CAKE – It’s been a long Time

Anybody can look at a map and read the news and tell you that a majority of CAKE’s units operate in some of the most economically challenged parts of the country. Even better than that, we can use Malcolm Knapp’s regional data for a very specific look at CAKE’s regional performance. While we don’t yet have December data, my guess it will look like November. For the November same-store sales data, there was not much movement among the best and worst performing regions of the country. The same regions of the country are still performing both above and below average so in November, CAKE still had 62% exposure to the worst performing regions of the country (third worst exposure behind only CPKI and MSSR). This is old news and consensus thinking.

The Research Quantitative Edge

The Research Edge quant models suggest that CAKE just turned bullish on both the “trend and trade.” On the trend line we see $8.51 as support and for a trade it broke the $9.26 shark line on Friday. If there is any turn in the fundamentals (see below), the stock looks like it’s going to $15.00. I would also note that the short interest is surprisingly low (6.3% of the float) relative to years past, and on balance that’s bearish. There has not been any insider buying recently, but there are no sellers for a while either. The composition of the shareholder list is a net positive – guys that probably buy more as fundamentals turn, plus you have the big slug owned by CEO Dave Overton that isn’t on the offer. Importantly, the high turnover hedge fund beta appears to have been drained from the top holders list.

Here are some of the fundamental aspects to think about when looking at CAKE over the next four quarters.

(1) EPS NEXT WEEK - I don’t expect the tone of the earnings call to be good next week. Same-store sales are an issue, but we know that. I do think that street estimates are low for the quarter and possibly for 2009, but that is impossible to tell right now. Less than toxic will be the tone from the call.
(2) LOWER COMMODITY PRICES - CAKE will benefit more quickly than most restaurant companies from lower food costs. Dairy prices have declined substantially over the past year and tend to have a more immediate impact on the P&L.
(3) CONTROLLING CONTROLABLES – CAKE’s capital spending has declined very quickly and now stands at less than 5% of sales, which is one of the lowest levels of spending in the industry. The significant decline in capital spending will make the company a more efficient organization, reducing its cost structure and allowing for sequential margin improvement, even with declining same-store sales.
(4) M.E.G.A. - Sticking with the Research Edge MEGA thesis on the consumer, if Knapp Track sales trends become less bad as we head into the spring, the leverage to EPS is even stronger in a company with a more efficient cost structure.
(5) NEW MANAGEMANT – CAKE recently hired Doug Benn as CFO. Traditionally, the role of CFO has been a revolving door at CAKE, and to be honest I don’t view Doug’s position any differently until proven wrong. First, rumor has it that it is a challenge to work for CEO Dave Overton. Second, Doug’s roots are in Atlanta, which is far cry from southern California. Having said that, Doug is a much respected CFO in the restaurant industry and brings significant credibility to the organization. In addition, last July, CAKE hired Mark Mears as CMO. Mark’s hire was the first time that CAKE has had a CMO.
(6) NO BALANCE SHEET ISSUES – CAKE recently entered into an agreement to amend its revolving credit facility, taking a proactive step to increase its financial flexibility in light of the uncertain economic environment.

At 5.3x NTM EV/EBITDA, CAKE is cheap, but who cares – there are a lot of cheap restaurant stocks. What matters to most investors is stability and smart decisions. The actions CAKE has taken to right size the company and add creditability to management will be reflected in the company’s stock price over the next six months.

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