The Cheesecake Factory Incorporated

Transcription

1 March 20, 2015 The Cheesecake Factory Incorporated (CAKE-NASDAQ) Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 01/12/2011 Current Price (03/19/15) $48.82 Target Price $ Week High $ Week Low $42.88 One-Year Return (%) 1.54 Beta 0.88 Average Daily Volume (sh) 734,322 Shares Outstanding (mil) 50 Market Capitalization ($mil) $2,441 Short Interest Ratio (days) 5.48 Institutional Ownership (%) 89 Insider Ownership (%) 9 Annual Cash Dividend $0.66 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 4.3 Earnings Per Share (%) 12.8 Dividend (%) N/A using TTM EPS 24.9 using 2015 Estimate 22.6 using 2016 Estimate 19.5 Zacks Rank *: Short Term 1 3 months outlook 4 - Sell * Definition / Disclosure on last page SUMMARY The Cheesecake Factory posted lower-thanexpected fourth-quarter 2014 results. Adjusted earnings of $0.48 per share decreased 18.5% year over year and missed the Zacks Consensus Estimate by 20% owing to higher total costs. Further, revenues missed the consensus mark by 2%. Unit growth led to 5.2% year-over-year revenue growth. In fact, the company has been reporting positive comps since the beginning of Going forward, we expect the company to remain well positioned with its sales boost initiatives and international expansion in regions with growth potential. However, continued underperformance of the Grand Lux Café, moderate consumer spending and food cost inflation remain headwinds. Also, the cut in earnings guidance for 2015 is a concern. Risk Level * Below Avg., Type of Stock Mid-Growth Industry Retail-Restrnts Zacks Industry Rank * 107 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 470 A 470 A 475 A 1,878 A A 496 A 499 A 500 A 1,976 A E 530 E 536 E 539 E 2,124 E ,285 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.47 A $0.54 A $0.52 A $0.57 A $2.10 A 2014 $0.43 A $0.59 A $0.48 A $0.48 A $1.96 A 2015 $0.49 E $0.61 E $0.53 E $0.53 E $2.16 E 2016 $2.50 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Founded in 1972 and based in Calabasas Hills, CA, The Cheesecake Factory Inc. (CAKE), operates upscale, casual, and full-service dining restaurants in the United States. As of Feb 27, 2015, the company operates 189 full-service, casual dining restaurants throughout the U.S. and Puerto Rico, including 177 restaurants under The Cheesecake Factory brand, 11 restaurants under the Grand Lux Cafe brand; and one restaurant under the RockSugar Pan Asian Kitchen brand. The company also has two bakery production facilities located in Calabasas Hills and Rocky Mount, N.C. These produce baked desserts and other products for its restaurants, as well as for other foodservice operators, retailers, and distributors. Currently, the company operates through two segments, The Cheesecake Factory and Other. REASONS TO BUY Strong Brand Recognition: Cheesecake is one of the most recognized upscale casual restaurants operating in the U.S. It taps all dining preferences from lunch and dinner day parts to the midafternoon and late-night day part. Cheesecake Factory is well positioned to sustain its same-stores sales growth owing to a constant increase in guest traffic. It has posted positive comps for fifth consecutive year. Focus on Expansion: Despite challenging economic conditions, The Cheesecake Factory has been expanding in the domestic as well as international markets. Driven by huge demand, the company opened 10, 9 and 8 new restaurants during 2014, 2013 and 2012, respectively and plans to open more, going forward. The company remains focused on opening its restaurants at high grade sites to hit targeted returns. The restaurants opened over the past three years are performing better than the erstwhile locations. Besides the domestic market, the company is of late foraying into lucrative markets like the Middle East, North Africa, Central and Eastern Europe, Russia, Turkey, Mexico and Chile. Also, the company has expanded into East Asia, a region known for its economic growth and healthy investment returns. The region boasts a relatively younger population and a growing middle class with higher disposable income. Therefore, entry into this market has helped the company to boost traffic and improve comps. Initiatives to Boost Sales: The company is committed to boost its sales and improve margins to survive in the competitive environment. In order to boost comps, the company is focusing on improving its speed of service and training its servers so that they render higher level of service. Meanwhile, the company continues to focus on gift card program. In each of the past two years, gift card sales have increased approximately 25% on an average. Also, the company is capitalizing on technology and is building a mobile app branded for The Cheesecake Factory for quick payments. We believe that these initiatives would help the company to continue to keep up the trend of positive comps. Focus on Improving Margins: The company is evaluating different approaches to limit its costs. It installed a cost management system with substantial capabilities across production, planning and inventory management a few years ago to help analyze usage and waste. Amid current soft environment, such efforts to control costs would help to limit margins. Cash Deployment Strategy: Cheesecake continuously returns wealth to shareholders via dividends and share repurchases. In 2014, 2013 and 2012, the company repurchased shares worth $140.5 million, $183.7 million and $101.4 million, respectively. Moreover, the company has continuously paid quarterly dividends since it announced its first dividend payment of $0.12 per share in the Equity Research CAKE Page 2

3 REASONS TO SELL RECENT NEWS second quarter of Since then, the company has increased its dividend twice, by 17% and 18% in the second quarter of 2013 and 2014, respectively. The company returned $170.8 million and $210.9 million in cash via share buybacks and dividends to shareholders in 2014 and 2013 respectively and expects to continue to return its free cash flow to shareholders in the form of share repurchases and dividends in 2015 also. Over the long-term, the company expects total shareholder returns in mid-teens plus range. Rising Food Costs Hurt Profits: The overall cost environment for food commodities has remained under pressure due to domestic and worldwide agricultural supply and demand imbalance and other macroeconomic factors. Going forward, the company expects food cost inflation in the range of 1% 2% in 2015 owing to higher beef and chicken prices, which would hurt profits. After lowering its earnings guidance for three consecutive quarters in 2014, the company also cut its earnings projection for 2015 in the fourth quarter owing to a continuous rise in food costs. Also, some additional costs related to self-insured group medical coverage and pre-opening costs of outlets are likely to hurt profitability in the near term. Continued Sluggish Performance in Grand Lux Cafe: Continued underperformance of Grand Lux Cafe remains a matter of concern. Segment comps have been continuously declining for the past few quarters as the company has been consistently increasing menu prices. These menu price increases amid a soft consumer spending environment have been hurting traffic and thereby comps. Moderate Consumer Spending Environment: The restaurant industry has been experiencing low consumption over the last few quarters. Despite moderate improvement in economic growth, consumer spending has increased slightly as an increase in jobs this year is yet to translate into significantly higher wages. High interest rates, higher health care costs and still-tightened credit availability continue to hurt consumer discretionary spending in the U.S. As a result, Americans are unwilling to dine out, thereby lowering the company s sales. Cheesecake Factory Lags Fourth Quarter Earnings on Higher Costs Feb 11, 2015 The Cheesecake Factory Inc. posted dismal fourth-quarter 2014 results wherein both earnings and revenues missed the respective Zacks Consensus Estimate. The company's adjusted earnings of $0.48 per share missed the Zacks Consensus of $0.60 by 20%. Also, earnings were lower than the company s guidance of $0.58 to $0.62 and decreased 15.8% year over year. The downside reflects higher expenses. The restaurateurs' revenues increased 5.2% year over year to $499.7 million, mainly due to unit growth. However, it missed the Zacks Consensus Estimate of $510 million by 2%, mainly due to sluggish comps. Inside the Headline Numbers Comps increased 1.4%, which was lower than 1.8% growth in the last quarter, but better than comps growth of 1.1% in the year-ago quarter. Further, it was at the mid-point of management s expectation of 1% to 2% increase. Total costs and expenses increased 7.9% to $464.9 million as cost of sales and labor expenses and other operating costs and expenses rose. Cost of sales ratio increased 90 basis points (bps) to 25.3% Equity Research CAKE Page 3

4 due to higher dairy costs. Labor expense ratio went up 90 bps to 32.5% due to higher medical costs. Preopening expenses were $5.5 million, down 13.7% year over year. Full-Year Results For 2014, earnings were $1.96 per share, down 6.6% year over year. Revenues for the year came in at $19.8 billion, up 5.3% from Store Update In 2014, 10 restaurants were opened, with five in the fourth quarter alone. Internationally, one restaurant was unveiled in the Middle East in the quarter. In fiscal 2015, the company plans to open 11 company-owned restaurants domestically. In addition, four restaurants will be unveiled in the Middle East and Mexico under licensing agreements Guidance Cheesecake Factory expects earnings per share in a range of $2.08 to $2.20 in 2015, down from the prior expectation of $2.35 to $2.45. However, the company increased its comps growth guidance to 1.5% to 2.5% from the prior range of 1% 2%. The company expects food cost inflation of 1% 2% owing to higher beef and chicken prices, partially offset by a year-over-year decline in dairy and seafood costs. Quarterly Guidance For the first quarter, the company expects earnings per share between $0.47 and $0.50 based on estimated comps growth of 3% to 4%. However, it expects comps growth in the range of 1% to 2% in the other three quarters of the year. Equity Research CAKE Page 4

5 VALUATION Cheesecake s current trailing 12-month earnings multiple is 24.9x, representing a discount of 63.9% to the industry average of 69.0x. Over the last five years, Cheesecake s shares have traded in the range of 16.7x to 26.5x trailing 12-month earnings. The P/B multiple of the stock was approximately 4.5x, a 83% discount to the industry average of 26.5x. Our target price of $51.00 is based on approximately 23.6x of our 2015 earnings estimate. On a P/B basis, the price target is based on a P/B multiple of approximately 4.7x. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low The Cheesecake Factory Incorporated (CAKE) Industry Average NA 48.5 S&P Domino's Pizza, Inc. (DPZ) The Wendy's Company (WEN) Papa John's International Inc. (PZZA) Texas Roadhouse, Inc. (TXRH) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA The Cheesecake Factory Incorporated (CAKE) Industry Average NA S&P Equity Research CAKE Page 5

6 Earnings Surprise and Estimate Revision History Equity Research CAKE Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CAKE. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1133 companies covered: Outperform %, Neutral %, Underperform 9.0%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Research Analyst Copy Editor Content Ed. Lead Analyst QCA Reason for report Shikha Kansal Debasmita Banerjee Sneha Nahata Shikha Kansal Kinjel Shah Earnings Update Equity Research CAKE Page 7