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Tickers in this Article: CAKE
In the span of just a few years, Cheesecake Factory (Nasdaq:CAKE) has gone from running a handful of Los Angeles-based restaurants to a nationwide enterprise with 139 locations in 34 states. Unfortunately, if its Q4 results are any indication, the growth spurt is at an end.

For the main course the casual dining chain failed to meet earnings expectations, and then for dessert it announced it is cutting expansion plans in half.

Fourth Quarter To Forget
In the quarter ended January 1, Cheesecake Factory earned $13.3 million (19 cents per share). That's a 34.8% drop from the $20.4 million (26 cents per share) it earned in the comparable period last year, and this number was about 7 cents shy of analyst earnings per share (EPS)forecasts. The company saw its top line grow 12.6% to $406.3 million from $360.7 million last year, but this was still about $7 million short of expectations. Finally, comparable store sales dropped by 0.4% from last year.

Not surprisingly the slowing economy was fingered as the culprit behind the lousy quarter. The company also said "inclement weather" hurt sales to the tune of $1.2 million. (To learn more, see Everything You Need To Know About Earnings.)

End of a Growth Trend
If you take a broader view, you can see that the company is coming to the end of its growth spurt. From 2002 through 2006, Cheesecake Factory grew its revenue line to more than $1.3 billion from $652 million, a compounded annual growth rate of 19.2%. During that same time its net income line rose to $81.3 million from $48.8 million, which translates into a compounded annual growth rate of 15%. This year represents a pretty sizable shift from that growth trend, and investors who had been banking on that growth to continue may shy away now.

To be fair, Cheesecake Factory's comps weren't that bad, but when compared to other big-name casual dining chains they are uninspiring. For example they were below the 0.1% gain that Red Lobster put up and the 3.2% increase that Olive Garden experienced in their latest quarters. For an up-and-coming chain, you would think Cheesecake Factory's results would be more powerful.

Expansion Plans Cut In Half
Management expects to grow earnings in the current year at a 10-15% pace, which implies EPS of roughly $1.11-1.16 a share. It also said that it expects 10-12% revenue growth, which implies a top line of about $1.6-1.7 billion.Wall Street expected earnings of $1.29 per share and revenue of about $1.73 billion. Also, the company downplayed expectations for this year, and I think we can expect less favorable research from the sell side moving forward. This could hurt the stock.

Another disappointment is that the company now plans to open seven to nine new locations this year. That's about half of the 17 that were previously planned.

This is a problem for two reasons. First, analysts had based their 2008 and 2009 estimates upon a more aggressive opening schedule. Second, it doesn't bode well for the overall health of the industry if, over about a four-month period, management cut its new location plans in half. To me, it says that management is either being extremely conservative, or that conditions are so bad that adding new locations would be fruitless. Either way, it's not a good sign.

The Peltz Wild Card
Rumor has it that billionaire activist investor Nelson Peltz is purchasing or has purchased a stake in the company. If the rumors are true, he must be enjoying this recent news. It could give him more leverage over the existing board, and it could also allow him to pick up additional shares on the cheap.

The good news for investors is that Peltz could potentially provide a safety net for the stock. If he is buying the common shares he could soak up some of the stock for sale in the market. He would also probably only let the stock drop so far before he intervened with the current board and agitated for change. (Want to ride the coattails of Wall Street's most ruthless investors? Check out Activist Hedge Funds.)

Bottom Line
Cheesecake Factory's Q4 results were disappointing and management painted a bleak picture for the current year. This combined with a decrease in anticipated new store openings leads me to believe that the stock is ripe for a tumble. The good news, however, is that if Peltz is scooping up shares, he could provide a safety net.

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