CMG - Playing with fire
It can get worse from here; the company's pricing strategy is insane. The LONG investment case is breaking down brick by brick:
- Aggressive pricing to get paid your incentive comp and the long-term impact on traffic is now a negative
- The effectiveness of LTOs is waining (CMG officially on the LTO treadmill)
- Aggressive unit growth causes increased labor inflation (CMG cant keep the current stores staffed properly)
CMG reported 3Q22 Non-GAAP EPS of $9.51, beating by $0.32 (after significant adjustments). Revenue of $2.2B (+12.8% Y/Y) misses by $30M. Comparable restaurant sales increased 7.6% (beat by 30bps). In-restaurant sales increased 22.1%, while digital sales represented 37.2% of food and beverage revenue. Restaurant-level operating margin was 25.3%, increasing 180 basis points YoY (beat Factset by 20bps). The number of restaurants at the end of the period was 3,090, below estimates of 3,107. Average restaurant sales (TTM) $2,796M, +9.5% y/y, For 2022, management is anticipating the following: Fourth quarter comparable restaurant sales growth in the mid to high-single digits Between 235 to 250 new restaurant openings, which assumes construction, permit, and material supply delays don't worsen. An estimated underlying effective full-year tax rate between 25% and 27% before discrete items.
From the beginning of the earnings call, the CEO was on the defensive about his current pricing strategy when he said, "While it is difficult to predict the macro impact on future spending trends, we know our value proposition remains strong, and we experienced minimal resistance to our price increase in the quarter. To put it into perspective, our average chicken burrito or bowl, which makes up about 50% of our orders across the US, is below $9 in our restaurants." That may be true, but add chips, guac, and a bottle of water, and the bill goes up by another 50%.
Conference call notes:
- Aggressive pricing +13% protects margins with labor leverage of 70bps YoY (so the CEO can get paid). Expect more of the same in 4Q22, with pricing up 15.5%
- Cutting labor hours to make the numbers is a very bad sign - leverage from the labor line likely to reverse in 2023
- Guidance assumes further traffic deceleration in 4Q22.
- Signs that LTOs are having less of an impact on frequency. The current premium chicken 4Q22 LTO is not doing as well as last year's Brisket (Why will LTO's performance improve in 2023?)
- Expecting SSS to accelerate in the back 1/2 of 4Q on easier compares.
- Getting more aggressive on price into 4Q22 up to 15.5%, dropping to 11% in 1Q23
- In-store sales are up 22%, and traffic is down 1% (delivery getting crushed bad for DASH)
- The company is betting on consumer trading down to offset the loss of lower-income consumers, yet the CEO said
- The CEO said the concept provides relative value at a $9 burrito (lol)
- The company missed the unit opening by 32 and now needs to open 111 in 4Q22 or double the pace of opening of the last two quarters combined to hit the low end of 235-250
CHEF Earnings
Organic sales growth slowed to 22.2% from 36% in 2Q22 and 62.9% in 1Q22.
The Chefs' Warehouse (CHEF): 3Q22 Non-GAAP EPS of $0.41 beats by $0.13. Revenue of $661.9M (+36.7% Y/Y) beats by $41.26M. Organic sales increased $107.2 million, or 22.2%, compared to the prior year. Net sales for the full year of 2022 will be in the range of $2.45 billion to $2.55 billion from prior outlook of $2.375 billion to $2.475 billion vs. $2.45B consensus. Gross profit to be between $575.0 million and $599.0 million and Adjusted EBITDA to be between $145.0 million and $155.0 million
