We reiterate our long-term Neutral recommendation on casual
dining restaurants chain,
Chipotle Mexican Grill, Inc.
), following the robust second-quarter 2013 results. Chipotle's
strong market standing, menu innovation and increased media
exposure are encouraging. However, higher food costs and limited
consumer spending scenario are the possible headwinds.
Why the Reiteration?
On Jul 18, 2013, Chipotle delivered solid second-quarter 2013
results. The company's second-quarter earnings of $2.82 per share
were in line with the Zacks Consensus Estimate but up 10.2% year
over year. The year-over-year rise in earnings was mostly due to
higher top line and increased share repurchase activity.
Revenues grew 18.2% year over year to $816.8 million and also
beat the Zacks Consensus Estimate of $803 million by 1.7%. The
better-than-expected results were driven by higher comparable
sales (comps) growth and unit expansion. The company's
sales-driven initiatives and marketing strategies have started to
yield results as can be seen from the rise in traffic which in
turn led to comparable sales (comps) growth of 5.5% during the
Additionally, Chipotle's 'Food with Integrity' program
introduced in 2001 continues to spur growth. The customers are
fond of Chipotle's naturally-raised products, which are expected
to drive traffic further. Chipotle is the first in the restaurant
industry to tag its foods as genetically modified organism
(GMO)-free. We believe that the company's initiative to provide
GMO-free foods will trigger its business in the ensuing
Chipotle has compelling growth drivers like the ShopHouse
concept, catering program, continuous expansion and aggressive
marketing strategy to sustain revenue momentum. Chipotle
introduced the ShopHouse Southeast Asian Kitchen concept in 2011
with the opening of its first unit in Washington, DC. The company
is now heavily concentrating on augmenting the presence of its
Asian-style restaurants in the country. We believe this ShopHouse
concept will contribute robustly to Chipotle's business in the
Moreover, Chipotle's new off-premise catering program
initiated in the first quarter of 2013 is expected to spur
growth. This program, currently operational in 200 units, is
expected to spread nationwide by the end of 2013.
However, higher food costs may hurt Chipotle's margin, going
ahead. The Zacks Rank #3 (Hold) company believes that the cost of
food will be higher in the second half of 2013 due to the rise in
avocado and steak costs, thus, hurting margin. Along with this,
sales-building initiatives including marketing programs and
improved supply chain will lead to higher costs for the
A limited consumer spending environment has also added to the
woes. Government budget cuts, high tax rates and still-tightened
credit availability continue to hurt consumer discretionary
Other Stocks to Consider
Some other restaurant industry stocks with a favorable Zacks
Jack in the Box Inc.
Buffalo Wild Wings Inc.
Cracker Barrel Old Country Store, Inc.
). Jack in the Box carry a Zacks Rank #1 (Strong Buy) while
Buffalo Wild Wings and Cracker Barrel carry a Zacks Rank #2
BUFFALO WLD WNG (BWLD): Free Stock Analysis
CRACKER BARREL (CBRL): Free Stock Analysis
CHIPOTLE MEXICN (CMG): Free Stock Analysis
JACK IN THE BOX (JACK): Free Stock Analysis
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