Cheesecake Factory Analyst Downgrades Stock As 2023 Expectations Are Difficult To Hurdle

Wedbush analyst Nick Setyan has downgraded the rating of The Cheesecake Factory Incorporated CAKE shares from Outperform to Neutral and lowered the price target from $37 to $35.
The analyst no longer expects market share gains in 2023 that would result in top-line growth ahead of expectations, nor a path to a margin recovery towards the consensus 2023 UL margin estimate.
He knows that an incremental price increase in early December will take full-quarter menu pricing to 8.25%.
The analyst thinks a December acceleration is necessary for Q4 SSS growth to hurdle consensus, but even if one occurs, it will not be a good indicator of underlying fundamentals.
Management's early 2023 guidance is mid-single-digit total inflation and more than enough pricing to offset inflation, resulting in UL margins of >15%.
At the time of the Q3 earnings call, the 2023 consensus UL margin was 14.4%. The analyst’s 2023 UL margin estimate is now 13.9%.
For the top line, Setyan is below consensus, and consensus is below the midpoint of $3.5-$3.6 billion 2023 revenue guidance.
Price increases are exiting Q4 and entering Q1:23 at more than three times the historical norm for Cheesecake.
While other casual diners are at similar pricing levels, Cheesecake’s pricing trailed the category through Q3:22, and is set to overtake category pricing starting in Q4.
He is especially concerned given that the favorable gap between grocery inflation and restaurant inflation is starting to narrow, and could disappear, if not reverse, by 2H:23.
Setyan views price increases as one of the primary reasons why full service has not seen a recovery to pre-COVID transaction levels, and why the recapture of pre-COVID transactions by restaurants, particularly full service, has not gone as smoothly as expectations entering '22.
Price Action: CAKE shares are trading lower by 4.36% at $33.14 on the last check Friday.
Photo Via Wikimedia Commons

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