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Chipotle Beats on Overall Growth

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The fast food restaurant chain Chipotle Mexican Grill Inc. (CMG - Free Report) has reported first-quarter 2012 earnings of $1.97 per share, surpassing the Zacks Consensus Estimate of $1.93 as well as the year-earlier earnings of $1.46. The better-than-expected results were driven by double-digit top-line growth and margin expansion.

Revenue in the quarter rose 25.8% year over year to $640.6 million, based on new restaurant openings and higher comparable store sales (comps).

Quarter Highlights

Comps grew 12.7% during the quarter, on the back of higher traffic and menu price increases witnessed last year. Higher menu prices added about 4.9% in the quarter under review. Comps also benefited from favorable weather throughout the quarter and a leap day in February. The upside in comps marks the seven consecutive quarter of double-digit growth.  Comps rose 160 basis points (bps) sequentially and 30 bps annually.

The restaurant operating margin enhanced 220 bps to 27.4%, attributable to a 90-bp cut in labor and 60-bp drop in occupancy costs, partially offset by a 20-bp rise in food, beverage and packaging costs and a 100-bp increase in other operating costs (as a percentage of total revenue).

Total operating margin expanded to 16.0% from 14.7% in the year-ago quarter despite an increase in general and administrative (G&A) expenses. G&A expenses were 7.7% of revenue, up 140-bp from the prior-year period, affected by an increase in non-cash stock-based compensation expense and higher payroll tax expense.

Stores Update

During the quarter under review, Chipotle opened 32 restaurants. The company currently operates 1,262 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 $370.2 million and shareholders’ equity of $1,169.8 million as compared with $401.2 million and $1,044.0 million in 2011, respectively.


The management reaffirmed its outlook for 2012. Management expects mid single-digit comparable store sales growth and an increase of mid single in food costs.

Our Take

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. As a result the company succeeded in beating the tough year-over-year comp comparison during the quarter. Moreover, to further improve its performance, the company continues to focus on its manpower, food quality and customer service.

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 , currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are maintaining our long-term Neutral recommendation on the stock.

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