Cheesecake Factory Has Short-Term Woes, but Remains a Long-Run Winner

Step into your average Cheesecake Factory (NASDAQ: CAKE  ) and it looks as though the concept was just introduced three weeks ago. Though the company plays a very similar game to that of Chili's, Olive Garden, or Longhorn Steakhouse, its corporate umbrella doesn't seem to deter the increasingly discerning eater. In its recent earnings report, Cheesecake Factory underwhelmed investors and analysts, but the reaction may have been overblown. For one thing, the company has a wide-open international market that it has barely begun to explore. The casual-dining business has posted same-store sales growth that, while underwhelming at times, has headed upward for years without fail. Here's why you should take a closer look.

Advantage: Cheesecake
There are a few things that set Cheesecake Factory apart from its casual-dining brethren.

First of all, there is an air of celebration at many Cheesecake Factorys, regardless of the fact that it is basically your typical corporate restaurant with soulless decorations and artery-clogging fare. This is partly due to the relatively small number of locations -- about 180 around the world. It's also a matter of the menu: a wide array of rich, comforting foods that beg for a one-night stand away from your dietary restrictions.

The company has a handful of restaurants in the Middle East, and plans to tack on more locations there and in Mexico this year. A cautious, well-executed expansion plan is more forgiving to quick changes in the global economic landscape.

The restaurants have a higher price point than a Chili's or an Applebee's. While it makes Cheesecake Factory more susceptible to economic downturns (the company was crushed during the recession), it also lends well to a wide array of diners. Middle-class eaters view the restaurant as a nicer place to eat and splurge for a night out. Higher-income earners prefer its snazzier atmosphere to the kitschy walls of a Chili's. Evidencing its appeal is the fact that Cheesecake Factory has consistently grown sales on the top and bottom lines even during sustained periods of economic tepidity.

Cause for concern?
The company's recent earnings report fell short of expectations, but the numbers weren't so bad. Was this just an overambitious market or is Cheesecake Factory losing some of its red-hot appeal?

Excluding a weather-impact charge, same-store sales grew 1.6% -- not too bad considering recent results from competitors, though still under the results of some of the high-growth chains such as Darden's Capital Grille and Longhorn Steakhouse.

In the company's fourth quarter, revenue ticked up just over 2.2%, while adjusted earnings grew 11.8% to $0.57 per share. The number came in at the low end of previously issued guidance and just short of analysts' $0.58-per-share estimate.

It appears that most of Cheesecake Factory's current headwinds are not company-specific. Inclement weather is affecting a wide variety of industries, including restaurants. The company has a calendar shift coming up that puts Easter in the second quarter instead of the first. Some food costs are rising, like those for certain seafood items, while others are coming down. Management expects food inflation in the range of 3%-4%.

In the coming years, we should continue to see the steady growth that Cheesecake Factory has offered in recent periods. 2014 shows 10 new store openings on the horizon, half of which will take place outside the United States. The company has a proactive management team that, along with its cautious growth plans, is committed to returning capital back to shareholders via buybacks and a modest 1.2% dividend.

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