Barclays Loses Its Appetite For Cheesecake Factory

The bearish case for Cheesecake Factory Inc CAKE can be made despite the restaurant chain remaining a leader within the high-end segment of the casual dining sector, according to Barclays.

The Analyst

Barclays' Jeffrey Bernstein downgraded Cheesecake Factory from Equal-Weight to Underweight with a price target lowered from $51 to $47.

The Thesis

Exiting Cheesecake Factory's third-quarter earnings report, it's evident the company faces five fundamental headwinds, Bernstein said in a note. These include:

The company's footprint stands at around 200 units in the U.S., but faces a lack of available and/or desirable higher-end mall locations to reach its longer-term goal of 300 units.
Two other brands under Cheesecake Factory's umbrella, North Italia and Flower Child, remain unproven with no evident national growth strategy. In addition, operational and execution risks are high as management now has three different and unique brands to oversee.
Restaurant margins are down from around 20 percent a few years ago to the current 17 percent and the company faces cost inflation ahead.
Management's long-term EPS growth of 11 to 12 percent is at risk as this level of growth hasn't been seen over the past few years.
Cheesecake Factory's stock is trading at 20 times forward P/E, which is at the high-end of its three-year range of 14 to 21 times and a premium to the average of 18 times. Given multiple headwinds, including concerning mall traffic trends, the stock's valuation looks "fully loaded" at current levels.