Cheesecake Factory (CAKE) shares are approaching all-time highs. Our advice on the stock? Simple.
Sell.
“Management is living with a business in secular decline,” says Hedgeye Restaurants analyst Howard Penney. In the video excerpt above, Penney lays out the many reasons to sell CAKE.
Below are key takeaways for investors:
- Peak Margins? – CAKE’s operating margins are at peak levels, while their most important commodity, dairy, is at multi-year lows. We see both of these trends reversing in 2017. A higher Federal minimum wage would also boost wage inflation. CAKE can’t manage margins by raising price forever. Something has to give!
- CAKE Is In Secular Decline – One look at CAKE’s traffic declines since 1Q12 and it’s clear where this concept is headed! The bottom line is that management needs to reinvest in the brand to build traffic.
- Financially Strong? – Working against our SHORT case is the company’s strong balance sheet and cash flow. The company also expects to buy back $150 million of stock in 2016, and $117 million in 2017. CAKE has the authority to purchase 9.5 million additional shares under their current authorization.
In the clip above, an investor asks Penney about timing the coming “doomsday scenario” for CAKE. Penney responded:
“If you were to put a gun to my head and ask me, ‘When do you think this would begin to play out,’ I’d say in the second quarter of 2017. That’s when we’re going to start to see potential for sales slowing further or not recovering and/or inflation coming back. When they report in the first quarter and give guidance for second quarter they are probably going to disappoint.”
In other words, sell CAKE