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Cheesecake Factory's Tasty Prospects

By Ryan Fuhrmann, CFA – Updated Nov 14, 2016 at 10:37PM

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Near-term costs continue to worry investors, but Cheesecake Factory is here to stay.

Upscale restaurateur Cheesecake Factory (NASDAQ:CAKE) made less money selling its decadent desserts during the second quarter, but the overall company growth and profitability outlook remains quite tasty.

Granted, Cheesecake Factory isn't growing at the breakneck pace it used to, but 16% growth for a quarter is nothing to sneeze at, and management is targeting a similar level of total sales growth for the entire year. Longer-term, it sees the potential for 200 namesake stores, 60% more than the current count.

During the earnings conference call, the company highlighted that new stores will be about 5% smaller than existing ones as new markets entered are also smaller. However, new growth is moving to the lucrative Northeast, which has higher population density. Better yet, the Grand Lux Cafe concept is still in its infancy, with nine stores as of quarter's end. Management sees the potential for at least 150 Grand Lux stores.

In terms of comparable-store trends, the namesake stores posted a modest 0.8% increase while Grand Lux continued a strong run with a 5.7% increase. Share repurchases offset lower operating margins and higher interest expenses, resulting in a 10% earnings increase. EPS still came in ahead of analyst expectations for the quarter. To offset higher dairy costs and labor expenses, the company is implementing a 1.5% increase in menu prices. Management mentioned that the move is a defensive measure and not relied on to drive revenue -- it has plenty of new store growth to take care of that.

Overall, Cheesecake Factory operates in the highly competitive restaurant industry, with archrivals such as P.F. Chang's (NASDAQ:PFCB), California Pizza Kitchen (NASDAQ:CPKI), and a number of concepts run by Landry's Restaurants (NYSE:LNY) targeting a similar, casual upscale flavor. The casual-dining space is also crowded by such companies as Buffalo Wild Wings (NASDAQ:BWLD) and BJ's Restaurants (NASDAQ:BJRI), which are looking to expand at a breakneck pace.

So far, Cheesecake Factory has succeeded in differentiating itself and is able to earn one of the higher average check prices in the industry. As a result, few peers, save for B-dubs, have been able to match its profitability levels. Even fewer can consistently grow in the double digits and fund expansion through internally generated cash flow, which is what management expects again for 2007.

For related Foolishness:

Buffalo Wild Wings recommendations is a Hidden Gems recommendation. You can view the entire Hidden Gems scorecard with your free trial. 

Fool contributor Ryan Fuhrmann is long shares of Cheesecake Factory but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.

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Stocks Mentioned

The Cheesecake Factory Incorporated Stock Quote
The Cheesecake Factory Incorporated
CAKE
$28.43 (-2.44%) $0.71
Buffalo Wild Wings, Inc. Stock Quote
Buffalo Wild Wings, Inc.
BWLD
BJ's Restaurants, Inc. Stock Quote
BJ's Restaurants, Inc.
BJRI
$23.89 (-4.02%) $-1.00

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