Brian Niccol made his first big slip as the CEO of CMG.
On yesterday's earnings call, the company was asked to break out traffic and check, and his response was, "we don't break that out."
Since when? In 2019 CMG was bragging about its industry-leading traffic growth. Why now? Because it does not fit the narrative that they are on their way to $2.5 million in average unit volumes and 25% restaurant-level margins in 2022. The company reported 2Q20 AUV's of $2.1 and 13% restaurant-level margins, with a teaser that June's performance had average unit volumes a little over $2.2 million and 20% margins. June margins were weighed down by the cost of the incremental promotions around free delivery. 3Q20 margins and EPS will likely remain bumpy "as we continue to make further investments in our people, our business and our communities." Why will that stop in 4Q19 and 2021? Specifically to 3Q20 margin guidance, they expect it to be "in the high teens." Margin recovery is hampered by food inflation and higher labor costs, given the reopening of its dining rooms. The company is expecting sales to continue to build and margins, and earnings to normalize in 4Q20. How much of that is dependent on the federal government spending remaining at the current level, which seems unlikely.
CMG, like every QSR company, is likely seeing traffic down 10-15%, that's what happens when you close your dining rooms. Yes, the "transaction" has changed, but that is no excuse for not breaking it out! The CFO went on to say, "the group size has changed significantly both because people have moved to digital and digital is a larger group size. And then even within the order in the restaurant, the group size has changed. And I think that's because instead of the person working and going out to lunch, maybe with a group, but they're all paying themselves, now it's going to the restaurant and then ordering for the family." The CFO went on to say that entrees were down 15%, which is the first time the company has ever reported that number.
The company is betting on significant growth coming from Chipotlanes, which could be a risk for the balance of 2020 and into 2021. They are only 100 Chipotlanes in the system today. Yet, the company is pulling back promotional spending by 2% (free delivery promotions likely to be less frequent) and the company "pivoting more aggressively towards Chipotlanes," which will drive incremental transactions.
The Street estimates currently have the company putting up $2.3 million and $2.5 million in average unit volumes in 2021 and 2022. This implies a 10% average unit volume growth in 2021 and a 6% growth in 2022. The current 2021 EBITDA of $976 million is above the $709 million reported in 2019 and reflects a complete recovery in 2H20 and 2021. Brian Niccol is a strong CEO, but this performance would be a heroic performance in the current environment.
