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CMG Fails to Meet Both Estimates

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Chipotle Mexican Grill Inc. (CMG - Free Report) has reported third-quarter 2012 earnings of $2.27 per share, which fell shy of the Zacks Consensus Estimate of $2.30. However, the result was ahead of the year-ago earnings of $1.90 per share. Double-digit top-line growth and margin expansion led to the year-over-year growth in earnings.

Revenues grew 18.4% year over year to $700.5 million in the reported quarter buoyed by new restaurant openings and higher comparable store sales (comps). However, revenues too missed the Zacks Consensus Estimate of $703 million.

Quarter Highlights

Comps grew 4.8% during the quarter under review, thanks to the higher traffic and uptick in menu prices in the Pacific Region.  On a sequential basis, transaction trends were almost flat. However, rate of comps growth plummeted 650 basis points (bps) year over year and 320 bps quarter over quarter.

The restaurant operating margin expanded 70 bps to 27.4%, attributable to a 60-bps cut in labor, 30-bps drop in occupancy costs, 70-bps decrease in other operating costs and 40-bps slip in food, beverage and packaging costs (as a percentage of total revenue).

Total operating margin expanded 210 bps to 17.4% in the quarter, benefiting from overall lower expenses. However, general and administrative expenses went up 60 bps year over year to 6.9% of revenue due to the investment toward the biennial conference in the third quarter, higher stock based compensation expense, and about $1 million in bad debt expense related to general contractor insolvencies.

Stores Update

During the reported quarter, Chipotle opened 36 new restaurants, including two units unveiled in London, England. At the quarter end, the company operates 1,350 units.  


Chipotle ended the quarter with cash and cash equivalents of $421.1 million and shareholders’ equity of $1,307.6 million.


For 2012, the management reaffirmed its outlook of mid single-digit comparable store sales growth while comps for 2013 are expected to be within flat to low-single digit level.

The company remains on track to open atleast 155–165 new restaurants or more in fiscal 2012. For 2013, Chipotle raised its openings outlook to the range of 165-180 units.

Our Take

Chipotle seems to have lost momentum as depicted by the miss in the latest quarter, top-line miss in the prior quarter, continued deceleration in comps growth and the muted comps projection for 2013 as well. Though these arrays of concerns came as a disappointment to some investors, we believe that Chipotle is still well positioned to generate improved earnings, margins and returns on invested capital.

Even in an anemic economy marked with lower consumer confidence and stiff competition, Chipotle managed to grow its earnings and revenue year over year by a huge margin. With sound unit economics and the successful ‘Food With Integrity’ program, the stock will likely provide relative safety over the longer term.

Chipotle, which competes with the likes of Yum! Brands Inc.’ (YUM - Free Report) Taco Bell, currently carries 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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