This day coincided with the third quarter earnings announcement from Chipotle Mexican Grill. The past few years have been tough for this once loved purveyor of proteins and vegetables. A few solid years of unabating global inflation had caused input costs to soar which, in turn, means menu inflation followed. It was around this period that Chipotle faced increasing backlash online about their portion sizes— both in terms of their inconsistency as well as the fact customers felt they were being shortchanged. Was this tactful internal policy to save margins or an unfortunately-timed gradual decline in the enforcement of standards? Who’s to say.

The fact of the matter is that this earned Chipotle a lot of bad press. So much so, that press releases and advertising campaigns were spun up to console angry customers and assure them more attention would be given to serving beefy portion sizes once more. A recurring theme throughout earnings calls of 2024 and 2025 was the company’s progress on setting the portion problem straight.

Below is a snippet from the first time the social media backlash was brought up during the company’s Q2 2024 results in July 2024.

“I want to take a minute to address the portion concerns that have been brought up in social media. First, there was never a directive to provide less to our customers. Generous portion is a core brand equity of Chipotle. It always has been, and it always will be. With that said, getting the feedback caused us to relook at our execution across our entire system with the intention to always serve our guests delicious, fresh, custom burritos and bowls with generous portions. To be more consistent across all 3,500 restaurants, we have focused in on those with outlier portion scores based on consumer surveys, and we are reemphasizing training and coaching around ensuring we are consistently making bowls and burritos correctly”.

- Brian Niccol, former CEO of Chipotle

Brian Niccol would leave shortly after, in August 2024, to join Starbucks. By November, Scott Boatwright, Chief Operating Office since 2017, was appointed.

The Coming of Slop

I don’t know exactly when the phrase entered the lexicon of the english-speaking world, but at some point Chipotle, and a handful of other quick-serve bowl-centric restaurants, began to adorn the title of “Slop”. Slop merchants. Bowls of slop. The era of slop. Slop fatigue. One of my favourite headlines1 read, ‘The slop bowl recession just sent Chipotle’s stock cratering’.

The date of this article was October 31st, 2025. The day after Chipotle reported their third quarter earnings for the year and the stock fell 18.2%. Only three times in history has the stock fell harder in a single day. Two occasions during the great financial crisis of 2008 when the company’s share price would fall ~20% within 2 months of each other. Once, in 2012, where Chipotle fell 22% after the E.coli scandal hit the headlines.

What was so calamitous in this earnings call that caused such a sudden recoil from investors? Following successive negative comparable sales, Chipotle managed to squeeze out a 0.3% improvement on comparable sales in that quarter. Restaurant margins decline 100bps YoY falling to a, still high by industry standards, 24.5%. Talks of macroeconomic pressures, results failing to live up to analyst expectations, yada yada yada. The objective truth of the matter is that Chipotle was still choking down the inflation from the post-pandemic era and it’s influence on the, now more sensitive, consumer.

With the mythical powers of hindsight, its clear that Chipotle sprayed the inflationary bazooka for a little too long. Instead of offsetting inflation, they were confident the consumer could absorb more price. Observing the 3 years before and after the pandemic (2020) are telling. In 2017, 2018, and 2019, Chipotle pushed through annual menu price increases of 1.2%, 2.4%, and 0.2%, respectively. In 2021, 2022, and 2023, the annual price hikes were 8.5%, 12.0% , and 5.2%. After pressure on transactions growth started to appear, Chipotle lowered the price inflation to 2.9% in 2024. Despite pushing price so hard, Chipotle’s consumers were unwavering. Comparable sales kept printing good numbers. Transactions, albeit with a wobble in 2022, continued to look strong too, with comps of 10.3%, 0.9%, 5.0%, and 5.3% in 2021, 2022, 2023, and 2024, respectively.

One could be forgiven for thinking that Chipotle knew something we didn’t. How could this business continue to raise prices even as inflation in the United States, Chipotle’s largest market, started to come back down to earth in early 2023? What made them so confident?

In early 2024, while discussing the company’s Q4 2023 results, former CFO John Hartung suggested that Chipotle could see restaurant-level margins as high as the “30% range” as the company approach $4 million average unit volumes.

“As we get up to $4 million, I would expect we’d be in the high 20%, maybe even in the 30% range. Again, you’re talking about predicting something over a very long period of time. But our margins will definitely get stronger over time, which means our returns will get stronger as well as we move from $3 million to $4 million”.

-John Hartung, former CFO of Chipotle

At the time, Chipotle had just reported 26.2%2 margins while simultaneously surpassing $3 million in AUV for the first time. In the following year, Hartung’s message would seem like gospel as margins increased 50bps and the AUV saw an incremental $190k improvement to $3.2 million.

All seemed well. There was some social media backlash against small portions. There was a change in CEO. The rise of the term “slop bowl” was becoming more prominent. But until around Q1 of 2025, Chipotle had showed few signs of fundamental deterioration. The stock marched on. By the end of 2024, Chipotle shares traded for ~$60 which was not too far away from the all-time high of $68.

Chipotle continued the inflation party long after the economy began signalling it needed a break and this ultimately came back to haunt them in 2025. In financial markets it only takes a few bad quarters for a story to “fall apart”. The first two quarters saw consecutive bouts of negative comparable sales. Counter narratives started forming. Margins begin to slide and so too did the share price.

If there is one thing you can count on, its the high correlation relationship between falling share prices and headlines declaring the end times for said company. In a lot of cases, this is apt. In some cases, and this is where you are paid as an investor, its a simple case of narrative following price. In the case of Chipotle, it is my opinion that the challenges facing the company are temporal. Nature catching up with a company that overreached in price without an accompanying increase in quality. Nature eventually striking down those who traded on borrowed time. We’ve since seen Chipotle make a strong effort to bring value back to the menu with incredibly low priced, protein packed, offerings. Smaller tacos, protein bowls with 32g protein under $4. It’s not exactly my cup of tea, but it’s an obvious boon to the add-on business as well as something to satiate the cheapskates.

In my mind, it doesn’t take a lot to put Chipotle back on track. In my opinion it never really derailed, but in the eyes of the fickle analysts, it has. Chipotle has an incredibly efficient box-box scaling model, high margins that can take a punch or two, and a largely untapped global market outside of the United States, where more than 95% of their stores are located.

Following the intra-day dump of Chipotle on October 30th, I picked up shares for the price of $30 a piece. I find it laughable that commenters claim that Chipotle is finished. Like there is not a world outside of the borders of the U.S of A. I don’t expect much in the 2025 fiscal year results. Revenue will grow at a subdued rate. Margins will likely contract. Comparable sales are going to decline for the first time since 2016. Much of this was priced in the second it became apparent to the market, many months back.

As for 2026, I see it probable that an improvement on 2025 results will occur. From there, I think the narrative will eventually shift back to business as normal. Maybe next year, maybe the one after that. Maybe the crowds shouting “Slop” will get bored and move onto the next struggling industry, who knows. I don’t invest on two-year time horizons. I am not skilled, nor lucky enough to do so. I have heard that longer time horizons improves the odds of getting lucky. Lord help me. At $30 per share, I think much of the downside is accounted for.

Thanks for reading,

Conor

1

2

Following the Q4 earnings in November 2024, an announcement to raise (at $85 per share) a further $64.6 million in proceeds surfaced; once again for CapEx and operating costs. Armed with more than $100 million in cash on the balance sheet (an all-time high) the business is secure for the next few years.

In the fiscal 2024 year, Kura opened 14 new units steering CapEx to $44.3 million, up 65% from the $22.8 million in 2022. A further 14 stores are expected in the fiscal 2025 year, meaning we can expect that figure to approach the $50 million mark with the added maintenance costs of an evergrowing portfolio1 (now 69 stores across 21 States).

Share issuance carries dirty connotations. Kura, whose sharecount has expanded by 43% since 2020, has not shied away from using public markets to acquire growth capital. The cons of doing so are well-known. It’s not sustainable to rely on public favour, it dilutes shareholders, and it can be a wasteful endeavour without capital discipline. It’s my opinion that Kura bucks the trend.

Management has demonstrated savvy capital allocation with respect to share issuance, tapping into the market at times when the share price is scorching hot. They have, at times, favoured this method to avoid or pay down debt appropriately. The signal that Kura has often provided for issuing stock is that of expansion opportunity. Given that growth has outpaced dilution, I believe this has proved to be justified. The added liquidity this affords has resulted in a steady increase in institutional ownership too.

On a per-share basis over the period the sharecount has climbed 43%, revenue (+90%), gross profit (+152%), and book value (+97%) have all more than offset the dilution effect.

A return to pre-pandemic profitability has eluded the business thus far. The last time Kura Sushi reported a positive net income was back in 2019, at a razor-thin margin. Operationally, excluding the insignificant $332,000 in EBIT reported in 2023, they have by all accounts evaded operational profitability since 2019 too. Since then, however, the acceleration in overheads from a considerably more aggressive expansion has been immense. It’s not exactly a moment in the company’s history when they ought to be prioritising profitability over scale. Since 2019, Kura’s revenues have grown 270% at a 30% CAGR, now amounting to $238 million on a trailing basis (up 27% YoY). Management is guiding for revenue growth in the mid-teens for fiscal year 2025.

Signs the economic model is growing stronger over time continue to stack up. While food and labour costs climbed slightly year-over-year on the back of inflation, Kura management maintained a restaurant-level operating margin above 20% for the third consecutive year. The SG&A margin, 14.1% in fiscal 2024, has continued to improve in alignment with CFO, Jeff Utz’s, guidance and is expected to fall another 60bps by fiscal 2025. Average Unit Volumes, up 35% since 2019, held steady at $4.23 million in 2024.

Strength in AUV was no doubt aided by pricing, but this was impressive as Kura’s mid-year was troubled with a decline in traffic. In his post-mortem, CEO Hajime Uba claimed that while initially believing the slowdown was a result of the “sticker shock” (higher pricing) after the implementation of the AB 12282 , his thinking changed to a “wider national macro factor, which has been corroborated by the earnings calls of [industry] peers”.

Comparable restaurant sales growth, which has been in free fall since the middle of 2023, has been in sequential decline since mid-2023. After flirting with a negative comp in Q3, comparable sales dipped into the negative (3.1%) in Q4.

The tide may be changing, however. Uba would remark in the Q4 call that “The sales pressures beginning in April improved significantly over the course of the quarter” which assisted in the company avoiding negative comparable sales for the fiscal year, coming in at 0.7%. This was followed by assurances that the team expect positive comparable sales in the coming fiscal 2025 year.

There isn’t much value in getting distracted by short-term traffic trends; particularly when similar headwinds have been felt across multiple industries. Kura’s guidance is modest and around half of the 2Y average revenue growth rate. It was nice to see a more conservative approach to guidance after the faux pas3 in fiscal 2024. When asked about why the guide is so muted, it seems management wanted to avoid being the cat that touched the stove top twice.

“We're very pleased with the performance that we've seen to date as we've entered the fiscal year September and October. Q1 is definitely outperforming Q4, and we're very happy to see that. But -- it's also true that we're still in mid-process in terms of recovery. And so we feel it's prudent not to be overly aggressive with our revenue guidance at the beginning of the year. The last thing we want to do is to have to do a repeat of downward revenue guidance that we did last year. And so we felt that this was the most prudent approach”.

Five stores have been opened so far in fiscal 2025 with another 6 under construction. There could be some upward revision there given that 35% of the guidance has been delivered before Q1 is over. The expected implementation of the self-seating system is not currently included in the guidance, a variable that management suggests could provide up to 50bps of savings on the labour line item and flow directly to the bottom line as “gravy” to the current guidance. Moreover, as we have seen in the past Kura typically likes to lowball annual guides and provide incremental upgrades with improved clarity. Granted this bit them in the ass in 2024, but there remain a lot of positive opportunities for surprises in the coming year, assuming the macro environment remains stable.

The handful of KPIs worth following for this business remains on track as far as I am concerned, leaving me comfortable with holding for the foreseeable future. One concluding remark I will make is that was I slightly jaded in the summer when the stock sunk to ~$50 per share. In my infinite wisdom, I held off buying this drawdown partly because the position size was comfortable and because I had reservations that the drawdown came at a time of weakness compared to the past few times which came after incredible earnings. I did suggest my significant other take a small position around this time and her investment is now up more than 100%, so not all was lost.

Thanks for reading,

Conor

1

Kura Sushi store distribution by State. In the fiscal fourth quarter, they opened one new store in New York. Subsequent to the quarter they opened five stores; two new states in Oregon and Maryland, one in New Jersey, one in Washington and one in California.

3

An excerpt from my comments in Q3: “At the end of Kura’s fiscal 2023, the company communicated guidance of $241 million (mid-point) in fiscal 2024 revenue. Following successive upgrades in Q1 and Q2, the guide increased to $245 million. The Q3 revision which calls for $236 million is now 2.1% lower than what they guided for in Q4 of last year and implies a 3.7% downgrade from last quarter’s mid-point estimate”.

The alcohol industry has been under pressure this year. Product mix has shifted as consumers cut discretionary spending or trade down to lower-quality brands. There are also voices suggesting that alcohol is in the early stage of a structural decline. Something about young people not drinking as much as prior generations.

In the midst of all of this, Campari Group decided to indulge in the sizeable acquisition of Courvoisier Cognac; a subcategory that has had a torrid three years. The rationale was as follows; (a) Courvoisier will strengthen Campari’s exposure to cognac and China, (b) they had an opportunity to acquire a never-sell, top 10 brand, (c) the business’ gross margin is at least 10% to 20% below where it could be, and (d) they don’t feel cognac demand has disappeared permanently. Outgoing CEO, Robert Kunze-Concewitz, explained to the Financial Times in December 2023 that people have short memories and this acquisition was a long-term decision:

“This year cognac players have a problem because there was scarcity during the pandemic, so distributors built stock . . . inflation and interest rates rose and players increased the prices, the macro scenario crisis affected consumption and distributors ended up with large stocks. But people have a short memory . . . cognac in the US is now a lot more popular than it was before the pandemic, in spite of the [current decline in sales].

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Burberry’s turnaround is moving at a glacial pace. So much so, that…

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The news means that Tortilla will now control ~120 company-operated and franchised locations across the UK and France as it looks to make a stamp on a continent which has been left relatively untouched by gargantuan rivals like Chipotle. Who, as of April 2024, only has…

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It places Burberry in the lowest percentile in more than 10 years across several valuation1 measurements. A discounted valuation might just be all that Burberry has going for it right now, however.

Revenues in FY24 (£2.97 billion) came in flat at constant currency but declined 4% YoY after foreign exchange. This marks Burberry’s fifth annual revenue decline in the last seven years. The downturn was widespread with both the retail (£2.4 billion revenue, down 4%) and wholesale businesses (£506 million revenue, down 7%) down on the year. Across product categories, growth was absent. The company’s largest division, accessories, accounts for 36% of revenue and saw revenue decline 6% to £1.06 billion.

Geographically, small deviations in the Asia Pacific (down 1%) and EMEIA (+1.3%) offset one another, with a net £2 million gain YoY. The Americas saw revenue decline 19% for an incremental loss of £140 million in revenue. Persistent pressure in the region continues to weigh on results. The table below highlights the messy nature of Burberry’s year, represented by a mixed bag of comparable store sales across regions. The Americas stands out as the worst performer, failing to report a single positive comp in any quarter.

To combat this, Akeroyd suggests that the United States and China will be a priority in the coming fiscal year. The majority of this will focus on lifting brand presence via marketing investment. The reopening of the number one flagship store in the US, located on 57th Street in New York, is expected to be complete this year too.

Outlook fails to inspire

Revenue is 13% higher than in 2019, before the pandemic. To Akeroyd and Lee’s credit, they inherited a turnaround business in a complicated time. That said, the fundamental picture at Burberry is bleak. Revenue has stalled and margins2 are declining. In FY24, gross margin (67.7%) declined by 280bps while operating margins (14.1%) declined by 640bps to levels not seen since the height of the pandemic in 2020. Far below the 20% operating margin that management aspires to. The business remains profitable but progressively to a lesser extent. Net income amounted to £270 million in FY24, down 45%.

The company have repurchased ~£800 million in shares over the last two years, reducing the outstanding share count by ~10%. This decision, in addition to the £435 million in dividends paid out during that time, has left the balance sheet looking somewhat sensitive. Cash & equivalents of £441 million is the lowest the company have held on the balance sheet in over a decade and has stretched net debt to adjusted EBITDA to 1.4x; well ahead of the 0.5x to 1.0x target range. Despite this, Akeroyd claims they are “comfortable with this leverage position” in light of the fact Burberry “continue to be a cash-generative business”. Evidently, because on June 13th the company announced the issuance of a £300 million bond at a 5.75% coupon due June 2030 (rated Baa2 by Moody’s).

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If I ask one hundred investors to name a few public companies in the alcohol industry, the usual suspects will surface. Companies like Anheuser-Busch (Budweiser, Stella Artois, Estrella), Diageo (Johnie Walker, Guinness, Captain Morgan), Heineken (Amstel, Heineken, Red Stripe), Constellation Brands (Modelo, High West, Corona), LMVH (Hennesy, Moët & Chandon, Glenmorangie) and Pernod Ricard (Jameson, Absolut, Malibu). Bonus points to those who would have said Campari Group (Aperol, Campari, Frangelico) because they own some of my personal favourites. They are home to the world’s most favoured beers, wines, and spirits.

Of those hundred investors, I wager fewer than four would have replied Laurent Perrier. There are a few hundred Champagne Maisons throughout the Champagne region of France; for the meme connoisseurs amongst us, only wines produced in this region may be labelled and sold with this prestigious title. Laurent Perrier, with its rich history stretching back to the early 1800s, is one of those Maisons, making it a rarity. Rarer still, it’s one of the few traded on public markets (FRA:LPE).

Champagne Heritage

Producing champagnes since 1812, Laurent Perrier is the company’s flagship brand; accountable for 44% of group revenues1. They are particularly well-known for their cuvée and offer a limited range of core and speciality wines, priced towards the higher end of the market. In the champagne world, the term cuvée has many meanings. In the context of this article, it’s enough to know that a cuvée indicates the wine is a blend of grapes. It’s also a designation which refers to the first-pressed juice for the wine; which is considered the most potent, flavoursome, and highest quality of the batch.

Having sampled a few of these champagnes, I can attest to their quality as a layperson. The Cuvée Rosé is particularly great. You’ll find that a bottle from their classic collection will cost anywhere from ~$65 for their standard La Cuvée to ~$110 for the Cuvée Rosé. Speciality champagnes, such as their Alexandra Rosé Millésime, will go for $500 to $1,000 depending on the vintage. Coming in at ~$250, the Siécle Grande Cuvée N.26 was awarded Wine of the Year 2023 by James Suckling; beating out 39,000 others. Receiving the highest score (100/100), it was described as being “electric on the palate” with a “freshness and balance that draws you back”.

Brands like Moët & Chandon, Dom Pérignon, and Bollinger enjoy widespread recognition. But Laurent Perrier stands tall amongst the world’s most popular champagnes, producing ~7 million bottles each year. As we will come to learn, production volume isn’t everything. It’s estimated that Laurent Perrier controls a worldwide market share of ~3.5% to 4%.

As a group, Laurent Perrier is exclusively focused on Champagne and owns a total of four brands. While not as renowned as the namesake label, they also own Delamotte (1760), Champagne de Castellane (1895), and Champagne Salon (1920).

Keep It In The Family

Laurent Perrier was born in Tours-sur-Marne, France, the heart of the Champagne country. Cask maker and bottler, Alphonse Pierlot, founded the business in 1812. After his passing, and with no descendants, the business was inherited by his cellar master, Eugène Laurent. It wasn’t until 1887 when the newly widowed Mathilde Emilie Perrier took ownership that the company would bear the name Veuve Laurent-Perrier. She would find moderate success and by the time the First World War came, Laurent Perrier had become an international brand; marketing itself to UK audiences. In 1925, Mathilde passed away and left the company to her daughter who would sell the business in 1939.

The acquirer was one Mary-Louise Lanson de Nonancourt. Her acquisition of Laurent Perrier was the inception of family ownership that would continue for the next 85 years and is still ongoing. Mary-Lousie’s youngest son, Bernard de Nonancourt, would inherit the business in 1949 and become a pivotal figure in the business’s history.

“After returning from the war, Bernard de Nonancourt completed a demanding apprenticeship in the vineyards before becoming CEO at the age of just 28. At the time, the company employed around twenty people and sold 80,000 bottles. Under his leadership, Laurent‑Perrier became a true innovator in Champagne in just 40 years. Fascinated by innovation, attached to the traditions of the Champagne region and the quality of its people and wines, Bernard de Nonancourt created the Laurent‑Perrier style - freshness, elegance, purity - and developed a unique range of champagnes that were exported worldwide to more than 160 countries”.

- Laurent Perrier History

The company’s acquisitive exploits would occur under Bernard. A majority stake was acquired in Champagne de Castellane in the early 1980s, resulting in a full acquisition years later. Delamotte was acquired in 1988, followed by Champagne Salon one year later. In 1999, the company floated on the Paris Stock Exchange and created a management structure that introduced Bernard’s daughters, Alexandra Pereyre and Stéphanie Meneux de Nonancourt. Following his death in 2012, his children continue to run the business to this day. Anchored in its homeland, France, the group operates 6 subsidiaries throughout Europe with one in the United States2 and partners with independent distributors in more than 140 countries.

Owner Mentality

Throughout the De Nonancourt’s tenure, the family has controlled the majority of the ownership and voting rights. At present, they own ~65% of the outstanding shares and ~78% of the voting rights. Since 2000, the outstanding sharecount3 has never deviated more than 2%. By now you’ve probably guessed Laurent Perrier is a fairly illiquid stock. You’d be right. Throughout the last decade, Laurent Perrier’s market cap has shifted between €350 million to €830 million. On an average day, the stock will trade 820 shares or €65,900 in notional value. Nick Train, of Lindsell Train, commented on the difficulty of accumulating a position in Laurent Perrier during their 2023 annual report:

“In fact, our only activity was to add to our most recent position, Laurent Perrier. This is now getting on for a 2% holding and we look to build it further, when shares come available, which is infrequently”.

Lindsell owns less than a percentage of the business. First Eagle Investments (an investment advisory) is the largest outside owner, at ~9% of outstanding shares and ~5% of voting rights. In a 2019 memo, First Eagle commented on Laurent Perrier in a segment titled the “Search for Quality”.

“Another example of an old family-owned business is Laurent-Perrier a Champagne maison founded in 1812 and controlled by the De Nonancourt family, which has been running the company for three generations and currently owns 61% of it. With its supply structurally limited by French law that defines the geographic area in which it can be produced, Champagne is a scarce asset, and the vast majority of both the wine and the grapes needed to produce it are in the hands of large maisons like Laurent-Perrier. While its Champagne brands—most notably Laurent-Perrier but also Salon, De Castellane and Delamotte—are very valuable, Laurent-Perrier also controls certain impossible-to-replicate assets in the form of its vineyards and other prime real estate and its large inventory of aging bottles”.

Constrained supply is a beautiful thing for luxury businesses. Only so much Champagne can be produced in the region each year. It’s heavily regulated and the barriers to entry are high. The average Champagne Maison will produce ~20% of its grape yield from their own vineyards each season. Contrary to peers, Laurent Perrier produces only 10% of its grape requirements from owned vineyards in a given year. They say this is because they “never believed that the purchase and operation of vineyards should be its core business” and instead favour agreements with a range of wine growers. This has allowed them to be flexible and keep fixed costs low. Areas they can exercise some control is in their reserve inventory management. Nonetheless, a myriad of external factors influence yields such as weather, contracts, and regulation. Not to mention the fact Champagne of this quality must undergo lengthy ageing processes, at times up to 15 years.

Champagne’s scarcity and the muscle of pricing power make it a natural luxury product. Scarcity is great Laurent Perrier, but what about shareholders? With so few shares traded, it requires an investor who is either (a) patient or (b) certain of a particularly potent catalyst or liquidity-inducing event. For the patient investor, you are investing alongside the family which has owned the business for what is now approaching a century. Companies with such ownership tend to ignore the quarterly posturing and fanfare of appealing to analysts. Instead, they make long-term decisions, which isn’t a luxury afforded to most management teams. Of course, this has its downsides too. While a family-owning 78% of the voting rights are unlikely to be distracted by quarterly minutiae, they are equally unlikely to be influenced by warranted activism or shareholder unrest. It’s their damn business after all. In Laurent Perrier’s case, there has been no precedent for concern.

Two Distinct Stages

Looking backwards can be a deceitful practice for an investor. We do so for a fuller understanding of the backstory and history of the business. We want to see how management teams behave under various regimes and cycles. How the products hold up over time. Laurent Perrier struggled following the great financial crisis of 2008. Revenues took a 25% haircut and wouldn’t recover for ten years. Last week, Laurent Perrier reported an all-time high of €312.5 million in group revenue for 2023.

When dreams are smashed, expectations are reset. Following a plunge in demand for champagne in the wake of the crisis, Laurent Perrier’s stock price bottomed out at ~€30 per share4in the first quarter of 2009. From there it has gone on to produce ~9.5% compounded annual returns. Not too shabby. It’s more accurate to look at these two distinct stages in the company’s history as one embodied by steady growth that was crushed by a global crisis and the other as the long-winded recovery. Following the most recent external shock, the 2020 pandemic, Laurent Perrier recovered much faster. Why?

The most accurate answer is outside of the remit of this article. It’s enough to say this shock was different and inflicted pressure on consumers’ finances and taste for luxury that was more ephemeral. It was fierce, unprecedented, and uncertain. Unemployment rocketed, stock markets cratered, and the gauges for global supply and demand aggressively recalibrated several times to reflect the continuously evolving reality we found ourselves in; the effects of which are still reverberating through the economy. But I suspect that in years to come, people will look back on this time and feel that it disappeared as suddenly as it arrived. Stock markets had recovered by the Fall, unemployment soon retreated to multi-decade lows again, and following a boom for e-commerce companies came the inevitable recovery of the out-of-favour physically-presenced businesses. Governments were quick to step in and support the consumer, who was looking for ways to occupy their time as they remained indoors for the better part of two years (Champagne anyone?).

Pricing Power

Laurent Perrier has proven to be resilient in the face of a crisis; the management team now has a few under their belt. But this recent chapter of recovery had other dynamics at play. Following the great financial crisis, there was a bout of inflation. Rates varied, but across the United States and Europe, they would peak at 5.6% and 4.1%, respectively, before disinflation and even a brief period of deflation in 20095. Rates wouldn’t cross 4% again until 2021; and boy did they cross 4%. Inflation has since cooled but climbed to as high as 10.6% and 9.1% across the US and Europe throughout 2022 and 2023.

During this inflationary phase, most companies began to pass on price increases to consumers as a way of offsetting costs. Laurent Perrier was no different. While it’s always been a part of their strategy to inflate their prices over time, much like any luxury business, the last few years have been particularly notable. In the years 2022 and 2023, Laurent Perrier saw champagne revenues grow by 3.1% and 0.5% while volumes fell by 7.4% and 12.4% in consecutive years.

Over the period, the price mix effect was 9.5% and 13.0%; considerably higher than usual. In other words, Laurent Perrier has been maintaining (modestly growing, even) Champagne revenues while aggressively pricing their offerings upmarket. Operating profits have benefited greatly. From 2018 to 2023 Laurent Perrier has grown operating profits by 130%, margins have expanded from 16.6% to 31.3% for Champagne and they grew earnings per share by 176%. Net income margins, currently at 20% of 2023 revenues, are at all-time highs too.

You may ask how sustainable this is.

It’s likely the elevated price mix will float back down to mid-single digits in coming years, but this wasn’t a strategy conducted in the frenzy of a crisis. Laurent Perrier’s Value Policy has been in place for several years before the pandemic. The policy saw the management team explicitly focus on positioning their premium cuvées within the higher end of the market. They felt they were leaving money on the table. Paraphrasing from a couple of the last annual reports:

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Aperol, with its vibrant flavour and inviting orange hue, is a classic in many parts of the world. However, it wasn’t always this popular. The beverage has seen phenomenal growth in the last two decades; averaging more than 20% annual sales growth. In the most recent financial year (2023), Aperol saw 23% organic growth and recorded ~€700 million in sales. The recipe is over 100 years old and has never changed, so why is it so popular today?

Italian connection

Founded in 1919 by two brothers in Italy, Aperol was later nurtured and successfully commercialized by the Campari Group (CPR, listed on the Milan Stock Exchange). Campari, the famous red liqueur, is the main ingredient in a Negroni, as well as several other iconic drinks. As a collective, the Campari Group has a long and successful history of acquisitions.

In 2003, eyeing something special about their orange-tinted cousin, Campari paid €150 million for Aperol, whose revenue was ~€30 million at the time. Back then, Campari’s flagship brands were Campari (15% of sales) and SKYY Vodka (12% of sales, acquired in 2002). By 2011, Aperol briefly became the group’s largest brand; later cementing its place more permanently. Today, it accounts for almost a quarter of group sales. Perhaps the Campari Group ought to consider a name change.

But this growth hasn’t come at the expense of other brands; more of which were acquired along the way. Both Campari (€117 million → €321 million) and the rest of their portfolio (€566 million → €1.9 billion) have witnessed respectable growth in tandem.

When Campari acquired Aperol, the group wasn't yet a global business. At that time, nearly 50% of its sales came from Italy, 19% from the rest of Europe, and 31% from the Americas. The portfolio was also heavily concentrated in higher alcohol content beverages such as Campari (20.5% to 28.5% depending on where sold), SKYY Vodka (40%), and Tequila 1800 (38%).

Across Europe, a shift in behaviour towards lighter alcoholic beverages had been brewing. Campari faced a challenge that was largely outwith their immediate control. One made more difficult in 2008 as a reduction in discretionary spending hit Europeans in the aftermath of the financial crisis. Aperol was an ace in the hole. It was a lighter beverage (11% alcohol) with natural ingredients that could be enjoyed without food and didn’t dent the purse strings quite as much as spirits.

The aperitif playbook

The Aperol Spritz (a cocktail that is three parts Cinzano Prosecco, two parts Aperol, and one part soda) would be the vehicle through which Campari marketed and popularised the Aperol brand. Campari invested heavily in the Aperol brand both domestically and internationally; focusing on bars, cafes, and other locations where dining is often more informal and less expensive than in restaurants.

Flip through the past few decades of Campari annual presentations and you’ll get a sense of the plethora of vibrant and fun ways the group have continued to market the brand. Trade events, sponsorships, quirky point of sale, tours, bars, parties… Aperol has demonstrated incredible dexterity in marketing over the decades, particularly as it relates to selling the beverage as an experience.

More recently, the "It Starts With Aperol Spritz" campaign, was launched circa 2017 to emphasise the simplicity and appeal of the Aperol Spritz recipe.

It was a playbook that Campari had executed before. Gaspare Campari was the creator of Campari and founder of the Campari Group. Born in 1828 he would later open a bar, Caffè Campari, serving his namesake creation to customers. The story goes that sometime in the 1860s a customer returned the beverage complaining that it would be better serviced over ice with fizz. And so, Gaspare created a cocktail that is now known as the Americano; composed of Campari, sweet vermouth and club soda.

A little later in the timeline, the Americano would become the father of the Negroni; another classic cocktail which popularised the use of Campari; a fortified version of the Americano. In a similar fashion to the discovery of the Americano, the story goes (I am not sure how true these stories are, but hey) that Mr Camillo Negroni, wishing to strengthen his beloved Americano, requested that the soda water be replaced with gin. Like Aperol’s Spritz, the resurgence in popularity of the Negroni this century in turn boosted the sales of Campari.

There is a fascinating relationship that takes place in the alcohol industry. Alcoholic beverages with strong brands that are intrinsically tied to classic cocktails, extend their longevity and status through that cocktail. Ask any pretentious Negroni lover (I happen to think a little pretension never hurt anyone) and they will tell you “It can’t just be any bitters. It has to be Campari”. There will be copycats1, but they will never be the “real thing”.

From hometown to the world stage

Throughout Campari’s ownership, Aperol has shown strong and steady growth in core markets while simultaneously reporting, at times, triple-digit growth across second frontier markets; new regions where they rolled out the Spritz playbook.

The geographic dispersion of Aperol’s sales broadened as it found success internationally. Still a popular staple in Italy, Aperol now derives a larger share of its revenue across Western Europe as well as in the USA. This trend perforated across the entire group as they looked to de-risk themselves from Italy and capitalise on a global scale.

Once accounting for 50% of sales (2005), Italy remains an integral part of the identity of Campari and many of its brands. But it’s no longer the dominant market; a trend which has been in motion since the turn of the century.

Aperol’s got legs

Campari Group has historically been a steady, mid-single-digit revenue growth, type of company. The two years post-pandemic lockdown saw the business accelerate to grow revenue by 22.6% and 24.16% in 2021 and 2022, respectively, before tapering off to 8.2% growth in 2023. Margins, despite the frequency of acquisitions over the years, have remained fairly steady. On a trailing basis, Campari boasts gross margins of ~58%, operating margins of ~20%, and net income margins of ~11%. Like most companies, Campari managed their way through the inflationary environment of the last few years by passing that on to customers.

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Starbucks

Weighting as of writing: 5%

10th May 2024 - Q2 FY24 Results

On the 30th of April, Starbucks presented results for the second quarter of FY24. While Starbucks shows growth on a 6-month YoY basis, Q2 was a continuation of the troubling trends from last quarter in what the company call a “complex operating environment”. A broad decline in same-store sales comps and transactions across the board, offset only by a +4% comp in North American ticket, has led many to speculate that Starbucks pushed the envelope too far with price inflation in years prior. Voting with their wallets, consumers have lost their appetite for the world’s largest coffee chain. Matters were made worse when Laxman Narasimhan, Starbucks’ CEO, received harsh criticism from Jim Cramer on CNBC. The bumbling, corporate-sounding, and vague rebuttals to Cramer’s legitimate questions did not paint Howard Schultz’s appointed successor in a good light.

At home, Starbucks Rewards members declined sequentially. In China, where recovery has yet to take off in a meaningful way, aggressive discounting behaviour from competitors is showing up in Starbucks’ anaemic revenue growth in the region despite rapid store growth. Guidance for FY24 EPS took a sizeable haircut. Starbucks is facing immense challenges from every corner, and the share price, now ~$76 per share, is far from its last high of $118 (2021). The company’s forward PE1 of 19.1x is the lowest it has been since the great financial crisis of 2008 and while this is subject to likely downward revisions on estimates, the sentiment surrounding Starbucks as both a business and stock is exceptionally foul.

Key points from the report:

• Revenue of $8.6 billion (-2%) with a 4% decline in comparable sales (-6% decline in transactions, +2% in average ticket).

  • North America same-store sales (-3%) driven by 7% decline in transactions with +4% in average ticket.

  • International same-store sales (-6%) driven by 3% decline in transactions with a 3% decline in average ticket.

  • China same-store sales (-11%) driven by 8% decline in transactions with a 4% decline in average ticket.

• Margins are down across the board.

• Significant downgrade in FY24 guidance across the board for revenue, store expansion, EPS, and the Q2 to Q4 China recovery.

• A rare sequential decline (1.5 million / 4.3%) in US Rewards membership as occasional customers rotate out of the 90D cycle.

  • Rewards membership in China (21 million) has been flat since Q4 FY23.

• Starbucks plans to introduce tapioca balls (boba) and a new energy drink line; open the Rewards app to non-Rewards members to reach the occasional consumer; and consider a deeper exploration of the relatively unserved evening to night daypart.

Trouble at home

For Starbucks, the trouble starts at home. North America saw a 3% decline in compare store sales with a 7% decline in transaction volume; partially offset by a 4% increase in average ticket. Revenues were flat year-over-year but came with a 6% decline in operating income ($1.48 billion) and a 110bps decrease in margin (18% in the quarter). Continued concerns over the loss of appeal to the occasional customer were illustrated by a 4% sequential decline in US Rewards membership; a rare occurrence for Starbucks. While up 6% on a year-over-year basis, the trend of customers falling out of the 90-day activity catchment is a concern. It indicates that, for whatever reason, people are visiting Starbucks less frequently. Remarking that their most loyal customers are showing no signs of fatigue, the root of the problem seems to lie with the casual customer.

In a best-case scenario, this is the result of a temporary shift in consumer behaviour; a degration of their propensity to consume smaller luxuries like Starbucks in light of the current economic environment. You can argue that Starbucks perpetuated this by increasing prices too aggressively during inflationary times.

Consumer’s disposable income and appetite for small luxuries will always fluctuate. The great financial crisis, for example, stifled the consumer’s appetite for life’s little luxuries (Starbucks revenue declined 6% between 2008 and 2009) but didn’t cause permanent damage to Starbucks. The worst-case outcome is that Starbucks has gone too far or, more importantly, lost appeal amongst a subset of the American consumer. I believe the former is closer to reality. Arguments about increasing competition and the “mid” quality of Starbucks coffee are moot points; both factors have been present for decades. But time will tell.

The troubles may start at home, but they don’t stop there. International as a whole saw a decline of 6% in same-store sales with a 3% decline in both transactions and average ticket. One caveat here is that China, which saw an 11% drop in same-store sales, is pulling down the average. Excluding China, international would have seen positive revenue and same-store sales comps in the quarter with strength across Latin America and Japan. Things have been so bad that founder and multiple-time CEO, Howard Schultz, took to LinkedIn to share his perspective on their lack of focus; “It’s clearly not business as usual” he said.

“It’s not the miss that matters. It’s what comes next. What’s the diagnosis of the problem? What’s the impact on morale? And what’s the strategy to fix it? At any company that misses badly, there must be contrition and renewed focus and discipline on the core. Own the shortcoming without the slightest semblance of an excuse. There is a natural tendency to try to do too much too soon. Don’t try to do everything at once. Leaders must model both humility and confidence as they work to restore trust and increase performance across the organization.

Starbucks will recover, of that, I am certain. Starbucks created an industry that did not exist. The brand is one of the most recognized and respected in the world. I am confident the China business will return to health and become the company's largest market. The brand is incredibly resilient, but it’s clearly not business as usual”.

- Howard Schultz

Schultz concludes that “the company’s fix needs to begin at home” citing the US operations as “the primary reason for the company’s fall from grace”.

Guidance faux-pas

Starbucks could have gotten ahead of this wave of negative sentiment by ripping the band-aid off last quarter. In Q1 it was expected that Q2 would be “meaningfully below” the full-year growth guidance. Coincidingly, amidst a downward revenue revision, Ruggeri repeatedly played down questions asking why the year’s EPS forecast remained at 15% to 20% despite the evidently deteriorating consumer trends. Adamant they’d be able to maintain the growth rate, she told investors “Despite these headwinds, we remain committed to our full-year fiscal 2024 EPS growth in the range of 15% to 20%”.

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Tortilla Mexican Grill

Weighting as of writing: 1%

24th April 2024 - FY23 Results

Last week, Tortilla Mexican Grill announced its full-year 2023 results. It’s been a tumultuous 12 months for the nation's largest Mexican quick-serve chain, which new CEO Andy Naylor described as a “recovery” year. The company’s strategic long-term goals have been updated. Tortilla will now be focussed on UK profitability, brand growth, reinvestment in tech & people, and has declared intent to “double down” on franchising and kick-start international expansion.

Overall, it was a mixed report. While the added emphasis on profitability and expectation of margin expansion in 2024 will please some investors, a conservative revision to store expansion will not. Previously guided for 8 to 12 stores in the current fiscal year, the estimate has been revised down to just 8. Only 3 of those are expected to be company-operated; implying the slowest company-operated store growth since 2018. Tortilla has averaged ~6 ne…

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Lululemon Athletica

Weighting as of writing: 3%

23rd April 2024 - FY23 Results

On March 21st, Lululemon reported FY23 results. All things considered, the results were good. Guidance, however, caused some upset. Lululemon shares are down ~29% this year; after being down just 6% before the report, and is currently the 8th worst-performing stock in the S&P 500. Lululemon’s implied 11.5% revenue growth for 2024 is a notable deceleration from years prior; having averaged an annual revenue growth rate of 24.4% over the last 5 years. This year’s revenue guidance is closer to, but still behind, the 5 years before that; where Lululemon averaged 15.7% annual revenue growth.

A report1 from Jefferies concluded that Lululemon “could be the next under armour”. The report cites competition from rival premium athleisure brands such as Alo and Vuori, fashion shifting to “wide-leg” pants which are not Lululemon’s fotre2, the wasteful capital allocation of Mirror hardware and entering the footwear market as

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LVMH Moët Hennessy

Weighting as of writing: 3%

18th April 2024 - Q1 FY24 Trading Update

On April 17th, LVMH published a sales update for the first quarter of 2024. The group reported 3% revenue growth, or -1% after accounting for a 4% FX drag. Notably, wines and spirits (down 12%) continue to suffer; cautious restocking of US retailers and soft local demand during the Chinese New Year were cited as headwinds. Selective retail (+11%) continues to be a bright spot in the portfolio. The soft US consumer, largely influenced by aspirational clientele, has been a constant theme over the last 18 months. The trend persists, but executives believe a gradual improvement is on the horizon.

Key points from the update:

• Group revenues (€20.69 billion) +3% organic & -2% reported1.

  • Wines & spirits (€1.42 billion) -12% organic & -16% reported.

  • Fashion & leather (€10.49 billion) +2% organic & -2% reported.

  • Perfumes & cosmetics (€2.18 billion) +7% organic & +3% reported.

  • Watches & jewellery (€2.45 billion) -2% o…

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Auction Technology Group

Weighting as of writing: <1%

17th April 2024 - H1 FY24 Trading Update

Sometimes you can’t quite catch the timing. A few weeks after buying a small stake in the Auction Technology Group, I am granted a 16% single-day decline. The movement followed a H1 FY24 trading update ahead of the interim report due May 16th. Little was said. But what was said kicked up a dust cloud. Perhaps my impatience will cost me this time around.

Positive signs from A&A

Now reporting in US Dollars, ATG’s revenues for the 6 months of FY24 amount to $86 million. The 6% growth reflects the acquisition of EstateSales in 2023 and was +1% on an organic basis. Revenues in the arts & antiquities (A&A) grew by 17% to $44.6 million (also includes EstateSales) or +5% on an organic basis. Revenues from the Industrial & Commercial business (I&C) saw modest declines of 2%, as anticipated, to $35.2 million. Overall, marketplace revenues (derived from the A&A and I&C segments) are up 2% organically.

Guidan…

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Kura Sushi US

Weighting as of writing: 4%

5th April 2024 - Q2 FY24 Results

On April 4th, Kura Sushi US reported earnings for the second quarter of FY24. Nothing major to report and similar themes to previous quarters so will keep this one short. The market valuation is astronomically stupid. Average unit volumes at Kura are $4.28 million and have improved significantly; up 22% since 2019. Nevertheless, the market currently places a value of ~$20.5 million per unit at today’s rates.

At the business level, things continue to tick along nicely. Management raised revenue and store opening expectations for the second successive quarter. Comparable restaurant sales are decelerating as the company lapses aggressive menu price hikes from 2023. H2 is Kura’s strongest season for sales leverage and traffic, typically when the company makes up for losses and weaker margins in H1. With most of the year’s construction behind them, Kura has several tailwinds as they ride into the second half.

Key points …

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Auction Technology Group

Weighting as of writing: <1%

Towards the end of January 2024, I shared some notes on Auction Technology Group. The company, through its various online marketplaces, operates a two-sided network that matches auction houses and sellers with buyers, as well as provides a range of value-added services such as back office, support, marketing, delivery, payments, analytics, and account management.

The margins are illustrative of a moaty business. The number of auction houses and bidders has been growing steadily. Questions circulate the brand over its level of cyclicality. As signs of a slowdown nestled into the second half of 2023, one wondered if the spectacular growth seen since the pandemic was about the unwind. From 2020 to 2023, marketplace revenues (derived from the A&A and I&C segments, the company’s primary segments) have grown 158% from £48 million to £123.8 million. Revenues from auction services have grown 453% from £1.5 million to £8.3 million o…

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Greggs Plc

Weighting as of writing: 6%

6th March 2024 - FY23 Results

On March 5th, Greggs followed up the January trading update to release the remainder of its FY23 results. The Jan trading update showed that revenues of £1.81 billion grew +20% in the year, with a healthy +13.7% like-for-like sales1 comp. We also learned that the business opened 145 net new shops, bringing the total to 2,473 (+6%), surpassed its 500th franchise store, and expanded delivery across partners UberEats and JustEat. This new report brought us the rest of the data, and it didn’t disappoint. Amidst a skittish UK economy, which is now technically in recession, Greggs continues to track positively against its 5Y plan, set in late 2021. They are now halfway towards their goal of doubling revenue by 2026 (~£2.5 billion) just two years in, and the aspiration for more than 3,000 units looks achievable with a further ~150 expected in 2024.

Progress in newer growth vectors such as delivery, digital channels, and evening…

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Match Group Inc

Weighting as of writing: 2%

25th February 2024 - FY23 Results

On January 30th, Match Group released earnings for the fiscal year 2023. There were bright spots to pick out from this mediocre report but ultimately felt like more of the same. Sentiment is especially poor. Post-pandemic, performance has been lethargic. As the company migrates through unfavourable KPI trends (notably, a significant decline in payers) the share price has sulked. Since 2023, the S&P 500, which MTCH is a constituent of, has hit new highs and returned 35% compared to a decline of 11% for MatchGroup.

Key points from the report:

• Revenue for FY23 of $3.36 billion (+5.5%) decelerates but is achieved on the back of an 8.5% decline in operating expenses ($2.45 billion).

• Payers continue to decline, down 5.5% in 2023, to 15.12 million.

  • Guidance implies Tinder payers may revert in H2.

• Record operating income ($916.9 million) grew by 78% YoY, or 7.6% vs 2021 levels.

  • Over 1,000 bps of margin expansion in FY23, how…

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Chipotle Mexican Grill

Weighting as of writing: 3%

19th February 2024 - FY23 Results

On February 6th, Chipotle Mexican Grill rounded off the year with $9.9 billion (+15.4%) in revenues and a healthy 7.9% comparable sales comp. On an operating and restaurant level, margins expanded to 15.8% and 26.2%, respectively. Proving once again that Chipotle ought not to fear inflation; because Chipotle is inflation. Overall it was a solid report, but I want to focus today’s note on driving growth via traffic vs price.

Chipotle has notoriously been somewhat of a perpetually “expensive” stock if you take an optical approach. Today it trades at ~49x forward earnings; on par with the 10Y mean. On a price-to-free cash flow basis, the 58x multiple is slightly below to 10Y mean of 62x, but still relatively expensive. We can get into the nuances of relying on multiples as a means of relative valuation assessment, but something Chipotle has not been known for throughout its history is being an expensive cons…

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