August 20, 2007
– Comments (11)
2 pictures, much better than 2000 words.
If only so many other cases/thoughts could be so clearly presented in this world :) ...Nicely done.
What's your favorite restaurant?
I'm asking because I'm thinking a little gentlemen's wager is in order. I'm thinking that you could go on record in CAPS putting your red thumb down on RRGB - and a year from now we see whose score is higher.
Loser buys the winner dinner? If I win, it's dinner at Red Robin for me, and if you win, you let me know where to go to buy the gift certificate.
Surely, Seth is going to Chipotle. You know, the one you have that wicked red robin thumb on, Russell?
Nothing better for us Fools to dine on than a heavyweight champion restaurant battle royale. Russell - I know you get loads of free advice but if you have the time I hope a future post will explain why all those color by numbers Bent has up there don't worry you too much. If I could venture a guess, I'm saying TMF E believes that shrinking and/or stagnant margins are due to worthwhile investments in marketing and expansion.
There's no question that Red Robin's been posting less than stellar numbers - which is something I did my best to openly disclose in my blog.
I don't think that the past numbers here are necessarily indicative of what we'll see in the future - which is probably where Seth and I come to a fundamental disagreement.
Will Seth win this one? Will I? One thing I do know is that by openly airing disagreements, along with data/rationale to back them up, and being held accountable, we're all facilitating the Foolish learning process - and in that regard, we all win.
So, in other words, one can flip a coin on this stock and, either way, wind up with the support of a seriously intelligent dude. Suddenly this company that I could never have cared less about is more interesting than following one of the countless sports teams that won't ever make me a nickel.
I can bet dinner, but this is a better bet, IMO. 3 years, CMG.b against RRGB, winner eats free at the restaurant of his choice.
(One year is just noise...)
Oh, and my thumb's already up on CMG. I wouldn't give it a red thumb from here, because I figure it could outpace the S&P 500. But I'm sure it won't beat Chipotle, not in a million years.
Not beat Chipotle in a milion years? Pretty strong words my friend - you're on! I think Chipotle's multiple is wickedly rich.
So, use last night's close as the starting point? CMG-B at $91.82 vs. RRGB at $39,14, for three years (close as of 8/21/10)?
Looking forward to the race!
This is an interesting debate, so I figure we'll continue it here, rather than online, because here we can link to images that 'splain a few things.
I previously posted the diminishing FCF, SFCF, and stagnant margins at RRGB, here are the similar charts for CMG.
You'll note that CMG is crossing an inflection point, where the increasing sales are leveraging margins (and therefore earnings) at what looks like an accelerating pace. In fact, Chipotle's margins hit record levels again last quarter, though this is expected to moderate a bit for the full year.
Here's another one that is, I believe, indicative of the problems at RRGB.
Returns on equity and capital are meager -- about equal to the weighted cost of capital, in my opinion and they're going nowhere fast.
To be fair, Chipotle's are currently lower. But, they appear to be on the move, heading up.
I believe we're seeing here a fundamental difference in the business prospects of these two businesses. RRGB has a much more limited audience than Chipotle, so the grow like crazy model -- which has yet to yield leverage, seems to me futile.
Chipotle, on the other hand, is crossing over and leveraging its existing base, and it's probably got about 1/4 of the total count I believe possible before the U.S. is saturated. Let's be honest, no one's walking to the corner for a RRGB at lunch, whereas Chipotle locations are mobbed and only get busier as time goes on.
That means, as I see it, we don't really know where the margins top out at Chipotle. And listen in on a call and you'll hear a relentless management focus on improving business speed and efficiency, a la McDonalds -- but with a higher premium on taste. These guys are clearly at the top of their game, and they're only getting started. RRGB looks tired already, and its room for expansion looks minute by comparison to CMG.
Of course, this is exactly why Chipotle is richly valued and looks expensive. The Street is anticipating that this will happen. I believe it will too.
A few things:
- None of the charts are taking into account that the capex is almost all expansion capex, which blurs the analysis for both, but more so for cmg/cmg.b I think.
- The quality of the board at RRGB and its actions in the past are just dreadful, IMO.
- If consumers are swayed by quality received for price paid (my hunch is yes) then CMG will win hands down.