CMG 16Q4 Earnings and Analysis

Chipotle’s 4Q16 financial results were a bit of a mixed bag – there were encouraging aspects, while other angles were disheartening.

This earnings report is the first one (since I’ve been covering the company) where Chief Executive Officer (CEO) Steve Ells is the sole man in charge. He seemed to have two messages he wanted to convey as overarching themes for the call – and for the company itself. First, he thinks Chipotle got overly complex, and he’s going to simplify it. Second, everything the company does will focus on providing an excellent customer experience.

Earnings Report Highlights

The earnings press release can be found here: http://ir.chipotle.com/phoenix.zhtml?c=194775&p=irol-new…. Seeking Alpha’s transcript of the conference call can be found here: http://seekingalpha.com/article/4042294-chipotle-mexican-gri…. (Thanks, Seeking Alpha.) Unless stated otherwise, all italicized quotations are from the Seeking Alpha transcript.

4Q16 Revenue: $1.035 billion It’s nice to finally see a positive number for year-over year revenue growth (3.7%). There was a modest decline sequentially (-0.2%), but that is not unusual from a seasonal perspective. Per Yahoo! Finance, Wall Street analysts expected $1.04 billion in revenue, so Chipotle officially missed revenue expectations, but it was a pretty small miss.


(in $ millions)
         1Q       2Q       3Q       4Q    Comments
2012    640.6    690.9    700.5    699.2

2013    726.8    816.8    826.9    844.1
Y-o-Y   13.5%    18.2%    18.0%    20.7%

2014    904.2   1050.1   1084.2   1069.8
Y-o-Y   24.4%    28.6%    31.1%    26.7%

2015   1089.0   1197.8   1216.9    997.5  4Q15 Food-borne illness crisis
Y-o-Y   20.4%    14.1%    12.2%    -6.8%

2016    834.5    998.4   1037.0    1034.6 3Q16 Chiptopia promotion
Y-o-Y  -23.4%   -16.6%   -14.8%      3.7%

4Q16 Comparable Restaurant Sales (comps): -4.8% The prior four quarters had all offered double-digit declines, so this is an improvement. Declining comps are always difficult to stomach, but the trend is favorable. Management had guided towards a low-single-digit decline; arguably that’s accurate, but this sure feels like a mid-single-digit decline to me. For those who want to focus on good news, the December comp (the first month where both months in the comparison are post-E. coli) was +14.7%. January’s comp was even better at +24.6%, made all the more impressive because last January had five Fridays and Saturdays (typically higher-volume days) while this January had five Mondays and Tuesdays (typically lower-volume days).

4Q16 Restaurant-Level Operating Margin: 13.5% I am frustrated to note that restaurant operating margins have declined for the last two quarters. While no one had expectations of an improvement over last year, I was hopeful for sequential improvement, especially in light of revenues that were virtually flat against last quarter. For comparison, 2Q16 and 3Q16 restaurant operating margins were 15.5% and 14.1%, respectively. While this is a significant improvement over 1Q16’s dismal 6.8% result, it falls well short of the 20% figure tossed around as an aspirational goal for 2017. One wonders whether/how they’ll get there from here. I’ll try to explore that in a separate section.

4Q16 Net Income: $16.0 million ($0.55 per diluted share) On the surface, this result might look pleasing – more than a doubling from last quarter, but I don’t think that’s the right way to look at it. 3Q16 included the $0.29 ShopHouse impairment charge, and certain Chiptopia-related revenues were deferred from 3Q16 into 4Q16. Wall Street expected $0.67, and it is unclear whether that amount included earnings associated with the deferred revenue.


Earnings per Share (GAAP)
         1Q      2Q      3Q      4Q    Comments
2012    1.97    2.56    2.27    1.95

2013    2.35    2.82    2.66    2.53
Y-o-Y   19.3%   10.2%   17.2%   29.7%

2014    2.64    3.50    4.15    3.84
Y-o-Y   12.3%   24.1%   56.0%   51.8%

2015    3.88    4.45    4.59    2.17  4Q15 Food-borne illness crisis
Y-o-Y   47.0%   27.1%   10.6%  -43.5%

2016   -0.88    0.87    0.27    0.55  3Q16 ShopHouse write-off
Y-o-Y    nmf%  -80.4%  -94.1%  -74.7%

4Q16 Cash Flow From Operations (CFFO): $68 million At $67 million, CapEx consumed almost the entirety of CFFO.

2017 Guidance Management has resumed giving their normal guidance of comps (high single-digit increase), new restaurant openings (195-210), and tax rate (39.0-39.5%, subject to changes in stock-based compensation accounting standards). These are very similar numbers to the “targets” offered last quarter, except their tax rate had been 39.5%. There was no official update on the earnings and restaurant-level margin targets ($10.00 and 20%, respectively), but these were the subject of much discussion during the Q&A. More later. During his prepared remarks, Chief Financial Officer (CFO) Jack Hartung indicated that he expects 2017 CapEx spending to total $225 million. I estimate that translates into 70% towards new restaurants and 30% towards “other” (e.g., restaurant upgrades and technology infrastructure).

CMG earnings day share price: $404.08 -4.54% (vs. S&P 500 +0.73%) The day’s decline seems appropriate given the disappointing (but not tragic) earnings miss and low restaurant-level operating margins, offset by the nice December and January comps.

1000 Days of Ratios Analysis
I start with a data base of the last 1000 days of trading history (about four years). For each day, I calculate the Price/Earnings, Price/Sales, and Price/Free Cash Flow ratios based on the trailing twelve-month (TTM) data that was known on that date. I sort the data on each of the metrics to see where the current ratio stands compared to the data base’s history. Finally, to identify prices that might be considered a bargain, I find the ratio value for each metric where the ratio is “cheaper” only 25% of the time.

Current Price to Earnings Ratio: 436.62 (worst 1% – range is 24.11x to 436.62x)
Current Price to Sales Ratio: 3.03 (best 9% – range is 2.78x to 5.94x)
Current Price to Free Cash Flow Ratio: 130.79 (worst 1% – range is 28.55x to 130.79x)

25% P/E cut-off ratio is 39.82x. TTM earnings per share are $0.93. P/E-based target is $36.85.
25% P/Sales cut-off ratio is 3.35x. TTM sales per share are $129.35. P/Sales-based target is $446.09.
25% P/FCF cut-off ratio is 40.74x. TTM FCF per share is $3.65. P/FCF-based target is $125.87.
Target Price: $202.94 (based on averaging the three 25% cut-off targets)

Please do NOT rely on this analysis at present. It works best for companies that are in a steady state, not in the throes of change, as Chipotle is today. As always, do your own due diligence. Tom Engle (TMF1000) has suggested applying a target PE ratio using “normalized” earnings for Chipotle, but that approach demands that you take a very long-term view (as he does). You should go to his CMG page posts to get his full thoughts on this point. I’ll point out that – pre-crisis – the TTM earnings were $16.76, TTM revenue per share was $144.96, and TTM FCF per share was $14.16. Just because they’re “pre-crisis” doesn’t necessarily make them “normalized”, though.

Financials
Food Inflation and Price Increase Philosophy
CFO Hartung said during the Q&A, “… we’ve been absorbing … inflation. We’ve not had a price increase in three years. We’re not planning any specific price increase right now. But at some point over time, we’ll need to pass on some of the higher costs. But we believe we’ll be able to do that.” I think that CFO Hartung must mean an across-the-board price hike, as I recall that there were selective price hikes within the last eighteen months associated with regions with high wage and occupancy costs, as well as price increases on beef products.

In answering a later question on the topic, CFO Hartung indicated that price increases, when they eventually occur, would likely be selectively tested in regions where Chipotle’s recovery has been strong (or where the effects of the crisis were minimal), where they felt their operations were strong, and where competitors’ prices offered them the opportunity to raise theirs. “If that goes well, we’ll consider what we do from there. But no specific plans right now to do anything with price.

Average Restaurant Sales
This metric has declined for the fifth quarter in a row. With comps turning positive, I’d expect the number to rise from this quarter’s $1.868 million. This is down about 26% from the 3Q15 peak of $2.532 million. Conversely, it would take a 34% increase to return to $2.5 million in average restaurant sales. CFO Hartung believes that restaurant-level operating margins could return to the high 20% range should that kind of volume be achieved.

Stock Repurchases
Diluted share count continues to decline, although the rate of decline seems to be slowing. This quarter’s average diluted share count id down to 29.0 million from last quarter’s 29.17 million. Chipotle purchased $67 million worth of shares at an average price of $392 this quarter.

Cash, Cash Equivalents, and Investments
Cash, short-term investments, and long-term investments declined a little from $610 million last quarter to $543 million at the end of this quarter. The company remains debt free. CFO Hartung has said in the past that he wants a buffer of $500 million in cash and investments.

$100 Million in Efficiencies
My best guess is that I will drop this subject heading after this report. Management offered no commentary about this initiative. Former co-CEO Monty Moran had introduced it last quarter, and it isn’t clear to me that the management team continues to embrace this goal. The biggest cost savings announced – perhaps ironically – is that the All Managers Conference will not be held this year. That will probably save somewhere between $10-15 million. I say “ironically” because this conference was a team-building and communication initiative introduced by former co-CEO Moran.

People
Former Co-CEO Moran
There was absolutely no mention of former co-CEO Moran. Not in the press release nor in the prepared remarks. No thanking him for years of service. Zilch. Nada. Analysts took the hint and didn’t mention his name either. While I’ve insinuated in prior posts that perhaps his model of what makes an individual Chipotle restaurant great weren’t as properly-focused as they could have been, I have mixed feelings about his departure. He’s very bright, driven, charismatic, and articulate. His focus on throughput was a key enabler of Chipotle’s unit economic model, which to my mind is what makes Chipotle an interesting investment. In many ways, his presence allowed CEO Ells to concentrate on the food, which is probably where CEO Ells shines the brightest. It also took pressure off CEO Ells’ public-speaking skills (not such a strong point). Sadly, it seems that CEO Ells let former co-CEO Moran operate a little too independently, and failed to recognize that Mr. Moran was too focused on “people” and “throughput” and not enough focused on “restaurant”. Appropriately or not, former co-CEO Moran will take the fall for Chipotle’s crisis. I don’t find him solely culpable, but I recognize that this is the way things can work in large organizations, especially when an activist shareholder starts stirring the pot. That said, as a shareholder, I’m happy to no longer be underwriting former co-CEO Moran’s compensation package.

Morale
Asking a CEO of a company – any company – to opine on morale is likely to produce a positive answer. Better to go to a variety of stores and observe the front line. In any case, here is CEO Steve Ells’ commentary on company morale: “… I think our folks appreciate that we’ve simplified it. I think that in our past, the tools that we had were sometimes more complicated than actually running a good restaurant. So we’ve really allowed now our folks – with great training, with a clear path to restaurateur, we’ve really allowed them to thrive. And so we’re starting to see a great morale.” [By the way, Seeking Alpha misattributes this quote to Chief Information Officer (CIO) Curt Garner. Trust me; it was CEO Ells.]

Food
There really wasn’t anything mentioned during the conference call that appropriately fit under this heading. No illnesses, thankfully. No new safety protocols. No mention of how chorizo is doing or how the testing of desserts is going. That seems odd for a restaurant, but I guess there are bigger concerns at present.

I’ve seen/heard of recent articles claiming that a tariff on imports of avocados from Mexico will hurt Chipotle. Of course, any cost increase “hurts”, but this is largely a canard and probably politically-motivated. The story gains plausibility because Chipotle laid partial blame on 3Q16 results to the high cost of avocados. CFO Hartung noted last quarter that a $10 increase in the price of avocados affects Chipotle’s earnings by $0.17 per share. During the first half of 2016, the average cost of a case of avocados was $30. A temporary shortage spiked the price close to $80, but prices have since subsided. A 20% tariff on $30 cases of avocados would nick Chipotle’s earnings by only ten cents. That may be noticeable while Chipotle is running close to breakeven, but it is not significant if you look at Chipotle’s historical earnings power. I don’t want to start a political discussion and I am not arguing for or against tariffs. I am trying to quantify the effect of avocado tariffs on Chipotle’s bottom line and make it clear that I don’t believe Chipotle’s investment thesis hinges on the presence or absence of avocado tariffs, despite the assertions of certain authors.

Real Estate
New Restaurants
Chipotle opened 72 new restaurants – one of their most prolific quarters ever – bringing the total to 2,250 stores, and increasing the 2016 total to 240 net openings, above the 220-235 guidance. Mr. Crumpacker, who now seems to be in charge of real estate, indicated two changes. First, new stores will be introduced to the community with marketing, citing improvement in their reception when this occurs. Second, in markets that are considered “developing” (Chipotle is not new to the market, but it’s not firmly established yet either), Chipotle will only open “Tier 1” locations.

Growth Seeds
There was no mention of any of Chipotle’s growth seeds, either in the press release or during the conference call. However, I was able to gather information from Chipotle’s web site, and there have been some changes.

In Europe, a sixth Chipotle Mexican Grill location has opened in Paris. There are still six locations in London and one in Frankfurt.

The ShopHouse count is unchanged at 15: five in Southern California, four in Maryland, four in Washington DC, and two in Chicago. This assumes the ShopHouse web site is accurate and up-to-date – an assumption that is not supported by the 2016 copyright on the bottom of each web page. That said, the Chipotle web site does still have a link on its home page to the ShopHouse web site.

The Pizzeria Locale count stands at seven: three in and around Kansas City, two in Denver, and two in Cincinnati.

There is now a link to the TastyMade web site on the Chipotle home page. TastyMade still has just one location, in Lancaster OH. Last quarter I mistakenly located it in Lancaster PA, and I regret any confusion I may have created.

Marketing and Technology
Promotions
CFO Hartung declared, “… we’ve weaned ourselves off of promo.” This is actually kind of impressive, if you look at the December and January traffic increases and realize that almost everyone was paying full price!

Mobile and Online Ordering
CEO Ells commented, “We’ have redesigned and simplified our online ordering site, enabled online payment for catering and integrated with several well-known third-party providers for delivery.” “Smarter pickup times” has been rolled out to roughly half the restaurants and should be completely rolled out shortly. Initial results indicate customer wait times have been reduced by half. The second make-line is critical to this effort, and it has been streamlined. Promotion of online ordering has started in restaurants where “smarter pickup times” is available.

Chipotle on TV
Chipotle is experimenting with television advertising. Mr. Crumpacker described mixed results from a one month trial in three test markets. Last quarter, I credited management for “broadening the playbook”. Upon further reflection – and especially in light of the mixed results – I wonder if this is a bad idea. I think that part of Chipotle’s cachet is that they became popular largely through word-of-mouth advertising. In an era when everyone everywhere is inundated with advertising incessantly, how cool is it that Chipotle grew mostly through word-of-mouth? Will their presence on TV negate some or all of that cachet? It is tough to know. Chipotle may be too large at this point for the coolness of word-of-mouth to still matter.

Other Random Musings
How Realistic Are 20% Restaurant-Level Operating Margins?
I’m not particularly skilled at creating models for the companies I cover, and I’m sure my analyses reflect that (hopefully there are other strengths to offset that weakness). That said, I went through a rudimentary modeling effort for 2017 quarterly earnings to see what restaurant-level operating margins would fall out of that effort. I modeled revenues as growing by 17%, which reflects 9% growth in restaurant count and 8% growth in customer spend (based on high-single-digit comparable restaurant margins). I modeled food cost growth at 15% because CFO Hartung mentioned initiatives to minimize waste and negotiate with suppliers, and he targeted food costs as a percentage of revenue a little above 34%. I grew labor costs by 13% to account for new hires to support new stores, and for 4-5% wage inflation. I modeled occupancy growth at 9% - just accounting for new stores. Finally, I let “other” grow by the full 17%, matching revenue growth. I was tempted to cut a percent or two from “other”, but I know that marketing spend will be elevated. The result? 2017 restaurant-level operating margins are likely to run about 16%, maybe a bit less. I think it probably takes heroic efforts to get them close to 20% by year-end. Or a price increase. Or comps that wildly exceed guidance.

Cover Story in this Week’s Barron’s
I subscribe to Barron’s and usually – but not always – respect the content they present. To my mind, this week’s cover story is a hit piece that barely clings to the edge of respectable financial journalism. If you want to read it, use your favorite search engine to find “Chipotle: Can it be Fixed?”

Criminal Investigation
No news; I just want to keep the topic on our radar.

Closing Thoughts
In my introduction, I mentioned that results were a mixed bag of encouraging and disheartening. I think I am most disheartened by the current dynamics of restaurant-level operating margins. With food and labor costs high as a percentage of revenue, and an increasing propensity to spend on marketing, I don’t envision margins reaching 20% without a price increase or a real surge in traffic. What encourages me the most are the strong December and January comps, especially January’s. CFO Hartung took pains to point out that it is difficult to ascertain trends from January, as weather can be an important factor. However, if Chipotle can maintain double-digit comps into the warmer months, then the leverage inherent in Chipotle’s unit economic model will come into play and make the results I modeled seem far too low.

I have to admit that Chipotle’s slow recovery has tempered my bullishness and made me wonder whether the size of my personal holding (it’s a top-ten holding for me) aligns well with my current level of conviction regarding the company’s long-term prospects. Perhaps I am just not patient enough. There is a lot of leverage in Chipotle’s unit economic model, but they’ll need to bring traffic in the door for the leverage to succeed. That’s why those post-crisis comps are so encouraging.

Fool on!
Thanks and best wishes,
TMFDatabaseBob (long: CMG)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

23 Likes

“However, if Chipotle can maintain double-digit comps into the warmer months, then the leverage inherent in Chipotle’s unit economic model will come into play and make the results I modeled seem far too low.”

Yea but comparing to last years dismal numbers isn’t the comparison that I think you should base any trend on. I’d rather see a comparison to two years ago numbers, well before the ecoli disaster. How far off are they from 2015 numbers.

Chris

3 Likes

Fair question, Chris, and I can take a stab at an answer. We were never told the absolute amount of any particular month’s sales, but we can “stack” the comps to come up with a percentage of the two year-ago monthly sales.

We’re told that Dec '15 comps were down 30% and December '16 comps were up 14.7%. Multiplying 0.7 and 1.147 tells me that December '16 sales were 80.3% of December '14 sales.

January fell harder and climbed more, leaving a slightly-lower percentage of January '15. Jan. '16 comps were -36.4 and Jan. '17 comps were +24.6, so the stacked multiple is 79.25%.

I don’t think this should be too surprising given the trend in average store sales which, as I mentioned, were 26% below peak. The only reason that the 4Q16 revenue is as close as it is to 4Q14 revenue is all the new stores. I’m sure you realize that, Chris. Just sayin…

My main concern around that point was how are they going to get to 20% restaurant-level margins when my model (flawed as I’m sure it is) shows more like 16%? One possible answer to that question is comps that are better than high-single-digit. Given that December and January were both double-digit, I hold out some hope for February and March to give us double-digits too. The '16 comps for those two months were -26.1% and -26.5%. March, you may recall, included the “bad” news about that one voluntary store closure where four employees called in sick with norovirus-like symptoms. But it was really good news because it meant the protocols were working. The store got a good cleaning while closed, and no customers were sickened. They got praise from the local board of health for that one, but that’s not how the media played it up.

Anyway, I hope that my stacking the comps gave you useful insight.

Thanks for the insightful question, and best wishes,
TMFDatabaseBob (long: CMG)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

2 Likes

Hi all.

Let me add one more comment about the “stacking” of year-over-year comps that I did earlier in this thread. The analysis is probably accurate enough to be useful, but it is not perfect. The flaw is that the second “comp” includes more stores than the first “comp”. The comps are based on stores that have been active for 13 months. The set of stores active in, say, January '17 is about 10% greater than the set of stores active in January '16. This detail doesn’t poison the results, but it does make the analysis less-than-perfect. I hope this commentary adds value.

Thanks and best wishes,
TMFDatabaseBob (long: CMG)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

2 Likes

4Q16 Restaurant-Level Operating Margin: 13.5% I am frustrated to note that restaurant operating margins have declined for the last two quarters. While no one had expectations of an improvement over last year, I was hopeful for sequential improvement, especially in light of revenues that were virtually flat against last quarter. For comparison, 2Q16 and 3Q16 restaurant operating margins were 15.5% and 14.1%, respectively. While this is a significant improvement over 1Q16’s dismal 6.8% result, it falls well short of the 20% figure tossed around as an aspirational goal for 2017. One wonders whether/how they’ll get there from here. I’ll try to explore that in a separate section.

I’ve probably said enough on CMG so feel free to tell me to shut up, but I just don’t understand 20% operating margins, not one bit. They were 17% in 2013 and 2014! The CMG glory days.

They seem to believe they’re going to suddenly become MCD. I’m sorry but this seems not just impluasible but nigh impossible. They still have a long uphill battle and 20% just doesn’t seem realistic at all.

Bear

Hi Bear.

I just don’t understand 20% operating margins, not one bit. They were 17% in 2013 and 2014! The CMG glory days. … 20% just doesn’t seem realistic at all.

Chipotle isn’t targeting 20% operating margins. They’re targeting 20% restaurant-level operating margins. Big difference. 20% is VERY realistic. But NOT for 2017, if my (flawed) model is on target, unless they get a lot more traffic, are able to raise prices, or find a way to cut more restaurant-level costs.


CMG   OpMarg   R-L OpMarg
1Q11   14.7%      25.2%
2Q11   14.7       25.8
3Q11   16.6       26.7
4Q11   15.8       26.1
1Q12   16.0       27.4
2Q12   19.4       29.2
3Q12   16.9       27.4
4Q12   14.7       24.6
1Q13   16.5       26.3
2Q13   17.9       27.6
3Q13   16.7       26.8
4Q13   15.3       25.6
1Q14   15.0       25.9
2Q14   17.1       27.3
3Q14   19.2       28.8
4Q14   17.6       26.6
1Q15   18.2       27.5
2Q15   19.0       28.0
3Q15   19.3       28.3
food-borne illness crisis
4Q15   10.4       19.6
1Q16   -5.6        6.8
2Q16    4.1       15.5
3Q16    0.9       14.1
4Q16    3.0       13.5

Longer-term, new minimum wage rules and additional benefits for restaurant staff will make getting back to the high 20s difficult. Food costs are higher too. Part of Chipotle’s mantra is that they want to remain “affordable” to all, so there are limits to how high they’ll push their prices if they want to remain true to that. Traffic-willing, I think they can get back to low- to mid-20s with time and effort (and price increases). But they’ve got to regain more of their former traffic volumes. I think I’ve been consistent about that part of the message and consistent about how important I believe that is. If they can regain traffic, this is a good investment. If they can’t, it isn’t. That’s why - from the beginning of the earlier thread - I indicated that I believe neither a bull call nor a bear call is a no-brainer. The answer that ultimately proves correct will depend - in my opinion - on customer traffic.

I hope that helped.

Thanks and best wishes,
TMFDatabaseBob (long: CMG)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

6 Likes

Chipotle isn’t targeting 20% operating margins. They’re targeting 20% restaurant-level operating margins.

Oh. Haha, sorry. Yeah, that does make a difference. 20% doesn’t seem so great in that context…but it does seem more attainable. It’s certainly not the near-30% they were sporting according to your very nice chart…and that does seem like a big difference.

If they can regain traffic, this is a good investment.

Are you sure about that? You’re talking about a lower than previous R-L OpMarg being difficult to achieve. You also mentioned higher min wage, benefits, food cost, etc. So we can safely assume that even if they regain traffic they won’t be as profitable as before. But you also have to keep in mind that the stock price was based on assumptions for growth. They could get back to their traffic volume, but if they’re less profitable and the growth story isn’t in place, they’ll never get back to their former valuation.

I agree with you that this isn’t a no-brainer. Maybe it could work out. But what are the odds? And how much reward is there for you if it does, and in what likely time frame? Is this stock going to double a few times? I doubt it. Getting back to former levels seems like it would take a LOT. Growing from there is a whole other story. Aren’t there simply better options? It seems like you’re trying to make the thesis work, and I just have to ask why.

Bear

1 Like

Hi Bear.

You’re not going to draw me in further. It’s earnings season, and I have work to do. I already spent a fair amount of time this morning refuting your assertions.

It seems like you’re trying to make the thesis work, and I just have to ask why.

Now you’re questioning my thought process. Sometimes I’ll go there. I think I was reflective and transparent about my thought processes in both the other CMG thread and also in the INFN 16Q3 earnings analysis thread. But not during earnings season. I’ve got too much other stuff to do.

It seems like you’re trying to make the thesis NOT work, and I just have to ask why. Back at’cha. Why are YOU so intent on proving the thesis broken. Remember… you started this with your cross-post from Value Hounds.

Speaking of INFN…

You “piled on” about how broken INFN is too, while I said it had little further to drop.

See my post #22430 from October 30 “I think the primary reason for holding today is twofold: (1) I don’t see it going much lower (absent general market decline); and (2) Insight Infinera on 11/17 is a near-term potential catalyst.

And your post #22444 from October 31 “This just seems like the definition of a broken thesis.

It turns out that the recent low was set November 4 at $7.32. INFN closed on Friday at $9.37 - a 28% gain.

I’m sorry if I sound so cross… I work very hard on my analyses, and then I hate to have to work hard again to correct statements that aren’t carefully made. I also get pretty stressed during earnings season because of the effort I put in, so you’re definitely catching me while I’m “on edge”. For that aspect, I apologize.

Anyway… I’ve got to get back to work…

Thanks and best wishes,
TMFDatabaseBob (long: CMG, INFN)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

15 Likes

“Chipotle isn’t targeting 20% operating margins. They’re targeting 20% restaurant-level operating margins”

Restaurant level operating margins? Is that an alternative fact? :wink:

Honestly I have no idea what an RL operating margin is. Is that before fixed costs like rent and utilities? Regardless, the only important number is the bottom line. It’s all about the bottom line.

Chris

1 Like

Restaurant-Level expenses are “Food, beverage, & packaging”, “Labor”, “Occupancy”, and “Other operating costs” - the ones I talked about as I explained the inputs into my “model”. “Other” includes marketing.

It excludes:
General & Administrative
Depreciation & Amortization
Pre-Opening Costs
Loss on Disposal/Impairment of Assets
Interest
Income Taxes
Foreign Exchange Gains/Losses
Investment Gains/Losses

I don’t dispute that the bottom line is important. I commented on things like the managers’ meeting and former co-CEO Moran’s compensation package, which aren’t restaurant-level.

Just to pick a semi-random earnings period, let’s look at the current one. Restaurant-level expenses were 86.5% of revenues and non-restaurant-level expenses were 10.5% of revenues. Yes, management should be paying attention to ALL expenses and executive stock-based compensation has been egregious in the past. That said, I think it’s probably appropriate for management to expend about eight times the effort on restaurant-level expenses, based on how each affects the bottom line.

For the same reason, I don’t fault myself for focusing my analysis there.

Thanks and best wishes,
TMFDatabaseBob (long: CMG)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

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You’re not going to draw me in further.

It seems like you’re trying to make the thesis NOT work, and I just have to ask why. Back at’cha. Why are YOU so intent on proving the thesis broken.

Bob, sorry, I know this is a sensitive subject, but I honestly have no motive other than wishing to see you not lose money. I wasn’t really trying to add anything in the way of analysis or make you do any more work…I was really just agreeing with you:

I have to admit that Chipotle’s slow recovery has tempered my bullishness and made me wonder whether the size of my personal holding (it’s a top-ten holding for me) aligns well with my current level of conviction regarding the company’s long-term prospects.

It’s literally none of my business, but just out of brotherly love, I would like to see you follow your convictions. I know CMG is not where I’d want to be hanging my hat. There are a lot of companies out there doing exciting things, and the future seems bright for them. CMG on the other hand has a very hard road to hoe, and with that road comes uncertainty. I wish them the best, but I think it would be silly to have a high level of confidence, and it sounds like you actually agree. I merely want to suggest following through on your convictions with your asset allocation.

Bear

Hi Bear.

Thanks for the kind response. Probably better than I deserved…

My CMG is in a taxable account and has large gains embedded in it. There are two aspects of tax issues that bother me.

First, my choice for deploying the proceeds has to be MUCH better that the incumbent choice. If I sell (some) CMG and use the proceeds to buy XYZ, XYZ starts with a deficit - the amount of capital gains tax I paid (probably 15%). With CMG, I’m starting at 100%. I recognize the B&W looks at the situation a bit differently and argues that I only really have ~85% of CMG today. While B&W’s point is well-taken from a buy-and-sell perspective, I haven’t convinced myself whether or not it is valid from a compounding perspective, and that’s how I look at most of my holdings, at least right now.

Second, I’ve hesitated to bring personal issues onto the boards, but my wife and I keep a lot of our finances separate. We’re both investors, but we have differing styles and neither of us is comfortable enough with the other’s to merge. It’s purely a commentary on our “financial marriage”. Our “personal marriage” is filled with mutual love and respect. [Amusingly, our financial returns aren’t all that different despite the differing styles.] We do have jointly-held assets, but they’re more of a day-to-day variety. However, since we file taxes jointly, we both pay for them. So, when I take capital gains, she feels part of the tax pain. While we will often check in with each before recognizing capital gains in our accounts, so that we can keep the total between the two of us to manageable levels, I tend to be the one keeping track of the totals. Since CMG is a large holding for me with a lot of embedded capital gains, I am likely to move slowly with it, assuming I move at all, to minimize the taxes my dear, sweet wife and I jointly pay. I recognize that I could say something like, “I’m going to incur $X amount of taxes this year so I’m going to contribute an extra $X”. But that’s a slippery slope. I think the only completely fair way to work with that is to figure out each of our taxes individually and then pay the joint amount (presumably less) in the proper proportion based on the individual results. But neither of us enjoys preparing taxes enough to opt for preparing three sets of taxes instead of one.

So I do think I will likely sell some CMG this year, but it is likely to be of modest size to keep the tax bite reasonable. I don’t think I’d want to sell my entire holding anyway, since I think CMG has a great unit economic model, and there’s a decent chance they’ll regain enough traffic to provide investors with a good return. Back to glory days? No. I don’t see that. Decent returns? I don’t think investors need “glory days” for that. But I haven’t forgotten your question about appropriate market capitalization. I just haven’t had the bandwidth to give that exercise the analysis it deserves. That, of course, is another impediment to my acting immediately. How strong should my buy/sell conviction be if I’m not convinced whether the company is worth more or less than its current market cap? Intuition tells me “more”, but I’d rather work with something more concrete given that it’s a large holding. I’ll be busy with earnings through the end of this month, though, and CMG market cap is not the only project I’ve put on the back burner these past few weeks. As I said, I’ll likely take some action this year, but I’d rather accumulate another year’s worth of earnings reports before contemplating what I might or might not do in 2018.

Enough for now. I really do have to get back to work.

Thanks and best wishes,
TMFDatabaseBob (long: CMG, SBUX)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

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Bob, from what I can find, half the world is optimistic and the other half pessimistic about CMG. They are not going out of business and sales seem to have stabilized.

As you say, unless you have somewhere much better to put the money (which would include the option to hold it in cash) don’t incur a tax liability and most of all don’t piss off your wife. Seriously there.

This assumes you are diversified sufficiently.

There is a time to sell. Maybe this is it for you but don’t let anxiety get in your way of long term superior returns and IRS debts, not to mention marital spats.

Tinker

Hi Bob,
Thanks for being open and sharing your situation and all that goes with making a decision.

It does sound complicated, but I ask you to possibly if you can take a step back from it and if you can strip away the emotional aspect of that decision. Seems like you have tied a lot of factors to it that frankly didn’t tie themselves. Maybe if you step back a bit you might be able to see that most everything you’ve tied to it should have nothing really to do with your decision. Investing is at times emotional enough without adding to it all these factors that the individual stock in question knows nothing about.

I’ve never been one to not sell a stock because of other reasons like taxes, capital gains. Yea if it’s December I might wait until January to sell, but that’s about as far as it goes. I sell only on my conviction or lack of for an investment. If I feel it’s time to sell or at least trim, I trim.

So let’s say you want to sell some CMG. If you wait until say September and sell, and let’s say the stock is 350, are you going to be happy because now your capital gains will be less because the stock is down? Of course not.

WFM has a very difficult road ahead. You have to decide if it’s worth holding onto and then make a decision based only on that. Much cleaner way to invest.

Here is an example of how simple my approach is to me.

I bought TWLO last week after discovering and reading up on it here on Saul’s board.
Ok, do I think TWLO can double in the next year or two? Hell yes.
Do I think WFM can double in the next year or two? Hell no.

I’ll choose “hell yes” every time.

Chris

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