DooDiligence Posted November 12, 2017 Share Posted November 12, 2017 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. I like the activist angle this guy brings up but don't believe that the franchise model he suggests is the only avenue for growth. https://seekingalpha.com/article/4105252-cheesecake-factory-ripe-activist --- Also seems like they could start taking more shelf space in Publix, etc. and this https://www.amazon.com/s/ref=nb_sb_ss_i_3_12?url=search-alias%3Daps&field-keywords=cheesecake+factory&sprefix=cheesecake+f%2Caps%2C176&crid=2E77S3I2N9JQ7 Sorry 4 the naked link but I'm in a hurry this morning :o Link to comment Share on other sites More sharing options...
DooDiligence Posted November 12, 2017 Share Posted November 12, 2017 Attached is a location list I was able to find using the InteRwebs. Unfortunately, the stock price is starting to run away from us. Distinct lack of locations in smaller southeast markets. NW FL, coastal MS & all of Alabama, GA & SC (us rednecks like good food too!) Don't newer locations do well & somewhat offset SSS declines elsewhere? --- Also, independent director Herb Simon (Chair Emeritus of Simon Properties) just bought $1m slug. http://archive.fast-edgar.com//20171107/AUZZQG2CZC274Z22222P2ZZ2O8GRZZ2RXH92/ Link to comment Share on other sites More sharing options...
DooDiligence Posted November 12, 2017 Share Posted November 12, 2017 Here's a good article https://www.bizjournals.com/boston/news/2017/11/08/restaurant-stocks-take-a-pounding-as-tastes-shift.html I like the point about increasing turnover. They do generate some low sales & profits per employee & shortening the menu might help? Link to comment Share on other sites More sharing options...
gokou3 Posted November 12, 2017 Share Posted November 12, 2017 I like Cheesecake Factory as a customer. They seem to be located mostly in or near class A malls. When I read the investor presentations of GGP and SRG, they seem to be very keen on re-developing their space into service-oriented businesses including restaurants. This should increase competition for CAKE going forward? Link to comment Share on other sites More sharing options...
DooDiligence Posted November 12, 2017 Share Posted November 12, 2017 I like Cheesecake Factory as a customer. They seem to be located mostly in or near class A malls. When I read the investor presentations of GGP and SRG, they seem to be very keen on re-developing their space into service-oriented businesses including restaurants. This should increase competition for CAKE going forward? True Link to comment Share on other sites More sharing options...
DTEJD1997 Posted November 12, 2017 Share Posted November 12, 2017 Here's a good article https://www.bizjournals.com/boston/news/2017/11/08/restaurant-stocks-take-a-pounding-as-tastes-shift.html I like the point about increasing turnover. They do generate some low sales & profits per employee & shortening the menu might help? CAKE generates low sales & profits per employee? I would be SHOCKED if that is the case! Every CAKE I've ever been to has been busy to PACKED at all times. I think part of the "draw" is that there are a HUGE amount of choices on the menu. Everybody can get what they want, and everybody can get something different.... I would also question how much benefit they would get from streamlining their menu. If you look at the sales metrics, CAKE locations do some of the very highest dollar volume in sales...how much more margin are they going to capture if they only have 25 items on the menu? I would counter that CAKE is doing just about everything right....the biggest & bestest way to make more $$$ would simply be to increase more entree prices by $1. The last time I was there, everybody was SHOCKED at how good everything was in comparison to the price of the check. Everybody thought it would be more. I think CAKE is doing about a 9/10 in terms of their operations...they should keep on keeping on, and don't pay attention to magazine pundits telling them to tinker with operations to juice margins a bit. Link to comment Share on other sites More sharing options...
Sullivcd Posted November 12, 2017 Author Share Posted November 12, 2017 Agree with everything dtejd just said. They do over 11m in sales per store, blowing out their competitors, it's literally not even close. The mall competition issue is legitimate but not something to lose sleep over because they are better than alternatives and desired by A malls. The major problems I see are grocery cost deflation and wage inflation. Their costs are rising while the consumer alternative, staying home and cooking, is getting cheaper. But if you have enjoyed a slice of their red velvet cheesecake or have simply thrown a dart at the cheesecake menu you will feel confident in the brand's staying power. I tell my wife everytime I have the red velvet it is the best thing I have ever tasted. The bang bang chicken and shrimp or miso salmon aren't too shabby either. Link to comment Share on other sites More sharing options...
DooDiligence Posted November 12, 2017 Share Posted November 12, 2017 Here's a good article https://www.bizjournals.com/boston/news/2017/11/08/restaurant-stocks-take-a-pounding-as-tastes-shift.html I like the point about increasing turnover. They do generate some low sales & profits per employee & shortening the menu might help? CAKE generates low sales & profits per employee? I would be SHOCKED if that is the case! Every CAKE I've ever been to has been busy to PACKED at all times. I think part of the "draw" is that there are a HUGE amount of choices on the menu. Everybody can get what they want, and everybody can get something different.... I would also question how much benefit they would get from streamlining their menu. If you look at the sales metrics, CAKE locations do some of the very highest dollar volume in sales...how much more margin are they going to capture if they only have 25 items on the menu? I would counter that CAKE is doing just about everything right....the biggest & bestest way to make more $$$ would simply be to increase more entree prices by $1. The last time I was there, everybody was SHOCKED at how good everything was in comparison to the price of the check. Everybody thought it would be more. I think CAKE is doing about a 9/10 in terms of their operations...they should keep on keeping on, and don't pay attention to magazine pundits telling them to tinker with operations to juice margins a bit. I got the info from Fidelity & haven't verified its accuracy yet. http://uglymule.com/images/CAKE-Op-Metrics.png I agree with you re: CAKE being very well run & the gigantic menu is probably something people respond to (and they've shown that they can manage the complexity.) If the employee/revs & earns metrics from Fidelity are accurate (need to get better comps since these are prob apples to oranges) then it does seem like shaving a few minutes on the average customer stay might boost sales a bit. Can anyone comment as to the plating of meals & deserts? Are they as artfully presented as the promo images? (just curious since they do tout the "memorable dining experience" thing.) I'm hot to buy a little behind Mr. Simon & then hope it goes down 10% for more (evidence of anchoring to a purchase price.) Someone shoot this thing in the guts with a worst case scenario (and not falling comps / mall traffic or food born pathogens.) Link to comment Share on other sites More sharing options...
Sullivcd Posted November 12, 2017 Author Share Posted November 12, 2017 Actually the artful presentation of the cheesecake probably contributes to the slow averahe ticket time. I haven't sat down in a store for years but recall waiting for cheesecake for a long time. Management is aware of the issue and created the cake pay app for this reason. You can pay without waiting for the check. Link to comment Share on other sites More sharing options...
DooDiligence Posted November 13, 2017 Share Posted November 13, 2017 Interesting FinTwit CAKE thread. https://twitter.com/GS_CapSF/status/925819507863519232 --- Who carries their external bakery products? https://www.harryanddavid.com/h/bakery/cheesecake-factory?flws_rd=1 http://www.publix.com/search?query=cheesecake%20factory and of course Amazon. anyone know of more? Link to comment Share on other sites More sharing options...
no_free_lunch Posted November 13, 2017 Share Posted November 13, 2017 Someone shoot this thing in the guts with a worst case scenario (and not falling comps / mall traffic or food born pathogens.) The thing is falling comps is the worst case scenario. It is a very competitive industry that they are in and new restaurants are opening all the time. Let`s not try to analyze it beyond that, there are just unknown risks when you operate in a near commodity environment. Their margins are in the 6-7% range and if SSS starts going down it would be highly leveraged to the margins. In the past they have gone down to 4-5% so that could easily knock a third off earnings and who knows what to the price. That being said, it is a very well managed company. If you read their 10-k they talk about management compensation and retaining their employees. They claim there is a profit sharing agreement for management and that employees are compensated above average. They are also very, very conservative with new store openings and often won`t meet their already modest growth targets. For some this is a con but the resulting scarcity probably adds to the brand appeal. It clearly shows management is thinking long-term. There is also their track record with buybacks, I haven`t run the numbers precisely but they seem to be very opportunistic in waiting for share declines to buy stock back. Link to comment Share on other sites More sharing options...
no_free_lunch Posted November 13, 2017 Share Posted November 13, 2017 Thinking about it it some more, the one other risk is the management. The quick summary is that the CEO started the chain back in the 70's, took it public in the 90's and has been CEO through it all. I have been told that management is critical to running a restaurant so I don't know what would happen without him. There are just so many details to running a chain and I have to wonder if he hasn't been a big part of the success. However, if you run the numbers, if he started it in the 70's then he would have to be 70-80 by now. I would just be concerned that he starts to lose his touch or hand the reins over to somebody else without us shareholders catching on. Link to comment Share on other sites More sharing options...
Sullivcd Posted November 13, 2017 Author Share Posted November 13, 2017 You hit the nail on the head on multiple levels nofreelunch. It's ultimately a commodity business with no real moat. Overton is 71 and will eventually have some tool replace him who will lever up the balance sheet and chase new concept growth with no sustainable advantage. I get the impression from the cc scripts he calls most if not all the shots and rightfully so, he's a genius. At this point though, Overton is showing no signs of slowing down and they have pretty easy access to their stated 9% growth target for the foreseeable future. Link to comment Share on other sites More sharing options...
DooDiligence Posted November 13, 2017 Share Posted November 13, 2017 Thinking about it it some more, the one other risk is the management. The quick summary is that the CEO started the chain back in the 70's, took it public in the 90's and has been CEO through it all. I have been told that management is critical to running a restaurant so I don't know what would happen without him. There are just so many details to running a chain and I have to wonder if he hasn't been a big part of the success. However, if you run the numbers, if he started it in the 70's then he would have to be 70-80 by now. I would just be concerned that he starts to lose his touch or hand the reins over to somebody else without us shareholders catching on. Listened to their recent call & really like the new CFO Matt Clark. He fielded most of the substantive Q & A. --- I was questioning the fact that management says there’s potential for 300 more domestic locations & yet they only expect to open 4 or 5 new company owned domestic locations through 2018 & thankfully one analyst got the CFO to talk about this. Q - Why did unit growth go from 10 or so per year to 4 or 5? A - Construction costs went up + a slow comp environment. We’re confident in a long term 3% or 4% unit expansion. — Q - Are you waiting for a cycle? A - We’ll open more stores when the time is right. — The Simon Properties connection helps them get the kinds of properties they want. I like the measured approach too & believe the bench could possibly be covered by Matt Clark. He also talked about leaning into opportunistic repurchases as the better capalo choice for now (he sounds like someone WEB & Munger would enjoy meeting.) --- And yeah, like you said, continued sinking comps would be bad. --- You're right too Sull, no pricing power. If instead of chasing concepts (which they are taking write-downs on now) they simply stick to the proven Cake model & continue to scale it up opportunistically (when the environment/costs are right) they'll eventually hit a cycle & since they aren't everywhere, they could hit a growth spurt. I guess it boils down to price. It looks like there might be a lot of late to the game shorts here (no funny business & this is not a zero.) https://www.schaeffersresearch.com/content/analysis/2017/07/05/short-sellers-sink-their-teeth-into-struggling-cheesecake-factory-stock Link to comment Share on other sites More sharing options...
DTEJD1997 Posted November 13, 2017 Share Posted November 13, 2017 Here's a good article https://www.bizjournals.com/boston/news/2017/11/08/restaurant-stocks-take-a-pounding-as-tastes-shift.html I like the point about increasing turnover. They do generate some low sales & profits per employee & shortening the menu might help? CAKE generates low sales & profits per employee? I would be SHOCKED if that is the case! Every CAKE I've ever been to has been busy to PACKED at all times. I think part of the "draw" is that there are a HUGE amount of choices on the menu. Everybody can get what they want, and everybody can get something different.... I would also question how much benefit they would get from streamlining their menu. If you look at the sales metrics, CAKE locations do some of the very highest dollar volume in sales...how much more margin are they going to capture if they only have 25 items on the menu? I would counter that CAKE is doing just about everything right....the biggest & bestest way to make more $$$ would simply be to increase more entree prices by $1. The last time I was there, everybody was SHOCKED at how good everything was in comparison to the price of the check. Everybody thought it would be more. I think CAKE is doing about a 9/10 in terms of their operations...they should keep on keeping on, and don't pay attention to magazine pundits telling them to tinker with operations to juice margins a bit. I got the info from Fidelity & haven't verified its accuracy yet. http://uglymule.com/images/CAKE-Op-Metrics.png I agree with you re: CAKE being very well run & the gigantic menu is probably something people respond to (and they've shown that they can manage the complexity.) If the employee/revs & earns metrics from Fidelity are accurate (need to get better comps since these are prob apples to oranges) then it does seem like shaving a few minutes on the average customer stay might boost sales a bit. Can anyone comment as to the plating of meals & deserts? Are they as artfully presented as the promo images? (just curious since they do tout the "memorable dining experience" thing.) I'm hot to buy a little behind Mr. Simon & then hope it goes down 10% for more (evidence of anchoring to a purchase price.) Someone shoot this thing in the guts with a worst case scenario (and not falling comps / mall traffic or food born pathogens.) The relatively low profit per employee may be due to the fact that a lot of them are part time employees. Years ago, when I worked in a restaurant, other than the owner, managers, a bartender and some of the kitchen staff, a lot of the workers were less than 40 hours a week. A lot of waiters/waitresses/busboys/valets/lower level staff work 12-20-30 hour weeks. A lot of times when I went to CAKE (and I suspect others too), it is a small event...date night, birthday celebration, family get together...and so on. So people are inclined to probably stay & talk just a bit & relax. Could CAKE speed things up just a bit? Sure, maybe...could they raise the price of a lot of entrees $1? Sure could...I think that would be the most effective way to really juice the income statement. CAKE is making a bit over 6% NET on their sales. 5% net is pretty good in this industry... CAKE is simply heads & shoulders above most of their competitors. Witness KONA, they are simply a shambling wreck compared to CAKE. KONA is not profitable, has not been profitable, and probably WON'T be profitable. There are several other chains that compete with CAKE that are NOT or are only marginally profitable. I would rate CAKE an "A" on their operations. Could they do better? Sure...but I don't think there is that much more they can realistically do. Link to comment Share on other sites More sharing options...
SharperDingaan Posted November 13, 2017 Share Posted November 13, 2017 You hit the nail on the head on multiple levels nofreelunch. It's ultimately a commodity business with no real moat. Overton is 71 and will eventually have some tool replace him who will lever up the balance sheet and chase new concept growth with no sustainable advantage. I get the impression from the cc scripts he calls most if not all the shots and rightfully so, he's a genius. At this point though, Overton is showing no signs of slowing down and they have pretty easy access to their stated 9% growth target for the foreseeable future. This misses most of what this business is really about. They sell quality cakes (product), in a congenial atmosphere (experience), and are the place to go to provision your event (story). The combination allows them to charge a higher price, and keep a higher margin. Good marketing, good operational execution. Expansion for them isn't more of the same. It's 1) splitting the offerings into a core of 'standards' at a lower price (volume > margin loss), and an unlimited array of 'customs' at a higher price (margin gain > volume loss); 2) selling cake by the slice in European style 'coffee shops' (luxury market); and 3) getting paid for apprenticing master cake makers. Turn the limitation (working life of the master cake maker) into an asset, raise the number of these people that you have (more product to sell), and reduce exposure to the loss of any one of them. Sustainability. Great business, but not so much as an investment. You have to sit on it, get paid via dividend, and hope for a buy-out when Overton chooses to 'retire'. Awesome if this is for retirement cash flow (dividend); otherwise - not so great. It's not enough to find a 'great' business, it also has to be consistent with your philosophy and investment requirements. SD Link to comment Share on other sites More sharing options...
DooDiligence Posted November 13, 2017 Share Posted November 13, 2017 You hit the nail on the head on multiple levels nofreelunch. It's ultimately a commodity business with no real moat. Overton is 71 and will eventually have some tool replace him who will lever up the balance sheet and chase new concept growth with no sustainable advantage. I get the impression from the cc scripts he calls most if not all the shots and rightfully so, he's a genius. At this point though, Overton is showing no signs of slowing down and they have pretty easy access to their stated 9% growth target for the foreseeable future. This misses most of what this business is really about. They sell quality cakes (product), in a congenial atmosphere (experience), and are the place to go to provision your event (story). The combination allows them to charge a higher price, and keep a higher margin. Good marketing, good operational execution. Expansion for them isn't more of the same. It's 1) splitting the offerings into a core of 'standards' at a lower price (volume > margin loss), and an unlimited array of 'customs' at a higher price (margin gain > volume loss); 2) selling cake by the slice in European style 'coffee shops' (luxury market); and 3) getting paid for apprenticing master cake makers. Turn the limitation (working life of the master cake maker) into an asset, raise the number of these people that you have (more product to sell), and reduce exposure to the loss of any one of them. Sustainability. Great business, but not so much as an investment. You have to sit on it, get paid via dividend, and hope for a buy-out when Overton chooses to 'retire'. Awesome if this is for retirement cash flow (dividend); otherwise - not so great. It's not enough to find a 'great' business, it also has to be consistent with your philosophy and investment requirements. SD Thanks, your statement re: expansion buckets & Master Cake Makers is provocative. I'm gonna keep watching & if it gets egregiously cheap, I'll look again. Sell side gets paid to say YES & buy side gets paid to say NO. Link to comment Share on other sites More sharing options...
Gregmal Posted November 13, 2017 Share Posted November 13, 2017 Would have to think Roark/BWLD is a big time positive in terms of implications for CAKE. Link to comment Share on other sites More sharing options...
Sullivcd Posted June 15, 2018 Author Share Posted June 15, 2018 Congrats to everyone who invested in this great company. I sold today on the buyout rumor that is making the stock fly. Link to comment Share on other sites More sharing options...
DooDiligence Posted June 15, 2018 Share Posted June 15, 2018 Congrats to everyone who invested in this great company. I sold today on the buyout rumor that is making the stock fly. (sound of me smacking myself in the forehead...) I bought Berkshire instead so it's all good. Link to comment Share on other sites More sharing options...
rkbabang Posted March 26, 2020 Share Posted March 26, 2020 Not good. The Cheesecake Factory Tells Landlords Across the Country It Won’t Be Able to Pay Rent on April 1 https://la.eater.com/2020/3/25/21194144/cheesecake-factory-rent-strike-chain-restaurant Link to comment Share on other sites More sharing options...
ScottHall Posted March 26, 2020 Share Posted March 26, 2020 I'm kinda retired from posting here but I wrote something about this from an alt perspective just this morning so I figured why not share it. Probably wrong I'm just spouting off etc. etc. but maybe it's helpful in some way IDK. https://lizardbrain.substack.com/p/corona-cheesecake-and-testing-the farewell again friends <3 Link to comment Share on other sites More sharing options...
rkbabang Posted March 26, 2020 Share Posted March 26, 2020 I'm kinda retired from posting here but I wrote something about this from an alt perspective just this morning so I figured why not share it. Probably wrong I'm just spouting off etc. etc. but maybe it's helpful in some way IDK. https://lizardbrain.substack.com/p/corona-cheesecake-and-testing-the farewell again friends <3 Interesting. Thanks for sharing. Link to comment Share on other sites More sharing options...
LC Posted March 26, 2020 Share Posted March 26, 2020 Leases are broken all the time. Property owners rarely expect to extract full payment from a bankrupt tenant who broke their lease. Let's say CAKE refuses to pay. The property owners have two options: -Let CAKE stick around, maybe make some deal where the property owner gets paid some % in the future. -Or, the owner kicks out CAKE, finds a new tenant, and sues CAKE to eventually collect their capped payout in BK courts. Now, cheesecake factory is not your neighborhood bakery and the property owners are not a little old couple who own a duplex. So you're looking at large CRE owners negotiating with a large tenant. So the game gets a little more involved. Can SPG for example, shut the doors on 30 CAKE restaurants, find new tenants, and launch a lawsuit against CAKE (all during a viral crisis) for a lower price than letting CAKE bail on rent for a month or three? And, how will that affect SPG's reputation among future tenants, investors, etc.? I don't know, but that's a big chunk of what this boils down to. Link to comment Share on other sites More sharing options...
Guest roark33 Posted March 26, 2020 Share Posted March 26, 2020 This cap from bankruptcy is only if CAKE actually files for bankruptcy, if they just don't want to pay rent, there is no cap. Link to comment Share on other sites More sharing options...
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