EAT HER CAKE, AND MAKE MONEY OFF IT TOO!

EAT HER CAKE, AND MAKE MONEY OFF IT TOO!

Sales & Analysis
In October, 2014, Cheesecake Factory (CAKE going forward) gave us earnings guidance for 4Q fiscal 2014, of $0.58 to $0.62 based on an assumed comparable restaurant sales (SSS going forward) increase of between 1.0% and 2.0%.  At the same time, CAKE also offered 2015 earnings guidance of between $2.35 and $2.45 per share, based on an assumed SSS increase of between 1.0% and 2.0%.  This SSS range of 1% to 2% has been consistent since fiscal 2010, but there is a chance that CAKE will break out of this range to the upside, simply because its consumer will have more money in her pocket.  

My logic behind consumers having more money is simple.  The price of gasoline has sharply declined over the last three months, so the US consumer has more discretionary income in her pocket.  To quantify this savings, for every consumer who fill up with 15 gals of gasoline per week, she will see an extra $60/ month in her bank account.  At the same time, the personal savings rate (PSR going forward) in the United States decreased to 4.40 percent in November of 2014 from 4.60 percent in October of 2014.  Just for clarification, PSR is the percentage of a person’s income that is saved, rather than spent.  Since the PSR is 4.40 percent, the US consumer spends 95.6 percent of her income.  In short, many Americans have more money to spend, and they are doing so. 


The margins of the business declined year over year (YOY going forward) because of an increase in the cost of dairy and healthcare insurance.  Looking at dairy, Doug Benn, the CFO of CAKE said, “The impact to us in the third quarter alone from overall diary pricing was approximately $4.3 million and $0.06 in earnings per share compared to prior year.”  When input costs rise faster than you can raise the price of what you are selling, your profits suffer; but management feels as though the price of dairy will normalize in 2015.  In order to quickly check the price of dairy in the US, you can simply look at the commodity futures market to find the price of butter.  From what I can see, the price of butter has declined by 10% since mid-October, so as of now the trend is positive for CAKE. 


One potential issue that I see related to sales is that CAKE has 48 out of 186 restaurants (26%) within the top 5 oil producing states in the country.  I don’t think this is a reason to panic because oil derricks are still pumping in Los Angeles, but if they were to stop because of declining oil prices, many jobs would be lost.  CAKE Texas locations (14) would feel the biggest blow from this potential issue, but that state has less than 10% of CAKE’s restaurants.  California is a large market for CAKE (34 locations), but the oil jobs in CA are minuscule compared to Silicon Valley and Hollywood jobs.  All in, I am sure that the savings from other consumers will overcome this challenge if it presents itself in the future.

Price Target     

The stock is expensive, trading at a forward P/E of 22, but the company has committed to an EPS growth rate of 15% in 2015, well before the consumer gained strength.  At the same time, the CEO has gone on record stating, “We remain confident in our ability to deliver on our target of averaging mid-teens earnings per share growth over the next five years, while also providing a continuing and meaningful dividend.”  I am comfortable with saying that the stock will trade above $60/share by 2016, as long as management can honor its target of mid-teens earnings growth.  


Note: I am not a registered financial/investment adviser, therefore you must make an independent decision regarding investments or strategies mentioned on this website. Before acting on information on this website, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.      


Comments

  1. UnknownJanuary 23, 2015 at 7:06 PM

    I am a front of house manager at California Pizza Kitchen in LA County. We have also experienced a substantial increase in sales over the last while. I thought the sales increase was strictly due to our newest restaurant remodels. But after reading this very insightful intuitive blog I can't help but wonder and agree that it also has to do with declining gas prices. I would like to thank the author of this article and also tell everyone that I look forward to seeing them at a California Pizza Kitchen near them very soon. Also be sure to check out our new remodeled restaurants.

    ReplyDelete

Post a Comment

Popular posts from this blog

Five Below: Lowered Q4 Guidance so the Stock gets Hammered!

Five Below: Lowered Q4 Guidance so the Stock gets Hammered! Sales & Analysis In after-hours trading on Thursday, Five Below (ticker FIVE) announced that net sales for the nine weeks ended January 3, 2015 increased by only 24.5% to $230.7 million from $185.3 million in the comparable nine-week period of fiscal 2013.  In addition, sales guidance for the full year is now expected to growth 27% to $680 million. This year over year (YOY) sales growth is similar 2013 versus 2012, but retail companies make the majority if their earnings during the holiday season, so I never like seeing a slowdown in growth during the holiday.  Such a slowdown leads me to believe that the trend will continue into 2015.  Looking at same-store-sales (SSS), the company lowered guidance to an increase of 3.2%, compared to previous guidance of 4%.  Furthermore, executives said, “the increase in SSS was driven by average ticket,” so I would interpret the increase in SSS as a combination of price incre
Read more

DECK Decker Outdoor Analysis

Decker Outdoor is changing the structure of its product distribution model by adding company owned retail stores to its distribution model.   Since building out retail stores is a capital intensive process, I think sales revenue and fcf are the best tools to access a company’s success in the short term. My analysis will focus on revenue comps and product distribution comps to show everyone that Decker Outdoor is going to continue having challenges with shifting the business.   These challenges will have huge impacts on EPS and operation capital requirements because the company’s core product, Ugg Boots, is experiencing a sharp decline in sales.   In August 2011 I was noticed a shift in women’s fashion:   Riding boots were the new trend.   I wish Frye was a publicly traded company.   http://www.thefryecompany.com/ From a fashion standpoint, trendy women don’t wear Uggs anymore, and there are knockoff brands sold at WMT as well as many other large retailers for a fraction of the
Read more

HBO Standalone Streaming will Drive Growth for Time Warner in 2015 and 2016

HBO will offer Standalone Streaming in the spring of 2015, which will drive growth over the next five years TWX long term guidance of $6/share and $8/share in 2016, and 2018, respectively EPS CAGR of 20% and 18%, in 2016, and 2018, respectively Initial price target of $120/share, based on 20x 2016 earnings of $6/share How many people have cut-the-cord, cable cord that is, over the years because they either couldn’t afford or couldn’t justify the monthly expense associated with 200 plus cable channels in order to access HBO?   Honestly, not that many, but I see a drastic shift in Premium Cable viewing because HBO is going to offer a streaming service that doesn’t require you to sign up for cable with any of the traditional cable brands such as Comcast, Time Warner Cable or DirecTV.  Think of it; instead of paying that cable and internet bill of more than $100 per month, you would simply use your internet TV or OTT box to subscribe directly to
Read more