Chipotle Earnings Preview: Sales To Remain Robust But Margins May Suffer

Chipotle Mexican Grill (NYSE:CMG) will release its first quarter earnings report on April 17. The company has been consistently performing well because of its use of healthy organic ingredients, growing outlet count and a loyal customer base. Chipotle’s same-store sales peaked at 9.3% and grossed $844.1 million. The impressive sales figures are mainly attributed to higher customer traffic. Same-store sales or comparable sales, is an important measure to gauge a restaurant’s performance since it only includes restaurants open for more than a year and excludes the effect of currency fluctuation. We expect Chipotle to continue performing well and record strong sales figures in Q1 2014. It has successfully introduced catering services, expanded its menu, and also diversified into other cuisines through ShopHouse and Pizzeria Locale. However, due to continued inflationary pressures and no menu price hikes as of now, Chipotle’s margins may suffer.

We have a $438 price estimate for Chipotle, which is about 20% lower than the current market price.

See Our Complete Analysis For Chipotle Mexican Grill

Catering Services And Expanded Menu Can Aid Sales Growth

Incremental sales due to catering services, launched by Chipotle in January last year, accounted for about 1% of the company’s gross revenue in Q4 2013. By the end of 2013, the company had introduced catering services in all its restaurants, except those in New York City. Its plans to start catering services in NYC this year could boost sales further.

Chipotle’s decision to introduce Sofritas – a tofu-based vegan menu item – in 40% of its restaurants proved to be a success last year. The item was introduced to target the vegan and vegetarian customers and contributed 3% to total sales. Should Chipotle continue to introduce Sofritas in more outlets, the company’s sales would surely get a boost.

Margins May Suffer

With inflationary pressures building up and no menu price hikes in Q1 this year, Chipotle’s profitability could get adversely affected. Its food costs in the last quarter were 33.9% of the total revenues – higher than the historical range. In Q1 this year, we expect the food costs to cross the 34% mark in the wake of continued inflation. Moreover, the supply constraints for avocado in Mexico and beans in California can further raise these expenses.

Other operating costs as percentage of revenue such as occupancy and labor costs are not expected to see any drastic changes. This is mainly because the sales growth is likely to compensate for the rise in these expenses.

Chipotle’s management is planning to raise the menu prices in the third quarter this year. Until the company passes on the higher costs of raw material to the customers, margins may continue to shrink.

Outlet Numbers To Rise

Chipotle added 56 new restaurants in the fourth quarter last year, bringing the total count to 1,595. The company aims of adding 180-195 new restaurants this year. Recently, it also opened its first mobile outlet in Alabama.

Chipotle’s continually rising sales and its expansion plans are reassuring to its investors. If the expansion rate persists and the company carries on attracting customers after hiking its prices, Chipotle could surely go on performing above expectations.

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