CHIPOTLE MEXICAN GRILL INC CMG
February 09, 2016 - 4:21am EST by
macrae538
2016 2017
Price: 445.00 EPS 0 0
Shares Out. (in M): 31 P/E 0 0
Market Cap (in $M): 13,795 P/FCF 0 0
Net Debt (in $M): -1,300 EBIT 0 0
TEV ($): 12,495 TEV/EBIT 0 0

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  • Franchised Restauarants
  • Restaurant
  • Consumer Goods
 

Description

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.” – Warren Buffett

Chipotle Mexican Grill, Inc. (“Chipotle”) is a great company facing a temporary problem. The company’s well-publicized E. coli and norovirus outbreaks in October and November have decimated customer traffic, such that fourth-quarter same-store sales were down 14.6%. December and January same-store sales were down 30% and 36%, respectively. Restaurant-level and company operating margins are certain to fall significantly this year due to fixed cost deleveraging, one-time costs, higher food safety expenses, and higher marketing expenses. The company’s once beloved stock has collapsed from a recent high of $759 per share to $445 per share—a 41% drop. I believe the stock is now a very compelling investment.

This is an opportunity to buy a piece of a great business at a cheap price. Chipotle has a proven model with incredible unit economics, a rabid fan base, and an opportunity to more than double its restaurant count in the U.S. over time. Additionally, the company is planting seeds in Canada and Europe, and has two emerging “Chipotle-like” concepts in ShopHouse Southeast Asian Kitchen and Pizzeria Locale.

I believe the company’s stock is currently worth at least $650 per share and that value will grow meaningfully as the company opens over 200 new restaurants per year. Paying $445 per share for the stock is likely to provide an attractive return over time as the value of the business grows and the discount at which the stock is trading eventually closes.

The stock is mispriced primarily due to the uncertainty around near-term business results and market participants’ tendency to extrapolate present circumstances indefinitely into the future. Recent sales results have been dismal and sales and margins are certain to be weak this year, but few seem willing to look beyond 2016. Much of the sell-side commentary remains overly negative, often suggesting investors wait until a recovery is underway before buying the stock.

Importantly, other restaurant chains have gone through their own food safety issues—some more serious than Chipotle’s—and ultimately recovered as the negative headlines faded. I am confident that Chipotle will recover and its 2015 food safety issues will seem like an unfortunate but distant memory within a few years. Sentiment should improve as same-store sales improve sequentially during 2016 and margins begin to recover in 2017. By 2018, I expect average restaurant sales and margins to have recovered to pre-incident levels.

The best part of this investment is that Chipotle is not slowing down its unit growth. The company is opening 220-235 new locations this year and will probably open similar numbers during the next several years, so the company’s underlying earnings power is growing meaningfully below the surface. By 2018, I expect a full recovery in restaurant economics and roughly 33% more restaurants than exist today.

Company Background

Steve Ells graduated from The Culinary Institute of America in 1990. After working as a sous chef at Stars restaurant in San Francisco, Mr. Ells moved to Denver with the goal of opening a restaurant. With a loan from his father, he opened the first Chipotle Mexican Grill in 1993. After opening another 15 locations, the company accepted an investment from McDonald’s, which was diversifying by buying other restaurant chains at the time. McDonald’s helped accelerate Chipotle’s growth in a mostly hands-off manner, and ultimately sold its stake during and shortly after Chipotle had its IPO in 2006.

At the end of 2015, Chipotle had 2,010 restaurants with about 98% of them in the U.S. The company owned 23 locations between Canada and Europe, and another 16 of two growing concepts: ShopHouse Southeast Asian Kitchen and Pizzeria Locale. The company expects to open 220-235 new locations this year and sees room for at least 4,000 locations in the U.S. over time. The ultimate potential number of locations has grown larger over the years as the company has gained widespread acceptance and average restaurant sales have continued to increase, reaching over $2.5 million during 2015.

Restaurant Economic Model

Chipotle’s economics are among the very best in the restaurant industry. Return on invested capital has continuously improved over the years as average restaurant sales and margins have drifted higher.

Average restaurant sales peaked at over $2.5 million during the third quarter of 2015—just prior to the food safety issues—and have increased year after year as the company improved its customer throughput potential and consumers flocked to the stores. The ultimate potential for average restaurant sales could be meaningfully higher than $2.5 million. Chipotle’s focus on increasing throughput allows them to serve a tremendous number of customers, yet long lines were still the norm before the food safety issues. To alleviate the long lines, the company is working on growing online or mobile orders, catering orders, and delivery orders (via its third party delivery partners). Those orders are made on a second line, which avoids disruption to the main customer line and increases overall throughput, average restaurant sales, and unit economics.

In 2015, Chipotle spent about $879,000 to open a new location between leasehold improvements, equipment, and pre-opening costs. According to management, new units open at an initial sales run-rate of $1.8–$1.9 million per year; however, according to the 2014 proxy statement, new units opened in 2014 averaged a $2.0 million annual run-rate during the year. New restaurants typically ramp up their sales to the $2.5 million company average within roughly 24 months. At that productivity level, restaurant-level margin reaches about 27-28%, amounting to about $690,000 of restaurant profit per year. That is a pre-tax cash-on-cash return in the 70%–80% range. Certainly, unit economics will be weaker during 2016 but should rebound to these figures with time. The ability to roll out new restaurants and generate returns in that ballpark for a very long time will create a tremendous amount of value.

Market Potential

Chipotle ended 2015 with 2,010 restaurants with about 98% of them Chipotle restaurants in the U.S. Management believes the U.S. market potential for Chipotle is over 4,000 restaurants. Management’s view of the ultimate market potential has increased over time as the brand’s popularity has grown and average restaurant sales have surged higher. The company is now able to open new restaurants in locations it never would have expected just a few years ago.

“At the time of the IPO, we had calculated that if we just penetrated the top 75 DMAs, we could build about 3,000 restaurants in Chipotle. Let's go to the next group of about 150 to 200 DMAs and then had densities similar to our most dense market at that time that was years ago, that would get you up to 4,000. Well, our densities in those dense markets are greater today than they were back then and we've entered different opportunities today. In the last several years of that, we didn't have that then. For example malls, we are starting to enter malls. We've got a couple dozen malls that are doing exceptionally well, like food court malls where it's very, very small space, a thousand square feet or so. And we're doing phenomenally well. The financials are terrific. We've entered small towns, which we had not entered eight years ago. So we don't think about the pace of how fast we will get there. We know that our potential is at least that 4,000, but it's likely greater. And we know if we're very discerning about the sites that we pick, we pick only great real estate, that we have great managers ready to run those restaurants, we know that the potential whatever that number is, it's going to continue to grow and then the pace of growth is less important than making sure that we have that ultimate tremendous potential.” — Jack Hartung, CFO, on April 29, 2014

Exhibit 1 shows the largest restaurant chains in the U.S. and their average unit volumes. Many less popular chains with inferior food quality and inferior unit economics have far more U.S. locations than Chipotle.

Additionally, restaurants with higher quality food like Chipotle have a tailwind at their backs. Consumers are increasingly shifting towards chains with higher quality ingredients and away from the highly-processed foods of traditional fast food restaurants. Chipotle’s “Food with Integrity” mission is a meaningful differentiator, highlighting the company’s “Responsibly Raised” meats, which come from free-range animals that have not been treated with hormones or antibiotics, its organically grown produce, and cheese and sour cream from pasture-raised cows. Between Chipotle’s “on trend” message and food quality, its $2.5 million and growing average restaurant sales, and its very high returns on new restaurants, I believe the brand’s upside is likely higher than 4,000 locations in the U.S. over the long term. Additional locations for Chipotle in Canada and Europe and for the two emerging concepts in the U.S. should add to that potential.

Food Safety

I am confident Chipotle will recover from its recent food safety issues because it has implemented what appear to be very rigorous food handling and screening protocols, both at the supplier level and the company level.

In addition, Chipotle is not the first restaurant chain to have food safety incidents.

In 1993, Jack in the Box had its own outbreak that resulted in over 700 cases of E. coli. The outbreak originated from undercooked beef at 73 restaurants in Washington, Idaho, California, and Nevada. 171 people, including 45 children, were hospitalized. 41 victims developed hemolytic uremic syndrome (HUS), a disease that destroys red blood cells and can lead to kidney failure. Tragically, four children died.

Jack in the Box same-store sales declined 22% in its fiscal second quarter of 1993, including a 40% decline during the first week of February. After three quarters of 9% same-store sales declines, same-store sales rebounded 23% in its fiscal second quarter in 1994. The brand posted solid same-store sales gains in the next few years. Since 1993, Jack in the Box has expanded from about 1,200 total company-operated and franchise-owned restaurants to over 2,200 locations today.

In comparison, Chipotle’s impact on human health in 2015 was far less severe. Chipotle sickened 60 people with E. coli in October and November. Two separate norovirus outbreaks linked not to food, but sick employees, sickened 386 people. Salmonella sickened another 60 people in two states. No one developed HUS and no one died. However, the widespread reach of today’s media, including social media, significantly amplified the news. The negativity culminated with a Bloomberg BusinessWeek cover story highlighting Chipotle’s food safety woes.

Chipotle’s same-store sales fell 14.6% in the fourth quarter, including declines of 16% in November and 30% in December. January’s same-store sales fell 36% as the media reporting continued for an extended period of time and the CDC’s investigation into the cause of the outbreak continued. Chipotle management decided to wait until the CDC’s investigation was concluded before trying to actively bring customers back in to the stores with a marketing campaign.

The CDC finally concluded its investigation on February 1, 2015. The long time period between the first negative headlines in October and the CDC’s “all-clear” lengthened and deepened the same-store sale weakness, in my opinion.

Chipotle is set to begin the largest marketing campaign in its history this week and closed each of its stores for four hours yesterday to host a companywide food safety meeting. It is highly probable that the worst of the company’s same-store sales declines are over.

Valuation

I primarily use a discounted cash flow model to value Chipotle. The key assumptions are:

  • A weak 2016 with average restaurant sales down 11% and a depressed 8.5% operating margin

  • Average restaurant sales recover to pre-incident levels in 2018.

  • Restaurant-level and company operating margins roughly equal 2014 levels in 2019.

  • 2.0% same-store sales growth in 2019 and beyond

  • 225 new restaurant openings per year until 4,000 units are reached in 2024

  • New restaurants cost $805,000 to build between leasehold improvements and equipment.

  • 8.0% discount rate

  • 5.0% TTM NOPAT yield for the terminal value

These assumptions result in about $19.0 billion of enterprise value, to which I add $1.3 billion of cash and investments, cash for options assumed exercised, and deduct $478 million for imminent share repurchases. The result is an equity value of $20.5 billion or $657 per share.

If the long-term market potential is 5,000 restaurants instead of 4,000 restaurants, that would create roughly $3 billion of additional present value or roughly $100 per share, making the equity worth about $757 per share.

What does the current stock price of $445 per share imply? I believe it implies the company recovers to normal economics in a few years, but only opens another 400–500 more restaurants from today’s number. Those numbers represent roughly two more years of growth before the brand permanently halts its expansion. That is wildly unrealistic, in my opinion.

A second DCF that isolates the new restaurant growth opportunity suggests the NPV of that growth is about $8 billion. I use the same new restaurant growth assumptions as outlined above.

Method 2: 2018 Earnings

My numbers are above consensus, but I can apply a 35x TTM multiple to 2018 consensus earnings and reach a $678 share price at the end of 2018. At that point, the company would have something around $1.7 billion of cash on the balance sheet, assuming no additional repurchases, which would be worth another $55 per share. A year-end 2018 stock price of $733 per share suggests a 65% return in three years, or 18% annualized.

A good question is whether Chipotle will deserve a 35x trailing multiple at the end of 2018. I believe it will.

  • The stock’s average TTM multiple between 2006 and just prior to the food safety issues was 44x. Certainly, the average multiple at which a stock has traded is not necessarily the “right” multiple; however, it is impossible to argue that the average multiple was too high considering the stock appreciated 14-fold over that period. With the benefit of hindsight, the multiple was clearly too low for most of those ten years.

 

  • The average TTM multiple in the three years leading up to the food safety issues was 46x, indicating the 10-year average multiple was not skewed by meaningfully higher multiples in the earlier years.

 

  • Considering my expectation that the business recovers to its normalized best-in-class economics, and will still have a long growth runway ahead of it, it seems unlikely the market would apply a multiple below 35x.

To be clear, Chipotle deserves such a high multiple because the return it generates on new restaurants is off-the-charts and it has an opportunity to open at least 2,000 more in the U.S. alone. Chipotle is a proven concept with a loyal fan base and a demonstrated track record of creating value through new restaurant openings.

Why Is the Stock Mispriced?

  • It is psychologically difficult for most people to buy in the face of negative headlines and sparsely crowded restaurants. Many cannot help but extrapolate current circumstances indefinitely into the future. A common view is currently, “Let’s wait to see traffic come back before buying the stock,” or “Let’s see how effective the marketing campaign is first.” Those expressing these views seem not to appreciate that by the time a recovery is apparent, the stock price is likely to be much higher than it is today.

 

  • Some believe Chipotle is destined to have lower margins over the long term as a result of higher food safety expenses. While this is clearly true in 2016 and perhaps 2017 due to 200 bps of higher food safety related expenses, this is unlikely in the long run. Management has stated it expects the company’s margins to fully recover as the company grows average restaurant sales, leverages fixed costs, and eventually implements a modest price increase in 2017 or 2018.

 

  • Some believe certain changes in food preparation are going to negatively impact the taste of Chipotle’s food and impair customer traffic in a meaningful way. Certainly, tomatoes, lettuce, and cilantro will be chopped and prepared in central kitchens and other items like jalapenos and avocados will be quickly blanched to kill any potential microbes. However, I would challenge anyone to eat at Chipotle and honestly conclude the food tastes any different than it did six months ago. I do not notice a difference.

 

Even that is missing the point though. Not only would customers have to notice, but the difference in taste would have to be drastic enough to cause them to eat elsewhere. I find that unlikely. I believe Chipotle’s customers would still find a hypothetical Chipotle burrito that tastes 98% as good as it did six months ago to still be more appealing than most alternatives.

 

  • I have also heard, “Sure the stock has fallen 40%, but it is still trading at 50x forward earnings.” This argument ignores two important points. First, 2016 earnings are enormously depressed and should not be used to value the company. Second, it can be misleading to simply slap a multiple on a business without understanding the long-term assumptions baked into that valuation. Every business is different and has different growth profiles and return characteristics, so comparing Chipotle’s multiple to that of lower quality restaurant companies is not very useful, in my opinion. I prefer to value Chipotle by discounting the cash flows the old-fashioned way, so that I can be more certain about the assumptions my valuation implies. I believe Chipotle is worth a substantial premium to its current market price because of its highly productive existing restaurants and its opportunity to open many more at very high returns on capital.

Catalysts

Last week, the CDC concluded their investigation into E. coli at Chipotle, effectively signaling the “all-clear.” The company will begin its largest ever marketing campaign this week in an effort to bring customers back into the restaurants. I expect investor sentiment to improve as same-store sales declines become less and less negative during 2016 before ultimately turning positive perhaps in late 2016 or early 2017. Market participants will gradually recognize that the business is not permanently impaired and is likely to fully recover with time.

Risks

  • Traffic does not come back and Chipotle’s business model is permanently impaired.

  • Higher food safety costs prevent the business from returning to its historical margins and returns.

  • The grand jury investigation into Chipotle’s handling of its food safety incidents results in massive fines or mandates additional changes to the company’s business practices, which negatively impact margin potential permanently.

  • The company’s potential restaurant count is far lower than 4,000. That said, I believe the current stock price is pricing in only 400–500 new restaurants.

Conclusion

Chipotle is a great business with fantastic unit economics and a large growth opportunity. The food safety issues of 2015 are unfortunate for the business, but are only a temporary problem. The company’s stock is cheap because most investors are unable or unwilling to buy in the face of a weak and uncertain 2016. As long as the brand eventually recovers and continues to grow—which is highly probable, in my opinion—paying $445 per share in early 2016 is likely to be a good decision. Most importantly, I believe the long-term assumptions necessary to appraise the stock at or below its current price are completely unrealistic. In other words, I believe losing money permanently with this investment should be highly unlikely.

As a side benefit, I expect an investment in CMG to be somewhat uncorrelated with the overall stock market. The stock’s future trajectory will be much more dependent on the company-specific recovery than on overall changes in consumer spending, the general whims of the stock market, or things of that nature.

“If you wait for the robins, spring will be over.” — Warren Buffett

 

Disclosure: The author’s fund is long CMG. This is not a recommendation to buy or sell any security. All the information in this write-up may be completely wrong. Do your own research.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Last week, the CDC concluded their investigation into E. coli at Chipotle, effectively signaling the “all-clear.” The company will begin its largest ever marketing campaign this week in an effort to bring customers back into the restaurants. I expect investor sentiment to improve as same-store sales declines become less and less negative during 2016 before ultimately turning positive perhaps in late 2016 or early 2017. Market participants will gradually recognize that the business is not permanently impaired and is likely to fully recover with time.

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    Description

    “The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.” – Warren Buffett

    Chipotle Mexican Grill, Inc. (“Chipotle”) is a great company facing a temporary problem. The company’s well-publicized E. coli and norovirus outbreaks in October and November have decimated customer traffic, such that fourth-quarter same-store sales were down 14.6%. December and January same-store sales were down 30% and 36%, respectively. Restaurant-level and company operating margins are certain to fall significantly this year due to fixed cost deleveraging, one-time costs, higher food safety expenses, and higher marketing expenses. The company’s once beloved stock has collapsed from a recent high of $759 per share to $445 per share—a 41% drop. I believe the stock is now a very compelling investment.

    This is an opportunity to buy a piece of a great business at a cheap price. Chipotle has a proven model with incredible unit economics, a rabid fan base, and an opportunity to more than double its restaurant count in the U.S. over time. Additionally, the company is planting seeds in Canada and Europe, and has two emerging “Chipotle-like” concepts in ShopHouse Southeast Asian Kitchen and Pizzeria Locale.

    I believe the company’s stock is currently worth at least $650 per share and that value will grow meaningfully as the company opens over 200 new restaurants per year. Paying $445 per share for the stock is likely to provide an attractive return over time as the value of the business grows and the discount at which the stock is trading eventually closes.

    The stock is mispriced primarily due to the uncertainty around near-term business results and market participants’ tendency to extrapolate present circumstances indefinitely into the future. Recent sales results have been dismal and sales and margins are certain to be weak this year, but few seem willing to look beyond 2016. Much of the sell-side commentary remains overly negative, often suggesting investors wait until a recovery is underway before buying the stock.

    Importantly, other restaurant chains have gone through their own food safety issues—some more serious than Chipotle’s—and ultimately recovered as the negative headlines faded. I am confident that Chipotle will recover and its 2015 food safety issues will seem like an unfortunate but distant memory within a few years. Sentiment should improve as same-store sales improve sequentially during 2016 and margins begin to recover in 2017. By 2018, I expect average restaurant sales and margins to have recovered to pre-incident levels.

    The best part of this investment is that Chipotle is not slowing down its unit growth. The company is opening 220-235 new locations this year and will probably open similar numbers during the next several years, so the company’s underlying earnings power is growing meaningfully below the surface. By 2018, I expect a full recovery in restaurant economics and roughly 33% more restaurants than exist today.

    Company Background

    Steve Ells graduated from The Culinary Institute of America in 1990. After working as a sous chef at Stars restaurant in San Francisco, Mr. Ells moved to Denver with the goal of opening a restaurant. With a loan from his father, he opened the first Chipotle Mexican Grill in 1993. After opening another 15 locations, the company accepted an investment from McDonald’s, which was diversifying by buying other restaurant chains at the time. McDonald’s helped accelerate Chipotle’s growth in a mostly hands-off manner, and ultimately sold its stake during and shortly after Chipotle had its IPO in 2006.

    At the end of 2015, Chipotle had 2,010 restaurants with about 98% of them in the U.S. The company owned 23 locations between Canada and Europe, and another 16 of two growing concepts: ShopHouse Southeast Asian Kitchen and Pizzeria Locale. The company expects to open 220-235 new locations this year and sees room for at least 4,000 locations in the U.S. over time. The ultimate potential number of locations has grown larger over the years as the company has gained widespread acceptance and average restaurant sales have continued to increase, reaching over $2.5 million during 2015.

    Restaurant Economic Model

    Chipotle’s economics are among the very best in the restaurant industry. Return on invested capital has continuously improved over the years as average restaurant sales and margins have drifted higher.

    Average restaurant sales peaked at over $2.5 million during the third quarter of 2015—just prior to the food safety issues—and have increased year after year as the company improved its customer throughput potential and consumers flocked to the stores. The ultimate potential for average restaurant sales could be meaningfully higher than $2.5 million. Chipotle’s focus on increasing throughput allows them to serve a tremendous number of customers, yet long lines were still the norm before the food safety issues. To alleviate the long lines, the company is working on growing online or mobile orders, catering orders, and delivery orders (via its third party delivery partners). Those orders are made on a second line, which avoids disruption to the main customer line and increases overall throughput, average restaurant sales, and unit economics.

    In 2015, Chipotle spent about $879,000 to open a new location between leasehold improvements, equipment, and pre-opening costs. According to management, new units open at an initial sales run-rate of $1.8–$1.9 million per year; however, according to the 2014 proxy statement, new units opened in 2014 averaged a $2.0 million annual run-rate during the year. New restaurants typically ramp up their sales to the $2.5 million company average within roughly 24 months. At that productivity level, restaurant-level margin reaches about 27-28%, amounting to about $690,000 of restaurant profit per year. That is a pre-tax cash-on-cash return in the 70%–80% range. Certainly, unit economics will be weaker during 2016 but should rebound to these figures with time. The ability to roll out new restaurants and generate returns in that ballpark for a very long time will create a tremendous amount of value.

    Market Potential

    Chipotle ended 2015 with 2,010 restaurants with about 98% of them Chipotle restaurants in the U.S. Management believes the U.S. market potential for Chipotle is over 4,000 restaurants. Management’s view of the ultimate market potential has increased over time as the brand’s popularity has grown and average restaurant sales have surged higher. The company is now able to open new restaurants in locations it never would have expected just a few years ago.

    “At the time of the IPO, we had calculated that if we just penetrated the top 75 DMAs, we could build about 3,000 restaurants in Chipotle. Let's go to the next group of about 150 to 200 DMAs and then had densities similar to our most dense market at that time that was years ago, that would get you up to 4,000. Well, our densities in those dense markets are greater today than they were back then and we've entered different opportunities today. In the last several years of that, we didn't have that then. For example malls, we are starting to enter malls. We've got a couple dozen malls that are doing exceptionally well, like food court malls where it's very, very small space, a thousand square feet or so. And we're doing phenomenally well. The financials are terrific. We've entered small towns, which we had not entered eight years ago. So we don't think about the pace of how fast we will get there. We know that our potential is at least that 4,000, but it's likely greater. And we know if we're very discerning about the sites that we pick, we pick only great real estate, that we have great managers ready to run those restaurants, we know that the potential whatever that number is, it's going to continue to grow and then the pace of growth is less important than making sure that we have that ultimate tremendous potential.” — Jack Hartung, CFO, on April 29, 2014

    Exhibit 1 shows the largest restaurant chains in the U.S. and their average unit volumes. Many less popular chains with inferior food quality and inferior unit economics have far more U.S. locations than Chipotle.

    Additionally, restaurants with higher quality food like Chipotle have a tailwind at their backs. Consumers are increasingly shifting towards chains with higher quality ingredients and away from the highly-processed foods of traditional fast food restaurants. Chipotle’s “Food with Integrity” mission is a meaningful differentiator, highlighting the company’s “Responsibly Raised” meats, which come from free-range animals that have not been treated with hormones or antibiotics, its organically grown produce, and cheese and sour cream from pasture-raised cows. Between Chipotle’s “on trend” message and food quality, its $2.5 million and growing average restaurant sales, and its very high returns on new restaurants, I believe the brand’s upside is likely higher than 4,000 locations in the U.S. over the long term. Additional locations for Chipotle in Canada and Europe and for the two emerging concepts in the U.S. should add to that potential.

    Food Safety

    I am confident Chipotle will recover from its recent food safety issues because it has implemented what appear to be very rigorous food handling and screening protocols, both at the supplier level and the company level.

    In addition, Chipotle is not the first restaurant chain to have food safety incidents.

    In 1993, Jack in the Box had its own outbreak that resulted in over 700 cases of E. coli. The outbreak originated from undercooked beef at 73 restaurants in Washington, Idaho, California, and Nevada. 171 people, including 45 children, were hospitalized. 41 victims developed hemolytic uremic syndrome (HUS), a disease that destroys red blood cells and can lead to kidney failure. Tragically, four children died.

    Jack in the Box same-store sales declined 22% in its fiscal second quarter of 1993, including a 40% decline during the first week of February. After three quarters of 9% same-store sales declines, same-store sales rebounded 23% in its fiscal second quarter in 1994. The brand posted solid same-store sales gains in the next few years. Since 1993, Jack in the Box has expanded from about 1,200 total company-operated and franchise-owned restaurants to over 2,200 locations today.

    In comparison, Chipotle’s impact on human health in 2015 was far less severe. Chipotle sickened 60 people with E. coli in October and November. Two separate norovirus outbreaks linked not to food, but sick employees, sickened 386 people. Salmonella sickened another 60 people in two states. No one developed HUS and no one died. However, the widespread reach of today’s media, including social media, significantly amplified the news. The negativity culminated with a Bloomberg BusinessWeek cover story highlighting Chipotle’s food safety woes.

    Chipotle’s same-store sales fell 14.6% in the fourth quarter, including declines of 16% in November and 30% in December. January’s same-store sales fell 36% as the media reporting continued for an extended period of time and the CDC’s investigation into the cause of the outbreak continued. Chipotle management decided to wait until the CDC’s investigation was concluded before trying to actively bring customers back in to the stores with a marketing campaign.

    The CDC finally concluded its investigation on February 1, 2015. The long time period between the first negative headlines in October and the CDC’s “all-clear” lengthened and deepened the same-store sale weakness, in my opinion.

    Chipotle is set to begin the largest marketing campaign in its history this week and closed each of its stores for four hours yesterday to host a companywide food safety meeting. It is highly probable that the worst of the company’s same-store sales declines are over.

    Valuation

    I primarily use a discounted cash flow model to value Chipotle. The key assumptions are:

    These assumptions result in about $19.0 billion of enterprise value, to which I add $1.3 billion of cash and investments, cash for options assumed exercised, and deduct $478 million for imminent share repurchases. The result is an equity value of $20.5 billion or $657 per share.

    If the long-term market potential is 5,000 restaurants instead of 4,000 restaurants, that would create roughly $3 billion of additional present value or roughly $100 per share, making the equity worth about $757 per share.

    What does the current stock price of $445 per share imply? I believe it implies the company recovers to normal economics in a few years, but only opens another 400–500 more restaurants from today’s number. Those numbers represent roughly two more years of growth before the brand permanently halts its expansion. That is wildly unrealistic, in my opinion.

    A second DCF that isolates the new restaurant growth opportunity suggests the NPV of that growth is about $8 billion. I use the same new restaurant growth assumptions as outlined above.

    Method 2: 2018 Earnings

    My numbers are above consensus, but I can apply a 35x TTM multiple to 2018 consensus earnings and reach a $678 share price at the end of 2018. At that point, the company would have something around $1.7 billion of cash on the balance sheet, assuming no additional repurchases, which would be worth another $55 per share. A year-end 2018 stock price of $733 per share suggests a 65% return in three years, or 18% annualized.

    A good question is whether Chipotle will deserve a 35x trailing multiple at the end of 2018. I believe it will.

     

     

    To be clear, Chipotle deserves such a high multiple because the return it generates on new restaurants is off-the-charts and it has an opportunity to open at least 2,000 more in the U.S. alone. Chipotle is a proven concept with a loyal fan base and a demonstrated track record of creating value through new restaurant openings.

    Why Is the Stock Mispriced?

     

     

     

    Even that is missing the point though. Not only would customers have to notice, but the difference in taste would have to be drastic enough to cause them to eat elsewhere. I find that unlikely. I believe Chipotle’s customers would still find a hypothetical Chipotle burrito that tastes 98% as good as it did six months ago to still be more appealing than most alternatives.

     

    Catalysts

    Last week, the CDC concluded their investigation into E. coli at Chipotle, effectively signaling the “all-clear.” The company will begin its largest ever marketing campaign this week in an effort to bring customers back into the restaurants. I expect investor sentiment to improve as same-store sales declines become less and less negative during 2016 before ultimately turning positive perhaps in late 2016 or early 2017. Market participants will gradually recognize that the business is not permanently impaired and is likely to fully recover with time.

    Risks

    Conclusion

    Chipotle is a great business with fantastic unit economics and a large growth opportunity. The food safety issues of 2015 are unfortunate for the business, but are only a temporary problem. The company’s stock is cheap because most investors are unable or unwilling to buy in the face of a weak and uncertain 2016. As long as the brand eventually recovers and continues to grow—which is highly probable, in my opinion—paying $445 per share in early 2016 is likely to be a good decision. Most importantly, I believe the long-term assumptions necessary to appraise the stock at or below its current price are completely unrealistic. In other words, I believe losing money permanently with this investment should be highly unlikely.

    As a side benefit, I expect an investment in CMG to be somewhat uncorrelated with the overall stock market. The stock’s future trajectory will be much more dependent on the company-specific recovery than on overall changes in consumer spending, the general whims of the stock market, or things of that nature.

    “If you wait for the robins, spring will be over.” — Warren Buffett

     

    Disclosure: The author’s fund is long CMG. This is not a recommendation to buy or sell any security. All the information in this write-up may be completely wrong. Do your own research.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Last week, the CDC concluded their investigation into E. coli at Chipotle, effectively signaling the “all-clear.” The company will begin its largest ever marketing campaign this week in an effort to bring customers back into the restaurants. I expect investor sentiment to improve as same-store sales declines become less and less negative during 2016 before ultimately turning positive perhaps in late 2016 or early 2017. Market participants will gradually recognize that the business is not permanently impaired and is likely to fully recover with time.

    Messages


    SubjectUnit Economics
    Entry02/09/2016 06:32 AM
    MemberLTYC123

    Thanks for the write-up. Few questions..

    1) To what extent do you expect unit economics to change going forward? My gut would tell me that there have to be diminishing returns as you ramp the next 2,000 restaurants? 

    2) Similar to 1) - Wendy's & KFC might have ~5,000 restaurants, but they utilize a flexible business model (dine-in / car take-away) which allows them to operate more effectively in more remote areas. How does chipotle overcome this issue? 

    3) Whats your view on international? Whats the option value? 


    Subjectnew restaurant concepts
    Entry02/10/2016 02:52 PM
    MemberDen1200

    Do you have any idea as to what the economics (ROIC, sales per store, profit) are for the Southeast Asia Chicken and Pizzeria Locale?

    I have a Pizzeria Locale around the corner and I eat there often. There used to be two pizza places in that location that went out of business, then Pizzeria Locale goes in and it is doing very well. I am just curious to see what the economics on those units are.


    SubjectRe: Thinking out loud
    Entry04/26/2016 05:04 PM
    Memberbafana901

    Maybe I was too inluenced by one up on wall street where peter lynch advised me to ask my wife where she shops, but, I love anecdotes. where do you eat now? I hope it is not bwld? I shorted bwld as I cant figure who would want to frequent this place over the long term. 

     


    SubjectRe: Re: Re: Thinking out loud
    Entry04/27/2016 10:46 AM
    Membermack885

    Macrae538 - have you adjusted your new store opening trajectory?  on the call last night, CMG hinted that new market openings are much softer then previous new market entries, and that they maybe shifting there store openings to already penetrated markets.  How do you think this impacts there ability to double the store count?  is the valuation based on new store openings?  and if new store openings in new markets are shifted, would this slow down the ability to open new stores?  also, previously CMG did very little PR on new store openings, however it now seems they may have to spend more to promote a new store?  Any color around new store openings and costs to promote new stores is much appreciated.


    SubjectRe: Re: qual vs quant
    Entry06/14/2016 04:29 PM
    Membermack885

    Macrae538 - do you know what the AUV average from 2005-2013 was?  I dont think it was anywhere close to 2M?  And arent your best locations opened first?  What if we return to AUV of 1.7 (i think thats closer to the long term AUV average?) ?


    SubjectRe: Re: Re: Re: qual vs quant
    Entry06/15/2016 11:09 AM
    Membermack885

    Why do you think AUV's would drop further to $1.7 MM?

    I have no idea if they will or wont, but if the average from 2004-2013 was closer to 1.75, isnt it possible this thing was just a Fad?  Why are you so sure they will remain north of 2?  

    The point is - its unknown.  and if its unknown - why is it worth premium multiple?

     


    SubjectRe: Re: historical examples
    Entry06/15/2016 03:58 PM
    Membermitc567

    I remember the Jack in the Box issue.  It did take a few years to recover, but the difference here is that it wasn't a fad food chain, just a regular burger chain.  Hard to know if that makes a difference in actual recovery.


    SubjectRe: Re: Re: historical examples
    Entry06/15/2016 04:07 PM
    Memberzzz007

    I think Jack in the Box was more serious as well. Five or so kids died, and a hundred or a couple hundred were permanently injured with kidney failure and brain damage. Must have been a more virulent strain of E Coli, or maybe treatment options weren't as good back then.


    SubjectRe: Re: Re: Re: historical examples
    Entry06/16/2016 11:56 AM
    MemberFlashdance

    While it had other issues to deal with, Boston Chicken is the one that most comes to mind. Unique concept and they had over 1,000 stores at one point but collapsed pretty abruptly. The other issues (google for some history) were to blame but the reality is that if the stores were better (ie if the food was better) the chain would still be around today in some form. It's not.

     

    Is Chipotle the next Boston Chicken? God no. But again, this is a +$10 billion company that traded at +30x earnings even before the scandal, so basing an investment on the leap-of-faith that things will just like, ummmm, get better, isn't going to cut it. Things need to get A LOT better. Arguablt even better than before. I'm also a bit surprised by the people who love Chipotle here but didn't own it in 2012 at $250 when it was in the gutter from a combination of the Taco Bell fresh menu (or whatever the hell they called it...even back then it was obviously never going to work) and David Einhorn presenting it as a short idea. Are people trying too hard this time around? I don't know.

     

    So now we're left to wonder whether +$2.0 million AUV's was the "right" level or whether that might have been aided by a few factors and is not truly sustainable, especially in light of an abrupt change in consumer preference. I don't know the answer; no one does. But here's what I see:

    • The QSR concept was nascent in the mid-to-early 2000's. I think back to where I used to go to lunch around then and none of it was good. Au Bon Pain. Bruegger's. Cosi (ha!). There just wasn't a concept that had figured this out. Times have changed, and there are now tons of these QSR's who have their acts together.
    • Tastes and preferences change. My girlfriend and I used to love Cheesecake Factory. Whether it's a general maturing process where you "wake up" to food quality or you just get sick of eating it too often, people will move on to something else eventually. Sometimes they just need a nudge.
    • Management has made essentially no changes to the menu.
    • Management has made no effort to add morning daypart.

    I think my prior assertion will probably be correct. If at the end of 2016, most people have returned to the stores, then this is likely to work out okay. If traffic hasn't improved (without heavy discounting) then this is going to be a long slog. Jury is still out but my instincts don't like what's going on.

     

    Neither here nor there but I always joke about the name Chipotle Mexican Grill. There is virtually NOTHING that's Mexican about their food. I'm half surprised some of these Latinx PC vigilantes haven't started a campaign against Chipotle alleging cultural misappropriation.


    SubjectRe: Sequoia Letter
    Entry07/13/2016 09:34 AM
    MemberSpocksBrainX

    interesting - thanks for posting


    Subjectstore openings
    Entry07/22/2016 06:46 AM
    Membermack885

    I bolded language I found concerning in yesterdays conference call regarding store opening tempo.  Has anyone started to moderate store opening expectations or elongate those expectations?  I am concerned that it may take them much longer to open new stores and the below is a shift?

    "We've refocused our real estate team on assessing future openings with a more conservative lens that takes into account our current economic model, particularly given recent changes to our average unit volumes. We have also temporarily shifted markets into our developing markets category in order to direct our new store investments towards markets with the strongest track record of opening sales. This may slightly temper the number of openings in these markets in the near term as we look to rebuild our sales momentum and will help us ensure strong new store productivity.

    The impact from this is primarily on where we open new stores with a minimal impact on the total opening. Because the real estate pipeline is inherently long term in nature, some of our efforts to reprioritize our market mix will not be realized until late in 2017. Of course, we will update you in the coming months as to how many restaurants we do expect to open in 2017."


    SubjectChorizo
    Entry07/22/2016 10:40 AM
    Membercloud89

    What are people's thoughts on the potential of the addition of chorizo to the menu to drive increased sales? I had a chorizo burrito bowl in NYC last week and honestly it was the best meal I've had at CMG in a long time. I could see myself eating the chorizo a number of times before I would get tired of it. I've spoken to others in NYC and they have also had very positive things to say about it and have observed at certain NYC stores long lines. As we all know, CMG rarely changes its menu and therefore I think the addition of chorizo is meaningful, despite the fact that not everyone can eat it due to religious reasons and therefore the addressable market is not as large as it is for some of the other proteins like chicken.

    Management expects to have chorizo in all of its restaurants by the end of this year. Chorizo currently accounts for approximately 6% to 7% of entrée sales in the restaurants where it's available. Perhaps this percentage comes down slightly as the buzz around a new addition to the menu dies down. I don't have a position in CMG one way or the other, and I don't think the chorizo addition is in itself probably enough to overcome the slower store growth management alluded to in their most recent earnings call (therefore I don't think chorizo changes this from a short to a long). Nonetheless I think it's important to assign some value to the chorizo addition and not to ignore it as part of the story.

     


    Subjectexisting geography strategy risks cannabilization
    Entry08/18/2016 10:05 AM
    Membermack885

    CMG opening new stores in existing geographies carries a greater risk of cannabilizing the existing stores.

    analysts are out today warning that CMG maybe opening stores at a slower pace because of existing geography strategy, yet not mentioning this risk in the strategy?

    macrae I believe you continue to take a longer term view, but what if the margin profile is impaired, and CMG remains a mid teens margin QSR and doesnt return to the high 20's?

    This valuation gets harder to justify the more the sands shift in my view.

    Here we are >8 months removed from the original ecoli outbreak and there are signs of moderate recovery?  coming with heavy promotions.

    I am unsure that consensus estimates of $14.72 in 2018 are achievable.  


    SubjectRe: Re: existing geography strategy risks cannabilization
    Entry08/18/2016 04:53 PM
    MemberValue1929

    RE: "The fact that traffic was running down only mid-teens in July is impressive, given 44% of people think no changes have been made. [By the way, July is also the hardest comp in 3Q; August and September are easier.]"

    I really think you need to incorporate what is real "traffic" versus promotional/give-away traffic.  Not sure if anyone saw my comment about this topic, but mgmt. noted early July sales as, "nearly 30% of all transactions are engaged in Chiptopia."

    So, if you assume half that 30% are die hard Chipotle fans and the remaining are just there for the promotion, one could arrive at a substantially lower traffic in July.  I think most investors have come to the realization that Q3 sales are juiced, essentially a one-time quarter, Q4 (if limited promotional activity) will be the real testament. 

     


    SubjectRe: Re: Re: existing geography strategy risks cannabilization
    Entry08/18/2016 05:56 PM
    Membermack885

    100% agree, Q4 is the tell.  If SSS dont improve by a minimum of 7%, CMG is heading materially lower.  

    When they report Q3, Im sure CMG will be commenting that college campuses just repopulated explaining away Q3, and will speak to improvement in September... 

    Also note that the big holders look to be exiting, FIDO, T Row, GMO.....  

    Ruanne Cuniff is hardly a value investor holding 20% of there portfolio in Valeant at 225... 

    I bet some of the notable hedge funds that bought into June, have already liquidated... 

    On many metrics CMG looks like a better short today, then it was at 600 (the start of the food illness problems)...

    There has not been a recovery, industry wide labor inflation is starting to show up, they dont have pricing power, and the multiple remains in the stratosphere while people cling to the prayer that they will recover 100% of there lost sales...  

    There  are a lot of new taco concepts starting to Roll from Velvet Taco to Torchys.  

    Surely there are better investment opportunities then the unknown that exists at Chipotle.

     


    SubjectRe: Re: Re: Re: Re: existing geography strategy risks cannabilization
    Entry08/19/2016 06:26 AM
    Membermack885

    I think we are playing the same game.  The reality is - its really hard to manage fresh food at this type of scale.  Its a lot easier to nuke a frozen burger patty.  

    I dont believe the 2015 food issues were very uniqe to 2015.  CMG actually had quite a few prior incidents, and the future is uncertain as it pertains to food costs (making fresh food at scale - safe).  I would call this a long term margin red flag.  Its one thing when you have 20 units and a manager who frightens employees into following a 25 point checklist, its quite another when you have 2200+ units, corners get cut.  Time will tell if the new protocols are enough.

    Also shifting store openings to higher population density, is another way to juice AUV (comes with risk to cannabilization), but I seriously question if AUV as a metric even matters right now for CMG.  Its all about margins.  Its probable existing geography store openings come with higher rent expense (long term margin red flag).  Stores in NYC have a much higher AUV for example, but also come with higher rents and rents that have grown faster then new geographies perhaps.

    These long term issues remain unresolved, its way too early to tell if they will be successful. 

    I encourage you to read the Fatmans CMG write up from 2008 on VIC, a truly prescient incredible long call... CMG had 800 units at the time, the mkt cap was 1.2B and the runway remained very large.  At that time longs were concerned that true saturation existed at 2500 units.  Here we are today at 2200 units, announcing a new store trajectory, unknown long term red flags on margins, and the highest valuation on many metrics in the companies history.

    So yes - we are playing the same game, we just disagree on what an enterprise is worth over the long term when faced with too many to tell unknowns.  


    SubjectRe: Re: Re: Re: Re: existing geography strategy risks cannabilization
    Entry08/19/2016 07:57 AM
    MemberFlashdance

    macrae, did you ever own Chipotle before the e coli incident?


    SubjectPershing Square 13D
    Entry09/06/2016 05:30 PM
    Membermacrae538

    https://www.sec.gov/Archives/edgar/data/1058090/000119312516702094/d233755dsc13d.htm


    SubjectRe: Re: Re: Re: Pershing Square 13D
    Entry09/07/2016 04:57 AM
    MemberFlashdance

    "Monty, is there any bacterial contamination going on?"

     

    Many, including myself, have been joking a lot about this. That's the fallout from losing one's reputation. For a company like Chipotle whose brand perception is critical at the moment, I cannot think of a worse turn of events than having the man behind one of the most despicable, scandalous companies in the last decade, one of the most spectacular retailing implosions, and a massive case of kinda-sorta-but-I-found-a-weird-loophole-thingy insider trading get involved. On the brightside, at least it wasn't Shkreli who filed the 13D. Chipotle longs, your drama-factor just increased 10,000%.


    SubjectRe: Re: Re: Pershing Square 13D
    Entry09/07/2016 10:34 AM
    Membermacrae538

    elehunter: Franchising is possible, but that's clearly not where Steve wants to go. They have been more than willing to buy back a lot of stock. Dividends are the last thing I'd want to see given new stores and buybacks are clearly better uses. Some financial leverage, which would enable more buybacks, is possible. They have not been enthusiastic about taking on debt though. I'm not sure how much cost there is to cut -- their normalized margins and unit economics are already peerless among restaurants. That will simply recover with sales. To mip14's point, they have not taken price to keep up with their food inflation over the years, so that is an opportunity, but it would probably be wise to wait a little longer on that.

    They did spend $32 million on a corporate jet in 2013/2014, so he could encourage them to sell it. Use the proceeds to buy back more stock. That wouldn't be a huge needle mover though, so I'm not sure it would be worth the headache/friction it would create. Having referred to "visionary leadership" in the 13D, his strategy is unlikely to be very critical of management.

    I think the marketing strategy is the biggest area for improvement. They have essentially tried to sweep food safety under the rug, so as not to remind people. I'd prefer a more transparent, authentic, mea cupla-ish approach. I think of Domino's approach, which was a massive success: https://www.youtube.com/watch?v=AH5R56jILag

    I think management understands that though. They eluded to new marketing that directly addresses food safety on the last call. A William Blair survey from a few months ago indicated 44% of survey respondents weren't aware of any changes Chipotle made to its food safety procedures. While the vast majority of people are eating at Chipotle again, there are some holdouts. Marketing that walks through the changes they've made would be helpful in bringing some of those people back. It would remind some people, but people who have already eaten there would not stop eating there because they see marketing that says "Chipotle is the safest place to eat now." Some holdouts would see it and come back. I don't see any downside to it.

    Another thing he could push for is more new menu items. I'm sure they are already working on that.


    SubjectRe: Re: Re: Re: Re: Re: Pershing Square 13D
    Entry09/09/2016 05:00 AM
    MemberFlashdance

    One of the issues here is that Ackman's "list of things to do" is probably either obvious or already underway in some form. New menu items? Already doing it. Buybacks? Already doing it. Aggressive promotions to drive traffic? Already doing it. Marketing improvements? Already doing it. Other concepts? Already doing it, although arguably they should put that on hold. (We're what, five years into ShopHouse and they have about a dozen stores? I would imagine this thing has sucked up a ton of capital and time.)

     

    Breakfast has long been an issue for Chipotle, and I've spoken to the company on several occasions in the past about this. Eggs are a big issue. They are a nightmare from a health safety perspective, so I don't know if now is the time to tackle that. I can't even imagine the fallout if something went wrong here. They're also difficult from a quality perspective, as I'm sure anyone who's been to a breakfast buffet can attest to. 

     

    People can argue about franchising and store rollout plans. Corporate fat must be very, very thick, but aligning it isn't going to make or break the stock. 

     

    I will repeat again: all of this fiddling around has so far not produced any encouraging results. Critically, I would define "encouraging" as implying the the chain will return to its prior path, because if it doesn't there is no way this stock is attractive. (And even if it did return - which again, it's not even close to doing - it's still debatable whether the stock is undervalued by much) All of this tinkering and surveying about food safety awareness and scratching heads why the customers aren't returning but the simplest answer is probably the correct one and the one I've said before: maybe a bunch of people just got sick of eating it all the damn time and needed a nudge. People got burnt out. They're not coming back and Ackman is the last person alive who can fix that. I agree with Biffins: I have a suspicion that Ackman just saw a chart of a good company and figured his odds of not losing a ton of money were good, and he is desperate to get Valeant and all of his other recent catastrophes out of the headlines. 


    SubjectRe: Re: Re: Re: Re: Re: Re: Pershing Square 13D
    Entry09/09/2016 05:16 AM
    MemberFlashdance

    One other related comment. We are creatures of habit. Many people had near addictions to Chipotle, and management have commented on the customer behavior recently. Those habits seem to have gotten broken, which is what's most concerning about the whole situation. The smartest thing management is doing, in my stupid generalist opinion, is sticking with the extremely aggressive promotions to drive traffic. In my mind, this is probably 95% of the job in front of them: get customers in the habit of frequently coming back to the stores. That's it, there is nothing else (other than the obvious food safety issues, which seem to have been fixed and were never a widespread problem in the first place) they need to do in order to get things back to the way they were. Just get the damn customers in the habit of coming back multiple times per week. If that means giving away free food for a year or more, so be it...at least they can underwrite it. There's a lot to dislike about Steve and Monty but I think they're handling the most important thing just about right. 


    SubjectDenver Post Story
    Entry09/10/2016 12:56 PM
    Membermacrae538

    http://www.denverpost.com/2016/09/09/chipotle-foodborne-illness-cases-settled/

    Chipotle Mexican Grill settled nearly 100 legal cases brought by customers sickened in last year’s foodborne illness outbreak. Terms were not disclosed. Except for one: One client asked for “free-burrito” coupons as part of her settlement.

    “In 25 years of doing foodborne illness cases, I’ve never had a client ask for coupons for the restaurant they had gotten sick at,” said William Marler, an attorney with Seattle-based Marler Clark who represented 97 Chipotle customers. “In fact, some (clients) had gone back to the restaurant and they would call me and say, ‘Do you think it’s bad that I went back and got a burrito?’ ”

    You just don’t often find customers like his 19-year-old client who after recovering from being hospitalized for a few days told him, “the one thing I want is free burritos and I’m like what? She wanted me to ask for her because (she said) ‘I really love Chipotle and want to go back.’ ”

    And she wasn’t alone. While none of his other clients specifically asked for coupons, “a lot of them were getting them,” he said.

    “They have a following of especially 20-somethings that other restaurants don’t have,” Marler said. “It’s a little odd, but it probably says something positive about Chipotle.


    Subjectfood safety campaign + european importance?
    Entry09/21/2016 11:48 PM
    Membermack885

    CMG's new attempt, a mea culpa:

    https://vimeo.com/183028766/5bbc20e243?gclid=CLGV3IWEos8CFcReNwod3O8O5g&gclsrc=ds

    and then this article in NY Times "Every Days a Safety Drill":

    http://www.nytimes.com/2016/09/22/business/every-days-a-safety-drill-as-chipotle-woos-customers-back.html?rref=collection%2Fbyline%2Fstephanie-strom&action=click&contentCollection=undefined&region=stream&module=stream_unit&version=latest&contentPlacement=1&pgtype=collection

    How do these food safety procedures impact margin?  Are they done implementing food safety procedures, or is it still evolving - mission accomplished?  

    Macrae - has CMG disclosed how many new store openings in Europe are targetted?  Is the recent PR around European hires a signal that US openings need to slow (cannabilization), and store opening strategy continues shifting?  I still seriously question whether you will get the same ROIC ever again on new store openings that CMG had in 2014, and am unsure how you can just have blind faith it will return... I can easily model $7 or less of EPS in 2018...   

    I found the below quote by Steve Ells in the NY times to be thought provoking, on a few levels.  In a world where Elizabeth Warren can smash the CEO of Wells Fargo and continue to bash Wall Street and demand criminal indictment, where does selling hundreds of millions of $ of equity while making people sick along the way fit in?  Also - why havent we seen Monty or Ells pony up a single dollar and buy stock yet?  

    “Part of the thing that was so devastating was because there were multiple incidents, and so it may have looked like we were out of control,” Mr. Ells said. “We had good food safety standards in place — but were they good enough to ensure something like this wouldn’t happen given the momentum of our business and that we rely on fresh ingredients prepared on the spot? Maybe not.”

     

     


    SubjectRe: food safety campaign + european importance?
    Entry10/17/2016 11:35 PM
    Membermack885

    https://www.fastcompany.com/3064068/chipotle-eats-itself

     


    SubjectRe: Unhealthy?
    Entry10/18/2016 03:45 PM
    Memberbedrock346

    I think the scandal played up the angle that the food is fresh but highly caloric, and I guess fresh doesn't mean safe it it comes with a side of e coli. I used to go once a week, knew the stuff was too caloric. So I used the food scare to break the habit. I think many others did as well.


    Subjectvw v cmg
    Entry10/19/2016 11:24 AM
    Membersocratesplus

    i view vw and cmg in the same manner, but i prefer vw.  i look at them not as a car company and a fast food company, but as turnarounds, so i think they are peers and competition for a portion of my portfolio.  i think both franchises are strong, but if i am betting on a vw resurrection being easier than a cmg resurrection.  


    SubjectRe: What's Priced in at $365
    Entry10/28/2016 10:27 PM
    Membermack885

    19% restaraunt level operating margin in 2017 is optimistic.  The trend continues lower from 15.5 previous qtr to 14.4% most recent.  Avocado pricing is unknown, impact is large enough that Ells felt the need to mention it.  The level of disclosure CMG provided around achieving this much improved operating margin seemed pie in the sky to me: "To earn a full year 2017 target of 20% restaurant-level operating margin, we need to earn about 50 basis points of additional margin versus the current underlying run rate of about 15%. We will recover this 500 basis points in several ways.  First, by effective scheduling of our crews to ensure we have the right staff at the right times to deliver an excellent guest experience. But also to ensure we're not ever overstaffed, especially during low sales periods. We can manage our food costs more effectively by reducing waste by ordering, prepping and cooking the correct quantities throughout the day. By cooking to ideal temperatures which not only makes our food taste better, it also results in avoiding unnecessarily – unnecessary yield loss. We can also more effectively manage smaller but important restaurant costs such as repairs and maintenance and kitchen supplies which has grown faster than sales in recent years."  

    in other words, same plan they been failing at thus far.... 

    Promotions remain incredibly high, disclosure around chiptopia was less then I had hoped for, anecdotally I had a friend go for a BOGO and handed 2 coupons for free burritos... an epic 4 for 1 burrito special.  Pretty incredible.  Perhaps traffic is over earning right now, and will fall off post all the promo... 

    The irony of CMG resorting to linear to TV to drive traffic over social ad spend, is notable.   

    my original question about whether or not CMG is just a fad remains unknown.  October '16 is running >-20% comp, I found this disclosure stunning, given we are at the start of comping the comp.  AUV at CMG from 2004-2013 was approx 1.75, maybe thats the normal.... after all the dust settles.

    CMG seems overly optimistic on labor efficiencies, just today CNN ran this article:  http://money.cnn.com/2016/10/28/news/economy/chipotle-nightmare-job/index.html

    labor inflation maybe significantly higher for CMG, given what they are expecting out of there employees.

    Management is hard to trust.  But at the same time, do you think if management was booted, this would be a positive?    This is the problem with a DCF on management that is hard to trust.  They were reported today to be building a team to fight Ackman: http://www.reuters.com/article/us-chipotle-ackman-exclusive-idUSKCN12S00I  (this will be distracting, effecting change will take ackman a time)

    I think store openings which are slowing from 245 the previous year, to 195-210 in 2017, will be forced to slow even further as cannabilization (on this topic CMG commented: "And even with our lower sales levels in 2016, we are not seeing a marked increase in cannibalization from opening new restaurants, which remains at less than 1% nationally.") takes root, although not evident yet.

    Bottom line i think there is a reasonable probability restaraunt level margin remains mired in the mid teens as they continue to struggle with labor, new procedures, new advertising, food costs.  Management Guidance seems pie in the sky.

     

     

     


    Subjectsecond make line/mobile ordering
    Entry10/29/2016 11:16 AM
    Membergocanucks97

    Hi macrae, i am curious if you know what's the % of sales today from second make line/mobile ordering/catering. SBUX had attributed mobile orders as a key driver for their SSS (maybe even 15-20% of sales?). I think CMG is similar to SBUX in the sense that they both lose potential sales to long lines (maybe less so for CMG today). 

    I know you don't like focusing too much on near term trends, but are you not concerned about Oct not showing much sequential improvement at all? November is the first month of lapping, but we are almost one year removed from the incident. And mgmt noted both coasts are seeing mid 20's decline still. 

    thanks.


    SubjectRe: Re: Re: Re: Re: What's Priced in at $365
    Entry10/31/2016 12:30 PM
    Memberpuppyeh

    "On the short-term explaining the long-term, I just don't agree, at least in this case. I think that's the crux of the difference. I've seen too much evidence of consumers returning to prior behavior after enough time has passed. Tylenol, Jack, Taco Bell, etc."

    Macrae, this has been an illuminating discussion thread, but I am quite confused why you rely so heavily on historical analogues when there is so much that is novel about how society has changed since those scandals. The power of social media deserves far more of an analysis here. It is pretty clear that many kinds of highly discretionary, 'high cost of failure' consumer products (ie anything related to health) can be devastated by even minor scandals in the social media age. Lumber Liquidators (LL) is a pretty instructive example to my mind. This is before even touching the issues others like utah have raised, namely the increased competition and simple changing of consumer preferences.

    Arguing 'consumers always come back' in this case to me is akin naively expecting Ray Rice to get another NFL gig. Judging by similar - or worse - scandals in the past (Ray Lewis, Michael Vick, etc) you'd think of course he would, but sometimes, as I think in this case, patterns of behavior just change.

    fwiw, short CMG (for this and many other reasons)


    SubjectRe: Re: Re: Re: Re: Re: Re: What's Priced in at $365
    Entry10/31/2016 08:13 PM
    Memberpuppyeh

    thats fine, no need to go over old ground.

    re valuation, I use a pretty simple framework - I don't think this should trade at a massive premium to the restaurant space, at this point post scandal and with traffic trends still so weak. I am highly skeptical of the continued unit growth trajectory the bulls outline, in the face of continuing weak traffic despite promotions. I view 20x 'normalized' 2018 EPS as more than a fair valuation, which gets me to mid-high 200s even at consensus (my own numbers ding the margin recovery a bit as I think discounts go on for longer so are a little lower).

    You are right, we are getting closer to territory where risk/reward is less skewed. But I think headline valuation still needs to come down a fair bit before non-growth buyers can take a more serious look. It is not a huge position for me at this point.


    Subjectshelf registration statement and 13Da filing by PS
    Entry03/04/2017 11:23 AM
    Membermack885

    is Pershing Square a long term CMG investor, or liquidating?  seems odd to file a shelf, with no intent to liquidate?

     

     


    SubjectRe: Author Exit Recommendation
    Entry07/18/2017 12:58 PM
    Membershoobity

    Maybe it'sobvious with the additional outbreak but if something else could you please expand on your exit. 

    Thank you

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