- 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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