Cheesecake Announces Decent 4Q and 2011 Forecast; Stock Slightly Overvalued

After reviewing Cheesecake Factory's CAKE fourth-quarter sales, we are maintaining our fair value estimate. During the quarter, comparable-restaurant sales growth decelerated to 0.9%, from 2.8% during the third quarter. However, sales were affected by one-time factors including severe weather in the Northeast and a holiday calendar shift. Excluding these factors, comparable-restaurant sales were up 2.1% during the quarter. Despite the softness in sales, Cheesecake reaffirmed its operating margin forecast of 7.7%-7.8% for 2010, validating our view that the firm will be able to pass on cost increases to consumers. Additionally, the firm reiterated its 2011 earnings guidance of $1.55-$1.70 per share, assuming 1%-3% comparable sales and modest operating margin improvements, which is in line with our $1.60 forecast for the year.