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Chipotle Meets Earnings, Beats Rev

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Quick-casual restaurant chain, Chipotle Mexican Grill Inc.’s (CMG - Free Report) second-quarter 2013 earnings of $2.82 per share were in line with the Zacks Consensus Estimate but up 10.2% year over year. Higher top-line and increased share repurchase activity pushed up the earnings during the quarter.

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.

Behind the Headline Numbers

Comps grew 5.5% during the quarter on the back of higher traffic. It has also gained from one extra operating day in the second quarter of 2013 as compared with last-year period. Although comps declined 250 basis points (bps) year over year, it increased 450 bps sequentially.

The restaurant level operating margin was down 160 bps annually to 27.6% in the reported quarter. Higher food costs and mounting marketing expenses pressured margin during the quarter.

Food, beverage and packaging costs as a percentage of revenue increased 100 bps to 33.1% with the rise in prices for cheese, chicken and salsa offsetting the decline in avocado prices. Labor costs as a percentage of revenue contracted 40 bps to 22.7% as a result of the company’s labor management initiatives. Total operating margin declined 150 bps to 17.9% in the quarter due to higher costs.

Stores Update

During the second quarter, Chipotle unveiled 44 restaurants. As of Jun 30, 2013, the company operated 1,502 restaurants. The company has also introduced a new ShopHouse restaurant in Los Angeles in the quarter.


Chipotle ended the quarter with cash and cash equivalents of $281.6 million versus $346.9 million in the previous quarter. Total shareholder equity was $1.4 billion.

Share Repurchase

In the second quarter, the company bought back 84,000 shares worth $30 million and nearly $120 million worth of shares are left to be purchased under the company’s existing share repurchase program. 


The company has increased its comps guidance for 2013. Following the improving traffic trend, management now expects comps to grow in low-to-mid single-digits, higher from the previous estimate of low single-digit. Effective tax rate will be nearly 38.9%, up from 38.5%.

Further, the company remains on track to open nearly 165–180 restaurants this year. Apart from this, the company is also intending to unveil two ShopHouse units in the third quarter and has also penned a lease agreement to open four more units across the U.S. by 2014.

Chipotle believes that the cost of food will be higher in the second half of the year due to the rise in avocado and steak costs.

Our Take

We are encouraged by Chipotle’s double-digit top-line growth and higher earnings. It seems that the company has started to gain from its sales-driven initiatives and promotional strategies which led to a rise in the traffic.

This Zacks Rank #2 (Buy) company is the first in the restaurant industry to provide genetically modified organism (GMO)-free foods. It continues to benefit from the Food With Integrity program which focuses on using naturally raised/locally grown ingredients like pork, chicken and beef. Additionally, we remain optimistic about Chipotle’s new catering program (launched in the first quarter of 2013) which is expected to boost its sales, going ahead.

Some other players in the restaurant industry which look attractive at the current level include Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) , Jack in the Box Inc. (JACK - Free Report) and Krispy Kreme Doughnut Inc. . All these companies carry a Zacks Rank #1 (Strong Buy).

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