Expect Chipotle To Post Strong Sales Though Margins Could Decline

Chipotle Mexican Grill (NYSE:CMG) is scheduled to announce its fourth quarter and full-year earnings on January 30. Shares of the company have stayed above the psychological $500 mark, ever since the third quarter earnings were announced in October. Chipotle’s same-store sales surged 6.2% in the third quarter of 2013, beating market expectations. The same-store sales growth is the most widely followed metric for Chipotle, with the headline figure often causing huge movements in the stock price.

Comparable sales, or same-store sales, is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation.

We have a $416 price estimate for Chipotle, which is about 20% lower than the current market price.

Sales To Remain Firm

Incremental revenues from catering services are likely to buoy overall sales and add to the comparable sales growth. In the third quarter, catering sales were already close to 1% of the sales at the restaurants at which this service was being offered. ^[1] However, only a limited number of restaurants were offering catering by then. The service was extended to all restaurants on a nationwide basis by October. Thus, we can expect catering to add a few basis points to the overall sales.

Chipotle is also likely to benefit from some of the menu additions such as sofritas and margaritas, which were introduced at the start of the year. Sofritas, in particular, has gained popularity among its patrons with the unusually named item accounting for ~4% of the restaurant sales in the third quarter.

The restaurant chain could also benefit from a favorable comparison (on a year-over-year basis) since comparable sales grew only 3.8% in the fourth quarter of 2012, which is on the lower side of the historical range. ^[2] Had the sales growth been unusually high in Q4 2012, Chipotle would have had a hard time topping that figure.

Margins Could Decline

The costs of food, beverage and packaging have eaten up some of the profitability in 2013. Chipotle’s management says it will increase prices only from 2014, so the fourth quarter results are likely to witness high costs of food, beverage and packaging as well. Once the prices are raised this year, one can expect the cost of raw materials to ease. In the three quarters through September, the cost of raw materials rose 90 basis points to 33.2%, when expressed as a percentage of the total revenues. ^[2] Investors generally view ShopHouse as an attractive proposition with potential for many more such restaurants within the country in the next few years. However, since no concrete number is given out by management, it is generally expected that new ShopHouse stores will constitute only a tiny fraction of the total openings at least in the near future.

See full analysis for Chipotle Mexican Grill

Understand How a Company’s Products Impact its Stock Price at Trefis

1. CMG Earnings Transcript [↩]
2. CMG 8-k [↩] [↩]