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CMG: Building Market Share

Takeaway: We remain bullish on CMG, as it continues to take share in an ultra-competitive environment. Recent comp & traffic numbers are unheard of.

Comps: CMG delivered +13.4% comp growth in the quarter, beating estimates of +8.8%.  Management upped its FY14 comp guidance from low to mid-single digit growth up to high-single digit growth.  Revenues of $904.163mm came in 3.5% higher than consensus estimates.

 

Margins: Despite accelerating top line trends, margin pressure continues to squeeze profits.  Food costs accounted for 34.5% of revenue, up nearly 150 bps YoY, due to higher beef, steak, avocado and cheese prices.  Restaurant level margins came in at 25.9%, down 40 bps YoY.  G&A expenses accounted for 7.4% of revenue in the quarter, up 130 bps YoY due primarily to higher non-cash compensation exp. and litigation costs.  Operating margins came in at 15%, down nearly 150 bps YoY.

CMG: Building Market Share - 4 17 2014 4 05 37 PM

Earnings: EPS of $2.64 came in light, missing consensus estimates by approximately 8% as the aforementioned margin pressure weighed on profits.

 

Analysis: While the majority of the restaurant industry continues to blame poor weather for disappointing comps, Chipotle delivered +13.4% comp growth primarily on the back of traffic gains.  Chipotle continues to take market share in an increasingly competitive environment.

 

Declining margins are a concern, but are not insurmountable.  Food inflation is weighing heavily on the cost of sales line, as beef, steak, avocado and cheese prices continue to surge.  In order to combat this pressure, management announced they will take a mid-single digit price increase in 2H14.  This should help mitigate food costs, which are expected to run above 36% of revenues (excl. any price increase) for the full-year.  Management indicated they have ample pricing power and we tend to agree.  In our view, Chipotle’s loyal and growing customer base will be willing to look past a $0.24-0.40 increase in the price of a burrito.  People are willing to pay for a premium product. 

 

Even with this margin pressure, Chipotle still operates a best in class business model and the demand for the product appears as strong as ever before.  Faster throughput contributed meaningfully to the quarter, as restaurant saw an average increase of seven transactions at both peak hour lunch and peak hour dinner times.  A unique and differentiated marketing/advertising approach helps keep CMG top of mind and continues to drive incremental traffic.  Catering, though immaterial, continues to be a potential sales driver.  We expect this to pick up steam in 2Q as graduation season commences. 

 

CMG typically trades up on strong comps post-earnings, even when EPS misses, but an uncertain margin outlook has weighed down the stock.  We believe same-store sales momentum and a price increase will effectively mitigate oncoming pressure, leading CMG to deliver +20% EPS growth over the next two years.  Longer-term, international, ShopHouse and Pizzeria Locale continue to provide CMG with a strong growth runway.

 

Catalysts:

  • CMG continues to poach market share from competitors as same-store sales and same-store traffic momentum persists.
  • Marketing/advertising drives incremental traffic as the “Better Ingredients” campaign rolls out to 30 different markets in 2Q.
  • Catering ramps up.
  • Management accelerates its share buyback program.

Risks:

  • Increasingly difficult comps for the remainder of the year.
  • Food costs continue to surge.
  • Consumers aren’t as receptive to a price increase as anticipated.
  • Margin pressure erodes earnings.

 

CMG: Building Market Share - cmg2

 

CMG: Building Market Share - cmg3 

 

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst



Poll of the Day Recap: Investing Green Bills in Green (Medical) Pot

Takeaway: 80% responding YES; 20% NO.

Poll of the Day Recap: Investing Green Bills in Green (Medical) Pot - m2

 

It can’t be denied that the medical marijuana market is escalating. In states that have recently legalized marijuana, tax revenues have soared into the millions, exceeding expectations. And, to the extent that this legalizing expands, it is likely that tobacco companies will enter the field.

 

But, before we put together our own conclusions, we wanted to hear your view. We asked in today’s poll: Would you invest in a company that produces medical marijuana?


At the time of this post, the clear majority favored 80% responding YES; 20% NO.

 

Many voters who chose YES agreed that as long as the product was legal, they’d be comfortable investing in it. Additionally, several noted that marijuana has proven and obvious benefits in the medical field.

 

Other noteworthy YES comments included:
 

  • “It's a business like any other. Like tobacco, I think people are nuts to use it heavily but they're all grownups. If the company can make consistent, superior returns and is priced attractively one should own it.”
     
  • “It'd probably be better than investing [in] pharmaceuticals, which are crap-shoots with the FDA.”
     
  • “It is obvious that marijuana use will become fully legal, probably with the same kind of controls now applied to alcohol and tobacco. There’s too much social acceptance, opportunity for tax revenue, and by the way, serious political pressure from Latin American countries that have paid the price in hundreds of thousands killed because US drug users won't give up their habit.”
     
  • "It's a burgeoning market with extensive pent up demand and a virtually undeniable medium-term growth trend... And it's green, man.”
     
  • “I think it’s a dope idea...I would invest in any company that was well-managed with a competitive advantage or a disruptive product.”

One responder over in the NO group, however, put it this way: “I wouldn't invest in these stocks for the same reason I wouldn’t invest in tobacco or alcohol stocks. I just think that, on balance, all of these products aren't good for people. That said, I'm not casting any moral aspersions on legalizing or using marijuana. In fact, I agree with the decision to make it legal. I just wouldn't personally invest in these types of companies.”

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TROW: Removing T. Rowe Price From Investing Ideas

We are removing T. Rowe Price (TROW) from Investing Ideas.

 

TROW shares have held up well in the volatile equity market year-to-date but we think the stock will be too cyclical for more challenging broader economic results as we move into the middle part of the year. Mutual fund trends are starting to reflect this slowing growth with bond trends starting to improve with stock fund trends starting to slow over the most recent 12 week period. We do not think it is a rush for the exits on TROW shares and are still expecting a good earnings result upcoming this week on April 24. We are getting ahead of this catalyst however and recommend that investors use any stock strength to sell or reduce their TROW position.

 

TROW: Removing T. Rowe Price From Investing Ideas - 1

 

TROW: Removing T. Rowe Price From Investing Ideas - 2



GREEN SCREEN MACRO: Flowers, Showers, Ticking Clocks & Back-Half Ramps

SUMMARY BULLETS: 

 

  • GREEN SCREEN MACRO:  Paint whatever eco growth picture you want.  And remember, when in doubt, herd your point estimate for growth right on the current consensus and… always, always, bake in the back-half ramp
  • TRACKING THE BOUNCE:  Is anyone not expecting a bounce in the reported March/April fundamental data?   We continue to think the 2014, growth-slowing playbook remains the relevant one.
  • INITIAL CLAIMS  -  April Flowers:  A 4th week of accelerating improvement.  The numbers for the MTD are supportive of a strong April jobs report.
  • #InflationAccelerating:  Food, energy, and housing are all key cost centers for the consumer and with inflation in each currently running at a premium to wage growth, share of wallet for other discretionary purchasing will remain under pressure
  • #HousingSlowdown:  The pervasive deceleration in housing activity to start the year has extended itself into March/April - across geographies.  The West, not the Northeast, has looked the worst.   
  • Policy Thoughts: The Ticking Clock - The Fed needs to get out if only to allow themselves to (credibly) get back in.  The tock is ticking on the current expansionary cycle.  

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - Weak in the Dollar

 

Macro’s Green Screen

Listening to Yellen’s remarks and the referencing of her now enigmatic “dashboard” yesterday while staring at consensus growth estimates for 2014 provided his year’s most potent reminder that professional macro forecasting remains very much a storytelling exercise.   

 

Indeed, for Fed tea leaf readers, the chess match that has become massaged messaging to markets under the Fed’s fledgling, increased transparency directive only adds another distortive layer to the storytelling.

 

For forecasters..remember, when in doubt, herd your point estimate right on current consensus (which at a round 3% is, itself, just an un-imaginative expectation for a return to pre-recession Trend line growth) and always, always, bake in the back-half ramp

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - GDP estimates Cons

 

SLOPE STACKING:  Tracking the Bounce

With a host of domestic macro metrics recording some of the biggest sequential declines in history in the weather distorted, Dec-Feb period, is anyone not expecting a bounce in the reported March/April fundamental data?   

 

What we’d like to see, in short, is the slope of growth track back towards the levels that characterized the heart of the 2013 acceleration.   

 

Thus far, the March/April data has been mixed as most measures have shown sequential improvement, but haven’t exhibited a material, rebound effect that would be suggestive of deferred activity and certainly haven’t retraced the cumulative declines realized in the peri-new year period.   

 

With the dollar holding in bearish formation, 10Y yields broken (& declining in the face of the last few, low volume equity rallies), and inflation still rising alongside increasingly harder growth/inflation comps through 3Q14, we continue to think the 2014, growth-slowing playbook remains the relevant one.   

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - Macro Slope Stack

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - Eco Summary Table 041714

 

Initial Claims:  April Flowers for Labor

Initial Claims has been the notable positive diverger from a fundamental data perspective over the last month. 

 

This morning’s labor data extended the streak of accelerating improvement to four consecutive weeks as the 4-wk rolling average in non-seasonally adjusted claims improved to  -12.1%  YoY  vs. -10.5% the week prior.    

 

The trend in headline, seasonally-adjusted claims was similar with the 4-wk rolling average falling -4.25K WoW to 312K, the lowest level since August of 2007.

 

As Josh Steiner, our head of Financials research at Hedgeye, re-highlighted this morning: 

 

The weather's turn, particularly in the Northeast, remains coincident with the turn in the claims data. Based on the numbers so far, it looks like the April job's report will come in quite strong.

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - 2

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - 1

 

 

#InflationAccelerating:  Headline CPI inflation accelerated +40bps sequentially to +1.5% YoY while Core CPI  accelerated +10bps to +1.7% YoY in March.   Under the hood, the existent trends extended themselves as food, energy, and shelter price growth all continued to accelerate.  

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - Core PCE vs Food   Energy Inflation March

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - CPI Housings Pull march

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - OER Contribution March

 

Real Hourly Earnings of Production & Non-Supervisory Employees grew +0.8% YoY in March according to BLS data released Tuesday – a sequential deceleration of 70bps vs. the +1.5% YoY growth recorded in February – and nominal spending continues to grow at a positive spread to incomes

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - Spending vs. Earnings Nominal 041714

 

Food, energy, and housing are all key cost centers for the consumer and with inflation in each currently running at a premium to wage growth, share of wallet for other discretionary purchasing will remain under pressure. 

 

Further, with household savings rates already at the low end of the historical range, consumer credit growth (ex-auto’s & student loans) tracking sideways, equities down YTD and housing slowing, the capacity for non-wage related factors (i.e. credit, reduction in savings, wealth effect) to support incremental consumption growth appears constrained.  

 

Core PCE inflation, meanwhile, continues to list at ~+1.0% YoY.  Persistent, sub-2% PCE inflation gives the Fed latitude to further talk down the dollar which, in our view, will only perpetuate rising inflation and, by extension, a slowdown in domestic consumerism.  

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - Median Consumer Expenditures

 

Source: Hedgeye Financials

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - loan compendium chart


 

#HousingSlowdown:  The pervasive deceleration in housing activity to start the year has extended itself into March/April - across geographies.  The West, not the Northeast, has looked the worst.    

 

  • NAHB HMI:  Headline NAHB confidence increased 1pt MoM in April vs the downwardly revised March print.  Notably, with the exception of the Northeast, builder confidence was flat or down across geographies.  Confidence in the West region slid for a third consecutive month to 45, continuing its expedited drawdown from a peak reading of 71 just three months ago. 
  • Mortgage Applications:  Yesterdays purchase application index rose 1.3% WoW  but remains -17% off the May 2013 peak.  Similarly, the composite index (purchase + refi) gained +4.3% WoW but remains in free fall at -58% YoY.  We continue to believe the confluence of QM implementation, declining affordability, and a slowing consumer will drag on housing demand, with home prices responding on a lag.   
  • Housing Starts/Permits:  Housing starts rose 26K MoM but missed estimates by a comparable amount while Building Permits went sub-1MM, declining -2.4% MoM to 990K.  On a relative basis, supply/demand/price dynamics in the new home market continue to compare favorably to those in the existing market.  Buyer demographics and the cumulative deficit in new housing units built since the recession should help buttress the relative downside in new construction activity.  

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - NAHB Regional

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - Mortgage Apps

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - Home sales by region NAR

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - San Fran Case Shiller

 

 

Quasi-random policy thoughts:  The Ticking Clock

By FOMC admission, the juice on QE has been largely exhausted and the risk/reward balance has shifted.   If anything at this point, the Fed needs to get out if only to allow themselves to (credibly) get back in. 

 

A cessation of QE alongside decent macro data accomplishes two things. 

 

First, from a messaging perspective, it signals confidence in the ability for the private sector to carry the recovery forward. 

 

Second, stopping QE while the fundamental data is supportive implies that QE was (at least in part) effective in its objective.  Some measure of perceived effectiveness by the market allows them to come back to it should they need to.    

 

Perma-QE, however, is de-facto admission of its ineffectivenss, leaving it largely impotent as a forward policy tool.     

 

The line of thinking above isn’t necessarily new or novel but, as of April, the duration of the current expansion stands at 59 months – exactly the mean duration of expansions following recessions over the last 100 years. 

 

Sure, balance sheets recessions are defined by slower recoveries with lower amplitude, but you think the Fed is completely unaware of the ticking clock?  

 

Enjoy the long weekend.

 

GREEN SCREEN MACRO:  Flowers, Showers, Ticking Clocks & Back-Half Ramps - US Recession Cycle

 

 

Christian B. Drake

@HedgeyeUSA

 


Jobless Claims: Fourth Consecutive Week of Solid Numbers

Takeaway: Claims continue to fall at an impressive rate as a precursor to a tight labor market and wage inflation.

the streak

The labor market put in another good week, bringing the series to four consecutive weeks of solid data. While a modest deceleration from last week on a single week basis, the rolling trend continued to sequentially accelerate. 

 

Jobless Claims: Fourth Consecutive Week of Solid Numbers - ATS stock

 

The year-over-year change in non-seasonally adjusted initial claims came in at -11.6% vs the prior week's 15.9% improvement and the previous week's 7.1% improvement. That brought the 4-week moving average to -12.1%, as compared with -10.5% and -7.5% in the preceding two weeks. Remember, a more negative number is better as it reflects a faster rate of improvement. 

 

As we pointed out last week, the weather's turn, particularly in the Northeast, remains coincident with the turn in the claims data. Based on the numbers so far, it looks like the April job's report will come in quite strong.

The Data 

Prior to revision, initial jobless claims rose 4k to 304k from 300k week-over-week, as the prior week's number was revised up by 2k to 302k.

 

The headline (unrevised) number shows claims were higher by 2k week-over-week. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -4.25k week-over-week to 312k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -12.1% lower year-over-year, which is a sequential improvement versus the previous week's year-over-year change of -10.5%

 

Jobless Claims: Fourth Consecutive Week of Solid Numbers - 1

 

Jobless Claims: Fourth Consecutive Week of Solid Numbers - 2

 

*   *   *   *   *   *   *

 

Editor's Note: This is an excerpt of a research note that was originally provided to subscribers on April 17, 2014 at 10:18 a.m. by Hedgeye’s Financials team Jonathan Casteleyn & Josh Steiner. Follow Jonathan and Josh on Twitter @HedgeyeJC and @HedgeyeFIG.

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