CAKE: INVESTORS SAY “SHOW ME”

The premarket look at the stock is down 5%.  We think this price is a good opportunity to buy the stock for a trade.  The intermediate and longer term TREND and TAIL, respectively, is less certain.  Many questions remain around sales and margin trends in 2H12.

 

As the industry fundamentals continue to improve (benefiting from better weather) putting up a clean quarter is a must in this environment.  In this context CAKE did not deliver on the 4Q11 numbers.  EPS benefitted from a favorable tax settlement and an extra week also added approximately $0.05.  While CAKE will never be a comp store sales story, the top line performance was strong.  Comps were +2.7% including 1.7% traffic and 1% average check.  Despite comps coming in 70 basis points above expectations, the lack of flow through meant that the targeted EPS growth could not be achieved without the help of an extra week.

 

CAKE: INVESTORS SAY “SHOW ME” - cake vs icsc

 

CAKE reported $0.53 adjusted EPS versus consensus of $0.52 but neither our model, nor consensus we believe, was anticipating how the company would reach that target.  The 4Q11 results are reminiscent of the CAKE of old, when the company could not seem to put it all together.  That is not to say that the concept is highly flawed but it is an expensive concept to execute consistently.

 

Some of the issues that stand out are:

  1. Guided 1Q12 EPS $0.34-0.36 versus $0.40 consensus based on 2-3% comparable sales growth.  Sales guidance for 1Q12 of $435-440 million negatively impacted by extra week in 4Q negatively impacting revenues. 
  2. Despite raising FY12 comp growth guidance range by 50 bps to 1.5-2.5%, EPS guidance was unchanged at $1.80-1.90. Higher labor costs are expected to impact margins along with impact of extra week in 4Q11.
  3. Revised FY12 U.S. openings from 7-10 to 7-8 due to third party issues and the openings have merely “shifted out a bit”, according to management.
  4. Pre-opening expense of $3 million in 4Q11 in support of two additional restaurant openings.  Who spends that kind of money on preopening costs?  Only CAKE!!
  5. 4Q results included an impairment charge of three previously impaired restaurants of 1.5 million. 
  6. A favorable settlement of a lawsuit filed against the IRS resulted in the company recording interest income of $719,000 and a credit to the tax provision of $1.1 million relating to the settlement.

 

The key question for investors in this stock is whether or not they believe that management will be able to deliver on FY12 expectations despite effectively preannouncing that 1Q will come in lower than many have been expecting.  As we progress through 2012, the compares on both the revenue and margin lines become sequentially more difficult. 

 

The company guidance of 2-3% SSS this far into 1Q12 suggests that the current trends remain in place.  2.5% comp growth in 1Q12 implies two-year average trends 30 basis points above 4Q levels.  The company will need to execute from a top line perspective with higher labor costs and tax rate (28-29%), offset by commodity cost inflation rolling off, set to negatively impact EPS growth this year.   ICSC chain store sales (chart above) are implying a slight slowdown in quarter-to-date numbers and we will continue to monitor this trend as the quarter progresses. 

 

The premarket look at the stock is down 5%.  We think this price is a good opportunity to buy the stock for a trade.  While the negative reaction to the quarter was not misplaced, we do believe that the company remains healthy.  There is a lot of uncertainty and investors will be seeking reassurance on the full year prospects during the next earnings call on 4/25. 

 

CAKE: INVESTORS SAY “SHOW ME” - cake pod1

 

CAKE: INVESTORS SAY “SHOW ME” - cake pod2

 

Howard Penney

Managing Director

 

Rory Green

Analyst


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