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