CHIPOTLE MEXICAN GRILL (CMG) – UPDATED WRITEUP

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CONCLUSION:

 Chipotle is firing on all cylinders. Same store sales are up, among the very best in the industry. Margins are improving. New locations are opening well. There continues to be a long runway for further growth in units. Their position relative to digital ordering, takeout and delivery sales from their relatively small store allows them to regain the market share lost in 2015-2016 and attract new customers as well. Their separate “make line” allows them to provide superior service to customers who are dining outside the four walls, and that competitive edge should be in place for the foreseeable future.

The stock has regained, and even exceeded the valuation relative to earnings and EBITDA that was maintained in their younger days. There is no reason to expect a fundamental stumble here. Absent a general market downtrend, we expect CMG stock performance to parallel the continued earnings and cash flow improvement.

 THE COMPANY:

 Chipotle Mexican Grill, Inc. operates Chipotle Mexican Grill restaurants which feature a varied menu of burritos, burrito bowls, tacos and salads. Their mission statement is “Cultivating a better world by serving responsibly sourced classically cooked food with wholesome ingredients.” Chipotle continues to be a brand with a demonstrated purpose and at the core of their commitment is Food with Integrity. The idea behind Chipotle’s inception was to show that food served fast didn’t have to be a typical “Fast Food” experience. As of December 31, 2019, Chipotle operated 2,580 locations throughout the U.S. and 30 international and 3 non-Chipotle restaurants.

STORE LEVEL UNIT LEVEL ECONOMICS (Source: 2019 10K SEC Filing):

UNIT LEVEL ECONOMICS COMMENTARY:

AUV rose 10% in fiscal 2019 primarily driven by 7% increase in comparable restaurant transactions. Additionally, digital sales increased from 7.1% to 18% of revenue for the full year 2019; an increase of 10.9% of revenue for the full year 2018. Cost of Goods Sold increased by 20 basis points in 2019 primarily due to higher protein costs and food expenses related to the launch of Chipotle Rewards in March 2019. These increases were partially offset by the menu price increases taken at the end of 2018. Labor Costs decreased by 90 basis points primarily due to sales leverage, partially offset by wage inflation. Occupancy Costs decreased in 2019 by 60 basis points primarily due to sales leverage on a largely fixed cost basis. Other Operating Costs decreased by 40 basis points in 2019 primarily due to sales leverage and, to a lesser extent, elevated store repair and maintenance costs in 2018. This was partially offset by increases in Delivery Expenses in 2019.

Store level EBITDA increased from 18.7% in 2018 to 20.4% in 2019; an improvement of 170 basis points. This was achieved primarily as a result of sales leverage.

UNIT DEVELOPMENT

DEVELOPMENT COMMENTARY:

During fiscal 2019 Chipotle opened 140 new restaurants and closed 7 units for a net total of 2,622 at end of fiscal 2019. In 2020: 150-165 new locations are planned.

SAME STORE SALES

SAME STORE SALES COMMENTARY

Comparable restaurant sales increased 11.1% in 2019 as a result of a 7.0% increase in transactions and a 4.1% increase in average check.

RECENT DEVELOPMENTS – Per Q4’19 Earnings Release and Conference Call

Fourth quarter results were very strong. Comp sales were up by 13.4%, including 8.0% transaction growth. Price was only 2%, so the balance was menu mix. Digital sales grew by a dramatic 78.3%, accounting for 19.6% of total sales. The strong sales allowed for “leverage” in every store level expense line, demonstrating how top line progress solves lots of problems. CGS was down 10 bp to 33.1%, Labor was down 60 bp to 26.5%. It’s worth noting that the labor efficiency was in spite of the inefficiency involved in openings 80 new restaurants in Q4. Occupancy Expense was down 70 bp to 6.5%, Other Operating Costs were down by 70 bp. The restaurant EBITDA operating margin was therefore up 220 bp to 19.2%. Diluted EPS, adjusted for legal, corporate restructuring and certain other costs, was up 66.3%. In addition to the 80 new restaurants, whose opening volumes management has described as the “highest in company history”, there was one relocation and three were closed. There were 46 Chipotlanes opened in Q4, for a total of 66 operating at year-end. $38M of stock was repurchased in Q4, $168M for the year. Also noteworthy is the Company effort to retain valued employees and build an improved culture, which is being done by way of Debt-Free Degrees, improved crew bonus programs and better mental health coverage.

There continues to be the opportunity to enhance store level margins further. Management points out the possibility of generating a 25% store level EBITDA at $2.5M of annual store revenues, and that possibility is obviously not as far away as it might have seemed a year or so ago.

In 2020, 150-165 new restaurants are planned, more than half with Chipotlanes. Management is guiding to mid-single digit comp sales in 2020, no doubt taking a conservative view, going up against difficult comparisons and the past success of carne asada. The Company continues to buy back stock, with an additional $100M approved in Q4, on top of the available $69.4M at 12/31. In terms of Q1’20 expectations, labor costs are expected to be in the mid 26% range (including 4-5% labor inflation), CGS in the mid 32% range (with moderating avocado costs partially offset by higher carne asada expense).

In recent product and marketing news: CMG announced the launch of Guac-mode – an exclusive benefit that will unlock access to free Guac rewards exclusively for Chipotle Rewards members. During the month of February, Reward members who purchase a regular priced entrée and scan their App will receive Guacamole (considered one of the best in the industry) as a topping for free. The Company has also announced plans to revamp their menu in 2020, and introduce one or two new menu items per year. The very successful Carne Asada will be coming off the menu in QTR-1 (might return later as a permanent menu item). New to the menu (during Qtr-1) will be a new Queso Blanco which will replace the existing Queso. Still in test are Quesadillas and Beverages. Pre-configured diet driven lifestyle bowls were introduced in January and there was “terrific feedback”. In terms of CMG’s success with digital marketing and delivery, the digital pickup shelves are now systemwide and 98% of the stores have a delivery capability. There are now 8.5 million members in the loyalty program less than a year after being launched.

The Company is enhancing employee benefits, with Debt-Free Degrees, crew bonus programs and better mental health coverage.

 CONCLUSION: Provided at the beginning of this article

Roger Lipton