. During the fiscal third quarter, the company opened The Cheesecake Factory in Katy, TX, North Italia in Dunwoody, GA, and Fly Bye in Phoenix, AZ. In fiscal 2022, the company anticipates opening up to 13 new restaurants, including three Cheesecake Factory restaurants, four North Italia restaurants, and six FRC restaurants (including three Flower Child locations).

This Zacks Rank #3 (Hold) company is benefiting from strong off-premises sales. Off-site sales contributed approximately 23% of the company’s restaurant sales during the third quarter of fiscal 2022. It continues to perform well in the delivery channel.

In order to increase consumer convenience, the company has implemented operational changes and technology upgrades, including contactless menu and payment technology, and text pagination. We believe that an increase in the number of customers coupled with targeted off-premises marketing will further boost channel performance in the coming periods.

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High costs remain a concern. Pre-opening costs for outlets, given the company’s unit expansion plans, expenses related to sales initiatives, increased labor expenses, and additional cleaning costs, are likely to affect earnings.

During the third quarter, cost of sales, as a percentage of revenues, increased 270 basis points (bps) year-over-year to 25.2%. The increase was mainly driven by commodity inflation and higher menu prices. Labor expenses, as a percentage of total revenues, rose to 37.4%, 30 bp above the levels of the prior-year quarter.

Other operating costs, as a percentage of total revenues, came in at 27.7%, 100 bp above prior-year quarter levels. We expect total costs and expenses to increase 12.4% year-over-year in the fourth quarter of 2022.

key picks

Some of the top-ranked stocks in the Zacks Retail – Restaurants industry are Wingstop Inc. (TO free report), Chuy’s Holdings, Inc. (CHUY free report) and Chipotle Mexican Grill, Inc. (CMG free report).

Wingstop sports a Zacks Rank #1 (Strong Buy). WING has a long-term earnings growth rate of 11%. WING shares have declined 6.1% in the past year. You can see the full list of today’s #1 ranked Zacks stocks here.

The Zacks Consensus Estimate for Wingstop’s 2023 sales and EPS suggests growth of 18.1% and 16.4%, respectively, over comparable levels in the prior-year period.

Chuy’s Holdings currently has a Zacks Rank #2 (Buy). CHUY has a profit surprise in the last four quarters of 18.6%, on average. CHUY’s shares have fallen 1.7% in the past year.

The Zacks Consensus Estimate for Chuy’s Holdings 2023 sales and earnings per share suggests growth of 8.6% and 11.7%, respectively, from levels in the same period a year ago.

Chipotle currently has a Zacks #2 rank. CMG has an earnings surprise in the last four quarters of 4.1%, on average. The stock has decreased by 11.8% in the last year.

The Zacks Consensus Estimate for Chipotle’s 2022 sales and earnings per share suggests growth of 15.1% and 31%, respectively, from corresponding levels in the prior-year period.

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