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Lateral Reads From Chipotle (CMG) – April / May / June / July SRS Cadence

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  • Human / consumer behavior is largely repeatable and thus predictable. How many times does one sit down at a restaurant and always order the same 1 or 2 items?
  • Chipotle reported 2Q results and disclosed the April/May/June/July cadence of SRS. The consistent improvement was likely felt by other casual and quick service operators.
  • The June/July SRS improvement for CMG bones well for MCD, YUM, QSR, WEN, SBUX, DNKN and others.
  • YUM Brands (YUM) / Taco Bell we believe offers the best long risk reward set-up in the restaurant space.

YUM Brands (YUM) / Taco Bell Lateral Read 

Taco Bell has small sales mix of breakfast vs. competitors like a McDonalds (MCD) who is dependent on the breakfast traffic business (the worker getting into their car and traveling to work). With covid-19 and work from home orders, McDonald’s likely seeing the larger impact on the breakfast business followed by SBUX and DNKN.

Taco Bell is the crown jewel for franchisee’s in the business (consistent 3-5% SRS the past few yrs, HT RLM, 25%+ ROIC etc.

As we look across the restaurant landscape, we believe many companies out years EPS estimates need revising higher to justify current multiples.

YUM / QSR / DNKN are the three players in the QSR (quick service) / franchisee space that doesn’t need higher EPS estimates for the stock to go higher.

Recall from 1Q Conference Call – re Taco Bell U.S. SRS Commentary

“Turning to Taco Bell, Q1 system sales grew 4% with 1% same-store sales growth and 4% net new unit growth. Importantly, excluding the last two weeks of the quarter, same-store sales growth in the U.S. was trending toward an impressive 6%. The year started with a value offering at a power price point with the $1 Double Stacked Tacos.”

+6% SRS for Taco Bell in 1Q prior to the pandemic in March. Obviously April SRS continued the terrible trend seeing in late March but this is where CMG’s May comp of -7.0% relative to its April comp of -24.4% is directionally instructive and CMG’s June comp of +2.0% relative to the decline in May. CMG then reported that July comp was running +6.4% another improvement from May’s comp.

If Taco Bell is back to positive SRS in late June and July, we believe that bodes well for actual upward EPS revisions in F21 and F22 and thus a stock that is on a relative basis offers the best long risk reward trade.

Analyst's Disclosure: I am/we are long MCD, YUM, DNKN.

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