CMG LEVERAGE DRYING UP IN FY13?

Chipotle Mexican Grill reported (pre-announced) 4Q and FY12 earnings after the close.  Comps and earnings were in line with consensus expectations and the pre-announced figures but some important metrics, which we flagged in recent research notes, inflected in the fourth quarter.  Below, we recap 4Q12 and offer some thoughts on 2013.  

 

From here, we remain reluctant to chase the recent move in the share price.  A significant reason behind that is that consensus is, in our view, too optimistic in its view of food and labor costs. See the second-to-last chart of this post for more on this point.

 

 

4Q12 Earnings Recap

 

Important Drivers:

  • Same-restaurant sales grew by 3.8%, year-over-year, in 4Q which was in line with preannouncement
  • The comp was driven by 3.8% traffic, 90 bps of price, offset by mix
  • The company opened 60 new units versus consensus expectations of 42
  • RLM decreased by 150 bps vs 4Q11 as food costs increased +130bps
  • Wage line delivered for the first time in over five years “as wage inflation, including promotional increases more than offset any leverage from the comp”. We think this is a trend

 

CMG LEVERAGE DRYING UP IN FY13? - cmg recap

 

 

2013 Outlook

 

The broad guidance parameters are unchanged:

  • 165-180 new units in 2013
  • Flat-to-low-single-digit comp growth

 

Other points:

  • No decision on menu pricing but inflation “so far makes it more likely”,  Dairy and protein prices are likely to force management’s hand in this respect
  • Management seems reluctant to take price and hinder transaction growth
  • Management is trying to gain leverage from G&A
  • The international business is producing altogether different returns from that of the domestic market.  Volumes and returns are lower, with brand awareness taking some time to elevate to desired levels.

 

Key Metrics

 

The good news for Chipotle this quarter is that New Unit AUV Growth seems to be slowing at a decelerating rate.  This is a good sign for revenue growth and returns if the bottoming process plays out.

 

CMG LEVERAGE DRYING UP IN FY13? - CMG AUV Growth vs New AUV Growth

 

CMG LEVERAGE DRYING UP IN FY13? - cmg sales growth new unit volume growth

 

 

More of a concern is the margin side of the earnings equation.  Food costs are being guided to 33.5% to 34% and labor costs, long a source of margin, could now be turning higher. 

 

If management takes price, which seems likely given the earnings call commentary, then food as a percentage of sales could come in below guidance.  The worry is how great of an impact that will have on traffic.  

 

Consensus Metrix shows the sell-side expecting continued labor leverage in 2013.  We are less confident; the company’s hiring practices have come under scrutiny and cost of compliance, along with the stated driver of wage inflation, could drive labor costs higher going forward.

 

CMG LEVERAGE DRYING UP IN FY13? - cmg labor cost tailwind

 

CMG LEVERAGE DRYING UP IN FY13? - CMG pod 2

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst

 

 


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more