We at Valuentum have received fairly consistent guidance from the casual dining space recently, with chains generally anticipating 1.5% to 3% same-store sales growth, countered with higher input costs. This is by no means incredibly bullish for the US economy, but we are happy to see firms looking for growth (even though the broader signals point to mediocre expansion). We aren’t fans of the space in particular, but if we see results accelerate (or slow) materially, it could be a sign of broader strength (or weakness).Earlier this week we examined the solid results and guidance from casual diners Texas Roadhouse Inc (NASDAQ:TXRH) and Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB). The results from the The Cheesecake Factory Incorporated (NASDAQ:CAKE) and BJ’s Restaurants, Inc. (NASDAQ:BJRI), however, were not as positive. Let’s dig in.
Cheesecake Factory’s revenues dropped 3% year-over-year to $465 million, slightly better than consensus estimates. Earnings per share took a hit, but they came in better than expected, dropping 6% year-over-year to $0.51 per share (after excluding impairments taken related to discontinued operations at some Grand Lux Café locations).
The company struggled to drive growth during the period, with aggregate same-store sales expanding only 0.9% year-over-year (though the firm said Hurricane Sandy eliminated 60 basis points of growth). Weaker traffic, which fell 1% in the period, is a company (and industry-wide) issue, so the sales expansion in the quarter came from higher checks. The firm’s flagship Cheesecake Factory’s same-store sales increased 1.3%, but its Grand Lux Café sales dropped 3.2%.
Since Grand Lux has a similar menu and ‘feel’ as the core Cheesecake Factory concept, we’re a little surprised to see the divergence. We can only assume that the Cheesecake Factory brand name is stronger and more resilient when spending is constrained. Still, management noted that it plans to open more Grand Lux locations in 2014, and they haven’t soured on the concept yet.
The firm’s operating margins were incredibly weak, falling 190 basis points year-over-year to 6.1% during the fourth quarter, though overall margins were up 10 basis points to 7.7% for the full-year. Cheesecake carries an expansive menu with several different inputs, so we could see some gross margin weakness in 2013, though the brand might have some decent pricing power (which we are not dismissing).
On the positive side, the Cheesecake Factory continues its international expansion plans and has opened some new locations in the Middle East, which are outperforming initial expectations. The company also announced some licensing agreements in Latin America that will allow its partner to open restaurants in Mexico and Chile. We like its international growth opportunities.
Looking ahead, the company plans to open as many as 10 restaurants in 2013, and it anticipates earning $0.40-$0.43 per share on same-store sales growth of 0%-1% during the first quarter. For the full year, Cheesecake thinks it will earn $2.10-$2.18 per share (growth of 12%-15%) on 1.5%-2.5% expansion in same-store sales. Given the first-quarter outlook, we believe the firm’s full-year same-store sales growth rate looks ambitious, but it will have an easy fourth-quarter comparison. Regardless, we think shares look fairly valued at this time, and we aren’t looking to add the name to the portfolio of our Best Ideas Newsletter.
BJ’s Restaurants, Inc. (NASDAQ:BJRI)
BJ’s Restaurants’ fourth-quarter wasn’t nearly as challenging, but the firm’s valuation is ahead of the company’s fundamentals, in our view, so any signs of slowing growth can send the shares sharply lower. Revenue increased 8% year-over-year to $185 million, modestly exceeding expectations. On an apples-to-apples basis, sales advanced 17% after adjusting for the extra week in the fourth quarter of 2011 (on a reported basis, sales increased 8%). Earnings per share fell 29% (20% excluding the extra week) year-over-year to $0.24 per share, in line with expectations.
