Chipotle Mexican Grill, Inc. (CMG) reported second quarter 2011 earnings of $1.59 per share, which missed the Zacks Consensus Estimate of $1.68 but increased 8.9% from the prior-year quarter earnings of $1.46 per share. The results included a pre-tax charge of $2.4 million or 5 cents a share related to the loss incurred by the company in ANGR Holdings LLC.
The company reported lower-than-expected results primarily due to higher food costs and increased legal expenses arising from the ongoing federal immigration investigation.
The fast food restaurant chain reported revenues of $571.6 million, up 22.4% year over year, driven by new restaurant openings and higher comparable store sales. The reported revenues also outperformed the Zacks Consensus Estimate of $557 million.
Quarter Highlights
Comparable stores sales climbed 10.0% in the quarter due to higher traffic and were also up 8.7% from the prior-year quarter level.
However, restaurant operating margin was down 110 basis points (bps) to 25.8%, attributable to a 250-bp (as a percentage of total revenue) rise in food, beverage and packaging costs, partially offset by a 40-bp fall in other operating costs and a 50-bp drop in both labor and occupancy.
Total operating margin plunged from 16.1% in the second quarter of 2010 to 14.7% in the current quarter, due to higher food costs and a 80-bp growth in general and administrative expenses, partially offset by a 50-bp drop in depreciation and amortization costs and a 10-bp decline in pre-opening costs.
Stores Update
During the quarter under review, Chipotle opened 39 restaurants. The company currently operates 1,131 outlets.
Chipotle has remained largely unruffled by the recent economic slowdown. The company plans to open 135-145 new restaurants in fiscal 2011.
Financial Position
Chipotle ended the quarter with cash and cash equivalents of $349.8 million and shareholders’ equity of $939.1 million.
Outlook
For fiscal 2011, management now expects high single – to low double-digit comparable store sales growth, compared with its previous expectation of mid single-digit growth.
Our Take
We believe Chipotle is well positioned to expand rapidly while generating improved earnings, higher margins and strong returns on invested capital. With a strong balance sheet, consistent earnings, healthy cash flow, excellent unit economics, international expansion and continued marketing initiatives, we are of the opinion that the stock provides relative safety and consistent growth. However, margins are expected to remain under pressure due to labor turnover related to the federal probe and food cost inflation, but will improve once Chipotle implements the broad-based price increase before the third quarter of 2011.
The company has reported results below expectations for only the second time in its history due to higher food prices. Hence, we expect estimates to move down in the coming days. The Zacks Consensus Estimates for 2011 and 2012 are pegged at $6.82 and $8.49, respectively.
One of Chipotle’s primary competitors Ruth’s Hospitality Group Inc. (RUTH) will report its second quarter 2011 results on July 27, 2011.
