Restaurants, like retailers and media companies, have been hit by shifting consumer preferences over the past few years. While dinner and a movie used to be a popular entertainment choice, people have started to replace that evening out with Netflix Inc. (NASDAQ:NFLX) and dinner via a meal delivery service. That’s left casual dining chains like Cheesecake Factory, Inc. (NASDAQ:CAKE) struggling.
CAKE stock has had a bumpy ride over the past five years and the company has never fully recovered from a steep fall in September 2017 that knocked $20 off its share price. So, at $51.60, should you jump on board for a turnaround or watch Cheesecake Factory continue to struggle from the sidelines?
Here’s a look at the pros and cons for CAKE.
Pro: Brand Awareness
One of CAKE stock’s biggest assets is the company’s massive brand name and recognition. Most people in the U.S. know what the Cheesecake Factory is and associate its name with fresh food and above all, decadent cheesecake. That recognition has helped the firm find new avenues for growth — from being able to open new restaurants both at home and internationally to selling CAKE branded goods in the supermarket.
Even when the chips are down, brand name means something — especially if that brand is associated with something positive. With that in mind, buying Cheesecake Factory stock before its turnaround has been fully executed could be a great move because you’d get a powerful name for a bargain price.
Con: Turnaround is Stagnant
However, judging from the firm’s most recent earnings report, you don’t need to rush out and buy the stock right away. You’ve got plenty of time to drag your feet because CAKE stock’s turnaround appears to be moving slowly. Very slowly.
Cheesecake Factory, like many of its peers, has been hurt by rising food prices which has squeezed the firm’s margins. Not only that, but the company has also had to offset the cost of higher labor costs as well. That double whammy led management to scramble to find ways to protect its profts, including raising prices and tightening up its supply chain.
In 2017, total costs and expenses rose 200 basis points — a worrying trend that is expected to continue through this year. While that might be acceptable for a company with stellar sales, CAKE stock simply hasn’t had the comparable sales to support that kind of cost increase.
Pro: Management Makes Smart Moves
Although Cheesecake Factory hasn’t quite orchestrated a successful turnaround, the company has been making shrewd moves to ensure that the restaurant benefits as much as possible from the improving economy. As people gain more disposable income, they will be more inclined to eat out, or so restaurants are hoping.
CAKE is working to make sure that its restaurants benefit even if eating in continues to gain popularity. Nearly all of the company’s restaurants offer delivery through third parties and sales for delivery orders have been increasing steadily. The firm is also building out its technology strategy by improving its CakePay mobile app, which allows customers to pay via their phones, and by creating an online ordering platform which is expected to debut before the end of this year.
Another big move that the firm has been working on is polishing its menu and offering more healthy options. CAKE already has a reputation for casual dining with fresh ingredients, but the company is looking to further its popularity among health-conscious diners by creating “super food” menu items with on-trend ingredients.
On top of those forward-thinking decisions, I believe there’s a lot to like about the Cheesecake Factory’s management. The firm is steadily opening new locations across the U.S. as well as abroad. In 2018 the company is expected to open 4-6 new US locations at 4-5 international restaurants. That’s a vastly different picture from what some of the firm’s peers are doing; many casual dining restaurants have had to decrease their footprint in order to cope with falling traffic. CAKE, on the other hand, was slow to open new locations, waiting first for stores to become profitable before moving on.
Con: CAKE Comps Are Stagnant
While there’s a lot to respect about CAKE stock and its management, one fact remains painfully clear- Cheesecake Factory is suffering from stagnant comps. Despite improving economic growth across the U.S., CAKE saw lackluster same-store sales in the final quarter of 2017 and that trend is expected to continue in the year to come. That’s worrying because unless people are spending more at the restaurant, none of those great ideas outlined above really matter. The larger concern here is that people are simply losing interest in the restaurant.
Bottom Line on CAKE Stock
I wouldn’t say CAKE stock is a lost cause, but it hasn’t done enough to convince me that a turnaround is on the horizon. With margins under pressure and lackluster comps, the business simply doesn’t look like much of a money-maker.
As of this writing, Laura Hoy was long NFLX.