We recently downgraded our rating for Chipotle Mexican Grill, Inc. (CMG) to Neutral from Outperform. This downgrade is primarily attributable to escalating input and labor costs, fierce discount wars among quick service operators and sagging consumer spending declining traffic.
First-Quarter Results Ahead of Estimates
Chipotle’s first quarter earnings 2010 of $1.19 per share were ahead of the Zacks Consensus Estimate of 95 cents per share. Revenue for the quarter shot up 15.6% to $409.7 million and comparable-stores sales leaped 4.3% in the quarter under review, reflecting a sequential increase of 230 basis points.
Restaurant operating margin was 26.1%, up 260 basis points from the year-ago period. The better-than-expected results were primarily driven by a strong top-line growth buoyed by a higher traffic count and new restaurant openings.
Outlook for 2010
For fiscal year 2010, management expects mid-single digit comparable-store sales growth, up from its previous guidance of flat comparisons. In fiscal 2010, the company plans to open 120 to 130 new restaurants, reflecting a growth of 12.6% to 13.6%.
Downgraded to Neutral
We believe, Chipotle has remained largely unruffled by the recent economic slowdown and is well positioned to expand rapidly while generating improved earnings margins and returns on invested capital. With a strong balance sheet, consistent earnings and healthy cash flow, we believe that the stock provides relative safety and consistent growth.
However, Chipotle faces raging discount wars among quick service operators, which may hurt the company’s restaurant operating margins and profits. Moreover, the company’s customers remain sensitive to macroeconomic factors, which may restrict their discretionary spending, thereby negatively affecting the company’s growth and profitability.
Additionally, the company’s dependence on organic ingredients shoots up the uncertainty in a commodity market that is already teetering, which blurs visibility regarding growth from a margin perspective.