CMG | CHASING GHOSTS

Chipotle Mexican Grill, Inc. (CMG) remains on the Hedgeye Restaurants Best Ideas list as a SHORT

 

KEY POINTS FROM THE INVESTOR CONFERENCE:

  • Co-CEO Monty Moran was not present, likely on his way out.
  • CMG is focused on making changes to the board, adding relevant experience and addressing tenure issues.
  • Sales recovery is slower than expected, recovering at 1% per month for the last 10 months.
  • Core customers have almost returned to pre-crisis levels, but management missed out on a crop of potential new consumers during this crisis.
  • No disagreements with Ackman on what needs to happen, Ackman wants a Board seat, and appears like he will get one.
  • ~50% of restaurants have an internal rating on key metrics of ‘C’ or worse.
  • Lines are back, but some of them are just due to slower throughput.
  • Management remains dedicated to store opening trajectory; long-term 5,000 units still feels right for them.
  • Selective price increases could hit in 2017.

 

On October 28th, we outlined what we believed Chipotle needed to do in order to come out on the other side of this debacle in one (badly beaten) piece. Atop that list was “Chipotle desperately needs NEW LEADERSHIP and, more importantly, a NEW DIRECTION.” This sentiment has not changed on our end, and it seems that CMG may be coming around with regard to new leadership, as Co-CEO Monty Moran was not present at today’s presentation and Steve Ells’ insistence that the company is taking very seriously complaints regarding the tenures of some on their Board of Directors. According to Ells, they have been hard at work on a Board “refreshment”, with hopes of addressing complaints regarding the long tenures of various Board members and focusing on individuals with expertise in governance, finance, and crisis management, in addition to hinting at the fact that Bill Ackman could land a seat on the Board.

 

That being said, CMG has a long way to go as the recovery has been hard to come by. Chipotle's stock took a 7%+ plunge in mid-day trading today after Ells admitted that he has concerns about CMG’s ability to adequately recover from last year’s foodborne illness disaster.  According to management, over the past 10 months, the brand has recovered sales at a pace of 1% per month, as they are just beginning to gain more customers than they are losing (according to research conducted by CMG). However, overall customer experience is still unsatisfactory and has contributed to the brand’s slower than anticipated recovery. To combat this, the Company has strengthened field leadership in their Boston and NY markets, and reiterated that guest experience is at the top of their priority list.

 

Moving to sales and comps, Management emphasized that they are hoping to push comps higher through an increased emphasis on the guest experience. Ells expressed uneasiness about hitting sales targets provided in October, as lines are back at Chipotle locations, but some of those lines are a result of poor throughput, not improving traffic (re: customer experience).  According to the Company, their slow recovery is also largely attributable to their sales makeup, as a small number of customers represent a large portion of their sales. In 1H16, their incoming wave of customers was wiped out, and ~78% of their least frequent customers were eliminated. During the second half of the year, the Company saw a sizeable increase in patronage, but ONLY AFTER aggressive marketing and promotions! And when pressed about possible minimum wage increases coming down the pike, Management expressed intentions to raise prices to offset possible wage increases. Increases in labor costs means that margins could come under even more pressure!

 

No matter how much makeup you put on a pig, at the end of the day, it is still a pig! CMG disregarded the most important rule of the restaurant business, and that is DO NOT GET YOUR CUSTOMERS SICK! No matter how much technology you place around your business, or how many bags of free chips you give away, when a brand is broken, you have to rebuild it from the bottom up.

 

CMG | CHASING GHOSTS - Chart 1

 

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst


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