Sector: Consumer Discretionary
Industry: Restaurants
Key Statistics
 

Cheesecake Factory's (CAKE) fourth quarter profit fell 9.7% from a year ago, but beat analysts' expectations due to a lower tax rate.  The company's stock fell as much as 4.7% following the announcement. 

Earlier in September, we outlined our neutral view on the stock.  Our assessment has proved right, with shares remaining about flat since then. 

We continue to view Cheesecake Factory as a leader in the high-end casual dining segment, and believe it is more resilient to softer consumer spending due to its strong brand recognition and niche customer base.  Looking ahead, the company should return to strong consistent sales, benefiting from easier year/year comparisons as well as the internal resolution of a stock option review. 

For the fourth quarter, net income declined to $20.4 million, or $0.26 per share, from $22.6 million, or $0.28 per share, during the same quarter last year.  A four-cent beat was due primarily to an unexpectedly low tax rate.  The company's tax provision was $31.9 million for the quarter, compared with $46.3 million last year.

Revenue rose to $360.7 million from $328.6 million, exceeding analysts' expectations of $353.6 million.  The company, best known for its array of cheesecakes, including White Chocolate Raspberry Truffle and Chocolate Peanut Butter Cookie-Dough, said sales at Cheesecake Factory restaurants open at least 18 months increased 0.4%, while same store sales at its Grand Luxe Cafe outlets rose 7.8%.  Meanwhile, total costs and expenses climbed 14% year/year to $337 million, due to new store expansion as well as higher commodity and labor costs. 

Cheesecake Factory opened 13 new restaurants in the quarter, and plans to open as many as 21 new restaurants in fiscal 2007, including as many as 5 to 6 Grand Luxe Cafes.  The company reiterated its guidance for 18% sales and earnings growth in 2007.  There appears to be more room for growth too, as management has stated that its long-term goal is to reach a total of 200 Cheesecake Factories and 150 Grand Luxe Cafes, with a third concept under development.  

While relative weakness of consumer spending could extend longer than expected, and cause consumers to trade down from casual dining to alternatives, we believe Cheesecake's longer-term growth prospects remain in tact, and suggest investors stay the course with the stock.  The company has an established a proven concept with unparalleled branding, and has a second profitable concept still in an early growth phase.  Given its superior operational structure and high-quality food offerings, we believe CAKE remains a compelling story for long-term investors.  However, we would continue to keep an eye on rising labor costs and same store sales growth, which could fuel margin pressure going forward. 

--Richard Jahnke, Briefing.com