Zacks Commentary

Chipotle Mexican Grill Inc (CMG) is slated to release its first quarter 2012 results on Thursday, April 19. The current Zacks Consensus Estimate for the first quarter is $1.92 per share, representing an annualized growth of 31.75%.

Earnings Surprise

With respect to earnings surprises over the last four quarters, Chipotle has outperformed the Zacks Consensus Estimate in two quarters and missed the same in the other two quarters. The earnings surprise ranges from negative 5.36% to positive 2.70%, with the average at negative 0.41%. This indicates that the company has missed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Performance

Chipotle’s fourth quarter 2011 earnings of $1.81 per share missed the Zacks Consensus Estimate by a couple of cents but improved from the year-earlier earnings of $1.47.

Revenues for the quarter shot up 23.7% year over year to $596.7 million and comparable store sales spiked up 11.1% in the quarter under review, backed by higher traffic and menu price hike.

Restaurant operating margin expanded 20 basis points (bps) to 26.1%, attributable to a 100 bps cut in labor and 50 bps drop in occupancy costs, partially offset by a 120-bps rise in food, beverage and packaging costs and a 30-bps increase in other operating costs (as a percentage of total revenue).

Outlook

For fiscal 2012, management expects mid-single-digit comparable store sales growth and food costs to increase in the mid-single digits sequentially.

Zacks Consensus

The analysts covered by Zacks expect Chipotle to post earnings of $1.92 per share for the first quarter of fiscal 2012, higher than the prior-year earnings of $1.46. Currently, the Zacks Consensus Estimate ranges between $1.74 and $2.08 a share.

Estimate Revision Trend

The earnings outlook for Chipotle remains strong ahead of its quarterly results. Estimates have moved up in the last 30 days, implying that the analysts remain positive on the stock.

The current Zacks Consensus Estimate is $8.74 for 2012, reflecting a year-over-year growth of 29.2%. The Zacks Consensus Estimate for 2013 is $10.88, indicating an annualized growth of 24.5%. The estimate revision trends and the magnitude of such revisions justify the strength in the stock.

Agreement of Estimate Revisions

In the last 30 days, out of the 20 analysts covering the stock, four analysts increased their estimates while one analyst decreased the same for the first quarter. Additionally, five out of the 22 analysts raised their estimates for fiscal 2012 and six out of the 22 analysts increased their estimates for fiscal 2013. None of the analysts trimmed the estimates for fiscal 2013, but one analyst moved in the opposite direction in 2012.

Over the last 7 days, no analysts made downward revisions, but two analysts raised the estimates for the first quarter, 2012 and 2013 respectively.

The analysts have increased their estimates based on improving traffic trends, strong operational focus and higher comparable store sales growth expectations. Chipotle has remained unaffected by the economic slowdown and has been able to deliver positive comparable store sales consistently. Unit expansion, particularly in international markets like Canada and U.K also remains encouraging

The analysts also remain optimistic about Chipotle’s focus on expansion through new smaller prototype openings, named A-Model. The company’s first Asian themed restaurant called ShopHouse Southeast Asian Kitchen in Washington; D.C is also performing very well. The analysts view this concept to be an important long-term growth driver for the company and hence in the second half of 2012, Chipotle plans to open its second ShopHouse restaurant in the Washington, DC market.

However, one analyst has reduced the estimate on weaker-than-expected margins due to escalating input costs. Moreover, the company currently has no plans for a systemwide price increase despite input cost pressure

Magnitude of Estimate Revisions

The magnitude of estimate revisions for Chipotle has been quite in significant over the last 30 days. Estimates for first quarter, fiscal 2012 and 2013 have shot up by 2 cents, 3 cents and 5 cents to $1.93, $8.74 and $10.88, respectively.

In the last 7 days, estimates shot up by a penny for the first quarter, fiscal 2012 and 2013, respectively, implying that the analysts expect Chipotle to post favorable results for the quarter as consumer’s spending power is driving the top line.

Our Take

We expect Chipotle to provide earnings above expectations as the economy is improving.

We have a Neutral recommendation on Chipotle as it is well positioned to expand rapidly while generating improved earnings margins and returns on invested capital. With a strong balance sheet, consistent earnings, healthy cash flow, excellent unit economics, the successful ‘Food With Integrity’ program, and continued marketing initiatives, we are of the opinion that the stock provides relative safety and consistent growth.

We are also encouraged with Chipotle’s international expansion plan. The company sees future growth opportunities in Europe, and hence is looking for sites in the U.K, Germany and France. The company plans to open an outlet in Paris in spring this year and two additional restaurants in London by second half of 2012.

However, Chipotle faces raging discount wars among quick service operators and higher input cost along with increased general and administrative expenses (G&A) may hurt its operating margins and profits. Moreover, the company’s customers remain sensitive to macroeconomic factors, which may restrict their discretionary spending, thereby negatively affecting the company’s growth and profitability.