Shares of Cheesecake Factory Inc (NASDAQ: CAKE) fell more than 7% today after management lowered its second quarter earnings guidance, citing industry-wide softness and higher dairy costs. The company forecast second quarter revenue would increase 14.5% to 15.5% and quarterly margins would be down 1% year-over-year. Earlier today, Bear Stearns downgraded shares of Cheesecake Factory to Peer Perform from Outperform on the news. Bear Stearns expected Cheesecake to show revenue growth of 16-17%, or 34c per share. CIBC World Markets followed suit and downgraded shares to Sector Perform from Outperform on the news.
Raymond James cut shares to Outperform from Strong Buy, expecting shares of the restaurant to trade lower in the near-term. The analyst still considered Cheesecake a good long-term buy, given the likelihood that dairy prices will retreat in time.
Despite the downgrades, most firms on the Street see Cheesecake Factory in a positive light. Freidman Billings, which reiterated its Outperform rating on the stock this morning, still considers the restaurant to be one of the better-positioned companies in the sector and highlighted its favorable risk-reward profile.
William Blair feels that management's negative commentary suggests that consensus estimates have been too high. When looking at the casual dining sector, one has to acknowledge that the sector has been hurting from higher gas prices. Add higher dairy costs and overall higher food costs and expectations for the industry must be lowered.
If the price of crude continues to move north, I would expect consensus to trim their expectations not only for Cheesecake Factory, but for the industry as a whole.
As of 2:00 pm, shares of CAKE have been down 7.25% or $1.94 to $24.81.
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