CHIPOTLE MEXICAN GRILL INC CMG
August 28, 2017 - 7:10pm EST by
Den1200
2017 2018
Price: 312.00 EPS 0 0
Shares Out. (in M): 29 P/E 0 0
Market Cap (in $M): 8,890 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 8,890 TEV/EBIT 0 0

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  • Broken Ackman value trap
  • Restaurant

Description

Well Chipotle finally reached a price of $311 a share. Given the quality of the business and its prospects I think that is attractive.

CMG was doing very well until 2015. It kept opening more restaurants, while the comparable store sales continued to increase at a fast clip which allowed for restaurant and operating margins to improve at a fast clip. Basically it was a virtuous cycle for the company that resulted in excellent ROICs. Here are some numbers through 2014.

 

2014

2013

2012

2011

2010

2009

2008

2007

Number of Restaurants

                    1,783

                 1,595

                 1,410

           1,230

           1,084

               956

               837

               704

Comparable Sales

16.80%

5.60%

7.10%

11.20%

9.40%

2.20%

5.80%

10.80%

Average Restaurant Sales

 $2,472

 $2,169

 $2,113

 $2,013

 $1,840

 $1,728

 $1,763

 $1,734

Restaurant Level Operating Margin

27.20%

26.60%

27.10%

26.00%

26.70%

24.90%

21.50%

22.34%

Operating Margin

17.3%

16.6%

16.7%

15.4%

15.7%

13.4%

9.3%

10.0%

 

Then CMG was hit with not one, but six food safety events in the period from July 2015 through November 2015. Three E.Coli outbreaks, one Salmonella outbreak and two Norovirus outbreaks. Then in July 2017 we had another Norovirus outbreak. While it is hard to have 100% food safety it was clear that there was a problem. So during the 2015 and 2016 period CMG made significant efforts to improve it food safety. Despite the latest Norovirus outbreak I feel confident that they largely fixed the problem. Norovirus is hard to protect oneself against 100% as a restaurant. One customer or employee can bring it in, which is what happened in each of the instances of Norovirus at CMG.

This all had a significant impact on the business as the numbers for 2015 and 2016 show. Things went from great to horrendous as average restaurant sales went from a high of $2.472 million in 2014 to $1.868 million in 2016. At the same time CMG had significant expenses in fixing the food safety issues and spending on marketing to drive more traffic to the stores.

 

2016

2015

Number of Restaurants

                    2,250

                 2,010

Comparable Sales

-20.4%

0.2%

Average Restaurant Sales

 $1,868

 $2,424

Restaurant Level Operating Margin

12.80%

26.10%

Operating Margin

0.9%

17.0%

 

But things have been improving during Q1 and Q2 2017 as shown below. Average restaurant sales have increased again to $1.957 million. We are not yet back to where we want to be but it is an encouraging trends to see average restaurant sales increase by close to $100K over the last two quarters versus Q4 2016

 

Q2 1017

Q1 2017

Q4 2016

Q3 2016

Q2 2016

Q1 2016

Q4 2015

Q3 2015

Comparable Sales

8.1%

17.8%

-4.8%

-21.9%

-23.6%

-29.7%

-14.6%

2.6%

Average Restaurant Sales

 $1,957

 $1,931

 $1,868

 $1,914

 $2,067

 $2,230

 $2,424

 $2,532

Restaurant Level Operating Margin

18.8%

17.7%

13.5%

14.1%

15.5%

6.8%

19.6%

28.3%

 

What is also interesting is how CMG management has continued to open new restaurants. In 2016 the number of restaurants opened actually accelerated to 243. In the first two quarters of 2017 they added another 107 restaurants. CMG spends about $900K to open a restaurant. What this means is that if you look at the capex it is fairly easy to figure out that maintenance capex for CMG is low. Therefore I think the best way to value CMG is using adjusted maintenance free cash flow.

Adjusted Maintenance Free Cash Flow

2016

2015

2014

2013

2012

2011

Operating Cash Flow

               349,242

             683,316

             682,067

         528,780

         419,963

         411,096

Capex

               258,842

             257,418

             252,590

         199,926

         197,037

         151,147

Number of stores opened

                        243

                     229

                     192

                 185

                 183

                 150

$900K per store

               218,700

             206,100

             172,800

         166,500

         164,700

         135,000

Maintenance Capex

                  40,142

               51,318

               79,790

           33,426

           32,337

           16,147

Pre-Opening Costs

                  17,162

               16,922

               15,609

           15,511

           11,909

             8,495

Adjustment for pre-opening costs

                  22,980

               34,396

               64,181

           17,915

           20,428

             7,652

Adjusted Free Cash Maint Capex

               326,262

             648,920

             617,886

         510,865

         399,535

         403,444

Adjusted Free Cash Maint Capex Per Average Store

                        153

                     342

                     366

                 340

                 303

                 349

 

I believe that it is highly likely that CMG will be able to return to some form of its previous performance. Clearly the mix of social media and these repeated food safety issues was toxic, but CMG is pro-actively addressing them. Many new procedures were put in place and the same as happened with other food safety alarms for other companies, CMG seems to have fixed the problem. The main worry I have is that the Norovirus makes another return. The problem is that the Norovirus is highly contagious and just an employee that decides to come to work sick can start it.

If the food safety issue is truly behind us, then I do not see why revenues per store should not return to its old growth path. The reason being that Chipotle is just a great offering for the customer. You get an excellent quality meal for the price you pay. I am an avid Chipotle eater and early 2016 I even back off as the news was seemed so bad, but soon I ended up finding my way back. What else should I get for lunch? KFC, MCD, Subway? Even the nutritional value of a Panera meal does not come close to what is on offer at Chipotle. (Yes, I know it is high in sodium.) If it was not for the food safety issues, I would guess that revenues per restaurant by now would have been higher than the $2.472 million in 2014.

Here is the way I get to my valuation:

Free Cash Flow Maint Capex Valuation

   

Number of restaurants

                    2,399

 

Adjusted Free Cash Flow Maint Capex Per Store

                        340

(average from 2011 through 2016)

Total Adj Free Cash Flow Maint Capex

               815,660

 

Number of shares

         28,511.853

 

Adjusted Free Cash Flow Maint Exp Per Share

                    28.61

 

 

If I take the average of the adjusted free cash flow per store for the years 2011 through 2015, I get $340K in adjusted free cash flow. Multiply that by the amount of stores we had at the end of Q2 2017 and divide that number by the amount of shares outstanding at the end of Q2 and we get $28.61 in adjusted free cash flow per share on a normalized basis. That is about a 9.2% free cash flow yield once the business normalizes.

Then we also have the potential continued growth. The number management keeps throwing out is a minimum of 4,000 restaurants.

If we add 1,600 restaurants using the same $340K in average adjusted maintenance free cash flow per restaurant. Then we get additional adjusted free cash flow of $19.07 per share. Now that will also cost an additional 1.44 billion in growth capex.

So let us add the $19.07 to $28.61 and we get $47.68 in adjusted maintenance free cash flow with 4,000 restaurants which gives us a 15.3% yield. Now it will take some time to get to 4,000 restaurants. At the current pace they should get there in about 8 years. If we assume that the company should then trade at a 15 multiple $715.2 per share or a market cap of $20.4 billion. Deduct the $1.44 billion in growth capex and I get a market cap of $18.95 billion or $664 per share.

Now I do believe we will not have to wait too long before we actually get a higher price for our CMG shares. As the whole food safety issue abates over time, demand for the stock should increase. A good way to think about stocks I feel is that “you will always make way more money when things go from truly awful to merely bad, than when they go from good to better”. Well to me it seems the CMG stock is trading at a price as if things are still pretty awful, while the company has already made significant progress and we are already at the merely bad phase on the way to good.

Now here is why I really like CMG … and it is called Pizzeria Locale. CMG management has talked in the past about implementing the same processes of serving food used by Chipotle restaurants for other foods. I think CMG management is on the right track there. They started up Shophouse, but recently closed it down, because management was not seeing the financial restaurant level results it was hoping for. A good sign of disciplined management I believe. I believe Ells personally spent a lot of developing the concept, but when it did not meet the necessary hurdle they killed it. Then they also just opened Tasty Made, a hamburger concept, and opened one restaurant. I have no idea if this will be a successful concept, but it is a good try. Because in the end for CMG stock to have the potential to become one of those stocks that goes up many more times in value, we need one of these concepts to work. If CMG can do another concept like Chipotle and open another 4,000 restaurants over the next few decades, the numbers will become crazy. And once investors believe there is another concept that is successful CMG stock should sell for significantly more. And I think that new concept is Pizzeria Locale. Pizzeria Locale is a new pizza concept following the Chipotle principles. It is a joint venture with Denver based entrepreneurs that currently have a majority stake, but the agreement with CMG is that once Pizzeria Locale is large enough CMG has an option to buy a majority stake. I am not sure how much that majority stake will be, but honestly, I would guess that the moment CMG thinks it is ready to put a lot of money behind the Pizzeria Locale concept, they will just buyout the current owners. So why do I like Pizzeria Locale so much? Well the first Pizzeria Locale was opened 4 blocks from my house a number of years ago. Since I had moved to my current place that same location had had in short order 2 other pizza places in the same location and both were busts. Actually when they were building this Pizzeria Locale I thought “another idiot trying to do pizza where two others failed”. And I was wrong. I eat at this place often and each time it is busy. I can already hear you say “it’s just another pizza place”. But I believe it is not. And so do many other patrons think because every time I pass by there, there is a nice crowd in there. It is more of a dinner crowd than lunch, but even at lunch I often see a decent crowd in there. It is very similar to Chipotle, in that you line up, order your pizza. They make it there right in front of you, then they drop it into this proprietary oven burning at 1,000 degrees that turns and two minutes later, when your pizza has gone around one turn, your pizza comes out ready to eat. It is low cost as you do not need anyone to really pay attention to the pizza, except to make sure they take it out after the first lap. While you wait you get to order your salad, meatballs, Prosciutto, dessert, soda or alcohol. You pay and take your food to a table. It takes a little longer than going through a Chipotle line, but not much. All the items are of great quality and it ranks with the best pizza I have eaten. I remember telling a friend what a great concept it was when it opened and I have come to appreciate it more over time. Sitting at my table I have looked at every aspect of what is going on and I feel the economics must be very much in line with Chipotle restaurants. Basically the pizza is an 11 inch dough with cheese, marinara sauce and some toppings. The next item on the menu are the Prosciutto and the meatballs which should have a decent margin and then there are the salads, soda, alcohol and the one dessert they sell. Many at night also order alcohol which is high margin. I just don’t see how Pizzeria Locale doesn’t have at least similar margins as Chipotle. And then there is the revenue number. At $2.5 million in revenue a Pizzeria Locale would have to generate about $6,850 per day. I believe they hit that number. Especially on weekends the place is packed all day it seems. I assume an average check size of $10, but I believe that to be conservative as I see many people ordering multiple items and alcohol with their meal. If/When Pizzeria Locale does become a CMG business I think it will reenergize the market cap of the company. Imagine if you the Chipotle concept had a runway of 8,000 more restaurants rather than the 1,600 I assumed. If I am right, I think Pizzeria Locale could be bigger than the Chipotle concept. It is hard to transfer the Chipotle concept outside of the US. Mexican like food is just not as accepted in many overseas areas. But Pizza is. I think this concept would do just as well internationally as it would do in the US. Anyway, I know this sounds like an enormously bullish story, but I have now eaten at that place for a number of years on a weekly basis and it is just a great quality product. Some will say “It is just pizza, everyone can do it”. Well everyone can make Burritos too. Also from what I learned the oven is a differentiator. The oven was developed internally with the help of CMG where CMG brought an engineering team together to design it. From what I learned they are on their 7th iteration of the oven. So yes, other companies could do the same. But you will need money to develop the oven. Lastly if one compares the capex needed to open a Pizzeria Locale I have a hard time seeing how the average new Pizzeria Locale would cost more than a new Chipotle restaurant, for Pizzeria Locale does not need the same size kitchen as Chipotle does. So ROIC should be similar. The one downside argument against Pizzeria Locale is that the pizza is mostly useless carbs, where at Chipotle they serve more nutritious food. Lastly one might question why CMG hasn’t put more money behind Pizzeria Locale. I think for now CMG management has its hands full fixing the Chipotle restaurants and do not have the bandwidth to take on Pizzeria Locale. Also I think it might make sense to allow Pizzeria Locale to work out the concept completely before blowing it out. Anyway, even if I am wrong and Pizzeria Locale does not become a CMG concept I think we are still covered well with just the Chipotle restaurants at a valuation around $311 per share.

Risks:

More food safety issues will likely impact the price of CMG stock negatively. I am not too worried about the Norovirus issue. Each time it has turned out that it was caused by a sick employee that was made to work by a manager. CMG has implemented many new food safety rules, like all employees need to wash their hands every 30 minutes. If we get more E.Coli and Salmonella incidences then I would start worrying.

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

Continued improvement of restaurant metrics.

CMG putting its muscle behind Pizzeria Locale.

 

    sort by    

    Description

    Well Chipotle finally reached a price of $311 a share. Given the quality of the business and its prospects I think that is attractive.

    CMG was doing very well until 2015. It kept opening more restaurants, while the comparable store sales continued to increase at a fast clip which allowed for restaurant and operating margins to improve at a fast clip. Basically it was a virtuous cycle for the company that resulted in excellent ROICs. Here are some numbers through 2014.

     

    2014

    2013

    2012

    2011

    2010

    2009

    2008

    2007

    Number of Restaurants

                        1,783

                     1,595

                     1,410

               1,230

               1,084

                   956

                   837

                   704

    Comparable Sales

    16.80%

    5.60%

    7.10%

    11.20%

    9.40%

    2.20%

    5.80%

    10.80%

    Average Restaurant Sales

     $2,472

     $2,169

     $2,113

     $2,013

     $1,840

     $1,728

     $1,763

     $1,734

    Restaurant Level Operating Margin

    27.20%

    26.60%

    27.10%

    26.00%

    26.70%

    24.90%

    21.50%

    22.34%

    Operating Margin

    17.3%

    16.6%

    16.7%

    15.4%

    15.7%

    13.4%

    9.3%

    10.0%

     

    Then CMG was hit with not one, but six food safety events in the period from July 2015 through November 2015. Three E.Coli outbreaks, one Salmonella outbreak and two Norovirus outbreaks. Then in July 2017 we had another Norovirus outbreak. While it is hard to have 100% food safety it was clear that there was a problem. So during the 2015 and 2016 period CMG made significant efforts to improve it food safety. Despite the latest Norovirus outbreak I feel confident that they largely fixed the problem. Norovirus is hard to protect oneself against 100% as a restaurant. One customer or employee can bring it in, which is what happened in each of the instances of Norovirus at CMG.

    This all had a significant impact on the business as the numbers for 2015 and 2016 show. Things went from great to horrendous as average restaurant sales went from a high of $2.472 million in 2014 to $1.868 million in 2016. At the same time CMG had significant expenses in fixing the food safety issues and spending on marketing to drive more traffic to the stores.

     

    2016

    2015

    Number of Restaurants

                        2,250

                     2,010

    Comparable Sales

    -20.4%

    0.2%

    Average Restaurant Sales

     $1,868

     $2,424

    Restaurant Level Operating Margin

    12.80%

    26.10%

    Operating Margin

    0.9%

    17.0%

     

    But things have been improving during Q1 and Q2 2017 as shown below. Average restaurant sales have increased again to $1.957 million. We are not yet back to where we want to be but it is an encouraging trends to see average restaurant sales increase by close to $100K over the last two quarters versus Q4 2016

     

    Q2 1017

    Q1 2017

    Q4 2016

    Q3 2016

    Q2 2016

    Q1 2016

    Q4 2015

    Q3 2015

    Comparable Sales

    8.1%

    17.8%

    -4.8%

    -21.9%

    -23.6%

    -29.7%

    -14.6%

    2.6%

    Average Restaurant Sales

     $1,957

     $1,931

     $1,868

     $1,914

     $2,067

     $2,230

     $2,424

     $2,532

    Restaurant Level Operating Margin

    18.8%

    17.7%

    13.5%

    14.1%

    15.5%

    6.8%

    19.6%

    28.3%

     

    What is also interesting is how CMG management has continued to open new restaurants. In 2016 the number of restaurants opened actually accelerated to 243. In the first two quarters of 2017 they added another 107 restaurants. CMG spends about $900K to open a restaurant. What this means is that if you look at the capex it is fairly easy to figure out that maintenance capex for CMG is low. Therefore I think the best way to value CMG is using adjusted maintenance free cash flow.

    Adjusted Maintenance Free Cash Flow

    2016

    2015

    2014

    2013

    2012

    2011

    Operating Cash Flow

                   349,242

                 683,316

                 682,067

             528,780

             419,963

             411,096

    Capex

                   258,842

                 257,418

                 252,590

             199,926

             197,037

             151,147

    Number of stores opened

                            243

                         229

                         192

                     185

                     183

                     150

    $900K per store

                   218,700

                 206,100

                 172,800

             166,500

             164,700

             135,000

    Maintenance Capex

                      40,142

                   51,318

                   79,790

               33,426

               32,337

               16,147

    Pre-Opening Costs

                      17,162

                   16,922

                   15,609

               15,511

               11,909

                 8,495

    Adjustment for pre-opening costs

                      22,980

                   34,396

                   64,181

               17,915

               20,428

                 7,652

    Adjusted Free Cash Maint Capex

                   326,262

                 648,920

                 617,886

             510,865

             399,535

             403,444

    Adjusted Free Cash Maint Capex Per Average Store

                            153

                         342

                         366

                     340

                     303

                     349

     

    I believe that it is highly likely that CMG will be able to return to some form of its previous performance. Clearly the mix of social media and these repeated food safety issues was toxic, but CMG is pro-actively addressing them. Many new procedures were put in place and the same as happened with other food safety alarms for other companies, CMG seems to have fixed the problem. The main worry I have is that the Norovirus makes another return. The problem is that the Norovirus is highly contagious and just an employee that decides to come to work sick can start it.

    If the food safety issue is truly behind us, then I do not see why revenues per store should not return to its old growth path. The reason being that Chipotle is just a great offering for the customer. You get an excellent quality meal for the price you pay. I am an avid Chipotle eater and early 2016 I even back off as the news was seemed so bad, but soon I ended up finding my way back. What else should I get for lunch? KFC, MCD, Subway? Even the nutritional value of a Panera meal does not come close to what is on offer at Chipotle. (Yes, I know it is high in sodium.) If it was not for the food safety issues, I would guess that revenues per restaurant by now would have been higher than the $2.472 million in 2014.

    Here is the way I get to my valuation:

    Free Cash Flow Maint Capex Valuation

       

    Number of restaurants

                        2,399

     

    Adjusted Free Cash Flow Maint Capex Per Store

                            340

    (average from 2011 through 2016)

    Total Adj Free Cash Flow Maint Capex

                   815,660

     

    Number of shares

             28,511.853

     

    Adjusted Free Cash Flow Maint Exp Per Share

                        28.61

     

     

    If I take the average of the adjusted free cash flow per store for the years 2011 through 2015, I get $340K in adjusted free cash flow. Multiply that by the amount of stores we had at the end of Q2 2017 and divide that number by the amount of shares outstanding at the end of Q2 and we get $28.61 in adjusted free cash flow per share on a normalized basis. That is about a 9.2% free cash flow yield once the business normalizes.

    Then we also have the potential continued growth. The number management keeps throwing out is a minimum of 4,000 restaurants.

    If we add 1,600 restaurants using the same $340K in average adjusted maintenance free cash flow per restaurant. Then we get additional adjusted free cash flow of $19.07 per share. Now that will also cost an additional 1.44 billion in growth capex.

    So let us add the $19.07 to $28.61 and we get $47.68 in adjusted maintenance free cash flow with 4,000 restaurants which gives us a 15.3% yield. Now it will take some time to get to 4,000 restaurants. At the current pace they should get there in about 8 years. If we assume that the company should then trade at a 15 multiple $715.2 per share or a market cap of $20.4 billion. Deduct the $1.44 billion in growth capex and I get a market cap of $18.95 billion or $664 per share.

    Now I do believe we will not have to wait too long before we actually get a higher price for our CMG shares. As the whole food safety issue abates over time, demand for the stock should increase. A good way to think about stocks I feel is that “you will always make way more money when things go from truly awful to merely bad, than when they go from good to better”. Well to me it seems the CMG stock is trading at a price as if things are still pretty awful, while the company has already made significant progress and we are already at the merely bad phase on the way to good.

    Now here is why I really like CMG … and it is called Pizzeria Locale. CMG management has talked in the past about implementing the same processes of serving food used by Chipotle restaurants for other foods. I think CMG management is on the right track there. They started up Shophouse, but recently closed it down, because management was not seeing the financial restaurant level results it was hoping for. A good sign of disciplined management I believe. I believe Ells personally spent a lot of developing the concept, but when it did not meet the necessary hurdle they killed it. Then they also just opened Tasty Made, a hamburger concept, and opened one restaurant. I have no idea if this will be a successful concept, but it is a good try. Because in the end for CMG stock to have the potential to become one of those stocks that goes up many more times in value, we need one of these concepts to work. If CMG can do another concept like Chipotle and open another 4,000 restaurants over the next few decades, the numbers will become crazy. And once investors believe there is another concept that is successful CMG stock should sell for significantly more. And I think that new concept is Pizzeria Locale. Pizzeria Locale is a new pizza concept following the Chipotle principles. It is a joint venture with Denver based entrepreneurs that currently have a majority stake, but the agreement with CMG is that once Pizzeria Locale is large enough CMG has an option to buy a majority stake. I am not sure how much that majority stake will be, but honestly, I would guess that the moment CMG thinks it is ready to put a lot of money behind the Pizzeria Locale concept, they will just buyout the current owners. So why do I like Pizzeria Locale so much? Well the first Pizzeria Locale was opened 4 blocks from my house a number of years ago. Since I had moved to my current place that same location had had in short order 2 other pizza places in the same location and both were busts. Actually when they were building this Pizzeria Locale I thought “another idiot trying to do pizza where two others failed”. And I was wrong. I eat at this place often and each time it is busy. I can already hear you say “it’s just another pizza place”. But I believe it is not. And so do many other patrons think because every time I pass by there, there is a nice crowd in there. It is more of a dinner crowd than lunch, but even at lunch I often see a decent crowd in there. It is very similar to Chipotle, in that you line up, order your pizza. They make it there right in front of you, then they drop it into this proprietary oven burning at 1,000 degrees that turns and two minutes later, when your pizza has gone around one turn, your pizza comes out ready to eat. It is low cost as you do not need anyone to really pay attention to the pizza, except to make sure they take it out after the first lap. While you wait you get to order your salad, meatballs, Prosciutto, dessert, soda or alcohol. You pay and take your food to a table. It takes a little longer than going through a Chipotle line, but not much. All the items are of great quality and it ranks with the best pizza I have eaten. I remember telling a friend what a great concept it was when it opened and I have come to appreciate it more over time. Sitting at my table I have looked at every aspect of what is going on and I feel the economics must be very much in line with Chipotle restaurants. Basically the pizza is an 11 inch dough with cheese, marinara sauce and some toppings. The next item on the menu are the Prosciutto and the meatballs which should have a decent margin and then there are the salads, soda, alcohol and the one dessert they sell. Many at night also order alcohol which is high margin. I just don’t see how Pizzeria Locale doesn’t have at least similar margins as Chipotle. And then there is the revenue number. At $2.5 million in revenue a Pizzeria Locale would have to generate about $6,850 per day. I believe they hit that number. Especially on weekends the place is packed all day it seems. I assume an average check size of $10, but I believe that to be conservative as I see many people ordering multiple items and alcohol with their meal. If/When Pizzeria Locale does become a CMG business I think it will reenergize the market cap of the company. Imagine if you the Chipotle concept had a runway of 8,000 more restaurants rather than the 1,600 I assumed. If I am right, I think Pizzeria Locale could be bigger than the Chipotle concept. It is hard to transfer the Chipotle concept outside of the US. Mexican like food is just not as accepted in many overseas areas. But Pizza is. I think this concept would do just as well internationally as it would do in the US. Anyway, I know this sounds like an enormously bullish story, but I have now eaten at that place for a number of years on a weekly basis and it is just a great quality product. Some will say “It is just pizza, everyone can do it”. Well everyone can make Burritos too. Also from what I learned the oven is a differentiator. The oven was developed internally with the help of CMG where CMG brought an engineering team together to design it. From what I learned they are on their 7th iteration of the oven. So yes, other companies could do the same. But you will need money to develop the oven. Lastly if one compares the capex needed to open a Pizzeria Locale I have a hard time seeing how the average new Pizzeria Locale would cost more than a new Chipotle restaurant, for Pizzeria Locale does not need the same size kitchen as Chipotle does. So ROIC should be similar. The one downside argument against Pizzeria Locale is that the pizza is mostly useless carbs, where at Chipotle they serve more nutritious food. Lastly one might question why CMG hasn’t put more money behind Pizzeria Locale. I think for now CMG management has its hands full fixing the Chipotle restaurants and do not have the bandwidth to take on Pizzeria Locale. Also I think it might make sense to allow Pizzeria Locale to work out the concept completely before blowing it out. Anyway, even if I am wrong and Pizzeria Locale does not become a CMG concept I think we are still covered well with just the Chipotle restaurants at a valuation around $311 per share.

    Risks:

    More food safety issues will likely impact the price of CMG stock negatively. I am not too worried about the Norovirus issue. Each time it has turned out that it was caused by a sick employee that was made to work by a manager. CMG has implemented many new food safety rules, like all employees need to wash their hands every 30 minutes. If we get more E.Coli and Salmonella incidences then I would start worrying.

    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

    Continued improvement of restaurant metrics.

    CMG putting its muscle behind Pizzeria Locale.

     

    Messages


    SubjectNice writeup
    Entry08/29/2017 08:51 AM
    Memberjim211

    I've been looking at this too and as with any turnaround it just begs the question what is the probability that past normal is normal for the future?

    What I didn't see in your writeup and am interested in your thoughts on is whether there are just too many of these things.  Not just Chipotle's but me-too competitors as well.  There are more Chipotle's near my house than five years ago and there are also more Qdobas and some that are probably local me-too chains.  I like Chipotle, but I am fairly indifferent between that and Qdoba.

    If you are right that the health issue is behind them, this would seem to be the biggest reason why "back to normal" might not be a sure thing.  Wondering how you handicap that question.


    SubjectRe: Nice writeup
    Entry08/29/2017 02:52 PM
    MemberSpocksBrainX

    minor

    -in the last call (which I happen to be reading today) management noted that development costs are now down to $760k (which does not include marketing for new units which they didn't quantify...)

     thanks for the writeup


    SubjectRe: Re: Nice writeup
    Entry08/29/2017 05:12 PM
    MemberValue1929

    What I'm not seeing is your assumptions on how you arrive at $800mn+ adj. FCF (main. Capex) and time-frame? Restaurant level operating margins are still stuck in the teens at 18.8%, it looks to me that you're assuming almost a full margin recovery? Also, your maintenance Capex levels look way too low, it should trend with the store-count increase, no?

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