CAKE reported disappointing 2Q14 results, missing top line and bottom line estimates by 110 bps and 313 bps, respectively. The miss was driven by lower than expected comparable sales growth of +1.2%, which missed consensus estimates of +2.1%, and significant margin pressure in the P&L as cost of sales and labor expenses muted earnings. Traffic declined -1%, making it the seventh consecutive quarter of negative traffic. Management guided down full-year same-store sales estimates from 1-2% to 1-1.5% and full-year earnings estimates from $2.24-2.33 to $2.19-2.25.
Casual dining same-store sales are weak, we get that, but what did management attribute most to the miss? Cream cheese. Furthermore, CFO Douglas Benn noted that butter, which is typically a good proxy for cream cheese prices, spiked to all-time highs in late 2Q14.
But we’re not here to talk about CAKE – that’s old news. Instead, the aforementioned comment from Mr. Benn got us thinking about BLMN, which tends to use quite a bit of butter in their restaurants. We’ve been bearish on BLMN since 11/27/2013, when we added it to the Hedgeye Best Ideas list as a short. Despite removing it from this list on 05/14/2014, we've maintained our bearish bias and are more confident than ever that there’s another leg down to the stock.
Not only have casual dining sales come in weaker than expected this quarter, but street estimates of $0.29 in EPS in 2Q14 are too high by about $0.03-0.05. This estimate suggests BLMN will see 17% EPS growth on 7% sales growth in the quarter. As we’ve harped on before, BLMN has very little leverage in their business model and the company is in no shape to handle the current commodity inflation (beef, shrimp, salmon, butter).
As it stands, FY14 estimates aggressive, but FY15 estimates for 19% EPS growth on 7% sales growth are even more egregious.
At any rate, at least there's no "love" inflation!
Call with questions.
Howard Penney
Managing Director
Fred Masotta
Analyst
