A year or so ago, upscale casual dining chain Cheesecake Factory (Nasdaq:CAKE) could seemingly do no wrong. But its recently released first-quarter results suggest that things may not be as sweet for the California-based company going forward. Should investors buy a slice of this company? Let's take a look.
Comp Results Reveal Weakness
In the period ended April 1, Cheesecake Factory's comparable store sales declined about 1.8%. This isn't a total disaster, but given that Brinker (NYSE:EAT), which operates Chili's, saw its comps increase about 1% in its latest quarter, and Olive Garden, which is operated by Darden Restaurants (NYSE:DRI), posted a 5.7% increase in same restaurant sales, Cheesecake's results are not overly encouraging.
In addition, Cheesecake Factory wasn't exactly going up against a tough comparison. Last year's first-quarter comps were up a paltry 0.4%. This suggests that the company is having a difficult time acclimating to the slowing economy and standing out in an increasingly crowded field.
As for its margins and expenses, its cost of sales line accounted for 25.1% of sales in last year's Q1. This year in Q1, it accounted for 25.6%. Its labor accounted for 33.3% of revenue last year (in Q1) and 33.7% this year. The only real positive was that its G&A line went from 5.5% of revenue to 5.2% this year. Overall, very little about Cheesecake's Q1 results stand out - except for the fact that this was reportedly the company's first quarterly profit decline in eight years.
What's the Allure?
The analyst community generally likes a clean story. In other words, analysts tend to recommend industry leaders, companies that have some strategic advantage, and/or organizations that are showing consistent year-over-year margin growth, comp store sales growth, and EPS growth. They are also attracted to turnaround stories and companies that have recently broken out of bad results. Retail investors are pretty much the same.
Cheesecake Factory seems to be lacking on this front as well. As a result, the analyst community may shy away from the stock, at least until things start to firm up. (To learn more about analyst recommendations and what they could mean to you and your investments, read Analyst Recommendations: Do Sell Ratings Exist?)
Is Cheesecake Factory truly an industry leader, or does it have some sort of strategic advantage? I don't think so, and I don't think too many people will argue with me on that one. In casual dining circles, this company is still somewhat of a "newbie". Although it has been around since about 1972, it did not reach critical mass, or achieving national popularity and/or recognition, until just a few years back.
The Icing on the CAKE
Cheesecake Factory's recent results are likely to pose a couple of problems that could further hinder the company's prospects. First and foremost, I think that Cheesecake Factory needs analyst sponsorship if it's going to get its stock price back up at this point. Retail investors tend to need some reassurance that things are going to get better, otherwise they'll probably just ditch the stock at year end for a tax loss.
The second reason that the Q1 metrics are an issue is because there is nothing to really set the company apart and to lure analysts and retail investors in. For example, Darden has the Olive Garden comps in its favor, and Brinker's comp numbers were not too shabby either. As a result, both of these companies have been drawing some interest from analysts and investors. Darden is also about four times bigger than Cheesecake Factory in terms of sales and Brinker is a little under two times larger, putting them in a stronger overall position.
Also, although all restaurant companies are facing margin pressure as a result of rising labor and food costs, it seems that Darden and Brinker are faring better. Brinker has bounced nicely off its lows as has Darden. Meanwhile, although Cheesecake has come off its lows, it still seems to be stuck in a funk. As such, it seems unlikely that sell-side analysts will be serving up recommendations on this stock.
Bottom Line
Cheesecake Factory's Q1 results aren't the end of the world. However, its comp store results suggest that the company is having trouble in the current operating environment. This, coupled with what I think will be a lack of analyst interest, makes me believe that investors should probably skip dessert - at least for now.
For more insight, see Sinking Your Teeth Into Restaurant Stocks.