Cheesecake Factory's Profits Gobbled Up

With the Cheesecake Factory (Nasdaq: CAKE  ) announcing the resignation of its CFO last night, you could guess that today's second-quarter earnings wouldn't be nearly Brownie Sundae Cheesecake delicious.

Revenue grew 9.1%, but strip out the 22 new restaurants opened in the past year, and things don't look so sweet. Same-store sales dropped by 4.1%, compared with the 1.8% comps decline in the first quarter, when the company attributed dwindling sales to bad weather. No bad weather this quarter, though -- just a bad economy.

Like the rest of the restaurant industry, Cheesecake Factory suffered from escalating milk costs and the rapidly rising cost of inputs. Accordingly, the cost of goods sold outpaced top line growth, increasing 13.3%. Higher expenses trickled to the bottom line, which tumbled nearly 20% to $19.1 million.

Earnings on a per-share basis fell 12% but were kept from being any worse as the result of a $52 million share repurchase. The buybacks could end up being a decent investment, especially if the new store openings are as positive as the recent store openings highlighted in the earnings release were. However, long-term debt has grown by $100 million in the past six months, so you have to wonder whether The Cheesecake Factory should be working to drive down debt in today's credit-challenged environment.

The Cheesecake Factory's stock has fallen 46% from its 52-week high, and the upscale restaurant leader is not alone in its pain -- a wide range of high-end foodies from Starbucks (Nasdaq: SBUX  ) to Morton's (NYSE: MRT  ) are struggling in the lagging economic market. Even McDonald's (NYSE: MCD  ) is working to balance promising same-store-sales increases with growing commodity costs.

The company is selling at just 12 times next year's earnings expectations, but as rising inflation continues to swallow up profits, The Cheesecake Factory will have to stay on a strict diet to deliver satisfying profit growth to hungry investors.

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