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.

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