David Einhorn Comments on Chipotle Mexican Grill
In presenting our short thesis on CMG (CMG), we noted that the stock trades at a premium multiple but faces significant headwinds including rising food costs, higher healthcare costs related to Obamacare, and competition from a resurgent Taco Bell. We conducted a consumer survey that provided evidence that Taco Bell's new Cantina Bell menu, priced at a substantial discount to CMG's average menu item, will draw customers away from CMG.
The protests from CMG's bullish supporters can be summarized as:
¡No Quiero Taco Bell!
Have you ever actually tried the food!?!
Have you seen the lines at CMG?
CMG and its bullish supporters insist that CMG has a completely different customer base than Taco Bell. However, our survey results show otherwise. We believe Taco Bell will pluck away some percentage of CMG's customers, which will cause CMG's same store sales to deteriorate. Given CMG's high valuation, we don't believe the market will be forgiving.
We surveyed 1,608 CMG customers. Of those, 25% never go to Taco Bell, and their median income (about $59,300) skews higher than the average CMG customer. Of the remaining 75%, almost one-third of them had ordered from the Cantina Bell menu within the first 50 days of launch. The preliminary results aren't favorable for CMG: Half preferred CMG, but the other half either preferred Cantina Bell or rated them equally. The latter group tends to be younger (median age: 26) and less well-to-do (median income: $36,600).
More importantly, we found that CMG's highest frequency customer—those who go a couple times a week or more—are much more likely to have tried Cantina Bell, more likely to prefer Cantina Bell to CMG, more likely to return to Taco Bell more often as a result of the Cantina Bell menu introduction, and twice as likely to cut down on trips to CMG as compared to the average CMG customer.
Our survey found that more than a third of CMG's customers are 18-24 years old (we didn't survey people younger than 18) and more than two-fifths of CMG's customers earn less than $40,000 per year. On the margin, this group is likely to show up at CMG a bit less often. The Partnerships closed out their CareFusion (CFN) position during the quarter. The company failed to achieve the earnings we hoped it could generate. Even so, the investment compounded at a double-digit rate over our three years of ownership. We wish all our "unsuccessful" investments did so well.
From Greenlight Capital's third quarter letter.