CMG: THOUGHTS INTO THE PRINT

CMG: THOUGHTS INTO THE PRINT - chart1

 

CMG reports on Monday, July 21st AMC.

 

Takeaway: CMG has been the best performer in the restaurant space over the past year (+57.1%) and is a name we continue to prefer on the long side.  We are cautious, however, about the upcoming quarter given notable inflation in avocado, beef and cheese prices.  Recall that Chipotle only began taking ~6% of menu price in early June (~1,000 units), with the system-wide rollout likely completed by the end of 2Q.  Therefore, we question the extent to which management was able to protect margins in the quarter in the face of pressing inflationary pressures.  Looking out into 2H14, same-store sales momentum and the full impact of pricing suggests estimates are too low.  We'd therefore be buying on any post-earnings weakness.

 

Investment Thesis Overview

Chipotle continues to be one of our favorite longs in the big cap QSR space, highlighted by a best in class operating model and recent same-store sales momentum.  Traffic grew 13.4% in 1Q and management has several drivers in place (faster throughput, non-traditional marketing, GMO-removal, sofritas, catering) to help capitalize on this and enable them to deliver +15% revenue growth and +20% EPS growth for the next few years. 

 

Food inflation driven by high beef, avocado and cheese prices continues to be a cause for concern, but a MSD price increase should mitigate these pressures in 2H14 and 1H15.  We believe Chipotle has ample pricing power which should allow them to raise prices with little resistance and give another leg up to margins.

 

Chipotle also continues to attract investors with two potential growth drivers (ShopHouse, Pizzeria Locale) and a strong balance sheet (room to accelerate buybacks).

 

Earnings Expectations

For 2Q14, the street expects revenues of $989.1 million (+21% YoY), adjusted EPS of $3.09 (+9% YoY), and company owned same-store sales of +10.2% (incl. +2% price).  We’re cautious on earnings given food inflation and little impact on the Q from June price increases.

 

Same-Store Sales Trends

Given recent momentum and menu pricing of ~6%, we expect two-year same-store sales to accelerate throughout 2H14 and into 1H15.

 

CMG: THOUGHTS INTO THE PRINT - chart2

 

CMG: THOUGHTS INTO THE PRINT - 3

 

CMG: THOUGHTS INTO THE PRINT - 5

 

CMG: THOUGHTS INTO THE PRINT - 4

 

Margins

The 2Q margin outlook is dicey given food cost pressures.  As such, we expect to see notable restaurant level and operating margin contraction.  However, this trend should turn moving forward, as we expect price increases in 2H14 and 1H15 to drive restaurant level and operating margin expansion for the next several quarters.

 

CMG: THOUGHTS INTO THE PRINT - 6

 

CMG: THOUGHTS INTO THE PRINT - 7

 

CMG: THOUGHTS INTO THE PRINT - 8

 

Valuation

CMG is currently trading at 43.34x P/E and 21.92x EV/EBITDA on a NTM basis.

 

Risks

This quarter depends on the company’s ability to maintain prior same-store sales momentum and mitigate food cost pressure by leveraging labor and other operating expenses.  2H14 performance will also depend on these factors, but will have the full benefit of ample price increases, which should give restaurant and operating margins another leg up.  Any pushback to these price increases (though unlikely), would be a significant blow to our bullish thesis.  Highly promotional QSRs are trying their best to make this happen.  A decline in new unit productivity would also raise a red flag, as CMG begins moving into smaller markets.

 

Call with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Did the US Economy Just “Collapse”? "Worst Personal Spending Since 2009"?

This is a brief note written by Hedgeye U.S. Macro analyst Christian Drake on 4/28 dispelling media reporting that “US GDP collapses to 0.7%, the lowest number in three years with the worst personal spending since 2009.”

read more

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more