CAKE - MODEL AND RISK MANAGEMENT UPDATE

Following management’s recent visit to NYC, I spent some quality time with the CAKE model and here are some of my initial thoughts.

Keith covered CAKE in the Hedgeye Virtual Portfolio today.  I remain bearish on the fundamental side of the stock.  Below are some key details to my perspective:

1. I am coming in a little higher than guidance for Q2 and then closer to the low end of guidance for the FY.
2. I think they can probably do more than their guidance of "at least $100M in share repurchase” given that high ending cash balances.
3. Relative to recent trends, CAKE's comparable restaurant sales guidance seems reasonable.
4. The bakery sales line slowed significantly in 1Q (on a 2-year average basis); the economy is keeping this business at bay. 

Here a few other important things to remember: 

1. CAKE has an extra week in Q4
2. They are doubling openings in FY11, which will impact preopening expense and capex; two important items that are hardly ever factored in correctly by consensus.

I still favor cake on the short side, particularly on any strength.

Howard Penney

Managing Director