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Cheesecake Factory (CAKE) Up 43% in 3 Months: More Upside Left? – November 18, 2020

The Cheesecake Factory Incorporated (CAKE Free Report) is likely to benefit from menu innovation, digital initiatives, third-party delivery services and off-premise offerings. In the past three months, shares of the company have rallied 42.6% compared with the Zacks Retail – Restaurants industry’s 10.9% growth. However, a rise in labor and other operating expenses, along with coronavirus-related woes are concerning.

Let us delve into the factors highlighting why investors should hold on to the stock for the time being.

Factors Driving Growth

Cheesecake Factory is focusing on various sales-building initiatives to stay afloat amid the pandemic. Notably, menu innovation and advanced digital capabilities are the primary fortes of the company. Going forward, it intends to carry on with menu innovation by adding new Super Food items and the famous indulgences of The Cheesecake Factory. The Super Foods program has increased consumer awareness of brands. It also plans to launch the Timeless Classics special menu card nationally.

 

In case of technology-enabled initiatives, the company is receiving positive feedback with regard to its mobile payment app, CakePay. Notably, it continues to improve the to-go business, including online ordering capability. In order to boost consumer convenience, the company has implemented operational changes and technology upgrades, which include contactless menu and payment technology, as well as text paging.

Cheesecake Factory is witnessing incremental sales from its nationwide delivery service. It has signed an exclusive national delivery partnership with DoorDash. Notably, the company expects to reap benefits from these collaborative marketing opportunities.

Even though the company has reopened the majority of dining rooms with limited capacity post the withdrawal of COVID-19-led shutdowns, off-premise operations continue to be a driving factor for overall sales. Notably, off-premise sales contributed approximately 45% to its restaurant sales during the fiscal third quarter of 2020.

Meanwhile, the restaurant operator has initiated the opening and expansion of patios around the perimeter of restaurants to attract more guests. Notably, this flexible seating layout is allowing the company to boost sales despite capacity restrictions. Also, it has implemented glass partitions at approximately 50 Cheesecake Factory restaurants to increase its capacity. Nearly two-thirds of the Cheesecake Factory locations are likely to have partitions installed in the coming weeks.

Currently, 187 locations have indoor dining rooms open, 17 are open for outdoor dining only and one location is operating an off-premise only model in accordance with local mandates.

Concerns

The coronavirus outbreak has rattled the Retail – Restaurants industry. Although the company has reopened the majority of restaurants, it is likely to witness dismal traffic due to social-distancing protocols. Notably, the pandemic is likely to hurt operations for some time.

Moreover, it has been continuously shouldering increased expenses, which have been detrimental to margins. Higher marketing expenses and costs related to sales-boosting initiatives are building pressure on its margins. The company is also facing high general and administrative expenses.

For fiscal third-quarter 2020, labor costs — as a percentage of sales — increased 230 basis points (bps) to 38.7%. Other operating costs (as a percentage of sales) were 30.7% compared with 25.5% in the prior-year quarter. General and administrative expenses accounted for 7.3% of revenues, up 110 bps from the prior-year quarter.

Zacks Rank & Key Picks

Cheesecake Factory currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the same space include Brinker International, Inc. (EAT Free Report) , Red Robin Gourmet Burgers, Inc. (RRGB Free Report) and Fiesta Restaurant Group, Inc. (FRGI Free Report) . Brinker sports a Zacks Rank #1, while Red Robin and Fiesta Restaurant carry a Zacks Rank #2 (Buy).

Brinker has a trailing four-quarter earnings surprise of 116.6%, on average.

Red Robin has a three-five year earnings per share growth rate of 10%.

Fiesta Restaurant’s earnings for 2021 are expected to surge 418.8%.

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You know this company from its past glory days, but few would expect that it’s poised for a monster turnaround. Fresh from a successful repositioning and flush with A-list celeb endorsements, it could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in a little more than 9 months and Nvidia which boomed +175.9% in one year.

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