CMG - Signs of Slowing....

I love going to Chipotle! Every time I go, the stores are clean, the food is tasty and there is usually a line of people waiting. But is that enough?
  • Valuation - CMG is the most expensive restaurant stock on the planet.
  • Peak Margins Right now CMG is the only restaurant company with double digit EBIT margins. In the world before rampant food inflation, labor inflation and consumer distress the best run restaurant companies barely achieved double-digit EBIT margins. To be clear, we are not talking about those companies that generate most of their revenues from a royalty stream. In the heyday when P.F. Chang's and The Cheesecake Factory were trading at 40x EPS, they generated EBIT margins around 10%.
  • Same-Store SalesGiven the current economic environment, CMG's same-store sales are in a class of their own. Over the past two quarters the company has posted same-store sales of 10.6% and 10.2%, respectively. Looking out over the balance of 2008, CMG's same-store sales are likely to slow to mid-single digit growth. In 1Q08, CMG did benefit from an easy 8.3% comparison due to a tough winter last year. For the next two quarters comparisons get more difficult at 11.6% and 12.4%, respectively.
  • Current TrendsCurrent Trends

Rebate Check Spending Survey

The following press release is from BIGresearch. Over the past four year we have found the BIGresearch surveys to very good insight in consumer spending trends.

NRF Survey Confirms Consumers Plan to Spend Much of Rebate Checks on Necessities

--Spending on Gas and Groceries Top Consumers' Lists--

Washington, May 13, 2008

MCD - Specialty coffee - It was never going to be easy!

We know MCD can sell lots of coffee!

For 12-months now I have been skeptical about the company's ability to sell significant amounts of specialty coffee. An article in Crain's suggests that MCD specialty coffee sales remain soft in the two initial test markets

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MCD - Asia Slowing?

As noted in HedgEye's early look today - the prime investment focus should be moving away from the credit crisis and towards Asia's double edged sword of accelerating inflation and decelerating growth."

A data point from MCD Japan supports this thesis. MCD Japan reported that same-store sales fell 0.5% in April, the first decline in 27 months. One-time issues like difficult comparisons and one fewer Sunday should be noted, but even after adjustments the trends are slowing from 1Q08 same-store sales of 4.4%.

WEN/TRY - On Saving $60 Million...

On May 12, 2008, a letter from Roland Smith was distributed to all Wendy's employees and franchisees and posted on Wendy's internal portal.

The $60 million in synergy saving was not mentioned but, he did say: There will be job cuts at Wendy's. I don't know how to put it any other way and say that I am acting with integrity. We will continue to be truthful with you about these as they come up and as we look at the plan for organizing our company as we go forward.

This is the hard part about trying to not look like the bad guy from the south.....

CKR - Moving The Compensation Goal Posts Mid-Year

Shareholders can't be happy about this!

Determining Executive Compensation......

The Employment Agreements for senior management permits bonuses to be paid based on the discretion of the Board. In FY 2008 CKE restaurants did not hit the targeted income for management to receive a performance bonus. So, the Board felt that it was important to analyze why the company missed numbers and determine if senior management should get a bonus.

And guess what........ The market value of the company declined nearly by $600 million The CEO made $6.2 million, down from $6.8 million last FY.

According to the CKE proxy - During fiscal year 2008, a number of material events occurred which were not anticipated at the time the original target income was approved and which changed the Company structurally. Since these events were not anticipated, they were not factored into the original budget.
These events included the following:

(1) In July of fiscal year 2008, the Company sold its La Salsa brand. The original budget contemplated owning La Salsa for the entire year.

(2) The Company refranchised 136 Hardee's restaurants pursuant to a refranchising program the Company announced in April of fiscal year 2008. The original budget contemplated owning these Hardee's units throughout the fiscal year.

(3) The Company repurchased $266,640,000 of its common stock during fiscal year 2008. The Company increased its borrowings under its credit facility by $219,404,000 in fiscal year 2008 principally as a result of the share repurchases, thereby increasing interest expense during the fiscal year. The original budget did not contemplate this volume of share repurchases or the attendant interest expense.

(4) The primary unforeseeable events creating these adverse consequences were the significant increase in commodity costs, the extent of the increase in the minimum wage, and the substantial decline in interest rates resulting in mark-to-market accounting charges which the Company was required to take on the interest rate swap agreements the Company had entered into with respect to certain of its debt.

Because of the structural changes to the company and unforeseen events the board believed that the original budget was no longer relevant in determining management compensation. As a result, there was no impact to senior management compensation, despite a nearly 50% decline in the value of the company.

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