Here's Why Investors Should Hold on to Cheesecake Factory
The Cheesecake Factory Incorporated CAKE is likely to benefit from digital initiatives, third-party delivery services and off-premise offerings. In the past three months, shares of the company have rallied 27.1% compared with the Zacks Retail – Restaurants industry’s 13.1% growth. However, a rise in labor and other operating expenses along with coronavirus-related woes is concerning.
Let us delve into factors highlighting why investors should hold on to the stock for the time being.
Factors Driving Growth
Cheesecake Factory is committed to bolstering sales to stay afloat during the coronavirus pandemic. Notably, the company has been doing well with feedback on its mobile payment app, CakePay, being positive. In order to boost consumer convenience, the company has implemented operational changes and technology upgrades, which include contactless menu and payment technology, as well as text paging.
The company is also witnessing incremental sales from its delivery service, which continues to be rolled out nationwide. To this extent, it has signed an exclusive national delivery partnership with DoorDash. Notably, the company expects to reap benefits from these collaborative marketing opportunities.
Meanwhile, the restaurant operator has initiated the opening and expansion of patios around the perimeter of restaurants to attract more guests. Notably, this flexible seating layout allows the company to boost sales despite capacity restrictions.
Even though the company has reopened majority of dining rooms with limited capacity post COVID-19-led shutdowns, off-premise operations continue to be a driving factor for overall sales. From the start of the third quarter to Jul 29, off-premise sales accounted for approximately half of its total sales. For restaurants that are operating only in an off-premise model, weekly sales are $4.2 million on average per unit on an annualized basis.
Nonetheless, the company possesses enough liquidity to survive the coronavirus pandemic for some time. As of Jun 30, 2020, the company’s cash balance totaled nearly $250.2 million compared with $81 million at the end of first-quarter 2020. As of Jun 30, 2020, its long-term debt (including operating lease liability) stands at $1.6 billion, almost flat sequentially. Nonetheless, at the end of second-quarter 2020, the company had a debt-to-capital ratio of 0.8, which indicates manageable debt levels.
Concerns
The coronavirus outbreak has rattled the Retail - Restaurants industry and Cheesecake Factory has not been spared. Although the company has reopened majority of its restaurants, it is likely to witness dismal traffic due to the social-distancing protocols. Moreover, the company anticipates that the pandemic will hurt operations for some time.
Moreover, the company has been continuously shouldering increased expenses, which have been detrimental to margins. Higher marketing expenses and costs related to sales-boosting initiatives are building pressure on the company’s margins. The company is also facing high general and administrative expenses.
In second-quarter fiscal 2020, labor costs, as a percentage of sales, increased 530 basis points (bps) to 41.5%. Other operating costs (as a percentage of sales) were 41.1% compared with 24.7% in the prior-year quarter. General and administrative (G&A) expenses accounted for 12.1% of revenues, up 590 bps from the prior-year quarter.
Zacks Rank & Key Picks
Cheesecake Factory currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the same space include Brinker International, Inc. EAT, BJ's Restaurants, Inc. BJRI and Chuy's Holdings, Inc. CHUY. Brinker sports a Zacks Rank #1, while BJ's Restaurants and Chuy's Holdings carry a Zacks Rank #2 (Buy).
Brinker has a three-five-year earnings per share growth rate of 11.4%.
BJ's Restaurants has a trailing four-quarter earnings surprise of 54.9%, on average.
Chuy's Holdings 2021 earnings are expected to surge 133.8%.
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The Cheesecake Factory Incorporated (CAKE) : Free Stock Analysis Report
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