In preparation for CMG’s 2Q12E earnings release on 7/19, we’ve put together some recent forward looking company commentary and important consensus metrics for the upcoming 2Q12 earnings release.
Summary Thoughts
- CMG is comparing against very weak 2Q11 results, due to significant food inflation last year
- Street modeling 10.1% SSS for 2Q12, a 250 bps slow down in 2-year trends
- Consensus expectation for 2H12 food costs look low
- Short interest is 7.45% of the float, and trended lower during the quarter
- CMG has lost ground on the Hedgeye Restaurant sentiment scorecard over the past 8 weeks
- New store performance continues to be the future for this stock
PRICING
“In March, we raised prices in our Pacific region by about 4.5% to reflect the higher cost of doing business in the region, and to help narrow the pricing gap with other U.S. markets. This price increase was completed in March. And because it laps a similar increase in the Pacific region at about the same time last year, it will have no additive effect to our comps going forward.”
“While we continue to believe we have pricing power, we do not have plans for any additional menu price increases during 2012 to offset expected food inflation.”
HEDGEYE – Every management team has pricing power until they don’t – just ask the management of DRI about the pricing power at Olive Garden. The bottom line is that consumers determine whether you have pricing power or not, and if you abuse the privilege you can get burned badly. Yes, even Chipotle.
SAME-STORE SALES
“Our comps held up well in the first quarter despite the toughest quarterly comparison in 2011 of 12.4%. Unseasonably mild weather through much of the quarter helped transaction trends remain strong. And in addition, we benefited from the leap day in February, which added about 1% to the comp.”
“Our sales comps continue to benefit from the menu price increases taken during the second and third quarters of 2011. At the current menu price increase run rate of 4.9%, we will lose 3.9% of the benefit over the next two quarters as we lap the price increases from last year, with about 30 basis points dropping off in Q2 and about 360 basis points dropping off in Q3. We also face tough sales comparisons in the back half of 2012, as beginning in the third quarter we will comp against two full years of double-digit comps for the first time since before the recession. Taking all this into account, we reaffirm our full-year comp guidance of mid-single-digits.”
HEDGEYE – Expectations are loftily for CMG, but this is not new. Some of our own internal metrics suggest that 10% same-store sales figure is likely a good estimate for the quarter.
G&A
“G&A was 7.7% in the quarter, up 140 basis points from last year, due primarily to higher non-cash, non-economic stock compensation expense, and higher payroll tax expense related to the exercise of options during the quarter. The non-cash, non-economic stock comp expense was about $20.5 million in the quarter, or $11.5 million higher than last year. About half of the increase, or $5.6 million, was due to a one-time catch-up adjustment for performance shares issued during 2010. These performance shares have a three-year vesting schedule ending in October 2013. And the amount of the award can increase or decrease depending on our financial performance during the three years.”
HEDGEYE – Outside of another “one-time” adjustment compensation expense with 10% same-store sales, there should be no surprises in this line item for the quarter.
MARGINS
“Restaurant level margins increased by 220 basis points to 27.4%, just 30 basis points shy of our highest quarterly restaurant level margin set back in Q3 of 2010. The higher margins were driven by sales leverage, including the benefit of the menu price increase, and from lower promo costs due to the large promotion in Q1 of 2011. Operating margins increased by 130 basis points, lower than the restaurant level margin expansion because of increases in non-cash stock comp, which I'll talk about in more detail shortly.”
HEDGEYE – The Street is expecting a 156bps improvement in restaurant level margins as the company should be able to leverage labor costs and other expenses with 10% same-store sales. Food costs appear to be the wild card.
INFLATION
“We continue to expect food inflation in the mid-single-digit range over the next few quarters, due primarily to rising costs of beef, dairy, and avocados.” “Contributing to these higher costs is the expectation that all of our sour cream will come from cows that are pasture raised beginning in the second quarter, and from seasonally higher avocado costs as we return to buying avocados from California this summer.”
“Right now we think that over the next two quarters it's going to be mid-single-digit inflation. We think that if things go as planned then the fourth quarter will level off a little bit. So I think when you take that mid-single-digit inflation and convert that into impact on food costs, I think you are looking at somewhere between 100 basis points to 150 basis points of higher food costs over the next couple quarters.”
“But more importantly, from the fourth quarter to the first quarter, we had the same food costs. So we didn't see any net effects of food inflation so far in 2012. And that's, I think, the most reflect – I think the most – the best way I think to look at it is kind of sequentially from the fourth quarter.”
“If you look at the fact that we had a – we've got a run rate of about a 5% menu price increase, and our food costs went up by 20 basis points, you could just back in to the fact that we had like a, call it a 6% or 7%, in that kind of ballpark inflation year-over-year.”
“But more importantly, looking at it sequentially, didn't get hit in the first quarter. We do think that the mid-single-digit inflation going forward will kick in, and we think it'll hit over the next two quarters.”
“And we expect higher costs as we move into the second quarter and the third quarter. It's coming from three principal places. We continue to see inflation in beef costs. We will see seasonally higher prices. Even though avocados year-over-year will be lower, as you get into the second and third quarters, they're going to be higher than they are in the first quarter, because we're going to start buying from California and they will be more expensive.”
HEDGEYE – The Street is modeling a YoY 5bps decline in the cost of sales for the quarter and a 61bps sequential increase. CMG is losing some benefit from pricing, and food inflation in the company's P&L is accelerating quarter-to-quarter.
NEW RESTAURANT PERFORMANCE
“Our new restaurants continue to perform very well, reflecting the success of our real estate development strategy and the growing awareness of the Chipotle brand across all U.S. markets. Our new restaurants are opening at or above our $1.5 million to $1.6 million communicated range. And A-Models continued to perform well with sales just below traditional sites, but they generate higher returns.”
HEDGEYE – All eyes are on this metric as investors seek to gain a clearer idea of how big this company can be!
