CMG - Chipotle

[DCG]

I think their biggest potential is expanding outside of the U.S.. They have less than 30 locations outside of the U.S..

[TwoCitiesCapital]

I think their biggest potential is expanding outside of the U.S.. They have less than 30 locations outside of the U.S..

 

South/Central American food has limited success outside of the U.S. for whatever reasons. Europeans are all about Turkish food and, to a lesser extent, Asian food. Very few seem to gravitate towards South/Central American quisine. I don't know why - but that is the preference and experience of other chain operators.

 

Taco Bell, for instance, has 7000 locations in the U.S. alone, but only envisions being able to grow to 1000 outside of the U.S. from the current 300.

That means Taco Bell envisions that the rest of the global will have 1/7th of the taco bell density the U.S. has. - that's a pretty significant impediment to those expecting Chipotle will have massive success in international sales growth.

[Gregmal]

I think their biggest potential is expanding outside of the U.S.. They have less than 30 locations outside of the U.S..

 

South/Central American food has limited success outside of the U.S. for whatever reasons. Europeans are all about Turkish food and, to a lesser extent, Asian food. Very few seem to gravitate towards South/Central American quisine. I don't know why - but that is the preference and experience of other chain operators.

 

Taco Bell, for instance, has 7000 locations in the U.S. alone, but only envisions being able to grow to 1000 outside of the U.S. from the current 300.

That means Taco Bell envisions that the rest of the global will have 1/7th of the taco bell density the U.S. has. - that's a pretty significant impediment to those expecting Chipotle will have massive success in international sales growth.

 

I don't blame the Central/South American countries. What CMG puts out there is basically a mockery of their authentic food, which is basically everywhere. CMG is essentially a hipster draw, much like the Frappacino is to coffee. Compare that to what those people are used to eating and you have an over priced, millenialized version of food that is supposed to be replicating the types of food these people eat and make at home all the time anyway.

[Spekulatius]

I think their biggest potential is expanding outside of the U.S.. They have less than 30 locations outside of the U.S..

 

South/Central American food has limited success outside of the U.S. for whatever reasons. Europeans are all about Turkish food and, to a lesser extent, Asian food. Very few seem to gravitate towards South/Central American quisine. I don't know why - but that is the preference and experience of other chain operators.

 

I think there is a market for fast casual well tasting food pretty much everywhere, but the demand is met in different ways. In the US, it happens to be Tex mex, in Europe, where people are used to eating bread, the Döner is popular and those places pretty much everywhere (few are chains) and they are cheap and generally pretty good. I think it is hard for other ethnic food operators to crack into these markets when there is a well competition. I think Chipotle could do well in bigger cities, but they probably wouldn’t be able to go beyond that.

[Guest jeffswaldron]

I set a target of $1.75 million in sales per unit and wanted to see how many customers that would translate into by year, month, etc.  Using 2250 units and an avg check of $12 I arrived at about 3,000 customers per week.  This seems like an unsustainable number -- does anyone know how I can find out realistic customer traffic without sitting in a Chipotle and counting customer transactions?

 

Some roughly estimated numbers below:

 

units 2250

Avg Check $12

 

Annual

Company sales $3,937,500,000

Per Unit $1,750,000

 

Monthly

Company sales $328,125,000

Per Unit $145,833

 

Weekly

Company sales $82,031,250

Per Unit $36,458

Customers 3,038

 

Daily

Company sales $11,718,750

Per Unit $5,208

Customers 434

 

 

[DTEJD1997]

I set a target of $1.75 million in sales per unit and wanted to see how many customers that would translate into by year, month, etc.  Using 2250 units and an avg check of $12 I arrived at about 3,000 customers per week.  This seems like an unsustainable number -- does anyone know how I can find out realistic customer traffic without sitting in a Chipotle and counting customer transactions?

 

Some roughly estimated numbers below:

 

units 2250

Avg Check $12

 

Annual

Company sales $3,937,500,000

Per Unit $1,750,000

 

Monthly

Company sales $328,125,000

Per Unit $145,833

 

Weekly

Company sales $82,031,250

Per Unit $36,458

Customers 3,038

 

Daily

Company sales $11,718,750

Per Unit $5,208

Customers 434

 

This is going to be very difficult to model out...You've got locations in NYC and other major metropolitan areas that can easily have 3,000 customer transactions per week...and then you've got CMG locations out in the middle of nowhere Ohio, where 3,000 transactions would be silly.  Most locations would be somewhere in the middle.

 

Going forward, I think CMG has ALREADY captured most of the super prime locations and will largely be building in "B" and "C" locations.  Thus, most new units will have lower transactions & sales than earlier units.  There will also be some thieving of sales as some newer locations are taking customers from already existing units.

 

I think CMG is a great business and GENERALLY well run...but the valuation is too high for my taste.

[Gray Fox]

I love Chipotle and have been a frequent customer for close to fifteen years.  That being said I have been short (on and off) the past two years.  The incremental quality of the future locations is the real crux here.  They've had twenty years to pick the 2200 best locations in the United States they could find.  The odds the next 2000 are going to be just as good are quite slim. Two personal anecdotes:

 

-NYC is totally saturated.  There at least three within a 10 minute walk of my office and at least three within a ten minute walk of my apartment.  I go Friday at lunch probably once a month and there is never a line at 12:30pm.  I walk past a Dos Toros on the way and there is always a line.  On the weekends there is almost never a line.  I imagine other large metros are saturated as well.

 

-I grew up in the Midwest and go home 4-5x a year for holidays, football games etc.  Major Midwestern cities and college towns all have multiple Chipotle's.  Even rural communities are within 15-20 minutes of a Chipotle.  Some of the locations blow my mind and I can't fathom them being profitable.  I'm talking about areas where the per capita income is in the $30k range and they overlap with dozens of other fast food/fast casual options. 

 

The bull case rests on getting to 20% unit margins and 4000 stores.  Go to pg. 24 of the 10K where they break out the store count by State. 

 

https://www.sec.gov/Archives/edgar/data/1058090/000105809017000009/cmg-20161231x10k.htm#Item_2

 

Can they get another 120 in New York?  Another 160 in Ohio? I could maybe see an argument for being underpenetrated on the East Coast but I just can't get to another 500 good units, let alone 1800.

 

Pershing Square is strident that they still believe.  RCG started to hint they might have been wrong in their letter.  Time will tell.

[JayGatsby]

I think their biggest potential is expanding outside of the U.S.. They have less than 30 locations outside of the U.S..

 

South/Central American food has limited success outside of the U.S. for whatever reasons. Europeans are all about Turkish food and, to a lesser extent, Asian food. Very few seem to gravitate towards South/Central American quisine. I don't know why - but that is the preference and experience of other chain operators.

 

I think there is a market for fast casual well tasting food pretty much everywhere, but the demand is met in different ways. In the US, it happens to be Tex mex, in Europe, where people are used to eating bread, the Döner is popular and those places pretty much everywhere (few are chains) and they are cheap and generally pretty good. I think it is hard for other ethnic food operators to crack into these markets when there is a well competition. I think Chipotle could do well in bigger cities, but they probably wouldn’t be able to go beyond that.

Other chains that seem to do the same thing have been successful:

England: Barburrito (21 locations) https://barburrito.co.uk/restaurants/

Ireland: Boojum (10 locations): http://www.boojummex.com/locations/

Australia, New Zealand: Zambrero (160 locations, also apparently in Thailand and Ireland) http://zambrero.com.au/story

 

https://www.theguardian.com/lifeandstyle/2015/apr/28/burritos-britain-mexican-food-growth

 

Not sure why Chipotle hasn't done more. Part of it may be that they see higher ROIs investing in 2nd tier US locations. Seems like they would've been able to do both since they have the cash flow. Now Chipotle has ceded the position to be the market leader in those locations. Barburrito wasn't good in my opinion, but Boojum and Zambrero both seem to be good concepts (although I haven't eaten at them). Zambrero does a Toms shoes style 1 for 1 meal program.

[DTEJD1997]

Hey all:

 

Looks like CMG missed on Sales, SSS, earnings....Stock is down about 10% in after hours trading (-$31).

 

Could this be an overreaction, OR sign of things to come?

[Gregmal]

Hey all:

 

Looks like CMG missed on Sales, SSS, earnings....Stock is down about 10% in after hours trading (-$31).

 

Could this be an overreaction, OR sign of things to come?

 

I think this is still overvalued. It may be inaccurate, but I just don't see CMG's long term moat. I think your CAKE thread is a much better example of a high quality brand with staying power. CAKE is a sit down restaurant, viewed as high end to many middle/upper middle class folks; ie when I was in high school this was a premier place to take a date if you didnt want to look like a cheap schmuck. It's menu seems catered toward everyone, and it's a pretty decent overall bang for your buck. Basically PF Changs but serving white/Italian(what's also now called modern American) people food. CMG is a dying millennial brand. I am not short, but think this has over $100 a share of downside from here.

[JayGatsby]

Frustrating they're slowing new store openings.

 

Very unimpressive call... lots of hype over unimportant stuff like ordering burritos via facebook. Interesting they didn't discuss the norovirus incident that happened during the quarter (looks like late July). They'd previously said that negatively impacted comps by 5.5% in the weeks following. I guess they know that the second they mention it it will be front and center of all the clickbait financial websites. Better to not mention it.

[Txvestor]

If all of the growth story is discounted, then its worth about $200. If not then it is worth more. With each passing Q it starts to look like just another fast casual restaurant devoid of its growth of yesteryear, and with that it starts converge towards its base price.

It can't be more than a couple of quarters from when Ells is out of his job. His handling of the PR crisis, his botched roll out of menu expansions, his inability to maintain the brand value and generally his management style makes one wonder how he even ever got to this point. But rest assured, he will not last long as currently Ackman must be itching to get his hand in there. Don't know necessarily if thats a good thing. His record in these interventions is mixed, eg Hunter Harrison at CSX . But Ron Johnson at JC Penney .

From a personal perspective, I hope CMG does well. Apart from being a small investment for me, i think their products have been innovative, convenient and relatively cheap. Would hate to see a minor food safety issue and mismanagement take out such a uniquely american brand.

[DTEJD1997]

If all of the growth story is discounted, then its worth about $200. If not then it is worth more. With each passing Q it starts to look like just another fast casual restaurant devoid of its growth of yesteryear, and with that it starts converge towards its base price.

It can't be more than a couple of quarters oit that Ells is out of his job. His handling of the PR crisis, his botched roll out of menu expansions, his inability to maintain the brand value and generally his management style makes one wonder how he even ever got to this point. But rest assured, he will not last long as currently. Ackman must be itching to get his hand in there. Don't know necessarily if thats a good thing. His record in these interventions is mixed, eg Hunter Harrison at CSX . But Ron Johnson at JC Penney .

From a personal perspective, I hope CMG does well. Apart from being a small investment for me, i think their products have been innovstive, comveneient and relatively cheap. Would hate to see a minor food safety issue and mismanagement take out such a uniquely american brand.

 

If the growth engine of CMG is broken...then look out below.  A METRIC TON of "go go" momentum investors are going to come flooding out.  CMG may have overshot on the upside...and may overshoot on the downside.

 

I'll give management the benefit of the doubt, but the call did not exactly instill confidence. 

 

If the growth story is broken, I think $200 may even be high/optimistic.

[dyow]

This is the dangerous growth stock Ben Graham warned us about in the intelligent investor. 

 

No thank you Bill. No thank you.

[Txvestor]

Like I said, if the growth model is broken, it is overpriced, if not it is underpriced. The market is quite appropriately pricing in the risks here IMHO.

Remember CMG has zero debt on its balance sheet and still generates healthy FCF with which to fund its various initiatives. And sales are not declining. All these factors considered, the market price is perhaps about correct. Just as today this sells off 10+%, a little upward tilt in sales and the momentum upward could be equally swift. This will be volatile for a while.

[JayGatsby]

The Ackman effect continues: https://seekingalpha.com/pr/17013179-chipotle-begins-search-new-ceo

 

The company had a difficult, but straightforward task ahead when he took board seats. Since then it's only gotten off course. I think if Steve had the right support at the Board level they never would have introduced a queso that was liked by 10% and disliked by 90%. A financial analyst can easily do the math that if 10% of people buy it you've added EBITDA, but the effect on the overall brand perception was neglected in the analysis.

[nkp007]

Update:

 

Been going to Chipotle in NYC at least twice a week for the past couple months. I really enjoy the food. Still, there's usually no one in line when I walk in.

 

Will let y'all know when that changes. #primaryresearch

[DCG]

Update:

 

Been going to Chipotle in NYC at least twice a week for the past couple months. I really enjoy the food. Still, there's usually no one in line when I walk in.

 

Will let y'all know when that changes. #primaryresearch

 

 

The ones I've been to recently have been pretty busy.

[TorontoRaptorsFan]

It's almost down 10% today. I added to my position today.

I would like to see them abandon their Tasty Made concept and instead use their capital to acquire a burger chain.

Would also like to see them open more Pizzeria Locale locations vs more Chipotle.

Talking to the staff at my local Chipotle they say they're still getting long lineups at lunchtime for meals. Dinner traffic is steady.

 

https://www.cnbc.com/2018/02/06/chipotle-has-a-plan-to-regain-customers-it-keeps-losing-to-food-safety-issues.html

 

 

[sleepydragon]

I was in Chipotle for lunch, found a stone in my meal.

[bci23]

It's almost down 10% today. I added to my position today.

I would like to see them abandon their Tasty Made concept and instead use their capital to acquire a burger chain.

Would also like to see them open more Pizzeria Locale locations vs more Chipotle.

Talking to the staff at my local Chipotle they say they're still getting long lineups at lunchtime for meals. Dinner traffic is steady.

 

https://www.cnbc.com/2018/02/06/chipotle-has-a-plan-to-regain-customers-it-keeps-losing-to-food-safety-issues.html

 

I feel like CMG needs to hire some exec away from Toyota/Danaher/Fortive, someone to focus on continuous process and efficiency improvement in their restaurants. Lines are back but comps suck. Lines are long because their operations have become significantly less efficient in how how they move people through the line imo.

[johnny]

It's almost down 10% today. I added to my position today.

I would like to see them abandon their Tasty Made concept and instead use their capital to acquire a burger chain.

Would also like to see them open more Pizzeria Locale locations vs more Chipotle.

Talking to the staff at my local Chipotle they say they're still getting long lineups at lunchtime for meals. Dinner traffic is steady.

 

https://www.cnbc.com/2018/02/06/chipotle-has-a-plan-to-regain-customers-it-keeps-losing-to-food-safety-issues.html

 

As bci mentioned, their throughput is garbage, so they are able to put up lines even with lower sales. If you have a good relationship with them, the better question to ask is what their average daily sales are, and what they were last year, the year before, etc. The first thing you might notice is that almost anybody you ask will have no idea what ADS was in 2015, because they're mostly people that joined the company during its decline. They have only the vaguest sense of what Chipotle operations were like during the "good times" and for them, mediocre store performance is the only thing they know. That should be somewhat troubling.

 

When I was short, a big thing I focused on was how important the "restaurateur" concept was to the motivation of even the lowliest employee: there were so many new units coming online (in % terms), there was very visible promotion within one degree of pretty much everybody in the company. I believe this basically kept them working way harder/better for the wagedollar they received than could be sustainably expected. With the company deliberately pausing growth, and with a substantial changes to the restaurateur concept being deployed, and with the allure of being a restaurateur in the first place being meaningfully degraded (in 2015 the view on restaurateurs was aspirational: that they were bean-spooning heroes that now do six figures, in 2018 the view seems to be that they're just middle manager types that had lucky timing, got good numbers, and are now completely obsessed with typical middle manager stuff: food safety audits, upselling, labor efficiency), I think they may have permanently lost this labor advantage.

 

Why are you so down on Tasty Made? Do you have access to some data/experience that makes you think it doesn't have a very good future?

 

 

[JayGatsby]

Sold some today. Turnaround doesn't seem to be taking hold. Lessons learned, turnarounds are tough. They missed a big shot by rushing queso out to market before it was ready. They have billboards around town about how big of a deal their queso is, but when public opinion is that it isn't good the hype isn't helping.

 

Also don't like way the company is going with Ackman pushing Ells out (or Ells leaving at least).

[Spekulatius]

Problem is that it was never priced as a turnaround stock to begin with. It would be priced as a turnaround stock at $100/ share. Even at a current $270/ share, the valuation is ludicrous for a turnaround stock, given  current earnings.

[abcd]

http://www.businessinsider.com/taco-bell-ceo-tapped-for-chipotle-executive-job-2018-2