MOVING CMG UP TO THE TOP
We are moving CMG up to the top of the SHORT list.
The company is expected to announce earnings on Tuesday AMC. The big bullish talking point surrounding Chipotle current financial performance is its impressive comparable store sales. The company's second-quarter results convey that message as SSS grew by 10.1% year-over-year. The street is currently modeling 3Q22E of SSS of 7.3% and accelerating to 8.1% in 4Q22. The consensus estimate for 2023E is 5.8%. The bulls argue that Chipotle's strong same-store sales are driven by the concept's competitive advantage, which stems from its ability to offer high-quality food at affordable prices. Did that relationship change in 2022, with the company aggressively reading menu prices? The Placer.AI data is starting to reflect slowing traffic for the company, with the obvious question why now? Another longer-term consideration to be short is that California will be an overhang for the next year or more. In-N-Out, Starbucks, Chipotle, and a host of other chain operations are pouring millions of dollars into California to thwart the Fast Act, the controversial new law that gives fast-food employees and their union suitors a forceful role in setting wages. In 2Q22, the company missed sales and comps for the first time in four quarters. The company has only missed EPS twice in twenty quarters, so I'm not expecting the company to miss big this quarter. We will also not get guidance for 2023 next week, but the current estimate of 30% EPS growth on 13% sales growth in 2023 looks very rich.
Inflation's Impact On FOOD
Americans are increasingly noticing higher prices for groceries and restaurants and are reacting by trading down.
That’s according to a new study by Yelp that analyzed user searches and reviews in the third quarter and found that more people were searching for affordable food and restaurant options as their angst over prices grew. Year-over-year inflation actually eased slightly in the quarter after peaking at 9.5% in June, according to the U.S. Bureau of Labor Statistics, and gas prices came down. But September’s 8.2% inflation was higher than expected, and Yelp users’ price complaints grew louder during the period. Instances of “inflationary language” in reviews rose 4% compared to the previous quarter and 22% year over year. The biggest wallop came from food businesses and restaurants: Mentions of inflation in reviews of those businesses rose 7% and 5% quarter over quarter, respectively.
GROCERY FLASH CALL (KR, ACI)
We are hosting a flash call merger review and legal analysis of the Kroger & Albertsons merger today at 2 PM ET. Joining us on the call will be Paul Glenchur, Hedgeye’s Senior Policy analyst, who is focused on regulatory and competition policy issues involving the Justice Department and the FTC. Paul is a member of the American Bar Association Antitrust Section and the Supreme Court Bar.
Our call will analyze the odds of FTC approval, review the proposed SpinCo, discuss the competitive implications across food retail, and provide an early preview of what the combined company could earn. We expect the company to incur a difficult path for approval by the FTC. The merger will also make the company a convenient target for food inflation by politicians who have already blamed “Big Meat” and Russian President Vladimir Putin for higher prices.
