We are upgrading our rating on fast food restaurant chain Chipotle Mexican Grill Inc. (CMG)to Outperform from Neutral.
The rating upgrade is based on third quarter 2010 earnings, which surpassed the Zacks Consensus Estimate on the heels of strong top-line growth, buoyed by a higher traffic count and new restaurant openings. The company also raised its fiscal 2010 outlook for same store sales.
We also remain positive as the company has remained unaffected by the recent economic slowdown and has been able to deliver positive comps consistently. Moreover, the company remained relatively stable compared with most of its peers and is well positioned to expand rapidly while generating improved earnings margins and returns on invested capital.
With a strong debt-free balance sheet and healthy cash flow, strategic international expansion, successful Food With Integrity program and continued marketing initiates, we believe the stock provides relative safety and a consistent growth.
Moreover, we are encouraged, given the potential for improving unit economics as Chipotle executes its new smaller prototype openings, named A-Model as part of its expansion plans. A-model is serving the company with a higher return on investment.
So far, the company has opened 15 A-model restaurants and estimates that about 30% of stores planned for opening in 2011 will be A-model. The company is also testing a fast-casual Asian restaurant concept, as it is planning to open 1 new Asian-inspired restaurant in 2011.
Third Quarter Results Ahead of Estimates
Chipotle’s third quarter 2010 earnings of $1.52 per share surpassed the Zacks Consensus Estimate of $1.30 and the year-ago quarter’s $1.08.
Revenues in the quarter rose 23.0% to $476.9 million, driven by new restaurant openings and an increase in comparable-store sales. Reported revenues also outperformed the Zacks Consensus Estimate of $461 million. Comparable-stores sales climbed 11.4% in the third quarter, reflecting a sequential increase of 270 basis points.
Outlook for 2010
For fiscal year 2010, management expects high single digit comparable-store sales growth, up from its previous guidance of mid to high single digit growth. For 2011, Chipotle expects comparable restaurant sales growth of low single digit.
Additionally, Chipotle has been exhibiting a commendable unit expansion plan, both domestically and internationally. In fiscal 2010, the company plans to open 122 to 130 new restaurants and also open 135-145 new restaurants in 2011.
Zacks Consensus Estimate Increased
Based on strong third quarter results, the analysts raised their estimates. Additionally, the analysts expect higher same-store sales growth and the potential for improving unit economics. The company is also raising its unit openings, which will further drive higher traffic.
The Zacks Consensus Estimates for earnings, in the last 60 days, for the fourth quarter, fiscal 2010 and 2011 jumped to $1.27 per share, $5.46 per share and $6.53 per share, compared with $1.17, $5.11 and $6.10, respectively.
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