Markets

Will Chipotle (CMG) Disappoint Earnings on Lower Comps?

Chipotle Mexican Grill, Inc.CMG is set to report third-quarter 2015 results on Oct 20, after the market closes. Last quarter, the Colorado-based fast casual restaurant operator posted a positive earnings surprise of 0.91%.

Meanwhile, the company has surpassed earnings estimates in all the four trailing quarters with an average positive earnings surprise of 4.31%.

Let's see how things are shaping up for this announcement.

Factors to Consider

Chipotle delivered double-digit comps growth throughout 2014, but failed to sustain the trend in the first half of 2015. In January, the burrito chain suspended purchases from one of its suppliers that did not conform to the standards set for the size and condition of the enclosure where some of the pigs were kept. As a result, the company stopped serving Carnitas - a Mexican dish made of pork - at most of its outlets in the first half of the year, which affected comps. In fact, Chipotle expects 2015 comps in the low-to-mid single-digit range, much lower than 16.8% growth witnessed in 2014. We also apprehend that the limited pork supply will hurt third-quarter comps.

Meanwhile, higher food costs, especially beef, coupled with increased labor costs would hurt profits in the to-be-reported quarter.

However, the company's move toward lower carbohydrate ingredients to meet consumer preference should boost sales. The company's "Food with Integrity" program has been helping it to attract health conscious consumers, especially millenials, as the increase in demand for natural and healthier food in the country is on the rise. Additionally, the increasing popularity of fast casual chains among diners would boost third-quarter traffic for Chipotle.

Earnings Whispers

Our proven model does not conclusively show that Chipotle is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP : The company's Earnings ESP stands at -3.03%. This is because the Most Accurate estimate stands at $4.48 and the Zacks Consensus Estimate is pegged higher at $4.62.

Zacks Rank : Chipotle's Zacks Rank #3 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

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

Stocks to Consider

Here are a few companies in the restaurant industry which have a favorable Zacks Rank and a positive Earnings ESP and are therefore likely to beat earnings:

Starbucks Corporation SBUX , with an Earnings ESP of +2.33% and a Zacks Rank #2.

Panera Bread Company PNRA , with an Earnings ESP of +0.76% and a Zacks Rank #3.

Noodles & Company NDLS , with an Earnings ESP of +14.29% and a Zacks Rank #3.

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PANERA BREAD CO (PNRA): Free Stock Analysis Report

CHIPOTLE MEXICN (CMG): Free Stock Analysis Report

STARBUCKS CORP (SBUX): Free Stock Analysis Report

NOODLES & CO (NDLS): Free Stock Analysis Report

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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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