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Another huge calendar 2Q10 comp surprise...

CMG’s 2Q10 earnings of $1.46 per share came in much better than the street’s $1.39 per share estimate.  Same-store sales grew 8.7%, better than both my 6.0% estimate and the street’s 5.4% estimate.  On a two-year average basis, trends improved nearly 200 bps from the prior quarter and the company’s press release stated that traffic drove most of the comp increase.  For reference, CMG was facing an easy comparison from 2Q09 when traffic was down 3.3%.  Traffic up close to an estimated 8.0% is impressive, nonetheless.  Management raised its full-year comp growth guidance to up mid-to-high single digit, from up mid single digit (prior to earnings, street’s FY10 estimate was +4.8%).

Restaurant level margin growth was up nearly 90 bps in the quarter to 26.9%, putting CMG in the “Nirvana” quadrant of our sigma chart for its sixth consecutive quarter.  The company’s rate of YOY margin growth slowed from the first quarter due primarily to the delevering of the labor and other operating expense lines, as expected as a result of increased wage rate inflation, lapping of labor efficiency initiatives and increased marketing expense.  Food costs were also not as favorable on a YOY basis in the second quarter.  We will have to see what management says on its earnings call, but maintaining positive margin growth in 2H10 will be more difficult as food costs put increased pressure on margins.  If the company is able to maintain its comp growth momentum, investors may not be too concerned.

CMG – FIRST LOOK - CMG SSS 2Q10

Howard Penney

Managing Director