Cheesecake Factory: Steady and Safe
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Cheesecake Factory Inc (NASDAQ: CAKE) is set to announce its second quarter earnings on 25th July. Last month at the Oppenheimer Holding Inc consumer conference, the company reaffirmed its Q2 same store sales guidance of 1.5%-2.5% and provided a guidance of 2%-3% same store sales in F12. The guidance for Q2 EPS is $.47-$49.
Last quarter, Cheesecake Factory posted SSS of 2.6%, which was in-line with consensus. 1Q12 EPS of $0.37 was a cent higher than the consensus estimate of $0.36 as well as being at the high end of guidance of $0.34-0.36. Restaurant margins expanded nearly 70bps year-over-year to 18.2%.
The latest guidance for earnings per share for 2012 is $1.83-$1.91, representing 12% to 16% growth as compared to 2011. We believe the company is likely to achieve its EPS guidance, as the company’s same store sales trend has held up better than its peers and the earnings may be further boosted by lower food costs.
Guidance looks achievable with consistent SSS and share gains: CAKE has produced nine straight quarters of positive same restaurant sales, and more importantly, these sales were primarily driven by increases in guest traffic. The company’s 1Q12 SSS outperformed the industry (measured by Knapp-Track Index) by 63 bps after 130 bps of outperformance in 4Q11. SSS were positive in each month vs. industry SSS of 3.3% in January and February and -0.7% in March. The company has also improved its traffic with a 1.9% increase in traffic in 1Q12 vs. 1.7% in 4Q11. Its SSS consistency, along with improving traffic trends, gives us confidence that 2012 SSS will be toward the high end of reiterated 1.5%-2.5% guidance.
Improved labor leverage and easing food inflation: Labor leverage improved roughly 25bps above expectations as opposed to labor deleveraging nearly 85bps in 4Q11, despite identical SSS. Thus, we expect labor to leverage for full year 2012. Operating margin guidance for 2012 was lowered to 2.0-2.5% from 2.5-3.5%. With approximately 60% of the company’s food costs locked, if the costs in the remainder of the basket (mainly dairy) decline, there may be an additional upside to margins.
Greater fixed cost margin leverage due to high average unit volume: CAKE has an average unit volume of $10 million, which is multiple times that of its large cap peer group of Chipotle Mexican Grill (NYSE: CMG) and Yum! Brands (NYSE: YUM), both of which have an average unit volume less than $2 million. CAKE’s SSS growth of 2% may look nominal at first glance as compared to the double digit SSS growth of Chipotle and 6% SSS growth of YUM, but the revenue contribution from a 2% increase in CAKE’s SSS is significantly more than that of Chipotle and YUM. At the Cheesecake Factory, a 2% comparable sales increase on $10 million average unit volume is an additional $200,000 in annual sales for one restaurant. Thus, large sales volumes enable the company to drive greater fixed-cost margin leverage from smaller percentage same-store sales increases than many other operators can.
Moreover, the Cheesecake Factory possesses excellent real estate locations and a powerful brand that should allow it to maintain its position as a leading dining destination spot. After several years of cutback, unit growth acceleration is gaining momentum, with a focus on smaller units that offer a higher return on investment and greater growth in free cash flow. The free cash flow may be further deployed in share repurchase activity, which could drive EPS growth. Thus, we recommend it a buy.
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