Editor's Note: This is a brief excerpt from a recent institutional research report written by our Restaurants team. If you would like access to our research please email email@example.com.
Chipotle (CMG) is on our Hedgeye Restaurants Best Ideas list as a SHORT.
Even with a disastrous sales update after the close, we still feel like we’re fighting an uphill battle on the CMG short call, but make no mistake, our conviction level is very high! The CMG management team is flying blind and has no practical experience in recovering from one of the greatest foodborne illness disasters ever experienced by a restaurant company. That opinion and the blind faith the street has put in this management team makes for a great SHORT selling combination.
THE CURRENT SITUATION
In part, our conviction level remains high because the company was experiencing growth related issues in 3Q15, prior to the company’s 4Q15 sales related issues. Bottom line, CMG should have slowed unit growth following the 3Q15 earnings and not accelerated it! The three biggest problems the company faced then and still face today are:
- Limited supply of quality real estate
- Significantly higher lease rates for the sites they do open
- Lower average unit volumes
Taken together, all three suggest significantly lower returns and an increased likelihood that the company will not get the units open on time, or will compromise the quality of the openings to meet Wall Street expectations.
The other key to the SHORT case...
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