CMG: A CUT ABOVE

Back in October we wrote that CMG was well positioned for the balance of the year and expected the company to report another strong quarter in 4Q.  We reiterated our bullish view on the stock in a note in early January.  Needless to say, it did not disappoint.  Despite a choppy sales environment for the majority of restaurant companies in November and December, CMG was able to deliver exceptional results (+9.3% comp primarily driven by traffic), solidifying its position as one of the strongest restaurant companies in our space.  Sales, net income, and EPS all surprised to the upside in the quarter by 216 bps, 121 bps and 34 bps, respectively. 

 

Chipotle continues to separate itself from the competition through its unique food and people culture, unwaveringly loyal guests and top tier operating model.  As management noted on the call, the brand has significant durability as low volume days (due to poor weather, etc.) were typically followed by very high volume days, suggesting the resiliency of the typical Chipotle customer.  

 

We believe CMG has the sales drivers in place (faster throughput, sofritas, catering, GMO removal, non-traditional marketing) to continue delivering strong comp growth throughout 2014.  To this extent, management upped their 2014 sales guidance from low single digit growth to low – mid single digit growth.  It is important to note that this comp growth excludes any potential price increases, which management indicated they may implement (3-5% increase) beginning in 3Q14.

 

Furthermore, we believe the careful, calculated development of the Shop House and Pizzeria Locale concepts continue to be longer-term opportunities with tremendous upside potential.   For now, however, growth will primarily continue to be driven by new Chipotle restaurants in the U.S.

 

One point of contention, and perhaps the only, was the impact a potential cost of sales increase would have on margins in 2014.  Management guided this line to 34.5% of sales in 2014, due primarily to high avocado prices in addition to the system-wide rollout of non-GMO ingredients.  Higher than expected comp growth in 2014 could mitigate some of this pressure but, as we mentioned above, the company may need to take some pricing to further offset this pressure.  Though management would not commit to taking price in 2014, it would be interesting to see the effect it would have on traffic.  Given the loyal customer base and the premium placed on higher quality food, we’d assume it won’t have much of a negative impact, if at all, on traffic.

 

What we liked in 4Q13 results:

  • Sales ($844.1mm), net income ($79.6mm), EPS ($2.53) all beat expectations.
  • Comp growth (+9.3%) beat expectations of +6.7% and accelerated +110 bps on a two-year basis.
  • Traffic accounted for the vast majority of comp growth despite a very difficult environment.
  • Labor costs were 23% of sales in 4Q, representing a -90 bps decrease over the prior year.
  • Other operating costs were 11.3% in 4Q, representing a -20 bps decrease over the prior year.
  • Restaurant level operating margin was 25.6% in 4Q, representing a +100 bps increase over the prior year.
  • Sofritas (~3% of sales) are resonating with consumers and catering (~1% of sales) is set to accelerate in 2014.
  • Throughput increase by 5 transactions during the peak day hour and by 6 transactions during dinner hours in 4Q.
  • Non-traditional marketing strategy is resonating with consumers.
  • $90mm remaining on the current authorized share buyback program.
  • Continue to target 180-195 new restaurant openings in 2014.
  • Opening sales volumes continue to be very strong ($1.6-1.7mm range).
  • Will perform a full remodel on many of their oldest restaurants.
  • Plan to invest about $10mm to perform a significant network redesign in all restaurants.
  • Remain focused on the growth of the Chipotle brand domestically.
  • Not accelerating international development until they have built sufficient brand awareness.
  • Not rushing the development of the Shop House and Pizzeria Locale brands.

What we didn’t like in 4Q13 results:

  • Food costs were 33.9% of sales in 4Q, representing a +40 bps increase over the prior year.
  • Further food cost pressure is expected in 2014, with management guiding to 34.5% of sales.
  • For the full year, comparable restaurants sales increased +5.6%, representing a -150 bps decrease from the prior year.
  • For the full year, restaurant level operating margin was 26.6%, representing a -50 bps decrease from the prior year.

CMG:  A CUT ABOVE - sales

 

CMG:  A CUT ABOVE - traffic

 

 

Feel free to call with questions.

 

Howard Penney

Managing Director


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