With investor fears growing about the negative impact of tariffs and the strong dollar, one concern that had fallen between the cracks in recent weeks has been the rise of labor costs. Today, shareholders of Cheesecake Factory got a swift and painful reminder just how acute the impact of wage inflation is on the corporate bottom line when they dumped shares of the restaurant chain the most in more than 19 years after the company posted Q2 earnings that missed analysts’ estimates and lowered its full-year profit forecast.
While Cheesecake reported same-store sales that matched estimates, the company blamed rising labor, group medical insurance and legal costs for hurting the bottom line.
CAKE reported adjusted EPS of 65, far below the consensus estimate of 80 cents; the company also slashed guidance and now sees full-year earnings of $2.40 to $2.48 a share, down from a previous outlook of $2.62 to $2.74. Cheesecake Factory also cited $4.6 million in higher group medical insurance costs year-over-year and $4.5 million in increased legal expenses which they didn't detail except to say there are a number of current litigations.
But the biggest factor was the sudden surge in labor costs: on the conference call, CFO Matthew Clark said that increases in the minimum wage pushed labor costs up to almost 36% of revenue.
As Bloomberg notes, Cheesecake Factory isn’t alone in its struggle as restaurants nationwide compete for workers in a tight labor market even as minimum wages have been rising across numerous states and cities.
Commenting on the result, Wells Fargo analyst Jon Tower said that “we have limited confidence in a positive top-line or cash flow surprise on the horizon."
The shares tumbled as much as 14 percent to $48.03 in New York, the biggest intraday decline since January 1999. The stock had been up 16 percent this year through Tuesday’s close.