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CAKE reported fairly impressive 3Q13 results last night.  Despite the recent weakness surrounding the casual dining industry, the company was able to beat expectations during the quarter.

CAKE reported 3Q13 EPS results in which revenues and EPS both surprised to the upside.  For the quarter, the company benefited from cost of sales (24% vs. 24.2% estimate), as grocery costs, dairy prices and a shift in bakery mix were all favorable.  Other operating expenses also came in stronger than expected (24.3% vs. 24.9% estimate), due to favorable timing of certain expenses, leverage on rent expense and more efficient production in bakery facilities.

Comparable-restaurant sales were strong, as both total comps (+0.8% vs. +0.4% estimate) and Cheesecake Factory comps (+1.0% vs. +0.5% estimate) beat the numbers.  This comes despite lapping the most difficult comps of 2013.  Grand Lux Café comparable sales disappointed (-2.6% vs. -0.1% estimate), as they appear to have trended more in line with anemic casual dining trends.

4Q13 guidance was generally held flat, as management expects EPS to come in between $0.57-0.60 on +1.5-2.5% comps.  The outlook for FY14 is a different story, however, as management guided down FY14 EPS to $2.29-2.41 on +1-2% comps, primarily due to anticipated shrimp and salmon inflation.  Management plans to take 2-2.25% pricing next year in order to partially offset the cost of sales increase.  We don’t necessarily view the guide down as a negative.  In fact, we would argue management is being conservative and has put in place reasonable expectations.

Overall, we believe our bull case was validated by the recent results.  CAKE has proven it can withstand a difficult competitive and macro environment, while the majority of their peers struggle.  One concern we have is in regard to traffic, which was down -0.9% in 3Q13.  While this is certainly better than the casual dining industry in general, we do believe it is an issue.  Traffic has now fallen for four consecutive quarters and management must reverse this trend.  We are confident they will be able to do so in 2014. 

 

What we liked in 3Q13 results:

  • Both revenues and EPS beat
  • System-wide same-restaurant sales beat expectations
  • Cheesecake Factory same-restaurant sales beat expectations
  • Lapping easy comps in 4Q13
  • Board of Directors declared a quarterly cash dividend of $0.14 per share
  • Repurchased $90.2m worth of shares in 3Q13
  • Plan to repurchase another $65 million worth of shares in 4Q13
  • New unit openings continue to exceed expectations
  • Domestic and international growth plans remain on track
  • Cash flow generation is strong and predictable
  • Management remains committed to returning cash to shareholders

What we didn’t like in 3Q13 results:

  • Traffic was down -0.9% and has been negative for four consecutive quarters
  • Grand Lux Café same-restaurant sales missed expectations
  • Shrimp and salmon inflation could cause problems in FY14
  • FY14 EPS guidance was revised down to $2.29-2.41

CAKE: PROVING ITS METTLE - CAKE company

Howard Penney

Managing Director