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Cheesecake Factory Sours on Lowered Estimates


Downturn could affect other casual dining chains.


On Wednesday, the AP reported that a SunTrust Robinson Humphrey analyst dropped his rating on casual dining chain Cheesecake Factory (CAKE) from "Buy" to "Neutral."

The analyst also offered up the following in a research note:

"We believe weak casual dining sales during back-to-school portends a challenging holiday season, which has probably scared certain large casual dining chains into planning more aggressively priced promotions. Unfortunately, we do not believe [Cheesecake Factory] is prepared to counteract aggressive marketing from competitors, and will likely experience decelerating guest counts through the balance of 2008."

The analyst also lowered his EPS estimate for 2008 from $1.02 to $0.98, and the estimate for 2009 from $1.05 to $0.98.

Other analysts may be seeing the same things, and may lower their estimates accordingly. If I'm right, that could have an adverse impact on the share price. For the record, the Street is currently at $1.04 a share for 2008 and $1.15 a share for 2009.

In addition, the comments I read don't suggest that relief is just around the corner. In fact, it seems to put the kibosh on the rest of 2008. I think that this may lead some investors to bail.

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Incidentally, this news motivated me to kick the tires a little harder. To that end, I checked out recent insider activity/data on the stock as well, on the reasoning that officers or directors might think the dip in the share price over the last few months is something to be taken advantage of.

But, as it turns out, they haven't bellied up to the stock recently. In fact, according to the data, one officer sold 20,000 shares in late April (the sale appeared option-related). The one insider purchase I saw was for just 1,000 shares - and it happened back in February.

This news also made me think that other casual dining players may begin to experience some issues.

My feeling: Although Darden (DRI), which is known for its Red Lobster, Olive Garden and LongHorn concepts, and Brinker (EAT), which is known for its Chili's brand, were both up in Wednesday's trading, I think they too are susceptible.

Just think about the food these chains offer: It's pretty much all around the same price point(s), and the fare is somewhat similar. Long story short, I can't help but think that aggressive marketing and pricing could take its toll across the board.

Cheesecake Factory closed at $15.13, down $0.76 or 4.78%.

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No positions in stocks mentioned.

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