You know what? When in doubt, just go have some cheesecake. I am talking about Cheesecake Factory (CAKE) and how ridiculously easy this kind of stock is to own in this particular market.
Here's the setting. I am up at 3:30am scanning the overnights and sure enough, China's PMI is actually a point below 50, a 12-month low. The stimulus obviously isn't working. The S&P futures are off badly on the news and the market looks like it's going to open down by about a quarter of a percent.
Then we get a euro area purchasing managers index and it, too, is softer than expected, showing a downtick and a weaker rate of expansion. So maybe their quantitative easing's not going as well as we thought, so we can expect more upward pressure on the dollar cutting into our international companies' earnings. The futures slump further, we are looking down 0.33%.
Insult to injury, the U.K. then puts up a very dreary retail sales number and that's it, the dollar zooms and our markets are looking down more than 0.6%, giving up the entire gain from yesterday.
Then we get a leak out of Greece that things are going better, and there is short-covering in our futures market and we are down about 0.25% again.
It's as that point, all before 5:30, that I pick up the quarterly report from Cheesecake Factory, a place I am always intrigued by, because mine at the mall at Short Hills nearby is always packed, looking clean, with lots of smiling people going in and out of it -- people who are clearly not worried about China PMI or Greek exit, by the way.
What do I see with Cheesecake? Frankly, it's pretty extraordinary right from the first line of the conference call: "We had an exceptionally strong first quarter delivering our best comparable store sales increase in the past decade, which we leverage into earnings per share growth in excess of 25%."
Hmm, I like that.
CAKE delivered 4.2% comparable store sales growth, much better than the analysts were looking for, far superior to the fourth quarter and it was done by generating consistent sales on all day parts, both weekday and weekend. Costs were well-controlled, with natural gas coming down -- a big cost -- very little food inflation and, while there is 3% wage inflation -- the pesky minimum wage -- it will be made up by pricing. Prices can increase because the customers will be able to handle it, in part, I surmise, because of lower gasoline costs year over year and in part because of better labor conditions.
What's Cheesecake doing with this additional operating profit? First, it is opening new stores, 11 more, which will bring the chain to roughly 200 stores, still leaving a lot of room for growth. Second, it will continue to buy back stock, having bought back 1.7 million shares. It's a real buyback. The company has 49 million shares outstanding, versus 58.9 million five years ago and 78 million 10 years ago. You could argue the company, not getting the valuation it deserves, is taking itself private over time.
Plus, this isn't a pro-obesity story, as my trainer reminds me. In fact they have 50 dishes with fewer than 60 calories. It isn't an unnatural and inorganic story. The beef and chicken are of the highest standards and the cheesecakes are baked fresh from scratch every day.
The stock's not cheap, selling at 22x earnings. But let's face it. This is the ultimate domestic situation -- lower costs, higher sales, better profits, levered to lower gasoline and higher employment, with no strong dollar headwinds.
I say you get what you pay for, and with Cheesecake you get a good tasting meal, and a great tasting stock -- quite an antidote to the craziness that happens overseas between 3:30 and 5:30 a.m. every morning of our investing lives.