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Important consumer commentary from management.

CAKE posted in interesting quarter.  Same store sales up 1.6%, traffic up 1.4% and price up 1.4%. The implication is that pricing was down1.2% for the quarter.  As management state the consumer is doing a little “check management” when they come to the Cheesecake factory.  This is a problem - especially with commodity prices increasing. 

The company has touted the success of the new section on the menu “Small Plates and Appetizers.”  Unlike some restaurant companies that count entrées to measure traffic trends, CAKE actually measure traffic in terms of actual guest counts, which the server inputs when inputting an order for the table.  While you can not directly draw this conclusion, it seems likely that the success of the small plates and lower price points are the driver of incremental traffic.

Despite this, the company wants to raise prices 1% with roll out of the summer menu.  The company is trying to balance an increase commodity pressures and other expenses, while at the same time trying to get back to peak margins.  With the incremental traffic being driven by lower price points, the risk to the business model increases.  In a cautious consumer environment, slowing traffic trends is real possibility.

As you can see from out CAKE sigma chart, the company is currently operating in “nirvana”, the quadrant where same-store sales and restaurant-level operating margins are increasing year-over-year.  Given the current trends the company will move down in the “trouble brewing” quadrant, where same-store sales are still positive but margins are contracting year-over-year.  And that is how I would describe the position the company is in.  There is trouble brewing when the incremental consumer is coming in for lower price points and you need to raise prices to maintain margins.  




  • Weary of macro environment
    • Fed revision
    • Consumer confidence
  • Still produced traffic +1.4%
  • Sales were solid
  • Comps and savings helped drive 22% of EPS growth
    • Anticipating more in savings this year than in 2009
  • Opening new model (final for year) next month
  • Seeing more availability of quality restaurant sites


  • 1.3% increase in operating weeks due to opening new restaurants
  • Sequential sales comparisons impacted by gift card redemptions and holidays
  • Traffic up 1.4%, pricing up 0.6%
  • Check management by customers – particularly with beverages
  • G&A were down 80 bps vs 2Q09
    • Lapping accrual related to CEO retirement plan
  • D&A was down 30 bps yoy
    • Lower depr reslting from impairment charge being recorded
    • Positive sales leverage
  • Operating margins in the second quarter of 2010 improved 180 bps to 8.9%
    • On track to surpass operating margins of 07 – 7.3%
  • No more interest rate collars in place on remaining debt outstanding
  • 670,090 shares bought back at 17.4m dollars
  • Cash balance of 86m despite using sme cash to pay debt and unwind interest rate collar
  • Generated about $58m million in free cash flow

3Q Guidance

  • EPS between $0.31 and $0.33
  • Assumes comps between flat and +1%
  • Expecting dairy pressure, preopening expenses yoy (no new restaurant in 3Q09), and additional marketing expense to impact EPS by $0.04 (combined)

Full year 2010

  • EPS between $1.32 and $1.38
  • Assumes comps between 1% and 1.5%
  • In 4Q CAKE hits hardest compares yoy
  • 60% commodities contracted for 2010 but food inflation of flat to +1%
  • Lower contracted proteins but higher dairy and fish


  • The worst market we have is down 1% - California


Q: Changed back half of year earnings guidance?

A: Earnings outlook changed by 4 cents and 3 cents was upside of 2H. we changed it by a penny

Q: How are trends looking now, consumer habits?

A: Not talking about month by month.  We continue in the quarter to track closely to forecast.  When we expected soft comps because of difficult yoy compares we got them. 

Q: Still going to grow at low single digit range?

A: We’re looking at many sites, more than we did for 2010.  We won’t have color on 2011 until lease negotiations are further along.

Q: Price? Average check – still incremental boost from small plates?

A: Comps are up 1.6%, 1.4% is traffic, price is 1.4%, negative mix shift negated price.  Guests managed checks by buying fewer beverages.

Definitely some trading down. 

Expecting cost of sales for year to be about flat.

Q: On negative menu mix, do you think you’ll start to lap trade down that consumers have been doing? Do you think summer menu price may stick more?

A: They might…(not too confident!)

Q: Looks like volumes are lower, is there any reason to believe that there is not a capacity to grow comps based on historical range?

A: There definitely is capacity to gain our comps back if we take guest counts back.  We lost traffic, not pricing.  We can get it if we can get customers not managing check as much.

Q: How confident are you that you can control check management more?

A: It’s an art not a science, have to find a balance. We’ve seen TC’s increase over the last two quarters. (not convincing here)…

Q: What are some of the plans for this quarter?  Do you see trends move when you ramp up spending on marketing?

A: We are spending more in 2Q than we did in 1Q? it’s timing.  2010 marketing as % of sales will be about flat on last year.  We see redemptions in weekly sales, certainly.  Marketing is focused on remaining on brand and not doing deep discounting.  Engaging customer.  And creating positivity. 

Q: You introduced small plates and snacks as economy slid…considering the economy is not doing what we might of though, what is your take now? Guest satisfaction?

A: Last year we increased satisfaction every quarter.  Our expectation for this year is to maintain or slightly raise the level.  We are maintaining the high level of guest satisfaction. 

Menu innovation is one of our advantages. We have a new menu in just a few weeks.  Recently we brought our new cheesecakes that are the best selling we’ve ever had.

Q: Grand Lux has a small base but obviously slowed slightly…commentary?

A: Negative holiday shift in 2Q impacted Vegas and Florida strongly and they are a big part of the pie.

Q: 10-12 openings maybe in 2011, are any of those small formats?

A: Right now the Annapolis size is now our favorite – 8,500 sq ft.  The answer is yes and we’re looking at 7,000 when we think we can do 7m.  Might earmark one 2011 site for 7,200.  8,500 is the favorite at the moment. 

Q: Impact from the gulf?

A: No exposure there…Miami was strong though.

Q: Labor turnover vs where it was at the peak?

A: Incremental savings coming primarily on the labor line.  Turnover remains strong, slightly higher than peak retention but far above peer average. 

Q: Guidance, bakery revenues? Outside accounts?

A: Primary role of the bakery is to provide high quality desserts for restaurant.  They also sell externally; there is not a large amount of outside customers.  Bakery revenues are difficult to predict.  One customer can move the needle. 

Q: G&A guidance?

A: In 2009 we held back on a lot of things (raises, infrastructure) that we are spending on in 2010.  Going forward I would expect that our growth in G&A will be less than revenue growth so some kind of G&A leverage as soon as 2011.

Howard Penney

Managing Director