CMG remains on the Hedgeye Restaurants Best Ideas list as a SHORT.
Based on news reports, it’s clear Bill Ackman is working very hard behind the scenes to shore up his investment in Chipotle. The reporters from Reuters have been actively reporting news flow on Pershing’s signing of the confidentiality agreement and I suspect that following the disastrous 3Q16 earnings call and the 10% decline in the stock, Ackman needed to urgently stop the bleeding. The only real influence he can have in the immediate term is pushing for potential changes to the board. I suspect there is little he can do to change the trajectory of fiscal 2017 and there is still no clear plan to fix the business operationally.
Q: Does Ackman’s influence on the BOD change my SHORT thesis?
HEDGEYE - My gut says there is still 30% downside in CMG. I have always said CMG will remain a short until the company reduced capital spending and focused on four-wall profitability, and I’m sticking with that thesis. The changes to the BOD are much needed and are a good first step to fixing CMG. However, who they name to the board is critical, and an important ingredient to understanding how the future might unfold for the company.
Q: What do you think of Troy Alstead as a potential Board member?
HEDGEYE - The best thing for Chipotle shareholders is the potential news that former COO and CFO of Starbucks, Troy Alstead, is one of the potential new board members. Personally I think Troy should be brought on as the CEO, but that is not going to happen. Mr. Alstead transitioned to being the CFO of SBUX in 3Q 2008, just as the company was getting serious about transforming the company. It was not until 2009 that SBUX cut capital spending for the second year in a row. From peak to trough, SBUX cut capital spending by 61% between 2007 and 2010. Getting Mr. Alstead on the board would be the first sign that we could be one step closer to CMG making the difficult decisions needed to fix the profitability of the company.
Q: What do you need to see from the company operationally to cover the SHORT?
HEDGEYE - This is the type of language I need to see from the company to know that they are employing the right strategy to fix the business:
- The company cuts capital spending by at least 50%
- The company cuts G&A by $250 million
- “Our business continues to generate healthy operating cash flow, at the same time we have been very careful on capital spending, and continue to be.”
- “Over the next few years we will spend more capital on taking care of our existing base than we do on new restaurants and that is an important investment for us. We will also invest in technology and systems to drive customer engagement.”
- “As we enter the new fiscal year, we have a number of actions underway that will drive greater efficiencies in our store operations and our supply chain.”
- “We have refocused our efforts on the core of the Chipotle experience in our stores, while driving profitable innovation, and meaningful value to customers.”
- “We believe these efforts will enable us to improve operating margins and grow EPS, despite the challenging global economic environment.”
You can say a lot about Bill Ackman, but there is the potential that his influence on CMG’s management will ultimately be a positive for the company. The question remains will CMG’s management understand that he is trying to help, and actually listen to what he has to say. So far the evidence supports staying SHORT CMG.
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
