Cheesecake Factory (CAKE) is under some pressure this morning (-10%) after it lowered its Q2 same restaurant comp guidance to down approximately -1%. This is a reduction from prior guidance of +1-2%.
In case you're not familiar, Cheesecake Factory is a restaurant chain with 207 locations. The company says that it created the upscale casual dining segment. The vast majority (193) of its restaurants operate under the Cheesecake Factory banner. However, it also has 13 restaurants under the Grand Lux Cafe mark and one restaurant under the RockSugar Pan Asian Kitchen mark.
Internationally, 16 Cheesecake Factory restaurants operate under licensing agreements. In addition, the company operates a bakery division with two bakery production facilities, in Calabasas Hills, CA and Rocky Mount, NC, that produce cheesecakes and other baked products for its restaurants, international licensees and third-party bakery customers.
Cheesecake Factory restaurants provide a distinctive, high quality dining experience at moderate prices by offering an extensive menu. Its core menu offerings include appetizers, pizza, seafood, steaks, chicken, burgers, small plates, pastas, salads, sandwiches and omelets, including "Super" food choices and a selection of gluten-free items. Examples of menu offerings include Chicken Madeira, Cajun Jambalaya Pasta, Thai Lettuce Wraps, Avocado Eggrolls, California Guacamole Salad and our Bacon-Bacon Cheeseburger. Plus it offers approximately 50 varieties of proprietary cheesecake and other baked desserts.
The chain appeals to a diverse consumer base across a broad demographic range. CAKE competes for substantially all dining occasions, from the key lunch and dinner day parts to the mid-afternoon and late-night day parts, which are traditionally weaker times for most casual dining restaurants, as well as special occasion dining. All items on its menu are available for take-out, which represents approximately 11% of restaurant sales. In 2016, CAKE partnered with a third party to provide delivery service. Approximately 40% of its restaurants were covered by this service at the end of 2016, and the plan is to expand to additional locations over time.
The restaurant industry is comprised of multiple segments, including fine dining, casual dining and quick-service. Casual dining can be sub-divided further into upscale casual, core casual and fast casual dining. CAKE's restaurants operate in the upscale casual dining segment, with standards that are closer to fine dining. In contrast to many restaurant chains, substantially all of its menu items, except those desserts produced at its bakery facilities, are prepared from scratch at its restaurants. CAKE reviews and selectively updates its entire menu twice a year for customer appeal and pricing.
Turning to today's news, as mentioned above, CAKE lowered its Q2 comp guidance to -1% from +1-2%. CAKE wanted to get this news out ahead of two conference presentations this week. CAKE did not provide specific Q2 EPS guidance but did say the lower comps should impact Q2 margins and EPS.
To provide a little context, CAKE says it has continued to outperform the casual dining industry quarter to date, with over half of its regions posting positive comps in Q2, including its key markets of California, Texas and Florida. More broadly however, CAKE has seen heightened volatility in week to week sales trends, indicative of uncertainty on the part of many consumers. Specifically, CAKE has seen pockets of softness as it has moved through the quarter, notably in the East and Midwest where CAKE also faced unfavorable weather that reduced patio usage.
In sum, investors are clearly a bit disappointed with the lowered comp guidance and the impact on margins and EPS. However, many investors may have expected something like this as the stock has been trending down since CAKE reported Q1 results in early May. Management says its brand is as strong as ever and its underlying operating metrics remain solid. And they are managing the business for the long term. Investors are likely going to want to see some improvement in 2H17.