What happened

Shares of Cheesecake Factory Inc. (NASDAQ:CAKE) were heading lower today after the casual-dining chain posted a disappointing second-quarter earnings report, with rising labor costs weighing on bottom-line results. Consequently, the stock closed down 12.4%.

A slice of strawberry cheesecake

Image source: Cheesecake Factory.

So what

Cheesecake Factory posted solid results on the top line as comparable sales increased 1.4% in the period, and overall revenue was up 4.1% to $593.2 million, beating estimates for $589.9 million. However, higher labor, medical, and legal expenses ate into the bottom line; labor expenses increased 190 basis points, to 35.8% of revenue. General and administrative costs rose as well, and GAAP (generally accepted accounting principles) operating profit fell by nearly a third.

As a result, the company reported an adjusted per-share profit of $0.65, down from $0.78 a year ago, and much worse than expectations of $0.81.

CEO David Overton said that comparable sales were in line with expectations, but he acknowledged the impact of high labor costs due to higher minimum wages and a tightening labor market. Cheesecake Factory also raised its dividend for the sixth year in a row, hiking it by 14% to $0.33 a quarter, which brings the dividend yield to 2.7%.

Separately, the company announced a delivery partnership with DoorDash, following the lead of several other casual-dining chains that have looked to delivery to beef up sales.

Now what

Looking ahead, Cheesecake Factory lowered its full-year guidance for earnings per share from a range of $2.62 to $2.74 to one of $2.40 to $2.48, a sign that recent wage pressures would persist. On the earnings call, management said that hourly wage inflation is about 6% to 7%, which, in addition to higher food costs, is crunching margins.

Cheesecake Factory has been a consistent winner among restaurant stocks since the recession, but shares deserve to take a step after the company cut its guidance. The good news is that top-line growth remains solid, with comparable sales expected to grow 1.5% to 2% this year. Cheesecake Factory should eventually overcome these temporary headwinds.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.