Will the Economy Take a Bite Out of Cheesecake Factory?

The Cheesecake Factory (CAKE) is a well managed operation. It maintains a unique brand with few direct competitors. CAKE appears to have effective cost management, and there have been some improvements noted in regards to capital management.

However, there are issues that will impede CAKE's growth. The restaurant chain has an above average reliance on produce which in the present environment is inflationary. The reduced ability to contract other raw materials into 2009 may also upwardly spike the company's twice-yearly price adjustments. The company has high exposure to sub prime loans and destination markets (40% of Cheesecake's stores). And it often relies on retail shopping for some traffic, where weakness in a recession could be pronounced.

Regarding destination locations, high gas prices and a lack of benefit from "trade down" diners will not help, thus increasing the likelihood of lower single digit profit gains. This will have a negative impact on the restaurant's market price premium for casual dining. Finally, any promise of privatizing CAKE and extracting a premium for the chain in the current market environment is minimal.

The Cheesecake Factory has approximately 139 full service restaurants in thirty-four states and the District of Columbia. The company also owns several Grand Lux Cafes in nine states. Within the Disney empire, CAKE operates The Cheesecake Factory Express self-service restaurants. It also has a food service operation with distribution centers in California and North Carolina. CAKE has recently begun a bakery cafe operation which is being marketed to other food service operators.

Trading at $16.98 per share, CAKE is near its 52-week low ($28.24-16.59) and since mid-May has fallen significantly below the 200-day moving average.

I usually eat at The Cheesecake Factory when I am out of town. The restaurant chain is consistently good with service, cleanliness, portions and quality. For a chain restaurant, the atmosphere is better than many. For the unfamiliar, CAKE's menu can be daunting with over two hundred items from which to choose. And when one is ready for desert (a duty at CAKE), bon appetite wandering in the forest of cheesecake concoctions.

While I appreciate CAKE's efforts to present a huge variety of good food, the stock itself will continue to suffer from recession and energy-related inflation pressures. I would nibble at CAKE around $13/share if a restaurant chain is on your Buy list as a marker to own post-energy and recession malaise.

Comments

[marcos]

Gratuitous unneeded advice. He can't seem to make up his mind about whether or not the customer will go for a great value and good food at CAKE or opt for nothing at all. Restaurants are discretionary, sure, but if you have a choice and want to go out, CAKE is the preferred choice. The others will suffer much more than CAKE.

[grest]

All good points. However, it appears that the author seems to forget that CAKE's customers tend to be much less price sensitive than the average restaurant client. An extra couple of bucks for gas is not going to deter them, nor are small increases in menu prices. In addition, eating at CAKE is an event in itself and is a destination for celebrating special days. This is one of those stocks that will bounce back rapidly when food costs and the economy improve. Disclosure: I own shares of CAKE.

[dirsgt]

I am debting on buying CAKE. The reason I am thinking of it is that I travel a lot and have yet to be at a CAKE in the last 4 years that was not crowded. They have a very sucessfull formula.