CMG – PROVING THE NAYSAYERS WRONG

We continue to believe that Chipotle is one of the best positioned growth companies in the restaurant industry.  The company reported a very strong 2Q13 and we continue to believe that it is well positioned for the balance of 2H13.  Below are some of our thoughts on CMG’s 2Q13 results:

 

 

WHAT LOOKS GOOD

  • 2Q13 same-store sales of 5.5% beat consensus of 3.7% (as extra day adds 1%) and the two-year trend remains steady at 6.8% vs. 6.9% in 1Q13.
  • Management raised its guidance for 2013 same-store sales from “flat-to-low single-digits” to “low-to-mid single-digits.”
  • We expect 2Q13 traffic of 4.5% to continue into 3Q13.
  • $2.82 EPS was in line as a higher tax rate held back EPS by $0.04-$0.05.
  • Increased marketing appears to be driving incremental traffic.  Marketing costs increased to 1.5% of sales in 2Q13 compared to about 0.7% in 2Q12.
  • The company ended 2Q13 with $775 million in cash and cash equivalent along with no debt.
  • New restaurants are opening at (or above the high end) of the $1.5 million to $1.6 million sales target.
  • The company is expected to delay raising prices in 2H13, as management remains focused on continuing to drive traffic and take market share. 
  • Chipotle opened 44 new restaurants in 2Q13, putting year-to-date openings at 92.  It is clear to us that CMG is likely to exceed the high end of management’s targeted opening range (165-180 restaurants) for FY13.

 

POTENTIAL CAUSE FOR CONCERN

  • The majority of our concerns stem from margin pressure.
  • Restaurant level margin contracted -160bps in 2Q, primarily due to higher food costs.
  • The company reported food costs to be around 33% of sales in 2Q13 as salsa, chicken and cheese added the most pressure to margins.  We suspect that 33% may be the peak in food costs during the current cycle.
  • We continue to monitor new unit performance very closely.
  • Valuation is rich, but we believe the business model is built to stay this way. 

 

CMG – PROVING THE NAYSAYERS WRONG - CMG SSS  JULY19

CMG – PROVING THE NAYSAYERS WRONG - CMG EV EBITDA 1YR

CMG – PROVING THE NAYSAYERS WRONG - CMG EV EBITDA 3YR

 

 

 

Howard Penney

Managing Director

 


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