restaurant manager The Cheesecake Factory (NASDAQ: CAKE) the stock remains strong despite a surprising loss in Q3 2022 earnings. It operates more than 310 Cheesecake Factory restaurants, including restaurants in Northern Italy and Flower Child. The company is still affected by the economic headwind of costs and wage inflation in a potential recessive background while consumers use their discretionary spending. The Cheesecake Factory missed nearly every stat in its recent earnings report and expects commodities inflation from 15% for the fourth quarter, and yet the stock was able to not only bounce back from lows, but also break through the annual weekly downtrend channel. If stocks remain resilient after a dismal earnings report, it usually means that Mr. Market thinks the worst is over. Cheesecake Factory shares are down (-13%) for the year, still outperforming the S&P 500 (NYSEARCA: SPY) down (-21%).
Word of mouth
To its credit, Cheesecake Factory has been a success story that has built a multi-generational customer base solely through word of mouth. Casual dining restaurant brands like Darden Restaurants (NYSE: DRI) with Olive Garden, Brinker International (NYSE: EAT) with Chili’s or Bloomin Brands (NASDAQ: BLMN) spend a significant amount of money on marketing and with Outback Steakhouse ads through television, newspapers and digital channels. Although it has an active presence on social media, The Cheesecake Factory is unique in that it spends hardly any money on advertising.
On November 1, 2022, Cheesecake Factory announced its third quarter 2022 results for the quarter ended September 2022, a profit of $0.30 with (-$0.33). Revenues were up 3.9% year-over-year (year-on-year) to $784 million, excluding analyst estimates of $799.2 million. Same store sales were up 1.1% year-on-year (missing expectations for 2.8%) and 9.5% compared to 2019. Inflationary pressures took their toll on margins. The company repurchased 889,000 shares for $26.7 million in the quarter and increased their repurchase authorization by 5 million shares, bringing the total authorization to 61 million shares. The company plans to open 13 new restaurants in fiscal year 2022. The company ended the quarter with $372 million in liquidity, consisting of $133 million in cash and $239 million in available credit.
Keep your chin up
David Overton, CEO of Cheesecake Factory, commented: “While our operating performance has been solid and core cost inputs have become more stable and predictable, we continue to face a dynamic and challenging inflation environment in some areas. As a result, our profit margins reflected higher-than-expected operating expenses in the quarter, particularly in utilities and building maintenance.” He continued, “However, we remain strongly focused on bringing restaurant margins back to pre-pandemic levels in the short term, supported by appropriate pricing actions to offset higher costs, while also managing the business for the long term, including increasing of market share.” In an effort to bring margins back to pre-pandemic levels, the company will increase menu prices by a further 2.8% from December 2022, in addition to the 4.2% price increases that it has already implemented.
Impressive unit volumes
It’s worth noting that average unit volumes at The Cheesecake Factory brand’s flagship restaurants track $12 million for the year. This underlines the strong affinity with the brand, made even more impressive by the lack of any advertising expenditure. Labor productivity and food efficiency exceeded internal expectations, but construction and maintenance costs were higher than expected. The company opened three new restaurants in the quarter, including The Cheesecake Factory in Katy, TX, North Italia in Dunwoody, GA, and the first Fly Bye restaurant in Phoenix, AZ. Fly Bye is the latest fast-casual dining concept featuring improved stretch-style Detroit pizza and crispy chicken.
Reverse downtrend channel for a year
The weekly chart for CAKE stocks illustrates the year-long bearish downtrend channel in place since it peaked at $51.19 in September 2021 and hit a low of $26.12 in July 2022. Stocks bounced and gained momentum on the breakout by the weekly market structure low (MSL) trigger above $27.92 on July 18, 2022. This propelled the stock through the upper bearish trendline at $32.50 on October 17, 2022. The 20-period exponential moving average (EMA) resistance is running now up as support at $32.25 followed by the 50-period MA at $34.42. The recent surge peaked at $36.46 before pulling back through the weekly 50-period MA to form a weekly market structure-high (MSH) sell trigger at a breakdown below $31.81. The weekly 20-period EMA is trying to hold the support at $32.25. Sales volume peaked in the last week of October, but was absorbed by the weekly 20-period EMA. Pullback support levels to watch are near the weekly MSH trigger of $31.81, $29.96, $27.92 weekly MSL trigger, $26.12 swing low and $24.86.