prev

CAKE PERFORMING WELL

The Cheesecake Factory should continue to outperform its peer group in casual dining.  The stock has underperformed the market of late as broader industry concerns have weighed on sentiment but we continue to see this as the best long opportunity in the category. 

 

Macro Challenging But Company Performing

 

While the macro environment remains difficult, The Cheesecake Factory continues to perform strongly from a top-line perspective.  4Q12 same-restaurant sales grew 1.3% at The Cheesecake Factory and declined -3.2% at Grand Lux Cafe.  Consensus was looking for +1.7% and -1.6%, respectively.  Overall comps grew 0.9% but there was a -60bps impact from Hurricane Sandy.  The consolidated comp, excluding the impact of Sandy, is estimated by management to have been 1.5%.  The Street was looking for 1.5% system same-restaurant sales in 4Q.  We believe the strong performance in 1Q, while facing strong macro headwinds, is a positive indication of the strength of CAKE’s business.

 

CAKE PERFORMING WELL - cake pod1

 

 

Showing Resilience in Difficult Macro

 

While the stock price reacted negatively to the company guiding below Street expectations, the same-restaurant sales performance versus the Knapp Track industry benchmark was approximately +160bps.  The company guided to 0-1% comparable sales growth in 1Q13, including one-time items impact of 95bps.  Our expectation, based on casual dining trends in 1Q to-date, is for that outperformance versus Knapp to sequentially expand in 1Q by 0-50bps.  Over the last few quarters, CAKE has established strong outperformance versus the industry and we expect that to continue in 1H13.

 

The management team faced down three questions on the earnings call on current sales trends.  Despite the noise in the 4Q12 results and difficult comparisons versus a 53rd week in 2011, the underlying business trends of this company have been in line with our expectations. 

 

International development should continue to drive a greater portion of earnings growth, expanding margins over time.  The company announced a new international development agreement yesterday while reporting that the sales performance of the international restaurants is exceeding expectations. 

 

 

Margin Expansion Story Intact

 

Restaurant-level margins expanded by 90bps in the fourth quarter and we expect continuing margin expansion throughout 2013 as food cost inflation expectations are declining.  International growth, as we mentioned above, should also add to the growth of operating margins this year.

 

CAKE PERFORMING WELL - cake pod two

 

 

Attractive FCF Yield

 

Cash flow from operations was $195 million in 2012.  The company allocated roughly $86 million to capital expenditure, implying free cash flow of $109 million for the year.  We estimate that 2013 free cash flow will come in at roughly $100 million, which implies a FCF yield of ~6%.

 

 

Outlook

 

For 1Q13, comparable sales growth is being guided to as 0-1%, including the closure of a Hawaii location due to fire and snowstorm Nemo in the Northeast.  The combined impact is estimated to be 95bps.  Adjusting for the impact of the storm, underlying trends at The Cheesecake Factory seem to be accelerating on a two-year average basis.

 

1Q13 earnings guidance is $0.40-0.43 per share.  The storm has cost the company roughly $0.01 in EPS. FY13 EPS guidance is for 12-15% growth, or a range of $2.10-2.18, based on an annual comparable sales range of 1.5-2.5%. 

 

Commodity inflation is expected to be 3%, lower than prior expectations of 3-5%. 

 

The company plans to develop between 8-10 new stores in 2013, or 5% growth, having opened 10 new locations over the last 15 months.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 


INITIAL CLAIMS - LABOR MARKET STILL IMPROVING

Takeaway: NSA claims show underlying improvement in the labor market on a second derivative basis for the second week in a row.

Labor Market Improves Further In Latest Week

This week's backup in initial claims (SA) was a bit of a negative surprise, as the last four years have shown steady improvement throughout February. As a reminder, the seasonally-adjusted tailwinds will be coming to an end in a few weeks. 

 

Prior to revision, initial jobless claims rose 21k to 362k from 341k WoW, as the prior week's number was revised up by 1k to 342k.

The headline (unrevised) number shows claims were higher by 20k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 8k WoW to 360.75k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -4.2% lower YoY, which is a sequential improvement versus the previous week's YoY change of -2.7%. This is good news, as it signals that the real labor market is, in fact, still strengthening.

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 1

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 2

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 3

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 4

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 5

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 6

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 7

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 8

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 9

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 10

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 11

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 12

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 13

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 14

 

Yield Spreads Widen Further

The 2-10 spread rose 3.8 basis points WoW to 175 bps. 1Q13TD, the 2-10 spread is averaging 167 bps, which is higher by 24 bps relative to 4Q12.

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 15

 

INITIAL CLAIMS - LABOR MARKET STILL IMPROVING - 16

 

Joshua Steiner, CFA


PODCAST: Buy The Dip?

On today’s Morning Investment Call held for Hedgeye Subscribers, we discuss how permabulls would say to buy the dip in US equities today after yesterday’s pullback or whatever you want to call it. Just because stocks fell for five hours of trading doesn’t mean that everything is going to come crashing down. If you want to short something, short commodities because the US Dollar is strong. Strong Dollar = Strong America and Consumption. Meanwhile, Europe is getting smacked around, so if you’d like to be short something look there.

 

 

You can listen to the full call in the audio posted above.

 

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.73%
  • SHORT SIGNALS 78.79%

Get Big

Client Talking Points

Bigger, Stronger

Let’s do the math again: Strong Dollar = Strong America = Stronger Global Consumption as commodities deflate post-inflation. The consumer spends more money when the prices come down at the supermarket and when gas prices aren’t an ARM and a LEG. Brent Crude Oil snapped out TRADE line of support at $117.61, meaning we have some room for downside in the commodities space while everyone else is busy getting dizzy over a couple handle move downward in the S&P yesterday. 

Asset Allocation

CASH 47% US EQUITIES 15%
INTL EQUITIES 20% COMMODITIES 0%
FIXED INCOME 0% INTL CURRENCIES 18%

Top Long Ideas

Company Ticker Sector Duration
ASCA

We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.

FDX

With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.

HOLX

HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road

TWEET OF THE DAY

“At LAX they estimate 15 percent of wheelchair requests are just people trying to jump the security line.on.wsj.com/ZibjSE” -@TimAeppel

QUOTE OF THE DAY

“If you don't know where you are going, you will probably end up somewhere else.” -Laurence J. Peter

STAT OF THE DAY

JAN CONSUMER PRICE INDEX M/M: 0.0% V 0.1%E; CPI EX FOOD & ENERGY M/M: 0.3% V 0.2%E; CPI NSA: V 230.300E


ABI and DOJ – Keep Talking Guys – Trial Suspended as Parties Negotiate

Yesterday, in a joint filing, ABI InBev and the Department of Justice requested that the legal proceedings between the two parties be suspended until March 19.  It’s a positive development, as it means the parties have been and continue to work toward a negotiated end to the dispute.  We have had no doubt that the parties were talking and at this point we suspect the discussions are solely focused on getting the DOJ comfortable with the new deal structure.  Our view is that the transaction as currently contemplated addresses substantially all of the concerns expressed by the DOF in its initial filing.

 

There was some speculation yesterday that the DOJ was uncomfortable with STZ as the buyer of the Grupo Modelo assets, a concern that was expressed in the initial filing.  Justice is likely worried about internal documents that suggest that STZ would be likely/willing to raise prices on the Modelo brands, a strategy that represents a break with the recent actions of Modelo.

 

We see these concerns as misplaced, to be kind and idiotic, to be truthful, for the following reasons:

  1. Modelo’s pricing strategy (share gains vs. pricing) can be changed at any time, and isn’t written in stone
  2. STZ had no incentive to manage the brands for anything other than short-term profit given the prior structure and time frame of the Crown JV
  3. There is no guarantee that any other buyer would behave in substantially different fashion than the way DOJ assumes STZ would act
  4. Regardless, the idea that the pricing actions of Crown have represented some sort of braking mechanism on the other 94% of the industry strikes us as factually incorrect

We continue to believe that it is highly likely the new transaction gains DOJ approval and we view yesterday’s news as supportive of that position. 

 

 

Robert  Campagnino

Managing Director

HEDGEYE RISK MANAGEMENT, LLC

E:

P:

 

Matt Hedrick

Senior Analyst



the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

next