What to look for in Chipotle’s Q1: Sales growth, margins

Chipotle Mexican Grill (CMG) owns and operates more than 1,200 fast casual restaurants in the United States, Canada and England. CMG is now amongst the fastest growing restaurant chains in the industry, significantly benefitting from increased consumer spending on the fast casual food segment.

Contrary to most of its main competitors, CMG does not expand through franchising which is quite unique among the larger brands in the restaurant world. Having such a business model does however require CMG to take on additional risks, whereas the franchising business model more easily distributes risk factors to the franchise holders. 

With its unique business model, CMG has enjoyed more than 20% sales growth for the last 5 quarters. Analysts expect such growth to continue this quarter with an average estimate of 631m USD, corresponding to 24% growth year on year. During same quarter last year the company reported sales of 509m USD and earnings per share of 1.46 USD.

In two out of four quarters last year, CMG missed analysts’ EPS estimates (table 1) only by a few cents, after ten consecutive quarters delivering positive surprises to the market. However, analysts expect CMG to deliver an EPS of 1.93, a decent 32 percent increase from last year, for Q1.

On average, the full year performance is expected to increase sales and EPS by 21.5 and 28.6 percent compared to previous year.

Should CMG continue delivering positive surprises to the market, and eating into its main competitors' client base, it stock price could continue its upward trend. However, this massive growth doesn’t come at a cheap price as CMG’s 2012 expected P/E is 49.4x compared to a long term industry average of roughly 15x.

For this quarter’s results, investors should also pay attention to CMG’s margins development. Afraid of margins getting squeezed as input prices are increasing, CMG has been raising their prices slightly for the first months of this year hoping to please investors. Overall, CMG has outperformed the industry with a 29.7 percent price increase YTD, and is currently trading close to an all-time high. On average the company has a ‘Hold’ recommendation from analysts with a target price of 427.7, 2.4 percent short of last closing price.

In order to get an overview of the restaurant industry, pay attention to some of CMG’s main competitors who are reporting in the coming days:

• Yum! Brands (YUM): Reported yesterday, beat analysts’ estimates by 3 cents, 0.76 vs. 0.73 USD.
• McDonald’s (MCD): 20-04-2012
• Starbucks (SBUX): 25-04-2012
• Panera Bread (PNRA): 24-04-2012
• Buffalo Wild Wings (BWLD): 24-04-2012