Chipotle (CMG) is on the HEDGEYE Restaurants Best Ideas list as a SHORT.

SUMMARY

We still think there is significant downside to CMG.  The challenge to our short call remains timing.  The biggest challenge remains finding the right balance of being aggressive on the SHORT versus the slope of the line in the recovery in sales trends.  Aggressive capital allocation toward new units will be the ultimate downfall of the stock.  Timing matters.    

CMG | 2Q16 QUARTERLY DASHBOARD - CHART 1

STOCK PERFORMANCE

CMG continues to underperform the S&P 500 across all but the one-month duration!  

  • 1-Month – +7.1% vs. S&P 500 +4.5%
  • 3-Month – (10.9%) vs. S&P 500 +3.9%
  • YTD – (12.9%) vs. S&P 500 +5.9%
  • 12-Month – (36.8%) vs. S&P 500 +2.7%

BEAT/MISS RATIO

  • Revenues – 1 for 6 (missed the last 2 quarters)
  • Same-Store Sales – 2 for 6 (big miss last quarter)
  • EPS – 5 for 6 quarters
  • Price Impact – On average -4.5% for 5 of the last 6 quarters

SHORT INTEREST – SI is at a 5 year high.  Began 2016 at 8.2% and is now 15.5%.

 

EARNINGS REVISION – Will 2Q start to see a stabilization in the negative revision trends? No guidance from the company.

  • 2Q16 – Was $1.58 in MAR currently $0.95 down 40%
  • FY16 – Was $15.97 in DEC ‘15 currently $4.41 down 72%
  • FY17 – Was $16.73 in JAN currently $11.38 down 32%

CMG | 2Q16 QUARTERLY DASHBOARD - CHART 2

 

VALUATION – Currently trading at 22.5x NTM EV/EBITDA - YTD the EV/EBITDA multiple has risen 8.0x due to the decline in profitability. 

CMG | 2Q16 QUARTERLY DASHBOARD - CHART 3

 

OPERATIONAL PERFORMANCE

COMMENTARY – Aggressive store growth is the Achilles heel of the company.  CMG’s profitability trends remain a disaster, and there is no visibility on the trajectory of the recovery.   

  • UNIT GROWTH – 12.8% or opening 52 stores (ending stores 2,118)
  • SAME-STORE SALES - CM is looking for -20.3% or -8.0% on a 2-year basis vs -9.7% in 1Q16; Traffic  -17.6% vs -21% in 1Q16.
  • RESTAURANT LEVEL MARGINS – 15.2% vs. 27.98% LY
  • SG&A – 7.2% vs. 5.9% LY (knowing the LT run rate of this number is critical)
  • OPERATING MARGINS – 4.01% vs. 18.9% LY

CMG | 2Q16 QUARTERLY DASHBOARD - CHART 4

CIVICSCIENCE CONSUMER SURVEY

Closing out 2Q16 , the CMG consumer brand survey results held steady versus our last publishing (VIEW HERE). Now, two weeks into 3Q, we have received a few hundred responses to our survey, and it shows a minor trend to the positive for CMG, but before releasing we would like to gather more responses to get a reading representative of the broader population. 

CMG | 2Q16 QUARTERLY DASHBOARD - CHART 5

GUIDANCE

The only guidance the company gives is store growth of 220-235 new units.

Please call or e-mail with any questions.

Howard Penney

Managing Director

Shayne Laidlaw

Analyst