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Zack’s Bear of the Day: Cheesecake Factory

The Cheesecake Factory (NASDAQ:CAKE) recently reported Q4 revenue and earnings well below expectations as comparable restaurant sales increased only 1.4%. Analysts revised their estimates significantly lower for both 2015 and 2016 after the report, sending the stock to a Zacks Rank #5 (Strong Sell).

Despite the weak earnings momentum, shares do not look like a value at more than 20x forward earnings.

The Cheesecake Factory Incorporated operates 189 full-service, casual dining restaurants throughout the U.S. and Puerto Rico. It operates 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.

Fourth Quarter Results

The Cheesecake Factory reported disappointing fourth quarter results on February 11. Earnings per share came in at $0.48, missing the Zacks Consensus Estimate of $0.60. It was a 16% decrease from adjusted EPS in the same quarter last year.

Revenues rose 5% year-over-year to $499.7 million, which was below the consensus of $510.0 million. Comparable restaurant sales inched up just 1.4%.

Meanwhile, total costs and expenses increased from 90.7% to 93.0% revenues. This was primarily due to higher cost of sales and labor expenses.

Estimates Falling

Following disappointing Q4 results, analysts revised their estimates significantly lower for both 2015 and 2016. This sent the stock to a Zacks Rank #5 (Strong Sell).

The Zacks Consensus Estimate for 2015 is now $2.16, down from $2.42 before the report. The 2016 consensus is currently $2.50, down from $2.82 over the same period.

As you can see in the “Price, Consensus & EPS Surprise” chart, 2015 estimates have been declining for several months now amid disappointing results:

Premium Valuation

Shares of The Cheesecake Factory do not look cheap at 22x 12-month forward earnings. That is well above its 10-year median of 18x. And its enterprise value to cash flow ratio of 13x is also a premium to its historical median of 12x. Cheesecake’s free cash flow yield is just 3.5%.

The Bottom Line

With soft comparable restaurant sales, steadily declining earnings estimates, and lofty valuation, The Cheesecake Factory doesn’t offer investors much to like right now.

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