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Chipotle (CMG) Up 17.5% Since Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Chipotle Mexican Grill, Inc. (CMG - Free Report) . Shares have added about 17.5% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is CMG due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Recent Earnings

Chipotle Mexican reported mixed fourth-quarter 2017 results, with earnings surpassing the Zacks Consensus Estimate but revenues lagging the same.

Adjusted earnings per share in the quarter were $1.34, surpassing the consensus estimate of $1.32 by 1.5%. Including the 21-cent positive impact from the U.S. tax law, earnings came in at $1.55. Earnings also grew 143.6% year over year on lower costs and higher revenues.

Chipotle has been bearing the brunt of a challenging restaurant operating environment and has been particularly plagued by negative publicity related to food-borne illnesses, which had surfaced toward 2015-end. In order to regain reputation and drive sales, the company has been trying to streamline operations and enhance guest experience.

Toward this end, Chipotle is focusing on digital innovation. In fact, in the fourth quarter, the company hit new records as its digital sales mix was 8.6% of sales while two of the company’s regions have digital sales of more than 10% of their overall mix. Chipotle is also reinvesting in existing restaurants and trying to improve their appearances and functions.

Revenues and Comparable Restaurant Sales

Quarterly revenues of $1.11 billion lagged the consensus estimate of $1.12 billion by 0.9% but grew 7.3% year over year. The revenue growth is primarily attributable to restaurant openings. The company opened 38 new restaurants in the fourth quarter and relocated an additional four restaurants, reaching the total restaurant count to 2,408.

The rise in comps somewhat partially favored revenues. Comps in the quarter increased 0.9% which includes a 0.6% reduction related to deferred revenues recognized during the year-ago quarter due to the Chiptopia Summer Rewards program. Comps were driven by an increase in average check, including a 2.4% impact from menu price increase in select restaurants during the second and fourth quarter of 2017, partially offset by a decline in transactions.

Costs, Operating Highlights & Net Income

Food costs, as a percentage of revenues, decreased 110 basis points (bps) to 34.2% driven by cost savings in paper and packaging usage as well as higher menu prices. Favorable avocado prices during the quarter, when compared with the prior-year quarter, also led to cost reduction.

General and administrative expenses comprised 5.2% of total revenues, reflecting a decrease of 110 bps year over year. This can be attributed to lower legal costs and non-cash stock-based compensation expenses.

Restaurant level operating margin was 14.9%, up 140 bps from 13.5% in the year-ago quarter. The upside was primarily driven by reduced food, beverage and packaging expenses and lowered promotional activities.

Net income in the quarter was $43.8 million, up from $16.0 million in the prior-year quarter, courtesy of $6.0 million gain from changes in the U.S. tax law.

Balance Sheet

Cash and cash equivalents as of Dec 31, 2017, were $184.6 million compared with $87.9 million as of Dec 31, 2016.

Inventory totaled $19.9 million as of Dec 31, 2017, up from $15 million as of Dec 31, 2016. Goodwill, as a percentage of total assets, was 1.07% at the end of 2017 compared with 1.08% in the prior year.

Total shareholder’s equity was $1.36 billion as of Dec 31, 2017, compared with $1.40 billion as of Dec 31, 2016.

2017 Highlights

Revenues in 2017 increased 14.7% to $4.5 billion, with comps growing 6.4%. Diluted earnings per share were $6.17, including a benefit of 21 cents per share resulting from changes in U.S. tax law, compared with 77 cents in 2016.

Restaurant level operating margin was 16.9%, reflecting a year-over-year increase of 410 bps. Net income in 2017 was $176.3 million, showing an improvement from $22.9 million last year.

The company opened 183 new restaurants in the year and relocated 25 more, including 15 ShopHouse Southeast Asian Kitchen Restaurants.

2018 Outlook

For 2018, management expects comps increase of low single digits and expects to launch130-150 restaurants. Effective tax rate is estimated in the range of 30% to 31%, which includes an underlying effective tax rate of about 27% to 28% and the effect of prior year employee equity plans.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been five revisions lower for the current quarter.

VGM Scores

Currently, CMG has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. The stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for growth investors than momentum investors.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. It's no surprise CMG has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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