The Day Ahead: Analyzing a Blowup

 | Jul 25, 2013 | 8:00 AM EDT
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You always remember your first. No not that, stop thinking Anthony Wiener-ish! I mean that first blowup trade at your new firm. Or, the one in the aftermath of that $10,000 trading class held in a public library that promised consistent profit generation forever.

I have been rocking since going live with Belus on April 4. The power to make buy, hold and sell decisions without having to deal with boss person's restraint has been awesome. I absolutely love it. But that Cheesecake Factory (CAKE) long blew up on me, post its earnings report.

The total loss was 5% (tight stops on trades are my rule). I truly thought that all the fundamental factors were in place for a $0.02 to $0.04 earnings per share beat, in line with third quarter 2013 guidance, and an encouraging free-to-read earnings transcript.

Some Points:

  • Stock prices higher year-to-date meant Cheesecake Factory's already wealthier clientele became wealthier, which would make relative sales outperformance stronger.
  • Chipotle's (CMG) same-restaurant sales reaccelerated toward the end of the second quarter of 2013.
  • Disinflation has found its way into the raw materials that comprise a menu.
  • The Grand Lux division implemented a spring menu price increase.
  • In the first quarter, Cheesecake Factory both continued to outperform industry sales trends and notched success in parts of the day other than dinner.
  • Management threw cold water on expectations for the second quarter. If business momentum persisted, I assumed, the stage was set for healthy sales and earnings upside due to moderate analyst estimates.

What in the world went awry here? Certainly, I couldn't be wrong; that is never the case. Alas, it is true. I fell susceptible to paralysis by analysis (in my field, that is akin to connecting too many dots and general overthinking). I have now ruined my week (like Gordon Gecko said: "there is nothing I hate more than losses, pal"). Determined to learn from this, however, I have diagnosed a couple of judgment errors:

  1. I tend to operate by the mantra "price is truth", or that a stock price has a story to tell daily about the future. Cheesecake Factory's shares caught a bit of a downdraft into its earnings release, yet I held true to a thesis that the market was suggesting had flaws.
  2. Although Cheesecake Factory's sales have historically outperformed competitors, I underestimated the impact to the company's sales as the industry slowed further (which it did as evidenced in retail sales data). For example, Cheesecake Factory's sales were slightly positive compared to -2% for the industry in the second quarter. Recall that I was looking for the company's sales to re-accelerate in the second quarter, owing to higher stock prices spurring consumption and favorable menu mix. Traffic declined 1% in the quarter against a 1.8% increase in menu price, again not in line to my pre-report analysis.

In the end, Cheesecake Factory gets shelved as a potential recommendation for the near term, especially as Ruby Tuesday (RT) and Panera (PNRA) served stinky quarters to the market.

What's the deal with eating out nowadays? Buy a new home, and then BBQ? Buy a shiny new Ford truck to park in the new driveway, and then BBQ?

Something went down in the casual dining sector in June. Rather than stay irritated on the Cheesecake Factory blowup, the next course of action is to devise a plan to profit from a potential negative summer demand trend (how could perennial laggard Darden (DRI) being doing well).

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