The Cheesecake Factory Incorporated (NASDAQ:CAKE) stumbled a bit in its latest quarter, sending the stock down about 4% on Thursday. CAKE stock missed a few estimates, albeit not by very much, and that seems to be what the market didn’t like.
The Cheesecake Factory is an unusual story in the restaurant world. Despite being in business since 1972, it only has about 200 U.S. restaurants, and only 15 licensed restaurants worldwide. CAKE stock has done exceptionally well — returning some 1,300% since its IPO in 1972. It built its brand and its stores with careful diligence. It didn’t draw down massive amounts of debt. Management was always very patient, confident that it had a unique brand and position in the restaurant market.
Today, we see restaurants blast into the space, grow store base very quickly, and eventually start drawing down debt to maintain the torrid pace of growth. Not CAKE. The company appears to hate debt.
As a result, it has always delivered solid, if not spectacular, results. However, the market has clearly been fine with this. Slow and steady has won the day for CAKE stock.
The problem is that slow appears to now be slowing down, based on the same-store comps that CAKE stock is showing. Remember, a true test of a retail company’s business are same-store comparable sales. They tell us if a company is organically growing either foot traffic or price increases, since prices never get cut.
Comps fell 2.3%, which is usually an ominous sign for any retailer, especially since the year-ago quarter saw a 1.7% growth, and last quarter saw a 0.5% decrease in comps. This decline came despite a menu price increase of 2.4%. Traffic thus fell 4.3%. Some of this was due to the trio of summer hurricanes, which clipped comps by 0.8%.
As for August, CAKE says comps will be down 1-2%.
What this tells me is that CAKE stock is suffering because, although it took 45 years, consumers may be tiring of the menu. One problem that fast-growing restaurants have is over-saturation, and thus, quicker loss of interest from consumers. CAKE may only now be seeing customer boredom.
This tells me that CAKE may want to re-do its menu. I wouldn’t toss the concept or store design. All that stuff works very well. CAKE is known for its massive portions, and I have to wonder if there aren’t some savings there by trimming them just a bit to save on costs a tad.
Obviously, CAKE should keep its variety and its bakery, but some kind of retooling is probably due for the menu.
Bottom Line on CAKE
As for the numbers, adjusted EPS was $0.56, which was below the $0.60 estimate. That, alas, was a decline of 20% year over year. Net income was $26.44 million, down from $34.57 million. This came on sales of $555 million, but that was down by 0.8%. The bottom line was also hit by a 160 bps increase in labor costs.
Q4 is pegged at $0.50 to $0.54 per share, and CAKE further disappointed investors by guiding down to a range of $2.57 and $2.61, compared with $2.62 to $2.70, guided earlier.
CAKE stock is down 33% from its all-time high. That, plus its 2.6% yield, starts to make things interesting. CAKE is a terrific operation and I’d love to own Cheesecake Factory stock.
Based on previous experience, I suspect we will see CAKE struggle for a few quarters before announcing cost-cutting initiatives and a menu makeover of some kind. So I’m going to be patient, because I think I can get the stock cheaper.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years of experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
