CMG: Rinse & Repeat


CMG is indicated down premarket despite delivering another rockstar quarter.


Suffice to say, we've seen this story before.  Near-term concerns are legitimate, particularly given its lofty multiple, but "comping" mid-single digits while lapping +17-20% same-store sales growth is not a big deal to us.  Considering the long-term story is fully intact, we’d view notable dips moving forward as buying opportunities. 


This concept and company have never been stronger.


Earnings Recap

Revenues and same-store sales fell slightly short of estimates, but EPS came in well-above consensus at $3.88 vs $3.65 led by lower than expected cost of sales (benefit from dairy and avocados) and G&A expenses.  Same-store sales growth of 10.4% comprised of 6.1% price, traffic, and a minimal bump from average check.  Importantly, with pricing rolling off midway through the year, management plans to increase the price of its steak and barbacoa by the end of 3Q.  During the quarter, management repurchased $23 million worth of its common stock and has $170 million remaining on its share buyback program.  In addition, CMG continues to have no debt on its balance sheet.


CMG: Rinse & Repeat - 1


There’s More To The Story

In our view, there’s more to the story here than a temporarily decelerating top line.  This isn’t new news, in our view, and should be fully digested by the market.  A cursory look at the two-year average of +11.9% tells us things are just fine, and comes despite an estimated 100-200 bps negative impact from a harsh winter and backlash from the carnitas shortage.  Even with the disappointing comp, CMG realized significant operating leverage as cost of sales declined 59 bps y/y, restaurant level margins expanded 157 bps y/y, and operating margin expanded 316 bps y/y.  CMG boasts a best-in-class operating model that continues to show notable upside while continuing to grow units at a double digit clip.


Fundamentals Are Best In Class

Chipotle currently operates at all-time high restaurant level margins and AUVs.


With throughput constantly improving (+21 transactions per day in the quarter), catering ramping, more aggressive marketing, and mobile payment in the works, the opportunity for further growth is readily apparent.  To be clear, we think there is upside to the low-to-mid single digit comp guide, although our bullish bias partially discounts this.


Given the high returns it continues to see from new units, the company will continue to grow Chipotle at a double digit rate for a very long time and is currently molding two futures growth vehicles -- ShopHouse and Pizzeria Locale.  Valuation may be tough for some to swallow, but the stock trades at a discount to its five-year average of 40.7x P/E at a time when the fundamentals have been stronger than ever before.  Decelerating top line trends will be short lived and, while it gives the bears something to talk about, there’s a lot more positives that we can think of.  Even at 1,800+ restaurants, it will be difficult for investors to find a stronger growth story in the restaurant space.


Cash Is King

While this often goes overlooked, it is notable nonetheless.  Given Chipotle’s bullet proof balance sheet and over $1 billion cash and cash equivalents on hand, management has a number of levers it can pull—if necessary—to support shares over the intermediate-term.


CMG: Rinse & Repeat - 2


Takeaway: Latest data on bet levels in March corroborate our assertion that Street is underestimating the degradation in Macau’s grind mass segment.

  • Observed premium and grind mass posted minimum bet levels were lowered on average again in March.  Our new dataset, observed average bet levels, also continued its trend lower in March. 
  • We believe both metrics are indicative of demand.  Minimum bet levels are a measure of pricing set by the casino.  Observed average bet amounts are not as reliable but in the aggregate should directionally track true average bet.  Average mass bet size multiplied by the number of bettors should equal mass volumes.
  • The premium mass trend shouldn’t be a surprise. However, we’re most concerned with the trends in minimum bets and average betting levels for grind mass given the higher margins associated with this segment and the perception among analysts that it is still growing.  The data suggests otherwise.
  • Street estimates need to come down to reflect lower grind mass revenue assumptions for 2015/2016 and the associated negative margin impact.
  • While Hedgeye remains below the Street in our 2015 EBITDA projection for all Macau operators, the largest disparity (10%) remains with LVS - the most exposed operator to the grind mass segment.



Cartoon of the Day: Rangers...Blackhawks...Doves?

Cartoon of the Day: Rangers...Blackhawks...Doves? - Fed doves cartoon 04.21.2015

Rangers? Blackhawks? Forget it. The smart money is betting on the Fed Doves.

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McCullough to Penguins Fans: GET UP ALREADY!

Hedgeye CEO Keith McCullough can’t resist answering a subscriber question about Monday night's NHL first round matchup between the New York Rangers and the Pittsburgh Penguins, noting that there wasn’t much of a home-ice advantage for the Pens at Consol Energy Center.



EAT: Becoming A Victim Of Its Own Success

Key Takeaway

Brinker is a great company, but we fear it is becoming a victim of its own success.  As it stands, the 16% earnings growth on 4.4% sales growth that consensus expects in FY16 looks aggressive to us, particularly with industry sales and traffic rolling over.  We don’t see how they hit these numbers and expect estimates to be revised down as the year progresses.

Earnings Recap

Brinker kicked off restaurant earnings season this morning with a disappointing 3Q15 print, as same-store sales and traffic fell short of consensus estimates.  Despite the soft top line, EAT managed to deliver in-line EPS of $0.94 due in large part to lower than expected other operating and G&A expenses.  During the quarter, management repurchased 1.7 million shares of common stock for $104.2 million and paid a $0.28 dividend.  The stock is trading down on the day, with the majority of the casual dining group following suit.

 EAT: Becoming A Victim Of Its Own Success - 11


Soft Comps Are Concerning

After years of operating margin expansion driven by strategic investments within its restaurants (new kitchens, POS systems, fryers, tabletop tablets, remodels, etc.), the brand is entering a phase that will depend on top line trends for incremental leverage.  Despite the recent menu innovation around the Fresh Mex and Fresh Tex platforms, we haven’t quite seen the bump in sales or traffic that most were expecting.  Traffic declined -0.2% in the period, though it was +0.6% adjusting for the Christmas shift, and has now been negative in eight out of the past ten quarters.  While Chili's same-store sales continue to outpace the industry, according to Knapp, its gap is narrowing.  Management attributed this to the aggressive price increases competitors are taking and noted that consumers historically tend to push back once pricing reaches the 3% range the industry is currently running at.  EAT took +0.8% pricing in the quarter and plans to take an additional +1% price increase in mid-4Q in order to offset some of the commodity pressure (burger meat, fajita beef, salmon) they are seeing.


Food & Loyalty Are The Future

While soft comps are concerning, management is betting that initiatives taken to enhance the menu will ultimately prevail and drive future growth.  They expect the Fresh Tex menu to begin to resonate with consumers as they educate the market place on what exactly it is and plan to continue to leverage the Fresh Mex menu given its high profit margins.  Chili’s also eliminated a number of low selling items from the menu, in an effort to streamline operations (improve speed of service, food delivery temperature, etc.).  Management believes it has made, and will continue to make, the proper investments on the technology front (Ziosk, NoWait) in order to drive traffic in the future.  Loyalty, in particular, will be critical moving forward and EAT now has the technology in place that they can leverage to support this effort.


The Earnings Algorithm Is Changing

It’s clear to us that the fundamental earnings algorithm of the company is changing.  A model that once heavily relied on a seemingly endless stream of strategic operational improvements to increase margins is now transitioning to one dependent on sales and traffic growth.  This concerns us given recent trends and will continue to heading into FY16.  Loyalty could ultimately be the top line driver the company has been missing, but we suspect ramping up the program will take longer than most suspect.  Brinker is a great company, but we fear it is becoming a victim of its own success.  As it stands, the 16% earnings growth on 4.4% sales growth that consensus expects in FY16 looks aggressive to us, particularly with industry sales and traffic rolling over.  We don’t see how they hit these numbers and expect earnings estimates to be revised down as the year progresses.


EAT: Becoming A Victim Of Its Own Success - 2


EAT: Becoming A Victim Of Its Own Success - 3

McCullough: The Fed Is Going To Be Lower (Easier) For Longer


In this brief excerpt from today’s morning Macro Show, Hedgeye CEO Keith McCullough takes a look at the message of the bond market, Fed fund futures, and the “dots.”


Click here to watch the full edition of The Macro Show from April 21.


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