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Here's Why You Should Retain Cheesecake Factory (CAKE) Stock

Cheesecake Factory (CAKE) continues to focus on menu-innovation and advanced digital capabilities to drive growth. However, cost-of-sales inflation is...

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This story originally appeared on Zacks

The Cheesecake Factory Incorporated CAKE is likely to benefit from menu innovation, off-premise offerings and digital initiatives. Also, more focus on the Fox Restaurant Concepts bodes well. However, pandemic-induced soft traffic and higher costs are a concern.



Let us delve into the factors highlighting why investors should retain the stock for the time being.

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Factors Driving Growth

Cheesecake Factory is committed toward bolstering sales to stay afloat in the competitive environment. Notably, menu-innovation and advanced digital capabilities are the primary fortes of the company. Going forward, it intends to carry on with menu innovation by adding new Super Food items and the famous indulgences of Cheesecake Factory. The Super Foods program has increased consumer awareness of brands. Also, the company also launched its Timeless Classics special menu card nationally.



The company is also benefiting from its robust off-premise sales. In the first and the second quarter of fiscal 2021, off-premise contributed approximately 43% and 27%, respectively, to Cheesecake Factory’s total restaurant sales. Off-premise average weekly sales have doubled compared with fiscal 2019 levels. It continues to perform well in the delivery channel. In order to boost consumer convenience, the company has implemented operational changes and technology upgrades, which include contactless menu and payment technology as well as text paging.



Cheesecake Factory continues to benefit from impressive comps performance. During the first and the second quarter of 2021, comps at The Cheesecake Factory (across all operating models) increased approximately 220% and 150%, respectively, year over year. Comps in the first and the second quarter of 2021 rose 7% and 7.8%, respectively, from 2019 levels. The company stated that the momentum continued in the fiscal third quarter as well. Since the start of the fiscal third quarter to Jul 26, 2021, comps at Cheesecake Factory (across all operating models) increased approximately 61% year over year. Comps increased 10% from 2019 levels. Easing of pandemic-induced restrictions and solid off-premise sales contribution have favored the company.



Nearly after a year of closing its acquisition, Fox Restaurant Concepts or FRC has reinstated its confidence and strength amid the pandemic as well as paved the path for long-term growth. During the fiscal second quarter, FRC concept sales continued to increase and off-premise volumes remained solid. The in-restaurant kiosk technology enables a faster ordering experience and features artificial intelligence that learns individual guest behaviour to provide an enhanced experience. FRC plans to incorporate this technology at future Flower Child locations, complementing the traditional ordering mechanism.

Concerns

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Image Source: Zacks Investment Research

In the past six months, shares of Cheesecake Factory have fallen 28.9% against the industry’s growth of 8.2%. The dismal performance can be primarily attributed to the coronavirus pandemic. Although the majority of dinning services are open, traffic is still low compared with pre-pandemic levels. We believe that the Delta variant of coronavirus might hurt traffic and sales in the upcoming periods.



Moreover, high costs are a concern. Pre-opening costs of outlets — given the company’s unit expansion plans, expenses related to sales initiatives, higher labor expenses and additional cleaning costs — are likely to hurt profits. Investor sentiments were hurt following second-quarter 2021 results, where the company stated that it expects cost of sales inflation to be 3% for the back half of the year. Going forward, the company anticipates increased expenses in terms of business reinvestment and rewards program building.

Zacks Rank & Key Picks

The Cheesecake Factory currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.



Some better-ranked stocks in the same space are Yum! Brands, Inc. YUM, The Wendy's Company WEN and Jack in the Box Inc. JACK. Yum! Brands sports a Zacks Rank #1, while Wendy's and Jack in the Box carry a Zacks Rank #2 (Buy).



Yum! Brands 2021 earnings are expected to increase 22.4%.



Wendy's has a three-five-year earnings per share growth rate of 9%.



Jack in the Box has a trailing four-quarter earnings surprise of 26.4%, on average.



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