Chipotle’s bottom line is highly vulnerable to a continued rise in food prices.


CMG is a popular brand and their management team has done a great job in many respects.  One significant factor buttressing the bottom line since the stock price troughed in 4Q09 has been food prices.  As I wrote in my June post, “CMG: WATCH MARGINS”, the favorable commodity environment enabled CMG to attain higher margins from 1Q09 onward.  The company is not locked into many of its ingredients and continued food inflation will likely impact CMG’s earnings potential significantly.  


CMG: COSTS HEADED UP - cmg food margins crb


CMG: COSTS HEADED UP - crb foodstuff


Maintaining comparable restaurant sales in this economic environment will be difficult for all restaurant companies.  There is virtually no pricing (one tenth of one percent) in Chipotle’s comp but it seems that management would be hesitant to carry out such a move with unemployment this high.  As the chart below shows, positive traffic momentum has been instrumental in driving Chipotle’s top line.  If the company can maintain high single digit comparable restaurant sales trends, margins will likely remain healthy.  Slowing comps, however, will amplify the negative effect of food inflation on margins and make leveraging other parts of the income statement more difficult. 


CMG: COSTS HEADED UP - cmg comp detail


Below is a rundown of Chiptole’s commodity setup.  While they are largely unlocked on some items such as proteins and dairy, smaller items like rice, tortillas, and corn are locked for the remainder of this calendar year.  Should prices in these contracted commodities continue to trend higher, margins could come under additional pressure when the contracts expire at year end.


Looking at Chipotle’s commodity setup:

  • Rice is contracted through at least two more quarters (through 4Q).   Clearly, this is a good thing to have contracted given recent climate events in Pakistan and China.  
  • Soy oil and corn are also contracted through two quarters while tortillas have also been locked in for the remainder of 2010.
  • Chicken prices in the second quarter were held lower because the company, due to supply issues, only served 80% naturally raised chicken.  The company is “optimistic” that they can return to 100%.
  • The inadvertent change in chicken sourcing was margin accretive (by 20 bps) and partially offset the higher year-over-year cost of avocados and beef, which are not currently contracted.
  • CMG has not locked in cheese or sour cream. 


Howard Penney

Managing Director

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more

REPLAY: Review of $EXAS Earnings Call (A Hedgeye Best Idea Long)

Our Healthcare Team made a monster call to be long EXAS - hear their updated thoughts.

read more

Capital Brief: 5 Things to Watch Right Now In Washington

Here's a quick look at some key issues investors should keep an eye on from Hedgeye's JT Taylor and our team of Washington Policy analysts in D.C.

read more