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.

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