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Chipotle Mexican Grill Inc. (CMG - Analyst Report) has reported second-quarter 2012 earnings of $2.56 per share, comfortably ahead of the Zacks Consensus Estimate of $2.30 as well as the year-earlier earnings of $1.59. The better-than-expected results were driven by double-digit top-line growth and margin expansion.

Revenues rose 20.9% year over year to $690.9 million in the reported quarter, based on new restaurant openings and higher comparable store sales (comps). However, reported revenue fell below the Zacks Consensus Estimate of $706 million.

Quarter Highlights

Comps grew 8.0% during the quarter on the back of higher traffic and menu price increases witnessed last year. Higher menu prices added about 4.6% in the quarter under review. However, comps slipped 470 basis points (bps) sequentially and 200 bps annually.

The restaurant operating margin expanded 340 bps to 29.2%, attributable to a 100-bp cut in labor, 30-bp drop in occupancy costs and 130-bp decrease in other operating costs and 80-bp slip in food, beverage and packaging costs (as a percentage of total revenue).

Total operating margin expanded to 19.4% from 14.7% in the year-ago quarter, benefiting from lower expenses. General and administrative expenses were 6.1% of revenue, down 120 bps year over year, driven by favorable sales leverage, lower employee bonus accruals and lower legal expenses.

Stores Update

During the quarter under review, Chipotle opened 55 restaurants, including first restaurant opening in Paris, France. The company currently operates 1,316 outlets.

Chipotle has remained largely unruffled by the recent economic slowdown. The company remains on track to open 155–165 new restaurants in fiscal 2012.

Financial Position

Chipotle ended the quarter with cash and cash equivalents of $404.8 million and shareholders’ equity of $1,261.2 million as compared with $401.2 million and $1,044.0 million in 2011, respectively.


For 2012, the management reaffirmed its outlook of mid single-digit comparable store sales growth.

Our Take

Though the top-line miss by the fast-food restaurant chain came as a disappointment for some investors, we believe Chipotle is well positioned to generate improved earnings, margins and returns on invested capital. With a strong debt-free balance sheet, healthy cash flow, excellent unit economics, strategic international expansion, the successful ‘Food With Integrity’ program and continued marketing initiatives, we believe that the stock provides relative safety and consistent growth.

However, fierce discounting wars among quick-service operators, lower consumer confidence and higher input costs remains areas of concern.

Chipotle, which competes with Kona Grill Inc (KONA - Snapshot Report), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are maintaining our long-term Neutral recommendation on the stock.

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