YTD: -16% NYSE: CAKE Calabasas Stock falls after restaurateur reports first quarter of declining sales in seven years. Situation In June, the company announced it expected a 1 percent decline in sales during the second quarter – a surprise since earlier guidance projected a sales increase. Until that point, Cheesecake had recorded 29 straight quarters of sales gains. In the announcement, Chief Executive David Overton blamed the slump on unfavorable weather that “reduced patio usage” by diners during the quarter. But analysts pointed to a long-term decline in sit-down dining, a trend that Cheesecake has defied until now. Final second-quarter results will be announced Aug. 2. Meanwhile, the company continues to open new restaurants and expand overseas. Their Words “We have continued to outperform the casual dining industry quarter to date, with over half of our regions posting positive comparable sales for the period, including key markets of California, Texas and Florida. … More broadly, however, we have seen heightened volatility in week-to-week sales trends, indicative of uncertainty on the part of many consumers. Specifically, we have seen pockets of softness as we moved through the quarter, notably in the East and Midwest where we also faced unfavorable weather that reduced patio usage.” – Chief Executive David Overton in June 13 statement “On the development front, we recently achieved an exciting milestone. We will be bringing the Cheesecake Factory concept to Canada. We’ve executed a lease for our first company-owned and operated international location in Toronto at the Yorkdale Shopping Centre. … In 2017, we continue to expect to open as many as eight company-owned restaurants. This includes one Cheesecake Factory relocation in Hackensack, N.J., which is slated to open in the second quarter as well as our second RockSugar. We continue to expect as many as four to five restaurants to open under licensing agreements internationally in 2017. This includes our first location in Hong Kong, which opened earlier this week at Harbour City Mall, the largest and most diverse shopping mall in Hong Kong and a fantastic location on the Victoria Harbour. Pent up demand for the brand was tremendous, with a line at the door of over 100 people, and the wait for a table exceeding three hours on opening day.” – President David Gordon on May 3 conference call “Our restaurants generate a substantial amount of cash and we continue to effectively allocate our capital to achieve our targeted returns and maximize shareholder value. In keeping with our practice of consistently returning our free cash flow to shareholders, we plan to continue doing so in 2017 in the form of dividends and share repurchases. We expect to allocate as much as $100 million toward share repurchases this year.” – Chief Financial Officer Douglas Benn on May 3 conference call Analysts & Observers “The revised guidance (for the second quarter) comes just six weeks after quarterly guidance was issued and leads us to believe that the weak comps will continue into the third quarter. Longer term, we expect CAKE stock to attract investors, given the company’s record of dividend hikes, share repurchases and ability to open new stores while also generating consistent comp growth.” – John Staszak, analyst at Argus Research “We believe this is more of an industry rather than concept-specific issue, as evidenced by several markets remaining positive, and expect comps will be able to recover in coming quarters. We expect this will certainly weigh on investor sentiment, which combined with our lowered estimates reduces our price target.” – Peter Saleh, analyst at BTIG “Cheesecake Factory forecast a hiccup in same-store sales growth in Q2 2017. Subsequently the share price decreased. The decrease in share price provides investors with an opportunity to buy the stocks at a lower price. The company still has a strong ability to generate cash flows and aims for a total shareholder return of about 15 percent. The international licensing operations will add significant value.” – Gino Aalbrecht, investor on Seeking Alpha “The company is optimistic that its strategic initiatives to boost sales and traffic volume along with continuous expansion plans will aid in attracting customers and contribute to the future growth of its business and profitability. However, the recent outlook cut has certainly cast doubt on this … company’s ability to endure the broader slump in the restaurant industry.” – Zacks Equity Research Average Analyst Recommendation: 2.6 1 Strong Buy 2 Buy 3 Hold 4 Underperform 5 Sell Source: Thomson Reuters
