It's probably time to START thinking about taking a speculative plunge into cryptocurrencies again, now that bitcoin has established a new low after the December bubble collapse ($5,800 on Sunday by our count). But an old stock operator once said "don't fight the tape" so we'll be in keeping with that theme TODAY and talk about a hot stock. So while we aren't ready to get bullish on crypto-currencies again, yet, perhaps it's time to look at the corrollary and see if hot stocks should be faded? (fade is stock-jockey parlance for "sell" or "sell short" or "lighten position size by selling a portion")
CHIPOTLE: A MICKEY-DEEZE(Nutz) COMPANY
One red-hot stock this year has been Chipotle (ticker: CMG twitter: $CMG). Chipotle had been down in the dumps with poisoning some folks and losing their customers data (who HASN'T done this by now?), until they announced a new CEO.
The market, which is in constant love-affair with Domino's (DPZ) Pizza turnaround story for years, has been constantly looking for the next great restuarant turnaround. But the "next one" is always a worse watered-down version of the first, no? Remember how awesome the movie Gladiator was? Then Hollywood having no shame put out copycat movies "Troy" and "Alexander". Pathetic. Sometimes the next one even works, like Antz to "A Bug's Life", but eventually the copycat manuever becomes a cariacature of itself as it tries to do the impossible. Like when the popularity of anything with1 Molly Ringwald in the mid 80s caused Richard Berg to shit "Fresh Horses" (the worst movie ever made).
Oh you haven't heard of Fresh Horses? Oh you haven't heard of Richard Berg? There's a reason for that, it's called the movie Fresh Horses (which followed Sixteen Candles and The Breakfast Club). This is what Chipotle is like after hiring a new CEO from Taco Bell of all places. We met this with immediate skepticism, as if Black Sabbath in 1975 had hired Dionne Warwick to be their front man instead of Ozzie. Chipotle is trying to appeal to the fast-healthy crowd, and you're hiring a Taco Bell guy? Of COURSE the stock market ate this story up. "It's the next Domino's". "He's gonna install drive-thrus". "He's gonna make it an app". "He can put Avocado Toast on the menu". Ok, that last one is a joke; no Wall St jockeys said that--> AND THEN SHE DID!
Here's some music to play while you read the rest of this, cuz this article is gonna get better:
As we said, upon announcing CMG's next CEO was from Taco Bell, Chipotle's stock went up faster than a precocious schoolboy's hand in a "Who want's to be in Van Halen's Hot for Teacher Video" RFQ. This has been the last several months of the stock-- good news is good news and bad news is good news-- all gnews is good Gnus. Then today happened...
Here's the presser bomb Chipotle dropped last night...
(and on just an ironic note, gotta love the loose reference to both Charlie Sheen AND Donald Trump here...)
https://ir.chipotle.com/2018-06-27-Chipotle-Announces-Growth-Strategies-Focused-On-Winning-Today-And-Cultivating-A-Better-Future
Always be WINNING. Winning Time. Ok, to be fair maybe he just loved this movie?
"who's the best basketball player in the world? this is not a trick question."
So now that you've read the Chipotle news, let's break it down:
First, let's review why the stock is down. It's the store closures. SOMEtimes store closures are met with a stock going up, bc investors are happy they are separating the wheat from the chaff. We know, Wall Street is weird, but this is the classic case of "do the opposite" which Wall Street practices like it's religion (see past mentions of "sell the news"). But you have to understand that THIS time, many many stock analysts have justified Chipotle's crazy stock price by creating spreadsheet models which predict a whole lotta MORE stores in the near and distant future. More stores = more revenues = more profits. Or so you'd think. The kinda growth restaurant analysts REALLY want is called "Same Store Sales" (SSS) growth. It's growth in a store that's already been opened one year (so no "Grand Opening!" mojo to exploit). SSS tells you if more and more people are gravitating to Chipotle's restaurants or if they are simply growing by pushing stores into cruddier locations and torching their profit margins in the process.
So store closures. Ironically, while this sounds bad, to us store closings sounds like higher SSS will be reported in the future. This seems like a good thing for setting up Q3 for fat SSS growth; that is, if you just ignore revenue growth (which restaurant analysts routinely do). The Great Oz Speaks: Pay no attention to that man behind the green curtain with the negative store-count growth!!
Frankly speaking, we were actually amazed (a little) that the stock wasn't UP, rather than down on this press release. But we were ignoring how important "store count" was to the earnings models inside of spreadsheets inside of many Wall Street banks' estimates of Chipotle's growth. Future store
counts line-item just took a hit-- in those prognostications which justify the $1,000 stock price by 2019 "buy buy buy" ratings at sell-side financial institutions who control your 401K plans.
Have you run out of article-accompanying music by now? Try this one...
Here's a quick run-down of all the stuff they announced after store closings, and how we'd quickly interpret them:
Burrito Delivery?
= Lower margins, you gotta pay to have an $8 delivered, are you aware what minimum wage is these days? Have you ever eaten a delivered hamburger or burrito before? It ain't pizza, let's put it that way. Pizza crust doesn't get soggy.
Better Advertising?
= Lower margins, bc they will spend more on it. But will the new marketing work?
Loyalty Program?
= Lower margins, unless he plans on raising price again.
But if Loyalty Program offers customers a discount, can't they just raise burrito prices again? Sure they can, and they just did last year. As an investor do YOU want to endure yet another year of bad growth comps? BC that's customer's FIRST reaction to higher prices, they get mad and boycott you for awhile.
Look, as a customer, we love shit like loyalty programs. But does it work, or is it just a 5-10% price reduction which equals lower margins? Pretty sure we still have a Subway stamp cards in our wallets just in case Subway brings those stamp cards back. But those cards never made us visit Subway any more tho, it just made us pay nothing for one of our visits. Now maybe the loyalty "free burrito" would make great sense if he raised price at the same time, bc he has price flexibility. But they already pulled that lever LAST year, and it led to much lower growth which finally mercifully ended at the same moment the new CEO was hired-- at a very low stock price.
Longer store hours?
Sure seems like a no-brainer, but actually it results in hours of employees standing around during doldrums, which means higher expenses due to having to pay salaries during those hours, which means lower gross profit margins.
Last but not least, the previously mentioned... Shutting underperforming stores down
Well, that's ONE way to improve SSS I guess? Overall revenue growth takes a hit, but by removing the bad apples it makes the remaining stores SSS growth go up. It's sort've an accounting trick, meant to fool YOU the speculator.
New menu items
Is this new whipper-snapper CEO from Taco Bell aware 'Avocado Toast' is a meme against millenials?? Too funny.
Will millenials think so? It's like he put pet rocks into his toy store to please baby boomers.
What about the Milkshakes tho?
This reminds us SO much of the "new guy" CEO who tried to make JCPenney classy. Upon learning that an Apple guy was going to run JC Penney, the stock no shit went from like $25 to $40 in a jiffy. (it trades for $2 now)
That one appealed to us bc we never liked JC Penney from the getgo. But we learned a lesson from that one (without having to pay for it), you can't change a customer's stripes. Trying to pump Jeff Foxworthy humor into a George Carlin crowd isn't going to work any better than the opposite.
The Apple Stores guy (Ron Johnson) tried to "class-up" the legacy JC Penney customers w nicer stores (expensive capital expenditures) and getting rid of fraudy promotion days and "clearance sales". But the customers LIKED the promotions, that's why they showed up (at all) to the front door of the store bc they were getting a deal.
We really can't imagine the health-conscious types rolling in to orger (typo but seems appropriate so leaving it) their vegetarian-tofu burrito with a side of milkshake. Might as well start new restaurants as "Combination Denny's & Chipotle".
Milkshakes!!! ha ha. This is EXACTLY what we'd expect a Taco Bell guy to do.
Last but not least: Headquarters Move
Gotta love a guy who makes a few hundred people move, so that HIS family isn't taxed by his job career choices.
Moving Denver to SoCal. Unreal. Kinda tells us everything about the guy really. Very much a Taco Bell type move. Still think this guy is a clown from when it was first absurdly announced that a Taco Bell guy was taking over Chipotle. The whole hiring is to us like going to see a Pink Floyd Reunion show at the Garden and Waters and Gilmour select Dionne Warwick to open for them.
"YEY, let's get there early, i hope she does "That's what Friends are For"!!!!!
Maybe that's a dated example, how about a presser that says Jimmy Iovine and/or Bob Ezrin just signed Selena Gomez as a client? "Shit guys, maybe Jimmy can get Selena and Roger to do a solo together? that'd be awesome!!!"
Taco Bell:
Chipotle: "Hello, hello, hello, CEO, is there anybody IN there?"
Jesus, we can't wait until he announces...
drive-thru
Can't wait to see what capex and gross margins does when he tries that one. Ever try to eat mexican as big as a brick while driving? There's a reason why french fries come with everything at burger joints. EZ to eat.
On Taco Bell CEOs running wanna-be fast-healthy chains
Allow us to be frank... This (new CEO from Orange County) guy is a total total fucking clown, and we think there's going to be LOTS of pain where today came from. But until then, it probably bounces off $399 and re-surges to new highs before the numbers come in bad from all these shenanigans.
CONCLUSION
All we can say is, don't be afraid to "fade" Chipotle when it achieves new heights when they start whispering to sell-side analysts about upcoming drive-thrus.
Taco Bell. Unreal. All the customers are wanna-be (AGAIN: it IS a McDonald's spin-off you're aware of this right? Ok we already said that) health-conscious, the last thing they respect is milkshakes.
But let's leave on a positive:
The one good thing seems to be the app-order-pickups expansion. We HATE waiting in line. Even SuperCuts has a "butt in line" app. Seems like a no-brainer, customers been wanting them to do this since their inception, and it frees up their employees time. Shit, we'd even marry the online orders to the customer loyalty program such that if you don't pick up the burrito your loyalty gets slashed. carrot and stick.
But our question is, how is this just an "expansion" from their initial beach-head right now? (as per the presser) If it's been working, why isn't it "all hands on deck" to rollout the world's easiest and cheapest change of them all? It's software plus some changes in employee routine. Know why? BC old customers habits die hard, even Domino's didn't build Rome in a day like current CMG investors think is going to happen.
And if the rollout is slow bc it's not progressing fast enough to change anything, well then maybe that tells us something more than the store closures? Or maybe even worse, it helps DESCRIBE the store closures?
AKA, the stock price up 80% on a CEO announcement & bullet-point future, might take a lot longer than saying "Domino's" on a 1.9% SSS even-currency Q1 conference call.
source material:
No Gnews is Good Gnews w Gary Gnu:
movies... http://cineramble.com/2014/03/box-office-duels-hollywoods-reliance-on-copycat-movies/
