Among the most popular brands in the sit-down restaurant space prior to the COVID-19 pandemic, Cheesecake Factory (CAKE) provided a balance between upper-tier establishments – the kind that imposes a dress code – and the typical comfort-food joints. In other words, Cheesecake Factory represents the business casual attire of the culinary industry.

For a long time, this middle ground served the company well. However, when the global health crisis erupted, practically every restaurant – save for the fast-food places – incurred significant worries. To be sure, it’s difficult to put an exact figure on the devastation. While the apocalyptic scenario of 85% of eateries permanently closing never panned out, it’s still a sizable number.

Nevertheless, as the vaccine rollout materialized and as government agencies relaxed their previously strict mitigation measures, the phenomenon of revenge travel pushed consumers out of their homes to enjoy experiences previously denied them. One beneficiary was the restaurant industry. And with Cheesecake Factory’s stores usually located in high-foot-traffic areas, CAKE boomed in early 2021.

However, the bullish framework didn’t last that long for CAKE stock, in large part because of the rise of inflation. Combined with increased layoffs – particularly in the technology sector – fewer people had high-paying jobs. Therefore, it made sense not to spend too much money if a person could avoid it.

Adding to the woes impacting CAKE stock, the underlying company’s most recent third-quarter earnings report left much to be desired. In Q3, “the company reported an adjusted loss per share of 3 cents missing the Zacks Consensus Estimate of earnings of 28 cents. In the prior-year quarter, the company reported adjusted earnings per share (EPS) of 65 cents.”

Further, “total revenues of $784 million missed the Zacks Consensus Estimate of $799 million by 1.9%. The top line increased 3.9% on a year-over-year basis.”

It’s a messy situation. Nevertheless, options traders don’t seem to mind.

Unusual Stock Options Volume Points to a Big Move Ahead for CAKE Stock

After the close of the Friday Dec. 16 session, CAKE stock represented one of the highlights in Barchart.com’s screener for unusual stock options volume. This stat shows the difference between the current volume and the average volume over the past month. Typically, traders advantage this data to determine which stocks may be due for big moves ahead.

Specifically, CAKE’s volume level reached 5,072 contracts against an open interest reading of 28,640. Call volume hit 4,829 versus put volume of 243. The implied volatility (IV) rank hit 4.75%, which indicates the (at the money) average IV relative to the highest and lowest values over the trailing one-year period.

To summarize, IV signifies the expected volatility of a stock over the life of an option. As certain influencing factors for the underlying investment changes, the IV will likely change as well. Further, as demand for an option increases, so too will its IV.

The IV low for CAKE stock was 41.70% on Dec. 15, 2022. Almost a year earlier on Jan. 24, CAKE hit its IV high at 64.24%. Prospective investors should note that per Barchart.com’s technical analysis gauge, CAKE ranks as an average 8% buy. Though loosely positive for the momentum, nearer-term technical signals imply a 50/50 sentiment split.

Sure enough, Wall Street experts have an ambiguous take on CAKE stock. Three months ago, analysts had a consensus view of “moderate buy,” broken down as five strong buys, one moderate buy, five holds and two strong sells. In the current month, the broader assessment slipped to “hold.” The main difference was that there was one fewer strong buy rating and one more strong sell.

Still, on a parting note, Zacks Equity Research signaled to its readership that a big move may be coming for CAKE stock due to the aforementioned unusual options activity. Specifically, it identified high IV for the Jan. 20, 2023 $17.50 call option.

Per its assessment, “[o]ptions with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other.”

A Matter of Gross Margins

With both technical indicators and major publication houses not providing much in the way of directional confidence toward CAKE stock, it would be a fool’s errand for me to chime in with my own opinion. However, those interested in Cheesecake Factory must separate the narrative between short term and long-term objectives.

In the immediate framework, CAKE stock represents a roll of the dice. Further out, however, Cheesecake’s gross margin could be worth further investigation.

According to data from Gurufocus.com, the company’s gross margin sits at 38.79% on a trailing-12-month basis. This stat pings below the sector median value of 45.31%, translating to a metric worse than nearly 62% of the competition. Further, gross margin has been incrementally declining on a consecutive sequential basis since at least Q3 of last year.

In other words, heading into a possible recessionary cycle, Cheesecake might lack the capacity to adjust its pricing significantly. If it raises prices, hard-hit consumers will simply stop coming in. However, if it lowers prices, its net margin – which is already relatively thin at 1.52% – will suffer. Therefore, investors will need to be careful about making aggressively strong moves toward CAKE stock.

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