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Strong Sales & Margins to Aid Chipotle (CMG) in Q3 Earnings

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Chipotle Mexican Grill, Inc. (CMG - Free Report) is scheduled to report third-quarter 2018 results on Oct 25, after the market closes.

Chipotle’s increased focus on enhancing customer experience, along with various sales-building initiatives, is expected to have resulted in revenue growth in the third quarter. Further, lower marketing and promotional expenses are likely to have aided margins in the to-be-reported quarter.

Notably, shares of Chipotle have gained 34.5% over the past year, outperforming the industry’s rally of 6.4%.


Let us look deeper into factors that are likely to have shaped the company’s third quarter.

Sales-Building Initiatives to Bolster Top-Line Growth

Chipotle has been shifting its strategy from giveaways, discounts and rewards to new menu items, operational excellence, enhancement of guest experience, technology-driven convenience, and more aggressive brand marketing. Rollout of queso has substantially aided sales so far this year.

In the first six months of 2018, revenues totaled to $2.4 billion, marking an increase of 7.9% from the first half of 2017. Comps in the same period improved 2.8%, favored by increased average check and 4.5% benefit from menu price increases, partially offset by 2.6% fewer comparable restaurant transactions.

Given the company’s sales-building efforts, we believe that the upside trend is likely to have continued in the third quarter as well. The Zacks Consensus Estimate pegs third-quarter sales at $1.23 billion, a 9.4% increase from the year-ago quarter. Further, comps in the quarter under review are expected to rise 5.5%, comparing favorably with the second quarter’s 3.3% growth.

Will Earnings Benefit From Higher Margins?

In the first half of 2018, Chipotle’s restaurant level operating margin was 19.6%, marking an increase from 18.3% in the first six months of 2017. The improvement was driven by comparable restaurant sales increases combined with lower marketing and promotional spending.

We believe that the trend has continued in the third quarter as well and benefitted earnings in the quarter. The consensus estimate pegs the to-be-reported quarter’s earnings at $2.01, reflecting 51.1% growth from the year-ago quarter.

Quantitative Model Prediction

Our proven model shows that Chipotle does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing odds of an earnings beat in the third quarter. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Chipotle has an Earnings ESP of -2.64%. Notably, Earnings ESP represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Zacks Rank: Chipotle currently has a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Chipotle Mexican Grill, Inc. Price and EPS Surprise

 

Stocks to Consider

Here are a few stocks from the Restaurant space that investors may consider as our model shows that these have the right combination of elements to post an earnings beat in the third quarter.

Wingstop (WING - Free Report) presently carries a Zacks Rank #2 (Buy) and has an Earnings ESP of +4.48%. The company is scheduled to report quarterly numbers on Oct 29.

BJ’s Restaurants (BJRI - Free Report) has an Earnings ESP of +3.72% and a Zacks Rank #2. The company is slated to release quarterly results on Oct 30.

Brinker International (EAT - Free Report) has an Earnings ESP of +2.92% and a Zacks Rank #3. The company is expected to report quarterly numbers on Nov 7.

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