Priced For Perfection - Why This Burrito Market Is Heading For A Fall
Submitted by David Stockman via Contra Corner blog,
During the 150 days since August 4th, Chipotle’s share price has plunged by 45%. Nearly $11 billion of market cap has been obliterated——including $4 billion in the last three weeks.
Accordingly, its market value has now retraced back to March 2012 levels. The hyperventilating CMG bulls who rampaged for 1250 days in the interim have now been taken out back and summarily shot.
Stated differently, what had been $12 million per copy burrito shacks are now on sale for just $6.5 million each and are heading far lower, very fast. But the culprit in this stunning markdown is not the alleged once-in-a-blue-moon outbreak of E. coli, as CMG’s apologists claim.
To the contrary, CMG’s shares have been irrationally priced for perfection and beyond all along. 
Chipotle’s recent $24 billion market cap, in fact, is the bubble in extremis which explains the entire financial bubble at large. It is surely the poster boy for the manner in which the Fed-sponsored Wall Street casino has hyped the mundane into the miraculous; and substituted paint-by-the-numbers hockey sticks for substantive analysis and judgment.
That is, a financial market which can value rented burrito joints which generate just $750k of store level cash flow at $12 million per copy is just plain off it rocker; it’s a greater fools gambling den that would make the moguls of Los Vegas envious.
Yet the astonishing level of complacency that took CMG shares to a peak of $750 a few months ago, is not a one-off aberration. It embodies the sum and substance of financial markets that have been destroyed by massive central bank intrusion and systematic falsification of interest rates and asset prices.
Thus, at its early August peak, CMG’s $24 billion market cap represented 48X the $500 million of net income it had posted in its most recent LTM filing. But the 1,900 Chipotle restaurants that fetched this nosebleed PE multiple are not high-end food emporiums serving gourmet fare at luxury prices to the top tier of affluent households.
Actually, they slop out burritos, tacos, salads, black beans, salsa and chips at $9 per ticket. Its customers are mostly millennials, who have an average of $155 per month of discretionary income, including the ones living in mom and pops basement.
The business has no barriers to entry and miniscule brand advertising. It is being assaulted by an army of competitors including established chains like Taco Bell, and newcomers like Qdoba and countless more, who have belatedly discovered the popularity of Tex-Mex fare. And CMG is also now running into saturation of prime locations and markets—–the fate that always and everywhere brings down high-flying retail and restaurant roll-outs.
Yes, CMG has a clever marketing gimmick and value proposition. That is, that its food is fresh, organic, locally sourced and that the pigs and chickens which end up in the burrito bowls have not been ill-treated on an industrial farm.
So what? Is there anything in that proposition that could not be eventually duplicated by aggressive competitors——even if they needed to play catch-up ball for awhile?
The fact is, no company has ever permanently dominated a new chain restaurant category indefinitely——-from hamburgers joints to pizza chains, seafood eateries, pasta places and high end steakhouses. Nevertheless, Chipotle’s absurdly high PE multiple reflected exactly that proposition—–hyper-growth and complete dominance, world without end.
In fact, Chipotle’s approximate 25% annual earnings growth since 2009 was taken exactly out of a tried and true cookie cutter. Profits were growing because the company was rolling out 200 new stores per year based on leasing costs that were dirt cheap due to the Fed’s repression of interest rates and an abundance of gig-based labor at the minimum wage.
During that period they also aggressively raised menu prices by capitalizing on their first mover position in chain-based Tex-Mex segment and the temporarily faddish popularity among millennials of their purportedly unique “quality” proposition.
But the latter was the obvious Achilles heel of the whole operation. CMG promoted itself as being in a quality tier way above all of its competitors. Yet it did not spend much more on food and its supply chain than most of its competitors.
For instance, Panera’s food costs is 34% of sales compared to 33% for Chipotle. Even in the case of the burger chains, food and paper costs run in the same zone, and were about 32% in Wendy’s most recent quarter.
Now, there is a reason that most national restaurant operations are based on centralized supply chains fed by industrial farm production of meats and other major menu ingredients. Namely, industrially produced food costs are far cheaper and centralized supply chains are more efficient, reliable and bureaucratically stable than decentralized procurements from neighborhood farms.
That’s especially true for a wholly owned restaurant operation that now has upwards of 2,000 locations and 53,000 employees paid at an average rate of just $20k per year.
In a word, CMG was selling a quality-based, anti-industrial, healthy life-style value proposition, but wasn’t paying for it. And since it didn’t have the organizational infrastructure and cost levels needed to deliver on its brand promises, it was essentially harvesting phantom profits that weren’t sustainable.
It was only a matter of time before E. coli or dozens of other potential supply chain assaults on its fundamental brand equity erupted into the public domain.
That time has now arrived with a vengeance. According to its most recent 8-K filing, the former king of comps experienced a 30% same store sales plunge in December and there is no relief yet in sight. Accordingly, management has now slashed it Q4 outlook to $2 per share and does not expect improvement any time soon.
Well now. Annualize the current run rate and throw in two bucks of windage—–so you get an annualized run rate of $10/share. At its fevered peak last August, CMG was trading for what is looking more and more like 75X current earnings per share.
Here’s the thing. Like in the case of the scores of high flying retail and restaurant concepts in full national roll-out heat that have come before, there is no rational economic basis for capitalizing the one-time earnings growth from store openings at a nosebleed multiple. These high flyers always crash or their stock price hits the flat-line as PE multiples shrink back to earth even as organic same store earnings might continue to expand.
In Chipotle’s case, there was even more foolishness embedded in its high PE multiple. Competitor risk was coming. Supply chain risk was self-evident. Constant prices increases to its less than affluent customer basis were a ticking time bomb. Choice locations in most of the US had been used up. Tex-Mex wasn’t catching on abroad.
And most importantly, CMG has no assets except customer goodwill. It is a pile of off-balance sheet operating leases populated with relatively trivial amounts of equipment and improvements per store. So it can’t even pull an Eddie Lambert and claim that empty Sears stores don’t matter because the underlying real estate is invaluable.
Stated differently, the earnings from intangible goodwill not backed by brick and mortar assets, patents, proprietary know-how, breakthrough technology or super-heavy advertising and marketing on a permanent basis cannot possibly be worth 48X. The fact that CMG reached this lunacy only a few months ago is screaming evidence of the monumental complacency that prevails in the casino.
The rest of the market, in fact, is only a slightly less exaggerated case. Just as in the case of CMG, cap rates at the recent peaks make no sense whatsoever except on a paint by the numbers forward hockey stick basis, reflecting a world in which nothing could go wrong and the business cycle had been miraculously repealed.
Yet you don’t have to be excessively observant to recognize that the 20-year global credit and economic boom led by the Red Ponzi in China is coming to a screeching halt because the central banks have well and truly run out of dry powder and credibility.
The world economy is self-evidently in the midst of the greatest commodity deflation since the 1930s, while industrial prices and profits are getting whacked hard and CapEx is plunging into a veritable depression.
All of this is causing worldwide incomes and profits to fall, and this time the difference can’t be made up by phony credit expansion. That’s because virtually every economy in the world has arrived hard upon the shoals of “peak debt”.
Better to mind the fact that China purportedly grew at 7% last year, yet the truth is that power consumption did not grow at all and rail freight volume plunged by an unprecedented 10%. Note also that the flagship of the China supply chain—–the high tech industrial economy of South Korea—-is in a world of hurt. Its exports are now down by 15% on a Y/Y basis. Note further that crude oil, copper, iron ore and ocean freight rates are now in a death plunge.
Already, honest GAAP earnings for the S&P 500 companies have plunged from a peak of $106 per share in the September 2014 LTM period to $90 in the most recent LTM period. That’s a 15% drop and the bottom line weakness is just beginning to spread outward from energy, materials and industrials. Macy’s anyone?
Even then, the broad market multiple at 22X is not the half of it. Once again the same folks who brought you CMG at what turns out to be 75X have their lazy hockey sticks polished and pointing skyward.
Thus, in March 2014 Wall Street’s ex-items S&P 500 earnings forecast for 2015 was about $133 per share; it ended up 20% lower at $106.
Yet here they go again. The consensus for 2016 started out at $137 per share last spring, and is just now beginning to make its way back toward the high $120s. Given the massive headwinds in the global economy and the emerging signs of the inevitable recession in the US, however, the current consensus hockey stick is truly ludicrous.
But there is something else. It is a barometer of the abject complacency and intellectual sloth that has descended on the casino owing to two decades of Fed coddling and seven year of free money for the carry trades.
To wit, the so-called equity strategists and economist have morphed into brain dead, paint-by-the-numbers perma-bulls incapable of recognizing the obvious macro-economic failures and financial risks which abound everywhere, even in the domestic economy.
There has been no real business investment growth for 15 years; productivity is sliding down the tubes; there are still fewer full-time, full-pay breadwinner jobs than in December 2007; and the Federal debt and entitlement monster has been left completely unattended, meaning a massive fiscal crisis is coming in the years ahead.
Yet here’s what one of these perma-bulls said yesterday. Jeffery Saut has undoubtedly spent too many years baking his brain in the Florida sun, but why not issue hockey sticks and buy recommendations if you believe this:
The U.S. has solved many of its long-term problems,” Saut said. “Banks are less leveraged, the deficit is under control, balance sheets are strong.”
Oh, c’mon. Financial risk is greater than ever before——-the Fed has simply driven it from the banking system into the massive explosion of bond mutual funds, ETFs and other forms of nonbank finance.
Likewise, the Federal deficit will be back at more than $1 trillion annually at the first hint of a recessionary fallback; owing to the baby boom retirement driven costs of Medicare and social security the next ten years will see the public debt explode to $30 trillion and an Italian-style 135% of GDP
So too, business debt in the US has grown from $11 trillion before the crisis to $13 trillion now. Most of it has been wasted on stock buybacks and over-priced M&A deals.
In the case of CMG, it was always just a burrito. In the case of the US and world economy and financial markets, it’s not even that.
- Login or register to post comments
- Printer-friendly version
- Send to friend
- advertisements -



explosive downfall! what kind of idiots were paying 70x earnings. even without the bad news CMG would be in the 500's now that the momo growth chase has ended.
The tragedy isn't that a fast-food company lost 45% of it's share price... the tragedy is that people actually believed that a fast food company's share was worth buying at $750. What moron actually believes that? Mcdonalds has never been valued above $120.
never made sense, but trying to short it was a fool's errand before the shit-storm,
The methane leak in so-cal has a certain "Chipotle-esqe" quality about it.
With both, there is tons of gas being released into the air.
"The guac cost extra"...I Know, its an arm and leg extra!
Explosive downfall! Perhaps we should get Hitler involved. I heard he had terrible gas so perhaps it is a fit made in heaven
"Mcdonalds has never been valued above $120."
MCD has split many times over the years and has paid dividends fairly consistently.
I'm no maths genius but if we extrapolate the current share price backwards accounting for splits and dividend rollovers, the original shares would be worth way more than $750.
CMG's food is so bland and overrated and that was before it was poisonous.
CNN: Islam might be just 'an excuse' to shoot Philly cop
http://tinyurl.com/j6u35dp
Not to mention it makes you fatterin' shit
Check this legitimate ways to mak? money from home, working on your own time and being your own boss... Join the many successful people who have already used the system. Only reliable internet connection needed, no prior experience neccessary, that's why where are here. Start here... www.wallstreet34.com
Von Firstenberg! Uff dah. Senhor Secondary :(
I think the saddest thing about the restaraunt/fast food industry is that it flureshes because people can't cook. Hedgeless Horseman can a get an amen?
I think the continuous food based TV shows, food advertising etc etc have a bit to do with it as well. It's a pretty toxic concoction
Around here, it's because anyone with a job or jobs is working every available hour and, after the godawful commute, has no time or energy. The housekeeper's now out of the home chasing after the paycheck.
The alternative is domestic help, which most people can't afford, so we cooperatively hire cooks and servers and call it a restaurant. Public household staff.
Takes 5 minutes to prepare a salad. Add some tins fish or quickly fry up some meat and you have a perfectly heathy meal. You can throw meat, veg and stock into a slow cooker in the morning and come home to a cooked meal. You can make a stir fry in a few minutes. For snacks eat fruit, nuts and seeds.
There's a lot of heathly food that can be cooked in no time. In fact with not much spare time it's easier to eat heathy than spending all day making more complicated food.
Stockman is going ballistic : he has an opinion on everything.
Soon, he will be in orbit along with the Krug... a bleeding Asteroid circling the Earth !
Wow !
Ah, yes. The Hollywoodization of the public dialogue. It's just a celebrity being bitchy, eh?
At least he's got enough public face to avoid being hounded as a criminal for questioning the Conventional Wisdom. Unlike the rest of us.
Off topic but: I'm seeing today's DOW futures high as 16,666.
I'm watching the cats corpse twitching on the floor and wondering just how big
the selling will be at market closing.Probably a tsunami. If I was still trading I'd
be selling then.
no way - they will pull out all the tricks (vix smash, Oil stop run etc) today, gonna close green.
I know they will try, but that is like unlocking the exit door at this point.
We shall see.
at least Naz so the joob tube can say "US markets closed with mixed results"
edit: uhh maybe not... ho lee fuk
What, people aren't going to pay $20 for a trendy burrito, sides and drink? What's wrong with people (sarc).
The MoMo folks had to jump off this train.
They will pay for it...... ONCE, or maybe twice.
Now the novelty has worn off and they aren't going back. They can get the same fartastsic results for a fraction of the cost at Taco Smell, or McFarties for half the cost.
Having a little fun>>>> NYSE:CMG: 415.13 -0.87 (-0.21%) - Chipotle Mexican Grill, Inc.
Chipotle Mexican Grill, Inc. That valuation is everything that's wrong with central banking...
Every Chipotle I've walked by in recent weeks is less than 5% occupied . . . and those are probably off duty employees, investors and family.
Jimmy Cramer lives there... He swears by their E-Coli $ menu.
he has his own "mexican" dump in north jersey, surprised an irate Cramerican hasn't firebombed it yet
lol. Someone Zillow'ed Cramer last year.
His home was modest, but had an excessive number Gargoyles, and garden Knomes.
are they sure it wasn't him and his offspring out sprucing up the yard?
lol. It's nice that the " reality check" is finally happening.
I'll see you in Bilderberg, after I win the Powerball tomorrow ;-)
Bastiat, most of that might be because school is out; at our local Chipotles, a large part of the clientele are students, including my 2 children. The food is good. Their stupid, insane stock price and valuation is not their fault.
thanks janet
They will outlaw cooking at home and on outdoor grills . You know glow bull warming and health care . Gota prop up this shit from 30 yrs of a debt fueled apocalypse
so cmg rallies 5-10% next week?
And traders think the markets are oversold? That's the problem with reality... JFC, the global equity markets need to normalize after 6-7 years of manipulations.
The Fed. is scared shitless, because they know there's not enough counter-party risk, for them to start winding down their balance sheet.
I just know I won't be eating no Chipotle burrito any time soon. Let them go at least a year without poisening anyone and I'll think about it.
Price is unimportant.
Chipotle has been around since 1993. Besides a minor outbreak traced to lettuce back in 2009, it has had no problems. Now all of a sudden there are these big e. coli outbreaks, in different areas, and despite hundreds of tests they can't find the source? And one of the strains is quite rare and doesn't usually affect food. Now consider that they recently announced that they are dropping GMO food from the menu. And you have to wonder if they're being sabotaged.
I'll entertain your comment, and exclude e-coli.
It's a fast food restaurant FAD! Look at the levels it's stock is trading at?
the sheer volume of all their outlets so one minor slip and it amplifies itself. its a matter of food handling, which is why you have preservatives. organics and mass market franchises are incompatible. imagine the Chiplote franchise on a cruiseliner. i took a lot of cruises (for uncle sam) and we never got sick but mostly we were eating dehydrated goods, and cockroaches everywhere, and rotten meat, and bugs in the fresh lettuce, weevils in the cereal boxes, cockroaches everywhere did i say that? we seldom got sick. we may have gone too natural as a nation, we should quit eating raw foods, wash your food even if it is organic. my mother used to boil the hell out of vegetables, but there was a reason for that. cook your food.
Organics can still be cooked duh, and are allowed to have preservatives too. And I doubt Chipotle has suddenly changed their food handling policy to make it more lenient.
Even if the food is fresh and organic it is still coming from big suppliers, so they should be able to trace the outbreak using the standard procedures.
You have to remember that "organic" food is fertilized with SHIT. Cow shit, horse shit, chicken shit, but they call it COMPOST.
Conventional produce is fertilized with sterile synthetic fertilizer.
Think about that for a minute. And you wonder why organic food has outbreaks of rare e-coli ?
a few years ago Carls Jr went with something called Green Burrito, which is chicken nuggets and a salsa bar. i could go to a local burrito plant and get 1lb of pulled chicken for the same money. why would anyone go to Carles for burritos, i dont know, but Carls didnt fold, of course they have other things. i think when you deal in frozen nuggets and the eternal salad bar (30 day salads organic freaks, loaded with stuff that will give you an asthma attack) so it was crap it is still crap and why it exists is the question. organic is of course much better and these guys have made a lot of money but they are just another mexican food place. now they do it in trucks, low overhead. way too much capacity in this business.
is that where the term "Hot Carl" came from?
i ate there once. Walked out shaking my head about what the hype about it was over. Expensive and really no better than taco bell which i dont care for either. My teen age son and friends go to taco bell for eating contests from the dollar menu. YUK.... the meat looks like dog food to me.
it is they were sued for not meeting the minimum 40% beef in beef flavored products.
I think one of the reasons why they were able to keep their food costs down as opposed to Panera is that they really don't have a whole lot of selection. You can choose from chicken, steak, tofu or beans in either burritos or bowls and what have you.
It's easier to keep your food costs down when you are not ordering a large variety of perishable items. Non GMO may not be as cost prohibitive when you are buying in bulk also.
Typical grifter 21st centuary business model: overhyped quality and bottom dollar wage scale. If they had played it straight it could have been a good business. But nooo: greed uber alles
This person gets it... Nice comment.
Chipoleaway removes blood stains from underwear.
https://www.youtube.com/watch?v=RlIHDauX3ao