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    A Decade of Revolution Declare Your Research Independence

We can definitely be accused of not being a bull on CMG, but we have not been short either.  Either way we have a keen eye on trying to figure out when store growth is going to slow meaningfully.  Trying to guess same-store sale trends is not a reason to be short CMG.  The real question is when will incremental returns on new units slow?  When will the company need to slow the unit growth rate?  For the time being we are not there yet, but the recently filed 10-K offers some signs that the company is maturing.

Some highlights from the 10-K:

  1. CMG is now looking to “fine-dining” for inspiration
  2. Supply problems - the numbers of store serving you basic fast food chicken and beef is growing
  3. Per store labor costs are increasing
  4. Development costs have stopped going down and could increase in 2012
  5. Inflation is still a concern  


OLD PHILOSOPHY: Chipotle began with a simple philosophy: demonstrate that food served fast doesn’t have to be a traditional “fast-food” experience. Over the years, that vision has evolved. Today, our vision is to change the way people think about and eat fast food.

NEW PHILOSOPHY: Our vision is to change the way people think about and eat fast food. We do this by avoiding a formulaic approach when creating our restaurant experience, looking to fine-dining restaurants for inspiration.  We use high-quality raw ingredients, classic cooking methods and a distinctive interior design and have friendly people to take care of each customer—features that are more frequently found in the world of fine dining.   Our approach is also guided by our belief in an idea we call “Food With Integrity”.   Our objective is to find the highest quality ingredients we can—ingredients that are grown or raised with respect for the environment, animals and people who grow or raise the food.

HEDGEYE: CMG is now thinking in terms of a “fine dining” experience – talk about raising the bar in QSR!!


OLD PHILOSOPHY: Serving high quality food is what motivates us and is critical to our vision to change the way people think about and eat fast food.   As part of our Food With Integrity philosophy, we believe that using fresh ingredients is not enough, so we spend time on farms and in the field to understand where our ingredients come from and how the animals are raised.

NEW PHILOSOPHY: Serving high quality food “while still charging reasonable prices” is critical to our vision to change the way people think about and eat fast food.  As part of our Food With Integrity philosophy, we believe that using fresh ingredients is not enough, so we spend time on farms and in the field to understand where our food comes from and how it is raised.  Because our menu is so focused, we can concentrate on where we obtain each ingredient, and this has become a cornerstone of our continuous effort to improve our food.  As of December 31, 2011, we were serving exclusively naturally raised meats in all of our restaurants in the U.S. Continuing to serve naturally raised meats in all of our restaurants is one of our goals, but as discussed below, we have and will continue to face challenges in doing so. Some of our restaurants served conventionally raised chicken or steak for much of 2011, a few markets reverted to conventionally raised beef in early 2012, and more of our restaurants may periodically serve conventionally raised meats in the future due to supply constraints. We define naturally raised as coming from animals that are never given antibiotics or added hormones and that are raised responsibly—that is, in accordance with our animal welfare standards.

HEDGEYE: CMG sees the need to raise prices to execute on the current business model.  It’s going to get harder for the company continue to grow at the current pace and keep is integrity with customers and that will find it harder to claim they serve naturally raised food!  As of December 31, 2010, about 80% of the restaurants served naturally raised steak and about 86% of the restaurants served naturally raised chicken.  These percentages, to our knowledge, are no longer disclosed. 



THE BASICS DONE RIGHT: Each restaurant typically has a restaurant manager (a position we’ve characterized as the most important in the company), an apprentice manager (in about three-quarters of our restaurants), one or two hourly service managers, one or two hourly kitchen managers and an average of 22 full and part-time crew members.

HEDGEYE: CMG took the average crew up by 2 people in 2011.



We operated 1,230 restaurants as of December 31, 2011. We plan to increase the number of our restaurants significantly in the next three years, and plan to open between 155 and 165 new restaurants in 2012.

HEDGEYE: CMG was looking at opening between 135 and 145 new restaurants in 2011.



“One of our biggest challenges is staffing new restaurants. We seek to hire only top-performing employees and to promote restaurant managers from our crew, which may make it more difficult for us to staff all the restaurants we intend to open. Constraints on our hiring new employees are described further below under “ Our business could be adversely affected by increased labor costs or difficulties in finding the right employees for our restaurants .”

HEDGEYE: CMG added this new caveat to its 10-K this year. 



“We also have lowered the average development cost of our new restaurants significantly in recent years, from about $916,000 in 2008 to about $800,000 in 2011, and expect development costs in 2012 to be similar to 2011. In the event we are not able to achieve the average development costs we expect for 2012 or sustain the benefits achieved in prior years, which could result from inflation, project mismanagement or other reasons, our new restaurant locations could also result in decreased profitability.”

HEDGEYE: CMG will no longer see the tail wind of declining development costs.  This fact coupled with accelerated development could lead to lower returns on incremental invested capital.  This point is critical to keep an eye on.



“Food prices for a number of our key ingredients escalated markedly during 2011 and we expect that there will be additional pricing pressures on some of those ingredients, including beef, chicken, rice and beans, during 2012. We could also be adversely impacted by price increases specific to naturally raised meats or other food items we buy as part of our Food With Integrity focus, the markets for which are generally smaller and more concentrated than the markets for commodity food products. Weather related issues, such as freezes or drought, may also lead to temporary spikes in the prices in some commodities.”

HEDGEYE: This was not as much of a problem in 2011 with double digit same-store sales.  What about 2012?

Howard Penney

Managing Director

Rory Green