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Long shares in Cheesecake Factory was one of the two ideas we pitched yesterday during our consumer sector heads’ Best Ideas call, the other being short Burger King.

We have been vocal about our bearish stance on casual dining for some time and have focused that call on two stocks in particular: BWLD and DRI.  The DRI call was particularly impactful given that it was highly contrarian, but also because of the ramifications for the space.  The crucial ingredient in Darden’s most recent quarter was its statement that the company’s strategy was to be less protective of margins going forward.   We believe CAKE is one company within casual dining that will see limited impact from Darden’s “price war”.  The stock has underperformed the market of late but we believe bottoming earnings estimates and other fundamental factors could make the stock an attractive long at this price.

  • Strong marketing presence, loyal consumer base, and high average unit volumes
  • Improving housing outlook benefits the core CAKE consumer
  • Negative sentiment in the stock
  • Modest same-restaurant sales expectations vs optimism in casual dining trends outlook

CAKE: CASUAL DINER WITHOUT THE DRAWBACKS - cake comps vs consensus

 

CAKE: CASUAL DINER WITHOUT THE DRAWBACKS - cake price action

 

CAKE: CASUAL DINER WITHOUT THE DRAWBACKS - casual dining ratings

Potential For Upside Surprise

The company is set to take roughly 2% in price during 2013.  Consensus is modeling roughly flat average check growth despite traffic outperforming industry trends (Knapp) by an average of 270 bps over the past four reported quarters and mix running between -0.4% and -1%.  Management’s guidance on average check was quite firm during the most recent earnings call: “We're not considering a negative. The average check has never gone down that I know of, not in years. So no, we're not considering a negative average check.”

Howard Penney

Managing Director

Rory Green

Senior Analyst