We are maintaining our long-term Neutral recommendation on
Chipotle Mexican Grill Inc.
), a chain of restaurants located in the United States, United
Kingdom and Canada, specializing in burritos and tacos.
Chipotle's first-quarter 2011 results topped the Zacks Consensus
Estimate on double-digit top-line growth and margin expansion.
Revenue in the quarter rose 25.8% year over year to $640.6 million,
based on new restaurant openings and comparable-store sales (comps)
growth of 12.7%. The restaurant operating margin enhanced 220 bps
The company has remained unaffected by the economic slowdown and
has been able to deliver positive comparable-store sales
consistently. Chipotle expects comps to grow in the mid
single-digit range in 2012 based on strong traffic, menu price hike
and increased promotional efforts.
The fast food chain operator still possesses pricing power as
compared to its peers, but management has no plans to execute
pricing initiatives in 2012, even if food cost pressure continues.
Management is also concentrating on improving throughout,
developing the workforce, and enhancing marketing, which will
enable the company to drive more customers going forward.
Additionally, management believes that throughput enhancements will
further drive comps, particularly during the peak time. However,
the comps are expected to slow down in 2012 due to tough
Chipotle's 'Food With Integrity' program provides a significant
competitive advantage in the fast-casual segment. The program's
focus on the increasing mix of naturally raised pork, chicken and
beef, as well as organic produce, led to the growth in its natural
and organic food sales in the U.S. The program also helps Chipotle
to support farming communities around the country. The customers
are fond of its naturally raised ingredients and this results in
In 2012, Chipotle will continue to focus on its marketing
strategy to educate the customers regarding the program and also
standout among its peers with its "Food with Integrity" initiative.
The company's marketing program will have traditional advertising
including outdoor, radio and print; increased in-store
communications about "Food With Integrity"; and social media
programs to increase customers' awareness about the "Food With
Chipotle boasts a debt-free balance sheet and positive free cash
flow to support new unit growth as well as modest share buybacks.
The company has been pursuing a commendable unit expansion plan
both domestically and internationally. The company plans to open
155-165 new restaurants (13% expansion) in 2012. Thirty percent of
the planned stores will be A-Model restaurants, which provide
higher returns on investment. In the international market, Chipotle
currently has five restaurants, three in Canada and two in London.
It also plans to open an outlet in Paris in the spring, three
additional restaurants in London and a few more in Canada by the
second half of 2012. The company is also eyeing new markets
such as Germany.
The company's first Asian-themed restaurant called ShopHouse
Southeast Asian Kitchen in Washington, D.C, continues to perform
well, which we believe will be an important long-term growth driver
for the company. In the second half of 2012, Chipotle plans to open
its second ShopHouse restaurant in Washington, DC market.
However, like other peer companies
Red Robin Gourmet Burgers, Inc.
Panera Bread Co.
), Chipotle continues to experience food cost inflation. During the
first quarter of 2012, commodity costs rose 20 bps to 32.2% due to
higher beef and chicken pricing, partially offset by lower avocado
and dairy costs. Management expects food cost inflation to remain
in the mid-to-single range in the next few quarters, driven by
higher costs of avocados, beef and dairy. Thus, increased cost
structure will continue to weigh on margins. Additionally,
management expects the tax rate to increase from 38.5% in 2011 to
39.0% in 2012 due to discontinuation of HIRE Act and expiration as
well as non-renewal of Work Opportunity Tax Credit and the R&D
Additionally, the uncertain economic environment has resulted in
lower consumer spending, fierce discounting wars among
quick-service operators and ongoing audit investigations of
Chipotle's hiring records related to the citizenship of its
workers, further make us skeptical.
Agreement of Estimate Revisions
In the last 7 days, the estimates have not budged, implying that
the analysts reaffirm their view on the stock.
Magnitude of Estimate Revisions
Over the last 7 days, earnings estimates also remains unchanged
at $2.30 and $8.87 for the second quarter and fiscal 2012,
CHIPOTLE MEXICN (CMG): Free Stock Analysis
PANERA BREAD CO (PNRA): Free Stock Analysis
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