Chipotle (CMG) is on the Hedgeye Restaurants Best Idea list as a SHORT.
Two weeks ago we updated our short thesis on CMG and the news flow from Malcolm Knapp supports the fact that any recovery in CMG’s sales trends is a long way off!
September was a disaster for the fast casual industry.
In September, same-store sales in the Fast Casual segment, as provided by Malcolm Knapp, declined 3.1% (2-year avg. declined 30bps sequentially) versus 2.8% in August. When compared to the 3.3% decline posted in January during the height of the CMG foodborne illness scare, it is clear how bad things are for CMG.
In September, same-store traffic in the Fast Casual segment, as provided by Malcolm Knapp, declined 5.8% (2-year avg. declined 50bps sequentially) versus 4.4% in August. This is compared to a 5.9% same-store traffic decline in January!
For 3Q16, same-store sales and traffic were down 2.7% and 5.0%, respectively. Both of these numbers represent sequential declines versus 2Q16 in which the Fast Casual segment posted comparable sales of -1.3% and comparable traffic of -3.9%. The sequential decline in sales partially explains why we continue to see aggressive promotional activity from CMG.
Part of our short thesis rests on management being incapable of successfully managing the business through this crisis, and yesterday’s news from the company is a perfect example of what we are referring to.
Yesterday, CMG announced a new online game based on the company’s animated short film “A Love Story.” According to the press release, “the game is available online and allows users to test their memory skills by matching up real Chipotle ingredients while being careful not to select the imposters (added flavor or added color cards). Anyone who plays the game will receive a mobile Buy-One/Get-One (BOGO) free entrée offer (while supplies last) redeemable at any Chipotle in the U.S. or Canada just for playing.” The full press release can be seen here.
In the best of times, this same type of promotion (last year it was called “Friend of Faux”) barely drove positive traffic in 3Q15. In 3Q15, traffic increased 1.9%, which was an acceleration from down 0.3% in 2Q15. According to the company, the sales trends in 3Q15 were highest in July (when the Friend or Faux BOGO was in full force), but were lower in August and September when the discounting stopped.
We now have a clear look into how the company will drive the business forward against the easy 4Q15 comparison. The odds are high that the 4Q16 same-store sales estimate of 1.2% is now too aggressive!
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
