Earnings Preview: Chipotle Mexican Grill (CMG)

The Mexican fast food restaurant chain Chipotle Mexican Grill Inc. (CMG) is slated to release its second-quarter 2010 results on Thursday, July 22. The current Zacks Consensus Estimate for the second quarter is $1.39 per share, representing an annualized growth of 26.6%.

With respect to earnings surprises, Chipotle has outperformed the Zacks Consensus Estimate for all the trailing four quarters in a range of 22.2% to 25.3%. The average earnings surprise was a positive 23.80%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Performance

Chipotle’s first quarter 2010 earnings 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-store sales spiked 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 higher traffic and new restaurant openings.

Restaurant operating margin expanded 260 basis points to 26.1%, driven by lower food, labor and operating costs (as a percentage of total revenue).

Chipotle ended the quarter with cash and cash equivalents of $193 million and shareholders’ equity of $734.4 million.


For fiscal year 2010, management expects mid-single digit comparable-store sales growth, up from its previous guidance of flat comparisons.

In fiscal 2010, Chipotle plans to open 120 to 130 new restaurants, reflecting a growth of 12.6% to 13.6%.

Estimates Revisions Trend

The earnings outlook for Chipotle remains strong ahead of its quarterly results. Estimates have moved up in the last 30 days, implying that the analysts do see a meaningful catalyst for the time being. The current Zacks Consensus Estimate is $4.97 for 2010, reflecting a year-over-year growth of 25.8%. The Zacks Consensus Estimate for 2011 is $5.88, reflecting a year-over-year growth of 18.3%. The estimate revision trends and the magnitude of such revisions justify the strength in the stock.

Agreement of Estimate Revisions

In the last 30 days, out of 20 analysts covering the stock, 3 increased their second quarter estimates. Additionally, 3 out of the 22 analysts covering the stock raised their estimates for fiscal 2010 and 2 out of the 21 analysts covering the stock raised their estimates for fiscal 2011. One analyst has made a downward revision for the second quarter as well as for both 2010 and 2011.

The analysts have increased the estimates on improving traffic trends, a strong operational focus and higher comparable-store sales growth expectations. Chipotle has been able to post positive same-store sales in the past quarters despite the economic slowdown, when most of the restaurant companies struggled to plug declining sales. However, one analyst has reduced the estimates as margins are expected to be weaker in the second half of 2010 due to escalating input costs and labor cost, and higher advertising expense.

Magnitude of Estimate Revisions

Following the first-quarter earnings release, earnings estimates for the second quarter, 2010 and 2011 improved to $1.37, $4.92 and $5.81, respectively from the previous estimates of $1.26, $4.45 and $5.22, respectively. The analysts have based the upward revision on strong first quarter results as Chipotle’s results have been stable relative to many of its peers, along with a higher guidance and an improving macroeconomic backdrop.

Additionally, during the past 30 days, earnings estimates for the second quarter, fiscal 2010 and 2011 increased further to $1.39, $4.97 and $5.88 per share, respectively, implying that the analysts expect Chipotle to post strong results for the quarter as the economy is improving and the company remains on track to open 120 to 130 new restaurants in fiscal 2010, reflecting a growth of 12.6% to 13.6%.

Moreover, Chipotle’s “Food With Integrity” program provides a significant competitive advantage in the fast-casual segment. The program focuses on an increasing mix of naturally raised pork, chicken and beef, and organic produce, which led to the growth in its natural and organic food sales in the U.S. The company plans to raise its local produce goal to 50.0% for fiscal 2010, compared with 35.0% in fiscal 2009 and 25.0% in fiscal 2008.

Our Take

We expect Chipotle to provide earnings above expectations as the economy is improving. The company had anyway remained largely unruffled by the recent economic slowdown.

Chipotle’s major competitors include BJ’s Restaurants Inc (BJR) and Benihana Inc (BNHN).

We have a Neutral rating on Chipotle as it 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 are of the opinion that the stock provides relative safety and consistent growth.

However, Chipotle faces raging discount wars among quick service operators, which may hurt its 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.

CHIPOTLE MEXICN (CMG): Free Stock Analysis Report
BJ’S RESTAURANT (BJRI): Free Stock Analysis Report
BENIHANA INC (BNHN): Free Stock Analysis Report
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