CMG - Chipotle

[atbed]

Hey all:

 

There are reports now of another mass food poisoning incident at a Chipolte in VA.  Stock is down 6%+.

 

It just hit me that MAYBE this needs to trade at a DISCOUNT to the market and not a premium.

 

There is a TON of competition now, some of it is pretty good.

 

How many times have they had problems with food safety?  Is this the 4th time?  I seriously don't know, but it is MULTIPLE times.

 

20M people a year get Norovirus and clearly not all of them are getting it from Chipotle. Where are the news stories on all of the other chains where this happens?

 

The market is just overly sensitive to negative news on Chipotle given that it's pristine image was shattered by the initial scare.

 

You've got a poin that perhaps Chipotle gets more press than other chains.  I would counter that IF 20M a year get Norovirus, I doubt that many are getting it from restaurants.  I would suggest a lot of them are getting from home prepared meals or perhaps co-workers. 

 

I eat out a LOT and it is pretty rare that I get anything worse than an upset stomach (and that is rare).  The last serious case of food poisoning was a meal prepared by my ex-girlfriend.  The meal in question had nothing to do with her becoming an EX though.

 

HOWEVER, Chipotle should be on "double alert" because of their past problems AND management has got to know that if there are future problems, the press is going to pounce on it.

 

I find this entire situation fascinating... when I read that it was Norovirus -- I though it was hilarious that the media and public are making  such a big deal about it.  Basically someone with a stomach bug went to a restaurant and a bunch of people got sick.  Norovirus is incredibly contagious and most people get it because they come into contact or are in the same room as someone else who has it.  It's basically a super contagious stomach bug... nothing more and nothing less. My son's class had 26 out of 30 kids absent due to norovirus in the winter. And half of the entire school was sick with it at one point. Once my son got it, despite our every precaution it (wearing masks, airing out the room, disinfecting everything), my daughter, other son, wife and myself all got it within 2 days.

 

If only Chipotle was at a price I thought was attractive due to this news....

 

+1

 

I feel like many would like to buy this lower. I believe in the brand and think they will bounce back. But so do many others, and a recovery is partially reflected in the stock. IRR is attractive for many here. I just wish it were more so.

 

I'm hoping for a hundred bucks lower, but I don't think it will get there.

 

 

[JayGatsby]

Buy one, get one for those who think it's too expensive  :P: https://savorwavs.com/ (You give them your cell phone number and they say they'll send you up to 4 messages. So far I'm waiting for the first one with my burrito. It's a weird link, but it was advertised on Instagram by Chipotle.)

[BRK7]

Buy one, get one for those who think it's too expensive  :P: https://savorwavs.com/ (You give them your cell phone number and they say they'll send you up to 4 messages. So far I'm waiting for the first one with my burrito. It's a weird link, but it was advertised on Instagram by Chipotle.)

 

Ackman is calling attention to savorwavs.com as well.....though I suspect Ackman's debut on Twitter has more to do with showing a vote of confidence for Chipotle

 

https://twitter.com/BillAckman1

 

[AzCactus]

Maybe it's there way of apologizing for the Sterling mishap

[DTEJD1997]

Just when it can't get any worse...

 

The Drudge Report has a link to a Dallas TV station that has reports of RATS falling out of the ceiling of a Chipotle and running amok.

 

http://nypost.com/2017/07/20/its-raining-rats-at-this-chipotle/

 

 

[Guest Cameron]

Just when it can't get any worse...

 

The Drudge Report has a link to a Dallas TV station that has reports of RATS falling out of the ceiling of a Chipotle and running amok.

 

http://nypost.com/2017/07/20/its-raining-rats-at-this-chipotle/

 

Yeah I saw an article on seeking alpha compare this to when amex had the salad oil incident, this is WAY different then that situation.

[rmitz]

Just for another anecdote...I went to a Chipotle for the first time in about a year.  It was a new location, but don't know how much that matters.  The chips were terrible; no crunch at all.  The food was bland.  Not sure what was going on but it was nothing to write home about.  BTW, those 3 double cheeseburgers at McDonald's constitute about 1300 calories...

[johnny]

I'm going to go to Chipotle. Nobody here cares I'm sure, I'm just posting in this thread to substantiate my bona-fide business purpose. I think I will bring a scale and measure the burrito.

 

Has Ackman announced when he'll be doing a 4 hour conference call on this norovirus stuff?

[RadMan24]

I'm going to go to Chipotle. Nobody here cares I'm sure, I'm just posting in this thread to substantiate my bona-fide business purpose. I think I will bring a scale and measure the burrito.

 

Has Ackman announced when he'll be doing a 4 hour conference call on this norovirus stuff?

 

I expect a company-wide shutdown to instruct employees on proper ways of setting mouse traps and donning hazmat suits prior to serving and cooking "healthy" food. That and the invention of genetically modified food that is resistant to and/or kills pathogens.

[TorontoRaptorsFan]

I ate at my local Chipotle last night and it was crowded. Staff said they were aware of the news but mentioned to me that it was not affecting their abilities to do their jobs. At this level I'll pickup some more shares. After the first incident it was a priority of management to focus on food safety and it's still my belief that it's the safest place to eat anywhere with the measures they've implemented. I always said I'll pick up some shares when it's below $400 and at this price I'll pick up a few more today.

[cmlber]

It's still my belief that it's the safest place to eat anywhere with the measures they've implemented.

 

Mine too.  But that doesn't stop the average person from seeing e Coli, norovirus, and rats falling from the ceiling as a pattern of a disgusting restaurant.  As an investor, you're going to do much more research on these issues than the average person who won't 1) realize the e Coli is possible at every restaurant but since Chipotle is high profile and has 2,300 locations is more likely to get a reported case, 2) realize norovirus came from somebody outside of the restaurant, not the food, and 3) realize that it's not that crazy to think there would be a hole in one of 2,300 buildings at some point in time that would allow some mice in that were immediately exterminated.  All the average person sees is the headline.

 

Just like I said the other day, now every person who leaves Chipotle with a stomach ache is going to think they may have a lawsuit and report it.  If I saw mice at a mom & pop, I'd just get up and leave (and be disgusted...).  If I saw mice at Chipotle, I'd take a video of it and call the local news.  That's the problem. 

[JayGatsby]

It's still my belief that it's the safest place to eat anywhere with the measures they've implemented.

 

Mine too.  But that doesn't stop the average person from seeing e Coli, norovirus, and rats falling from the ceiling as a pattern of a disgusting restaurant.  As an investor, you're going to do much more research on these issues than the average person who won't 1) realize the e Coli is possible at every restaurant but since Chipotle is high profile and has 2,300 locations is more likely to get a reported case, 2) realize norovirus came from somebody outside of the restaurant, not the food, and 3) realize that it's not that crazy to think there would be a hole in one of 2,300 buildings at some point in time that would allow some mice in that were immediately exterminated.  All the average person sees is the headline.

 

Just like I said the other day, now every person who leaves Chipotle with a stomach ache is going to think they may have a lawsuit and report it.  If I saw mice at a mom & pop, I'd just get up and leave (and be disgusted...).  If I saw mice at Chipotle, I'd take a video of it and call the local news.  That's the problem.

Agreed. There's a lot of subconscious thought involved in food. It's like those mind association tests that psychologists do. If I say Chipotle and the first thing you say is guacamole, that's good. If I say Chipotle and you say norovirus, you probably won't be rushing out for a burrito.

 

Valuation is reasonable. Think the risk/reward is good here. If you annualize the last quarter they'd do a bit more than $450M of EBITDA. On a $9.5B TEV that's about 21x. McD is at 16x (although that seems awfully high to me). With the price increases Chipotle pushed through they should do better. Not deep value, but I think the risk/reward is reasonable. I do agree with others that the market has become more saturated, so unclear how long they can keep adding 200 a year. Last week I was thinking of buying more but may just hold onto what I have.

[JayGatsby]

Is there any rational argument for a shareholder lawsuit such as this one, other than that it's good for lawyers?: https://www.bloomberg.com/news/articles/2017-07-21/chipotle-sued-by-shareholder-following-latest-sickness-outbreak-j5eb0gzz

 

I see these things a lot and I've never understood them. There was one reported widely a week or so ago when Arconic shares were down. Aren't you basically sueing yourself? Maybe that's why the courts threw out the last one. I could maybe understand if they were against directors/officers but they seem to be against the company itself.

[sys]

this is extremely tangential to the discussion, but i can't help myself - the rodents in the video aren't house mice, they're baby rats (probably norwegian rats, but possibly black rats).  probably about 4 weeks old, maybe a little younger.

[WneverLOSE]

Is there any rational argument for a shareholder lawsuit such as this one, other than that it's good for lawyers?: https://www.bloomberg.com/news/articles/2017-07-21/chipotle-sued-by-shareholder-following-latest-sickness-outbreak-j5eb0gzz

 

I see these things a lot and I've never understood them. There was one reported widely a week or so ago when Arconic shares were down. Aren't you basically sueing yourself? Maybe that's why the courts threw out the last one. I could maybe understand if they were against directors/officers but they seem to be against the company itself.

 

a 0.01% owner suing the company for a sum that represent a 1% or 2% or 100% you name it of the company value, that's how you really make that lucrative 10x  8)

[JayGatsby]

Tried the queso. It was good, but not a game changer in my opinion. We got a side of it with chips for ~$3.50... came in one of those plastic cups they serve guac in. You could get a bigger cup for ~$5.50 or get it on the burrito for less. Next time maybe I'll try it on the burrito. The flavor was definitely good, but didn't have me rushing to scoop it onto my burrito (it's a pretty sharp cheddar flavor as opposed to the monterey jack type that most places have). I'm usually full enough from the burrito that I don't need a side, so doubt I'll end up ordering it much. Not sure if that helps anyone's investment thesis, but talking about food poisoning and how long the lines are was getting a bit old.

 

Also, I thought they'd raised the price from $6.50 to ~$6.85 but today it was $6.50. I could be wrong there... I'll ask next time if the price changed.

[TwoCitiesCapital]

Tried the queso. It was good, but not a game changer in my opinion. We got a side of it with chips for ~$3.50... came in one of those plastic cups they serve guac in. You could get a bigger cup for ~$5.50 or get it on the burrito for less. Next time maybe I'll try it on the burrito. The flavor was definitely good, but didn't have me rushing to scoop it onto my burrito (it's a pretty sharp cheddar flavor as opposed to the monterey jack type that most places have). I'm usually full enough from the burrito that I don't need a side, so doubt I'll end up ordering it much. Not sure if that helps anyone's investment thesis, but talking about food poisoning and how long the lines are was getting a bit old.

 

Also, I thought they'd raised the price from $6.50 to ~$6.85 but today it was $6.50. I could be wrong there... I'll ask next time if the price changed.

 

As long as people keep talking about norovirus, they keep offering me BOGO deals. That's been a much better return on my investment than the stock lol

[JayGatsby]

As long as people keep talking about norovirus, they keep offering me BOGO deals. That's been a much better return on my investment than the stock lol

This latest one via text message never came through for me :(

[JayGatsby]

Crazy stats:

Restaurant same-store sales fell 2.8% in July, according to data from Black Box Intelligence.

 

Comparable traffic was down 4.7%, a 170 bps decline from the pace seen in June.

 

Blackbox read: "Calculated on a two-year basis, sales in July 2017 were down -4.2 percent compared with July of 2015. Same-store traffic was -8.7 percent for that same period. These are the weakest two-year growth rates in over three years, additional evidence that the industry has not reversed the downward trend that began in early 2015."

https://seekingalpha.com/news/3288705-sharp-drop-u-s-restaurant-traffic-july

Combination of increased supply and decreased demand in a business with high operating leverage. We may finally be seeing a change to the supply proliferation. On the RICK conference call the CEO said the biggest challenge on franchising their restaurant concept is that franchisees are seeing decreasing comps in their existing businesses and are being exceptionally cautious despite what's actually a pretty profitable concept (at least before franchise fee). Other fast casual are actively closing stores: http://www.denverpost.com/2017/02/09/noodles-co-closing-restaurants/ . The flip side of that is it may be difficult for CMG to continue adding stores to a generally saturated market. A lot of my investment thesis is based on them adding ~200 stores a year with economics that are worse than they've achieved in the past but still quite good.

[JayGatsby]

If we take today's enterprise value ($7.9B) and last quarter's run-rate EBITDA assuming no seasonality (~$600M) we have an EBITDA multiple of 13, which is roughly in line with comps.

 

Key risks from here are:

Comps are overvalued

Negative industry trends continue

Growth reaches saturation, international never materializes

Last round of headlines scared away some customers (ie, $600M is overstated)

More headlines (whether real issues or not)

 

Upsides are:

Customers return (EBITDA gets back to pre-ecoli levels)

Pricing

Continue to add 200 [domestic] stores a year

Competitor closures (likely limited impact... there's a lot of restaurant choices and may still be more net adds than subtractions)

 

Anything I'm missing?

[AzCactus]

I think you touched on it but I think we need to do more than touch on it we need to really explore it and that's the potential reputation harm that may or may not be beyond repair.  If you ask people what they think of Chipotle and you hear ---dirty, rats, sick etc. you have a bad business. If the words are healthy, fast, affordable, sustainability you have a great business.  I am long CMG but believe that the road to recovery will be longer than initially thought. 

[Matson125]

My opinion is that the latest round of issues-rats and norovirus were mostly felt within the investment community and not in the general public.  I asked folks I knew who didn't follow CMG as an investment and none of them knew about either issues.  I walked by a few locations at lunch immediately after the scare and the line ups were 2 dozen deep each time.

[JayGatsby]

I think you touched on it but I think we need to do more than touch on it we need to really explore it and that's the potential reputation harm that may or may not be beyond repair.  If you ask people what they think of Chipotle and you hear ---dirty, rats, sick etc. you have a bad business. If the words are healthy, fast, affordable, sustainability you have a great business.  I am long CMG but believe that the road to recovery will be longer than initially thought.

Agree 100%. The argument that Chipotle had a superior reputation that has been permanently tarnished likely holds water. So whereas Jack in the Box was known for low quality food before their food safety issues, Chipotle has a harder mountain to climb to get back to where they once sat.

 

Just thinking about upside versus downside. Previously I was paying as though they were going to get back to $1B of EBITDA and then I got the benefit of any growth. Today I'm paying for current earnings and then I get the benefit of any rebound in traffic / pricing. Although I'm still paying a high multiple of current earnings, even though that's "market".

 

My opinion is that the latest round of issues-rats and norovirus were mostly felt within the investment community and not in the general public.  I asked folks I knew who didn't follow CMG as an investment and none of them knew about either issues.  I walked by a few locations at lunch immediately after the scare and the line ups were 2 dozen deep each time.

On the last call they said sales were down ~5.5% after those incidents. I doubt the rats had much of an issue, but the norovirus created a lot of headlines. I saw posts on my Facebook wall about it (from non-investors). Not sure how permanent the impact will be.

[BRK7]

On the July 25 earnings call, management seemed quite enthusiastic about the potential of their "queso" product.

 

Queso has since been launched in test markets, and is, I believe, now scheduled for national rollout.

 

I am wondering about the opinions of those who have tried queso.

 

I tried queso twice during the rollout period.  I didn't think it was bad, but I wouldn't be willing to pay extra for it, and I certainly wouldn't go to Chipotle specifically for the queso (though I like the food otherwise, and am a regular customer).  I thought the queso had a slightly grainy consistency, with more flavor coming from the peppers in the mix than from the cheese itself.

 

A couple of other (highly anecdotal) data points:

 

In 3 trips to Chipotle since the queso rollout, I've not frequently seen it on customer tables.  Very roughly 1 in 10 tables.  Maybe that changes as awareness of the product grows, though the order takers were proactively asking customers if they wanted to "add queso".

 

I had an opportunity to speak privately with one the food preparers, and he told me that he thought queso worked well within a burrito or similar, but not so much as a standalone dip.  The more I think about it, the more I agree with him.

 

Of course, all of this is highly anecdotal and based upon observations at a single Chipotle location. 

 

Does anyone else care to share their observations or opinions on queso?

 

 

[Guest roark33]

I eat at CMG at least 3 times a week.  I have tried the queso, I like it better with chips, but I actually don't like their chips.  I don't get it on salads, but it is good on burritos.  From a profit perspective, I think it is very high margin, with little downside, hence the rollout.  In my location, they took out chorizo, not sure if they are doing that everywhere.