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Aug 25, 2017

S3 Analytics: Chipotle Short Interest Rises Along with Avocado Prices

Chipotle Mexican Grill Inc.’s (CMG US) stock price fell to over a 4 year low on Wednesday but has since rebounded over $9 in just two days. Stephen’s upgraded Chipotle to “equal-weight” but lowered their target price to $325, 34% below 2017’s year-to-date high. The analyst’s projections may signify a temporary floor to Chipotle’s 19% year-to-date price drop but a much lower ceiling to its recovery.

Chipotle is finally starting to overcome the negative press following a single store outbreak of the norovirus and pest infestation but short sellers have continued to increase their positions since July. Short interest hit a year-to-date low of $1.3 billion in early July but has since increased by 21%, to almost $1.6 billion.

This increase in Chipotle short interest coincides with a 75% increase in domestic avocado prices. Credit Suisse recently reported that avocado’s account for 10% of Chipotle’s food expenses. With Chipotle’s food costs making up 34.1% of sales, as per CFO John Hartung, 3.41% of every dollar Chipotle earns goes to purchasing avocado’s.  Credit Suisse estimates that every 10% increase in the avocado prices will decrease Chipotle’s EPS by $0.30. 

The Restaurant Sector in general has seen an increase in short interest over the last month as same store sales and overall customer demand has been disappointing in 2017. Short interest in the sector has increased by $205 million over the last month, and is currently at $12.5 billion. Chipotle is the largest short in the sector, as well as the most profitable short in the sector after short sellers gained $467 million in the 3rd quarter. The least profitable short in the Restaurant sector is Panera Bread Co. (PNRA US) which is down $359 million for the year as JAB acquired the company in July for $7.5 billion.

Chipotle has already jettisoned its Shophouse chain and is looking to sell its Pizzeria Locale and Tasty Made burger chains in order to focus on its primary business. Increasing Chipotle’s operating efficiencies, customer satisfaction and digital offerings are the focus to bring the company back to earning over $10 of yearly EPS as it did from 2013 to 2105. Short sellers are not necessarily looking at Chipotle’s long term prospects but rather the short term earnings effect of promotional and marketing spending, margin degradation due to higher labor costs and the cost of avocados. Add in the usual negative seasonal effect on Chipotle’s 3rd and 4th quarter sales and shorts are hoping that second half EPS falls below the sub $2 consensus earnings forecasts.      

Want deeper insight into the above analysis? Contact:
Managing Director Predictive Analytics, S3 Partners
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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