Chipotle Earnings Preview: Margins And Growth Plans Are Driving The Stock

April 17th, 2012 by Trefis Team
-2.02%
Downside
62.01
Market
60.76
Trefis
CMG: Chipotle Mexican Grill logo
CMG
Chipotle Mexican Grill

Chipotle  Mexican Grill, Inc (NYSE:CMG) will announce its earnings on April 19, 2012. The stock continues to outperform the broader market indices as it has surged 30% Year-to-Date (YTD). Chipotle competes mostly with quick service and casual dining restaurants such as Chili’s, McDonald’s (NYSE:MCD), Burger King, Yum! Brands (NYSE:YUM) and Papa John’s, among others.

We have a $428 price estimate for Chipotle, which is slightly below the current market price. We are cautious on Chipotle’s margins, which might see a slight deterioration in 2012, and this can affect the company’s overall profitability and is a concern going forward.

See our complete analysis for CMG stock here

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Margins May Get Squeezed

Trefis adjusted EBITDA margins for Chipotle stood at 29.5% in 2011 compared to 31.4% in 2010. The cost of food, cost and packaging (as a percentage of sales) rose significantly due to high commodity prices. In 2011, the figure stood at 32.5%, whereas in 2010 it was 30.6%. In 2012, the company expects the cost of  raw materials to increase by 5%.

However, the negative impact of higher commodity costs are positively offset by an increase in comparable restaurant sales (or comp sales). For 2011, Chipotle witnessed an impressive 11.1% in comp sales. [1] Fixed costs such as labor and occupancy costs are spread over a wider revenue base (due to an increase in comp sales) and thus lead to margin improvements. All news and events this year point to continued momentum in 2012 and, therefore, we do not expect any significant drop in the margins.

Number of Restaurants Continue to Rise

Chipotle opened 156 new restaurants in 2011, including one ShopHouse Kitchen in Washington D.C. As of December 31, 2011, the company has 1,230 restaurants, almost all of which are in the U.S. In 2012, the company plans to add another 160 restaurants. Since its number of restaurants in the U.S. are still lower than other restaurant chains such as McDonald’s, Subway or even Starbucks, we anticipate continued high growth in the number of locations for several years to come.

Moreover, Chipotle’s experimentation with Asian cuisine, namely ShopHouse Kitchen, has overall received positive reviews, and the company has announced that the second location for the restaurant is in the works. [2]

Furthermore, Chipotle is set to launch three new restaurants in London in the second quarter of 2012. It currently has only two restaurants in Europe, and so if the company can successfully image itself, that could open the door to a world of new opportunities.

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Notes:
  1. No Dip For Blue Chip, restaurantcatchup.com, February 3, 2012 [↩]
  2. Chipotle’s ShopHouse Already Working on New Location, dc.eater.com, January 11, 2012 [↩]