There is very little not to like in CMG’s earnings release this morning (unless you care about margins or EPS results) – but we recognize that it is a growth stock and that top line growth is pretty much all that matters to some subset of investors and to CMG stock this morning.
- +24.4% revenue growth year over year bested consensus by approximately $30 million;
- Comparable restaurant sales increased an impressive 13.4% (we had heard whispers that were 10%+, but this result surely exceeds those expectations); one additional day in the quarter didn’t hurt either.
- Restaurant level operating margins declined 40 bps, driven by 150 bps of higher food costs related to inflationary pressures in a number of commodities (we have discussed some of this in our work on agriculture);
- EPS missed consensus in dramatic fashion, growing just 7.8% in the quarter, but is apparently an afterthought against the backdrop of sustained top line momentum.
Perversely, it seems that the more dramatic the impact of inflation, the more engaged investors become as the talk of CMG pulling the pricing lever moves to the forefront.
- Acknowledging the traffic trends, it is abundantly clear that CMG is on point with respect to its offering to consumers, and we don’t doubt that the brand has sufficient equity to take pricing on a reasonable basis, even in an uncertain consumer spending environment.
- On the other hand, if it ain’t broke don’t fix it can be applied to a large number of situations, this one included – we would not be buyers of CMG solely on the basis of an anticipated price increase because, even with substantial brand equity, there is an inherent riskiness to all price changes in terms of consumer response.
Ultimately, while we acknowledge the significant, positive momentum, likely on a multi-duration basis, behind the CMG brand, we can’t reasonably frame the risk/reward for investors and therefore can’t suggest being buyers of the name, particularly in light of our thematic work surrounding growth and value in the market.
Finally, there are a number of restaurant concepts whose positioning is far less fortunate than that of CMG in terms of brand equity and pricing flexibility and who are facing the same inflationary pressures (maybe not with respect to avocados) as CMG – beef and cheese sounds a lot like a hamburger, for example. The restaurant sector remains one of our least preferred across consumer as we add concerns about inflation to our already existing concerns on valuation and consumer spending.