CAKE - The Cheesecake Factory

[Sullivcd]

CAKE traded at a new 52 week low today, hitting $39.13.  14x EPS is not super cheap but cheap compared to the overall market and peers.  No debt with EV 1.8b and FCF 137m, EBITDA 283m.  Substantially all FCF is returned via dividends and buybacks and a significant portion of capex is for new stores.  The recent share price weakness is the result of same store sales decline last quarter and overall industry weakness in my opinion.  So, while not a screaming bargain, this could be one to keep an eye on.  Has anyone taken a look?

[DTEJD1997]

Thank you for bringing this to the attention of the board.

 

I used to eat at CAKE restaurants a fair amount.  It was one of my Ex's favorite places to (Grand Luxe).

 

The have good food, good workers, and it appears a good organization.

 

I agree with you 100% that it is not "cheap", but is probably close to being fairly priced.

 

One caveat though....I suspect they may take a hit on the next quarter's earnings.  A good chunk of their restaurants are in the Houston area.  I wonder how many are in Florida and the Miami area.

 

Finally, a lot of their locations are around higher end malls.  These malls are fighting to attract more bars/restaurants, thus resulting in more competition for CAKE going forward.

 

I will watch closely, but I suspect they may hit new lows in the upcoming months.

[Sullivcd]

Thanks for the feedback DTEJD.  One question, where did you find the store location breakdown? I only found one store in Houston using the locator on their site.  I agree with you about the mall issue, there is a lot of competition for space in my town at least.  I like how they are licensing internationally, gives them capex flexibility while not risking brand dilution.  If they can hit close to their target 9% EPS growth over the next five years while returning substantially all FCF to shareholders, this might be cheaper than it first appears.

[gjangal]

This is definitely getting interesting. They generate around 125mn in fcf. scope for 300 restaurants in the US. Expansion scope in Canada. Same store sales will come back. There is not a single time in 6 years i've been going to this place on saturdays where i was taken to the table straight away

 

You can get a reasonable return from this price. May not be hitting it out of the park but 12-15% possible over next 5 years

[DTEJD1997]

Thanks for the feedback DTEJD.  One question, where did you find the store location breakdown? I only found one store in Houston using the locator on their site.  I agree with you about the mall issue, there is a lot of competition for space in my town at least.  I like how they are licensing internationally, gives them capex flexibility while not risking brand dilution.  If they can hit close to their target 9% EPS growth over the next five years while returning substantially all FCF to shareholders, this might be cheaper than it first appears.

 

You can find their locations on the interwebs.  Just checking shows they have at least six restaurants in the Houston metro area.  I think only one of them is in an area that got relatively little storm damage. 

 

Further, if I remember correctly ALL of their Houston locations are in a mall OR in an area highly dependent on mall traffic (ie. across the street from a mall OR in mall parking lot...)

[Sullivcd]

Attached is a location list I was able to find using the InteRwebs. Unfortunately, the stock price is starting to run away from us.

Restaurant_Locations-CAKE.pdf

[DTEJD1997]

Hey all:

 

I went to the Detroit area CAKE last night with family.

 

At 7 PM, the wait was about 40 minutes.  The place was absolutely jammed.

 

This location is maybe "medium sized" compared to the other locations I've been to.  One interesting thing is that this location, which I think opened in 2013, clearly has design/layout cues from the "Grand Luxe" concept. 

 

Service was good.  The food was EXCELLENT.  My family members were very surprised at the high quality of the food.  They will be going back on their own in the future.

 

I think this will be a very strong brand going forward.

[Gregmal]

Cheesecake Factory opening soon at Rockaway Mall in NJ. Should do very well there. There is essentially nothing comparable to CAKE there. At best maybe Red Robin.

[DooDiligence]

Probably a stupid question but is the higher P/B a result of buybacks? (indirectly through a re-rating?)

 

Super tempted bc I need more small cap & something that might loosely correlate to NVO.

 

The closest location to me is NOLA & I need to go eat there (hope I don't get diabetes.)

[gjangal]

That sounds right. They return cash both in dividends and buybacks. 55mn in dividends and quite a bit of buybacks

 

Their 10k is very well written. Lots of numbers about operations. I found it simple to read and understand the business and how they allocate capital

[fareastwarriors]

Don't Dine and Dash on Cheesecake Factory

 

https://www.bloomberg.com/gadfly/articles/2017-11-02/cheesecake-factory-earnings-don-t-dine-and-dash

[no_free_lunch]

This seems like a boring but well run business.  Capital allocation has been excellent.  My only concern is that the CEO is listed as holding only $2.4M in stock.  Does anyone have better insider ownership numbers or is that correct?  The CEO started the company and so I would have expected a larger ownership stake.

[Nomad]

I have been looking at CAKE for awhile now but have held off. My primary concerns are (1) oversaturation in the US restaurant industry as a whole; and (2) changing consumer tastes, especially the trend among younger people to move away from establishments like CAKE that serve enormous portions and towards options that are perceived as "healthy," "local," "sustainable," etc.

 

I'm assuming you all have seen this article, but if not it's an interesting read: https://www.nytimes.com/2017/10/31/business/too-many-restaurants-wall-street.html

 

PS: Nice to 'meet' you all - I have been lurking for awhile and this forum is an excellent place to discuss ideas!

[oscarazocar]

This seems like a boring but well run business.  Capital allocation has been excellent.  My only concern is that the CEO is listed as holding only $2.4M in stock.  Does anyone have better insider ownership numbers or is that correct?  The CEO started the company and so I would have expected a larger ownership stake.

 

CEO owns 3.5 million shares, or 7.2% of the company.  I think you are looking at only the directly held shares.  He owns another 3+ million shares through trusts.

 

See page 91 of the proxy, footnote 6.

https://www.sec.gov/Archives/edgar/data/887596/000104746917002896/a2231887zdef14a.htm#dm37

 

[no_free_lunch]

oscarazocar, great, thank you so much.  I was almost certain from the capital allocation history that the CEO had to be a big shareholder.  However I just couldn't find the data.

 

Nomad, welcome.  You are on to the more complicated and important part of the analysis.  This is what I was concerned with as well, this is now an older company and will the younger generation be interested?  For those who have actually been to one of these restaraunts, what is their client base like as far as age?  Mostly older people?

[fareastwarriors]

oscarazocar, great, thank you so much.  I was almost certain from the capital allocation history that the CEO had to be a big shareholder.  However I just couldn't find the data.

 

Nomad, welcome.  You are on to the more complicated and important part of the analysis.  This is what I was concerned with as well, this is now an older company and will the younger generation be interested?  For those who have actually been to one of these restaraunts, what is their client base like as far as age?  Mostly older people?

 

I see mostly younger people on dates, groups of friends, or families in the SF area locations. There's always a line too... Perhaps the clientele is changing but it might be slower than expected.

[educatedidiot]

CAKE hasn't traded as low as 7x EV/EBITDA in around 8.5 years:

http://www.rocketfinancial.com/Charts.aspx?fID=5072&r=3650&t=4

 

Does anyone know what their mix of restaurants is in terms of mall-based vs free-standing or strip?

 

Thanks

[oscarazocar]

CAKE hasn't traded as low as 7x EV/EBITDA in around 8.5 years:

http://www.rocketfinancial.com/Charts.aspx?fID=5072&r=3650&t=4

 

Does anyone know what their mix of restaurants is in terms of mall-based vs free-standing or strip?

 

Thanks

 

They have said in the recent past that they are about 2/3rd in malls (all Class A malls), but it's closer to 90% of stores if you include being adjacent or close to the mall.  Their mall stores all have their own operating hours and entrances. 

[DTEJD1997]

oscarazocar, great, thank you so much.  I was almost certain from the capital allocation history that the CEO had to be a big shareholder.  However I just couldn't find the data.

 

Nomad, welcome.  You are on to the more complicated and important part of the analysis.  This is what I was concerned with as well, this is now an older company and will the younger generation be interested?  For those who have actually been to one of these restaraunts, what is their client base like as far as age?  Mostly older people?

 

The typical client of CAKE is not young like say at McDonalds or Chuck E Cheese....but they are not old like Sign of the BeefCarver....

 

The last time I went, I was there about 7PM...to about 8:30 PM.  Around 8 PM, there were a bunch of younger kids there on dates.  I would guess high school seniors or college Freshman.

 

I would say the average age is in the 30's...but there are those in the 20's and 40's that go there.  You will also see a good chunk of families depending on the time when you go.  Everybody I know either likes OR loves Cheesecake Factory and Grand Luxe, no matter their age.

 

Of all the thing to worry about with CAKE, I think the age of their customers is pretty far down the list.

 

 

[no_free_lunch]

Thanks DTEJD.  What do you see as the biggest risks here?

[DTEJD1997]

Thanks DTEJD.  What do you see as the biggest risks here?

 

Well, the more I research & think...the more I come to the realization that CAKE is one of the better restaurant companies out there.  I would argue that operationally, they are in the top 10%.

 

I also think that they are going to STAY in the top 10% in the near to intermediate future.

 

The risks I think are that a lot of their units are in/near malls.  With that being said, they are mainly in "A" class malls.  Still a potential risk though.

 

The face a potential greater risk of food inflation...but this has always been the case.

 

Another part of inflation risk is the increase in worker's wages, particularly in the service sector.  I am going to guess that the VAST majority of CAKE's workers make more (sometimes substantially so) than minimum wage.  Even so, this will probably get  more problematic as time progresses.

 

They may also face irrational competition, or more so than they have in the past.  For example, KONA is one of their smaller competitors.  KONA is frequently in close proximity to a CAKE unit.  KONA is in financial stress.  I could see them being under MORE stress, perhaps even SEVERE stress if the economy goes down.  Maybe they try and take market share by lowering prices?

 

CAKE may screw up their expansion/capital allocation plans.  They have not done so before now...I doubt they will in future, but they could.  CAKE has a top tier balance sheet...I don't see that changing.

 

Maybe they have a food safety issue like CMG?

 

Maybe the economy as a whole goes in the tank ala 2008?

 

The stock is trading at what I consider to be a very good valuation, and thus you have protection against some of these risks by the relatively low valuation.

 

I don't think there are too many things to sink CAKE...but I am watching it closely.

 

I do not have a position in CAKE, but I will if it goes below $40.

[no_free_lunch]

Looking historically, SSS have been in the 1-2% range for most of the past decade.  In 2009/2010 they were negative so overall they are likely below inflation.  This probably just reflects the competitive nature of the business they are in so not necessarily a knock against management.  Nevertheless, I think SSS is what it all comes down to. 

 

The rest of it is pretty solid, they can expand slowly at 2-3% with new restaraunts, they will pay a 2.75% dividend, they will repurchase 4-4.5% of the company each year.  If they can just get SSS to match inflation, then you are getting 10-11% return + inflation.  It is speculative but at some point you should get a multiple expansion if SSS can have a few good quarters and as we have seen that could lead to a 50%+ return.  There is also room for margin improvement (speculative of course) but that could add a one-time 15-20% to the stock.  However, with a perhaps bloated restaraunt market it is tough to call what same store numbers will look like. 

 

I am going to wait for a better valuation.

[Gregmal]

Cheesecake Factory at Short Hills today

 

11am about 90% full

11:30 15 minute wait

1pm over an hour wait

 

Granted Short Hills is probably one of the most affluent malls in the country, this is pretty impressive traffic for a mall based restaurant on a Sunday morning/early afternoon. I also noticed they are selling jars of their sauces and dressings. Would not be shocked to see a move following PF Changs into jarred sauces and prepackages food for grocery stores. There would definitely be demand.

 

I've always thought highly of CAKE, but lately I've been paying more attention, and what has become apparent, is that this is a very powerful, premium brand. I also love the balance sheet and how shareholder friendly they seem to be. I'll be looking to initiate a position here soon.

[DooDiligence]

Is this anything?

 

http://www.nrn.com/casual-dining/cheesecake-factory-buys-north-italia-flower-child

 

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They should stick to the proven concept & start opening in more US cities.

 

No shortage of "A" properties.

 

I love the buybacks (especially if they'd continue.)

[Sullivcd]

This looks like a small, tracking position type investment. They are guiding to 5 new US stores in 2018 and should license a couple more overseas stores. I really like the overseas licensing concept because it requires no pre opening capex and exposes them to zero brand risk. I also like the willingless of management to tap the revolver for buybacks, 30m last quarter becoming the only debt on the balance sheet. This management team is top notch imo.