Zacks_Analysts' Blog : Earnings Preview: Chipotle - Analyst Blog

Fast food restaurant chain Chipotle Mexican Grill Inc. (CMG) is slated to release its third quarter 2010 results on Thursday, October 21. The current Zacks Consensus Estimate for the third quarter is $1.30 per share, representing an annualized growth of 20.3%.

With respect to earnings surprises, Chipotle has outperformed the Zacks Consensus Estimate for all the trailing four quarters in a range of 5.0% to 25.3%. The average earnings surprise was a positive 18.8%. 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 second quarter 2010 earnings of $1.46 per share were ahead of the Zacks Consensus Estimate of $1.39.

Revenues for the quarter shot up 20.1% year over year to $466.8 million and comparable-store sales spiked up 8.7% in the quarter under review, reflecting a sequential increase of 440 basis points.

The better-than-expected results were primarily driven by a strong top-line growth, buoyed by a higher traffic and new restaurant openings.

Restaurant operating margin expanded 90 basis points to 26.9%, driven by comparable-store sales growth and lower food and occupancy costs (as a percentage of total revenue).

Outlook

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

The company remains on track to open 120 to 130 new restaurants in fiscal 2010, reflecting a growth of 12.6% to 13.6%.

Estimate Revision Trend

The earnings outlook for Chipotle remains strong ahead of its quarterly results. Estimates have moved up in the last 7 days, implying that the analysts do see a meaningful catalyst for the time being.

The current Zacks Consensus Estimate is $5.12 for 2010, reflecting a year-over-year growth of 29.7%. The Zacks Consensus Estimate for 2011 is $6.12, indicating a year-over-year growth of 19.5%. 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, 4 increased their third quarter estimates. Additionally, 5 out of the 22 analysts raised their estimates for fiscal 2010 and 5 out of the 21 analysts raised their fiscal 2011 estimates. One analyst has made a downward revision for 2011.

Over the last 7 days, no analysts made any estimate revisions.

The analysts have increased their estimates based 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.

The company also has 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.

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 hikes in menu price amid a backdrop of faltering consumer confidence.

However, one analyst has reduced the estimate as margins are expected to be weaker due to escalating input costs and labor costs. Moreover, the company has no plans to raise prices in 2010 despite input cost pressure.

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Chipotle has not been quite significant over the last 30 days. Estimates for third quarter and fiscal 2011 have shot up by 1 cent and 3 cents to $1.29 and $6.10, respectively. However, fiscal 2010 estimates remain unchanged at $5.11.

In the lat 7 days, estimates for third quarter and fiscal 2010 were raised by 1 cent to $1.30 and $5.12, respectively and fiscal 2011 estimates increased by 2 cents to $6.12, implying that the analysts expect Chipotle to post favorable results for the quarter as the economy is improving benefiting the top line. The company also remains on track to open 120 to 130 new restaurants in fiscal 2010, reflecting a year-over-year 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.

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 Krispy Kreme Doughnut Inc. (KKD)and Jack in the Box Inc. (JACK).

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, healthy cash flow, excellent unit economics and continued marketing initiates,we are of the opinion that the stock provides relative safety and consistent growth.

We are also encouraged with Chipotle’s international expansion plan. During the second quarter, the company opened its first restaurant in London, which is reported to enjoy a satisfactory response. The company is also looking for sites in Germany and France and plans to open a store in Paris by mid-2011.

However, Chipotle faces raging discount wars among quick service operators and higher input and labor cost along with increased general and administrative expenses (G&A) 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.