The Cheesecake Factory (CAKE) had a bad third quarter relative to expectations, according to Quo Vadis Capital’s John Zolidis, who has a Sell rating on the company’s shares. The company produces cheesecakes and other baked products for its restaurants and third-party customers.
I’m neutral on The Cheesecake Factory. (See Analysts’ Top Stocks on TipRanks)
TipRanks’ Smart Score
TipRanks’ Stock Analysis system assigns CAKE a Smart Score of 8 out of 10, citing insider buying in the last three months, strong blogger sentiment, and strong fundamentals.
Missing Expectations
Last week, the company reported $754.5 million in total revenues for the fiscal third quarter of 2021, up from $517.7 million in the same quarter of last year. Net income per common share came in at $0.64 in Q3 2021. Meanwhile, comparable restaurant sales increased 41.1% year-over-year and 8.3% relative to the third quarter of 2019.
Management was pleased with the results, with Chairman and Chief Executive Officer David Overton stating, “We drove strong sales performance at The Cheesecake Factory restaurants and across our concepts during the third quarter despite the surge in COVID-19 cases from the Delta variant,”
He then continued, “Our teams also generated solid profitability in the face of higher than anticipated group medical insurance costs and pandemic environment cost pressures during the quarter.”
However, Zolidis doesn’t see things that way, saying, “Total revs missed, comps missed, RLM came in at 13.7% vs. 15.4% in 3Q19 and guidance for solid margin improvement in 2H vs. ’19’19. EPS was five cents below consensus but included a tax credit. On an 11.5% tax rate (consistent with 1H21) the tax benefit was worth $0.13, suggesting the real bottom-line miss was $0.18. EPS would have been below 3Q19 due to the dilutive share offering during the pandemic. “
Where’s the Pain?
The U.S. restaurant industry is caught at the crossroads of two trends. On the one side, the rising vaccination rates and the pandemic’s easing are bringing people back to restaurants. On the other side, there’s a persistent rise in the direct cost of goods sold by the company (COGS).
That is where Zolidis sees the “pain” for The Cheesecake Factory, “COGS are holding relatively even vs. 2019,” he says. Zolidis continues, “However, both labor and operating costs are higher still. Forecasting 2022 comps is pretty difficult but the business will have to accelerate from here to avoid RLM contraction. Meanwhile, off-premise, CAKE’s big win during the pandemic, peaked in 1Q21 and has now declined sequentially for two consecutive quarters.”
Wall Street’s Take
The 11 Wall Street analysts following Cheesecake do not seem to share Zolidis’s pessimism. The Company has a Moderate Buy consensus rating, based on four Buys, six Holds, and one Sell assigned in the past three months.
The average Cheesecake Factory price target of $49.65 implies 11.4% upside potential, which is not that lousy of a return in a low-interest-rate environment. However, it may be too optimistic given the company’s headwinds.
Analyst price targets range from a low of $40.00 per share to a high of $60.00 per share.
Disclosure: At the time of publication, Panos Mourdoukoutas didn’t own shares of Cheesecake Factory.
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