CMG: Rinse & Repeat

Takeaway

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


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