After successfully calling the biggest drop in Facebook history last year and turning 1k into 20k I have been researching popular companies trying to find ones that are due for a huge haircut, and after making a visit to the Cheesecake factory and seeing almost nobody there in a very popular location it peaked my interest to dig deeper and do some more research. Here is what I found.
Sales: Unless your name is Chipotle, all restaurants in the sector have been declining, take a look at what happened with Dave and Buster’s $PLAY A very similar market cap along with an identical user clientele dropped 20% on earnings. Over the past 10 years sales have been stagnant.
Debt: As of January 2019 cheesecake factory has 571m of assets on 743m of liabilities.
EPS: while not a big deal for a lot of companies $cake has had a negative return on equity for a very long time and investors have gave them a pass but in today’s market this continued EPS loss I believe will catch up with them.
Planned acquisitions: The Cheesecake Factory is looking to acquire the North Italia casual chain from Fox Restaurants during the second half of 2019. I believe they will make this announcement with this earnings release. Acquisitions are never a good look for a company, not being able to increase core revenues and overpaying for a small niche chain will make investors run for the hills. Also they announced during the 1st quarter that they lost 1.5m in their initial funding round for high start-up costs for North Italia expect these to increase
New accounting standards: I believe something fishy is going on over at the Cheesecake factory in regards to how they account for their operating leases. $CAKE does not account for leases in its invested capital calculation, which explains why the company claims it earned a 14% ROIC in 2018 when it really earned an 8% ROIC. Companies will soon be required to account for operating leases on the balance sheet. When that new rule comes into effect, $CAKE will have to make a choice: Either change its calculation to ignore lease assets on the balance sheet or admit that it is not as profitable as it has claimed.
Also to add a personal anecdote, I went there with my family to a very nice location and it was practically empty. I don’t see how they are making money at all with increased food and labor costs. A 2b dollar valuation is way overvalued for 24m of net revenue.
Disclaimer: Consult your financial professional before making any investment decision.