Chipotle Mexican Grill, Inc.CMG posted soft third quarter 2015 results with earnings missing the Zacks Consensus Estimate but revenues marginally beating the same. Pork supply shortage resulted in soft comps in the quarter. Higher labor and marketing and promotion costs took a toll on profits. Meanwhile, the company expects higher labor costs in fourth quarter compared to the third quarter. Share price of the company declined 7.8% in aftermarket hours yesterday.
Earnings and Revenue Discussion
Adjusted earnings of $4.59 per share missed the Zacks Consensus Estimate of $4.64 by 1.1%. However, it increased 10.6% year over year as an improvement in revenues made up for higher costs.
Revenues grew 12% year over year to $1.22 billion due to comps growth and sales from new restaurant openings. Revenues marginally beat the Zacks Consensus Estimate of $1.21 billion.
Behind the Headline Numbers
Comps grew 2.6% driven by higher traffic and increase in menu prices. However, it compared unfavorably with the year-ago quarter comps growth of 19.8% as well as prior quarter comps growth of 4.3%. The downside reflects lower pork supplies that caused scarcity of carnitas at its restaurants. In Jan 2015, the company suspended the sale of pork at one-third of its restaurants in the U.S. as one of its suppliers failed to comply with the animal welfare standards set by the company. However, the company has recently resumed serving carnitas in 90% of its restaurants. (Read: Chipotle Starts Serving Carnitas Again: Will it Boost Comps? )
Food costs, as a percentage of revenues, fell 130 basis points (bps) to 33%, as menu price increase and favorable dairy and avocado costs made up for increased beef and packaging costs. General and administrative expenses were 5.8% of revenues, down 80 bps from the prior year, primarily due to lower non-cash stock based compensation expense and lower bonus costs, partially offset by higher wages. Labor costs were 22.2% of sales in the quarter, up 100 bps year over year.
Restaurant level operating margin was 28.3%, down 50 bps year over year due to an increase in labor costs and higher marketing and promotion costs.
Guidance for Q4 and 2015
Traffic trends have been soft so far in October. With the recent return of carnitas at 90% of its restaurants and the possible return of the same in all its restaurants soon, the company expects comps in fourth quarter to be almost same as in the third quarter. The company maintained its comps guidance and expects it to grow in the low to mid-single digit range in 2015, much lower than 16.8% comps growth witnessed in 2014.
Labor costs in the fourth quarter are expected to be higher compared with the third quarter. The company expects food costs to remain more or less the same as reported in the recent results for the rest of the year.
Cost Guidance for 2016
In 2016, the company expects food cost inflation to be relatively flat year over year. Marketing costs are expected in the range of 1.5% to 1.6% of sales.
Higher Food Costs Result in Menu Price Increase
In the third quarter, the company implemented a price increase for its Steak and Barbacoa menu due to an increase in beef prices. In the second quarterearnings call the company had stated that it will not increase the prices in about 40% of its restaurants that are yet to get a resupply of carnitas and will raise beef prices in these markets once carnitas are back. With carnitas back in 90% of the restaurants, the company expects to roll out the increase in the remaining markets in fourth quarter. The menu price increase is expected to contribute about 130 bps to comps when fully rolled out.
Chipotle carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks in the same industry include Arcos Dorados Holdings Inc. Cla ARCO , Bob Evans Farms, Inc. BOBE and Carrols Restaurant Group, Inc. TAST . All these stocks sport a Zacks Rank #1 (Strong Buy).
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