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I can say with certainty that every restaurant operator has been looking at CMG restaurant level margins with sheer amazement.  Undoubtedly, the financial performance has been nothing short of amazing in FY10 with restaurant-level margins that are about 1000 bps above comparable companies on average (please refer to the chart below for more details). 

CMG ON ICE? - CMG ROP margin comp

The lines that make up the biggest difference between CMG and the competitors are Labor costs and Occupancy and other.  News has emerged via the Wall Street Journal that Immigration and Customs Enforcement (ICE) officials are scrutinizing CMG’s employment practices.  Following the company being forced to dismiss hundreds of employees in Minnesota, ICE is going to examine the eligibility of CMG employees in Washington, DC, and Virginia.  Perhaps this piece of news goes some way towards explaining the “magic” CMG formula for restaurant-level margin outperformance.  If it were proven that the company has not been paying appropriate wages, it could possibly shed light on where some, or all of, the 500 to 700 basis points difference in labor costs is coming from.

CMG is due to report 4Q10 EPS on Thursday, February 10 after the market close.

I expect the company had a strong quarter, with same-store sales up 9-10% and EPS that can easily beat the consensus estimates of $1.30.  Clearly a beat would not be uncharacteristic for this company, so I expect the 2011 outlook to be a primary driver of the stock’s performance.  While significant food inflation is a given for CMG in 2011, higher labor costs might not be completely factored in.

As we can see below, Chipotle’s outperformance of another burrito concept, Qdoba, is nothing short of remarkable.  It will be interesting to gauge Chipotle management’s tone on the earnings call with regard to margin outlook and, of course, to hear the reaction to the recent ICE news.

CMG ON ICE? - burritos

Howard Penney

Managing Director