Despite the daily reminders of how tough the operating environment is for casual dining companies, whether it be company announcements or gloomy news articles about the state of the economy, tightened consumer spending or rising commodity costs, I was still shocked to hear CAKE's CFO Michael Dixon say that within our industry the Cheesecake Factory is one of the only companies that is projecting meaningful year-over-year earnings per share growth.
- Looking more closely at a sample set of casual dining companies; I realized that CAKE's comment was sad but true. The projected year-over-year EPS declines are pretty ugly for some of the companies (CPKI and RT). However, there are a select few other than CAKE (RRGB and TXRH) that are guiding to double-digit growth (only at the top end of their ranges). That being said, it is tough out there.
- Driving that point home was another statistic quoted by Mr. Dixon that 50% of casual dining operators are offering promotions or daily specials on their websites, which brings us back to the question around value (driving traffic) versus protecting margins. CAKE management chooses the margin side, saying We believe these types of promotions can have some short-term sale benefits, but usually at the expense of margins. More importantly, they can potentially have a long-term negative impact on a brand.
- Although there needs to be a balance between offering value and protecting margins, getting people in the restaurant is necessary. Thus far, CAKE can afford to favor margins because relative to its competition, same-store sales growth and traffic trends have been favorable. Going forward, this focus on margins should be beneficial as the company stated today that current spot prices on many of its commodities are above existing 2008 contract prices.
