CAKE – RISK MANAGEMENT UPDATE

06/13/11 07:03PM EDT

CAKE was sold short today in the Hedgeye Virtual Portfolio.

The Cheesecake Factory is one of our favorite short ideas in the restaurant space at the moment.  Keith sold it short today in the Hedgeye Virtual Portfolio based on his quantitative levels and our fundamental analysis which has highlighted significant risk of CAKE missing numbers this year.  Specifically, Keith wrote that we are “bearish on Cheesecake’s intermediate-term TREND and the stock is immediate-term TRADE overbought today”.   We published two posts, last Thursday and Friday, detailing our fundamental view.

As a recap, the main tenets of our fundamental thesis are as follows:

  • Management’s commodity guidance is likely too low for 2H11.  As we outlined on Friday, a chart of cheese or milk shows the current level of dairy costs are far in excess of those seen in 4Q10, a period management recently highlighted as a period that will offer easier comps from a dairy perspective.  While a significant leg down is possible, especially given the volatility in dairy costs for the year-to-date, we believe that the likelihood of still-significant dairy inflation in the fourth quarter is not adequately baked in to management’s guidance.  CAKE only has 60% of its food commodity basket locked.
  • The Cheesecake Factory is a concept with an average check problem and management’s constant increasing of price helps protect margins but does not help mix or traffic.  We believe that the concept must retain its relative value over time and it seems that management is – for now – steadfast in its belief that taking price consistently is its optimal strategy.
  • Sentiment around this name is bullish and has only become more so over the last several months.  The street’s ratings are as follows: 41% Buy, 59% hold, 0% sell.

CAKE – RISK MANAGEMENT UPDATE - cake chart

Howard Penney

Managing Director

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