Yahoo Finance Cheesecake Factory: Labor inflation is a top concern, says Citi analyst on downgrade
Shares of the company slid 4% following the downgrade by Citi.
Citi downgraded The Cheesecake Factory (CAKE) stock from a Buy to Neutral on Tuesday. The stock slid 4% following the news.
In a note to investors, "Hold The Dessert – D/G To Neutral from Buy - Altering Our Alpha Diet for 2023," analyst Jon Tower said that inflation and "no incremental plans" to tackle these higher costs makes it hard to gauge how the casual chain plans to grow its bottom line.
"They realized that inflation has really taken over the business and there's only so much pricing that they can take to offset some of the pressures," Tower told Yahoo Finance in a phone interview.
The cost of labor is one of the largest pressures, Tower said. "The big shift in their spend has been on labor, whether its been state mandated wage rate increases or just generally speaking wage rate increases driven by labor availability, just overall natural inflation pushing wage rates higher across a lot of their operating markets."
Though digital and off-premise dining have "been the 'hero' since COVID struck," operating expenses are up, Tower noted, "because of greater digital mix of their business, there's been other fees that have come along that have bumped up some of the costs."
There is some good news for the chain, as Tower predicts the cost of rising cost food will "see a decent amount of relief" in 2023.
In early November David Overton, chairman and CEO acknowledged some of the risks Citi cited, in its the company's third-quarter results.
"While our operational performance has been solid and core cost inputs have become more stable and predictable, we continue to face a dynamic and challenging inflationary environment in some areas. As a result, our profit margins in the quarter reflected higher than anticipated operating expenses particularly in utilities and building maintenance. However, we remain highly focused on returning restaurant margins to pre-pandemic levels in the near-term supported by appropriate pricing actions to offset the higher costs while also managing the business for the long-term including increasing market share.”
Last quarter, the company missed expectations. It posted a revenue of $784.0 million, lower than expectations of $800.18 million. Adjusted earnings per share posted a loss of 3 cents, far lower than expectations of $0.29 cents per share.
Where will the brand expand from here?
Tower said the firm has "limited visibility" on how Cheescake Factory plans to meet ~7% unit growth as it planned.
"The hope is that they can get that going and marching toward that 7% number, but I just don't have any visibility in that necessarily improving in 2023," he said.
However, growth expectations aren't from its namesake brand, Cheesecake Factory. Rather, Tower said to keep an eye out for locations of North Italia and the Fox Restaurant Concepts (“FRC”), such as Flower Child, that the company acquired back in 2019.
"That's really where the unit growth is going to come from," Tower said, "Frankly, if you think about square footage wise, the growth rate won't be as robust as the 7% implied because these boxes [locations] relative to a Cheesecake factory are smaller."
Citi maintained its $39 price target, citing a "bullish run" that brought shares closer to that price target. The California-based company is expected to post Q4 earnings on February 15th, 2023.
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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