Investors often put much of their focus on how companies are doing in the near term. But businesses' long-range, long-term targets are more crucial to watch. For instance, a 10% boost in cash flow for one quarter is good. But if a company forecasts that it will boost cash flow by 10% and sustain those gains for several years, it's much better.
That's basically what Chipotle (CMG 2.71%) and Macy's (M -2.08%) did when they reported on their most recent quarters. Each announced they were targeting a major increase for an important metric in the long run. Investors cheered the news, and the stocks soared.
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Macy's
Investors pay attention to EBITDA to weigh how a business is performing. Because this earnings metric excludes interest, taxes, depreciation, and amortization, it can sometimes provide more information about a company's operating performance than unadjusted earnings. That is certainly the case with Macy's, which expects massive depreciation expenses of $900 million in 2021 on less than $24 billion in revenue. But depreciation is a non-cash expense.
Therefore, investors were pleased this week when, in conjunction with its earnings report, Macy's raised its long-run target for its adjusted EBITDA margin to a range of 11% and 11.5%. That's up 200 basis points from the previous 2021 target range of 9% to 9.5%. In other words, Macy's communicated to investors that it would be generating 21.6% more in EBITDA than previously estimated. It's no surprise the stock has shot up by more than 20% since the report came out.
Chipotle
Similarly, Chipotle announced an increase in the long-run target for one of its important metrics. Adjusted unit volume (AUV) is the dollar value of sales generated by an average Chipotle restaurant. Taking the AUV and multiplying it by the number of locations in the chain gives an approximation of Chipotle's overall revenue.
This metric heavily influences the company's results. So you can imagine how pleased shareholders were when management said during its Q2 conference call in July that it was increasing its AUV target from the previous $2.5 million to $3 million. Importantly, during that call, management also mentioned their goal to pass through 40% of incremental sales to restaurant cash flow. That means the $500,000 increase in AUV will increase cash flow by $200,000.
Given that Chipotle aims to grow its footprint to 6,000 restaurants, this change raises its long-run annual cash flow projections by $1.2 billion. To put that figure into context, in 2019, Chipotle generated $722 million in cash from operations, a company record. This stock, too, soared in response to those upbeat projections.
Because changes in long-run estimates have implications beyond one quarter or one year, the effects on the stock price tend to be larger. That's one reason why investors should focus more on long-term expectations and performance instead of one quarter's results.
