Chipotle Beats 1Q Earnings, Revenues Up

Quick-casual restaurant chain, Chipotle Mexican Grill Inc.’s ( CMG - Analyst Report ) first-quarter 2013 earnings of $2.45 per share beat the Zacks Consensus Estimate of $2.14 per share by 14.5%. The earnings grew almost 24.4% from the prior-year quarter, driven by higher revenues, lower taxes and share count.

In the quarter, revenues grew 13.4% year over year to $726.8 million. The increase can be attributed to new restaurant openings. The top-line results also surpassed the Zacks Consensus Estimate of $725 million.

Behind the Headline Numbers

Owing to the adverse effect of two less working days in the quarter, comps grew only 1.0% compared with 12.7% in the year-ago quarter. Chipotle traded two fewer days in the first quarter of 2013 compared with last year since the store was closed on Easter and there was no leap day. Excluding the effect of these two days, comps would have grown 3%, which was still lower than the year ago, figure due to higher menu prices, a sluggish economy and a difficult consumer-spending environment. Menu prices expanded 70 basis points (bps) during the year while average check grew 30 bps.

The restaurant level operating margin declined 110 bps annually to 26.3%, owing to the rise in food as well as occupancy costs. Food costs as a percentage of revenue increased 80 bps to 33.0% with the rise in prices for cheese, chicken and salsa. Occupancy costs and other operating costs as a percentage of revenue expanded 30 bps to 6.6%.

Total operating margin expanded 50 bps to 16.5% in the quarter despite the decline in restaurant margins. Operating margins gained from improved operating expense leverage and lower general and administrative (G&A) expenses.

Stores Update

During the first quarter, Chipotle launched 48 new units. As of Mar 30, 2013, the company operated 1,458 restaurants.

Liquidity

Chipotle ended the quarter with cash and cash equivalents of $346.9 million versus $322.6 million in the previous quarter. Total shareholders’ equity was in line with the prior quarter at $1.3 billion.

Share Repurchase

In the first quarter, the company bought back 164,000 shares worth $51 million. During February, the company announced the addition of $100 million to the existing share repurchase program.

Guidance

The company has reiterated its guidance for 2013. Management expects comps to grow in the low single-digit level (rise in menu price excluded) mainly due to uncertain economic environment. Effective tax rate will be nearly 38.5%. Further, the company remains on track to open nearly 165–180 new restaurants in 2013.

Our Take

Although Chipotle’s earnings and revenues grew year over year, lowered comps growth in the past two quarters remains a major concern. Moreover, higher input costs, difficult consumer-spending environment and lower comps projection for 2013 is also concerning. However, its strong brand name and various initiatives to drive sales could provide some offset to all the negative factors.

Chipotle currently carries a Zacks Rank #3 (Hold). Other restaurateurs which are performing well include Red Robin Gourmet Burgers Inc. ( RRGB - Analyst Report ) , Cracker Barrel Old Country Store Inc. ( CBRL - Snapshot Report ) , both carrying a Zacks Rank #1 (Strong Buy), and Burger King Worldwide Inc. ( BKW - Snapshot Report ) carrying a Zacks Rank #2 (Buy).