No Dessert for Cheesecake Factory

For many businesses, making a "top 5" list can be rewarding, and sometimes management uses the recognition as a promotional tool. But while Cheesecake Factory (Nasdaq: CAKE  ) recently made it to the top of a list, I doubt you'll see a plaque hanging on the restaurants' walls for this particular accomplishment. Cheesecake Factory ranked among the top five "underperforming" stocks list just released by CalPERS (the California Public Employees' Retirement System).

So, just how does a company make it onto this illustrious list? Well, CalPERS says it starts with a stock screening, evaluating the stock's return, capital efficiency, and the company's corporate governance practices.

According to CalPERS, Cheesecake Factory has underperformed its peers by 140.5% in the past five years. CalPERS is concerned about the supermajority voting and staggered board terms, and seeks a "clawback" policy in which executive compensation would be paid back  in case of fraudulent behavior or mistakes in performance data.

There's no doubt that Cheesecake Factory has underperformed direct competitors like Darden Restaurants (NYSE: DRI  ) and Landry's Restaurants (NYSE: LNY  ) , and there's no comparison with solid fast-food joints that don't sell $7 slices of cheesecake, such as McDonald's (NYSE: MCD  ) and Yum! Brands (NYSE: YUM  ) . Still, P.F. Chang's (Nasdaq: PFCB  ) and California Pizza Kitchen (Nasdaq: CPKI  ) are two competitors that have five-year stock charts that are just as dismal as Cheesecake Factory's.

Of course, stock price is only a piece of this equation, and Cheesecake Factory has had internal issues in the past, including a $5.5 million restatement in 2006 for improperly granting stock options and expensing them. A chief compliance officer and new board members were added to bolster corporate governance, and Russell Bendel (previously with Outback Steakhouse and OSI Restaurant Partners) was named the new president and chief operating officer in August 2007.

Cheesecake Factory has not had the best growth prospects of late, but whether it deserves to be called out on CalPERS' focus list is a tough call. While it hasn't delivered much in the way of value in the past five years, it hasn't lost much value, either, which isn't all bad in today's market. The company did so well from 1998 to 2003 that investors were accustomed to high revenue growth and stock price appreciation, potentially triggering Cheesecake Factory for extra examination.

Fair or unfair, Cheesecake Factory will probably continue to receive increased scrutiny until it delivers what investors are looking for.

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