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Jun 22, 2017

S3 Research: Chipotle Short Interest Declining

In a recent SEC 8-k filing Chipotle Mexican Grill (CMG US) stated that increased marketing and promotional expenses would continue to partially offset same store sales growth as the restaurant chain continues to try and lure back customers after food related illnesses crushed sales in 2015. This news, in addition to this year’s operating costs continuing their upward trajectory and same store sales growth rising but missing analyst’s projections, caused CMG stock to fall 9% on 6/20-21.

Short sellers who had incurred $404 million of year-to-date mark-to-market losses as of 6/19 made back $157 million of their losses in those two days and are now “only” down $247 million in year-to-date losses. CMG short sellers were up $355 million, +20.0%, in 2016 and may see this price drop as an opportunity to cut their 2017 losses and still be profitable long term.

CMG short interest hit a five year low of $472 million in February 2015 as CMG’s stock price topped the $700/share level for the first time. By the time CMG hit its historical high of $757.77/share on 8/5/15 CMG short interest had climbed to almost $2 billion. Short sellers continued to increase their exposure to CMG as its price continued to slide. CMG short interest hit its historical high of $2.36 billion on 11/14/16, just two weeks after CMG hit its recent low of $359.92.
CMG short interest grew for most of 2015 and 2016, due to its initial flirtation and pullback from the $700/share price level in the early part of 2015 and eventually from its E-Coli outbreaks in late 2015. Short sellers began to trim their positions in 2017 as CMG’s management successfully turned around its negative same store sales trend, revenues once again hit $1.2 billion/quarter and earnings topped $1/share and are projected to surpass $2/share. CMG short interest is now $1.6 billion down $412 million, or 20%, since the end of the 1st quarter and CMG continues to be the largest short in the Restaurant sector.

After hitting its 52 week high in May, long shareholders may have taken this 2 day price drop as a cheaper entry point to accumulate more shares. We have not seen an increase in short interest over the last two days. In fact we have seen a small amount of buy to covers as shorts are using this price reversal as a time to recoup some of their year-to-date losses and exit their positions. The entire Restaurant sector has not been kind to short sellers this year with only one stock in the top ten, The Cheesecake Factory (CAKE US), profitable in 2017. The top ten shorts in the Restaurant sector are down $891 million in year-to-date mark-to-market losses and short interest in the top ten besides Starbucks and Yum! Brands have remained stable or declined over the last month.

Short interest in the overall Consumer Durables sector is down $1.3 billion over the last month with $144.3 billion in total short interest. Sectors such as Hotel, Restaurant and Leisure; Internet Catalogue, Media; Multiline Retail; Specialty Retail and Textiles, Apparel and Luxury Goods saw an aggregate decrease of over $3 billion. The only Consumer Durables sub-sector with a significant increase in short interest is the Automobile sector, which is up $1.4 billion over the last month to $15.2 billion in total. Short sellers may be re-allocating within the Consumer Durables sector or moving into other sectors altogether.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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