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We reiterate our long-term Neutral recommendation on casual dining restaurants chain, Chipotle Mexican Grill, Inc. (CMG - Analyst Report), following the robust second-quarter 2013 results. Chipotle’s strong market standing, menu innovation and increased media exposure are encouraging. However, higher food costs and limited consumer spending scenario are the possible headwinds.
Why the Reiteration?
On Jul 18, 2013, Chipotle delivered solid second-quarter 2013 results. The company’s second-quarter earnings of $2.82 per share were in line with the Zacks Consensus Estimate but up 10.2% year over year. The year-over-year rise in earnings was mostly due to higher top line and increased share repurchase activity.
Revenues grew 18.2% year over year to $816.8 million and also beat the Zacks Consensus Estimate of $803 million by 1.7%. The better-than-expected results were driven by higher comparable sales (comps) growth and unit expansion. The company’s sales-driven initiatives and marketing strategies have started to yield results as can be seen from the rise in traffic which in turn led to comparable sales (comps) growth of 5.5% during the quarter.
Additionally, Chipotle’s ‘Food with Integrity’ program introduced in 2001 continues to spur growth. The customers are fond of Chipotle’s naturally-raised products, which are expected to drive traffic further. Chipotle is the first in the restaurant industry to tag its foods as genetically modified organism (GMO)-free. We believe that the company’s initiative to provide GMO-free foods will trigger its business in the ensuing quarters.
Chipotle has compelling growth drivers like the ShopHouse concept, catering program, continuous expansion and aggressive marketing strategy to sustain revenue momentum. Chipotle introduced the ShopHouse Southeast Asian Kitchen concept in 2011 with the opening of its first unit in Washington, DC. The company is now heavily concentrating on augmenting the presence of its Asian-style restaurants in the country. We believe this ShopHouse concept will contribute robustly to Chipotle’s business in the near future.
Moreover, Chipotle’s new off-premise catering program initiated in the first quarter of 2013 is expected to spur growth. This program, currently operational in 200 units, is expected to spread nationwide by the end of 2013.
However, higher food costs may hurt Chipotle’s margin, going ahead. The Zacks Rank #3 (Hold) company believes that the cost of food will be higher in the second half of 2013 due to the rise in avocado and steak costs, thus, hurting margin. Along with this, sales-building initiatives including marketing programs and improved supply chain will lead to higher costs for the company.
A limited consumer spending environment has also added to the woes. Government budget cuts, high tax rates and still-tightened credit availability continue to hurt consumer discretionary spending.
Other Stocks to Consider
Some other restaurant industry stocks with a favorable Zacks Rank include Jack in the Box Inc. (JACK - Snapshot Report), Buffalo Wild Wings Inc. (BWLD - Analyst Report) and Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report). Jack in the Box carry a Zacks Rank #1 (Strong Buy) while Buffalo Wild Wings and Cracker Barrel carry a Zacks Rank #2 (Buy).