Cake Box - Sweet enough to take away the taste of Patisserie Valerie?

For the first StockSlam of 2019 I took a quick look at Cake Box. Floated in June last year, at 108p, my hope is that this share might take away my unhappy memories of Patisserie Valerie! Within two weeks of listing the shares hit their current level and have stayed there ever since - which makes sense given the lack of news-flow.

So Cake Box are a specialist retailer. They do fresh cream cakes but with a specific twist; everything is egg-free. This is great for certain religions (such as Hinduism), lacto-vegetarians and anyone with an egg allergy. Browsing their website they have a wide range of cakes mainly based on sponge and cream. That’s attractive to a lot of people it appears although this style is not to my taste.

The reason I know that the cakes are popular is that the company started in 2008, with just one store, and has grown quickly to around 101 profitable franchise stores. The key word there is obviously franchise. They don’t own any stores, and they don’t operate any stores either, which reduces both capital costs and roll-out risk. Their aim is to go from 101 stores to 250. With roughly two new stores opening per month they’ve got a fairly long runway ahead and there's plenty of scope to expand outside the South-East (which is why they are opening a new warehouse facility in the north).

Now the half year results came out recently and the company managed 4.35p in earnings along with increased cash and a 1.2p dividend. With unchanged analyst forecasts sitting at 8.1p (less than twice 4.35p) there's a bit of a disconnect here given plans to open at least another 10 stores. Still with Cake Box trading on a P/E ~20 you'd expect to see growth and perhaps forecasts being beaten.

At the franchise level the brand is doing well with total turnover up 29% to £14.1 million and online sales materially rising 86% to £1.99 million. Of course there are a number of new stores in there and at a like-for-like level sales growth was a much lower 4.4% (down from 9.0% in the previous year). Still with the store estate expanding by 10-20% per year the headline growth rates are going to continue to look impressive.

But there are negatives; is it another Patisserie Valerie? I’m not saying that Cake Box is a fraud in any way but it does have high margins and you’ve got to wonder whether people are going to keep buying these fresh cakes and maintain the margins? Looking at some online customer reviews they are very polarised. You either have people saying 5 stars, fantastic cakes, never had better or essentially giving the cake one star and saying that it was stale, like a brick, and inedible. I can’t tell you whether the cakes are really that good or bad but clearly not everybody is happy with the product.

I've also looked at employee reviews on glassdoor and indeed and it has to be said that the people who work there are often negative about the experience. They seem to be minimum wage staff, or even on unpaid internships, and they are being made to decorate cakes 14 hours a day and don’t much like it! Given that a number also raise hygiene issues I see this as a material concern.

Finally they only have one facility for baking cakes, situated in Enfield, and obviously if a disaster happens, it burns down let’s say, then that is pretty much the end of the business right there. I'm sure that Sukh Chamdal (CEO) and Pardip Dass (CFO) are cognizant of the risk here, given that they still own 50% of the business, but it would be useful to know what their disaster recovery plans actually are. Actually the Admission Document probably answers some of these questions and more will become clear when the FY results come out in the summer. Until then I'll probably watch and wait (and perhaps try a slice of their cake).

Disclosure: the author does not hold shares in this company

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