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Cheesecake Factory (CAKE) is a name we wanted to quickly flag as it traded above a $34-41 multi-month trading range on Friday to a new 52-week high. Given the recent strength seen in Brinker (EAT), another fast casual dining chain which operates Chili's, we wanted to take a closer look at CAKE ahead of its Q3 earnings report on October 29 after the close.

• In late July, CAKE reported its third consecutive EPS upside quarter. Revenue rose 4.4% yr/yr to $904 mln, which was a bit light of analyst expectations, but at the high end of prior guidance. More impressively, CAKE has made headway on its goal to cut operating costs and that was evident in Q2 when adjusted EPS jumped 24% yr/yr to $1.09. To miss on revenue but beat handily on EPS tells us margins were much better than expected.
• Also, of note, comps for its Cheesecake Factory segment returned to positive territory in Q2 at +1.4%, up from -0.6% in Q1. CAKE said that its comps, once again, meaningfully outperformed the casual dining industry and that resilient consumer demand for CAKE's distinct, high-quality dining experience has been pivotal in supporting its continued outperformance of the broader casual dining industry.
• CAKE has been increasing menu prices and it's benefitting from launching its the Cheesecake Rewards loyalty program just over a year ago. CAKE remains very pleased with the program's performance thus far. CAKE also operates other restaurant chains, including North Italia and Other Fox Restaurant Concepts (FRC). North Italia comps in Q2 were solid at +2% despite lapping a tough +8% comp in the year ago period. CAKE does not provide comps for FRC.
• On the cost side, CAKE was able to grow operating margin in Q2 to 6.5% from 5.5% a year ago as CAKE continued to realize improvement across several key line items in the P&L. Specifically, higher menu pricing has been able to partially offset commodity and labor inflation.

Overall, CAKE trading above its recent multi-month trading range caught our attention as that is generally a positive sign. The stock is pulling back today, but we see some positives. In particular, comps have been improving. However, CAKE will be lapping pretty decent +2.4% comps in the year ago period when it reports Q3 results. We also like the menu price increases, which are helping to improve both comps and margins. CAKE's recent results do not blow us away, but they are pointing in the right direction and investors are taking notice. We look forward to its Q3 report in a few weeks to get a better sense of how the business is performing.