Monthly Notes On Restaurant Industry: Chipotle Mexican Grill & McDonald’s

According to the National Restaurant Association, the restaurant performance index declined 70 basis points in November, compared to October’s number. ^[1] With harsh weather conditions in some areas of the U.S., the same-store sales of some of the top performers in the industry have taken a hit. On the other hand, the Paris attacks in November have negatively impacted the customer traffic in European countries. However, the restaurant companies are confident of their performance in the coming months, especially in the breakfast day-part.

Here are some updates related to the restaurant companies covered by Trefis:

McDonald’s

Recently, McDonald’s (NYSE: MCD) released their fiscal year 2015 earnings results and posted a strong comeback with the stock jumping to all-time high numbers. The perfect execution of the turnaround plan, the new and innovative menu additions, and marketing initiatives to attract more customers, instilled positive sentiments among the investors, leading the stock to its all-time high of $122. McDonald’s revenue increased 5% in constant currencies for the fourth quarter, with the diluted EPS rising 26% year-over-year (y-o-y). ^[2] As a result, McDonald’s global comparable store sales grew 5% in the fourth quarter, with a 5.7% increase in comparable sales in the U.S.

Most of the analysts were speculating the results to be negatively impacted by Japan’s dull performance throughout the year, as indicated by McDonald’s full year guidance for its Japan unit. (See: McDonald’s FY2015 Earnings Preview: Story Of A Perfect Comeback) Not only did the customer perception improve in the region, but it was reflected in the financial performance, as well. McDonald’s high growth markets witnessed 3% growth in comparable store sales in Q4 2015, and 1.8% growth for the full year. Accelerated progress in the Asian markets might be a strong justification for the company’s stock performance over the last 2 months.

MCD stock dropped from $120 to $115 in the first half of January, before jumping to its all-time high of $122 after the results. Our price estimate for MCD stock is $107, which is roughly 13% below the current market price.

Chipotle Mexican Grill

Chipotle Mexican Grill (NYSE: CMG) is scheduled to report its full-year earnings report for the year 2015 on February 2, 2016. ^[3] The E.coli (Escherichia Coli) outbreak has caused serious harm to the company’s operational stability. Moreover, lowering of the guidance for Q4 2015, as well as for the fiscal year 2016, has generated doubt among the investors regarding the company’s near-term prospects.

The company mentioned that the food chain might post a comparable store sales decline of -8% to -11% for the fourth quarter. Also, the restaurant level operating margins are expected to drop down to the 22%-24% range, whereas the diluted EPS is expected to be in the range of $2.45 to $2.85. Moreover, Chipotle’s officials mentioned that they cannot estimate the impact of this event on the fiscal 2016 comparable store sales growth. However, it is safe to say that, considering the slowing comparable store sales growth every quarter, 2016 will be a tough period for the company in terms of top-line performance.

CMG stock tumbled from $490 to $406 in the first two weeks of January, before rising back above $470. The stock is currently trading close to $450. Our price estimate for Chipotle’s stock is $560, which is more than 20% above the current market price.

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More Trefis Research

1. Restaurant Performance Index, December 31, 2015 [↩]
2. McDonald’s Q4 2015, earnings conference call [↩]
3. Chipotle Mexican Grill, Earnings conference call, FY2015 [↩]