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Takeaway: We still like the company, a lot. But, short-term pressure in the casual dining industry is forcing us to take a step back.

We are removing CAKE from the Hedgeye Best Ideas list as a LONG.

Getting Out of the Way

We remain extremely cautious on the casual dining segment and are not comfortable being long the name heading into the 3Q13 print.

In addition, its looks like industry sales trends are off to a slow start in 4Q13, which leads us to believe it could be a disappointing fourth quarter.

A couple of weeks ago, we posted a research note highlighting the bull case for CAKE.  To be clear, it remains one of our favorite casual dining names and we plan to revisit it on the long side when the time is appropriate.  Our call is more about a tumultuous casual dining environment, and the potential short-term pain it could cause, than it is about the company itself.  In fact, we would not be comfortable being long any casual dining names heading into earnings season.  If you need to be long something, we suggest looking to the quick-service segment, where we continue to like CMG, YUM and KKD.

The chart below highlights the correlation between the ICSC US Retail Chain Store Sales Index and CAKE’s comparable restaurant sales.  As depicted, the ICSC Index ticked down in 3Q and this trend has continued into 4Q.  According to Consensus Metrix, CAKE’s comparable restaurant sales in 3Q and 4Q are expected to increase +0.4% and +1.7%, respectively.  We believe these estimates are too high and should come down.


Also, we’d be remiss not to note – the slowdown in sales we are seeing in the early part of October coincides with lower consumer confidence numbers, as reported by the daily Gallup confidence reading.

Howard Penney

Managing Director