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HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE

Takeaway: Despite strong industry trends, restaurant stocks are not immune to looming cost pressures.

Editor's note: This research note from Hedgeye's Restaurants team was originally published February 12, 2015 at 13:18. The stock is down over -4% since.

CAKE delivered one of the worst prints we’ve ever seen out of them, missing top line and bottom lines estimates by 177 bps and 2025 bps, respectively.  Comps also disappointed, coming in at +1.4% vs the +1.9% consensus estimate.  After reading the press release, and seeing the massive level of margin deterioration, we didn’t think it could get much worse – and then the earnings call started. 

 

HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE - uno

 

HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE - chart2

 

COST PRESSURES

Management’s commentary on food and labor inflation was critical on a couple of levels: 1) CAKE will be hard pressed to grow margins in 2015 and 2) this is awful news for the small and weak players in the industry. 

 

To the first point, CAKE’s food cost pressures in 2014 were widely recognized due to higher dairy and seafood prices.  But the degree to which this line de-levered over the course of the year was astounding.  Management conceded that it is considering supplementing its contracting with direct hedging, but to what extent this will help is unknown.  While many expected CAKE to be one of the largest beneficiaries of the retreat in dairy prices, beef and, to a lesser extent, chicken are expected to drive 2-3% commodity inflation in 2015.  They will have a very difficult time leveraging this line further without delivering a 2%+ comp, a feat they haven’t accomplished in over two years.

 

HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE - chart3

 

Labor inflation was a much less publicized issue throughout the year that the company mainly attributed to unusually high group medical claims.  This pressure, however, is expected to continue in 2015 and could be compounded by minimum wage increases in select states across the nation.  All in, management expects $10-12 million in wage inflation.  We wrote in a bearish Black Book last January that the margin story was over for CAKE and it certainly appears to be.  They haven’t driven labor leverage since 1Q13 and probably won’t anytime soon.

 

HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE - chart4

 

To the second point, and we’ll have more on this in a later post, the pressure CAKE is seeing is not limited to them.  If a well-established player in the casual dining industry is struggling to control these costs, what does that mean for smaller, rapidly expanding players in the industry?  They’re going to feel a bigger impact – and it’s not going to be pretty.  Minimum wages increasing and the restaurant job environment is improving.  It’s getting increasingly difficult and expensive to retain employees – an issue that, just today, Panera referred to as the “war for talent.”  In the coming days, we’ll unveil a list of companies that we believe will have a much more difficult time operating in this environment than consensus expects.  And, yes, we’d short all of them.

 

ANEMIC TRAFFIC GROWTH

“Holiday 2013 was the first in which many traditional bricks and mortar retailers experienced in-store foot traffic give way to online shopping in a major way.”

-Howard Schultz, Chairman/President/CEO/Founder

 

Howard Schultz made this remark last year on his company’s 1Q14 earnings call – and we think it’s spot on.  If it’s not, CAKE’s traffic isn’t doing much to suggest so.  Traffic declined -1.2% in 4Q14, marking the ninth consecutive quarter of negative traffic.  Management insists it’s not related to the secular decline in mall traffic but, if that’s the case, they need to prove it.  The traffic and margin decline we’re seeing suggests this company is operating a broken model and, if it’s to be fixed, it will take significant time and investment.

 

HEDGEYE REWIND The Cheesecake Factory: A Troubled Concept | $CAKE - chart5

 

UPSHOT

CAKE guided FY15 EPS to a range of $2.08-2.20 on 1.5-2.5% comp growth, a far cry from the current $2.42 consensus estimate.  If they want to hit this range, they’ll need to deliver strong comp growth and, with limited drivers in place, we’re not sure how they do that.  Speaking to the lack of incremental leverage in the business model, management actually admitted that it needs to either develop or acquire a growth concept in order to deliver long-term EPS growth in the mid-teens.  And you probably already know how we feel about multi-concept operators.  This brand is in trouble and, if it weren’t down 10% today, we’d short it.  In fact, if it bounces meaningfully, we’d likely jump at the opportunity.

 


MACAU WEEKLY ANALYSIS (MAR 1-9)

Takeaway: March on track for 40% decline

CALL TO ACTION

Well, the Macau trend is not getting better.  With average daily table revenues falling 48% YoY this past week, volumes will have to pick up to hit our -40% projection.  While comps ease next week, the back half looks even tougher than week 1.  Until mass volumes base sequentially, a positive catalyst emerges, and valuations begin to reflect no contribution from junkets, we remain negative on the stocks.

 

Please see our detailed note: 

http://docs.hedgeye.com/HE_MACAU_3.9.15.pdf


The Euro, Commodities and Canada

Client Talking Points

EURO

It is the first day of QE in Europe, the Euro is down ahead of this about 3.1% last week and down 10.5% year-to-date. With QE and the insinuation that there could be a rate hike in the U.S., the reality is that the Euro will probably get a lot weaker here.

COMMODITIES

We all know the story of oil over the last year, the bigger story here is some of the other commodities; wheat is down 5.9% last week, orange juice is down 14.3% last week, respectively each of these are down 18.8% and 17.7% year-to-date. Commodity #Deflation is clearly continuing in 2015.

CANADA

The Canadian Loonie (Canadian Dollar) is not far behind the Euro, down about 7.5%. This obviously goes along with the weakness in oil. Housing Starts in Canada missed meaningfully came in 156.3K for the month vs. consensus of 175K. 

Asset Allocation

CASH 34% US EQUITIES 15%
INTL EQUITIES 11% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 10%

Top Long Ideas

Company Ticker Sector Duration
ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.

 

PENN

Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

 

Three for the Road

TWEET OF THE DAY

Japanese GDP missed again, but who cares - that only gets them to print moarrr Burning Yens

@KeithMcCullough

QUOTE OF THE DAY

Wisdom begins in wonder.

 -Socrates

STAT OF THE DAY

Only 2% of the world's population has green colored eyes.


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KORS – Adding To Long Bench

Takeaway: The brand appears healthy, growth remains, and the stock is flat-out cheap.

KORS: We’re adding this name to our LONG Bench for the first time.  While we had been much more inclined on the short side, the 43% relative draw down over the past year is too good to pass up for a quality company, management team and brand like this. To be clear, we’re not looking at this name as a multi-year double/triple like KATE or RH. But 20-30% returns aren’t half bad, either.  We’ve spent a lot of time on the road year-to-date, and too many people speak about KORS like it is the next Coach (i.e. on its way to the brand equivalent of Jurassic Park). We couldn’t disagree more. If anything, it is going the way of Ralph Lauren – perhaps not the best example given RL’s challenges right now. But RL has grown into a global luxury brand with a $15bn footprint. KORS is currently sitting at just $6.4bn. Can it get to $10bn in 3-years? It’s very possible. But the bigger question is whether the next move is to $8bn or below $6bn in 2015. We think it’s the former. With the stock trading at a mid-teens multiple with 13% of the float short, this is the kind of name we like betting on. 

 

We’ll be back with more analysis as we take the name more rigorously through our investment process.

 

KORS – Adding To Long Bench - 3 9 2015 chart1


Rocking Returns!

This note was originally published at 8am on February 23, 2015 for Hedgeye subscribers.

“You are what your record says you are.”

-Bill Parcells

 

That’s how William Thorndike kicks off a solid history/investing book that one of my friends recommended to me titled The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success.

 

Chapter 1 of the book, “An Intelligent Iconoclasm”, starts with another great quote from John Templeton: “It is impossible to produce superior performance unless you do something different.

 

In other words, if being long Europe with a concentrated position in Italian stocks was your big idea for 2015, you definitely did something different. And you’re getting paid for it. Italy’s stock market is +15.4% YTD!

 

Rocking Returns! - parx

 

Back to the Global Macro Grind

 

Yep, after 3 straight up weeks (on decelerating volume), never mind a +2.5% YTD return for the SP500, being long something like Germany’s DAX (+13.1% YTD) is where the rocking returns are at, baby!

 

After taking a -0.6% breather in the week prior, the US Dollar stabilized at higher-lows again last week and is ramping versus Burning Euros and Yens again this morning, +0.6% to $94.84 on the US Dollar Index.

 

Inverse correlations between commodity markets and USD remains surreal. Going back to when #Deflation’s Dominoes started to become readily apparent (let’s use 180-days ago) here are 4 big correlations to keep in mind:

 

  1. USD vs CRB Commodities Index -0.98
  2. USD vs WTI Oil -0.96
  3. USD vs. Gold -0.55
  4. USD vs SP500 +0.69

 

In other words, #StrongDollar has perpetuated both Oil and Commodity #Deflation. And now the US stock market is looking for some love from the bond market (or the lack thereof), because both USD + #RatesRising would force funds out of Treasuries.

 

That was our call in 2013 (#StrongDollar + #RatesRising) would force the Fed’s hand – and that would shake Fixed Income markets. Today is not 2013. It’s 2015, and this week USA’s un-elected-central-planner-in-Chief has 2-days of “testimony” to talk about that.

 

Will Yellen be hawkish or dovish on rates? I can tell you what I think she should do, but what she actually does is entirely another matter. Immediately following her lagging forecasts will be slowing inflation (CPI Thursday) and growth (GDP Friday) data…

 

“Hawkish” in currency terms = #StrongDollar, Commodity #Deflation.

 

On a mere +0.1% USD gain last week, here’s how that looked, in Global Macro terms:

 

  1. The Euro (EUR/USD) -0.1% to -5.9% YTD
  2. Canadian Dollar -0.7% to -7.3% YTD
  3. CRB Commodities index -1.9% to -2.3% YTD
  4. WTI Oil -5.3% to -6.4% YTD
  5. Gold -1.8% to +1.7% YTD
  6. Copper -0.6% to -8.2% YTD
  7. Coffee -8.2% to -9.7% YTD
  8. Wheat -4.2% to -14.7% YTD
  9. US Energy Stocks (XLE) -1.8% to +1.7% YTD
  10.  Latin American Stocks (MSCI LATAM) -0.8% to -3.7% YTD

 

Exactly! There are a lot of places (primarily USD/Commodity correlating) that you do not want your assets allocated during Global #Deflation. But you already know that. We’re well over 180 days into this, don’t forget.

 

Away from being long Italy, what else is rocking on the other side of this FX flow trade?

 

  1. European Stocks (EuroStoxx600 Index) +1.4% last wk to +11.6% YTD
  2. Japanese Stocks (Weimar Nikkei) +2.3% last wk to +5.1% YTD
  3. US Healthcare Stocks (XLV) +2.1% last wk to +5.6% YTD

 

Yep, in relative equity terms, US equity returns aren’t exactly rocking (Dow Bro 18,000 got you +0.7% last week to +1.8% YTD) this year. But they aren’t getting rocked like pie charts over-indexed to commodity inflation expectations either!

 

Seriously, who needs details about Greece when you can just look up YTD returns and see what your record is? Beating the market is the goal of the game, after all.

 

While I didn’t get beat telling you to be long commodities last week, I continued to get slapped around on the long-end of the Treasury bond curve. The Long Bond weakened (yield strengthened) with the UST 10yr Yield +6 basis points to -6 basis point YTD.

 

Consensus Macro (non-commercial CFTC futures/options net positioning) dog-piled me on that:

 

  1. Long Bond (10yr Treasury) net SHORT position ramped another 41,164 contracts last wk to -124,964
  2. Gold’s net LONG position dropped -23,800 contracts last wk to +110,164
  3. Oil’s net LONG position remained nauseatingly high at +328,656 contracts

 

#Dog-Piled. As in they bullied me, telling me what they’ve been telling me for 15 months (“rates are going higher, not lower, Keith”).

 

I don’t like (but I don’t mind) being knocked around. Especially when my team isn’t winning. We are what our record says we are. And there’s no better way to learn from that than by absorbing and learning from every mistake.

 

UST 10yr Yield 1.82-2.16%

SPX 2085-2125
RUT 1216-1243
USD 93.69-95.16
Oil (WTI) 49.02-53.70
Gold 1185-1220

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Rocking Returns! - USD correls


CHART OF THE DAY: Lagging, Late-Cycle Payroll Numbers

CHART OF THE DAY: Lagging, Late-Cycle Payroll Numbers - drake1

 

Editor's note: This is an excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for more information and to become a subscriber.

 

And, most importantly, as you can see in the Chart of The Day, the payroll numbers are the most lagging of late-cycle employment numbers there are. Most of the time they peak, AFTER the economic cycle does.

 


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