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Conclusion:  While this was a solid quarter for CAKE, the company keeping quiet on the impact of the small plate menu on the average check is telling; traffic and price alone will not keep this company on the right trajectory.

CAKE comparable store sales at both concepts, Cheesecake Factory and Grand Lux, came in ahead of the street’s expectations.  EPS of $0.37 was comfortably ahead of the consensus of $0.34 (although helped by a lower tax rate).  Looking at CAKE’s position on our SIGMA chart, which measures comparable sales growth against restaurant operating margin growth, the company remains in the optimal “Nirvana” quadrant with both metric showing year-over-year improvements.

CAKE: GOOD BUT NOT GREAT - cake sigma 1022

Looking at the top line, blended same-store sales growth of 2.8% handily beat the consensus estimate 1.6%.  Imbedded in the comp was 2.8% traffic and 1.3% of price.  This implies that the company experienced mix of -1.3%.  While management was averse to discussing the impact of small plates and snacks on average check during the earnings call, there is clearly an issue there.  The only instance where management touched on “check management” was in reference to a “sequential stabilization” in non-alcoholic beverage incidence rates.   Should this trend continue, as management rightly pointed out, it would enable the company to capture more of its menu price increases.  I will watch this space – one quarter does not a trend make.   The main takeaway is that – over several quarters now – CAKE has had an average check problem and it is not going away.

Unit growth guidance was certainly positive.  Management guided to six-to-nine new units for 2011, a sharp increase from three new units in 2010 (the last opening for 2010 was completed in 3Q). 

Turning to the bottom line, there were several factors that contributed to the impressive earnings growth in the third quarter.  As was the case in 2Q10, the company gained leverage on the following expense lines in the P&L: 10 bps of leverage on labor costs, 60 bps of leverage on other and operating costs, 40 bps on D&A, and 30 bps on G&A.  COGS were up as a percentage of sales by 50 bps. 

In terms of commodity cost guidance for 2010, the company adjusted its prior guidance of flat-to-1% to a new outlook of 1%-to-1.5%.  CAKE is vulnerable to price fluctuations (or moves straight up) in several commodities where the company is not locked in on a price but dairy was singled out as one example by management. 

All in all, a strong quarter from Cheesecake Factory and the concept has strong consumer position.  The decline in average check is definitely a red flag. 

Howard Penney

Managing Director