Chipotle (CMG) is on our Hedgeye Restaurants Best Ideas list as a SHORT.
Heading into 2017 CMG is still a core SHORT.
We suspect there will be lots of rumors coming out of the ICR conference this week, with a bias toward “things are getting better.” Following the ICR conference last year, CMG went up $75 on management saying they are going to get back to peak volume and margins. As we see it, the core of our SHORT thesis is stills very much intact. Despite changes to the Board of Directors, CMG’s management team is incapable of fixing the business and has not made changes needed to turn around the company.
The challenges of turning CMG around are complicated by the fact that the industry faces numerous macro challenges. We anticipate we will hear much more about the macro issues as the ICR conference begins to unfurl this week.
Since the last time we shared the CMG CivicScience consumer survey with you on December 13, 2016, we have seen two major changes. It is important to note that we are in the early innings of 1Q17, but have already compiled 1,145 responses versus an historical average per quarter of 4,020.
People saying “I like it” has catapulted upward from 17.6% of consumers in 4Q16 to 22.1% of consumers in 1Q17, while people saying “I love it” has retracted some, from 13.3% to 12.1% in the same periods. Although these two metrics have diverged, the combination of people saying “I Like it” or “I love it” has gained share from 4Q16 to 1Q17. The gained share seems to be purely from people saying “I don’t really have a strong opinion” or those saying “Never heard of it”. While the positive reviews have changed, what hasn’t changed much is the people saying “I don’t like it,” in 1Q17, this group declined a modest 70bps to 23.8% from 24.5% in 4Q16.
With management saying just over a month ago that half of their restaurants were internally rated at a ‘C’ or below, we find it hard to believe this was rectified in under a month’s time across the system. The key will be how these survey results translate into SSS improvement; consensus is currently estimating SSS in 4Q16 of -3.5% and SSS for all 2017 of 7.3%.
CMG is set to speak tomorrow at 1:30PM ET at the ICR conference, and although they did update their Q4 comp and EPS targets last year we are unsure if they intend to do the same this year given the differing circumstances.
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
