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Chipotle Mexican Grill, Inc. (CMG) remains on the Hedgeye Restaurants Best Ideas list as a SHORT



  • Co-CEO Monty Moran was not present, likely on his way out.
  • CMG is focused on making changes to the board, adding relevant experience and addressing tenure issues.
  • Sales recovery is slower than expected, recovering at 1% per month for the last 10 months.
  • Core customers have almost returned to pre-crisis levels, but management missed out on a crop of potential new consumers during this crisis.
  • No disagreements with Ackman on what needs to happen, Ackman wants a Board seat, and appears like he will get one.
  • ~50% of restaurants have an internal rating on key metrics of ‘C’ or worse.
  • Lines are back, but some of them are just due to slower throughput.
  • Management remains dedicated to store opening trajectory; long-term 5,000 units still feels right for them.
  • Selective price increases could hit in 2017.


On October 28th, we outlined what we believed Chipotle needed to do in order to come out on the other side of this debacle in one (badly beaten) piece. Atop that list was “Chipotle desperately needs NEW LEADERSHIP and, more importantly, a NEW DIRECTION.” This sentiment has not changed on our end, and it seems that CMG may be coming around with regard to new leadership, as Co-CEO Monty Moran was not present at today’s presentation and Steve Ells’ insistence that the company is taking very seriously complaints regarding the tenures of some on their Board of Directors. According to Ells, they have been hard at work on a Board “refreshment”, with hopes of addressing complaints regarding the long tenures of various Board members and focusing on individuals with expertise in governance, finance, and crisis management, in addition to hinting at the fact that Bill Ackman could land a seat on the Board.


That being said, CMG has a long way to go as the recovery has been hard to come by. Chipotle's stock took a 7%+ plunge in mid-day trading today after Ells admitted that he has concerns about CMG’s ability to adequately recover from last year’s foodborne illness disaster.  According to management, over the past 10 months, the brand has recovered sales at a pace of 1% per month, as they are just beginning to gain more customers than they are losing (according to research conducted by CMG). However, overall customer experience is still unsatisfactory and has contributed to the brand’s slower than anticipated recovery. To combat this, the Company has strengthened field leadership in their Boston and NY markets, and reiterated that guest experience is at the top of their priority list.


Moving to sales and comps, Management emphasized that they are hoping to push comps higher through an increased emphasis on the guest experience. Ells expressed uneasiness about hitting sales targets provided in October, as lines are back at Chipotle locations, but some of those lines are a result of poor throughput, not improving traffic (re: customer experience).  According to the Company, their slow recovery is also largely attributable to their sales makeup, as a small number of customers represent a large portion of their sales. In 1H16, their incoming wave of customers was wiped out, and ~78% of their least frequent customers were eliminated. During the second half of the year, the Company saw a sizeable increase in patronage, but ONLY AFTER aggressive marketing and promotions! And when pressed about possible minimum wage increases coming down the pike, Management expressed intentions to raise prices to offset possible wage increases. Increases in labor costs means that margins could come under even more pressure!


No matter how much makeup you put on a pig, at the end of the day, it is still a pig! CMG disregarded the most important rule of the restaurant business, and that is DO NOT GET YOUR CUSTOMERS SICK! No matter how much technology you place around your business, or how many bags of free chips you give away, when a brand is broken, you have to rebuild it from the bottom up.





Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw


Short Rich Americans?

Takeaway: In the years following the Great Recession, luxury spending was thriving. Today? Not so much.

Short Rich Americans? - one percenters 2


Hold back your tears, but America’s 1% is hurting too.


Among luxury consumers in the United States, income growth is slowing, household net worth is no longer booming, and consumer confidence is falling. What’s more, luxury brands are clueless about how to sell to today’s rising generation—a failure already undermining their bottom line in ways not yet priced into the market.


Three key points to consider:


  • Income-spending relationship turns sour: From 2012 to 2013, when the top tax rate jumped, this trend began to reverse: Average real income for the top 1% fell by 14.9% and grew by 0.2% for the bottom 99%. The next year, 2014, was the last hurrah for the wealthy. Ever since (though IRS data are not yet available), their average income has trailed that of other Americans.
  • You can’t put a price on confidence: According to the Conference Board’s Consumer Confidence Index, optimism among those making $50,000 or more largely has been on a downward trajectory since 2015, at which time optimism was still rising among lower earners.
  • Luxury spending is very pro-cyclical: It’s instructive to look at the historical business-cycle relationship between luxury spending and overall PCE. The most important lesson is that luxury spending is very pro-cyclical: It goes much more negative than other spending during recession, and it typically peaks early or mid-recovery.


Short Rich Americans? - lapse luxury chart7


Editor's Note

This is an excerpt from an institutional research note written by Hedgeye Demography Sector Head Neil Howe. To read more Demography research ping sales@hedgeye.com.

What to Watch During Trump's First 100 Days

Takeaway: Looming Washington to Wall Street issues and investing implications from our Chief Political Strategist.

What to Watch During Trump's First 100 Days - trump repeal obcare


The second Donald Trump finishes his oath of office he better have a pen handy. Congressional Republicans are getting ready to to spend the time between their swearing-in on January 3rd and the presidential inauguration January 20th passing legislation so Trump can sign legislation immediately upon taking office.


Republican lawmakers want to have the ACA repeal ready for Trump as he takes office. And then pivot and immediately move on to his cabinet nominees. The action won’t stop there. Plans for tax reform, regulatory rollbacks and an infrastructure bill are all being designed for Trump’s early months as president. Did we mention Congress will be working four-to-five days a week again?


Former MA Governor Mitt Romney is still in the lead to become the nation's top diplomat as former Utah Governor Jon Huntsman and former General David Petreaus have fallen down on the list. Trump has added more candidates:


  • ExxonMobil CEO Rex Tillerson
  • Retired Navy Admiral James Stavridis


To a list that already includes...


  • Former NYC Mayor Rudy Giuliani
  • Tennessee Senator Bob Corker
  • John Bolton, former ambassador to the UN


Romney’s courtship of Trump has not yet amounted to a nomination. But he has remained the frontrunner as the competition continues to rise and fall. Nonetheless, we think this is the most consequential pick Trump will make. Many Hill allies are hoping it comes sooner than later.


Now that Trump has nominated Steve Mnuchin as Treasury Secretary, the effort to roll-back Dodd-Frank will begin in earnest. Mnuchin’s primary concern? He wants to strip back the parts of the financial regulatory bill that inhibit banks from lending. He believes the rules for qualified mortgages are too restrictive and are burdensome for smaller, community banks. The tag team of Mnuchin and Financial Services Committee Chairman Jeb Hensarling all but ensures a bleak future for the contentious law.


The House’s high over repealing Obamacare may be short lived as the Freedom Caucus already has a problem with the plan. Republican leaders were hoping for a three-year phaseout of the current healthcare plan, but the conservative wing of the party says that it needs to be rolled back during the 115th Congress. The two-year plan is what Republicans rallied around last year when they send a reconciliation bill to President Obama’s desk.


Even though we expect more of the same from the Freedom Caucus, plans to hire a policy staffer devoted to their causes guarantees that they’ll do more than just object in the future.

3 Reasons to Sell Netflix | $NFLX

Takeaway: Our Internet & Media analyst is hosting an institutional call with investors at 1pm ET today. Here's a taste of what will be discussed.


3 Reasons to Sell Netflix | $NFLX - sha sha ne


Netflix may be one of the most contentious names in our Internet & Media analyst Hesham Shaaban's space. He is hosting a call at 1pm ET today to run through the bear case for Netflix (NFLX) shares.


Investors are currently debating whether the $52 billion video streaming service and Internet television network has a sustainable business model or not. Specifically, the debate centers on whether it will be able to grow its subscribers into its content expenditures/obligations.


Shaaban expects that debate to favor the bears next year, given heightened pressure on net sub adds. He will run through our supporting analysis, and the 2017 catalyst calendar on the call.


KEY POINTS to our short thesis

  1. CONTENT OBLIGATIONS = HAMSTER WHEEL: NFLX’s content expenditures are a much bigger hurdle than its income statement/contractual obligations would suggest.  NFLX’s content profiles more as recurring expense than it does asset, and its obligations are an understated view of the ongoing cost of running that model.
  2. RUNWAY GETTING SHORTER (SUBSCRIBERS): We expect that the bull/bear debate is coming to a head in 2017 with net sub adds in both segments facing mounting pressure with the emergence of two big headwinds in each market.  Consensus is positioned for improving trends through 2017.
  3. 2017 = NOT ENOUGH CAPITAL? It's possible that NFLX could conceivably counteract its 2017 sub-add headwinds by considerably ramping up its marketing spend, but we doubt it will have the budget to do so given our expectation for surging SAC and that the bulk of that budget is committed/earmarked for content outlays.


Attendance on this conference call is limited. 


Ping sales@hedgeye.com for more information.

3 Reasons to Sell DineEquity | $DIN

Takeaway: Our Restaurants analyst is hosting an institutional call with investors at 11am ET today. Here's a taste of what will be discussed.

3 Reasons to Sell DineEquity | $DIN - applebees


Our Restaurants analyst Howard Penney recently added DineEquity (DIN) to his Best Ideas list as a SHORT. DineEquity is the $1.5 billion parent company of restaurant chains Applebee's and IHOP. It operates more than 3,700 restaurants in 19 countries.


Penney recently wrote that the company "reeks of desperation." He will explain why during a live black book presentation Tuesday, December 6, 2016 at 11AM ET when he outlines his short thesis. 


  1. Business Fundamentals Are Deteriorating: The issues with the casual dining space are well documented.  That being said, there are some brands in casual dining that are doing well and there are those that are failing.  Applebee's is one of the old line brands that is failing and its food offering is stale and uncompetitive in the marketplace.  Significant market share losses, little re-investment in the brand, strategic operational errors and vacant executive positions are only some of the issues the company faces.  We believe the company's ability to fix these issues are limited and it will be expensive to execute.
  2. Franchisees Are Struggling: The heart and soul of the DIN business model is the health of the Applebee's franchisees.  To this end, there are significant issues and a number of franchisees are rumored to be in significant trouble.  Years of market share losses and mismanagement have finally taken its toll on the company.  Franchise profitability has been declining for years and the latest decline in same-store sales could be the tipping point for some franchisees.
  3. Financials Are Strained/Significant Balance Sheet Liabilities: Today, DIN finds itself in a precarious financial position.  Given the decline in the profitability of the franchisees, the company needs to invest in the business, but it had limited financial resources to do so.  The company’s significant leverage, off balance sheet liabilities and 62% dividend payout ratio are only the start of the issues.  As franchisee profitability continues to decline and the need for incremental investment grows, the pressure on the company's financials will be significant.    


Penney will also take a closer look at why current financial trends are unsustainable, including:


  1. Applebee’s market share trends
  2. Franchisee profitability
  3. Income statement stress points
  4. Cash flow sustainability issues
  5. Balance sheet/Off balance sheet items
  6. Valuation
  7. Sentiment 




Ping sales@hedgeye.com for more information.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%