Restaurants
Portillo's,
PTLO's raised $405 million by offering 20.3 million shares at $20, the high end of the $17 to $20 range. New investor Select Equity Group had indicated buying $100 million of the IPO (25% of the deal). The company has a market value of $1.4B and an EV of $1.7B. Backed by Berkshire Partners, Portillo's serves "iconic" Chicago street food through multichannel restaurants, offering a diverse menu that includes Chicago-style hot dogs and sausages, Italian beef sandwiches, and chopped salads, among other offerings. Nearly all of its restaurants have double-lane drive-thrus and a layout accommodating dine-in, carryout/curbside, delivery, and catering. As of June 27, 2021, Portillo's owned and operated 67 restaurants across nine states, primarily in Illinois, with plans to expand following the IPO.
Shoot me an email if you want to see the PTLO pre-IPO deck.
CMG EARNINGS
Chipotle Mexican Grill (CMG) is scheduled to announce 3Q21 earnings results today, AMC. The consensus EPS estimate is $6.32 (+68.1% Y/Y) and the consensus Revenue Estimate is $1.94B (+21.3% Y/Y). Analysts expect comparable sales growth of 13.7%. The restaurant-level operating margin is expected to be 22.7%. The new restaurant estimate is 48.64, with an average restaurant sales estimate of $2.59M.
EAT postmortem
The first part of the meeting dealt with the 1Q22 issues, which lasted much longer than that. What became clear from the Q&A was that much of the EAT issues are self-inflicted. The company's lack of strategic planning in the current was pronounced. When the middle of the P&L is seeing inflation 5-6%+, and you don't raise prices, that is a problem.
A few interesting comments that could impact others in the space:
Food costs (renegotiating contracts?) "we had to restructure a couple of contracts to make them realistic to where the markets were going to assure that we had that product access."
Labor costs - (Hedgeye Theme "Reopening is Hard") - "There's both transitory from our perspective and structural changes going on in the labor market."
- "130 basis points of that impact in that quarter, we feel is very much in the transitory category, and we will deal with that as we go forward."
- "50 basis points of training, 40 basis points of less productivity, again, a new workforce coming through the restaurants that need training, need to become more adept and get that muscle memory going of the systems and how we approach things."
- "And then some structural changes. Wage rates did increase in that 5% to 6% range that we had talked about before. So they are behaving kind of as anticipated. And then some leverage working its way and as we continue to drive the top line side of the equation."
- We saw a dramatic increase in turnover, both labor, hourly labor, and management labor early summer So April, really May, June, July. Is it over?
Repairs and Maintenance (another "Re-opening is hard" seeing elevated costs due to reopening) - - "Because you can imagine, that's the first quarter, really, really the first big quarter after the pandemic a lot of everybody. This is where everybody was saying, we found all these margin savings and were saying the no, you haven't. I mean, you just aren't -- you got nobody in your restaurant. Of course, you're not having to repair a lot of stuff. There's nobody in your restaurant. So we knew that was going to come back.
Supply Chain (stuff on boats!) - "I mean, there's stuff on those boats. There's stuff in other countries that we need to get here that will eventually start to move through that doesn't get the same kind of exposure as your Christmas present. But it impacts our restaurants, and one of them is just getting refrigeration units, getting air conditioning units so that we can open our building."
Consumer Staples
Modelo gold extension (STZ)
Modelo looks to be testing a line extension called Modelo Oro. Modelo Oro is a 90 calorie light beer with an ABV of 4.2%. Modelo Especial has an ABV of 4.6% and 141 calories. Modelo Especial is the #2 best-selling beer in the U.S. and the only one in the top five that is not a light beer. We do not expect a light version of Modelo Especial to be a better seller than the full-calorie version like Bud Light vs. Budweiser but expect it to grow the overall brand. Modelo's line extensions currently include Reserva, Pura Malta, Chelada, and Negra, but we would expect Oro to surpass the other extensions if it was fully rolled out. The TTB approved Modelo Oro's label:
Post-Pandemic Grocery Black Book Today
Today at 2 PM ET, Our Black Book will be the first in a series focusing on the headwinds and tailwinds by sub-sector in Consumer Staples. We start with the supermarkets, where nearly everything in Consumer Staples is sold. Next, we will dig into several key topics, the setup from here, and most importantly, outline our investment recommendations for each grocer.
Hedgeye's Macro team continues to see more evidence for Quad 2 in Q4. We will show how the grocers have performed historically in Quad 2, what may be different this time, and if we should expect a repeat of the past.
Inflation is top of mind for the stock market as well as for consumer staples. Inflation is said to be suitable for the grocers, with the top-line benefit creating nominal growth. We will show if that holds for periods of high inflation.
The pandemic has had an outsized impact on the grocery sector. But, what changes are permanent and what are temporary? Is this a new normal for at-home food consumption?
The headwinds facing the grocery industry also impact the suppliers. We are adding several companies to the shortlist on our position monitor.
The outline of our call:
