Chipotle Beats on Earnings, Comps to Remain Muted in 2015 - Analyst Blog

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Chipotle Mexican Grill, Inc. ( CMG ) posted mixed fourth quarter and full year 2014 results. While fourth quarter earnings beat the Zacks Consensus Estimate, revenues marginally missed the same. Share price of this fast-casual restaurant chain fell 6.41% in afterhours trading, as the company's muted comps outlook for 2015 did little to boost investors' confidence. Also, concerns related to rising food costs, especially beef, persist.

Fourth-quarter adjusted earnings of $3.84 per share soared 52% year over year driven by an increase in the top line and margins. Also, earnings beat the Zacks Consensus Estimate of $3.79 by 1.3%.

Chipotle Mexican Grill Inc. - Earnings Surprise | FindTheBest

Revenues grew 26.7% year over year to $1.07 billion. The upside was driven by higher comps growth, and opening of new restaurants. However, revenues marginally lagged the Zacks Consensus Estimate.

Behind the Headline Numbers

Comps grew 680 basis points (bps) year over year to 16.1% driven by higher traffic and average check increase which was primarily driven by the menu price increase rolled out in second quarter of 2014 and continued growth in catering. However, comps compared unfavorably with comps growth of 19.8% in the prior quarter. Also, it missed analysts' expectations.

Food costs, as a percentage of revenues, increased 110 bps to 35%, driven by increased prices for beef and dairy, partially offset by menu price increase. General and administrative expenses were 5.7% of revenues, down 90 bps from the prior year primarily due to the timing of accrual for annual bonus.

Restaurant level operating margin was 26.6%, up 100 bps year over year as positive sales leverage offset the impact of commodity cost inflation.

Full Year Results

Earnings per share were $14.13 per share, up 35% year over year. Also, earnings beat the Zacks Consensus Estimate of $14.05 by 0.6%. Revenues of $4.11 billion went up 27.8% year over year and were almost in line with the Zacks Consensus Estimate.

Comps in 2015 to Remain Subdued

The company expects comps growth in the low to mid-single digit range in 2015, much lower than 16.8% comps growth witnessed in 2014. In 2015, the company expects comps growth to be highest in the first quarter of the year. Later comps are expected to decline and remain flat year over year due to tough comparisons. Menu price increase in 2014 inflated the average checks of customers in the second half of the year resulting in higher comps.

Food Costs to Increase Menu Prices Again?

The company expects beef prices to remain high in 2015 and 2016 due to supply constraints. Also, prices of avocado are expected to remain slightly higher in 2015. Dairy prices are expected to come down in the first quarter of the year and remain at normalized levels in 2015.

Given high beef prices, the company intends to consider price increases for the Steak and Barbacoa menu later in 2015.

Other Expenses Guidance for 2015

Marketing expenses are expected to increase in the range of 1.5% to 1.6% in 2015. Average restaurant development cost is expected to decrease based on opening of more traditional in-cap and in-line restaurants, which are generally easier to build and cost less. Further, Chipotle expects to open 190 to 205 restaurants in 2015.

Our Take

Chipotle has been witnessing a fairly stable traffic trend over the past few years driven by its strong market position, menu launches and increased media exposure. The company is popular among health-conscious customers as it serves antibiotic-free meats and organic menu items. However, comps growth momentum could slow down in the upcoming quarters owing to tough year over year comparisons. Meanwhile, rising food costs are also expected to weigh on the company's profitability.

Chipotle currently carries a Zacks Rank #2 (Buy). Other stocks in the same industry that can be considered include Ignite Restaurant Group, Inc. ( IRG ), Bloomin' Brands, Inc. ( BLMN ), and Jack in the Box Inc. ( JACK ). While Ignite Restaurant Group and Jack in the Box sport a Zacks Rank #1 (Strong Buy), Bloomin' Brands carries a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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