Tag Archives: CMG

CHIPOTLE NEWS – MANAGEMENT UPDATE DUE SOON

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Our last update regarding Chipotle was 12/18/2015. We didn’t believe there would be any new announcements from the Center for Disease Control, or the Company, over the holidays, and there wasn’t. We expected that the pace of traffic would remain weak through the remainder of December, our estimate for December sales being a negative 20-25%. We currently have no reason to be more optimistic than before, and would guess the reported decline would more likely be above 25% than below.

The stock has sold off 90 points (from $540 to $450) since December 18th, as reality has begun to set in among analysts. Almost every day, another of the 25-30 analysts following CMG lowers an estimate, and that keeps pressure on the stock. We believe that process has further to go.

Earnings expectations depend on two major fundamental factors, the pace of sales and the cost of doing those sales. When sales are down and costs are up (both materially) the combination is lethal. We therefore believe that even the analysts who have revised numbers downward are underestimating the damage. The latest “consensus” estimate from Bloomberg is $2.50 for Q4 and $15.99 for calendar 2016. Recall that the last guidance from management had $2.65 at a midpoint. We believe the next guidance will be substantially below the $2.50 analysts are using, below $2.00 we suspect. The worst of the revised estimates for 2016 is at $14.00 but the Bloomberg consensus is currently still at $15.99. Since we believe that even $14.00 could prove to be optimistic, lots of further revisions and downgrades could be ahead of us.

Nobody, including ourselves, can predict with assurance how this saga plays out. We read one comparison recently to Lululemon, a high end sportswear brand that had its image tarnished with a line of apparel that was well below their standard for quality. LULU sales were sharply down for a couple of quarters then rebounded after management did their “mea culpa”, took back some product, and resumed production of better quality goods. There are major differences. Nobody got sick at LULU, and the new goods were “transparent” in terms of the improved quality. A customer at CMG doesn’t need the uncertainty, has lots of dining options, and certainly doesn’t want to expose family members to health risks that are completely unnecessary. We could go on, but the point is made in terms of ongoing uncertainty for CMG diners and stockholders in turn.

Next week, on Wednesday, January 13th, Chipotle management is scheduled to speak at the “ICR Conference” in Orlando, FLA.  We expect an update from management on Monday, Tuesday, or Wednesday A.M. regarding recent sales and costs. 

Anything management says, for quite some time, will only serve to refresh everyone’s memory of this unfortunate incident. As one of our very knowledge restaurant industry associates put it: “This is a very complicated situation”. From an estimate standpoint, if $14.00 can be considered a decent guess for 2016, CMG is trading at 32x that number, not a bargain by any means. At the moment, analysts really have no basis on which to project sales trends or the new food cost structure, so earnings projections are little more than a “crapshoot”. From a customer standpoint, the battle between the “Loyalists” and the “Betrayed” will continue to play out. From a stock standpoint, especially in an uncertain economy and an often paranoid stock market, ownership of CMG is a potential aggravation that investors don’t need. 

CHIPOTLE STOCK DOWN $50 OVERNIGHT – A BUYING OPPORTUNITY? – available to non-subscribers

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CHIPOTLE STOCK DOWN $50 OVERNIGHT – A BUYING OPPORTUNITY?

Chipotle reported earnings last evening and the stock promptly dropped from $705. To $650 overnight. Earnings were a few cents below street estimates and the same store sales were up 2.6% (on top of a phenomenal 19.6% figure a year ago), a scant 0.1% ahead of expectations. The corporate overview for the rest of the year was not changed materially, sales and traffic in line with the third quarter, a record number of store openings, and continued growth of the incubating Shophouse and Pizzeria Locale brands. A fine company with a great history of growth, debt free with over $600 million in cash ($20/share) up from $419 million nine months ago, generating a 24.6% after tax return on equity and a 19.6% after tax return on assets (according to Bloomberg). Seems to be a substantial overreaction (typical these days) to earnings that failed to beat expectations in a material way.

HOWEVER: STOCK PRICED TO PERFECTION, JULY WAS STRONGEST MONTH (WITH BOGOS), OCTOBER “CHOPPY”, LABOR COSTS COULD HURT, STOCK BUYBACKS UNWISE, NEW CONCEPTS ALWAYS QUESTIONABLE

Maintaining a price earnings multiple at substantially more than the growth rate is always difficult, requiring all the growth parameters to be in gear. Momentum investors require increasing same store sales and traffic, steady unit growth, steady margins at least, continued high returns on equity and assets. When the “second derivative”, the rate of increase in these parameters decreases, valuation metrics almost inevitably decrease. Within the conference call, the reference to “choppy sales” in August, September and October so far, expected increases in hourly wages, 2 million BOGO (Buy one, Get one free, basically a half price deal) transactions in July which was the strongest month of the quarter were all sobering considerations. Regarding the company spending $147 million in stock buybacks (“returning cash to shareholders”) the stock bought at an average of $642/share, almost 40x forward earnings and over 15s forward EBITDA, not exactly a bargain. It is also interesting that the average shares outstanding did not shrink during the nine month reporting period, so most of those shares were obviously reissued in stock options (“returning shareholder cash to executives?”) Finally, in reference to their two new concepts, Shophouse and Pizzeria Locale, no numbers have been provided regarding sales per square foot, investment per unit, or sales trends. We have no doubt that management is optimistic about these young concepts. However, we can think of NO successful restaurant company developing another concept that matched the first in terms of success. We go back as far as Wendy’s and it’s promising (at the time) Sister’s Chicken and Biscuits in the 1980s, and many other examples over the years.

CONCLUSION
We don’t doubt that Chipotle will continue to succeed in the future. It has been truly “disruptive” in the fast food space, spawning imitators from Tacos to Burgers, to Salad to Pizza. Trading, as I write this, at $656, down $50 from last night’s close, still over thirty times estimated 2016 earnings, I consider CMG far from a bargain.

You’ve Asked Rog:

I know that Whole Foods is not a restaurant stock, but food is food. If you follow it, what do you think?

Rog Answers:

I’ve followed it, from a distance, for many years, and of course have shopped there. The concern there has been increasing competition, which has lowered their margins as well as their same store sales trends. They report  a couple of weeks from now so we will know more then. It’s tempting at under 8 times trailing EBITDA, not much risk in any event. I would rather be long than short going into the earnings report.