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CAKE remains on the Hedgeye best ideas list as a LONG.

The company reported disappointing results relative to expectations yesterday, but the headline numbers look worse than the underlying fundamentals would suggest. 

CAKE reported 2Q13 EPS results that were $0.03 lower than consensus along with a slight top line miss of -0.73%.  Same-store sales also fell short of expectations (+0.8% versus +1.7% consensus), as Cheesecake Factory comparable sales (0.9% versus +1.8% consensus) and Grand Lux Cafe comparable sales (+0.1% versus +0.7% consensus) both disappointed.

Management cited weather and slower industry trends as the two main drivers of weaker sales than expected in the quarter.  We don’t like to see anyone pull the weather card, but CAKE’s reasoning holds more legitimacy than that of some of its peers as its restaurants struggled to utilize their patio space at levels seen in the past. 

While industry trends are slowing, CAKE’s comparable sales have outpaced the industry for at least 18 months and we expect this trend to continue.  Although 3Q13 should be challenging due to slowing industry trends and a tough comp, we don’t see any fundamental issues within the business.  We expect sales to rebound in 4Q13 and carry on into 2014.  Management acknowledged that they will not make any desperate or unadvised attempts to boost sales in 2H13. 

Rather, they will continue to focus on the core of the business and building the brand for the long-term through new restaurants (at “A+” sites), menu innovation, quality food, and high service standards.

Below are some of our thoughts on 2Q13 results.

What We Liked

  • Increasing the quarterly dividend by 17%
  • Plan to repurchase up to $125 million worth of shares in 2H13
  • Full-year development plans remain on track to open 8-10 new restaurants
  • Anticipate a 50bps year-over-year improvement in FY13 operating margin
  • Expect full-year cost of sales to be lower than previously forecast due to moderate commodity cost inflation and favorable dairy prices
  • Management appears unfazed by the disappointing 2Q13 numbers and remains committed to their core business values

Red Flags

  • 2Q13 traffic was down -0.8%
  • Management lowered full-year EPS guidance down to $2.10-$2.15 from $2.12-$2.18
  • Softening industry trends and a difficult year-over-year comp are likely to be headwinds in 3Q13
  • Labor and other operating costs were up 10bps and 30bps year-over-year, respectively 


Howard Penney

Managing Director