CMG continues to be on our Investment Ideas list as a long.
Brief Analysis: 3Q14 marked another impressive quarter for Chipotle, which managed to grow same-store sales by nearly 20% at a time when the majority of quick service and fast casual restaurants would be pleased to deliver a low-single digit comp. The company continues to thrive amid what appears to be a secular shift in the way people, and particularly Millennials, eat out.
The stock traded down after hours, however, as low to mid-single digit comp guidance for 2015 came in well below the street's 7.2% estimate. We believe this was a concerted effort by management to temper aggressive expectations. This guidance may very well prove to be conservative, but CMG will be lapping the strongest period of comp growth since being spun out as a public chain in 2006.
Underlying food inflation was up +8% in the quarter, which is quite possibly the only red flag we could find in the quarter. The fact of the matter is, this is an incredibly strong company, with strong management, best-in-class unit economics, a robust balance sheet and unparalleled momentum. We believe any sell-off today would be a nice buying opportunity.
Comps: CMG delivered 19.8% comp growth in the quarter, beating estimates of 17.2%, led by traffic growth and, to a lesser extent, an +8.5% increase in average check. Management guided to low to mid-single digit comp growth in FY15. Revenues of $1,084 billion (+31.1% y/y) beat consensus estimates by 2.34%.
Margins: Despite an accelerating top line trend and a price hike, cost of sales squeezed profits in the quarter, coming in at 34.31% of sales (+75 bps y/y) vs. expectations of 33.58%, as beef, avocado and dairy inflation persists. Fortunately, Chipotle benefitted from sales leverage throughout the rest of its P&L as labor costs, other restaurant expenses, and general & administrative costs all came in well below expectations. Operating margins came in at 19.13% (+255 bps y/y), beating estimates by 55 bps.
Earnings: Adjusted EPS of $4.15 (+56% y/y) beat expectations of $3.83 by 8.26%.
What We Liked:
What We Didn't Like:
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Takeaway: We put together a 40-page deck outlining our bearish long-term view on BABA. But we don't have a near-term catalyst, so we're staying on the sidelines for now. High level themes below. More detail to follow.
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
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