Chipotle Mexican Grill the McDonalds of the new generation

Chipotle Mexican Grill (CMG) is the fast casual dining pioneer. It was started with the idea that food served fast did not have to be a typical fast food experience. CMG is the McDonalds of the teen generation. While other retailers are complaining about the weather CMG reported double digit same store sales increases. CMG is benefiting from the move to fast healthy food with the quality expected of full service restaurants but with the speed and convenience of fast food and with no tips! 

Food with integrity?

CMG was founded by a chef named Steve Ells. His initial idea was to open his own restaurant but to fund it he decided to open a little Burrito store which then took off as Chipotle Mexican Grill. CMG is focused on using the freshest food that is also grown and raised sustain-ably with respect for the animals, land and farmers. In 2000 CMG realised they could charge more for better quality food and increase sales. When they started serving naturally raised pork in 2000 they had to raise prices by a dollar but sales increased as it turned out people like to feel good by buying responsibly raised food. This lead to serving 100% naturally raised chicken and beef.

                                                    A common site at a CMG store


McDonalds & the Burrito

McDonalds was an early backer investing in CMG when it was a 14 store chain. By 2002 MCD owned more than 90% of CMG shares. McDonalds divested the last of its stake in 2006 in the IPO. While they made a lot of money with the IPO CMG's current price is $675 versus the IPO price of $22 McDonalds left more than ten billion on the table. It was a great investment by McDonalds and in hindsight was amazing they did so well together with a totally different approach to food, sustainability and attitudes toward their workforce. While CMG average starting wage is not much higher than minimum wage their managers also known as restaurateurs can make 6 figure salaries.

The McDonalds of the teen generation
While CMG has been successful they still only have 1,637 restaurants and plan to open 180-195 new restaurants this year. The growth opportunity still has a ways to go with a target of 4,000 stores in the US with CMG likely having double digit store openings for the next decade. The cash on cash returns for new stores are amazing at 72% which compares to the industry averages of 25%-35%.

Breakfast and drive through are future opportunities. CMG stores open up between 10-11am suggesting that there is future potential to serve their products in the morning. CMG have recently rolled out catering for 20+ people it is currently 1% of sales, and mostly incremental with an average order of nearly $300.

Concept optionality

ShopHouse and Pizzeria Locale are some of CMG growth options. There are six ShopHouse restaurants (SouthEast Asian concept) and one Pizzeria Locale all tied together by the concept of fast casual with a food culture of sustainability. CMG itself is still an international growth opportunity opening a third restaurant in Paris with 10 restaurants in Europe. CMG have not disclosed sales volumes of the ShopHouse and Pizzeria Locale but they have said that they are behaving similarly in general to when CMG was unknown back in early 2000. 

The hottest report so far

CMG recently announced same store sales of 17.3% a ridiculously good number. This was CMG second highest sales comp as a public company second only to their first quarter as a public company in 2006. To put it into context back then CMG had 500 restaurants compared to the 1,700 today the annualised increase is nearly the total of CMG sales in 2005. They increased prices by an average of 6.25% and saw no real resistance to the increase. Prices have not increased since 2011 three years ago.

CMG is the leader in fast casual dining and is benefiting from the trend towards healthy eating. The only problem is the price, the multiple on the stock has priced in some of these near term opportunities. Much like CMG lines we will wait in line and hope we will get served up a better price.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in Chipotle Mexican Grill (CMG) stock

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Google two verbs for the price of one

If you need to know something you Google it, if you want to search for a video you Youtube it. It is no surprise that becoming a verb has helped these two websites become the world's largest and second largest search engines. Fortunately for Google (GOOG) they own both these verbs with the purchase of Youtube for $1.65 billion in 2006.

Still growing faster than the industry
Last week GOOG reported sales growth of 22% outpacing internet advertising market growth of 16% according to Zenith Optimedia. Search, video and social advertising continue to take market share from traditional banner displays helping explain the good performance of GOOG/Youtube and Facebook versus declining revenue at Yahoo. GOOG is expected to take in $53 billion of revenue this year a large number but in the context of a larger market opportunity. According to eMarketer digital ad spend will be $140 billion this year out of a $545 billion global advertising market. This digital opportunity should increase over time as mobile and internet usage increase at the expense of print and TV see below.

Google it

We are expecting growth to pick up for GOOG as it rolls out more mobile advertising including app indexing. GOOG is now able to search across apps so links to apps can appear in search results. Advertisers can find new customers by reaching out to those who have already installed apps from similar categories ie the maker of Candy Crush may want to reach users who have installed apps like Angry Birds. Advertisers can also link parts of their app directly to the ad ie wotif could take you directly to their app to book a hotel deal if you click their ad.

Youtube it

Youtube has more than 1 billion unique users per month with 40% of traffic from mobile devices. According to Youtube over 6 billion hours of videos are watched each month nearly an hour for every person on the planet! We are bullish Youtube as it is beginning to be run like a traditional TV network to attract the big advertisers. Using similar metrics to traditional advertising Youtube is including third party measurement from Comscore and guaranteeing views for the top 5% of content. This is important to brands as they only want to be associated with quality material not cats playing around with balls of string. We are also bullish on GOOG inserting app install ads on Youtube similar to Facebook where users can download the app when the ad is clicked. This is a big opportunity as Youtube keeps 45% of all advertising revenue on its site.

Here are the top five most popular videos on Youtube ever, you should be able to guess no.1.

GOOG seems to be creating a flywheel effect with Google Play and Youtube where users can access free content on Youtube while also being able to watch purchases from Google Play. GOOG is betting on free viewing subsidised by advertising (75% of Youtube ads are skippable) and pay as you go subscription content on Google Play. Apparently only 10% of people always skip Youtube ads. 

Play it?
GOOG's fastest growing division was other which is Google Play. In the March quarter Apple's iTunes/software division recorded $4.6 billion in revenue this compares to Google's $1.6 billion in the June quarter. Android users are now larger than Apple as they continue to increase Google Play sales should eventually overcome iTunes sales giving it a chance to become GOOG's third verb.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive has a position in GOOG stock

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Zulily discovering not searching online

Zulily (ZU) is a website that aims to change the way people shop online. Most online sites solve the problem of searching for a particular product, unlike other sites ZU is tailored for browsing and discovering similar to most offline shopping. ZU displays 6,000 new products a day. To put that into context your average Costco typically displays around 4,000 products. ZU is one of the top ten web only retailers in the US.

Discover not search based
Each site is personalised for each user depending on their demographics. Customers browse the site with no intent to purchase so it is up to ZU to display products interesting to the customer. What a mother with young kids sees is totally different to a single woman. Its products are at a very affordable price point of $18. This discovery niche means it largely does not compete with Amazon.

Being a site for moms they attracted a lot of word of mouth with customers growing 93% during the last quarter. While moms are still their base customer its no longer just about kids clothes which are now 39% of sales down from 55% in 2012. It is becoming more about what mom can buy for herself and her home as they make the majority of purchase decisions. ZU is also very mobile friendly with 47% of sales coming from mobile devices a much higher percentage than Amazon and Ebay which are both around 28%. For ZU its all about low prices. ZU doesn't pay for expensive models but gets parents to bring in kids to model for free in exchange they get to keep the photos. They have nearly 50 photo studios.

ZU still has many more initiatives that it could implement such as private label brands as well as having exclusive products from vendors which would help increase margins and customer retention. They also seem to score well with suppliers. 75% of vendors featured since 2011 have returned to the site suggesting that unlike Groupon vendors are gaining long term value. No single brand is more than 3% of sales.

Cheap prices long shipping times

The main customer complaint is shipping. The cheap prices come at a trade off for customers. Last year ZU took on average 11.5 days to ship a product after customers ordered them. ZU orders items from vendors after the sale ends it doesn't buy in advance. This has lead to poor customer service in some instances when suppliers cannot keep up with demand. 

Good product and management a winning combination

The company was founded by the same executives that founded online jewelry retailer Blue Nile. The CEO and Chairman created Blue Nile after getting engaged and created ZU after becoming dads. I'm looking forward to seeing what they will come up with next! ZU was backed early on by Maveron Capital which is Howard Schultz's of Starbucks  venture capital firm. The most amazing thing about ZU is its only 4.5 years old they are just getting started. Daily sales is a tough business but ZU has managed to execute and unlike other sites average revenue per customer is increasing, that is users are buying more unlike Groupon. This helps to explain the valuation which is expensive but somewhat reasonable given it is a scalable e-commerce business, this is one business we're keeping on our daily buy list.


Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in ZU stock

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.

Investing alongside Carl Icahn

Many investors follow Buffet's Berkshire stock but not many follow Carl Icahn's investment vehicle Icahn Enterprises (IEP). His returns over the past decade have been one of the best.  Carl Icahn is famous for activist investing. Similar to Buffet he looks for value but instead of waiting for the results to show he actively makes things happen.

Getting active
It is great environment for activist investors. The amount of cash companies hold is higher than what they have held in the past. Scarred by the GFC companies are tending to hoard cash. Low interest rates and the current willingness for institutional investors to back activists to get things done is driving inflows for activist investors. Carl Icahn has been one if not the leading activist investor since 1980. CEOs might not pick up the phone when you call but even Apple the world's largest company picked up the phone when Icahn called. He even got a lunch date with Tim Cook Apple's CEO. He even argues with other activists. (See the classic Ackman vs Icahn fight on CNBC below.)

IEPs invetment segment includes as of April 30th 2014 includes positions in Apple, Forest Labs, eBay, Chesapeake, Herbalife, Transocean, Nuance, Talisman engering, Hologic and Navistar.

IEP stock in the activist fight
Its something we haven't really seen yet but Carl believes he can use his script (IEP) as currency to make acquisitions where appropriate. The stock pays a $6 annual distribution. IEP raised equity three times last year for a total of $581 million after fees. The most recent raise was at $135. He did not really need the money but because IEP is tightly controlled he needs liquidity. The million new shares substantially increase the float of shares available to investors. Though when one of the best investors is selling you do not want to be a buyer! Since the raising shares have fallen to where the stock is now $100 and yields around 6%.

According to IEP's calculations the stock trades at around a 30% premium to its net asset value. As a comparison Buffet would only buy back his Berkshire stock at 1.2x premium to book value (book value likely to understate market value). IEP's smaller size to Berkshire should make it more nimble and possibly produce higher investment returns though this is captured in the current premium to the investment value.

Like father like son?
There has been recent news that Carl's son Brett will launch his own activist fund. IEP will give Brett a billion in capital. IEP has been managing its own money only returning outside money in 2011. If Brett does well IEP will participate as IEP will own 35% of the new fund.

As Icahn quotes on his website "a lot of people die fighting against tyranny. The least I can do is vote against it." The premium to assets is high at the moment but Icahn is definitely someone you want in corner when you want something to get done.

Jason

http://www.decisiveassetmanagement.com/

Disclosure: Decisive does not have a position in IEP stock

The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.