On Nov 28, 2014, we issued an updated research report on Chipotle Mexican Grill Inc. (CMG).
On Oct 20, this restaurant chain posted robust third-quarter 2014 results with both earnings and revenues beating the Zacks Consensus Estimate. Earnings and revenues were up year over year, owing to higher comps and unit expansion. Comps also grew both on a year-over–year basis and sequentially mainly due to higher traffic as well as an increase in average check. Restaurant level operating margin also increased backed by favorable sales leverage, partly offset by higher food costs.
Despite such strong results, Chipotle’s muted comps growth outlook for 2015 is a concern. The company expects comps growth in the low-to-mid single-digit range, much lower than the mid-teens range expected for 2014. In late April, Chipotle raised menu prices in the range of mid single-digits for the first time in three years to counter commodity inflation. This, however, did not have any effect on the robust traffic trend. Nevertheless, the elevated costs of beef and other meat products might force the restaurateur to hike prices again in 2015, hurting traffic trends, and in turn the top line.
In addition to elevated commodity prices, the company expects marketing and promotion expenses to increase in 2014 with most of the increase coming toward the end due to the improved ingredients advertising campaign. Also, the company’s sales-building initiatives including marketing programs and an improved supply chain will increase costs. Management also expects to incur additional costs in the ensuing quarters following its decision to use GMO-free food products. These escalating expenses might result in lower-than-expected margins in the near term.
Nevertheless, Chipotle has been witnessing a fairly stable traffic trend over the past few years driven by strong market position, menu launches and increased media exposure. The company’s decision to use non-GMO food also attracts the health-conscious customers.
Chipotle Mexican Grill presently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry worth considering include BJ's Restaurants, Inc. (BJRI), DineEquity, Inc. (DIN) and Ruby Tuesday, Inc. (RT). All these stocks sport a Zacks Rank #1 (Strong Buy).
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