No Frosting on This Cake

"We're in a very fluid environment."

"These are unprecedented times."

Those comments could have come from any earnings conference call this month, but they came this time from The Cheesecake Factory. The casual dining giant missed earnings estimates by a white chocolate raspberry truffle mile. The company reported earnings of $.19 a share, down from $.26 a year ago. Thomson was looking for $.27. Revenues increased 8 percent to $405 million, but same store sales decreased nearly 5 percent from a year ago. Looking to the current quarter, the company expects revenues to stay flat or grow one percent compared to a year ago, while same store sales are expected to be down 6 to 7 percent (the fourth quarter this year doesn't include New Year's Eve).

I've noticed in the last couple of months that, for the first time ever, I'm not waiting for a table at The Cheesecake Factory . The company says the slowdown has been especially felt in suburbs in the West and Southwest, areas where home prices have taken a beating. Overall, average weekly sales are down six percent.

"Nevertheless," says Matt Clark, VP of Strategic Planning, "our restaurants remain very busy." He says the firm's restaurant sales handily outperform rivals. Still, out where I live, only miles from the company's headquarters in Calabasas, the days of being handed a pager and walking around the mall 45 minutes killing time waiting for a table are over. Selfishly, I see this as the upside of the downturn.

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But in the middle of this slowdown the chain is facing a second assault hitting it where it really hurts: cheesecake. People are ordering fewer desserts! At The Cheesecake Factory! This is one reason the company has delayed some of its planned price increases. Sales are slowing as margins on bakery products took a five point hit in the last quarter. Eggs and cream cheese prices have been high, and while some commodity prices are starting to come down, cheese isn't expected to. On the positive side, the company has locked in poultry prices for 2009 to be flat with 2008. That's no small thing. Company officials joke that they use so much poultry they should be called The Chicken Factory.

The days of opening new restaurants right and left have also come to an end, for now. Chairman and CEO David Overton says that given the current environment, the company will only open three to five new stores for all of next year, down from earlier plans to open seven to nine. Even that new number is "fluid", as many mall developers are having their own problems. So the company has put wiggle room into its lease agreements with new developments. It's also temporarily suspended a share buyback program, allowing it to accumulate a total of $56 million in cash and marketable securities.

Basically, The Cheesecake Factory wants to hold onto as much cash as possible in these uncertain times. Unfortunately, that's exactly the same philosophy shared by customers.

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