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Cheesecake Factory reports 4Q EPS after the market close tomorrow.  Here are some thoughts on the release and a recap of the most recent forward looking commentary from management.


On January 11th, we posted “CAKE: LOOKING AHEAD TO 4Q EARNINGS”.  Our stance at that time was that, following our bearish view of the stock during much of 2011, several sell-side downgrades and had seen expectations come more in line with our view of the stock. Our estimate remains at $0.51 versus the street at $0.52 but, despite being below consensus, we believe that the strength on the top-line will offset other concerns.  Expectations around the company’s food costs, in particular, are now more realistic, in our view, than they were during 2011.


One chart we published in January and would like to do so is below; CAKE system same-store sales versus the ICSC Chain Store Sales Index.  The correlation between the two data sets is +0.8.  Given that consumer metrics in general, not only the ICSC Chain Store Sales Index, have been indicating quite healthy levels of spending for 4Q, it is difficult to be bearish on CAKE’s top-line prospects.  CAKE is a beneficiary of traffic in malls and the strong dollar as much as any other player in the space. 





Despite some short covering over the past couple of months helping the stock move higher, sentiment around CAKE remains quite bearish relative to other restaurant names.  The current short interest of 13.8% of the float poses some risk for investors selling the stock short ahead of the print.


CAKE: EARNINGS CHECKLIST - cake sentiment1



Below is a selection of important forward looking comments from management pertaining to 4Q and 2012.  As a reminder, 2011 was a 53-week year for CAKE with the extra week falling in 4Q.





“For the fourth quarter of 2011, we estimate a range of comparable sales between 1.5% and 2.5%, consistent with our recent trends. Based on this assumption, our estimate for diluted earnings per share is between $0.51 and $0.53.”

“For the full-year 2012, we are currently estimating diluted earnings per share in a range of $1.80 to $1.90 based on an assumed comparable sales range of between 1% and 2%, extending the trends we see in 2011. Our earnings per share estimate assumes that we will use the majority of our free cash flow for share repurchases.”





“We continue to experience higher food costs related to certain non-contracted items, particularly dairy, as well as some grocery and produce items.”


“Food costs are not moderating on a comparative basis quite as much as we expected them to, and we are now projecting cost of sales to be flat to only slightly better versus the prior year in the fourth quarter. That impacts the fourth quarter by about $0.01 in earnings as compared to our prior expectations.”





“Looking ahead to 2012, it looks to be a solid year. We're currently expecting to open as many as 7 to 10 new restaurants next year, including a new Grand Lux Café. The pipeline for high-quality sites is strong and more robust than we've seen in quite some time.”


“Our projection for capital spending this year [2011] is now $75 million to $80 million, in support of our planned seven new restaurant openings in 2011 as well as expected early 2012 openings.”


“We plan to open as many as 7 to 10 new domestic restaurants next year [2012] as well as 3 internationally. Our total capital expenditures are expected to be between $105 million and $125 million.”





“We are increasing our target for share repurchases by $20 million in 2011 to a range of between $145 million and $170 million. Our restaurants generate a healthy amount of cash, and we are using the majority of our free cash flow to buy back our shares.”



Howard Penney

Managing Director


Rory Green



The Knapp Track numbers for January were sequentially stronger than December’s.


Estimated Knapp Track casual dining comparable restaurant sales grew 3.2% in January versus a final accounting period number of 2.8% (prior estimate was +2.9%) for December.  The sequential change from December to January, in terms of the two-year average trend, was +30 bps.


Estimated Knapp Track casual dining comparable guest counts grew 0.5% in January versus a final accounting period number of 0.0% (prior estimate was +0.4%) for December.  The sequential change from December to January, in terms of the two-year average trend, was +5 bps.


While the numbers are impressive, it is important to note that there were weather- and calendar-related issues that impacted the print.  PNRA suggested that as much as 350 bps of its 1Q to-date (mainly January) +8.9% comparable restaurant sales growth was due to a positive weather impact. That impact will clearly vary by concept and we will have a post up on the weather factor of 1Q this week.



Howard Penney

Managing Director


Rory Green



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February projection raised to 11-17% YoY growth.



Macau logged another big week, causing us to raise our February forecast yet again.  We are now projecting full month February GGR will be in the range of HK$21.5-22.5 million, up 11-17% YoY.


This past week, average daily table revenues (ADTR) were HK$775 million compared to HK$751 million the prior week.  Month to date, ADTR was HK$775 million compared to HK$748 million for all of January.




In terms of market share, MGM was the big loser, dropping 200bps in one week.  Galaxy lost more share this past week and its February share remains well below recent trend.  MPEL and Wynn both gained share again as MPEL approaches its recent trend rate and Wynn remains above.  LVS increased its share slightly and is in striking distance of its January share of 18.2%.  




In preparation for BYD's Q4 earnings release tomorrow, we’ve put together the recent pertinent forward looking company commentary.




  • “As of September 30, IP generated about $36 million in LTM EBITDA… we continue to project we will be able to realize a minimum of $5 million additional EBITDA from the IP.”
  • “As the conversation about the legalization of online poker continues to gain momentum, we're working aggressively to position the company to take advantage of opportunities that may arise should Congress enact legislation related to the online gaming environment”
  • “We expect wholly-owned EBITDA, which includes corporate expense to be in the range of $73 million to $78 million inclusive of IP's results. Absent hurricanes and earthquakes, we expect Borgata to generate EBITDA of $34 million to $37 million compared to $34 million last year in the fourth quarter. With this range of EBITDA guidance including the IP's results adjusted EPS for the fourth quarter is expected to range from income of $0.01 per share to a loss of $0.04 per share.”
  • “I think as far as the impact of growth within the quarter overall the summer is obviously typically the slower part of the business for the Las Vegas Locals segment overall. The business overall has continued to improve, and if you go back a number of quarters, the rate of decline obviously continued to lessen and we've said it was a chance for us finally to post year-over-year revenue increase for the segment overall.”
  • “But overall on the gaming side of the business, we continue to see modest, but certainly positive improvements throughout the locals business.”
  • [4Q]: “I'm using the same tax rate that we had in Q3 because that's kind of the best information I have right now.”
  • “We get beyond kind of regular maintenance capital, I think the free cash flow is going to be going to de-leverage the business.”
  • [Maintenance Capex] “Our run rate probably for this year is about $70 million. We'll probably come in a little bit less than that I would expect. For next year, Boyd without kind of IP is probably $75 million to $80 million. And Borgata is about $8 million of maintenance for the third quarter and they'll end up spending probably on top of that this year probably about $20 million in capital related to their room refurbishment project.  So their normal maintenance would be normally around $15 million to $20 million and then about $20 million for the room refinish.  So again, $15 million to $20 million of maintenance and probably a little bit more for the refurbishment project related to just because of the spend, so you know maybe they end up  spending about $25 million to $30 million for that project. IP should be about $44 million of maintenance that we mentioned when we acquired that asset.”

Giant Defense

This note was originally published at 8am on February 06, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Defense is superior to opulence.”

-Adam Smith


If your 2012 defense can shut down both Aaron Rodgers and Tom Brady in back-to-back playoff games, evidently you deserve to win the Super Bowl. Opulent offensive statistics often win awards. Giant Defenses win Championships.


Anyone who has followed my hockey or professional career closely knows that I take pride in playing defense. Blocking shots and not losing money on market down days may not get my name in the paper – but that’s ok, I don’t read the Old Wall’s paper.


In a consciously conservative move to defend against both US and Global Growth Slowing again sequentially in February, I shorted the US stock market twice last week (at 1327 and 1343 in the SP500). This week, we’ll see if I played defense too early.


Back to the Global Macro Grind


Being early in this business is also called being wrong. For me, since I’m usually buying on red and selling on green, that happens a lot. After seeing the US stock market fall for 4 consecutive days after Ben Bernanke imposed an Inflation Tax on Consumers and Savers, most of last week’s squeeze came in 4 hours of Friday’s trading.


How do you defend against that? It’s not easy. And since there are tens of thousands of fund managers who are in the business of the stock market going up, that doesn’t make explaining why I decide to go on defense any easier.


To review my Global Macro Risk Management Process, when I think about countries and probability-weighing the bullish or bearish momentum of their respective economies, I heavily weight the following 3 factors:

  1. Growth (slowing or accelerating?)
  2. Inflation (slowing or accelerating?)
  3. Policy (perpetuating or fighting inflation?)

Most Deflationistas don’t agree with me on this because they are either academics who are not accountable to trading daily, weekly, and monthly P&L risk, and/or they don’t have a Giant Defense that has proactively prepared them to make these calls on the margin.


It’s what happens on the margin that matters to Macro Market Expectations most.


The reason why I pay such close attention to what Bernanke does is that he drives point #3 – Policy. If you get Fed Policy (hawkish or dovish on the margin) right, you’ll get the US Dollar right. If you get the US Dollar right, you tend to get most other things right.


Now plenty of people who are always taking offense to the Strong Dollar = Strong America point probably don’t agree with me on this either. Since we’ve been right on 26 of 27 long/short calls on the US Dollar since founding the firm in 2008, I’m not sure I care.


What I care about most is what Policy does to the Dollar - then what the purchasing power of that Dollar does to everything else that’s priced in Dollars. In the last 3 weeks, with the US Dollar down -3.2%, this is what Growth and Inflation Expectations have done:

  1. Inflation Expectations = Gold +7%, Copper +7%, and Oil +4%
  2. Growth Expectations = US Treasury Bonds (10yr) -5%, Yield Spread -6%

Again, a lot of people will take as much issue with me suggesting that falling US Bond Yields and a compressing Yield Curve (Yield Spread = 10-yr yields minus 2-year) represents Growth Slowing Expectations right here and now as they did in July, August, or November of 2011. This is the goal-line of the bull/bear US Equity debate.


This morning’s Global Macro Market signals only amplify my Growth Slowing point:

  1. Despite a stiff rally in US Equities on Friday, most other Asian and European equity markets didn’t agree
  2. Chinese stocks (Shanghai Composite) stopped going up at intermediate-term TREND resistance of 2342
  3. France, Spain, and Italy all backed off, hard, at their long-term TAIL lines of resistance (CAC = 3503)
  4. Dr. Copper said no thank you at its long-term TAIL of $3.98/lb resistance (down -1.1%)
  5. EUR/USD failed, again, at its intermediate-term TREND line of $1.34 resistance (down -0.5%)
  6. US Treasury Yield on the 10-year is down to 1.91% this morning and remains in a Bearish Formation

A Bearish Formation in US Growth Expectations (bond yields) is what made me bearish on US Growth in February of 2011 inasmuch as it is right here in February of 2012. Thankfully, unlike in January 2011, I caught most of the January 2012 up move in stocks.


Unlike most strategists in this game, I have no problem shifting from offense to defense – I usually slap on the Giant Defense when I see an inflection in the slope of Growth and Inflation Expectations. My process hasn’t changed. The game-time signals have.


My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Shanghai Composite, and the SP500 are now $1685-1726, $111.36-114.02, $1.29-1.32, 2269-2342, and 1321-1347, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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