American casual dining chain Cheesecake Factory Inc (NASDAQ:CAKE) is well known for its assortment of decadent cheesecakes and massive serving sizes. Unfortunately for investors, the firm’s well-recognized brand name is just about all it’s got going for itself right now. Although the U.S. economy appears to be on the upswing and people are loosening their pursestrings, Cheesecake Factory stock is still down in the dumps. The restaurant hasn’t seen the benefit of consumers’ rising disposable incomes yet.
Cheesecake Factory stock has fallen 25% over the past year. If the company’s most recent earnings report is anything to go by, that decline may continue in the year to come. CAKE is struggling against rising costs and waning consumer interest, and those headwinds have hurt the firm’s financial performance significantly.
CAKE stock declined over 6% on Wednesday evening after the firm announced its fourth-quarter results. Investors were not impressed to see that both adjusted profit and revenue posted year-over-year losses. Same-store sales also saw a 0.9% slide during the fourth quarter, a worryisome trend for the restaurant.
Future for Cheesecake Factory Stock
Despite the lackluster results, management was upbeat about the year ahead. CEO David Overton pointed to the company’s growth strategy and employee satisfaction as areas of bright light.
Cheesecake Factory did open six new restaurants last quarter, one of which was in Canada — the first of its kind. However, I’d say that six new restaurants as part of a chain that appears to be losing some of its appeal isn’t much to brag about.
On employee satisfaction, it’s true that the firm was named as one of Fortune magazine’s “100 Best Companies to Work For.” But from an investor standpoint, that doesn’t do much to up my confidence in the stock’s future performance. Just like the rest of the restaurant industry, Cheesecake Factory has had to cope with the rising cost of labor in the U.S. That is hurting the firm’s profits significantly.
While the company’s efforts to keep its operational costs low are commendable, they haven’t been enough to offset the impact of a minimum wage hike. Add to that the fact that food costs have also ballooned higher, and CAKE is facing a real dilemma. To cope with the rise in expenses, Cheesecake Factory, like many of its peers, raised its food prices. However, so far that decision appears to have simply deterred customers from visiting the chain rather than helped protect profits.
Not All Bad for Cheesecake Factory Stock
Cheesecake Factory stock isn’t the only company feeling the pressure in the restaurant industry — consumers are spending more, but not necessarily on dining. Analysts at CFRA noted February 17 in their coverage of CAKE stock that consumers have started to spend excess cash on big-ticket items like appliances.
With that said, it’s not all doom and gloom for Cheesecake Factory. The company’s widely recognizable brand name is certainly an asset. And investors benefit from the company’s 2.51% dividend yield. Management has proven to be very shareholder-friendly, saying that it plans to return the majority of its excess cash to shareholders through share repurchases and dividend payments.
Although consumer behavior appears to be changing, CAKE will probably see some benefit from America’s improving economic performance because people will be more likely to go out to eat. But just because people are eating doesn’t mean they will visit the Cheesecake Factory. Other casual dining chains with more convenient locations might see more of a benefit.
Bottom Line on Cheesecake Factory Stock
I wouldn’t rush out to buy Cheesecake Factory stock just yet. The company doesn’t look like it’s headed for bankruptcy. But the restaurant appears to be stagnating right now as it struggles against several headwinds. It could be that 2018 is a great year for restaurants as Americans benefit from a better economy. But there are better picks for your portfolio than this one.
CAKE stock price looks unlikely to make a real recovery anytime soon. I’d wait until comps show some genuine improvement before considering the firm to be a buy.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.