The circumstances that have presented themselves in the restaurant industry is the definition if crazy! Our overall belief is that there is too much complacency around understanding the systematic issues the restaurant industry is facing!
In three months, the sales shift in sales at CMG has caused estimates to go from $14.00 in EPS at the beginning of 2020 to a cash burn rate of $50 million a month (understanding that they can cut that by 1/3 if need be), yet the stock is unaffected. The move to digital was critical, but they do operate dining rooms. CMG is not Domino's, so delivery is a lower margin transaction especially if it is delivered for free.
Yes, delivery works off the second make-line which sets us up differently for CMG than other restaurant concepts. The cash burn rate on break-even profitability driven by same-store sales declines of 30% to 35% excludes the cost of “free” delivery. It was never clear from the previous public comments who was subsidizing free delivery and now it's clear the company is paying for it. When the dining rooms open, what happens to free delivery and the consumer's willingness to order CMG?
The rapid shift to digital and delivery has coincided with a decline in profitability. I found these comments on delivery from the CEO interesting: "as partners potentially change commission rates or you see various economic impacts on it, there's just a general understanding with the folks we work with, where it's like, look, we need to make money out of it, you need to make money out of it, and we'll figure out how we make this work."
For CMG, the COVID-19 era has erased all of the gains in average unit volumes since the recovery from the foodborne illness outbreak. The company came into 2020 with a $2.20 million AUV and now is at an AUV of $1.85 million, below the $1.94 million AUV in December 2017. At $880, the stock is saying that the move back to $2.2 million AUV will happen in months not years. I believe they don't even get back to $10.00 in EPS in 2021!
The decline in average unit volumes came from same-stores sales going from +14.4% (11% transaction growth) through the end of February to the bottom of -35% for the week ending March 29 and back to down mid-teens in April. The good news is that in March digital sales were 37.6% of sales, growing to the "high 60's%" in April. The company then said since the beginning of April in-store ordering is down around 75%, while delivery is up about 150%, and order ahead is up nearly 120%, highlighting the importance of our digital platform and setting us up for a bright future as digital sales tend to be sticky. Digital is currently accounting for nearly 70% of sales."
The two questions I have about the sustainability of digital/delivery:
- What happens when delivery is no longer free (they are offering free delivery from March 15 to at least early May)? Will the delivery be free when the dining room opens?
- Right now, many restaurants are closed and many that are open lack digital and delivery offerings. What happens when the industry reopens, and the consumer has more choices?
The company's answer to the above question is obvious, "A recent consumer survey showed that the vast majority of our pre-coronavirus consumers envision coming back to the restaurants at a similar or higher rate than before. As a result, we believe our long-term opportunity to expand AUVs, margins, and store base significantly remains in place."
On the call, the CEO said he thought the dining rooms would be open in a month or two. My response is “really?” In what state and what level of social distancing will be needed? California reported 2,318 new coronavirus cases Monday, marking the highest one-day jump the state has seen. Is California going to open in a month or two?
That leads to additional questions:
What percentage of the stores will be open, and when?
What if they open too soon and workers or customers test positive for COVID-19? The headlines for CMG in that scenario would be disastrous. Why would the CEO take that risk?
What if we open the country too soon, and there is a second outbreak?
Do people really want to go and sit in a dining room with people wearing masks?
Time will tell!
