ebook essays pieces of the puzzle
Saturday, August 25th, 2012
in the cake

One of the most interesting articles I have read lately is “Big Med,” by Atul Gawande in the New Yorker.  (That may not be a surprise to you if you’ve read my series of postings about investment process inspired by The Checklist Manifesto, Gawande’s 2009 book.)

In “Big Med,” Gawande compares and contrasts the operations of his local Cheesecake Factory (CAKE) with that of the typical hospital.  One might quip that enough CAKE will lead you to the hospital, but the article effectively uses the efficiency found in the typical chain restaurant today with the inefficiency seen in most hospitals.  You can argue whether the analogy is as apt as it could be, but it serves to highlight obvious and sizable issues regarding waste and effectiveness that face our health care system.

As a consultant on investment process, I also saw some ideas that were relevant to that realm.  For instance, who is the “kitchen manager” at your firm?

It’s hard to believe that CAKE will shortly celebrate its twentieth anniversary as a public company.  Above you can see the change in margins over that time.  The gross margin has remained quite consistent for a decade, while it’s been tougher to maintain profitability further down the income statement.  Sales growth (not shown) has been mired in the mid-single digits for a number of years, so reaching the growth expectations of investors may require even more operational excellence.

The bottom panel shows the return on the stock (and the mid-cap S&P 400) since its IPO.  The decline that started in 2006 was stunning, just as the subsequent bounce back has been.  (Chart:  Bloomberg terminal.)