CMG FREE FALLIN’

Takeaway: CMG's decline is not finished. Investors will likely assign a lower multiple to a lower cash flow estimate before this stock bottoms

We believe that CMG is a broken stock not a broken company.  The stock will likely trade much, much lower over the next six months from where it is trading after hours.

Chipotle reported very disappointing 3Q12 results and, most importantly, guided to flat-to-low-single-digit comparable restaurant sales growth for FY13 versus the Street at 5%, according to Consensus Metrix. 

Earnings could grow at a mid-single-digit pace versus 21% consensus as margins, while difficult to say, could contract to 20-25% depending on how food costs trend over the year.  The biggest impact to the share price, we believe, could come from multiple contraction as investors decide how much they will pay for flat-to-LSD comp growth and declining margins. 

Outlook

Revenue is set to miss current investor expectations in FY13 as comps are projected to grow between 0% and low-single-digit.  4Q12 comps are likely to decelerate from 3Q12 as unseasonably warm weather in December 2011 helped set up a difficult compare for this quarter.  Unit growth is expected to accelerate to 165-180 from a projected 165 this year. 

Margins are likely to come under pressure as food inflation is expected to ramp up in 2013.  Additionally, margins will likely contract significantly due to sales deleverage alone.  The implications of sales slowing to the degree that management is expecting are difficult to gauge but we believe that earnings growth could be in the mid-single-digit range for FY13 versus current expectations of 21%, per Bloomberg.

The company estimates that its FY13 tax rate will be 39% and announced an additional $100mm stock buyback authorization in conjunction with today’s earnings.

Recap

3Q12 earnings missed across the board but it was the outlook that was most impactful for the stock price.

Revenue came in light as same-restaurant sales growth was just shy of expectations.  New unit volume growth was negative for the second successive quarter but remain in the $1.5-1.6mm range.  Management said that it was happy with its transaction trends but fewer beverage orders, possibly due in part to fewer large online orders and an increase in to-go orders.  Management did not directly name Taco Bell but addressed speculation that “a competitor” was taking share, stating that 2Q and 3Q traffic trends were sequentially level and that there interpretation is that none of the rumored market share shift had occurred. 

Margins narrowly exceeded expectations as cost of sales benefited from favorable avocado prices which offset rising steak, chicken, and rice prices.  Labor and other operating costs benefitted from higher restaurant sales; we expect these line items to turn unfavorable in 2013 as sales growth slows. 

CMG FREE FALLIN’ - cmg earnings recap

 

CMG FREE FALLIN’ - cms pod1

Howard Penney

Managing Director

Rory Green

Analyst