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As we wrote on 12/17, we would be more constructive on the stock closer to $250.  We think the bottoming process will take time for CMG.

CMG preannounced preliminary 4Q EPS miss of $1.92-1.97 vs. consensus of $2.09, ahead of its presentation at the ICR XChange Conference on Thursday.  SRS were essentially in line at 3.8% versus 3.2% consensus and total revenues were slightly better that estimates.

The company missing EPS was due to lower-than-expected margins

  • Food costs are expected to come in at 33.5% of sales versus consensus of 32.8%
  • Other operating costs increased sequentially due to increased marketing and promotional related costs (driving traffic becoming more expensive)
  • Restaurant level margins of 24.6% missed analyst expectations of 25.7%

We wrote on 12/17 that the CMG bottoming process could take time and that restaurant-level margins were the wild-card for 2013.  The company purchases its commodities on the spot market, which means that its restaurant level margins are vulnerable to swings in commodity prices.  This is especially true with LSD comps.  Inflation is currently running at low-single-digit levels, driven by higher dairy and protein prices.   The company claims to be confident of food inflation leveling off in 2013, with avocado costs flat versus 2012, but, as recent years have shown, weather can have a significant impact on protein and produce costs and we believe that there are likely more surprises – good or bad – in store for commodity prices this year.

We continue to believe that there is further downside risk to EBITDA and EPS estimates, even after today’s announcement.  Bottoms are processes, not points.

A press release with final, fourth quarter and full year 2012 financial results will be issued at approximately 4:00 PM Eastern time on February 5th

Howard Penney

Managing Director

Rory Green

Senior Analyst