Takeaway: CMG in on the Hedgeye Best Idea list as a LONG

Yesterday, CMG’s new CEO and his team put forth their long-term vision for the company.  While the tone of the call was very positive and the new team comes across as organized and competent, there were no new numbers for the street to digest.  The focus of the call was more conceptual about where the company was headed in the future, but as the CEO said, there “is still lots of work to do and we are focused on singles and doubles.” 

Nothing happens in straight line, and CMG has been straight up since the new CEO came on board.  Chipotle is a great brand with significant potential, but there are some significant changes that need to take place for this brand to get back to $2.5 million in AUV’s.  The next leg up for the stock will not come until it’s clear that the strategies put forth on the call will lead to tangible results.  In the short run, the company not reaffirming the current guidance was a slight negative.

Below I have summarized all the key points from lasts nights call:

CMG’s New strategy going forward:

  1. Becoming a more culturally relevant, engaging brand that builds love and loyalty (customer facing initiative)
  2. Digitizing and modernizing our restaurant experience that creates a more convenient and enjoyable guest experience (customer facing initiative to make it easier to order food)
  3. Running great restaurants with great hospitality and throughput (customer facing initiative that Scott Boatright has been working on for 2 years)
  4. Being disciplined and focused to enhance our powerful economic model (internal process)
  5. Building a great culture that can innovate and execute across digital, access, menu and the restaurant experience (internal process)

Positives from the CEO:

  1. Consumers really love our brand, and now our marketing will lean into that to increase awareness and remind customers why they fell in love with Chipotle. 
  2. We also have an excellent value proposition (I'm not sure what he means by this).
  3. New restaurant economics today are very strong (not going to slow new unit capital spending).
  4. We have built a solid foundation and made progress in digital that we expect to accelerate in the coming months (big opportunity).
  5. Our second make-line is a significant competitive advantage that enables throughput and efficiency that enhances our economic model going forward (this is where there is significant leverage in the business model).
  6. I'm very proud of the passionate people we have working in or supporting our roughly 2,500 restaurants that are responding enthusiastically to our new strategy (redefining the culture of CMG is critical)

Negatives from the CEO:

  1. There is a lack of discipline around priorities, process and accountability, and we are not sufficiently results focused, which made us reactive and hampered execution (when the old CEO lives in NYC its a problem and why he is moving the company to CA).
  2. I found skills gaps in many areas and insufficient data for decision making that have held us back from reaching our potential (Moving to CA for this reason?).
  3. There is no validated menu innovation pipeline (this was obvious)
  4. A general lack of customer understanding and no real process for scaling and commercializing innovation (confirming the old CMO was a joke)

Words of caution from the CEO:

  1. We have a lot of work to do to win today and cultivate a better future (stock is up 50% YTD for what reason?)
  2. It's important to be patient and recognize that people and process changes don't happen overnight (look to FY 2019 for progress).
  3. We need to add talent, build and create muscle memory around processes and testing capabilities, and upgrade our enabling tools and technology.
  4. We're focusing on the singles and doubles that can create short-term sales and transaction momentum, while we build capabilities behind larger opportunities ( the larger opportunities are in 2020 and beyond).

Comments from the CFO:

  1. I want to remind everyone that we're not providing a financial update on our current quarter and we're not updating or reaffirming the guidance provided on our last earnings call.
  2. I'm confident that the strategies will lead to higher average unit volumes and higher margins in the future (we all want to know when!).
  3. In the meantime, we know that a combination of great operations, clever marketing and pushing further into our digital initiatives will drive near-term sales growth (i.e the singles and doubles the CEO was referring too).
  4. These nonrecurring costs primarily relate to the moving of our offices, the restructuring of our organization and the closing of underperforming restaurants.
  5.  In aggregate, we expect these costs to be in the range of $115 million to $135 million. Of that amount, we expect about $50 million to $60 million will hit the second quarter.
  6. While most of the remaining charges will hit in 2018, there will likely be some charges, particularly related to terminating restaurant and office leases that will spill into 2019.
  7. As a result of our review of underperforming restaurants, we expect to close between 55 and 65 restaurants, including the 5 Pizzeria Locale restaurants located outside of Denver ( always good news to see this).

We will have more details as they become available!