Chipotle

September 16, 2016
Table of Contents
Section
Investment Thesis I
Chipotle Business & Industry Overview II
Recent Development III
Activism Action IV
Valuation and Catalysts V
Appendix
I. Investment Thesis
Investment Thesis
■ Attractive business model - Strong fundamentals despite the recent scandals
■ Marketing campaigns are helping work regaining customer confidence
■ Strong growth potentials - domestically and internationally
■ Activism involvement - potential levering up, acquisitions and franchising
■ Normalization and increase of margins drive potential upsides
1
II. Chipotle Business & Industry Overview
Chipotle Business & Industry Overview
How Does Chipotle Make Money?
Revenue $4,501,223
Food, Bev & Packing Cost $1,503,835
Labor Costs $1,045,726
Gross Margin $1,951,662
Occupancy Costs $262,412
Other Operating Costs $514,963
General and Administrative Costs $250,214
Depreciation & Amortization $130,368
Other Costs $30,116
Total Operating Expenses $3,737,634
Interest Expense $6,278
Tax Expense $294,265
Net Income $475,692
2
Company Overview
Business Description
Status: Public (NYSE: CMG)

Founded: 1993
Headquarters: Denver, CO
Locations: 2,124 (2016 Q2)
■ Founded by Steve Ells in 1993, a former line cook, and

underwent an IPO in 2006.
■ Chipotle prides itself on serving “Food with Integrity”,
and it only serves high-grade meat and fresh vegetables.
They own and operate all of their stores.
1-Year Stock Price Performance
■ They are the industry leaders in the hybrid “fast casual”
industry. They’ve combined an upscale, high quality 120% S&P CMG
dining experience with the convenience and limited 110% 109%

service that fast food offers. 100%
■ Lucrative margins in the fast food industry. 90%
80%
■ Strong brand awareness and a loyal customer base, as
70%
seen by loyalty program initiatives such as Chiptopia.
60%
57%
50%
40%
Source: Company filings and website
3
Locations in US
■ Chipotle currently owns and

operates 2,124 locations
worldwide.
■ As of May 2016, they have 20
locations abroad; 14 in
Canada, 7 in England, 5 in
France and 1 in Germany.
■ In the next 8 years, Chipotle
plans on doubling its number
of stores. By the end of 2024,
they plan of having over
4,000 stores worldwide.
Source: RMAX Investor Presentation
6
Chipotle Industry Overview
Fast casual restaurants are a hybrid of fast food

and casual dining restaurants.
Fast casual restaurants offer minimal table
service and The menu is limited and moderately
priced, but the food is freshly prepared and can
be customised.
The median revenue growth rate of these eight restaurants was

15.5% during the quarter.
The fast-casual segment grew 13% in ‘14 versus the total

restaurant industry's growth rate of 3.8%.
Source: RMAX Investor Presentation
7
Chipotle Business & Industry Overview - Afrin
Steve Ells Montgomery F. Moran

■ CEO & Founder ■ Co-CEO
■ Founded Chipotle in 1993 ■ Joined Chipotle in 2005
■ Prev: Line Cook in SF ■ Prev: CEO at law firm
John R. Hartung Mark Crumpacker

■ CFO ■ Chief Creative and
■ Joined Chipotle in 2002 Development Officer
■ Prev: VP at McDonalds ■ Joined Chipotle in 2009
■ Prev: Creative Director
Source: Company website
9
III. Recent Development
Recent Development
Timeline of Chipotle’s decline
Aug. ’15- Breakout of Norovirus and Salmonella

As of Today:
Nov. ’15 - Accusations of E.Coli are made at 1.Sales have fallen for three straight
Chipotle after 60 cases are reported quarters
2.Same-store sales fell 23.6% in the most
Nov. to Jan. ’16 - Stock price crashed almost 45% recent quarter
3.Chipotle has spent over a billion dollars
Jan. ’16 - Chipotle discloses subpoena in buybacks over the past three quarters
4.CMG’s margins have taken a massive
Jun. ’16 - Chipotle unveils a new rewards program hit and have been dropping ever since
- ‘Chiptopia’
Source: Company filings
10
Recent Development
Remediation - Chiptopia Summer Rewards Program
What is it? Results to date

- It is a monthly rewards program - 32% of all transactions are from
- The 5th, 9th and 12th meal of every month is Chiptopia users
free - Over the first three weeks, 100,000
- If you earn the same status for three months, new users were added every day
you get a bonus - July sales comp trend was up by
- Mild = Free meal; Medium = $20 worth of 300 bps
merchandise; Hot = Free catering for 20 - Chiptopia has also given them
people (worth $240) access to a lot of data about dining
- To earn the free catering for 20 people, patterns and they are now planning
you have to buy 9 meals every months a permanent rewards program
10
Recent Development
Other Campaigns to Regain Customers
In February, the ‘Raincheck campaign’ In March, they gave out free guac and
allowed customers to text “raincheck” to chips if you played 3 rounds to their
receive a free meal spot-the difference game
10
III. Activism Actions
Activism Involvement
Bill Ackman brings opportunities (and uncertainties) to CMG’s future
Overview Potential Actions
■Ackman took 9.9% stake in the company ■Spin-off
■Stock up 5.6% on day of disclosing – Unlikely, given CMG’s concentrated core business
■Cost reduction
■Promises to ‘engage in discussions’ on ■Increasing leverage

CMG’s ‘governance and board composition, – Reduces cost of capital, justifying a higher valuation
business, operations, cost structure, [and]
– Faster growth through holdco/opco borrowing
management’
■Franchising
– Ackman’s past track record in franchising with

McDonald’s has proven successful
– More stable cash flows through royalty
■Acquisition
– 3G-esque type of investing

– Holding and building out restaurant brands
Our thesis doesn’t rely on Ackman, activist involvement acts as potential catalyst.
However, no matter which course of action is taken, it would lead to an uptick in stock price.
19
Valuation
2-Part DCF Method: 1) Existing stores and 2) Future stores

■ New stores: extremely attractive unit economics
– Used simple unit economics to project value
– Capex of $805k to open each new restaurant
– An average restaurant achieves sales of $2.4m/year in 2 years (straight line acceleration)
– Management plans to build 2000 more stores (~230 stores/year)
– Restaurants have a ~26% margin (normalized period)
– Variable costs projected as a % revenue, except occupancy, which tracks restaurant openings
■ Existing stores: same-store sales will increase as old customers return
– Recovery from illness-scandal by end of 2018
– Projected same-store sales growth of 3% per year after sales normalize
– New fixed costs related to health-safety precautions will not increase
■ Public perception has changed significantly, but the stock price does not reflect this – catalyst is future
earnings that reflect improving public perception paired with new store openings
16
Valuation
17
18
Valuation
Growth: $196
$418
Existing: $352
Market Price Our Valuation
19
VI. Conclusion
Conclusion
It's far better to buy a wonderful company at a fair price than a fair company at a
wonderful price
-Warren Buffett, Letter to shareholders, 1989
21

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September 16, 2016

Chipotle Business & Industry Overview II

Recent Development III

Valuation and Catalysts V

■ Attractive business model - Strong fundamentals despite the recent scandals

■ Marketing campaigns are helping work regaining customer confidence

■ Strong growth potentials - domestically and internationally

■ Activism involvement - potential levering up, acquisitions and franchising

■ Normalization and increase of margins drive potential upsides

Status: Public (NYSE: CMG)

■ Founded by Steve Ells in 1993, a former line cook, and

dining experience with the convenience and limited 110% 109%

■ Lucrative margins in the fast food industry. 90%

Source: Company filings and website

■ Chipotle currently owns and

Source: RMAX Investor Presentation

Fast casual restaurants are a hybrid of fast food

The median revenue growth rate of these eight restaurants was

The fast-casual segment grew 13% in ‘14 versus the total

Source: RMAX Investor Presentation

Steve Ells Montgomery F. Moran

John R. Hartung Mark Crumpacker

Source: Company website

Aug. ’15- Breakout of Norovirus and Salmonella

Source: Company filings

What is it? Results to date

Source: Company filings

■Promises to ‘engage in discussions’ on ■Increasing leverage

– Ackman’s past track record in franchising with

– 3G-esque type of investing

2-Part DCF Method: 1) Existing stores and 2) Future stores

Market Price Our Valuation

-Warren Buffett, Letter to shareholders, 1989

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