CAKE – Lacking conviction right now

Sales trends look better that most in 3Q09, but 4Q09 guidance is troubling.


There is no reason for me to patronize Doug Benn, but since landing at CAKE the company seems to be in much better shape.  It’s clear he brings a financial discipline to this company that it has lacked in the past.  Understanding that the significantly slower unit growth helps too!


Knowing that historical valuations are meaningless, it’s really hard to determine what the right multiple for any given name is.  As a group, the Full Service restaurants are trading at 6.1x NTM EV/EBITDA, with CAKE trading at 7.6x.  So it looks expensive on a relative basis.  The FCF yield is 10%, but it looks like capital spending is going higher in 2010.


Sales trends are under control and the proper financial disciplines are in place to assure some stability to the earnings trends.  The Cheesecake Factory is a strong concept, but the Grand Lux is an orphan. 


I don’t see a great short story, nor do I see a reason to be super long.  If CAKE can do $1.05 next year, it’s trading at 19x EPS.  Given some of the risks that are still facing the company and the industry, any multiple expansion from here is unlikely. The strong balance sheet and free cash flow is net positive. 


3Q Same-store sales trends – CAKE posted sequential improvement in same-store sales; sales decreased 2.4% and 6.0% at The Cheesecake Factory and Grand Lux Café, respectively.  This represents no improvement on the 2-year trends at The Cheesecake Factory and a deceleration of 0.6% at Grand Lux.


At The Cheesecake Factory, the trends were slightly more negative in the west, particularly in California and the northwest.  In the southwest, including Arizona and Nevada, CAKE is seeing stabilization on a sequential basis.  Surprisingly, Florida and the southeast were actually both slightly positive for the quarter. 


The sequential decline in sales trends at Grand Lux is troubling.  Management is working to address the issues.  I’m not confident there is much momentum behind that brand and would expect management to close some stores in the coming quarters.


Operating Expenses – In 3Q09 Cost of Sales decreased to 23.9% vs. 25.7% last year.  The 180bps improvement was driven primarily by lower restaurant costs of sale.  About 50% of the decline was due to the cost of sales initiative and 50% from lower commodity prices.  Labor costs were 32.9% vs. 33.2% last year.  Other operating costs and expenses were 25.5% vs. 25.6% last year.  Utilities costs decline by 50bps offsetting higher marketing expenses.  G&A expenses for 3Q09 were 6%, up 70bps from last year.  The majority of this increase came from performance bonus accruals. 


Development - CAKE is looking at 2010 and may open as many as three new Cheesecake Factory restaurants.


Strong Financial Position – At the end of the 3Q09, CAKE had a cash balance of $82 million and used $50 million to pay down debt during the quarter.  CAKE’s credit balance now stands at $125 million, as they have repaid $150 million so far this year.  The stated goal was to reduce debt by $125 million this year.  CFFO for the nine months was $146 million ($24 million capital expenditures); generating $122 million in free cash flow.


Outlook – EPS guidance is for 4Q09 EPS of between $0.18 and $0.20, based on same-store sales of between negative 2% to 3%. Impacting the sales trends in 4Q09 by 1% are (1) Halloween falling on a Saturday and Christmas will fall on a Friday, both of which will hurt year-over-year comparisons. (2) A new focus on gift card sales this holiday season.  The impact is expected to slow 4Q09 sales, but will build future traffic trends.


As you can see from the chart below, management’s current guidance for 4Q09 SSS would signify a significant slowdown in sales trends from where we ended 3Q09.


If these numbers are right, CAKE will have issues, but right now I don’t want to bet against Doug Benn being conservative.



CAKE – Lacking conviction right now - CAKEsss

COLM: Guidance Makes No Sense

This is a weird one. Street estimates for FY10 are shaking out to be pretty realistic at $1.95, but they’re way too low for the upcoming quarter. Check out our preview note from yesterday for color, but backlog trends have inflected on the positive side, inventories are close to being cleared, FX starts to help COLM in 4Q after a year and a half of hurting, SG&A cuts implemented in late 4Q08 still carry through this quarter, cold-weather gear has been a stand-out in early fall selling, and footwear growth for COLM was the best we’ve seen in over 4-years. Yes, I still have issues with the parts of the company as it relates to brand management, but let’s face it…more is going right than wrong. That’s the first I can say that for COLM in a while. High-single-digit 4Q revenue decline? No way… We’re shaking out at $0.60 vs. the Street at $0.40.


It's all about WAPs.


WMS guided to $160 - $168MM of revenues for 1Q2010, on August 3, 2009, and we don't think they are going to miss.  While the for sale market remains sluggish in NA given an anemic number of new openings and suppressed replacement orders, WMS already knew this when they gave guidance.   They should make up this weakness with another strong showing in participation. 


We estimate that WMS will report EPS of $0.37 and revenues of $167MM. Below are some of our assumptions and thoughts on the quarter.

  • Product sales will likely come in light, we estimate $90.5MM
    • Total unit sales just shy of 5,000 with pricing up 10% y-o-y
  • Participation should be good, we estimate $76.4MM


WMS's unit shipments are particularly difficult to gauge this quarter given the anemic number of North American new and expansion unit shipments - we estimate around 3,650 units.  So it's really all about replacement orders for WMS.  In addition, many of the new and expansion units are going to tribal gaming jurisdictions and may be Class II. Therefore, we would not be surprised if WMS's shipshare of new and expansion units this quarter comes in low, as it did last quarter. 


Last quarter we estimated that only 10.3k replacement units shipped to North American casinos.  This quarter's shipments will likely be even lower, since 2Q09 is a seasonally better quarter. How much lower is the million dollar question; our best guess is 7.5k units. For last quarter, we estimate that WMS got 36% share of replacement units, assuming a similar share in 3Q09 would put total WMS total NA unit sales around 3,000.  


We have less "edge" on the international shipments, as the majority of those units are replacement orders.  While WMS is entering Mexico and Australia, which should help them grow FY2010 international shipments, we estimate that y-o-y shipments to international markets in 1Q2010 will be down 5%.  International replacements have also been negatively impacted by this economic slump.



FY2010 thoughts:

  • FY2010 EPS of $1.89 and revenues of $770MM.  We believe that WMS may miss its new unit sales forecast but more than make up for it with strength on the participation side.
  • Product sales:
    • We think that FY2010 unit sale guidance is aggressive, unless international and Class II has materially more upside than we are modeling
    • Pricing guidance seems conservative and implies that WMS is pricing in some success in lower price Helios platform markets, as well as in international jurisdictions like Mexico
  • Participation:
    • WMS ended FY09 with an install base of 10,350.  Their guidance implies no growth in their install base, which we believe is very conservative given the positive qualitative feedback we continue to hear about WMS's participation products


4Q09 "Youtube"

  • In fiscal 2010, a heavier mix of lower margin product sales revenues and in fiscal 2009, coupled with lower initial startup margins on certain of our new revenue sources such as Class II in Australia, is expected to partially offset some of the anticipated improvement in our judicial businesses, resulting in product sales gross margin ranging from 52% to 54% for the full year.
    • Pricing on the Helios platform is roughly $8-10k per box, therefore should WMS have a lot of success here and meet their unit shipment guidance, pricing should indeed be lower than one would expect given the higher mix of BB2 platforms vs last year
  • We expect to sustain our gaming operation margin in the low 80's, in a range that will average between 80% and 82%, which includes a dampening effect of achieving our higher percentage of WAP units in our installed base.
    • WAP's do have lower margins than standalone participation games due to the associated jackpot expenses
  • We expect that depreciation expense will increase modestly in fiscal 2010, while declining as a percentage of total revenues
    • Typically participation games are depreciated over 2 years. The longer the average life of the participation box, the lower D&A expense on box on average.  We've seen WMS's "D&A per box" steadily decline as their games last longer over the last several years
  • We can still see participation business grow. But the rate of growth won't be like it’s been for the last couple of years.
  • On the international sales, I believe that they were 35% or 37% of units this year. That's likely to remain relatively constant next year.
  • We see the first six months of this year continuing on the trends of fiscal 2009 with the second half of the year picking up slightly in the calendar '10.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%


Research Edge Portfolio Position: Long EWT


Export Orders data for September released by the Ministry of Economic Affairs this morning showed that order flow last month picked up sequentially to a year-over-year decline of -3% as Production levels rose to positive year-over-year growth for the first time in 12 months (see chart below).


PANDA HUG - tai1


On an absolute USD basis, orders exceeded every month since October of last year, a sign that the warming relations with the mainland are firing a strong recovery, with critical Electronics sectors feeling the largest impact of Beijing’s stimulus (see chart below).


PANDA HUG - tai2


Not everyone views this apparent mainland largess as purely positive however; in a legislative committee meeting on Wednesday, Minister of Economic Affairs Shih Yen-shiang again voiced his firm stance that the proposed economic cooperation framework agreement will exclude cheap mainland industrial and agricultural goods and, critically, cheap mainland labor in response to continued criticism.  DPP Legislator Su Chen-ching responded that the proposed agreement is heavily skewed in favor of the mainland and would be “unfair and humiliating” for Taiwan to sign.  The overlapping political issues facing lawmakers are daunting: beyond the understandable mistrust of Beijing, which still refuses to acknowledge Taiwan’s status as an independent nation, concerns about job and intellectual property security are significant. At 6.09% the unemployment rate is at the highest level in over 30 years, making the prospect of a flood of cheap migrant labor from the mainland untenable for elected officials. Meanwhile, other voices in government have taken issue with the prospect of PROC based companies acquiring Taiwanese strategic technology through acquisition.


We are long Taiwanese equities via EWT, and continue to believe that orders from “the client”, particularly the voracious appetite for consumer electronics of the rising mainland consumer class, will drive a strong recovery in the coming quarters. On measure, we do not envy the leader there however, as they calculate the risks and rewards of accepting Beijing’s “panda hug” embrace.


Andrew Barber





October 23, 2009





I love being at the hub of investor sentiment and emotion of key issues in Retail. It’s easy to gauge by the velocity and tone of email after a print or piece of research (yes, it is often hate-mail, which is fine by me as it usually means I struck a chord). Here’s an exchange between a subscriber and me in the wake of the DECK print.


Question: DECK Q3 report and guidance is a blowout.  Q3 EPS beat is $0.34 and Q4 guide up is $0.30, bringing full year raise to $0.64.  That puts FY09 near $8.00, and I still think they are being conservative. Should end the year with approx. $20 per share in cash.  Also called out big pick up in UGG take away at retail in last 4 weeks, and strong acceptance of the brand overseas.  I know folks are skeptical, but shouldn’t this stock rip?  Interested in your thoughts when you get a chance. 


McGough: I'm in agreement on financials. This thing is a full-fledged brand. Ask any outerwear buyer at JWN.

But unfortunately I don't think the myopic Street will ever see the truth. 

That's why I will bet you dinner at the best rest in [XYZ City] that it is bought outright by this time next year. Someone will see the value – even if the Street does not.


Bottom Line: We’ve got $9 in earnings power in FY10 with $20 ps in cash. That’s about 4.5x EBITDA. Ignoring the cash (which you shouldn't), and applying a low 12-13x p/e for a ‘real’ high end brand, it gets to a stock easily over $110 – or 20%+ above where it is today.




Some Notable Call Outs


  • Investors and analysts have generally been fascinated by demographic trends and “ways to play” different target consumers. One area that receives a disproportionate amount of attention is Generation Y a.k.a The Millenials. While many statistics and studies have shown that teens and tweens like to shop, spend time at the mall, and are easily influenced by both the media and peer groups, a recent book suggests that those conclusions may in fact be understated. The statistic that jumps out at me is the finding that Gen Y shoppers spend five times more than their parents did at the same age (after adjusting for inflation).


  • In keeping up with the book wars, score one for the little guy. On behalf of independent booksellers across the U.S (are there that many left?), the ABA is asking the government to probe the recent and aggressive discounting by large retailers including AMZN, BKS, TGT, and WMT.


  • Most companies have been topping estimates by leveraging reduced cost structures and lean inventory positions, but COLM proved that heading into the quarter over-inventoried has its benefits– namely sales upside. The company outpaced its July sales outlook by more than 6%, driven by demand for fall products by U.S. retailers. We’re not suggesting companies with excess board shorts and tank tops are well positioned headed in the holiday, but rather companies with reasonable (i.e not too lean) inventory are likely to find an additional driver of upside beyond simple cost cutting and less clearance/promotional activity.





-Walmart Sees Faster Sales Growth on Store Expansion; Plans to Offer Lower Priced Items During Holiday Season - Wal-Mart Stores Inc., the world’s biggest retailer, expects sales growth to accelerate next year as it expands stores globally. Revenue will probably rise 1 percent to 2 percent this year and 4 percent to 6 percent next year, Chief Financial Officer Thomas Schoewe said at a meeting with analysts today in Rogers, Arkansas. Next year’s projection may prove to be conservative, he said. Wal-Mart announced it will offer weekly deep savings events and new everyday low prices on thousands of items across the store, starting today through the holiday period. Each week, Wal-Mart will announce new pricing reductions, beginning with selected items in groceries and entertainment. <> <>


-China: Retail sales up 15.1% in Q3 - China's retail sales in the first three quarters rose 15.1% year-on-year, or 17% after deducting price factors, to top 8.97 trillion yuan ($1.31 trillion), revealed the National Bureau of Statistics. The volume of retail sales topped 6.10 billion yuan in urban areas, up 14.8% year-on-year, and 2.87 trillion yuan in rural areas, up 16%. In terms of sectors, sales in wholesale and retail rose 15% in the first three quarters, and expanded 17.4% in accommodation and catering. <>


-India: Government visits Europe to lure textile investments - Indian's textiles minister Dayanidhi Maran will bring a business delegation to Switzerland, Italy and Turkey, followed by another trip to Germany and France in November in order to attract foreign investment in its textile and clothing sector. Promising 100% equity ownership, intellectual right protection and an average labour cost of US$0.70 per hour, India hopes to lure new capital to establish greenfield textiles, fabric, garment, technical textiles and clothing factories in the country. <>


-Amazon's Q3 Sales Jump 28% -, Inc., which acquired in July of this year, said  sales increased 28% in the third quarter to $5.45 billion from $4.26 billion in third quarter 2008. Excluding the $41 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, net sales would have grown 29% compared with third quarter 2008. Operating income increased 62% to $251 million in the third quarter, compared with $154 million in third quarter 2008. Excluding the $10 million unfavorable impact from year-over-year changes in foreign exchange rates throughout the quarter, operating income would have grown 69% compared with third quarter 2008. <>


-Amazon introduces software for reading Kindle e-books on a PC - Having dramatically increased demand for electronic books with the introduction of its dedicated e-book reader, the Kindle, Inc. today announced plans to make it possible to read Kindle e-books on another popular device—the personal computer. Amazon says consumers will be able to download for free the Kindle for PC software starting in November. Once the software is installed, consumers will be able to purchase any of the over 360,000 Kindle-compatible e-books available through Amazon at, and access their Kindle libraries of previously purchased e-books from Amazon servers. <>


-Mayor Bloomberg to Hold Retail Dinner - Mayor Michael Bloomberg, motivated by the success of Fashion’s Night Out and its collaborative spirit, is continuing to press the cause of retailing in Manhattan. The mayor has been quietly staging group meetings with retail chief executive officers, and now has sent out invitations for a third, less discrete gathering: a big dinner at Macy’s Herald Square on Jan. 11 to be hosted by Terry Lundgren, chairman, ceo and president of Macy’s Inc.; Deputy Mayor Robert C. Lieber, and possibly the mayor himself. Fifty to 60 ceo’s are expected. The dinner will take place the same week as the annual National Retail Federation convention at the Jacob K. Javits Convention Center, which is being held Jan. 10 to 13. <>


-Gucci Spotlights Mary J Blige Charity and Pop-Up Shop - Gucci was at both ends of greater New York on Thursday, feting a new partnership with Mary J. Blige’s charity in nearby Yonkers, N.Y., while preparing to open its Gucci-Icon Temporary pop-up store in SoHo. Creative director Frida Giannini, Blige and branding impresario Steve Stoute gathered in Yonkers to open the new Mary J. Blige Center for Women, a partnership between The Foundation For the Advancement of Women Now (FFAWN) — the charity that Blige and Stoute cofounded in 2007 — and Westchester Jewish Community Services (WCJS). <>


-Larry J. Franklin of Franklin Sports Elected SGMA Chairman - Larry J. Franklin has been elected as the new chairman of the Sporting Goods Manufacturers Association (SGMA).  Franklin, president of Franklin Sports, Inc., based in Stoughton, Massachusetts, was elected for a one-year term at the SGMA’s annual business meeting in Chicago earlier this week. Franklin succeeds Tom Rogge, president and CEO of Cramer Products, who served as SGMA Chairman from 2004-2009 and will remain on the board as Immediate Past Chairman <>





NKE: Phillip Knight, Director, sold 896,000 shares ($58mm).


CRI: David Pulver, Director, sold 25,000 shares ($720k).


NFLX: Reed Hastings, CEO, sold 10,000 shares ($450k) after exercising options to buy 4,500 shares.


MW: George Zimmer, CEO, sold 25,000 shares ($650k).



US Strategy – Churning

The Financials (XLF) went from the worst performing sector on Wednesday to the best performing sector yesterday.  As a result, the XLF moved back to bullish TRADE and TREND.  Yesterday, the S&P 500 closed at 1,093, up 1.1%.  So much for the big "correction," CRASH CALLERS got run over again!   


On the MACRO front, the markets support came from a key batch of economic data out of China that helped put the global RECOVERY trade on the front burner. Also, the trend of better-than-expected Q3 earnings continued yesterday, especially in Technology and Healthcare. A bounce in the dollar early in the day, weighed on The Energy sector. 


Yesterday, initial jobless claims rose 11,000 to 531,000 for the week-ended October 17th.  Although the four-week moving average continued to trend lower.  Lastly on the MACRO front, leading indicators rose a better-than-expected 1% month to month in September, marking a sixth consecutive monthly increase.


The portfolio activity included buying the Taiwan Index fund (EWT) and shorting the Consumer Discretionary (XLY).  We bought more SONC and shorted Nokia (NOK).  From a Research perspective, Rebecca Runkle remains bearish on both NOK and RIMM; she likes AAPL and MOT.  Nokia is up here on the day, so we'll take that as our entry point.


Yesterday, only three sectors outperformed the S&P 500 and every sector was up on the day.   The three best performing sectors were Financials (XLF), Consumer Discretionary (XLY) and Materials (XLB), while Energy (XLE), Consumer Staples (XLP) and Utilities (XLU) were the bottom three. 


The NAR is due to report at 10am existing homes sales.  A Bloomberg survey suggests that sales improved in September to the highest level in two years.  The survey suggests that sales rose 4.9% to a 5.35 million annual rate; the improvement would be the fifth in six months. 


Today, the set up for the S&P 500 is: TRADE (1,071) and TREND is positive (1,009).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 9 of 9 sectors are positive from the TRADE duration.  Yesterday, the Financials moved back to positive on both durations.           


The Research Edge Quant models have 1.0% upside and 2.0% downside in the S&P 500.  At the time of writing the major market futures were up. 


The Research Edge MACRO team.



US Strategy – Churning	 - charthp1


US Strategy – Churning	 - s pperf

US Strategy – Churning	 - s plevels



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