THE HEDGEYE EDGE
It is no secret that the restaurants space is struggling. With consumer pockets stretched to their limits, restaurants have taken the brunt of the hit, and have now been forced to turn to creative methods of attracting customer traffic. Aggressive value plays and now delivery have come to the forefront as key levers many Companies have pulled.
However, CAKE’s struggle stands out as it is effectively two-pronged. With ~90% of the Cheesecake Factory locations located in or in close proximity to shopping malls, CAKE has been forced to deal with historically low traffic at America’s malls, in addition to the overall downturn in the restaurants space.
Our view is that CAKE is in a secular decline, and one look at CAKE’s traffic trends since 1Q12, and it is clear where this concept is headed. With 1Q17 traffic at -2.3%, and -1.4% on a two-year average basis, the decelerating in the business is poised to continue, as estimates have two-year average traffic further decelerating to -1.8% in 2Q17.
INTERMEDIATE TERM (TREND)
We believe there are various factors at work here. On their most recent earnings call, CAKE’s management team stated that dairy showed some favorability in 1Q17 and we attribute this to the Company locking in their commodity basket well ahead.
As seen below, dairy prices have bottomed and reversed, and this will work as a headwind going forward as operating margins were at peak levels while dairy was at multi-year lows. The Company will be hard-pressed to find relief elsewhere, as labor costs remain on the rise due to a tightening and more competitive labor market.
LONG TERM (TAIL)
Reinvestment into the business will be paramount if the brand hopes to have long-term success, but with margins near peak levels, this appears to be a long shot. Macro headwinds (labor cost inflation, commodity inflation, traffic declines) will continue to put pressure on Company margins, and CAKE cannot continue to manage margins by raising prices.
ONE-YEAR TRAILING CHART
