Earnings Scorecard: Chipotle

On October 21, fast food restaurant chain Chipotle Mexican Grill Inc. (CMG) reported its third quarter 2010 earnings of $1.52 per share, well ahead of the Zacks Consensus Estimate of $1.30 and the year-earlier earnings of $1.08. Given below is our report on the recent earnings announcement as well as subsequent analyst estimate revisions and the Zacks ratings over the short and long-term periods.

Earnings Report Highlights

Chipotle’s earnings were buoyed by a higher traffic count and new restaurant openings. Revenues in the quarter rose 23.0% to $476.9 million, driven by new restaurant openings and an increase in comparable-store sales. Reported revenues also outperformed the Zacks Consensus Estimate of $461 million. Comparable-stores sales climbed 11.4% in the quarter under review, reflecting a sequential increase of 270 basis points.

(Read our full coverage on this earnings report: Chipotle Beats Zacks Estimate)

Earnings Estimate Revisions – Overview

Following the release of Chipotle’s third quarter results, earnings estimate revision trends among the analysts depict a clear positive outlook for the upcoming quarters and fiscal years. Let’s dig into the earnings estimate details.

Agreement of Estimate Revisions

Over the last 30 days, 19 of the 20 analysts covering the stock made upward earnings estimate revisions for the fourth quarter of fiscal 2010. Of the 12 analysts, 9 provided an optimistic outlook for first quarter 2011. A similar positive trend is noticed for fiscal 2010 and 2011, with estimates having been increased by all the 22 and 21 analysts, respectively. On the other hand, none of the analysts made downward revisions in estimates, except the 2 analysts who reduced their estimates for the first quarter of 2011.

In the last 7 days, the same positive trend can be witnessed. 15 and 7 analysts out of 20 and 12 analysts, respectively, raised their estimates for both the upcoming quarters. Of the 22 analysts in both the years, 18 and 17 analysts increased their estimates for both fiscal 2010 and 2011, respectively. Only, 1 analyst moved in the opposite direction for both the fourth quarter of 2010 and first quarter of 2011.

The analysts, by and large, are mainly impressed with the upside in the third quarter results, higher same-store sales growth expectations and the potential for improving unit economics as Chipotle executes its new smaller prototype openings, named A-Model as part of its expansion plans. A-model is serving the company with a higher return on investment. So far, the company has opened 15 A-model restaurants and estimate that about 30% of stores planned for opening in 2011 will be A-model. Chipotle also raised its comparable-store sales outlook for fiscal 2010 to high-single digit from its previous guidance of mid-to-high single digit growth. For 2011, Chipotle expects comparable restaurant sales growth of low single digit.

Chipotle’s results have been stable relative to many of its peers with industry leading comparable-store sales that have increased over time. Chipotle has remained unruffled by the recent economic slowdown, when most of the restaurant companies were struggling to plug declining sales.The company’s ‘Food With Integrity’ program also provides a significant competitive advantage in the fast-casual segment.

Additionally, Chipotle has been exhibiting a commendable unit expansion plan, both domestically and internationally. In fiscal 2010, the company plans to open 122 to 130 new restaurants and in 2011, the company expects to open 135-145 new restaurants.

The analysts are also optimistic about the business model of the company, which thrives on marketing initiatives, throughput enhancement, development in work force and no hike in menu price amid a backdrop of faltering consumer confidence.

However, a few analysts’ outlook remains comparatively less favorable for the fourth quarter and first quarter owing to the mounting cost pressure from higher food and labor costs. The company expects cost inflation to be in the low to mid single-digit range in 2011.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Chipotle has been quite significant over the last 30 days. Estimates for fiscal 2010 and 2011 have increased by 32 cents and 39 cents, respectively. Estimates for the fourth quarter of 2010 and first quarter of 2011 were raised by 10 cents and 6 cents, respectively.

Our Recommendation

We prefer Chipotle for the above discussed factors. Moreover, with a strong debt-free balance sheet and healthy cash flow, we believe the stock provides relative safety and consistent growth. However, we remain cautious on the stock as fierce discount wars among quick service operators and lower consumer confidence, higher input and labor cost are some of the factors that could pose a threat to the company’s growth.

Hence, we maintain a long-term Neutral recommendation on the shares of Chipotle, with a Zacks #2 Rank, which translates into a short-term Buy rating.

Apart from Chipotle, another stock that promises growth opportunity is Cheesecake Factory Inc. (CAKE), which currently has a Zacks #1 Rank, translating into a short-term Strong Buy recommendation. Cheesecake reported earnings of 37 cents a share in the third quarter of fiscal 2010, which surpassed the Zacks Consensus Estimate of 34 cents. The better-than-expected results were driven by comparable-store sales growth, higher traffic and effective cost management.

CHIPOTLE MEXICN (CMG): Free Stock Analysis Report

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