Cheesecake Factory Needs More Sweet To Enthuse Street

The Cheesecake Factory Inc (NASDAQ: CAKE) has managed to keep the Wall Street analysts "encouraged" despite fourth-quarter results being a mixed bag. However, the company needs to reverse its negative traffic trends to make the Street more optimistic on its fundamentals.

The company's quarterly EPS of 54 cents topped the Street's view by 2 cents, while comps of 1.1 percent came in below consensus view of 1.5 percent and were at the low end of the company's outlook of 1–2 percent.

The restaurant operator managed to post better-than-expected earnings due to favorable food costs, and analysts appear encouraged by the strong sales start to the first quarter, despite lapping a difficult compare.

Related Link: Stephens Upgrades The Cheesecake Factory, Denny's To Overweight

For the first quarter, the company sees earnings 59 to 62 cents, reflecting a same-store sales range of 1.5 percent to 2.5 percent. Cheesecake maintained its 2016 EPS forecast of $2.56–$2.68 based on same store sales of 1.5 percent–2.5 percent. The Street expects earnings of 57 cents for the first quarter and $2.64 a share for the full year.

The first quarter guidance represents a solid sequential acceleration into 2016. That said, pricing of 2.5 percent plus during 2016 implies traffic guidance of flat to down 100 basis points, following 1.9 percent drop in the fourth quarter.

Heard 'Round The Street

"An advantageous commodity environment & strong pricing likely offsets the margin impact of labor headwinds, but concerns about a traffic response to high pricing in a deflationary environment are fair," UBS analyst Keith Siegner said in a note to clients.

Siegner, who has a Neutral rating and $52 price target on the stock, said a return to positive traffic is important to the overall growth algorithm.

Oppenheimer analysts, who have a Perform rating on the Cheesecake shares, are of the view that estimates are unlikely to move, but their analysis suggests model is solidly positioned to achieve this year's expectations as cost of goods sold margins improve.

"Valuation is relatively attractive and '16 EPS appears achievable, but we require a material earnings upside thesis to become more bullish on shares. CAKE's unique labor cost issues are likely to eat the upside from improving COGS margins," analyst Brian Bittner said in a client note.

Analysts at Baird Equity Research said that though encouraged, they would hesitate to assume first quarter's projected two-year comp trend of 5.7–6.7 percent continues in the second quarter to fourth quarter, as this run rate likely would require a return to positive same-store traffic (after running negative in 12 of the last 13 quarters). The brokerage has a Neutral rating on the stock.

Following many of its peers, the company plans to test delivery that will start likely in the second quarter, and the analysts are positive on this upcoming development.

"We see this as a significant top-line opportunity for CAKE as to-go sales already represent 10 percent of sales," according to Sterne Agee analyst Lynne Collier who has a Neutral rating on the stock.

Cheesecake shares are up 7 percent this year and were trading at $49.50 at the time of this writing. They have been trading between $44.16 and $58.86 during the past 52-weeks.

"We continue to believe the company's best-in-class brand equity and operational execution supports a premium multiple vs. the median multiple of our covered companies trading at ~9.5x FY16E EBITDA currently," Nicole Miller Regan of Piper Jaffray said in a client note. Regan has an Overweight rating and $57 price target on the stock.

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