CMG: Look Past the Near Term Noise

CMG remains on the Investment Ideas list as a long.


It’s unlikely for a restaurant stock to trade down after reporting same-store sales growth of +16.1% and a $0.05 (or 136 bps) bottom line beat – but that’s precisely what we have here.  With a lofty valuation (41.5x NTM P/E; 21.41x NTM EV/EBITDA) and sky high expectations, Chipotle needed to deliver an impeccable quarter to appease the market.


Alas, in the market's eyes, margin pressure and some cautious commentary regarding 2015 same-store sales and cost of sales trends trumped the best in class comp and traffic growth.  Cost of sales inflation, primarily due to beef, dairy, and avocado, pressured margins in the quarter and the guide for 2015 was well above consensus estimates (35% vs 34.3% est.) as beef and avocado prices are expected to remain elevated while dairy normalizes. 


Management dismissed the notion that cost of sales is an issue as they tend to take a more holistic view of their operating model – as long as restaurant level margins are improving, they are pleased.  As an aside, restaurant level margins improved 101 bps in 4Q14 even as cost of sales increased 108 bps.  We firmly believe Chipotle should be praised rather than condemned for investing in its food, a phenomenon that the majority of its competitors are reluctant to do.


CMG: Look Past the Near Term Noise - 1

Source: Company Filings, Consensus Metrix


In our view, there were far more positives in the quarter than negatives and the street is overlooking the strategic investments the company made this year to further improve operating performance moving forward.


Comp growth was driven by 6.3% price, 2.0% mix, and 7.8% traffic.  In addition, throughput picked up again, as CMG increased its peak hour lunch and dinner transactions by three and five, respectively.  Its restaurants are now operating at AUVs close of ~$2.5 million, a number which management intends to improve through stronger operating efficiency.  To that point, the company has decreased its field leadership ratio from 15 a few years ago to 8 today and has created its own Restaurateur diagnostic tool that helps these leaders identify weaknesses in each of the restaurants they supervise.  With these two investments (people, diagnostic and plan tool) in place, 2015 should be a year of continued growth and development in each of Chipotle’s restaurants – better food, better throughput, better experience.


Considering CMG’s bullet proof balance sheet (nearly $1 billion in cash) and improving incremental returns (even at ~1,800 restaurants), it’d be foolish to bet against this stock.  It is the best positioned growth company in our space.



While we understand the market’s initial reaction to the report, we believe it is important to look past the short-term noise and volatility that sometimes plagues this stock around earnings releases.  What’s most important to us is that Chipotle’s brand positioning and relevance has never been stronger.  This is not only evidenced by the company’s same-store sales growth, traffic growth, and all time high AUVs, but also by the ever evolving preferences of American eaters.  Chairman and Co-CEO, Steve Ells, shed light on this early on in the call:


“For example, our vision is really resonating with teens, millennials, and Generation X. According to industry research, Chipotle is one of the most popular restaurant chains among teens and has been growing in popularity among this demographic. This report from 2014 ranks Chipotle as the third most popular brand among teens, up from number eight in 2013. Gen X consumers were 33% more likely than average to choose Chipotle, with millennials Chipotle was even more popular. With customers in this group 75% more likely than average to choose Chipotle over other restaurants.


We believe that our popularity among these younger consumers is tied to our vision and the growing interest in issues related to food and how it is raised. Our own research shows that these issues are clearly becoming more relevant and important when customers choose where they will dine. Based on our ongoing tracking research, 87% of fast casual diners say they prefer to eat foods that are grown locally, up from 70% in 2011. 86% believe ingredients raised or grown in a more responsible way taste better. That’s up from 76% in 2011. 73% feels important to buy organic for certain food items, up from 61% in 2011 and 69% try to eat meat that has been raised responsibly and that’s up 53% in 2011.”


If there’s a better positioned publicly traded restaurant than Chipotle, we’d like to know about it.  


CMG: Look Past the Near Term Noise - 2


CMG: Look Past the Near Term Noise - 3

Keith's Macro Notebook 2/4: USD | Commodities | Financials


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.

LEISURE LETTER (02/04/2015)




  • Feb 10: 
    • IGT extraordinary shareholder meeting vote
    • HOT 4Q CC 10:30am
      • (1866) ; pw: 67514695
  • Feb 12: 
    • MPEL 4Q CC 8:30am
      • (1866) ; pw: MPEL
    • PNK 4Q CC 10:00am
      • ; pw: 68847867
    • BYD 4Q CC 5:00pm
      • ; pw: 5378350
  • Feb 17: MGM 4Q CC 11:00am
    • ; pw: 8870181
  • Feb 18: 
    • HYATT 4Q CC 11:30am
      • ; PW: 62845475
    • MAR 4Q release 5pm
  • Feb 19:
    • HST 4Q CC 9:00am
  • Feb 25: Prestige analyst day (9:00am-12pm)



    CCL - Carnival Vista will homeport in Miami. The move is part of an extended deal between Carnival Corp. and PortMiami that would require Carnival to sail Vista out of Miami for at least 24 months in the three years after the ship launches next year. The 3,954-passenger Carnival Vista will launch May 1, 2016. After a season of 18 sailings in Europe, the ship will embark on a 13-night transatlantic crossing October 21, 2016, arriving in New York City on November 3. 

    Article HERE

    Takeaway: As expected.

    HOT - Bahrain-based International Investment Bank (IIB) has announced that its mixed-use real estate development in Sarajevo has signed a memorandum of understanding (MOU) with Starwood Hotels and Resorts concerning the project's second tower, which would house a luxury five-star hotel. Sarajevo City Centre (SCC), which is based in Sarajevo, the capital of Bosnia and Herzegovina, is a partnership between IIB and Saudi-based business group Al Shiddi Group.

    Article HERE







    Jimei – The company says it is expanding its gambling junket business in Macau. Jimei told the Hong Kong Stock Exchange that it had an agreement with New International Club Ltd to participate indirectly in the gaming promotion business in the city. New International Club is in negotiations with casino operator Wynn Macau Ltd about managing several VIP gaming rooms. The agreement will give Jimei all New International Club’s share of the revenue from these rooms in exchange for taking all the risk.

    Article HERE

    Takeaway: More VIP rooms coming for WYNN? 


    North America

    Alaska– The Alaska market may have found its perfect supply and demand scenario, as market capacity will remain flat year-over-year from 2014 to 2015 according to the 2015-2016 Cruise Industry News Annual Report. The market accounted for 900,000 passengers in 2014, and 2015 numbers remain the same, although still somewhat below a peak of 1 million passengers in 2008, before the infamous Alaska head tax drove 20 percent of the beds elsewhere.

    Article HERE


    New York - Again, NYC set a record for visitors, drawing 56.4 million of them in 2014. The total was a 3.9% increase over the 54.3 million visitors in 2013, which had been the all-time high for the city. The number of international visitors grew 7%, to 12.2 million. Domestic visitors totaled 44.2 million, a 3% increase. Also a city record: 32.4 million hotel room nights sold. The average daily rate was $295 and average hotel occupancy was 89% — both highs in the U.S. for 2014, said the city’s tourism organization, NYC & Company.

    Article HERE

    Takeaway: NYC was a hot spot for lodging in 2014 but Fx will be a hurdle in 2015?





    China PBOC announces system-wide reserve ratio cut by 50bp to 19.50%.  

    • Cut reserve ratio by additional 400 bps for agricultural development bank.
    • PBoC said it will continue to implement prudent monetary policy.
    • Maintain an appropriate degree of credit and social financing.

    Takeaway:  Largely expected by the market. Nevertheless, this is a positive for the VIP segment, on a 9-11 month lag.


    Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

    Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

    Morning Macro Call Replay: If USD Goes Up, Gold Will Go Up


    Please enjoy this complimentary look at our Morning Macro Call, a daily conference call for institutional investors.  In today’s Morning Macro Call, Hedgeye CEO Keith McCullough explains why inverse correlations matter, talks about the recent moves in oil, and debates Macro Analyst Darius Dale about which moving average is best.  


    Takeaway: Quick thoughts on a big number. Will be back tonight with a detailed playbook.

    1) We were expecting a release from KSS this week, with a best case comp of 3%. The company came in at 3.7%, with solid flow through to EPS with growth of 15%. Assuming SGA was up 1%, it suggests flat gross margin (which makes sense given flat inventory coming out of 3Q). Simply put, this is the first time in 13 quarters that KSS comped positive in its stores (about 0.7% assuming 25% dot com growth). 


    2) One X factor this quarter is last year's January washout. KSS comps were -8%, assuming a 14% weight for the month. To be fair, we completely knew about this, and thought we modeled it appropriately. And Macy's had an even greater impact with -10% last Jan, and it put up a 2% owned comp last night for the quarter which implies a 1.5% comp for January. KSS is the rare standout. 


    3) The big tell for us will be JCP.  If JCP comps somewhere in the low single digits, then we have some very serious questions to ask and answer, as it will suggest that there's something that KSS is doing to separate itself from the pack. If JCP comps high single, KSS trades down as the 'could I be wrong with the structural short call' concern abates. 


    4) To play devil's/bull's advocate, we'd say that the change in the rewards program at KSS caused an increase in loyalty and store traffic that will help the company finally comp sustainably positive for the first time in 3 years. 


    5) We think that logic is fundamentally flawed -- and the company's choice to decouple the credit card from the rewards program will ultimately sustain traffic, but will jeopardize a 400mm sg&a offset (9.5% of SG&A) that KSS receives from Capital One and books as a counter cost. This will play out over the course of 2015. 


    Finally, while this seems even more counter consensus today than when we made the call, we still think that that FY15 will be the last year KSS will earn better than $4 per share 


    If the market freaks out (as it appears to be) we'd short more based on what we know today. On the road this morning. Will return with a detailed playbook later this evening. 



    Takeaway: The quarter was bad across the board with January offering a sliver of Mass hope.



    It’s not all bad for WYNN. Yes, Q4 was all bad but Wynn’s Mass business started the Western New Year off with a bang.  Sure, hold was likely high and the Mass comparison will be the easiest until October. But at least we didn’t have to lower Q2015 estimates, although we were below the Street already.


    So where do we go from here? As everyone knows, the February comp is +40% and we think February 2015 could fall 32-36% YoY. Wynn’s recent efforts in attracting new high end Mass players should continue to bear Q1 fruit on a relative basis but is that enough? Relative to expectations, March could be the real disappointment.  Unless trends rebound, we think the market could fall 25-30% YoY in March which could surprise people more than a 34% decline in February. 


    And what about Vegas? Two companies have had disappointing YoY declines in EBITDA in that supposedly rebounding market, but Vegas means more to WYNN than LVS.  Our contention has been that Las Vegas gaming revenues are not actually rebounding – flattish is status quo – and RevPAR, while positive, still trails the rest of the country.  What’s all the excitement about?


    Please see our detailed note:

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