CMG FULLY PRICED BUT BUY ON PULLBACK

CMG reported EPS of $2.35 ($2.45 including tax refund) up 19% on a 13.4% increase in revenues and 1% in same store sales. The big upside to estimates ($0.20) came from G&A savings (lapping 1x costs & lower stock comp expenses) and $0.10 in tax credits.  

 

Sales Trends

 

The comp was driven by traffic of +0.7% and a 0.3% increase in average check (mix was negative due to fewer drink sales).  Same-store sales were impacted by two fewer trading days, compared to last year, as the restaurants were closed on Easter and due to leap day in 2012. As a result the underlying same-store sales were closer to 3%.  On a two-year basis, same-store sales declined from 7.5% in 4Q12 to 6.9% in 1Q13.  Management maintained the flat to low-single digit same store sales guidance for 2013.  The forward looking commentary on sales trends in April did not provide much insight into overall industry trends.

 

CMG FULLY PRICED BUT BUY ON PULLBACK - cmg pod1

 

 

Margin Trends

 

Overall food costs came in slightly better than expected.  Food costs were 33% in 1Q13, up 80 bps YoY, but sequentially food costs were down 50bps from 4Q12 due to lower avocado and dairy costs.  CMG was surprisingly able to leverage some labor on a 1% same store sales.  Labor costs were 23.6%, down 10bps YoY.  The leverage was driven by higher menu prices and some labor efficiencies.  Overall, restaurant-level margins declined 100bps YoY.

 

 

Sales Drivers

 

Looking ahead, CMG plans to continue rolling out catering (should help mix) as well as spend on enhanced traffic-driving

and brand building marketing initiatives.  The street is modeling to 4% for 2013, which is above management guidance and an acceleration from the current 3% implied run rate. 

 

 

Conclusion

 

Overall, CMG’s fundamentals remain unchanged.  Restaurant-level margins will likely trend lower on low single-digit same-store sales.   Catering will not be a big driver of same-store sales in 2013 and we see the company reluctance to take addition price is telling and they are concerned about their ability to take price.  The $700 million in cash and debt few balance sheet is a potential weapon that would make me nervous if I was short this stock.   

 

The company’s growth rate, margin structure, returns profile and cash position are all supportive of the 30x P/E multiple.   We would like to see the stock come in from the current levels to get long.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


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