Expecting Mild Chipotle Earnings As Cost Pressures Heat Up

Chipotle Mexican Grill (NYSE:CMG) is scheduled to announce its Q1 earnings on April 18. The stock price has consolidated in the last three months on a moderately stronger fourth quarter and a general upbeat U.S. economic recovery. Although the company’s long-term fundamentals look solid, this quarter could be a dampener for a couple of reasons.

Firstly, margins will remain under pressure since the company in January warned that soaring food costs were eating up its margins and price increases will only take effect starting in the second quarter. Food, beverage and packaging costs accounted for 33.5% of its sales in the fourth quarter of 2012, up 1.3% from the previous year’s quarter. ^[1]

The company has been reluctant to pass on rising commodity costs to its customers fearing such a move might drive them away to rival food chains. Chipotle’s competition also intensified in 2012 when Taco Bell introduced a new Cantina Bell menu consisting of burritos and burrito bowls at prices lower than Chipotle’s.

See full analysis for Chipotle Mexican Grill

Secondly, same-store sales growth might again fail to enthuse investors since it is coming on top of a high base. The corresponding figure stood at a whopping 12.7% in the year ago quarter. Also, a menu price hike generally impacts same-store sales positively. Due to a very limited price increase in the trailing twelve months, sales are likely to be tepid.

Chipotle is also experimenting with a new tofu-based item called ‘Sofritas’ at seven of its restaurants in the San Francisco Bay Area. The unusually named item has created a buzz and will eventually be extended to its restaurants nationwide. New menu items often lead to a jump in footfalls which can lead to higher sales. However, as already mentioned, they’re only present at a few locations currently and therefore the impact on overall sales this quarter, if any, will be negligible.

In short, this quarter could disappoint. However, the second quarter should be much better because:

(a) Menu price increases are likely to boost same-store sales.

(b) The rollout of Sofritas on a nationwide basis could have a positive impact on overall sales.

(c) Chipotle will expand its catering services, which contribute to its top-line growth.

We have a price estimate of $342 for Chipotle Mexican Grill, which is about 5% above the current market price.

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1. CMG 10-k [↩]