Chipotle Betters Expectation

Chipotle Mexican Grill (CMG - Analyst Report), known for premium-priced, fast-food Mexican entrees, reported better than expected second quarter results. EPS for the reported quarter surged 48.6% year over year to $1.10, surpassing street estimate of $0.88. Menu price increases, new restaurant openings and selective cost cutting measures drove the growth in EPS. 

Revenue for the reported quarter ascended 14.1% to $388.8 million driven by new restaurant openings and an increase of 1.7% in same-store sales. The increase in comparable sales was driven by 6.5% menu price increase, which in turn, helped offset 3.5% decline in traffic counts. The average check increased a little over 5%. Management reiterated its outlook of low single-digit percentage growth for same-store sales in 2009. 

Same-store sales growth has been decelerating since the prior year quarter, when it increased 7.1%. Since then same-store sales have been consistently falling, although it remained positive, showing its resilient character in a turbulent environment. Moreover, the restaurant chain was able to increase menu price, when other restaurant operators are offering discounts to woo consumers in a recession. Other quick service operators like Starbucks Corporation (SBUX - Snapshot Report), Jamba Inc. (JMBA - Snapshot Report), Wendy’s/Arby’s Group (WEN - Analyst Report), and Einstein Noah Restaurant Group (BAGL - Snapshot Report) have been experiencing declining comparable sales. 

Restaurant operating margin surged 360 basis points to 26% driven by menu price increase, lower food and labor costs (as a percentage of revenue), and decline in marketing expenses. 

The company currently operates 886 restaurants (as of June 30, 2009) and plans to open 120-130 restaurants in fiscal year 2009, a growth of 14.3%-15.5%. So far, in the first-six months of 2009, the company has opened 50 new restaurants and closed one with about two-third openings scheduled in the fourth quarter of 2009. However, we hold a cautionary view on the stock given its restaurant growth rate amid lingering recession, when other restaurant companies are postponing or slowing growth. 

The Zacks Rank for CMG stock is #3 (Hold).