MOST RECENT CONFERENCE CALL TRANSCRIPT
UPDATED CORPORATE DESCRIPTIONS: ROCKY MOUNTAIN CHOCOLATE (RMCF), DOMINO’S (DPZ), CHIPOTLE (CMG) & CHEESECAKE FACTORY(CAKE)
ROCKY MOUNTAIN CHOCOLATE FACTORY
UPDATED CORPORATE DESCRIPTIONS: CHIPOTLE (CMG), CHEESECAKE FACTORY (CAKE), McDONALD’S (MCD), DOMINO’S (DPZ) – with transcripts
UPDATED CORPORATE DESCRIPTIONS FOR: CHIPOTLE (CMG), RCI HOSPITALITY (RICK), RESTAURANT BRANDS (QSR), YUM BRANDS (YUM), YUM CHINA (YUMC)
THE WEEK THAT WAS, ENDING 1/28 – A FEW RATINGS CHANGES, EARNINGS REPORTS ABOUT TO BEGIN
ERIC GONZALEZ maintains DIN, CMG and MCD at Overweight – OTR Global downgrades YUMC – Brian Vaccaro maintains DIN, CMG, CAKE, EAT at Outperform, BLMN at Strong Buy -G0RDON HASKETT upgrades CMG to Buy -ANDREW CHARLES maintains DPZ at Outperform – Jeff Bernstein maintains MCD at Overweight.
No new transcripts on above companies.
EARNINGS SEASON ABOUT TO BEGIN
2022-02-01 After Market Close Starbucks
2022-02-02 Before Market Open Brinker International
2022-02-08 Before Market Open Portillos – unconfirmed
2022-02-08 Before Market Open Nathan’s Famous – estimated
2022-02-08 After Market Close Luby’s – estimated
2022-02-08 After Market Close Yum China Holdings
2022-02-08 After Market Close Chipotle Mexican Grill –
2022-02-09 After Market Close RCI Hospitality Holdings – estimated
2022-02-09 Before Market Open Yum Brands – estimated
2022-02-10 Wendy’s – Estimated
2022-02-11 Krispy Kreme – Estimated
THE WEEK THAT WAS – KRISPY KREME AND FIRST WATCH PICK UP SPONSORSHIP AT ICR CONFERENCE
Brett Levy Upgrades Texas Roadhouse to Buy, Brian Bittner Uprades Chipotle to Outperform. Christopher Carril joins Bittner in downgrading Starbucks. Sara Senatore Initiated Krispy Kreme with a Buy. Brian Vaccaro Initiated First Watch with an Outperform.
None of the companies above had earnings reports lately but we have provided below a link for First Watch’s update this week and Krispy Kreme’s slide presentation
EARNINGS REPORTS TO COME
A quiet time. No reports scheduled until the last week of January. We will keep you posted.
BILL ACKMAN, WITH 41% OF ASSETS IN QSR, CMG & SBUX COMBINED, IS STILL NOT WELL POSITIONED
We wrote an article on October 11th, discussing the three major positions in Bill Ackman’s Pershing Square Capital portfolio, within our knowledge base, that comprise a massive 41% of his $8.3 billion portfolio.
At the close of business, October 11th, Restaurant Brands (QSR) was $56.26, Chipotle (CMG) was $434.06, and Starbucks (SBUX) was $54.87. Our conclusion on October 11th was that he should switch his QSR immediately into McDonald’s (then at $163.98), sell his CMG to take advantage of the huge move since new management has been installed, and hold his SBUX (which has moved up nicely).
We have no reason to think that he has made any moves in the last several weeks, but Restaurant Brands, McDonald’s and Chipotle have all reported third quarter results. Starbucks reports tonight.
From the close of business October 11th to last night’s closing price, Restaurant Brands, at 53.06 was down 5.7%, or $85M on the $1.5B position. McDonald’s, at $178.42 was up 8.8%, so would have made Ackman’s Pershing Square Capital a profit of $132M. Chipotle closed at $465 so Ackman would have foregone a profit of 7.1% or $63M on his $900M investment.
Our advice, less than three weeks ago, to Ackman can definitely be considered “theoretical” in terms of the practical ability to switch $1.5B positions instantly, or sell $900M worth of Chipotle on the spur of the moment, and Ackman’s positions are established on the basis of long term prospects. Acknowledging that three weeks doesn’t “make a season” or prove a thesis, Ackman’s portfolio would be ($132M+85M-$63M) a cool $154M better off, or 4.5% of the $3.4B in these three positions, especially costly when all hedge fund managers are fighting for every basis point in a difficult market environment.
Our points here are (1) too many multi-billion hedge funds, and other institutions are playing hunches rather than making well informed long term judgements. This is a function of not enough really attractive reward/risk investment propositions when trillions of dollars of capital are competing to generate “alpha” after nine years of a bull market (2) there is too much emphasis on short term performance, trying to “game” the monthly comps for example, rather than evaluate long term strategic positioning (3) in too many cases, the self confidence of multi-billion dollar money managers is unjustified. They are very smart, hard working, in many cases have become very rich (which breeds inflated egos), and can’t be expected to know as much they should about every industry. Rather than make Bill Ackman an undeserved particular example: Eddie Lampert, still a billionaire, had no chance whatsoever to turn around Sears based on his strategies, and there were lots of highly experienced retailers that could have told him so. It has taken ten years to play out, but it was clear to many of us years ago that the brilliant and successful Lampert was wasting enormous time and money on Sears.
If we were speaking with Ackman today, we would suggest that it’s not too late to adjust the portfolio. The last three weeks are history. Let’s see what happens over the longer term.
CHIPOTLE (CMG) – 2 yrs. later, stock down over 50%, getting hammered again, what now?
We’ve written repeatedly about Chipotle over the last two years, almost always from a cautious standpoint. Readers can use the search function on our home page to revisit the various articles.
Earnings were released last night, and the stock is down $48 as this is written, to $276. per share. Investors and analysts were obviously very disappointed with the results and the prospect for near term improvement. We will not rehash the quarter here, since you can get that elsewhere. We will instead focus on our view relative to current store level performance, and the likelihood of better results.
Our focus, as a potential investor, should be on the existing system and the new stores that are being built. The AUV is now running at a rate of about $2M. The systemwide store level margin was 16.1% and 17.6% over the last three months and nine months, respectively. New stores are apparently doing about $1.5M with a first year store level EBITDA margin of about 10%. The average investment in leasehold improvements and equipment runs about $800,000. If we assume 18% EBITDA store level return on the current systemwide AUV of $2M, and 10% first year EBITDA return on $1.5M, we get a cash on cash return of 45% and 19% respectively. These returns are more than satisfactory for the mature stores, but less than exciting in the first year. The problem is that, charitably speaking, the AUVs and margins have been challenged for the last twenty four months, and the big question is whether volumes and margins will improve or not. This is especially so, with the stock still trading at over thirty times estimates for ’18 that will probably settle in the $7.00-$8.00 EPS range.
I think part of the extreme reaction by CMG stock this morning, is a result of what I would call encouraging commentary by Chipotle’s Chief Marketing Officer, Mark Crumpacker, and Bill Ackman, a prominent institutional stockholder. In late September, Crumpacker’s internal email memo was somehow obtained, and cited, by Bloomberg, saying that “diners like its new queso dish, even though some dissatisfied customers took to Twitter and other social media outlets to trash it”. Ackman, affiliated with two Board members, was quoted as saying that while “he hadn’t tried queso, people in his office had tried it and liked it” and the stock then trading around $312 “is extremely cheap”. He also said “I’m beginning to believe that Twitter is filled with a bunch of Chipotle short sellers.”
What’s somewhat surprising to me is that, though Crumpacker’s internal memo was presumably not intended for public distribution, some observers would assume that Ackman had an informed opinion regarding the impact of the queso introduction. The hope that Queso was doing very well, brought back to reality by last nights discussion, has been dashed, and may be contributing to the dramatic stock plunge this morning.
While the Company claimed to be satisfied with results of the rollout, indicating a high single digit sales lift when launched, then “leveling off” after initial trial. “Currently 15% of our customers continue to order queso”. As an analyst and an observer with no horse in this race (I’m not long or short CMG right now.) I’ve tried it, found it adequate, but far from a “game changer”. It may or may not contribute a few points to the comp, but it is not an “Oh, Wow!”
Remaining Strategic Issues
Many critics of the Company over the last two years have questioned the continued construction of 180-200 new stores, over 10% unit growth, at the same time retooling the system to prevent further operational problems. Announced last night was a reduction of unit growth, to 130-150 in ’18. Steve Ells, CEO, described the thought process on the conference call last night as follows: “..as Scott (new Chief Restaurant Officer) got involved…it was very clear that, the analogy I would use is we’re changing the tire while the car’s still moving and here we have a lot of people that we need to train or retrain how to run a great restaurant…….opening up new stores is a big distraction. You have to start thinking about hiring people months and months in advance….you’ve got to train people in advance of the opening..turnover in a new restaurant often is high…..so it’s a distraction in a lot of ways.” To which I say: “Really?” and “Too Little, Too Late!” It seems to this observer that 130-150 new stores could still be reasonably “distracting” from the ongoing challenge to regain old customers and attract new ones.
Another “strategic” decision that has been made, predicted, by myself and others, to be foolish and expensive has been the huge expenditure to buy back stock, at valuations that have been far from inexpensive. Prior to the most recent quarter, about ONE BILLION DOLLARS was spent to buy back stock in the mid $400 range, on average. I wrote over a year ago that the company was “out of their mind” to be buying stock back, at over $500 per share, especially when they knew the upcoming news would not be good. The folly continues. In the most recent quarter, $102.5 million was spent, at an average price of $341. An additional $100M has been authorized. There is still over $500M on the balance sheet and no debt. Could have been over $1.5B.
FROM THIS POINT FORWARD:
There are lots of initiatives that are in place, including the contribution from a number of highly qualified restaurant executives that have been added to the team. For details of this effort, I encourage interested observers to read the transcript of last night’s conference call. (https://edge.media-server.com/m6/p/izb7479f) It’s all promising, but challenging, especially in an environment that is generally unforgiving. Over the last two years, as the Chipotle brand has been undermined, new and old competitors have not been standing still.
In summary: My conclusion is about the same as it was two years ago, when CMG was over 100% higher. There is no rush to invest here, even with the stock down so substantially. The valuation is far from “cheap”. There are better alternatives if an investor wants to pay well over 30x expected earnings in calendar ’18.
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