At their last quarterly update 3 months ago, the Mexican restaurant chain beat on nearly all metrics and rallied ~13% on the session. Overnight it was a different story as second-quarter same-store sales growth missed estimates while guidance for Q3 was light on, pushing the stock down 9%. While the bar was set very high, the guidance for the next quarter implies that growth will moderate to the low to mid-single-digit range, while they opened fewer restaurants than expected in the period, adding 47 compared to the estimate of 57, although they do expect to open 255-285 in the FY, which remains in line with expectations. Interestingly, their ~3200 restaurants each produce average annual sales of $US2.94m, up 7.1% YoY driving FY revenue of ~US$10bn for the group. There was evidence of some cost pressures (Avocado’s an issue) which hit operating margins (17.2% v 17.5% exp), and the stock is expensive however in MM’s view, the investment thesis still stakes up.
- Growing sales through existing stores and adding new stores will continue to drive earnings growth over time.
We recently trimmed our position from 6% down to 4% giving us the flexibility to buy any protracted weakness following these results – an approach we often adopt across our portfolios.
MM remains bullish CMG US, and will look to add to the position on further weakness
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