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Strong Top-Line Momentum to Aid Chipotle's (CMG) Q4 Earnings

Chipotle Mexican Grill, Inc.CMG is scheduled to report fourth-quarter 2018 results on Feb 6, after the market closes .

The company's increased focus on augmenting customer experience by introducing food-safety programs, various sales-building initiatives and greater digital innovation is expected to have resulted in revenue growth in the fourth quarter. Further, lower marketing and promotional expenses are likely to have aided margins in the to-be-reported quarter.

The company's earnings have surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 12.8%. Backed by an impressive earnings trend, shares of Chipotle have gained 64.1% over the past year, outperforming the industry 's 8.7% rally.

Let us see how the company's top and bottom lines shaped up in the fourth quarter.

Top Line to Flourish

Chipotle has been shifting its strategy from giveaways, discounts and rewards to new menu items, operational excellence, enhancement of guest experience, technology-driven convenience, and more aggressive brand marketing. The rollout of queso substantially aided sales in 2018. Notably, the company's robust marketing activities, including a combination of brand-building efforts, as well as transaction-driving promotions and advertising, are resulting in a steady inflow of new customers.

In the first nine months of 2018, revenues totaled to $3.6 billion, marking an increase of 8.1% from the first nine months of 2017. Comps in the same period improved 3.3%, favored by increased average check and 4.3% benefit from menu price increases, partially offset by 2.1% fewer comparable restaurant transactions.

Given the company's sales-building efforts, we believe that the upside trend is likely to have continued in the fourth quarter as well. The Zacks Consensus Estimate pegs fourth-quarter sales at $1.19 billion, marking a 7.5% increase from the year-ago quarter. Further, comps in the quarter under review are expected to rise 4.4%, comparing favorably with the year-ago quarter's 0.9% growth.

How Will Earnings Shape Up?

In the first nine months of 2018, Chipotle's restaurant level operating margin was 19.3%, marking an increase from 17.6% in the first nine months of 2017. The improvement was driven by increases in comparable restaurant sales combined with lower marketing and promotional spending.

We believe that the trend has continued in the fourth quarter as well and benefitted earnings in the quarter. The consensus estimate pegs the to-be-reported quarter's earnings at $1.34, flat from the year-ago quarter. Earnings grew 11.9% year over year in the first nine months of 2018.

Quantitative Model Prediction

Our proven model shows that Chipotle has the right combination of the two key ingredients - a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher - for increasing odds of an earnings beat in the third quarter. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Earnings ESP : Chipotle has an Earnings ESP of +1.54%. Notably, Earnings ESP represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Zacks Rank : Chipotle currently carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Chipotle Mexican Grill, Inc. Price and EPS Surprise

Chipotle Mexican Grill, Inc. Price and EPS Surprise | Chipotle Mexican Grill, Inc. Quote

Other Stocks to Consider

Here are a few other stocks from the Restaurant space that investors may consider as our model shows that these too have the right combination of elements to post an earnings beat in the fourth quarter.

YUM! Brands YUM presently carries a Zacks Rank #3 and has an Earnings ESP of +2.01%. The company is scheduled to report quarterly numbers on Feb 7.

BJ's Restaurants BJRI has an Earnings ESP of +2.08% and a Zacks Rank #3.

El Pollo Loco LOCO has an Earnings ESP of +7.14% and 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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